Tyler Cowen's Blog, page 526

Master's in economics at GMU

The Mercatus MA Fellowship is a two year fellowship designed for students and young professionals who want to enter into or advance a career in public policy.  Students have gone onto careers in government (both federal agencies and Capitol Hill) and think tanks, and three have been named presidential management fellows.

Assorted links

1. Briefs from economists on the health care law.

2. Toy nationalism.

3. What would you say to the unicycling professor?

4. The new World Bank nominee on economic growth.

5. Doesn't seem to be a joke; Facebook claiming some trademark rights over "book."

The hysteresis effect on unemployed labor, and unemployment scarring

Here is a good WSJ piece on labor market hysteresis, a topic also of recent interest to Bernanke, Summers, DeLong, and others.  I've been trying to learn more about that literature, and here is what I came up with.

Pissarides has a seminal 1992 paper on the loss of skill during unemployment.

This very good paper (pdf) looks at women who take time off to care for their elderly parents, though there is an endogeneity problem.  Arguably it is the workers on a lower earnings trajectory who will take the time off.  Here is a much earlier 1980s paper on how intermittent labor force attachment lowers women's wages.

Holocaust survivors seem to have earned lower rates of return on human capital (though interestingly their children do better on average).

This German paper (pdf) shows that state dependence of earnings is, and should be, much lower when the unemployment has been generally high for the labor force as a whole.  This paper finds there is not much "scarring effect' in southern Italy, where unemployment perhaps is less socially shameful, but there is a significant scarring effect in northern Italy; social norms may matter.

This paper on Sweden suggests that one year out of work leads to a depreciation of skills — the skill of reading in their sample — is equal to losing five percentage points in the broader distribution of that skill.

Here is one paper from the psychology literature (with good cites); there are adverse psychological effects for the lower net worth unemployed but not necessarily for the higher net worth individuals.

Here is a whole host of papers on "unemployment scarring."  This one, on the UK, gives a concrete number: "Our results suggest a scar from early unemployment in the magnitude of 13–21% at age 42. However, this penalty is lower, at 9–11%, if individuals avoid repeat exposure to unemployment."  There are some reasonable controls for education and the like, though none for conscientiousness.

I was surprised to learn that "unemployment scarring" is a much more effective search term than is "labor hysteresis."

Is there any good paper which seriously takes endogeneity of separation into account?

At the Frontier of Personalized Medicine

In an essay on frighteningly ambitious startups Paul Graham writes:

…in 2004 Bill Clinton found he was feeling short of breath. Doctors discovered that several of his arteries were over 90% blocked and 3 days later he had a quadruple bypass. It seems reasonable to assume Bill Clinton has the best medical care available. And yet even he had to wait till his arteries were over 90% blocked to learn that the number was over 90%. Surely at some point in the future we'll know these numbers the way we now know something like our weight. Ditto for cancer. It will seem preposterous to future generations that we wait till patients have physical symptoms to be diagnosed with cancer. Cancer will show up on some sort of radar screen immediately.

An amazing paper in the March 16 issue of Cell illustrates the frontier of what is possible. Geneticist Michael Snyder of Stanford led a team that sequenced his and his mother's genome. Then, over a two year period they used blood and other assays to track in Snyder's body transcripts, proteins and metabolites. In the process they generated billions of data points and were able to watch in near real-time what happened as Snyder's body fought two infections and the surprising onset of diabetes.

From a writeup in Science Daily:

…"We generated 2.67 billion individual reads of the transcriptome, which gave us a degree of analysis that has never been achieved before," said Snyder. "This enabled us to see some very different processing and editing behaviors that no one had suspected. We also have two copies of each of our genes and we discovered they often behave differently during infection." Overall, the researchers tracked nearly 20,000 distinct transcripts coding for 12,000 genes and measured the relative levels of more than 6,000 proteins and 1,000 metabolites in Snyder's blood.

…The researchers identified about 2,000 genes that were expressed at higher levels during infection, including some involved in immune processes and the engulfment of infected cells, and about 2,200 genes that were expressed at lower levels, including some involved in insulin signaling and response.

…The exercise was in stark contrast to the cursory workup most of us receive when we go to the doctor for our regular physical exam. "Currently, we routinely measure fewer than 20 variables in a standard laboratory blood test," said Snyder, who is also the Stanford W. Ascherman, MD, FACS, Professor in Genetics. "We could, and should, be measuring many, many thousands."

One side-note: the techniques that the authors use to analyze their time-series data seem (to me) to be behind the curve compared to the VARs used in econometrics. Impulse response functions are what they need! With applications from economics to medicine to marketing, the statistics of big data is the field of the future.

Addendum: Derek Lowe offers further thoughts and Andrew S. points us to this TED video on blood tests without needles.

Has Africa really turned the corner?

The paper shows that between 1975 and 2005 the size, diversity and sophistication of industry in Africa have all declined.

That is from a recent study by John Page, gated version here.  The growth has come largely through commodities.

Hat tip goes to @ClaireMelamed.

The return of the house call

In the Netherlands, where else?:

In early March, the NVVE opened the world's first euthanasia clinic. It's called the Levenseindekliniek, the "end of life clinic." It serves as a point of contact for all Dutch people who want to die but don't have a primary care physician prepared to help them do so. The clinic has mobile euthanasia teams, each of which consists of a doctor and a nurse. When an individual qualifies for the program after passing a screening, one of the teams makes a house call to inject two drugs. One puts the patient into a deep sleep, while the other stops all breathing, leading to death.

The rest of the story is here.  And there is this:

The sweets were distributed two years ago as part of a promotional campaign. At the time, her organization was calling for Dutch pharmacies to be allowed to sell lethal drugs to individuals with a prescription. Printed on the wrappers is the word Laatstwilpil, or "last will pill."

*The Clash of Economic Ideas*

In 1958, on his first visit to India, the Hungarian-British development economist Peter Bauer was eager to meet the Indian economist B.R. Shenoy.  Bauer knew the name from a "Note of Dissent on the Memorandum of the Economists' Panel," which Shenoy had written criticizing India's Second five-Year Plan.  In 1955 the Indian government had recruited twenty-one senior Indian economists for the Panel of Economists, chaired by the minister of finance, to review the plan.  Twenty of the economists had signed a memorandum endorsing the plan.  Professor Shenoy was the lone dissenter  Shenoy's "Note of Dissent" was an annoyance to members of the Indian Planning Commission; to Prime Minister Nehru, who had initiated the planning effort; to Nehru's adviser P.C. Mahalanobis, who had drafted the plan; and even to international aid officials, who overwhelmingly supported the planning effort.  Shenoy had become persona non grata in official economic policy-making circles.

Yet Shenoy turned out largely to be right.

That is from the forthcoming excellent book by Lawrence H. White, Amazon link here.  The book is not mostly about India, but it is about the role of economic ideas in shaping economic outcomes.  The chapter on India is my favorite, however, and it is perhaps the very best place to start to understand the failures of India's planning period.

White also points our attention to Milton Friedman's 1955 Memorandum to the Indian Government, which is I believe not well known, not even among Friedman fans.

Very good sentences

The trick of conservatism as a disposition is that it should have pessimism of the intellect and optimism of the world.

That is from Charles Moore, with a nod to Gramsci, via The Browser, the entire interview is good.

Assorted links

1. How reliable are grades?, from the Fairfax Times.

2. Interview with Nick Bostrom on existential risk.

3. How movie stars are insured.

4. MIE: how to lower the crime rate in El Salvador.

5. Karl Smith on bubbles and the term structure, and the new Greek yield curve.

6. Chinese fiscal (monetary) policy.

The Age of the Shadow Bank Run

The introduction to my column is this:

I RECENTLY asked a group of colleagues — and myself — to identify the single most important development to emerge from America's financial crisis. Most of us had a common answer: The age of the bank run has returned.

I would like to see more discussion of how the permanently high demand for T-Bills as collateral will affect the U.S. economy:

Another feature of this new order is that more and more financial transactions will be collateralized with the safest securities possible: United States Treasuries. Demand for them will remain high, and low borrowing costs will ease our fiscal problems. Still, the resulting low rates of return serve as a tax on safe savings, encourage a risky quest for yield and redistribute resources to government borrowing and spending. It isn't healthy for the private sector when investors are so obsessed with holding wealth in the form of safe governmental guarantees.

The bottom line is this:

The core problem is that the growth of short-term credit has been outracing our ability to protect it, and since 2008 most investors have realized that these shadow-banking transactions are not risk-free.

I didn't have space to discuss whether this was a corporate governance issue or a moral hazard issue.  Under one view, managers/CEOs could purchase capital insurance to plug the runs, they just don't have the incentive to do so.  The downside simply isn't that bad for them.  Under another view, the market for "runs insurance" creates too much moral hazard to be feasible, or to some extent the market exists (CDS, etc.) but it just pushes the problem back another level and may even make matters worse by creating another level of credit.  A third view is that the collateral behind these short-term loans is somewhat of a farce, since it (sometimes) has value problems precisely in those world states when it needs to be called in.  It is probably a bit of each.

The conclusion is this:

In short, no promising financial path is before us. It's good that the American economy seems to be recovering, and this may shove some problems into the future. But banking and finance remain a mess at their core. Welcome to the 21st century.