Sunday, June 28, 2015

RECOMMENDED READING: "The truth about Greece"

Good article by my predecessor at the FTC, Jeremy Blow, and coauthor Kenneth Rogoff on Greece. They point out that Greece has been receiving net inflows (austerity would imply net outflows), at least until Syriza got elected and stopped implementing reforms.  He concludes by telling Greece why they should re-impose the reforms and struggle to stay in the EU:

  • First, a default would likely have cost it the €5 billion a year it receives in annual EU subsidies;
  • Second, it would have put at risk other benefits Greek citizens derive from being in the EU, including the ability to work in other countries, move capital across borders, and trade freely;
  • Third, even when the Europeans were not providing cash transfers directly to the Greek Government they were providing financing to the Greek private sector, basically to offset the capital flight from the banks, on terms that were vastly more generous than what the banks could have hoped to obtain from private lenders – who in fact probably would not have been willing to lend nearly as much on the same collateral regardless of the interest rate.

Tuesday, June 23, 2015

Why is the euro falling on good news from Greece?

Its all about the “carry trade.”
Currency investors often borrow in a currency with low interest rates to buy another with much higher interest rates, and pocket the difference, known as “carry.” The eurozone has some of the lowest interest rates in the world, making the euro a favorite for funding such trades—a role it has gradually wrested away from the dollar over the past two years. 
The borrowed euros are typically used to fund bets in riskier markets. If risks rise in financial markets (as they did while Greek talks were deadlocked), investors tend to exit these bets. That causes the euro to rise as the borrowed money comes home. 
But if risks fall, so does the euro.
So if final deal between Greece and its creditors is reached, then the Euro will fall; but if not, it will rise.

What causes recovery?

The answer comes from Stanford's Ed Lazear:

First, a business-friendly climate—market-oriented labor policies and lower taxes—is effective in raising the growth in a state’s gross domestic product and employment. Second, states that suffered the worst employment shocks in the 2007-09 recession had the most rapid postrecession employment growth.

The first finding is self explanatory; the second casts doubt on President Obama's explanation for the slow recovery, the depth of the recession.  Lazear's work suggests that the deeper the recession, the faster the recovery.

Lazear is careful to credit Nashville's own Art Laffer who has been saying the same thing for years, along with coauthor Stephen Moore and Jonathan Williams.

Tuesday, June 9, 2015

What happens when you raise tax on only some types of tobacco?

In 2009, the Federal government increased tax rates on roll-your-own tobacco, relative to pipe tobacco; and on small cigars, relative to large cigars.  What happened?
Monthly sales of pipe tobacco increased from approximately 240,000 pounds in January 2009 to over 3 million pounds in September 2011, while roll-your-own tobacco dropped from about 2 million pounds to 315,000 pounds. 
HT:  GAO, who also have a video on how to make cigarettes from pipe tobacco:

Friday, June 5, 2015

Randomistas: fighting poverty with science

We have blogged extensively about the merits of randomized trials to help us make better decisions under uncertainty, the topic of Chapter 17.  The WSJ has a report on progress by the "randomistas" on identifying and overcoming the barriers to success.  The following human traits are among the biggest obstacles to rising out of poverty:

• love to gamble regardless of the odds of winning, leading them to bet on underdogs, play the lottery or hit the slot machines;
• value distant risks and rewards much less than current gains and losses;
• often lack the motivation to pursue their own best interest unless it can be done almost effortlessly—declining to get vaccinated, for instance, until they are given a map of where the clinic is located;
• procrastinate, putting off until tomorrow just about everything they can get away without doing today;
• put money into arbitrary buckets, creating different “mental accounts” for various purposes, even though all dollars should be equal;
• want the comfort of knowing that others agree with them;
• are impatient to their own detriment, preferring to take pension payments in one lump sum rather than as an annuity spread over time or to start receiving Social Security payments as soon as possible instead of deferring them.

Friday, May 29, 2015

The Economist who realized how crazy we were

Profile of Richard Thaler from Bloomberg:

...Thaler began to keep a list of things that people did that made a mockery of economic models of rational choice. There was the guy who planned to go to the football game, changed his mind when he saw it was snowing, and then, when he realized he had already bought the ticket, changed his mind again. There was the other guy who refused to pay $10 to have someone mow his lawn but wouldn't accept $20 to mow his neighbor's. There was the woman who drove 10 minutes to a store in order to save $10 on a $45 clock radio but wouldn't drive the same amount of time to save $10 on a $495 television. There were the people Thaler invited over to dinner, to whom he offered, before dinner, a giant bowl of nuts. They ate so many nuts they had no appetite for the far more appealing meal. The next time they came to dinner Thaler didn't offer nuts -- and his guests were happier.

Wednesday, May 27, 2015

Can incentive pay give us better drugs?

Express Scripts, a PBM (Pharmaceutical Benefits Manager) who negotiates drug prices with pharmaceutical companies (on behalf of consumers) thinks it can
Express Scripts has in recent years been a vocal critic of high drug prices, which the company has used to promote its services to potential customers as it competes against CVS Health Corp. and others to administer drug benefits for health insurers and large employers. Pharmacy-benefit managers also sometimes keep a portion of the rebates and discounts they negotiate from pharmaceutical companies.

Their solution involves incentive pay
Express Scripts this month told clients it is seeking deals with drug makers for differentiated pricing for certain cancer drugs based on how well they work against different types of tumors, Express Scripts Chief Medical Officer Steve Miller said in an interview. Currently, Express Scripts and most insurers pay the same per-unit rate for a cancer drug regardless of the type of cancer it is being used to treat.

The biggest benefit of this kind of reimbursement are the incentives it creates for future drug development.

Tuesday, May 26, 2015

John Nash, RIP

John Nash and his wife were killed in a car crash as driver of the taxi he was riding in lost control.

Students of our textbook will recognize Nash equilibrium of strategic games from Chapter 15 and his non-strategic characterization of bargaining from Chapter 16.

Up until Nash's work on the theory of games, all we had were models of monopoly (one firm) and "perfect competition" (many small firms).  This was not very useful because most of the interesting problems arise in oligopoly (competition between a few firms), and Professor Nash gave us a way to characterize competition in this setting.  

Insights from his models have been distilled into advice given to generations of MBA students:

Use game theory to figure out where self interest is taking you; and if you don't like where that is, change the rules of the game.  

Likewise his strategic and non strategic (axiomatic) models of bargaining have been distilled into bargaining insights:

The alternatives to agreement determine the terms of agreement.  

John and Alicia Nash, RIP