Economics – Page 242 – artdiamondblog.com

Lack of Legal Status for Poor Keeps Them “In Constant Fear”

The passage below is quoted from a WSJ summary of an article in the July 16, 2007 issue of Time:

(p. B5) Writing in Time magazine, Ms. Albright, former U.S. secretary of state, and Mr. de Soto, a Peruvian-born economist who heads the Institute for Liberty and Democracy in Lima, say that about half of the world’s population work in shadow economies. They generally lack birth certificates, legal addresses or, crucially, deeds to their shacks and market stalls. “Without legal documents, they live in constant fear of being evicted by local officials or landlords,” write Ms. Albright and Mr. de Soto, who co-chair the U.N. Commission on Legal Empowerment of the poor. As a result, the poor are unable to invest or even plan for the future.

For the full summary, see:
“The Informed Reader; Poverty; Lack of Strong Legal Identity Helps Keep Down World’s Poor.” Wall Street Journal (Fri., July 6, 2007): B5.

The Free Market Works

The story quoted below tells how outsourcing high-tech jobs to India has bid up the salaries of high-tech Indian engineers, thereby reducing the appeal of further outsourcing. Marvelous how the market works!
Another lesson from the story applies to forecasting: mechanical extrapolation of current trends is inferior to prediction that takes account of predictable changes in prices (in this case, salaries).

(p. A15) Around the century’s turn, when U.S. companies first began flooding to India for its cheap labor, pundits warned that the subcontinent could increasingly rob the U.S. of high-end white-collar jobs. Debate was especially sharp in Silicon Valley, then in a slump, because India annually turns out nearly 500,000 engineering graduates.
. . .
Several years on, the forces of globalization are starting to even things out between the U.S. and India, in sophisticated technology work. As more U.S. tech companies poured in, they soaked up the pool of high-end engineers qualified to work at global companies, belying the notion of an unlimited supply of top Indian engineering talent. In a 2005 study, McKinsey & Co. estimated that just a quarter of India’s computer engineers had the language proficiency, cultural fit and practical skills to work at multinational companies.
The result is increasing competition for the most skilled Indian computer engineers and a narrowing U.S.-India gap in their compensation. India’s software-and-service association puts wage inflation in its industry at 10% to 15% a year. Some tech executives say it’s closer to 50%. In the U.S., wage inflation in the software sector is under 3%, according to Moody’s Economy.com.
Rafiq Dossani, a scholar at Stanford University’s Asia-Pacific Research Center who recently studied the Indian market, found that while most Indian technology workers’ wages remain low — an average $5,000 a year for a new engineer with little experience — the experienced engineers Silicon Valley companies covet can now cost $60,000 to $100,000 a year. “For the top-level talent, there’s an equalization,” he says.

For the full story, see:
Pui-Wing Tam and Jackie Range. “Second Thoughts: Some in Silicon Valley Begin to Sour on India; A Few Bring Jobs Back As Pay of Top Engineers In Bangalore Skyrockets.” Wall Street Journal (Tues., July 3, 2007): A1 & A15.
(Note: ellipsis added.)

Non-Market Health Care Pricing Results in Health Care Shortages

(p. A22) When my Labrador retriever became acutely lame, we were able to locate a veterinary orthopedic expert in Atlanta within 48 hours who was able to repair a ruptured tendon within one week. But my prospects of identifying an endocrinologist who can care for my daughter’s diabetes when she turns 18 are much less promising.
The limited number of endocrine specialists is a not a consequence of limited demand — everyone is aware of the epidemic of diabetes we are facing. There are also shortages of generalists and other specialists, and the reason is the absence of market signals — i.e., market-based prices — for influencing the supply of physicians in various specialties.
The roots of this problem lay in the use of administrative pricing structures in medicine. The way prices are set in health care already distorts the appropriate allocation of efforts and resources in health care today. Unfortunately, many of the suggested reforms of our health care system — including the various plans for universal care, or universal insurance, or a single-payer system, that various policy makers and Democratic presidential candidates espouse — rest on the same unsound foundations, and will produce more of the same.
. . .
One important lesson of the 20th century is that, while markets are far from perfect, more choices are available when people are able to use free markets to interact with each other. Markets may not get the prices exactly correct all the time, but they are capable of self- correction, a capacity that has yet to be demonstrated by administrative pricing.
It tells you something when the supply of and demand for specialist veterinary care is so easily matched when the prices of these services are established on the market — while shortages and oversupplies are common for human medical care when the prices of these services are set by administrators in the public sector. Will health-care reformers — and American citizens — get the message?

For the full commentary, see:
Robert A. Swerlick. “Our Soviet Health System.” Wall Street Journal (Tues., Jun 5, 2007): A22.
(Note: ellipsis added.)

Market Prices Send “the Right Signal to the Customer to Save Energy”

In the passage quoted below, the “commission” refers to China’s “National Development and Reform Commission.”

(p. A6) The commission estimates China’s energy efficiency is about 10% below that of developed countries because of obsolete technology. But many experts say Beijing’s policy priorities are a bigger obstacle.
Worries about social unrest and inflation led Beijing to put the brakes on pricing overhauls, at tremendous cost to state refiners PetroChina Co. and China Petroleum & Chemical Corp., known as Sinopec.
“Market prices are a very important and key issue because they send out the right signal to the customer to save energy,” said Yang Fuqiang, vice president of the Energy Foundation in Beijing.

For the full story, see:
David Winning. “Why Energy Efficiencies Prove Elusive in China.” Wall Street Journal (Tues., Nov. 6, 2007): A6.

Why We Need Some Savvy Entrepreneur to Start a Garage-Rating Business

“Henry Schneider found few competent, honest mechanics.” Source of caption and photo: online version of the NYT commentary quoted and cited below.

(p. C1) . . . , Mr. Schneider drove home to Connecticut and undertook a devilish little test.
Over the next few months, he took the Subaru to 40 garages, loosening the battery cable and draining some coolant before each visit. He even wrote himself a script and memorized it, to make sure he was telling every garage the same thing. “We bought the car recently, and we should have had it looked at before we bought it, but we didn’t,” he would say. “It hasn’t started a few times. Can you check that out?” He also asked for a thorough inspection.
Mr. Schneider was trying to answer a question that has occurred to pretty much all drivers who have ever been given the unsettling news that a car needs more repairs than they had expected: Does it really? Or is the garage just looking to make some extra money off me?
. . .
At only 27 of the 40 garages did mechanics tell Mr. Schneider that he had a disconnected battery cable, the very problem to which he had pointed them by saying his car didn’t always start. Only 11 mentioned the low coolant, a problem that can ruin a car’s engine. Ten of the garages, meanwhile, recommended costly repairs that were plainly unnecessary, like replacing the starter motor or the battery. (Tellingly, his results were in line with what the Automobile Protection Association found when it performed its experiments in Canada.)
In all, only about 20 percent of the garages deserved a passing grade. “And that’s with a pretty low bar,” Mr. Schneider told me. “I’m even allowing them to have missed a blown taillight that should have been caught.”
. . .
. . . , Mr. Schneider didn’t set out to study cars. His original goal was to examine the health care system. But he couldn’t very well give himself a heart murmur and then visit 40 cardiologists.
“It turns out it’s hard to get objective measures of people’s bodies,” as Thomas Hubbard, a Northwestern University professor who has also studied the economics of reputation, put it. “It’s a lot easier to get objective measures of people’s cars.”
. . .
Until some savvy entrepreneur starts a garage-rating business, the best solution may be the oldest one: asking for a recommendation from someone who is knowledgeable enough to distinguish between good service and bad. Just remember that a lot of people don’t know quite as much about cars — or their mechanic — as they think they do.

For the full commentary, see:
DAVID LEONHARDT. “ECONOMIC SCENE; When Trust In an Expert Is Unwise.” The New York Times (Weds., November 7, 2007): C1 & C9.

(Note: ellipses added.)

“Schneider sabotaged his dad’s old station wagon to test the honesty of mechanics.” Source of caption and photo: online version of the NYT commentary quoted and cited above.

Southwest Airline Manages Risk Through Oil Price Hedges

Source of graphic: online version of the NYT article quoted and cited below.

(p. C1) Southwest Airlines, in danger for much of this year of losing its quirky dominance in the domestic airline industry, could soon be standing, once again, head and shoulders above the competition.
Better service? Happier and more productive workers?
Not this time. The reason for Southwest’s rapidly increasing advantage over other big airlines is much simpler: it loaded up years ago on hedges against higher fuel prices. And with oil trading above $90 a barrel, most of the rest of the airline industry is facing a huge run-up in costs, and Southwest is not.
Southwest owns long-term contracts to buy most of its fuel through 2009 for what it would cost if oil were $51 a barrel. The value of those hedges soared as oil raced above $90 a barrel, and they are now worth more than $2 billion. Those gains will mostly be realized over the next two years.
Other major airlines passed on buying all but the shortest-term insurance against high fuel prices, allowing Southwest executives a bit of schadenfreude.

For the full story, see:
JEFF BAILEY. “An Airline Shrugs at Oil Prices.” The New York Times (Thurs., November 29, 2007): C1 & C10.

‘A Southwest Airlines worker fueled a plane. Southwest’s chief said the hedges against rising fuel costs “bought us time to retool our company.”” Source of caption and photo: online version of the NYT article quoted and cited above.

Incentives Matter: Capital Punishment Deters Murders

Source of graph: online version of the WSJ commentary quoted and cited below.

(p. A13) Recent high-profile events have reopened the debate about the value of capital punishment in a just society. This is an important discussion, because the taking of a human life is always a serious matter.
Most commentators who oppose capital punishment assert that an execution has no deterrent effect on future crimes. Recent evidence, however, suggests that the death penalty, when carried out, has an enormous deterrent effect on the number of murders. More precisely, our recent research shows that each execution carried out is correlated with about 74 fewer murders the following year.
For any society concerned about human life, that type of evidence is something that should be taken very seriously.
The study examined the relationship between the number of executions and the number of murders in the U.S. for the 26-year period from 1979 to 2004, using data from publicly available FBI sources. The chart nearby shows the number of executions and murders by year.

For the full commentary, see:
ROY D. ADLER and MICHAEL SUMMERS. “Capital Punishment Works.” The Wall Street Journal (Fri., November 2, 2007): A13.

“The No. 1 Need that Poor People Have is a Way to Make More Cash”

Moving water is easier with the 20-gallon rolling drum. Source of photo: online version of the NYT article quoted and cited below.

(p. D3) . . . , the Cooper-Hewitt National Design Museum, . . . , is honoring inventors dedicated to “the other 90 percent,” particularly the billions of people living on less than $2 a day.

Their creations, on display in the museum garden until Sept. 23, have a sort of forehead-thumping “Why didn’t someone think of that before?” quality.

. . .

Interestingly, most of the designers who spoke at the opening of the exhibition spurned the idea of charity.

“The No. 1 need that poor people have is a way to make more cash,” said Martin Fisher, an engineer who founded KickStart, an organization that says it has helped 230,000 people escape poverty. It sells human-powered pumps costing $35 to $95.

Pumping water can help a farmer grow grain in the dry season, when it fetches triple the normal price. Dr. Fisher described customers who had skipped meals for weeks to buy a pump and then earned $1,000 the next year selling vegetables.

For the full story, see:

DONALD G. McNEIL Jr. "Design That Solves Problems for the World’s Poor." The New York Times (Tues., May 29, 2007): D3.

(Note: ellipses added.)

The photo on the left shows a woman safely drinking bacteria-laden water through a filter. The photo on the right shows a "pot-in-pot cooler" that evaporates water from wet sand between the pots, in order to cool what is in the inner pot. Source of photos: online version of the NYT article quoted and cited above.

Chinese Price Ceilings on Diesel Fuel Cause Shortages

“Looking for usable coal at a cinder dump in Shanxi Province in China. Inadequate coal in the north limited power production.” Source of the caption and photo: online version of the NYT article quoted and cited below.
The article quoted below uses the word “tariff” in the sense of “price.”

(p. C4) HONG KONG — The Chinese government issued an “urgent notice” on Wednesday to the country’s power generators, coal companies and railways to address an electricity shortage that has led to rationing in more than a third of China’s provinces in recent weeks.
The rationing, mostly achieved by telling factories that their power will be shut off for a day or two each week, coincides with the annual frenzy of factory production to meet orders before shutting down for the Chinese New Year holidays, which fall in early February this year.
. . .
Power executives and government statements attributed the electricity shortfall this winter to a confluence of problems. Many of the problems appear to have their roots in the government’s imposition of a long list of price controls in recent months in an attempt to tamp down inflation, which reached 6.9 percent at the consumer level in November.
Trucks did not deliver adequate coal stockpiles to power plants before winter snows arrived in northern China, partly because of nationwide diesel shortages. Refiners had cut back on the production of diesel because price controls were forcing them to sell the diesel for slightly less than the cost of the crude oil needed to make it.
. . .
Low electricity tariffs, particularly for residential users, have been another problem.
The central government issued an official “suggestion” to provincial governments last fall that they not allow increases in electricity tariffs charged to customers, as part of national price controls.
Provincial governments have responded by freezing tariffs, and even reducing them in the case of Guangdong Province in southeastern China, the home of much of the country’s export-oriented light industry.
The low tariffs have made it uneconomical for oil-fired plants to operate, and many have stopped doing so.
“It makes absolutely no sense for anyone to run a diesel- or oil-fired plant. They’re all shut down,” said a power company executive in China who asked not to be identified because of the sensitivity of commenting on regulatory policies.
The executive added that even when ordered by the government to resume operating at a loss, many state-owned oil-fired plants had not done so, scheduling maintenance and repairs instead.

For the full story, see:
KEITH BRADSHER. “Pinched by Price Controls, Power Plants in China Scale Back.” The New York Times (Thurs., January 24, 2008): C4.
(Note: ellipses added.)

Raghuram Rajan on the Current Economic Downturn and the Subprime Mortgage Mess

“Traders in the oil futures pit of the New York Mercantile Exchange on Tuesday” (January 22. 2008). Source of caption and photo: online version of the NYT commentary quoted and cited below.

Raghuram Rajan is mentioned in the article quoted below. I first ran across him as the co-author of a book that was billed as applying Schumpeterian ideas of creative destruction to issues of economic growth and development.

Then, at the American Economic Association meetings in New Orleans in early January, I was on my way to a History of Economics Society reception, when I stumbled by chance into a modest reception in which Rajan was giving an informal speech on the subprime mortgage crisis.

It was such an interesting presentation, that I ended up totally missing the History of Economics Society reception. Rajan argued that the main problem was one of misguided incentives. Bonuses at top investment firms like Merrrill Lynch and JPMorgan Chase, are supposed to go to those whose investments produce high returns, with modest risks. The problem with the complicated securities based on the subprime mortgages was that they produced high returns, but the risks were actually also fairly high. The high-flying investors probably had some knowledge of this, but the public did not. In most years the investors could invest in the high return, but high risk, securities, and collect huge bonuses. But now the chickens have come home to roost.

Rajan suggested that the answer would be a change in the way in which the traders are given bonuses. Instead of handing them out annually, let them become vested only after observing the investment’s track record for several years. If the investment goes south before the bonus is vested, the trader does not get the bonus. This would provide an incentive and reward for those who accurately accessed the risk of their investments.

(p. A1) . . . , Wall Street hasn’t yet come clean. Even after last week, when JPMorgan Chase and Wells Fargo announced big losses in their consumer credit businesses, financial service firms have still probably gone public with less than half of their mortgage-related losses, according to Moody’s Economy.com. They’re not being dishonest; they just haven’t untangled all of their complex investments.

“Part of the big uncertainty,” Raghuram G. Rajan, former chief economist at the International Monetary Fund, said, “is where the bodies are buried.”

As Mr. Rajan pointed out, this situation is more severe than the crisis involving Long Term Capital Management in the late 1990s. That was a case in which a limited set of bad investments, largely at one firm, had the potential to drive down the value of other firms’ holdings in the short term. Those firms then might have stopped lending money because they no longer had the capital to do so. But their own balance sheets were largely healthy.

This time, the firms are facing real losses, which will almost certainly curtail lending, and economic growth, this year.

For the full commentary, see:

DAVID LEONHARDT. “ECONOMIC SCENE; Worries That the Good Times Were Mostly a Mirage.” The New York Times (Weds., January 23, 2008): A1 & A23.

(Note: ellipsis added.)

The Schumpeterian book co-authored by Rajan, is:

Rajan, Raghuram G., and Luigi Zingales. Saving Capitalism from the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity. New York: Crown, 2003.

Free Market Can Provide Better, Cheaper Health Care

"Eve Linney, 5, who had an infected finger, went with her family last week to a walk-in clinic at a Duane Reade drugstore on Broadway in Manhattan. Her father, John, is at the counter." Source of caption and photo: online version of the NYT article quoted and cited below.

Clayton Christensen and co-authors in Seeing What’s Next, make a plausible case for the improvement of health care through disruptive innovation. A key aspect of their vision is the increasing role of nurse-practitioners in taking on increasingly routinized tasks, a development they see as generally both effective, and cost-efficient.

The article excerpted below suggests that this trend is promising, if it does not get killed by the government, and by organized medical doctors protecting their turf from competition.

(p. A1) The concept has been called urgent care “lite”: Patients who are tired of waiting days to see a doctor for bronchitis, pinkeye or a sprained ankle can instead walk into a nearby drugstore and, at lower cost, with brief waits, see a doctor or a nurse and then fill a prescription on the spot.

With demand for primary care doctors surpassing the supply in many parts of the country, the number of these retail clinics in drugstores has exploded over the past two years, and several companies operating them are now aggressively seeking to open clinics in New York City.

. . .

More than 700 clinics are operating across the country at chain stores including Wal-Mart, CVS, Walgreens and Duane Reade.

New York State regulators are investigating the business relationships between drugstore companies and medical providers to determine whether the clinics are being used improperly to increase business or steer patients to the pharmacies in which the clinics are located.

And doctors’ groups, whose members stand to lose business from the clinics, are citing concerns about standards of care, safety and hygiene, and they have urged the federal and state governments to step in to more rigorously regulate the new businesses.

. . .

(p. A16) Patients, however, have flocked to the clinics, according to a new industry group, the Convenient Care Association.

“I think it’s great you don’t have to make an appointment. That could take weeks,” said Ezequiel Strachan, 33, who lives in Manhattan and walked into the clinic at the Duane Reade store at 50th Street and Broadway on a recent morning for treatment of a sore throat. “People here value their time a lot.”

The average waiting time for an exam at such clinics nationwide is 15 to 25 minutes, according to the Convenient Care Association.

The association estimated that 70 percent of clinic patients have health insurance and are using the clinics because of convenience. For them, costs may not be much different from those at doctors’ offices, because the same insurance co-payments apply. But uninsured patients could reap substantial savings.

In New York City, one in five residents lacks a regular doctor and one in six is uninsured, according to a recent survey by the city’s Department of Health and Mental Hygiene, and overcrowded emergency rooms are often their first resort for routine care.

. . .

MinuteClinic officials insisted that there was nothing improper in the relationships between providers and the drugstores and that medical care is not being compromised.

“We are transparent with regulators,” said Michael C. Howe, the chief executive of MinuteClinic, which is based in Minneapolis and operates more than 200 clinics nationwide. using the motto “You’re Sick, We’re Quick.”

Mr. Howe said the concerns of doctors’ groups and other critics “are being raised by voices of people who have not really studied the model.”

Preliminary data from a two-year study of claims from MinuteClinic by a Minnesota health maintenance organization, HealthPartners, which was released to The Minneapolis Star Tribune in July, showed that each visit to the retail clinic cost an average of $18 less than a visit to other primary-care clinics, but that pharmacy costs were $4 higher per patient.

Duane Reade, New York City’s largest drugstore chain, which opened four clinics in Manhattan in May, plans to open as many as 60 more across the city in the next 18 months. A key difference at the Duane Reade clinics is that they use doctors, while nurse practitioners and physician assistants typically provide the care at most retail clinics.

For the full story, see:

SARAH KERSHAW. "Tired of Waiting for a Doctor? Try the Drugstore." The New York Times (Thurs., . August 23, 2007): A1 & A16.

(Note: the title of the online version is "Drugstore Clinics Spread, and Scrutiny Grows." Ellipses added.)

"Dr. Maggie Bertisch saw Eve while her mother, Claire, waited." Source of caption and photo: online version of the NYT article quoted and cited above.