Economics/Finance

Wired Magazine has a fascinating story about buprenorphine, a heroin detox drug that offers significant promise for recovering addicts. Unlike methadone, buprenorphine (or “bupe”) doesn’t produce a high or low, and it’s almost impossible to abuse it. As a result, it can be dispersed in large quantities. (Methadone clinics generally only deliver one dose per day, which must be consumed on the spot.) Recovering addicts using bupe don’t have to deal with the sedative quality of methadone, and don’t have to schedule a visit to a clinic every day. Unlike methadone, it doesn’t show up on a urine drug test. All of these factors should significantly ease the reintegration of ex-addicts into the work world.

Despite the improved technology, bupe hasn’t been much of a success. Regulation has been bungled, and the relevant parties simply don’t have the incentives to promote a new, improved treatment. Methadone clinics are afraid that they’d lose money if methadone users got on bupe. GPs are afraid of bringing a new population of ex-addicts into their offices. A set of idiotic regulations prevents clinics from dispersing more than a pill a day, and bans even giant health care providers from taking more than 30 cases. The patent holder isn’t a pharma company, and doesn’t have the interest or expertise to promote the new drug. In fact, the protagonists of the article are a pair of treatment specialists who are promoting the drug freelance.

Well worth reading.

This poll showing that 57 per cent of Australians thought US foreign policy to be as great a threat as that of Islamic fundamentalism provokes a variety of thoughts. I happened to read the poll results on the same day as this NYT story about Maher Arar, whose ‘extraordinary rendition’ has been covered in detail at Obsidian Wings.

There are various ways of assessing threats, and most Australians rightly regard terrorism as an overstated danger. But, as far as terrorism is concerned, there can be few instances more horrible and terrifying than the kidnappings and televised beheadings we’ve seen in Iraq. There are, however, equally awful things going on that are not televised, and that are carried out by the United States government.

An unknown number of people have been kidnapped, then shipped to torture chambers in unknown locations. We’ve found out about this from cases like that of Maher Arar, who was eventually released after his captors gave up on the idea that he was a terrorist, but it’s likely that in most cases, the victim simply disappears and is never seen again. Arar was in transit through the US when he was grabbed, but there have been similar kidnappings in Italy, Sweden and Macedonia and of course, countries like Iraq and Pakistan are free-fire zones.

As with quite a few of the worst policies of the Bush administration, the practice of extraordinary rendition apparently began under Clinton, but has been greatly expanded by Bush[1].

As far as I’ve seen so far, all of the victims in this cases have been Muslims. If that comforts you, perhaps you ought to read Martin Niemoller

As long as extraordinary renditions and similar practices continue, Australians are right to regard at least some aspects of US foreign policy as a threat comparable to that of Al Qaeda.

An update In comments, Katherine observes, correctly I think, that arguments about moral equivalence are counterproductive. As she says ‘“Are we better or worse than Zarqawi and Bin Laden” is the debate people like James Inhofe and George W. Bush want us to have. ” So, I shouldn’t have said “equally awful” above. But what is being done is awful, and such things are contributing greatly to the fear of US foreign policy I referred to.

fn1. Supporters of the Clinton Administration might usefully think about this the next time they are tempted to take a small step on the slippery slope of curtailing civil liberties. Supporters of the current Administration might want to give some thought to the likelihood that the practices they are now defending or assiduously ignoring will sooner or later be directed by Hilary Clinton, who might well choose to use them against the vast right-wing conspiracy linked, at its extremities, to Oklahoma City (the apparent starting point of extraordinary rendition) and to terrorist attacks on abortion clinics.

I don’t feel rich. In fact, I know a lot of people who are richer than I am. Many of them live in my street; some of them work in my department. But when I take “the GlobalRichList test”:http://www.globalrichlist.com/index.php I come out well into the the top 1 per cent of earners in the world. That’s right, well over 99 per cent of the world’s population earn less than I do. Matthew Yglesias “wrote the other day”:http://yglesias.typepad.com/matthew/2005/03/superinequality.html about income distribution in the US and the psychological mechanisms that mean that people misperceive their own place in that distribution:

bq. This extreme inequality at the top does a lot to explain, I think, why you see a lot of people who make more than 85-90 percent of the population refusing to think of themselves as rich. Once you enter into the Rich Zone, you start coming into contact with people who are way, way, way, way richer than you are. If you run into somebody who has twice — to say nothing of 10 or 100 — times your earnings, it’s hard to think of yourself as rich. After all, you’re closer to making $0 and being out on the streets than you are to making what he makes.

And this is all the more true for the global distribution of income, where our place in the local distribution makes us radically misperceive our position in relation to the vast majority of humanity (my ex ante guess would have put me in the top 5 or 10 per cent — but the top 1 per cent!). My guess is that most active bloggers and journalists (in the developed world) are in that top 1 per cent also. One effect of this is that the blogosphere casually trades in assumptions about what is normal, where those assumptions are just a projection of what is normal for that top 1 per cent.

“Like Henry”:https://crookedtimber.org/2005/03/29/joining-up-the-dots/ and “Max”:http://maxspeak.org/mt/index.html, I got a bit of a laugh out of the “Left Business Observer’s plots”:http://www.leftbusinessobserver.com/FreedomIndex.html of the Heritage Foundation’s “Freedom Index.” I think the LBO are right to be skeptical of the index. But maybe the scatterplots they show sell it a bit short.

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Via Max, this gem from Doug Henwood’s Left Business Observer, deconstructing claims that the Heritage Foundation and Wall Street Journal’s “Index of Economic Freedom” tells us anything meaningful about economic growth. If you look at countries’ scores on the index in 1996, and graph it against their subsequent per capita GDP growth, there isn’t any meaningful correlation. If (as the Index’s authors do), you look at the relationship with aggregate GDP, you get a smallish correlation, which is very likely spurious. Short version: the Index is probably garbage – it doesn’t tell us about anything save for the ideological predilections of its authors. But take a look at the graph below and read Doug’s article, so you can judge for yourself.

I’ve been reading Todd Zywicki’s paper An Economic Analysis Of The Consumer Bankruptcy Crisis (1Mb PDF). Zywicki’s approach is to look at aggregate time-series data on a set of suggested causes of rising bankruptcy, suggest that the pattern for these time-series doesn’t match the observed increase in bankruptcy, The main point is, as he says,

Static or declining variables, such as unemployment, divorce, or health care costs, cannot explain a variable that is increasing in value, such as bankruptcy filing rates.

Hence, he says, the ‘traditional model’ of bankruptcy as a “last resort” outcome of financial distress is no longer valid. He therefore falls back on the residual hypothesis of changes in consumer behavior in the form of an increased willingness to resort to bankruptcy, possibly due to the rise of impersonal modes of lending and the decline of moral sanctions. Zywicki doesn’t mention the other obvious residual possibility: an exogenous increase in willingness to lend to high-risk borrowers, but symmetry suggests he ought to.

I don’t think Zywicki’s is the ideal research strategy (see below) but it has the advantage that anyone can play, armed only with Google. So let me point to a variable that has risen in the right way and could reasonably be expected to lead to rising rates of bankruptcy. That variable is the volatility of individual income, or, in simpler terms, the economic risk faced by the average person.

What this means is that the bankruptcy ‘crisis’ is an outcome of the general changes in the US economy over the past 30 years or so. If it weren’t for expanded credit and increased reliance on bankruptcy, the distress caused by growing inequality and income volatility would have been substantially greater. If bankruptcy laws are tightened, distress will increase. To put it simply, bankruptcy is the lesser of two evils.

I’m not getting continuations to work. There’s a full version at my blog.

Although I read quite a bit, one thing I always have difficulty with is suggesting good readings on topics, or knowing who originally proposed some idea. I think this has something to do with the fact that I tend to flit from one topic to another, picking up ideas but rarely doing a proper review of the literature. In any case, I’ve been asked to suggest some readings and so I thought I’d pass this request on to any readers who can help me[1]. What I’d like is either an original/early source for various concepts or a more recent summary discussion, ideally one accessible to an intelligent general reader. Anyone with useful suggestions gets an acknowledgement in my forthcoming Oxford Handbook chapter which is, literally, priceless.

Here’s my list of terms

* Crowding out
* Twin deficits hypothesis
* Shadow price
* Golden rule (for budgeting in UK and elsewhere)
* Globalisation
* Crony capitalism

Thanks in advance for any help

fn1. There is a piece of blog jargon for what I’m doing here, but I refuse to even mention it. As Belle said on this point a while back, if we keep going this way, we might as well just change the word “post” to “smegma” and have done with it.

I’ve been sitting on this great post about reforms to US bankruptcy laws and how they fit into the general pattern of risk being shifted from business to workers and to ordinary people in general. But I waited too long and Paul Krugman’s already written it. So go and read his piece, and then, if you want, you can look at the things I was going to write that Krugman hasn’t said already.
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In the weekend edition of the Australian Financial Review (reproduced here), Justin Wolfers writes about a betting market on the Iraqi election turnout, run by the Irish betting exchange Tradesports. The bet turned on whether turnout would exceed 8 million and was roughly even money before voting began. The price of the contract rose sharply on early reports of turnouts over 70 per cent, then fell back again when to around even money when it became clear these reports had little basis. The final official turnout was about 8.4 million.

Readers will recall that something very similar happened in the US election when early exit polls favored Kerry. Modifying an old aphorism to say that “two striking observations constitute a stylised fact”, I think we can now say pretty safely that political betting markets display the wisdom of crowds who read blogs.
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A striking development in the US economy in the last few years has been the growth in adjustable rate mortgages. This raises a couple of questions. First, if you’re thinking about buying a house, is better to go for adjustable or fixed-rate? Second, what does this mean for the economy as a whole?
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Now that Larry Summers has begun to live up to his putative commitment to open, freewheeling inquiry by finally releasing a “transcript of his infamous remarks”:http://www.president.harvard.edu/speeches/2005/nber.html, various people are commenting on it. “Matt Yglesias”:http://yglesias.typepad.com/matthew/2005/02/summers_redux.html says

bq. I don’t think you can reasonably expect any given university (or corporation, or person) to singlehandedly shoulder the burden of changing a set of social expectations that’s become very well entrenched over a very long period of time. At the same time, you can’t just do nothing about it, either.

“Bitch, PhD”:http://bitchphd.blogspot.com/2005/02/open-mouth-insert-dick-larry.html addresses this issue pretty well, as does “a correspondent of Mark Kleiman’s”:http://www.markarkleiman.com/archives/_/2005/02/larry_summers_redux.php. The main point is the first step toward addressing what Matt properly calls “a set of social expectations that’s become very well entrenched over a very long period” is — contrary to what Summers did in his remarks — to _stop_ treating it as a more-or-less simple result of the expression of individual preferences. Now, in other social-policy contexts, economists will jump all over you for not properly considering the incentives that shape people’s choices and smugly wheel out one-liners like “People respond to incentives, all else is commentary.” There’s a lot to that observation. But in contexts like gender and the labor market, the emphasis instead gets put on individual preferences as the mainspring of choice, rather than considering the social origins of the incentive structure.

“Here is an old post of mine”:https://www.crookedtimber.org/archives/000432.html, written in response to something “Jane Galt”:http://www.janegalt.net/blog/archives/004361.html (aka Megan McArdle) wrote. It addresses this issue a bit, with some pointers to accessible and practical discussions of it by specialists — some of the literature that Summers just baldly ignored, or was inexcusably ignorant of. As I said “back then”:https://www.crookedtimber.org/archives/000432.html,

bq. Jane’s initial question — “Should we [women] stay home, or shouldn’t we? It’s a difficult question for professional women” — effectively concedes the case as lost from the get-go. It frames the problem as wholly belonging to the prospective mother. Dad has no responsibility towards his potential offspring, is not required to make any work/family tradeoffs, and indeed has so much autonomy that a woman who chooses kids over career is “taking a huge financial bet on her husband’s fidelity.” … The institutions that structure people’s career paths may have deep roots, but that’s not because they spring naturally out of the earth. Cross-national comparison shows both that there’s considerable variation in the institutionalization of child care, and that this variation can have odd origins. … [They] aren’t immutable, either. In fact, in the U.S. they’ve changed a great deal since the early 1980s … Looking at the problem this way makes one less likely to fatalism about tragic choices, wanting to have it all, and the inevitable clash of work and family. … It also has the virtue — as C. Wright Mills put it forty years ago — of letting us “grasp history and biography and the relations between the two within society,” rather than forever being stuck at the level of individual women facing insoluble work-family tradeoffs.

None of that is particularly original, by the way. It’s a well-developed perspective with plenty of empirical evidence and theoretical elaboration, and even a little bit of reading in this area would make that evident. That’s why Summers’ audience was so ticked off. In fairness to the guy, at this stage his perilous position has little to do with the remarks themselves anymore, and has become an ouster by opponents dissatisfied with his Presidency in general.

My friend “Pierre-Olivier Gourinchas”:http://ist-socrates.berkeley.edu/~pog/ has co-authored a “very interesting paper”:http://ist-socrates.berkeley.edu/~pog/academic/IFA/ with “Hélène Rey”:http://www.princeton.edu/~hrey/ called “International Financial Adjustment.” (Here’s the “PDF version”:http://ist-socrates.berkeley.edu/~pog/academic/IFA/ifa.pdf.) You might think that’s not a title to set the world on fire, but don’t be fooled. A more appealing — though perhaps less responsible — alternative would be something like “Dude! We can predict exchange rates!” Here’s the abstract:

bq. The paper proposes a unified framework to study the dynamics of net foreign assets and exchange rate movements. We show that deteriorations in a country’s net exports or net foreign asset position have to be matched either by future net export growth (trade adjustment channel) or by future increases in the returns of the net foreign asset portfolio (hitherto unexplored financial adjustment channel). Using a newly constructed data set on US gross foreign positions, we find that stabilizing valuation effects contribute as much as 31% of the external adjustment. Our theory also has asset pricing implications. Deviations from trend of the ratio of net exports to net foreign assets predict net foreign asset portfolio returns one quarter to two years ahead and net exports at longer horizons. The exchange rate affects the trade balance and the valuation of net foreign assets. It is forecastable in and out of sample at one quarter and beyond. A one standard deviation decrease of the ratio of net exports to net foreign assets predicts an annualized 4% depreciation of the exchange rate over the next quarter.

Now, I am not a macroeconomist so I should leave further discussion to Daniel and John. The guts of the paper are really beyond my competence to evaluate. But this is a blog, so naturally I will carry on regardless and make three points anyway.

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This is an interesting Washington Post article about how rising property values have hurt homeowners who bought their homes through Habitat for Humanity.

Rising property values across the region have put the squeeze on taxpayers, but the bite has been especially acute for owners of Habitat for Humanity homes in Northern Virginia. In some areas, their homes have doubled and tripled in value in the past three years.

At least a dozen of the 47 Habitat homeowners in Northern Virginia pay more in property taxes and insurance than they do to pay off their mortgages, according to Karen Cleveland, executive director of the Northern Virginia arm of the housing nonprofit group. It is part of an international group that builds homes with volunteers and sells them to low-income buyers.

Now, you’re probably wondering why they just don’t sell. Here’s why:

In recent months, Habitat for Humanity of Northern Virginia has launched a campaign to persuade localities to provide tax relief for their homeowners. It is arguing that the Habitat homes shouldn’t be assessed at market rates because deed restrictions prevent their owners from selling the homes for profit or getting home equity loans until the 20-year mortgages are paid. If Habitat homeowners sell their homes before 20 years are up, they must sell them back to Habitat for the amount they cost — $80,000 to $120,000 in most cases, Cleveland said, which is the restricted value.

Perhaps someone can help me out here; why put this onerous restriction on the deed? I can sort of see that the nature of the charitable donation would be altered if it essentially became a cash gift rather than a house. And I suppose it makes some sense to restrict immediate sale. But 20 years? This seems to deprive the recipients of one of the main benefits of homeownership: capital appreciation. What would be wrong with letting this woman sell and buy another, cheaper house elsewhere in the area, rather than petitioning the local government for tax abatement? She and her family would be just as “housed.” On the other hand, she would seem to have a good case that her house is not actually worth the assessed price, since she can’t sell it for that amount. Thoughts?

I’ve mentioned Peter Griffiths and his book “An Economist’s Tale” before, and I’m going to mention it again in future, because it’s important. The book is a detailed case study of what Griffiths did when he was working for the government of Sierra Leone during a period when the World Bank suddenly got the free market religion. It’s a fantastic read, and by reading it you will get two valuable pieces of information; you’ll understand what economic consultants (those people whose jobs are advertised in the front bits of the Economist) actually do for a living, and you’ll understand the exact why and wherefore of what it is that people are complaining about when they protest against the Bretton Woods institutions and the Washington Consensus. Griffiths isn’t an “anti” in the normal sense; he makes clear at a number of points in the book that he’s actually in favour of free market reforms as the long term solution to a lot of development problems. But he is someone with very detailed, on-the-ground experience of the problem that Joe Stiglitz identified; the regrettable state of affairs that lets poor countries’ governments get bullied around by “third-rate students from first-rate universities”, with often disastrous results.

Below the fold is an article written by Peter, summarising some of the themes of the book; there are lots of good bits (including my favourite one-sentence summary of the moral dilemma of the economics profession, on which I will post anon) which aren’t mentioned there, so reading the article isn’t a substitute for buying the book. The book can be bought from Peter’s website; link above. Non-economists are not excused this one; if you can understand a Grisham novel you can understand this. It’s pacey, it’s exciting and it all really happened. It even has a happy ending (of a sort; given that the setting is the country of Sierra Leone, a genuinely happy ending was never on the cards).

(Full disclosure: I have no commercial or personal connection with Peter Griffiths other than through sending him an email to get this article. I bought the book with my own cash after seeing it advertised on the Zed Books website).

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