Debt is the sexually transmitted disease of finance. People won’t discuss it in public.
Russia’s war will remake the world | Financial Times Martin Wolff.
A new world is being born. The hope for peaceful relations is fading. Instead, we have Russia’s war on Ukraine, threats of nuclear Armageddon, a mobilised west, an alliance of autocracies, unprecedented economic sanctions and a huge energy and food shock. No one knows what will happen. But we do know this looks to be a disaster.
Rana Foroohar In the FT
I have a dermatologist friend who recently sold his practice to a private equity firm, but couldn’t bear to stay on after because management forced him to cut the amount of time spent with patients in half, and focus more on scale and less on people…
Why does the idea of Leon Black or Stephen Schwarzman focusing on post-Covid health issues make me feel more depressed? Is healthcare going to become the new subprime, with surprise billing, crushing debt, and sub-par treatment? Our system is complicated and patchy as it is. But Peter, the larger issue is what I’d like your take on. Do you agree with folks who say that we’ve never left the great financial crisis? With debt at record levels, and the Federal Reserve about to raise rates significantly, where will you be looking for financial risk?
Martin Wolff writing in the FT today.
Yet does this really matter? One used to think that economic performance was crucial to political success. Now we know there are alternative political tactics. If economic outcomes and fiscal largesse disappoint, Johnson can return to what has worked so well since 2016: the battle of undaunted Britain against the despotism of Brussels. Indeed, we are already seeing just this in his attempt to rewrite the agreement he reached over Northern Ireland just over two years ago.
In the last resort, blame what is wrong on foreigners. This has worked so far. But the patriotism card surely cannot work its magic forever.
Tyler Cowen says some interesting things in an article Why Economics is Failing US on Bloomberg. I don’t think his comments are limited to the economics domain.
Economics is one of the better-funded and more scientific social sciences, but in some critical ways it is failing us. The main problem, as I see it, is standards: They are either too high or too low. In both cases, the result is less daring and creativity.
Consider academic research. In the 1980s, the ideal journal submission was widely thought to be 17 pages, maybe 30 pages for a top journal. The result was a lot of new ideas, albeit with a lower quality of execution. Nowadays it is more common for submissions to top economics journals to be 90 pages, with appendices, robustness checks, multiple methods, numerous co-authors and every possible criticism addressed along the way.
There is little doubt that the current method yields more reliable results. But at what cost? The economists who have changed the world, such as Adam Smith, John Maynard Keynes or Friedrich Hayek, typically had brilliant ideas with highly imperfect execution. It is now harder for this kind of originality to gain traction. Technique stands supreme and must be mastered at an early age, with some undergraduates pursuing “pre-docs” to get into a top graduate school.
Sam Shuster, before I departed to Strasbourg, warned me in a similar vein, with reference to the Art of War by Sun Tzu:
Even the mystique of wisdom turns out to be technique. But if today must be learning technique, don’t leave the tomorrow of discovery too long.
I would say I heard the message but didn’t listen carefully enough. As befits an economist, Cowen warns us that there is no free lunch.
Terrific essay by Adam Tooze in the LRB reviewing Arguing with Zombies: Economics, Politics and the Fight for a Better Future. Three passages that caught my attention.
What sets Krugman apart within this cohort is the way he has, since the 1990s, stopped being a gatekeeper of the status quo and instead become its critic.
The basic idea of the MIT school of the neoclassical synthesis as defined by Samuelson was that Keynesian macroeconomics and neoclassical microeconomics were not contradictory but complementary. As Krugman put it, if you can get macro right then micro will follow. ‘In the Samuelsonian synthesis, one must count on the government to ensure more or less full employment; only once that can be taken as given do the usual virtues of free markets come to the fore.’ It was a dichotomised view of the world, with two different modes of analysis enshrined in separate textbooks and separate career paths for micro and macroeconomists. But as Krugman insisted, ‘inconsistency in the pursuit of useful guidance is no vice. The map is not the territory, and it’s OK to use different kinds of map depending on what you’re trying to accomplish.’ [emphasis added]
The Great Depression, Krugman wrote, ‘ended largely thanks to a guy named Adolf Hitler. He created a human catastrophe, which also led to a lot of government spending.’ ‘Economics,’ he wrote in another essay, ‘is not a morality play. It’s not a happy story in which virtue is rewarded and vice punished.’
“I work for a government I despise for ends I think criminal.”
John Maynard Keynes, 1917, in a letter to Duncan Grant.
The above quote via John Naughton who commented
I wonder how many officials in the US and UK governments currently feel the same way.
Following on from the previous post, here is a bit more economics, surely germane to Deaton and Case’s work, and which provides yet another example of where the ‘observation’ (‘facts’) may, if not shout for themselves, at least whisper that something important is going on. The graphs are from Saez and Zucman’s The Triumph of Injustice. Note the timeline for each graph.
The history of science is the history of rejected ideas (and manuscripts). One example I always come back to is the original work of John Wennberg and colleagues on spatial differences in ‘medical procedures’ and the idea that it is not so much medical need that dictates the number of procedures, but that it is the supply of medical services. Simply put: the more surgeons there are, the more procedures that are carried out1. The deeper implication is that many of these procedures are not medically required — it is just the billing that is needed: surgeons have mortgages and tuition loans to pay off. Wennberg and colleagues at Dartmouth have subsequently shown that a large proportion of the medical procedures or treatments that doctors undertake are unnecessary2.
Wennberg’s original manuscript was rejected by the New England Journal of Medicine (NEJM) but subsequently published in Science. Many of us would rate Science above the NEJM, but there is a lesson here about signal and noise, and how many medical journals in particular obsess over procedure and status at the expense of nurturing originality.
Angus Deaton and Anne Case, two economists, the former with a Nobel Prize to his name, tell a similar story. Their recent work has been on the so-called Deaths of Despair — where mortality rates for subgroups of the US population have increased3. They relate this to educational levels (the effects are largely on those without a college degree) and other social factors. The observation is striking for an advanced economy (although Russia had historically seen increased mortality rates after the collapse of communism).
Coming back to my opening statement, Deaton is quoted in the THE
The work on “deaths of despair” was so important to them that they [Deaton and Case] joined forces again as research collaborators. However, despite their huge excitement about it, their initial paper, sent to medical journals because of its health focus, met with rejections — a tale to warm the heart of any academic whose most cherished research has been knocked back.
When the paper was first submitted it was rejected so quickly that “I thought I had put the wrong email address. You get this ping right back…‘Your paper has been rejected’.” The paper was eventually published in Proceedings of the National Academy of Sciences, to a glowing reception. The editor of the first journal to reject the paper subsequently “took us for a very nice lunch”, adds Deaton.
Another medical journal rejected it within three days with the following justification
The editor, he says, told them: “You’re clearly intrigued by this finding. But you have no causal story for it. And without a causal story this journal has no interest whatsoever.”
(‘no interest whatsoever’ — the arrogance of some editors).
Deaton points out that this is a problem not just for medical journals but in economics journals, too; he thinks the top five economics journals would have rejected the work for the same reason.
“That’s the sort of thing you get in economics all the time,” Deaton goes on, “this sort of causal fetish… I’ve compared that to calling out the fire brigade and saying ‘Our house is on fire, send an engine.’ And they say, ‘Well, what caused the fire? We’re not sending an engine unless you know what caused the fire.’
It is not difficult to see the reasons for the fetish on causality. Science is not just a loose-leaf book of facts about the natural or unnatural world, nor is it just about A/B testing or theory-free RCTs, or even just ‘estimation of effect sizes’. Science is about constructing models of how things work. But sometimes the facts are indeed so bizarre in the light of previous knowledge that you cannot ignore them because without these ‘new facts’ you can’t build subsequent theories. Darwin and much of natural history stands as an example, here, but my personal favourite is that provided by the great biochemist Erwin Chargaff in the late 1940s. Wikipedia describes the first of his ‘rules’.
The first parity rule was that in DNA the number of guanine units is equal to the number of cytosine units, and the number of adenine units is equal to the number of thymine units.
Now, in one sense a simple observation (C=G and A=T), with no causal theory. But run the clock on to Watson and Crick (and others), and see how this ‘fact’ gestated an idea that changed the world.
From this week’s Economist | Breaking through
Yet nowhere too little capital is being channelled into innovation. Spending on R&D has three main sources: venture capital, governments and energy companies. Their combined annual investment into technology and innovative companies focused on the climate is over $80bn. For comparison, that is a bit more than twice the R&D spending of a single tech firm, Amazon.
Market and state failure may go together. Which brings me back to Stewart Brand’s idea of Pace Layering
Education is intellectual infrastructure. So is science. They have very high yield, but delayed payback. Hasty societies that can’t span those delays will lose out over time to societies that can. On the other hand, cultures too hidebound to allow education to advance at infrastructural pace also lose out.
I won’t even mention COVID-19.
I think1 the words are mine:
Every time I hear the term line-manager used about an academic, retirement gets a day closer
But the great JK Galbraith (senior) had some words of his own on line-management (Galbraith, a famous Harvard Professor of Economics, was ambassador to India for JFK)
Galbraith proved up to the task, in part, as Bruce Riedel writes in “JFK’s Forgotten Crisis”, because he had access to the president and his aides. Most ambassadors report to the State Department, but the blunt Galbraith told the president that going through those channels was “like trying to fornicate through a mattress”.
“Everyone wants growth but no one wants change.”
I read about the QALY (quality adjusted life year) during my intercalated degree in 1980-81, when we were exposed to some health economics. It was considered new and interesting at the time. It took me about 10 minutes to sense that it was nonsense, even if I couldn’t quite put my feelings into words that quickly1. The goal was fine, but the methodology was metaphysical in nature, rather than grounded in the world that you could touch with your fingers. At least not if you look at the world through the prism of the natural sciences.
Economists have a disturbing habit of confusing how the world works with their own (strange) ideas of rationality. If only the world could be said to work in a way that was amenable to their methods. When physicists wanted to estimate the speed of light they recognised that they had to create some theory and some technology in order to obtain the correct answer. Embarrassingly — at least from the economists point of view — they had to do some experiments and see if their answer made sense when applied to new observations in the external world. Until they had done this, they stayed shtum.
Not so, for our economists. Their solution is effectively to agree some conventions, and then define what the speed of light should be. Whether their theory explains the way the world really works is neither here-nor-there. So QUALYs became a make-believe that suited both economists and the technocrats in government. The former, because the need for QUALYs became a job creation scheme for health economists (just as evidence based medicine (EBM) became a lifeline for all those epidemiologists who belatedly realised that much of their subject was methodologically deeply flawed). The technocratic governments liked what the economists brought them because it exiled judgement (and hence blame), allowing human suffering to be traded in arbitrage markets from which they could metaphorically wash their hands — ‘just following the science’, ‘just following the science’ (ring any bells?). Many politicians don’t want to do politics, but they do want to stay in power. As do economists2, who appear pathologically obsessed with rank and status3. The Economist had a nice line earlier this year germane to my doubts:
But unlike poets, economists prefer to quantify their analogies—to measure whether thou art 15% or 20% more lovely and more temperate.
But if you think that artificial models that cannot predict the world are still useful — useful in the way the philosophers trolley problems are — then the quote below should indeed make you sit up and stare.
If we’re willing to pay $150,000 for each quality-adjusted extra year of life (a commonly used estimate), then we ought to view a 10% increase in spending per capita as a good investment if it extended average life expectancy by 2.5 days. That number may give readers pause — hence the importance of clarifying our spending priorities and focusing on care that produces real value for patients. With such a focus, we could feel more confident that higher health care spending was worth it.
(Image of NotGeld (emergency money) at top of page from here)
The killer whales (cash cows) of high-tuition prestige universities are international students. We claim we let them in for diversity. This is bullshit. International students are the least diverse cohort on earth. They are all rich kids who pay full tuition, get jobs at multinational corporations, and often return to the family business. At NYU, they constitute 27% of our student body and likely half our cash flow, as they are ineligible for financial aid. We have a pandemic coupled with an administration committed to the demonization of foreigners, including severely limiting the prospects of highly skilled grad students. This means the whales may just not show up this fall, leaving us with otters and penguins — an enormous fiscal hole.
Straight talking from Scott Galloway of Stern, NYU.
Angus Deaton: Many people have said that there are two ways of getting rich: One way is by making things, and the other is by taking things. And one of the ways of taking things is to make the government give you special favors. Those special favors don’t create anything, but they can make you rich, at the expense of everybody else.
Another telling figure from Thomas Piketty’s Capital and Ideology. The stiking thing about much of this book is how predicable and widespread so many social trends are.
We may be coming to realise that the people who complain about the nanny state are the people who had nannies.
Sarah Neville is the FT reviewing The Nanny State Made Me: A Story of Britain and How to Save It, by Stuart Maconie
But most of Case and Deaton’s ire focuses on the health care industry, which not only underperforms but is also wrecking the US economy. We [USA] spend twice per capita what France spends on health care, but our life expectancy is four years shorter, our rates of maternal and infant death are almost twice as high, and, unlike the French, we leave 30 million people uninsured. The amount Americans spend unnecessarily on health care weighs more heavily on our economy, Case and Deaton write, than the Versailles treaty reparations did on Germany’s in the 1920s. If, decades ago, we’d built a health system like Switzerland’s, which costs 30 percent less per capita than ours does, we’d now have an extra trillion dollars a year to spend, for example, on replacing the pipes in the nearly four thousand US counties where lead levels in drinking water exceed those of Flint, Michigan, and on rebuilding America’s bridges railroads, and highways—now so rundown that FedEx replaces delivery van tires twice as often as it did twenty years ago.
In the US, health insurance accounts for 60 percent of the cost of hiring a low-wage worker. Many employers opt instead to hire contract workers with no benefits, or illegal immigrants with no rights at all.
Perhaps, perhaps not. But when and where is even more important.
Hailed as a maths prodigy at school, Shields accepted a junior position at Merrill Lynch after studying engineering, economics and management at Oxford University because the trading room floor offered him a thrilling, dynamic environment. He was not alone: of 120 engineers in his year group at university, Shields added, only five went into engineering.
I think we should be much more cautious in attempting to direct young people’s choices beyond providing them with an education. We should feel proud of their independence of mind, remembering that supply side factors will likely win out over central planning. It is the supply side that we need to deal with, not least Putts Law. The same applies to medicine.
This personal story is worth a read for other lessons, too.
Goldman [Sachs) are smart: they can rip your grandmother’s face off and make her feel good about it.
Carbon offsetting is shaping up to be the greatest mis-selling scandal since the Dominican friar Johann Tetzel sold pardons to redeem the dead. Martin Luther attacked this practice in 1517, in his 95 theses.
Five hundred years later, those of us who seek planetary redemption should reduce our carbon footprint in ways that we control — rather than relying on middlemen who may or may not plant trees. The road to hell, I seem to remember, was paved with good intentions.
Well, the Catholic church usually got there first.
“If I can predict what you are going to think of pretty much any problem, it is likely that you will be wrong on stuff. [speaking of certain other economists]….they are very predictable
The future of capitalism is out of the hands of those who spend their time thinking about it.
Not too dissimilar to medicine, either: discuss…..
There is lots of variation, but in general elite institutions have been the biggest growers. Some, including Oxford and Cambridge, have chosen not to expand. But most prestigious universities have sucked up students, grateful for their fees, which subsidise research. The intake of British students at members of the Russell Group of older, research-focused universities has grown by 16% since restrictions were lifted. Some have ballooned. Bristol’s intake has shot up by 62%, Exeter’s by 61% and Newcastle’s by 43%.
Increases in intake do not automatically mean a worsening of what is on offer, but the difference between Oxbridge and the Russell group shout out at you: some are more equal than others.
Direct URL for this post.
Not often I spot typos in the New York Review of Books, but here is one that matters. The article dealt with the price of prescription drugs, and there are of course plenty of villains to go around: crony capitalists; advertising spending being larger than research spending —because it works!; and sloppy thinking with regard to IPR and patents. The article on paper read:
In late October, however, just before the congressional elections, Azar declared to reporters that high prices constituted “the greatest possible barrier to patent access.” Democratic strategists gave prescription drug prices high priority in congressional campaigns. Yet leaders in both parties understood that curbing prices would be no easy task. The pharmaceutical industry, which has long deployed one of the most powerful lobbies in Washington, was increasing its representation in the capital.
Yes, should have read patient not patent, although no doubt pharma might not have agreed.
Direct URL for this post.
Bluntly, the main motive for replacing the teaching grant by loans is an accounting trick. There is an apparent decline in public spending, but at the cost of distorting higher education policy … Thus the changes look like a dodgy [Private] Finance Initiative” – Barr, 2012
Well written piece on the loan scandal in Wonkhe by Nicholas Barr. In the language of the laymen, the government is fiddling the books, and dumping the costs on future taxpayers. It fiddles because it wants to mislead, for gain.
He goes on:
higher education finance has elements of a bubble. If I were a Vice-Chancellor, this aspect would give me sleepless nights.
Guarded language — fair enough — but it is not just a financial bubble. Let us just see how this year pans out.
Great interview with Paul Romer over at Conversations with Tyler. Romer won the Nobel prize for economics this year, and has had a wonderfully varied career (academic; founder of a software company that produces computer assisted learning material (Aplia); and time at the World bank. There are some earlier statements by him about education on my web page.
What caught my eye in this interview was:
“We should always remember that the education business is one of the ones that has the biggest problems with asymmetric information. A young person who pays somebody to educate them is very dependent on the decisions that the educator makes about “Study this, go in this direction.”
“I think that the problem in higher ed is that the institutional incentives don’t provide the kind of training that would maximize the opportunities for the students or, for that matter, maximize outcomes for the nation.”
Indeed: in many ways, the situation is even worse than in medicine.
This article and data on funding streams in higher ed is well worth exploring. It adds a necessary counterpoint to any consideration of what has happened to HE in the UK over recent decades. And, I see the time span maps closely to my own career as a Professor. I still struggle with the ‘why’ question. Some of the graphs are scary.
In 1903, Elizabeth Magie patented the Landlord’s Game, a property-based board game created with two sets of rules: a monopolist set in which the winner took all and an antimonopolist set in which all wealth was shared across society. It is revealing that only the former set of rules took off, giving birth to the bestselling game Monopoly. Radical Markets sketches a vision of how society might look if it adopted Magie’s second set of rules. Unlike playing with Monopoly money, the stakes in this societal game could scarcely be higher, and the importance of this book could scarcely be greater.”–Andrew G. Haldane, chief economist, Bank of England