Tyler Cowen's Blog, page 428

Marijuana Liberalization Reduces Drunk Driving Fatalities

Anderson, Hansen and Rees look at Medical Marijuana Laws, Traffic Fatalities, and Alcohol Consumption:

To date, 17 states have passed medical marijuana laws, yet very little is known about their effects. The current study examines the relationship between the legalization of medical marijuana and traffic fatalities, the leading cause of death among Americans ages 5 through 34. The first full year after coming into effect, legalization is associated with an 8 to 11 percent decrease in traffic fatalities. The impact of legalization on traffic fatalities involving alcohol is larger and estimated with more precision than its impact on traffic fatalities that do not involve alcohol. Legalization is also associated with sharp decreases in the price of marijuana and alcohol consumption, suggesting that marijuana and alcohol are substitutes. Because alternative mechanisms cannot be ruled out, the negative relationship between legalization and alcohol-related traffic fatalities does not necessarily imply that driving under the influence of marijuana is safer than driving under the influence of alcohol.

The decline in alcohol consumption is consistent with the fact that alcohol producers have opposed marijuana legalization. Hat tip: Scott Cunningham.

Don’t overinterpret this

Still, it is an interesting development:

Researchers have developed a genetically modified tomato that produces a certain peptide which will lower the plaque buildup in the arteries of mice. This could also work in humans.

Here is more, via @Harpersnotes.

Fiscal multipliers at the zero bound in an open economy

Let’s continue our look at debates over UK fiscal adjustment.

Will fiscal policy work in an open economy? The standard view has

been that in a Mundell-Fleming model fiscal expansion appreciates

the exchange rate and hurts the trade balance, thus offsetting

the fiscal policy. The U.S. may be too closed an economy for this

to be a big deal, but for the UK it seems this might apply, at

least if one is operating within Keynesian frameworks.

The recent Keynesian response has cited the “lower bound” as a

reason why fiscal policy still may be effective in an open

economy. But what does this literature really show? Let’s take a

brief tour of it, starting with the August 2012 piece by Emmanuel Farhi and Ivan Werning,

brilliant Harvard and MIT guys. Their piece is clear and

excellent, and it shows what the case for fiscal policy in this

setting looks like. (I don’t read them as offering concrete

advice to current governments and thus I have no criticism of

their paper, which I am pleased to have spent time with.)

Here are a few points:

1. “…the effects of government consumption work through

inflation.” In other words, if you think the BOE has greater

influence over inflation than UK government spending, you do not

need the other results of this paper for macro policy. I get the

point of “the central bank cannot precommit to elaborate

targeting schemes over time,” but that’s not what we need here.

We just need some basic money-induced price inflation to render

monetary policy dominant over fiscal policy, even in this case.

And pretty much everyone thinks the BOE can influence the rate of

price inflation. The rates of price inflation we are getting are

not some kind of strange coincidence.

By the way, even with a so-called liquidity trap, the BOE also

can play QE with the exchange rate, as do the Swiss.

2. The zero bound open economy model predicts that fiscal

tightening leads to exchange rate appreciation (contra the usual

Mundell-Fleming case), yet here is the British pound against the

dollar:

Not an obvious fit to the prediction. There are countervailing

factors, to be sure, but maybe that’s the broader story too.

3. The model in the paper suggests that “current” fiscal policy

won’t much help aggregate demand. Fiscal policy does best the

further away in time it is, provided it does not happen

after the liquidity trap goes away. This makes sense if you view

inflation as the channel for the effectiveness of fiscal policy.

Getting the inflation over with won’t help much, but if it hangs

over people’s heads they will spend more in response. In fact

there is even a problem that the multiplier can be infinite if

fiscal policy is sufficiently well-time and back-loaded.

None of this corresponds with the advice we actually are hearing.

4. The greater the nominal stickiness of prices in the model, the

weaker the Keynesian effects and in the limiting case they

approach zero. Yet we are told (by the policy commentators) that

nominal stickiness is of the utmost importance.

Let’s consider a few other pieces and points:

5. It is common for these papers to rely on squirrely mechanisms

of intertemporal substitution, which in other contexts are mocked

by Keynesians. Consider

Fujiwara and Ueda, a commonly cited paper on fiscal

multipliers and the zero bound:

Incomplete stabilization of marginal costs due to the existence

of the zero lower bound is a crucial factor in understanding

the effects of fiscal policy in open economies. Thanks to

this, government spending in the home country raises the

marginal costs of home-produced goods, which increases expected

inflation rates and decreases real interest rates.

Intertemporal optimization causes consumption to increase, so

that the fiscal multiplier exceeds one. While government

spending continues, the price of home-produced goods increases

more than that of foreign-produced goods. Expecting that two

countries are at symmetric equilibrium when government spending

ends, the home currency depreciates and the home terms of trade

worsen on impact when government spending begins. That shifts

demand for goods from foreign-produced goods to home-produced

ones. The fi…scal spillover thus may become negative depending

on the intertemporal elasticity of substitution in consumption.

If a passage like that came from an RBC theorist it would be

mocked, but in support of activist fiscal policy it passes

without critical comment.

6. When it comes to Japan and the Japanese lower bound, the

empirical evidence seems to show that “standard theory” predicts

quite well and the stranger zero bound theories do not predict

well. Here is Braun and

Korber:

We show that a prototypical New Keynesian model fit to Japanese

data exhibits orthodox dynamics during Japan’s episode with

zero interest rates. We then demonstrate that this

specification is more consistent with outcomes in Japan than

alternative specifications that have unorthodox properties….

Those same zero bound Keynesian models predict that economies

should have quite volatile responses to real shocks, yet they do

not:

We also considered specifications of the model that have larger

government purchase multipliers and some which also exhibit

unorthodox predictions for the response of output to labor tax

and technology shocks. We found that these specifications are

difficult to square with the fact that the period of zero

interest rates in Japan between 1999 and 2006 was a period of

low economic volatility. All of the specifications predict the

opposite should have occurred. The specifications with

unorthodox properties also have other problems. They predict

large resource costs of price adjustment which are difficult to

reconcile with empirical evidence that menu costs are small and

they require that households expect the period of zero interest

rates to be counterfactually long.

Need I state the irony that proponents of the relevance of the

zero bound often insist that real shocks simply aren’t making

such a big difference in recent years? That is inconsistent with

the basic model which they otherwise are citing.

7. In these settings (and assuming away all the problems above),

a lot of the effectiveness of fiscal policy, or sometimes all of

it, comes from “beggar thy neighbor” effects. Read Cook

and Devereux for some illustrative cases. Beggar thy neighbor

strategies are criticized and rejected when Germany (supposedly)

does them through its export prowess, but in the context of

fiscal policy they seem to be given a free pass.

8. In fact I could make further points but I believe that is

enough.

The bottom line: A look at this new and

interesting literature shows it does not support the

interpretations which the “policy commentariat” Keynesians are

putting on it and in some regards it even opposes those

interpretations. When it comes to UK fiscal policy, we are seeing

again what I described

last week: exaggeration and a lack of transparency in

argumentation.

Assorted links

1. Nash equilibrium and NBA player size.

2. Cockatoo can make its own tools.

3. Felix Salmon on the FT in play.

4. An appraisal of Elliott Carter; if you don’t know his work, he was an extremely impressive creator, producing gems past the age of 100.

5. Our hearts grow smarter.

6. Discussion of Chomsky and statistical learning in linguistics.

In case you hadn’t noticed

A slim majority of Puerto Ricans sought to change their ties with the United States and become the 51st U.S. state in a non-binding referendum that would require final approval from Congress.

Here is more.

Thomas McCraw passes away at 72

I loved his Schumpeter biography, and he had a long and distinguished career as an economic and business historian at Harvard.  Here are previous MR posts on McCraw.  Here is an obituary.

Conor Friedersdorf nails it

Before rank-and-file conservatives ask, “What went wrong?”, they should ask themselves a question every bit as important: “Why were we the last to realize that things were going wrong for us?”

Barack Obama just trounced a Republican opponent for the second time. But unlike 4 years ago, when most conservatives saw it coming, Tuesday’s result was, for them, an unpleasant surprise.

Here is a key sentence:

They were operating at a self-imposed information disadvantage.

Read the whole thing.  They should elevate him to something too.  And as Matt Lewis said on Twitter:

Conservative media outlets promote too many voices who mislead the base AND turnoff independents. Good for ratings & clicks/bad for America.

Marijuana, Prescription Requirements and the Doctrine of Informed Consent

It used to be common for physicians to withhold information and even to misinform patients “for their own good.” Authorities as venerable as Hippocrates advocated that some information be concealed from patients. Today, most of us would find it outrageous if a physician misinformed his patient to perform surgery regardless of the reasons. Changes in public opinion and a series of court cases have overruled medical paternalism. In the 1914 case Schloendorff v. Society of New York Hospital, Benjamin Cardozo wrote:

Every human being of adult years and sound mind has a right to determine what shall be done with his own body; and a surgeon who performs an operation without his patient’s consent commits an assault for which he is liable in damages. This is true except in cases of emergency where the patient is unconscious and where it is necessary to operate before consent can be obtained.

It wasn’t until the late 1950s and in particular the 1957 case Salgo v. Leland Stanford, however, that the doctrine of informed consent (DIC) became well accepted in practice and in medical ethics. The doctrine of informed consent has both consequentialist and deontological justifications. On the consequentialist side, informed consent generally leads to better medical outcomes. Patients are also better able to understand their own overall interests than are others so the DIC leads to better overall welfare. On the deontological side, it is today widely accepted that all patients have a right to autonomy and that physicians cannot justly abrogate that right even in the patient’s own interest. It would be wrong to require someone to undergo surgery even if such surgery was necessary to save their life.

In an interesting paper in the Journal of Medical Ethics Jessica Flanigan argues that the same reasons which support the doctrine of informed consent also support a patient’s right to use pharmaceuticals without a doctor’s prescription. Based on Peltzman and Temin she argues that the consequential outcomes of prescription-only have not been good, at least not overwhelmingly so. Most importantly, patient autonomy applies just as much to the choice to medicate as to the refusal to medicate:

Citizens have rights of self-medication for the same reasons that they have rights of informed consent. The prescription drug system has bad consequences and it privileges regulators’ and physicians’ judgements about a patient’s health over the patient’s judgement about her overall well-being. Most troublingly, the prescription drug system violates patients’ rights.

Instead, I propose that prohibitive pharmaceutical policies, which are a kind of strong paternalism, be replaced by nonprohibitive policies that enable patients to obtain whatever medicines they choose while promoting informed consumer choices by making expert advice readily available.

Notice that the argument is not simply that prescription only requirements are against social welfare but rather that support for the doctrine of informed consent also supports the right to use pharmaceuticals without getting the consent of an official.

I am pleased that the voters in Colorado and Washington approved adults to use marijuana for any purpose. In the future people will be shocked that we arrested millions for marijuana use in the same way that we are shocked that doctors used to perform surgeries without a patient’s informed consent.

Do Women Avoid Salary Negotiations?

The subtitle of the paper is Evidence from a Large Scale Natural Field Experiment and the authors are Andreas Leibbrandt and John List.  Here is the abstract:

One explanation advanced for the persistent gender pay differences in labor markets is that women avoid salary negotiations. By using a natural field experiment that randomizes nearly 2,500 job-seekers into jobs that vary important details of the labor contract, we are able to observe both the nature of sorting and the extent of salary negotiations. We observe interesting data patterns. For example, we find that when there is no explicit statement that wages are negotiable, men are more likely to negotiate than women. However, when we explicitly mention the possibility that wages are negotiable, this difference disappears, and even tends to reverse. In terms of sorting, we find that men in contrast to women prefer job environments where the ‘rules of wage determination’ are ambiguous. This leads to the gender gap being much more pronounced in jobs that leave negotiation of wage ambiguous.

An ungated copy I do not see, does anyone?

Assorted links

1. Is the romantic view more true for the weird?

2. Elliott Carter passes away at 103; here is my favorite Carter CD.

3. Miles Kimball refines the “abolish currency” proposal.

4. More on the GMU expansion to Songdo, South Korea.

5. How the Japanese cut cucumbers (video).

6. Gas for sex price controls don’t work markets in everything.

7. A loyal MR reader writes to me: “You may have seen he updated his profile: This very OKCupid profile has been linked from Marginal Revolution (one of the most popular econblogs). I swear I am not making this up.”  Link here.

8. Will top economists be swapped in Catalonia?  Here is the latest rumor (in Spanish).