Category: Economics

European Central Bank (ECB) Warns that Cash-for-Clunkers “May Delay Necessary Structural Change”

(p. A9) Cash-for-clunkers programs have no lasting economic benefit and could even lead to a “substantial weakening” in euro-zone automobile sales next year, the European Central Bank said.

The findings, though far from original, amount to an official slap on the wrist to European governments including those of Germany, France and Spain that rolled out the popular programs to stoke demand in their auto sectors at the height of the financial crisis.
. . .
Such incentive measures should be applied “with caution,” the ECB said, “as they may hamper the efficiency of the functioning of a free-market economy and may delay necessary structural change, thereby undermining overall income and employment prospects in the longer term.”

For the full story, see:
BRIAN BLACKSTONE. “Clunker Plans Are Risky Route, Central Bank Says.” The Wall Street Journal (Fri., OCTOBER 16, 2009): A9.
(Note: ellipsis added.)

Google Does Good

BookArkCartoon2009-10-23.jpg Source of cartoon: online version of the NYT commentary quoted and cited below.

(p. A25) . . . the vast majority of books ever written are not accessible to anyone except the most tenacious researchers at premier academic libraries. Books written after 1923 quickly disappear into a literary black hole. With rare exceptions, one can buy them only for the small number of years they are in print. After that, they are found only in a vanishing number of libraries and used book stores. As the years pass, contracts get lost and forgotten, authors and publishers disappear, the rights holders become impossible to track down.

Inevitably, the few remaining copies of the books are left to deteriorate slowly or are lost to fires, floods and other disasters. While I was at Stanford in 1998, floods damaged or destroyed tens of thousands of books. Unfortunately, such events are not uncommon — a similar flood happened at Stanford just 20 years prior. You could read about it in The Stanford-Lockheed Meyer Library Flood Report, published in 1980, but this book itself is no longer available.
Because books are such an important part of the world’s collective knowledge and cultural heritage, Larry Page, the co-founder of Google, first proposed that we digitize all books a decade ago, when we were a fledgling startup. At the time, it was viewed as so ambitious and challenging a project that we were unable to attract anyone to work on it. But five years later, in 2004, Google Books (then called Google Print) was born, allowing users to search hundreds of thousands of books. Today, they number over 10 million and counting.
. . .
In the Insurance Year Book 1880-1881, which I found on Google Books, Cornelius Walford chronicles the destruction of dozens of libraries and millions of books, in the hope that such a record will “impress the necessity of something being done” to preserve them. The famous library at Alexandria burned three times, in 48 B.C., A.D. 273 and A.D. 640, as did the Library of Congress, where a fire in 1851 destroyed two-thirds of the collection.
I hope such destruction never happens again, but history would suggest otherwise. More important, even if our cultural heritage stays intact in the world’s foremost libraries, it is effectively lost if no one can access it easily. Many companies, libraries and organizations will play a role in saving and making available the works of the 20th century. Together, authors, publishers and Google are taking just one step toward this goal, but it’s an important step. Let’s not miss this opportunity.

For the full commentary, see:
SERGEY BRIN. “A Library to Last Forever.” The New York Times (Fri., October 9, 2009): A25.
(Note: ellipses added.)
(Note: the online version is dated October 8th.)

Samuel Johnson Saw Benefits of Free Markets

(p. A19) In “A Journey to the Western Islands of Scotland,” an account of his travels with James Boswell through the Hebrides in 1773, Johnson vividly described the desolation of a feudal land, untouched by commercial exuberance. He was struck by the utter hopelessness in a country where money was largely unknown, and the lack of basic material improvements–the windows, he noticed, did not operate on hinges, but had to be held up by hand, making the houses unbearably stuffy.

He was even more struck by the contrast between places where markets thrived and those where they didn’t. In Old Aberdeen, where “commerce was yet unstudied,” Johnson found nothing but decay, whereas New Aberdeen, which “has all the bustle of prosperous trade,” was beautiful, opulent, and promised to be “very lasting.”
Johnson also understood that what Smith would later call the division of labor was instrumental for human happiness and progress. “The Adventurer 67,” which he wrote in 1753 at the height of a commercial boom (and 23 years before Smith published “The Wealth of Nations”), delights in the sheer number of occupations available in a commercial capital like London.

For the full commentary, see:
ELIZA GRAY. “Samuel Johnson and the Virtue of Capitalism; The great 18th century writer on commerce and human happiness.” The Wall Street Journal (Fri., Sept. 11, 2009): A19.

Federal “Stimulus” Money Delays Omaha Road Work

Omaha132ndStreet2009-10-09.jpg “Work has been put on hold for this stretch of 132nd Street between Blondo Street and West Maple Road. Omaha officials say the stimulus funds will be worth the wait, but some nearby residents are upset about the slowdown.” Source of caption and photo: online version of the Omaha World-Herald article quoted and cited below.

We live near the still-two-lane stretch of 132nd pictured above, and were happy to read in the Omaha World-Herald early last spring that the city would be finishing the widening of 132nd, by widening the above stretch during the summer of 2009. As the summer progressed and widening did not, we became more and more puzzled.
Well, after you read the passages quoted below, you will ‘know the rest of the story’ as Paul Harvey used to say:

(p. 1A) The federal stimulus program, which was designed to accelerate roads projects around the country, instead put the brakes on widening a major Omaha thoroughfare.

The chance to grab $3.5 million in stimulus funds was worth delaying a widening project along 132nd Street between West Maple Road and Blondo Street, Omaha officials decided.
Work was supposed to begin last summer. Now the project between the Champions and Eagle Run golf courses won’t begin until next spring.
Preliminary work was begun in March, when utility lines were moved out of the way. Part of the street was closed for that work.
Area residents expected more crews to start work during the summer.
When nothing happened for months, a handful of residents in the nearby Sunridge neighborhood called the city. They com-(p. A2)plained that digging from the utility work was causing mud and rainwater to pool near the subdivision’s entrances off 132nd Street.
Resident Mary Ellen Pollard was surprised to find out that the widening work had been put on hold because of the stimulus program.
“I thought that stimulus package was for projects that were ready to go,” she said Monday. “If it was ready to go, why didn’t they proceed with it? . . . The barricades are up. Let’s go get it done.”
Plans change, public works officials said.
Meeting federal stimulus guidelines for environmental studies on the 132nd Street project, plus other planning and documentation requirements, took several months, City Engineer Charlie Krajicek said.
“We expected to have some work going this year, but it just didn’t work out,” he said.

For the full story, see:
Tom Shaw. “Stimulus slows 132nd St. work.” Omaha World-Herald (Tuesday October 6, 2009): 1A-2A.
(Note: the online version of the article is dated Weds., October 7 and has the slightly expanded title: “Stimulus Watch: Program slows 132nd St. work.”)
(Note: ellipsis in original.)

Omaha132ndStreetMap2009-10-09.jpg

Source of map: online version of the Omaha World-Herald article quoted and cited above.

Health Care Incentives and Information Improve When Patients Are Payers

Nobel Prize winning economist Vernon Smith sees that the current health care system is an incentive and information “nightmare.” The third parties, who pay, have neither the incentive nor the information to reward the providers who do a good job. And patients, who have the information, do not have the power or incentives to reward those who do a good job. And since providers are not being rewarded for doing a good job, they will only avoid becoming cynical bureaucrats as long as they are mission-driven saints.
A better system, that goes a long way toward Smith’s “solution,” has been suggested by Susan Feigenbaum, who suggests that third parties provide payments directly to patients, who then may choose what services to buy from which providers.
Here is the core of Smith’s analysis:

(p. A11) The health-care provider, A, is in the position of recommending to the patient, B, what B should buy from A. A third party–the insurance company or the government–is paying A for it.

This structure defines an incentive nightmare.
. . .

I don’t know whether this problem has a solution. If it does, I think it requires us to find mechanisms whereby third-party payment is made to the patient, B, who in turn pays A, supplemented with any co-payment from B for services. Hence, from the moment B seeks services from A both know who is going to be paying A for what is delivered. A and B each has need for what the other brings to the table, and this structure carries the potential for nurturing the relationship between A and B. B is empowered to become better informed about the services recommended by various A’s that he might choose among, and the A’s might find it particularly important to build good reputations with B’s.

For the full commentary, see:
VERNON L. SMITH. “The ABC Dilemma of Health Reform; Third-party payment creates a big incentive problem.” The Wall Street Journal (Sat., OCTOBER 16, 2009): A11.
(Note: ellipsis added.)

Feigenbaum’s prescient suggestion for reform can be found in:
Feigenbaum, Susan. “Body Shop’ Economics: What’s Good for Our Cars May Be Good for Our Health.” Regulation 15, no. 4 (Fall 1992): 26-27.

Gallup Finds Highest Doubts of Government in Decades

(p. A23) If you want to know why Americans are so fearful of a government takeover of the health-care system, take a look at the results of a new Gallup poll on government waste released Sept. 15. One question posed was: “Of every tax dollar that goes to Washington, D.C., how many cents of each dollar would you say is wasted?” Gallup found that the mean response was 50 cents. With Uncle Sam spending just shy of $4 trillion this year, that means the public believes that $2 trillion is wasted.

In a separate poll released on Monday, Gallup found that nearly twice as many Americans believe that there is “too much government regulation of business and industry” as believe there is “too little” (45% to 24%).
Perhaps most significantly, in both of these polls Gallup found that skepticism about government’s effectiveness is the highest it’s been in decades. “Perceptions of federal waste were significantly lower 30 years ago than today,” say the Gallup researchers. Even when Ronald Reagan was elected president in 1980 with the help of the antigovernment revolt of that era, Americans believed only 40 cents of every dollar was wasted, according to Gallup.
. . .
Over the last decade, the federal government has become bloated and inefficient. Voters are on to the scam. Mr. Obama keeps calling federal spending an “investment,” but Americans apparently feel this is the worst investment they’ve ever made. They’ve come to regard Washington as a $2 trillion Bridge to Nowhere. They are right.

For the full commentary, see:
STEPHEN MOORE. “Our $2 Trillion Bridge to Nowhere; Americans believe Washington squanders half of every tax dollar.” The Wall Street Journal (Weds., SEPTEMBER 23, 2009): A23.
(Note: ellipsis added.)

Tax Cuts Better Than Stimulus Spending for Raising GDP

(p. A23) The global recession and financial crisis have refocused attention on government stimulus packages. These packages typically emphasize spending, predicated on the view that the expenditure “multipliers” are greater than one–so that gross domestic product expands by more than government spending itself. Stimulus packages typically also feature tax reductions, designed partly to boost consumer demand (by raising disposable income) and partly to stimulate work effort, production and investment (by lowering rates).

The existing empirical evidence on the response of real gross domestic product to added government spending and tax changes is thin. In ongoing research, we use long-term U.S. macroeconomic data to contribute to the evidence. The results mostly favor tax rate reductions over increases in government spending as a means to increase GDP.
. . .
The bottom line is this: The available empirical evidence does not support the idea that spending multipliers typically exceed one, and thus spending stimulus programs will likely raise GDP by less than the increase in government spending. Defense-spending multipliers exceeding one likely apply only at very high unemployment rates, and nondefense multipliers are probably smaller. However, there is empirical support for the proposition that tax rate reductions will increase real GDP.

For the full commentary, see:
ROBERT J. BARRO AND CHARLES J. REDLICK. “Stimulus Spending Doesn’t Work; Our new research shows no evidence of a Keynesian ‘multiplier’ effect. There is evidence that tax cuts boost growth.” The Wall Street Journal (Thurs., OCTOBER 1, 2009): A23.
(Note: ellipsis added.)

A longer and much more detailed account of Barro and Redlick’s recent research on this topic can be found in:
Barro, Robert J., and Charles J. Redlick. “Macroeconomic Effects from Government Purchases and Taxes.” NBER Working Paper # w15369, Sept. 2009.

Dutch Were Too Busy Trading to Build a Church

NewAmsterdamPrint2009-09-26.jpg “Print of New Amsterdam by Joost Hartgers, 1626.” Source of caption and image: online version of the WSJ article quoted and cited below.

(p. A15) The financial collapse of 2008 and the Great Recession have had, not surprisingly, a major adverse impact on the economy of the country’s financial center, New York City. There have been over 40,000 job losses in the financial community alone and both city and state budgets are deeply dependent on tax revenues from this one industry. There has been much talk that New York might take years to recover–if, indeed, it ever can.

But if one looks at the history of New York there is reason for much optimism. The city’s whole raison d’être since its earliest days explains why.
The Puritans in New England, the Quakers in Pennsylvania, and the Catholics in Maryland first and foremost came to what would be the United States to find the freedom to worship God as they saw fit. The Dutch–who invented many aspects of modern capitalism and became immensely rich in the process–came to Manhattan to make money. And they didn’t much care who else came to do the same. Indeed, they were so busy trading beaver pelts they didn’t even get around to building a church for 17 years.
Twenty years after the Dutch arrived, the settlement at the end of Manhattan had only about a thousand inhabitants. But it was already so cosmopolitan that a French priest heard no fewer than 18 languages being spoken on its streets.
. . .
Deep within the heart of this vast metropolis–like the child within the adult–there is still to be found that little hustly-bustly, live-and-let-live, let’s-make-a-deal Dutch village. And the creation of wealth is still the city’s dearest love.

For the full commentary, see:
JOHN STEELE GORDON. “Opinion; Don’t Bet Against New York; The financial crisis has been devastating, but the city has reinvented itself many times before..” The Wall Street Journal (Sat., Sept. 19, 2009): A15.
(Note: ellipsis added.)

Doctors Seek to Regulate Retail Health Clinic Competitors

NursePractitioner2009-09-26.jpg“A nurse practitioner with a patient at a retail clinic in Wilmington, Del.” Source of caption and photo: online version of the WSJ article quoted and cited below.

Clayton Christensen, in a chapter of Seeing What’s Next, and at greater length in The Innovator’s Prescription, has persuasively advocated the evolution of nurse practitioners and retail health clinics as disruptive innovations that have the potential to improve the quality and reduce the costs of health care.
An obstacle to the realization of Christensen’s vision would be government regulation demanded by health care incumbents who would rather not have to compete with nurse practitioners and retail health clinics. See below for more:

(p. B1) Retail health clinics are adding treatments for chronic diseases such as asthma to their repertoire, hoping to find steadier revenue, but putting the clinics into greater competition with doctors’ groups and hospitals.

Walgreen Co.’s Take Care retail clinic recently started a pilot program in Tampa and Orlando offering injected and infused drugs for asthma and osteoporosis to Medicare patients. At some MinuteClinics run by CVS Caremark Corp., nurse practitioners now counsel teenagers about acne, recommend over-the-counter products and sometimes prescribe antibiotics.
. . .
As part of their efforts to halt losses at the clinics, the chains are lobbying for more insurance coverage, and angling for a place in pending health-care reform legislation, while trying to temper calls for regulations.
. . .
(p. B2) But such moves are raising the ire of physicians’ groups that see the in-store clinics as inappropriate venues for treating complex illnesses. In May, the Massachusetts Medical Society urged its members to press insurance companies on co-payments to eliminate any financial incentive to use retail clinics.
. . .
The clinics are helping alter the practice of medicine. Doctors are expanding office hours to evenings and weekends. Hospitals are opening more urgent-care centers to treat relatively minor health problems.

For the full story, see:
AMY MERRICK. “Retail Health Clinics Move to Treat Complex Illnesses, Rankling Doctors.” The Wall Street Journal (Thurs., SEPTEMBER 10, 2009): B1-B2.
(Note: ellipses added.)

A brief commentary by Christensen (and Hwang) on these issues, can be found at:

CLAYTON CHRISTENSEN and JASON HWANG. “How CEOs Can Help Fix Health Care.” The Wall Street Journal (Tues., July 28, 2009).

For the full account, see:
Christensen, Clayton M., Jerome H. Grossman, and Jason Hwang. The Innovator’s Prescription: A Disruptive Solution for Health Care. New York: NY: McGraw-Hill, 2008.

RetailHealthClinicGraph2009-09-26.gif

Source of graph: online version of the WSJ article quoted and cited above.

Adaptation Greatly Reduces Negative Effects from Global Warming

One of the advantages of flexible economic systems, such as capitalism, is that they can adapt to unexpected or exogenous changes in the environment (e.g., changes in the weather). In the empirical analysis quoted from below, the primary finding is that roughly half of the short-term negative effects on income from rising temperatures, “are offset in the long run through adaptation.”
Almost all of the countries in the sample of 12 deviate substantially from the ideal of entrepreneurial capitalism. So the reduction by half is probably a much smaller amount of adaptation than would occur in a sample of countries that had adopted policies that allowed a flourishing of entrepreneurship.

(p. 203) Using subnational data from 12 countries in the Americas, we show that the negative crosssectional relationship between temperature and income exists within countries, as well as across countries. We then provide a theoretical framework for reconciling the substantial, negative association between temperature and income in cross section with the even stronger short-run effects of temperature shown in panel models. The theoretical framework suggests that half of the negative short-term effects of temperature are offset in the long run through adaptation.

Source:
Dell, Melissa, Benjamin F. Jones, and Benjamin A. Olken. “Temperature and Income: Reconciling New Cross-Sectional and Panel Estimates.” American Economic Review 99, no. 2 (May 2009): 198-204.