Tyler Cowen's Blog, page 362

How to make the rate of return on higher education negative

They’re signing up as we speak for a two-year degree course in heavy metal music (believed to be the first of its kind), which begins in September in a college in Nottingham.

…The degree organisers are loftily talking up the course by using terms such as “culture” and “context”. They point out that you can study music at Oxford, Cambridge or any other university, but that this “genre” degree is unique.

“Heavy metal is an extremely technical genre of music and its study is a rising academic theme,” they say. Metal is “seriously studied in conservatoires in Helsinki”, has classical music roots, and leading axe-men such as Joe Satriani incorporate the works of Paganini in their oeuvre.

Wow, Paganini.  Get this:

“It’s a degree, so it will be academically rigorous,” said Mr Maloy [the sequence designer].

And why Nottingham?:

Not only was Earache Records, a heavy metal-focused record label, founded in the city, but additionally, the region’s Download Festival appeals to over 75,000 rock and metal fans on an annual basis.

The course fees are £5,750 a year.  Here is a bit more information.

*The Americans*

Natasha and I have finished watching the first season, and I am pleased to report it is one of the few TV series I like.  It pretends to be about “two Soviet KGB officers posing as an American married couple in the suburbs of Washington D.C. in order to spy on the United States.”  But it’s actually about a) Russian mothers having to raise their children in the United States, b) what a marriage actually consists of (spoilers in that link), and c) to what are we loyal?  It captures the 1980s uncannily well.

TV viewing for this summer will likely include the full-length version of Fanny and Alexander, the Danish political thriller Borgen, and season two of Enlightened.

Assorted links

1. Memoir of an internet troll.

2. Photo of Iceland, via GH.

3. Restrictions on doctor-owned hospitals.

4. How Laura and John Arnold wish to give away their money (recommended, and cameo by Steve Levitt).

5. “…the Colorado cannabis industry is purely cash-based…”  You also can take on-line classes about how to grow marijuana.

6. Ben Bernanke gives a whole speech discussing the great stagnation and the “grandma test.”

Karl Smith on the liquidity leak

What Tyler calls a liquidity leak, I call markets at work. The ECB provides enough stimulus to get all of the Eurozone going but it all leaks to Germany. Fine. The German market heats up. German wages and rents rise. Retired German doctors start considering the virtues of a flat in Lisbon overlooking the harbor. German consultancies hold seminars on “How to make your  Mediterranean town competitive in the new German Outsourcing Model.”

This is the way things are supposed to work. The idea that a more competitive and efficient Germany should not command higher wages and rents is bizarre; and is only called inflation because the Eurozone, in its heart-of-hearts, doesn’t actually believe its one monetary union where the richer parts are distinguished principally by the fact that they have more money.

The link is here.  The analysis of course is correct, but I think this illustrates rather than solves the problem.

First, Portugal and Germany are not directly competing in so many export markets to a high degree.  So raising German wages and prices helps Portugal only somewhat.  Furthermore, the marginal propensity of Germans to spend, or the marginal propensity of German banks to lend, is not mainly directed toward the periphery.  Therefore the gradient of “how much inflation are Germans tolerating to get some real output effects in Portugal” is a steep one, much steeper than you would find within a traditional, one-nation, single currency area with geographically mobile money.

Imagine telling Americans that they must endure a good deal of inflation to help solve some aggregate demand problems in Ecuador and El Salvador.  No one doubts there is spillover, but if the banking system in Ecuador is falling apart, many of the possible transmission effects may not easily stick, or would not if Ecuador used more bank money and less pure currency.  (Just fyi, right now inflation in Ecuador is higher than in the U.S.; here are numbers for El Salvador.  It doesn’t look like a tight belt of monetary transmission to me, and those countries do not have the same bank insolvency problems which we are seeing in the eurozone periphery).

Second, this mechanism solves (at best) only one of the core problems of the eurozone, namely incorrect relative prices between Portugal and Germany.  It helps less with the “Portuguese nominal wages are too high” problem, the “Portuguese banks are not sound” problem, and the “Portugal badly needs structural reform” problem, among other difficulties.  The inflation would be an easier sell to the German public if it really would set the rest of the eurozone right, but that is a difficult case to make.  Just try uttering this sentence vor dem Publikum: “It’s the leak that will make this work.”

Third, one effect of this policy would be that Germans buy up a lot of Portuguese assets.  “Not that there is anything wrong with that” I hear you saying and indeed that is right.  Still, solving the crisis by selling a lot of the country to the Germans is not exactly a popular policy in a lot of the periphery and we could expect political resistance from that side as well.

You can think of this all as a rather odd and stunted “price-specie flow mechanism,” where the specie itself has limited geographic mobility.  To be sure, this means the inflation would have worked much better had it been applied in earlier years, before various periphery banking systems saw so much trouble.

My initial post on the liquidity leak was here.

What I’ve been reading

1. T. J. Clark, Picasso and Truth: From Cubism to Guernica.  I guess I had to read this one, but it did deliver as I had promised.  Excellent color plates, and overall a very good book (the best?) on what makes Picasso special.

2. C.P. Snow, Variety of Men.  Have I mentioned that most older books — beyond the immediate classics — are, well…crud?  But this series of portraits, covering such diverse figures as Ernest Rutherford and Robert Frost, is both entertaining and useful.

3. Julian Barnes, Levels of Life.  A subtle and moving short tale which cannot be described without introducing spoilers.  Avoids the problems which plagues some of Barnes’s less-deep works.  Right now out in the UK only, U.S. release coming later in the year.

4. Nicholas Murray, Aldous Huxley: A Biography, and Jeffrey Meyers, D.H. Lawrence: A Biography.  These are good books to read in tandem.

5. Mark Mazzetti, The Way of the Knife: The CIA, A Secret Army, and a War at the End of the Earth.  On the origins of drone warfare and also how the role of the CIA has changed.  The contents of this book, which cover secret intelligence (in a non-sensationalized fashion) are difficult to judge, but I can say it held my interest.

Bayonne business practice of the day

The most expensive hospital in America is not set amid the swaying palm trees of Beverly Hills or the luxury townhouses of New York’s Upper East Side.

It is in a faded blue-collar town 11 miles from Midtown Manhattan.

Based on the bills it submits to Medicare, the Bayonne Medical Center charged the highest amounts in the country for nearly one-quarter of the most common hospital treatments,  according to a New York Times analysis of 2011 data, the most recent available. No other hospital was at the top of the price list more often.

Bayonne Medical typically charged $99,689 for treating each case of chronic lung disease, five times as much as other hospitals and 17 times as much as Medicare paid in reimbursement. The hospital also charged on average of $120,040 to treat transient ischemia, a type of small stroke that has no lasting effect. That was six times the national average and 24 times what Medicare paid.

For those prices, the quality of care at Bayonne Medical is no better — or worse — than that at most other New Jersey hospitals.

The back story is this:

Bayonne Medical, which was founded in 1888, was losing nearly $1.5 million a month before it filed for bankruptcy in 2007. By 2011, under new ownership and a new financial model [sic], its patient revenue had nearly tripled and its operating income had reached $9.3 million, according to the American Hospital Directory, a publication that compiles data from Medicare and other sources about health care facilities.

Here is one commentary:

“Their model is to charge exorbitant rates, particularly for emergency room services, and if the insurance companies don’t pay them, they threaten to go after the member for the balance of billing,” said Carl King, head of national networks for Aetna, whose in-network contract was also ended by Bayonne in 2008.

You can read more here, interesting throughout.

Sentences to ponder

A family can get implicitly taxed 238% on that additional $501.

The thing is, I don’t even need to tell you what the topic is.  The original source is here.

Assorted links

1. Does parenting suffer from a cost-disease?

2. Ezra Klein interviews Bill Gates about public health and development.  Excellent piece.  Gates, by the way, is now the world’s richest man once again.

3. College enrollment is falling more than had been expected.

4. “The french fries arrive soggy.”

5. John Lanchester on Google Glass.

6. The pervasive effect of priors.

7. The culture that is English.

The Man of System

One sometimes hears arguments for busing or against private schools that say we need to prevent the best kids from leaving in order to benefit their less advantaged peers. I find such arguments distasteful. People should not be treated as means. I must confess, therefore, that I took some pleasure at the findings of a recent paper by Carrell, Sacerdote, and West:

We take cohorts of entering freshmen at the United States Air Force Academy and assign half

to peer groups designed to maximize the academic performance of the lowest ability students.

Our assignment algorithm uses nonlinear peer eff�ects estimates from the historical pre-treatment

data, in which students were randomly assigned to peer groups. We �find a negative and signi�ficant treatment eff�ect for the students we intended to help. We provide evidence that within our

“optimally” designed peer groups, students avoided the peers with whom we intended them to

interact and instead formed more homogeneous sub-groups. These results illustrate how policies

that manipulate peer groups for a desired social outcome can be confounded by changes in the

endogenous patterns of social interactions within the group.

I was reminded of Adam Smith’s discussion of exactly this issue in The Theory of Moral Sentiments:

The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder.

Do note that this discussion is not a critique of the paper which is very well done.

Does the eurozone have a monetary policy transmission mechanism? Or rather a liquidity leak?

What would happen if the ECB immediately and directly ran a helicopter drop of money to the periphery?  I don’t find that an easy question to answer.  Here is one recent report:

But the indicator [interest rate spreads] has since risen again and reached a record of 3.7 percentage points in January, indicating companies in southern Europe were paying significantly higher interest rates than northern rivals.

“Market segmentation remains, divergence in bank lending rates persists and, as a result, immediate growth prospects in the periphery are bleak,” said Huw Pill, European economist at Goldman Sachs, who was previously a senior monetary policy official at the ECB in Frankfurt.

Or read this update. Here is about how small to mid-sized Italian banks are contracting.

Would the new helicopter drop money be kept in periphery banks and lent out to stimulate business investment?  Or does the new money flee say Portugal because Portuguese banks are not safe enough, Portuguese loans are not lucrative and safe enough, and Portuguese mattresses are too cumbersome?

The former scenario implies that monetary policy should be potent.  The latter scenario implies that the helicopter drop will be for naught and the fiscal policy multiplier also will be low, on the upside at the very least (fiscal cuts still might cause a lot of damage on the downside).  I call this the liquidity leak, rather than the liquidity trap.

So which scenario is it?

Does it matter who gets the helicopter drop?  Perhaps a granny gets the money first and sticks it in the local bank.  Alternatively, a financial manager in Lisbon would transfer that same euro rather seamlessly to his second account in Frankfurt.  Under this differential scenario, changes in the distribution of wealth also have nominal and eventually real effects.

Is the flow of marginal deposits the problem or the flow of marginal loans?  Or both?

Ryan Avent suggests allowing banks to swap their risky commercial loans for safer assets.  Other ideas propose running QE on packages of small to mid-sized loans or accepting those loans as collateral at the ECB.  Of course these assets are difficult to price and also moral hazard problems would loom.  If the ECB is not “overpaying” for the small loans, they won’t be encouraged.  If the ECB is overpaying, there are plenty of Sicilian businessmen who have friends at the local bank.  The mere lending isn’t enough, the projects also need to be good ones, because in these cases we are talking about tackling issues in the real economy.  Can a long-distance ECB collateral support operation spur good, growth-inducing projects?  It is easy to see why the Germans might be skeptical.

In some regards these problems will look like liquidity traps, because monetary policy will not always work.  But in the periphery lending rates are high (albeit with restricted credit), and standard liquidity trap models will not in general apply.  Again, I call it the liquidity leak.

Liquidity trap approaches will encourage you to think in terms of raising expectations of inflation (which is indeed the correct question in many settings), but here the geographic distribution of credit and economic activity is instead the crux of the matter.  Our current macroeconomic tools are not well-suited for integration with spatial economics, I am sorry to say.

Addendum: On some related issues, read Scott Sumner.