Archive for November, 2009

China’s surplus capacity

Monday, November 30th, 2009

China continues to promote savings and investment at the expense of consumption.  As a consequence, domestic demand is low and there is unused capacity throughout the economy. This policy is costly for the Chinese people and threatens producers in the rest of the world. Consider steel, for example. At the end of 2008, Chinese plants were capable of producing 660 million tonnes of steel, but demand was only 470 million tonnes. The difference of 190 million tonnes was nearly as large as the entire output of the European Union in 2008.  Despite this low 72% rate of capacity utilisation, investments are underway to add an additional 58 million tonnes of capacity.

The Financial Times, in an editorial today, describes such spending as “absurd”, and calls on China to effect a structural shift to domestic consumption, away from investment and exports.

In China’s current development model, household income is taxed, to support corporate profits. Corporations now generate more than half of China’s huge savings. Since consumption tends to grow more slowly than GDP, excess capacity can only be used up via yet more investment or exports. This year, economic crisis has made the latter impossible. But China desperately needs to expand its exports once again. The result may well be a crisis in the trading system.

China’s trading partners have to engage with the rising giant. They must explain that they cannot – and will not – absorb the surplus capacity its heavily distorted model of development is creating. But they can point out that this pattern also damages the standards of living of ordinary Chinese. China has to shift income from its corporations to its households and spending from investment to consumption. What is needed for that is a massive structural reform. This must start now. Indeed, it may already be too late.

“The cost of China’s excess capacity”, Financial Times, 30 November 2009.

migrating Chinese peasants

Sunday, November 29th, 2009

GMU economist Tyler Cowen has an interesting column on China in today’s New York Times.

Among other things, he refers to the migration of peasants from the countryside to urban factories:

Several hundred million Chinese peasants have moved from the countryside to the cities over the last 30 years, in one of the largest, most rapid migrations in history.

To help make this work, the Chinese government has subsidized its exporters by pegging the renminbi at an unnaturally low rate to the dollar.

Tyler Cowen, “Economic View: Dangers of an Overheated China”, New York Times, 29 November 2009.

The Chinese government has helped make this work also by keeping labour costs low with a hukou (household registration) system that was promulgated in January 1958 and is still in effect. The system allows the State to treat 150 million internal migrants as ‘guest workers’ in their own country. Immigrants from the countrysides have no right to permanent residence, and no claim on social benefits – not even public schooling for their children! In an unfortunate oversight, Cowen overlooked the hukou system when he drafted today’s column.

rationing health care in the USA

Saturday, November 28th, 2009

MR. GREGORY:  Senator Hutchison, you said this [task force recommendation against routine mammography for women aged 40 to 49] is the beginning of rationing.

SEN. HUTCHISON:  I think it is.

MR. GREGORY:  Why did you say that?

SEN. HUTCHISON:  It’s because it’s whether the insurance and the public option [in the health reform bill] are going to pay for a woman who decides that she wants to have the mammogram before the age of 50 or more than every other year after 50. If the public option doesn’t pay for that–and the task force recommendations are what the public option is going to rely on. So this task force says all of a sudden we’re going to change the guidelines that we have had for all these years.  And now the public option may not pay for those, and that means the insurance companies are going to follow. The key is that these are covered by insurance so women will not have to decide if they’re going to spend $250 to get a mammogram because they and their doctors believe it is right to do so.

That is TV journalist David Gregory interviewing Senator Kay Bailey Hutchison, a Texas Republican, on “Meet the Press” last Sunday (22 November 2009).  Ms Hutchison is a vocal opponent of the Democrats’ health reform bill. Yet she also believes that public or private insurance should cover the full cost of a mammogram. If a woman of any age, on advice of her doctor, wants a mammogram, she should not be forced to pay $250 out-of-pocket in order to obtain it.

Princeton economist Uwe Reinhardt was listening and, only partly tongue-in-cheek, writes

I cannot recall a clearer statement of unreserved support for universal and comprehensive health insurance for America and a more straightforward definition of rationing health care.

Uwe E. Reinhardt, “Health Care Rationing, American-Style”, Economix, 27 November 2009.

Professor Reinhardt is absolutely correct. Senator Hutchinson has been active in promotion of screening for breast cancer, but her logic would apply equally to screening for other cancers, indeed to medical attention for the prevention and treatment of other illnesses, such as hypertension and diabetes. In sum, though she may not be aware of it, Senator Hutchinson’s reasoning supports universal health insurance.

free Ostrom/Williamson downloads

Friday, November 27th, 2009

The 2009 Nobel Prize in Economic Sciences was awarded jointly to Elinor Ostrom “for her analysis of economic governance, especially the commons”,  and to Oliver E. Williamson “for his analysis of economic governance, especially the boundaries of the firm”.

Elsevier, the Dutch publisher of around 2,000 academic journals, is allowing open access to “the laureates’ key articles published with Elsevier”. Links are posted here.

OSTROM

WILLIAMSON

hospital emergency rooms

Thursday, November 26th, 2009

MYTH: Emergency room overcrowding is caused by non-urgent cases

According to critics, patients with minor problems take up limited emergency room (ER) resources and create backlogs, leaving the sickest patients at risk of facing unreasonable and unsafe waits for potentially life-saving care. If this were true, then clearing the backlog would depend on diverting non-urgent patients away from the ER ….

[This would have costs.] It’s generally considered unsafe medical practice to divert non-urgent patients from the ER, since a small percentage [of non-urgent patients - 4.3% in one study, 7.6% in another -] will legitimately need to be admitted for care. ….

Lower complexity patients don’t worsen the situation because their care tends to be simple, brief and require few resources. Through a process of triage, priorities for patient care are based on the type and severity of patient symptoms. In Canada, the Canadian Emergency Department Triage and Acuity Scale (CTAS) is the nationally recognized tool for assigning priorities for patient care. Although triage is not an exact science and its benefit for clearing backlogs is yet unproven, it does help to ensure that the sickest patients are cared for first. Increasingly, non-urgent patients are seen by professionals working in fast-track units embedded in the emergency department. These units free up emergency room resources to meet the most urgent care needs.

Canadian Health Services Research Foundation, Mythbusters, October 2009.

For further details and 18 references, download the complete two-page essay. Additional Mythbusters can be downloaded here.

Of related interest, with reference to ER costs and charges in the USA:

Consider the oft-quoted “statistic” that emergency-room care is the most expensive form of treatment. Has anyone who believes this ever actually been to an emergency room? My sister is an emergency-medicine physician; unlike most other specialists, ER docs usually work on scheduled shifts and are paid fixed salaries that place them in the lower ranks of physician compensation. The doctors and other workers are hardly underemployed: typically, ERs are unbelievably crowded. They have access to the facilities and equipment of the entire hospital, but require very few dedicated resources of their own. They benefit from the group buying power of the entire institution. No expensive art decorates the walls, and the waiting rooms resemble train-station waiting areas. So what exactly makes an ER more expensive than other forms of treatment?

Perhaps it’s the accounting. Since charity care, which is often performed in the ER, is one justification for hospitals’ protected place in law and regulation, it’s in hospitals’ interest to shift costs from overhead and other parts of the hospital to the ER, so that the costs of charity care—the public service that hospitals are providing—will appear to be high. Hospitals certainly lose money on their ERs; after all, many of their customers pay nothing. But to argue that ERs are costly compared with other treatment options, hospitals need to claim expenses well beyond the marginal (or incremental) cost of serving ER patients.

David Goldhill, “How American Health Care Killed My Father”, The Atlantic, September 2009.

Princeton economist Uwe Reinhardt supports Goldhill’s suspicions in an essay written years ago:

Hospital emergency departments have long been decried as one of the most “expensive” places to deliver routine health care, even by policy analysts who ought to know better. Once an emergency room is built, staffed, and ready for calamities, it can deliver routine care at relatively low incremental costs when it is not preoccupied with an emergency. To be sure, the algorithms that hospital accountants use to allocate overhead, and the pricing policies that hospital executives erect on those algorithms, have made such routine care seem expensive. But that appearance has nothing to do with the true incremental social costs of rendering routine care there during downtimes.

Uwe E. Reinhardt, “Spending More Through ‘Cost Control’: Our Obsessive Quest To Gut The Hospital”, Health Affairs 15:2 (Summer 1996), pp. 145-154.

For empirical evidence, see “The Costs of Visits to Emergency Departments”, by Dr Robert M. Williams, in The New England Journal of Medicine, 7 March 1996, pp. 642-646.

compensation packages and financial crashes

Wednesday, November 25th, 2009

Journalist John Cassidy, in a lengthy extract from his new book, How Markets Fail: The Logic of Economic Calamities, explains why Wall Street compensation packages are dangerous for the economy.

When the markets are rising and deals are getting done, traders, investment bankers and their bosses are paid magnificently; when things go wrong, the shareholders of the firms and, in extreme circumstances the taxpayers, suffer the bulk of the losses.

The market failure begins on the trading floor …. Some trading desks give their employees up to half of the profits they generate above a certain target. However, the trader’s downside is capped. If his trades generate large losses, he might lose his job, but he doesn’t have to write the firm a cheque to cover the cost of his mistakes. If his trades turn out badly, the firm has no recourse to his personal assets, or even the bonuses he earned in previous years. ….

[As for CEOs, remunerating them with stock options] amounts to giving them a heavily levered and one-sided bet on the value of the firm’s assets. If the bank’s investments do well, the stockholders, including the CEO, get to pocket virtually all the gains. But if the firm suffers a catastrophic loss, the equity holders quickly get wiped out, leaving the bondholders and other creditors to shoulder the bulk of the burden.

John Cassidy, “What was really behind last year’s market crash?”, The Guardian, 25 November 2009.

What is the solution? Reform from within, argues Cassidy, is bound to fail. “For although the financial sector as a whole has an interest in controlling rampant short-termism and irresponsible risk-taking, individual firms have an incentive to hire away star traders from any rivals that have introduced pay limits.” Only government can enforce compliance.

One question unanswered, at least in this extract, is why don’t shareholders – the owners of financial firms – enforce compliance by shunning firms which give outrageous pay packages to their traders and CEOs ?

happiness is access to medical care

Tuesday, November 24th, 2009

Dartmouth economist David Blanchflower finds lack of access to a doctor (because of inability to pay) to be an important source of unhappiness in the United States, even for people with high incomes.

The inability to see a doctor is [a] highly significant [determinant of happiness], … even when a full set of controls are included for income, labor status, smoking, exercise and BMI etc.. ….

To explore this issue further [I estimate effects] … by income group. The effect of not seeing a doctor is significant in each of the equations. Particularly impressive is the fact that this is the case even for those in the highest income category [>=$75,000] … , even if they are in very good or excellent health. The effects are broadly of the same orders of magnitude … [--] approximately the same as the difference between zero income and income of $75,000 or more or between working as an employee and having been unemployed for at least twelve months.

These effects are larger than the effects from the equivalent amount of money that the service would cost, because the person could simply pay for them. But that is to be expected as what is being picked up is not the cost of the coverage itself but the service needed. So health insurance, say costs $10,000 a year but if an individual falls ill, the cost could be half a million dollars. Hence the need for insurance.

They, or a member of their family, have just experienced a negative health shock. The uncertainty around subsequent health care expenses could be causing this big fall in happiness. By falling ill, the person who needs the treatment experienced a major negative income and wealth shock. Not having access to a doctor lowers life satisfaction and worsens mental health. And by a lot, even controlling for income, education and many other controls. This is true even for people with high incomes. Hence, providing health care coverage for all will likely raise the health and happiness of the nation.

David G. Blanchflower, “Happiness and Health Care Coverage”, IZA Discussion Paper 4450 (September 2009).

Professor Blanchflower analyses data for the years 2005 through 2008 from the Behavioral Risk Factor Surveillance System (BRFSS). The BRFSS was established in 1984 by the Centers for Disease Control and Prevention (CDC). More than 350,000 adults in all 50 US states are interviewed each year by telephone.

In 2008 15.6% of all BRFSS respondents –up from 13.6% in 2005– answered “yes” to the question “Was there a time in the past 12 months when you needed to see a doctor but could not because of cost?”. Noteworthy is the fact that 8% of respondents with health care coverage were among those answering this question in the affirmative. “Presumably”, suggests Blanchard, “this arose because of large deductibles or because of restrictions on access to doctors of choice through HMOs”. Health care is often rationed, even for those with private insurance.

health accounts in the tropics

Thursday, November 19th, 2009

In developing countries, side-payments are often necessary to secure access to services in public facilities, especially in clinics and hospitals. Dr Ravi Rannan-Eliya, a Sri Lankan public health specialist, explains the recommended treatment of these payments for National Health Accounts.

The health accountant should not confuse official fees collected on the basis of official regulations by public sector facilities with other payments incurred by patients when patronizing such facilities. Such other payments can … [include] private and informal payments made to employees … , usually for the purpose of preferentially accessing services in the public facility. ….

[T]here is no definitive statement of how such transactions should be reported in the context of the SHA [System of Health Accounts] framework. In fact, the general problem of how to report private illegal payments or bribes to public sector employees in exchange for services produced in the public sector is an issue that remains debated in the national accounts field. On this issue, national accounts experts from international agencies, such as the World Bank and IMF, have expressed the position that these transactions should be reported as private sector payments, and definitely not be treated as involving production by the public sector, nor added to estimates of public sector production.

Ravi P. Rannan-Eliya, “National Health Accounts Estimation Methods: Household Out-of-pocket Spending in Private Expenditure”, prepared for WHO, Geneva, Switzerland, January 2008, pp. 27-28.

Obtaining reliable data on these payments is definitely a challenge. Dr Rannan-Eliya recommends that health accountants “conduct a special survey of households to determine what payments are being made in association with visits to public sector facilities. This is recommended over conducting a survey of patients at the facilities or surveying the providers themselves, since in both instances cooperation or truthful responses may not be forthcoming.”

useless economic research?

Thursday, November 19th, 2009

Either there is an excess supply of economists in the world, or a shortage of problems that might benefit from economic analysis. Otherwise, I cannot understand why three German economists have taken time to quantify the obvious: right-wing extremists make life difficult for immigrants! Here is the abstract of their paper, with a link to the full text:

This study analyzes the effects of right-wing extremism on the well-being of immigrants based on data from the German Socio-Economic Panel (SOEP) for the years 1984 to 2006 merged with state-level information on election outcomes. The results show that the life satisfaction of immigrants is significantly reduced if right-wing extremism in the native population increases. Moreover, the life satisfaction of highly educated immigrants is affected more strongly than that of low-skilled immigrants. This supports the view that policies aimed at making immigration more attractive to the high-skilled have to include measures that reduce xenophobic attitudes in the native population.

Andreas Knabe, Steffen Raetzel and Stephan Lothar Thomsen, “Right-Wing Extremism and the Well-Being of Immigrants” (October 2009). CESifo Working Paper Series No. 2841. Available at SSSRN: http://ssrn.com/abstract=1500290

The paper contains numerous regression equations, now obligatory for ‘serious’ empirical work, complete with “robustness checks” in support of an unsurprising conclusion: “These results suggest that recent attempts to make immigration more attractive to the high-skilled are ill-fated if they do not simultaneously address the question of how to reduce hostile attitudes among the native population.”

In fairness to the authors, I should point out that they do report one finding that is both interesting, and not obvious: Xenophobia affects the high-skilled more than the low-skilled, possibly because “better-educated immigrants have a stronger desire to identify with and integrate in their host country”.

The SSRN download requires payment of a fee, but an ungated copy is available here.

reverse remittances

Wednesday, November 18th, 2009

Mexican migrants to the US are losing their jobs, and remittances are beginning to flow north as families back home help relatives in need.

Unemployment has hit migrant communities in the United States so hard that a startling new phenomenon has been detected: instead of receiving remittances from relatives in the richest country on earth, some down-and-out Mexican families are scraping together what they can to support their unemployed loved ones in the United States. ….

At one small bank in Chiapas that used to see money flowing in from the United States, more money is going out than coming in.

“I’d say every month 50,000 pesos are sent from here to there,” said Edith Ramírez Gonzalez, a sales executive at Banco Azteca in San Cristóbal de las Casas. “And from there, we’d receive about 30,000 pesos.” Fifty thousand pesos is $3,840.  ….

As expected during an economic slowdown, the money sent home by immigrants has fallen. The Bank of Mexico reported recently that remittances during the first nine months of this year dropped to $16.4 billion, a 13.4 percent decline compared with the same period in 2008.

The flow of money out of Mexico is believed [still] to be a tiny fraction of the remittances still arriving. “The evidence in this regard so far is anecdotal,” said Juan Luis Ordaz, senior economist at the Spanish bank BBVA Bancomer, who has begun investigating the reverse money flow.

Marc Lacey, “Money Trickles North as Mexicans Help Relatives”, New York Times, 16 November 2009.

Illegal travel to the US is difficult and expensive, so “there has been no sign of a mass exodus of migrants back to Mexico”. If temporary migration were simple, unemployed migrants would undoubtedly return home, where they can live cheaply, waiting to return when the US economy picks up.

HT to Tyler Cowen.