Attiat F. Ott's Blog

Globalization of the Old and the Very Old

2010-11-09T12:51:00.003-05:00

A recent article by Ted C. Fishman titled “The Old World” (the New York Times Magazine, October 17, 2010, pp.50-53), paints a very disturbing picture for the developing economies. Mind you that the current picture is as bad as “probably” can get, nonetheless the author gives the impression that it is going to be even worse. The author puts the following thesis: “The world is currently divided between those under 28 and those over 28”.Twenty eight seems to be the magic number. If you are one of those, I say REJOICE, if not read on. But, before getting into the nitty-gritty of the old age globalization thesis, let me begin by defining the globalization term. This may turn out to be as useful to understanding the current economic problems as it is for understanding the problems of an aging world population. So what globalization means and how did the term came about?
Robert Cox (1994) defines the global economy as a “system generated by globalizing production and global finance”. Thus, the definition conveys two things: First that the global economy is not a universe without borders. Rather, it is a socio-cultural, economic structure brought about by some event or events. Secondly, globalization is a process encompassing modes of production, trade and finance. Reinicke (1998), advanced the notion that globalization is a process brought about through transborder by firms undertaken to organize their development, production, sourcing and financing activities. The globalization process thus described links globalization of the world economy to the organizational structure of the firm. In short, it is an economic phenomenon undertaken to enhance competition in the belief that the market ideology and discipline enhance “world” welfare.
Having defined the concept as it has originated why the term did become imbedded in our lingo and when it is talked about it seems to conjure all sorts of influences most of them are not salutary. Two issues are commonly talked about. The first is outsourcing – exporting jobs and the resulting dislocation of workers giving rise to unemployment, wage differentials and hence income redistribution. These effects are magnified in stagnant economies and during severe and prolonged recessions. The second is the technical revolution and the rapid transmission of technology. A technology that makes low skills redundant have not only far reaching impact on low skills workers in both advanced and developing economies but also the changes the dynamics of production (where firms would locate) with far reaching implications for the world wage structures and balance of payments.
The US and many of its partners in the developed world is the engine that spurts technical advance and innovation. Put to practice, these advances are labor saving technology replacing workers by “workerless” production techniques and thus making labor redundant. Reallocation of labor across industries or occupations is not easy or rapid. When labor services become redundant, it has a devastating effect on workers, not only on those who lost their jobs but also on those in occupations or industries close to the ones that have experienced updated and/or new technical advances.
It is worth emphasizing that the middle age group—those between the ages of 28 (the magic number) and 40 will likely bear the brunt of redundancy and reallocation. The reason is that skills are acquired well before the age of 28. Augmenting skills to meet advances in technology is needed if the economy were to accommodate displaced workers. This task may be accomplished during periods of economic growth but may not be feasible when the local or the global economy is in recession. In short displaced workers with low skills have a long “row to hoe”.
How about the old-- those over the age of 40? This group traditionally has had the lowest unemployment rate. However, with outsourcing and a “executive watch over the bottom line”, their employment picture is far from clear. This group clearly have a mix of skills acquired by “being on the job” as well as through formal education. Hence, this group will experience job security as well as redundancy.
Let me now turn to the old and very old.
It need not be emphasized that “we, the people,” have brought the “aged-nonaged” problem on ourselves. How many articles and speeches were given about the need to restrict the size of the family to insure a better standard of living? The development of birth controls and their widespread use in the developed world was the medical response to the “Malthusian” prediction that population growth if left unchecked spell hunger, wars and disease. In his First Essay on Population (1979) reprinted 1926, Malthus wrote: “The power of population is indefinitely greater that the power in the earth to produce subsistence for man”. Another factor which took a life of its own is advances in medical technology that eliminated many of the ills that made life if not unbearable as one ages but also inspired the old to seek forcefully these cures to insure longer and healthy life. Initially, the benefit by far exceeded the cost. Children and their parents in the developed world enjoyed higher standard of living, higher educational attainment and better health. Unfortunately, the dynamics of these events meant that a smaller population has down side effects: a shrinking pool of the young and an expanding pool of the old. It does not take a “mathematician” to figure out the odds against the young. They have to bear the cost of “raising” their parents as their parents once did. That is o.k. The problem is that the scale has become unbalanced, not enough young to return the favor bestowed on them by their elders.
The cost of living longer is unattainable in a stationary population especially in periods of unemployment and stagnant economy. Short of undertaken “measures” at either end of the age structure, societies need to think of ways to address intergenerational transfers. It is worthwhile to remember that today’s old were yesterday’s young. They raised today’s young and educated them, they funded the public sector budgets, they made advances in health technology as well as other technical innovation possible, and they went to war giving up their life to secure the life and liberty of today’s young. Every generation bears the cost for the succeeding generation and under a social contract it follows that the younger generations transfers some of its wealth to the older generations. The problem is, when resources are diminished the social contract looses its imperative. Intergenerational transfers are reexamined.
Guess who will make such reexamination? With few exceptions they are likely to be made by the “younger generations”. They will have to legislate higher taxes, cut spending or both. The inescapable fact is that they have to face the question of intergenerational transfers.
Let me now return to the globalization of the old and the very old which is the title of this blog. A look at the population data is quite useful (Table 1).
A few examples suffice. Three types of data are shown: The age distribution of the population; the birth rate and the US unemployment rates by age group. The dat given covers 10 year periods. The story that emerges is what Fishman’s article sought to convey. The age structure of population in the developed world makes it clear that a shrinking pool of the young faces a growing pool of the old and the very old. Birth rate data show one of the fundamental reasons why the young pool has been shrinking over time. Without changes at either end of the age spectrum (not likely in the short run), the young need to garner higher intergenerational transfers. Short of

that, the very old will see the social contract crumbles and they have to find ways to cope with the loss of support.
A look at the US unemployment rate by age groups, population in the two age brackets (34-44 and 45-54) have typically enjoyed the lowest rates of unemployment. If this scenario were to change a further stress on society resources will be manifested. That is not only transfers of resources will have to take place from the young to the old but also from the working population to the unemployed population.
Putting the unemployment issue aside (for another blog), the question that was raised in the Fishman’s article is how to deal with the old and especially the very old. One solution which has been practiced not only in the US but elsewhere is to alter the social contract—raising the retirement age, taxing pension benefits and health benefits and so on. The problem is these remedies are ad hoc solutions that are not likely to “remove” the problem of aging from the social agenda.
Good minds and not such good minds have advocated many solutions ranging from “privatizing” the social insurance system including pension and medical care to keeping the old and the very old in the work force. But as Fishman puts it “one conundrum for aging societies is how to keep older people employed”. Obviously, if that was possible, then tax revenues rise, benefit payments fall or pushed further into the future. This scenario has been achieved to some extent in the US but the problem of an aging population did not go away. As outlined above, the problem gets exacerbated when economic conditions worsen and when technical advances favor the very young. Mr. Fishman is very pessimistic about the future outlook of aging societies. According to Fishman “…as the world gets older, we need to anticipate how this extraordinary change might undermine our commitments, weaken nations and push able people to the side…it now looks as if global power rests on how willing a country is to neglect its older citizens”.
Well… I wonder how old is Mr. Fishman? Would he retain this thought when he gets to join the “army of the old and the very old”?
What kind of solutions are likely to emerge if the age structure continue as it has been in the past? If the future is a repetition of the past, societies will have to revisit those solutions advocated by many. Mind you, these solutions are not new—they are worn out so to speak, but there they are:
• Negate or abolish the “implicit” social contract—you pay, do not pass go and do not collect your “owed” pension.
• Curtail the delivery of medical care through rationing—if you are over 50 you are on your own—sink or swim (The British National Health Service ration medical care to the old).
My prescription is:
• “Do not send the young to do the business of the old. If the over 40 politicians need to change the world through war-like engagement, they should send the age group over 40, over 50 and over 60’s (that should end war quickly).
• Lend credence to the world globalization by allowing free movement of people. Migration is one way to populate a country by the “young”. Of course that means not only migrants have to be young but also possess needed skills. This option not only will chip away at the “outsourcing” problem but also will neutralize the effects of aging throughout the global economy.
Alas, these solutions, at least for the moment, are far fetched solutions. Nonetheless, they should give us all a pose, perhaps food for thought.

Is it Irrational Behavior or Risk Aversion? (Round Two)

2010-07-29T21:19:00.001-04:00

On July 15, 2010, I posted a blog with the same title except that it was round one. Today, I write a follow up hence the label round two. Why the designation? In the first round, I have contrasted the outcome of choice involving two medical options (pp.2, 3). The options involve a risky choice. One of the options had a certain outcome—the individual knows with certainty the outcome of the choice whereas the other was labeled “risky” choice as it involves uncertainty. I discussed how the individual calculates the outcomes of the two options by assigning what economists call utiles, a scale of measurement for the utility of the choice. My example was intended to show that the risk averter is likely to choose the certain outcome over the risky choice. I have also shown, that to make the uncertain option equally valued would require (given my numerical assignment) a reduction of the risk valuation ascribed to the risky option. In this round I would like to put forth another scenario. I would like to suggest another way of making option Y the winning option. For this to take place option X is rendered an “uncertain” option. Given that my examples are medical intervention options, the agent who can alter this and hence the choice is the “physician”.
Now assume that the physician who monitors the patient were to inform the patient that the certainty attached to the outcome of option X is no longer valid. That is, the probability of success now is equals to zero. Moreover, assume that the physician were to point out that there exists the probability that a side effect that did not exist earlier will materialize if option X is chosen. This means that not only the intervention with 100 percent probability has become ineffective, but also it carries with it a “negative” outcome. The comparison between the two options will hinge on the value a risk averter will assign to this negative effect. Note that in comparison to option Y there is no benefit attached to continuing the treatment. This scenario then pushes the individual to choose option Y without a change in its probabilities or the negative valuation attached to the side effect, a component of the option.
In short, the purpose of the exercise was to show how difficult it is for the individual to exercise choice when faced with uncertainty, not only because information may be incomplete but also because of his/her dependence on the market (third party) to evaluate the risky options. When an option is chosen in situations involving risk or uncertainty it is not an easy task to label the choice as rational or irrational. The saving grace is that in some situations a choice can be amended, in others the loss arising from the “wrong” choice cannot be recouped. That brings me to the literature that brought the risky choice models to the theory of consumer choice.
I have mentioned in the previous blog the seminal article by Milton Friedman and L.J. Savage (1948). A year earlier a most influential contribution by Von Neumann, J and O. Morgenstern’s Theory of Games and Economic Behavior (1947) offered utility functions that permit the complete ranking of options in situations involving uncertainty; the comparison of utility differences and the calculation of expected utilities thus making it possible to analyze choice in situation involving uncertainty (see chapter 1 of their book). Since then we have gained insight into this issue through contributions by several economists about consumer choice in situations characterized by risk and uncertainty. It is worth noting that risk has an objective probability while uncertainty involves assigning “subjective” probability. Hence the importance of ascertaining the individual type: whether he/ she is a risk averter, a risk neutral or a risk lover as this is critical to understanding choice. It is of note that an individual may be a risk averter in one situation and a risk lover in another. Now, I turn to the contribution of Behavioral Economists to the study of consumer choice.

Behavioral economists reject the economist models’ assumptions of rationality and maximization of utility. Rationality is defined as the “cognitive abilities” for solving economic problems .Behavioral economists dispute full rationality on the basis of research findings by psychologists and some economists “people exhibit preference reversals; have problems with self control and make different choices depending on how the issue is framed.” For a number of reasons, people make errors and behave in a manner contrary to their self interest. Given this premise, placing constraints on the exercise of free choice may be called for. That is, “paternalistic” intervention by the state or the community may be called for.
There are many variants of state paternalism: Paternalism (Mead, editor 1997), Patronizing Paternalism (Burrows, 1993), Libertarian Paternalism (Sustains and Thaler 2003), Permissible Paternalism (Goodin 1991), Benign Paternalism (Choi et al.2003), and Asymmetric Paternalism (Cramer et al. 2003). The different labels notwithstanding, the underlying premise of paternalism is simple: intervention by the state or the community will generate significant welfare gains. Sources that give rise to “bad” individual choice are: bounded rationality, slow learning, framing and lack of self control.

A question that needs to be posed: when people choices are ‘bad’, should the state and /or the community (a) Override their choices? (b) Steer them towards ‘welfare’ improving choices? (c) Encourage “good” choices without being coercive? or (d) Do nothing?
I have explored this issue in a conference presentation: “State Paternalism and the Rules of Reason” at the International Atlantic Economic Society meeting, which took place in Savanna, GA, on October 2007. In the paper presented, I have summarized the arguments put forth in a number of papers pointing out differences in the policies advocated to deal with “irrational” behavior. In a nut shell, paternalistic policies are advocated to help those individuals whose rationality is bounded (i.e. less than perfect) from costly errors. In the medical intervention example, if the individual was to reject option Y then he/she will bear a costly outcome.
It needs to be emphasized that not all policies advocated by behavioral economists call for coercion. Libertarian paternalism for example allows for differences between individuals and ‘covert’ coercions are not contemplated. At this juncture, it is befitting to call upon one of the architect of liberalism in economic thinking, John Stuart Mill. In his essay on liberty (1859), Mill wrote: “the only purpose, for which power can rightfully be exercised over any member of a civilized community against his will, is to prevent harm to others” (1984 edition, p.92). Following the writing of Nobel Laureate James Buchanan in his Logic of Limits (Buchanan and Musgrave 2000, p.111), one may ask: Why should constraints be placed on the individual when his actions do not infringe on others?
An understanding of the logic of limits may be gained by examining individuals choice in situations where they voluntarily impose restrictions on own actions. Behavioral economists advocating paternalistic intervention do so because they doubt the validity of the logic of limit concept altogether or at least as it applies to those individuals exhibiting bounded rationality. Buchanan’s observation that persons do adopt rules that they intend to abide by is valid for many but not for all. Not all smokers purchase stops smoking aid; alcoholics join Alcoholics Anonymous (the examples given by Buchanan, p.112).
Ruling out the logic of limits as it applies in the example of medical intervention given above in favor of paternalistic intervention; it is imperative to recall that “state or community” intervention most often entails coercion for they command the tools to implement said intervention (power to tax, impose fines, outlaws certain actions and so forth). Paternalism exercised by a parent and/ or a care giver does not command the same coercive power. In the medical intervention example cited above, the physician may attempt to move the patient towards his preferred option but he cannot coerce the patient to do so. Unlike the state, or the community, his power over the individual is not absolute; the patient can opt out of his care.
To conclude:
Behavioral economists have made a significant contribution towards our understanding of human behavior. It is undoubtedly true that some “bad choices” at least from the point of view of society are likely to be made, others are not .But placing constraints on free or voluntary choice of the individual should not be taken up lightly. To err on one side or the other demand more empirical proof that we currently do not have.
Each and every one of us can relate to situations where choices made were far from utility maximizing and/ or ‘fully’ rational. Most of us believe that the choices we voluntarily make are optimal in the sense that their expected costs are below those associated with alternative-dictated choices.

Is it Rational Behavior or is it Risk Aversion?

2010-07-15T13:16:00.000-04:00

As I was struggling with a “medical” decision as to whether to continue a “mode” of treatment that has run its course and is no longer viable or alternatively embark on a new treatment with a new technology, I read a most interesting and to the point write up in THE WEEK. It goes without saying that the “old” is familiar; the new is approached with apprehension if not suspicious. Hence, anything that makes the “new” a bit “old” helps. In the June 18th issue of THE WEEK, under the heading of “Author of the Week” , a story unfolds about a medical choice made quite a few years back by Dan Ariely who has written a couple of books using this choice to facilitate the understanding of a relatively new theory of economics.
Dan Ariely is a fellow economist, a “behavioral economist”, who according to THE WEEK has written a 2008 bestselling book: “The Upside of Irrationality”. Behavioral economists are a new breed of economists who are challenging the standard “textbook” notion of human “rationality”, a notion so fundamental to main stream economics. Rationality is a basic assumption economists use to analyze the individual decision, whether the choice is that of a consumption basket, a choice of occupation, and work versus leisure and so on. It is assumed that the individual knows the alternatives and chooses the one that “maximizes” his or her utility. This assumption is essential to our understanding of choice exercised in the market place in a setting which does not involve risk or uncertainty. When the individual is confronted with a choice that involves “RISK”, the choice is not as simple. In this situation we need to sort out individuals in terms of their “sensitivity” to risk taking.
Economists analyze three categories of risk taking exhibited by the individual: Risk averter, Risk lover and Risk neutral. The individual is said to be “risk averse” when he/she places a much higher weight to a choice that “minimizes” taking of risk; a risk lover goes for a risky choice while a risk neutral gives equal weight to risky and non-risky options.
That was more or less all we needed to know to decipher choices of the individual. But then, a group of economists mainly from the “Chicago School” revived a critique levied against the assumption of rationality and self control (See for example Schelling, T., (1978) Economics or the Art of Self Management, Am. Eco. Rev. pp. 290-94). The new group including Sunstein, Thaler, Laibson, O’Donoghue and Rabin to name but a few, earned the label: Behavioral economists for their contributions to the understanding of human decisions. In a nut shell, behavioral economists challenged the notion of rationality and maximization of utility. In effect, they argue that observed behavior is more likely to exhibit “irrational” rather than a rational decision making process. An example that is often cited has to do with the consumption of “sin” goods—cigarettes, alcohol, drugs and the like. Lack of self control is essential to the analysis, as well as the dimension of choice.
Back to the choice made by Dan Ariely, which THE WEEK Magazine uses in alluding to his book on the thesis of behavioral economics. As the magazine tells it (I have yet to read the book), Dan uses his own choice to explain one of the tenants of the behavioral economists’ theory—that people are less than perfectly rational in their choices. The author uses his own choice which he has made several years back to make the point. The choice involved two types of “medical intervention”. According to the write up, at the age of 18, the author suffered burns on 70% of his body. Two medical options were put before him: Amputate his right arm and replace it with a “hook”, or retain the arm after an excruciating surgery and endure severe pain and partial use of the arm for the rest of his life. At the time, at the age of 18, the choice he made was to retain the arm. Was this a rational or irrational decision?
At the time the decision was made, the author, in my view, exhibited what traditional economists label as “risk aversion”. As he put it: I was “incredibly attached to my hand—in multiple ways”. On backward reflection on such decision, Dan Ariely posits that the decision made at the time was “irrational”. When revisiting the decision about his own arm, as it is retold by THE WEEK, he admits that IRRATIONALITY may have led him astray. On revisiting the decision, at least for the book’s benefit Dan Ariely speculated about whether “prosthesis might have been more functional—that keeping my arm was, in a cost-benefit sense, a mistake”.
This reflection on a past decision causes me to revisit in this blog the assumption of rational choice not in terms of one period horizon but intertemporally. In simple terms, a choice with consequences lasting more than one period, for example, a choice involving one period can be depicted by the consumption of an ice cream cone, a cup of tea or a glass of mineral water. An intertemporal choice is a choice with consequences beyond the period when the item is consumed. As an example, cigarette smoking in one period gives satisfaction in that period but carries with it undesirable consequences in subsequent periods.
A great deal has been written about this type of choice. Traditional economists have advanced theories explaining intertemporal choice. The add-on by behavioral economists is that the individual may exhibit what is called “bounded rationality”—that the individual lacks self control when it comes to consumption of sin goods. Accepting this proposition has led some behavioral economists to advocate “paternalism”. Government or some higher authority would override individuals’ preferences for society’s preferences (the ban on smoking in public places, restaurants and bars is an example). For more on this point and references see Bae and Ott “The Public Economics of Self Control”, Journal of Economics and Finance (October 2008. Pp. 356-367).
Let us contemplate a decision at time t, involving two courses of action: An action A and action B. If one knows with “certainty” the outcomes of both, then the standard economist model applies. That is if a choice of A gives pleasure or satisfaction equal to X utiles, and B gives satisfaction equal to Y utiles (discounted if it were to materialize in a future period), then if A is chosen rather than B, then X utiles are greater than Y’s and vice versa. The individual choice maximizes his/her utility. Two problems arise in this scenario: first, a choice with outcome extending beyond the one period (future period(s)), involves uncertainty or unmeasured risk. Secondly, what discount rate to apply to future outcomes?
Back in the late 1940’s, Milton Friedman and T. J. Savage put this issue before us in their seminal article “The Utility Analysis of Choice Involving Risk” in the Journal of Political Economy (August 1948, pp. 279-304). In order to get as close as possible to explaining the individual temporal choice—a choice involving one period when faced with risky choice, they use the categorization of individuals as risk averter, risk lover and risk neutral. In their example the choice involved two options: a “certain sum of money”, and a chance (game) with two outcomes: losing with a high probability a small sum of money and winning with a very small probability a very large sum of money. Depending on the threshold of risk a choice is made among the two options. If the individual is risk averse he is likely to choose the “certain outcome”, if risk lover he will choose the “bet”. Nothing in the second choice is said to exhibit irrational behavior even if the individual were to bet the house and looses it.
Fundamental to the analysis of choice involving risk, is not only the computation of the expected value of the bet so that it can be compared with the “certain” option, but also the expected utility of the uncertain outcome. The expected utility depends on the shape of the utility function of the individual exercising the choice. Such utility is a function of the individual tolerance of risk. Unfortunately, this is a subjective value that can only be assigned by the individual. Which brings me back to Dan Ariety’s choice, and to a choice I am contemplating.
To illustrate:
Using the example of medical intervention, let option X be current treatment mode which has lost most of its effectiveness in the face of the disease progression. Staying with option X is given a probability Pr. =0.2 that it will have some effect. Let individual A be designated as “risk averter”. He/she assigns a utility value to this option as equal to 100 utiles (some scale of value). Hence:
Pr* Ux= 0.2(100) +0.8(0) =20 is the expected utility.
Option Y has the probability of success of 0.7 that it will be effective, (1-0.7) it will not be. If effective, the utility is 1,000. Accordingly:
Pr*Uy=0.7(1,000) + (1-0.7) (0) =700.
Comparing the expected utility of the two options clearly indicates that option Y will be chosen.
This however is not the complete story. If the new technology carries with it, in addition to the failure probability, a probability of adverse side effects then such probability has to be incorporated to arrive at the expected utility of this option. This complicates the analysis as one needs to know, in addition, something about the risk tolerance of the individual.
Let the side effects (usually ascertained from clinical trials) to have a low probability equals (0.007) such that if it materialized will have severe consequences, even death. To calculate the expected utility of option Y one needs to account for this second component.
But there the problem with the optimal choices lies: one needs to know the risk profile of the individual.
As I have mentioned earlier, the individual can be a risk averter, risk lover or risk neutral (this last category is not likely to be prevalent in the population). Hence, I focus on the risk averter.
Suppose that the risk of side effect was evaluated as equal to -100,000 utiles and a probability of occurrence equals to 0.007. The calculation of the expected utility of option Y is: 0.7(1,000) + (1-0.7) (0) +0.007(-100,000) =0. Option Y will be rejected. For it to win over option X the evaluation of the risk has to be lowered. The equivalent value of the option Y to X requires a risk evaluation equals -97,142 utiles. With this value the individual would be indifferent between the two options. For Y to be chosen over X the risk tolerance has to be reduced so that the expected value of the loss is below the threshold of -97,142 utiles.
This is a problem a concerned physician is likely to face: First, he/she has to ascertain the risk tolerance of the patient (that can be done with a full review of the patient medical history a time consuming process to be sure), and secondly, how to induce the patient to lower the evaluation of risk as the probability of occurrence of the side effects is not subject to change without new information. The solution of this problem is not easy, not for the physician or for the patient.
It needs to be emphasized that at the time one is contemplating a choice involving risk, risk assessment has to be made so that the appropriate discount rate can be applied (the discount rate is used to convert future values to the present. This is ignored in this presentation). The choice Dan Ariely faced was a choice involving risk. His first option, keeping the arm may be viewed as the “sure bet” or the “certain” option. The second option is the uncertain option or the risky choice. The uncertainty about the outcome of the second option with all its ramifications would suggest that at the time the decision was made a very high discount rate was applied to the utility derived from choosing the second option to tip the scale in favor of the first option. In my view, that decision has nothing to do with being “IRRATIONAL”.
In a dynamic world, the discount rate does not remain constant. The discount rate that one would use at the age of 20, 30 versus 50, 60 or 70 is not likely to be the same. Accordingly, many years after the fact the author may have denigrated the discount rate he has used when he was at the age of 18. The traditional theory still holds in that intertemporal choices are made at the beginning of the period. However, nothing is irrational about revising the choice in subsequent periods when more information becomes available.
Having cleared up in my own mind as to how my own choice of the two medical options is likely to come down to, I maintain that “given the information at hand whatever option I choose”, my choice will be a “RATIONAL” choice. A fundamental lesson I have learned during my studies, teaching and research is the value of information and the quality of said information. Without good information the discount rate will be faulty and the choice “suboptimal” although “not irrational.”
A final note to reflect upon:
In a decision involving medical intervention, with an option that has an uncertain outcome, a physician uses his/her expertise to calculate the probability of a successful outcome of the option so that it can be compared with the status quo or some other less uncertain options. This probability when communicated to the patient would help the patient to calculate the discount rate that must be applied to obtain the expected value (and utility) of the uncertain mode of intervention, which can then be compared with the outcome of other options including the status quo. It is worth emphasizing at this juncture that the discount rate computed by the patient reflects his/her type, whether, he/she is risk averter, risk lover or risk neutral. As only the individual can put himself/herself in one of these three categories, a choice that may appear “irrational” is in effect completely “rational.”
In my next blog I shall review some of the literature on risky choice and some of the contributions of the behavioral economics especially as some aspects of the theory pits individual choice against societal choice.

What Africa Deserves

2010-05-04T14:12:00.003-04:00

A recent short piece by Joachin Chisano[1] which appeared in the African Executive (April 7, 2010), has as its title: Africa Deserves Better Leadership. The author’s main thesis revolves around the quality of leadership (or lack of leadership) in Africa. In his view, a “majority of Africa’s leaders are more of a liability than an asset to their countries. They are more interested in fulfilling their selfish personal ambitions than working for their people”. Mr. Chisano goes on to enumerate incidences where leaders short changed their countrymen (and countrywomen) and other leaders who put their people first and worked to improve their standard of living. Although the message is not new, it needs to be said and said often. Perhaps one day what has been said can be translated into action.
Everyone who is concerned in one way or another with Africa, whether as an active or a passive participant bemoans the prevalence of corruption, the blundering of rich resources, and the over presence of ethnic violence and mass killing.
Many articles and volumes have been written, speeches and advice have been given by African and non-African scholars, ordinary people and concerned citizens. But nothing suggested seems to have worked well. Nothing seems to penetrate the armors that shield corrupted leaders and/or corrupted citizens from the day of reckoning if such a day were indeed to come. As one of those scholars who came lately (I am not a development economist or engaged in regional studies) to the recognition that efforts, no matter how small, should be exerted so that we, the outsiders, could understand better why corruption persists, why leaders behave the way they do and above all why little seem to work or has been accomplished over decades of writing, speech giving and aid.
As I mentioned earlier, I did come lately as a concerned scholar about the progress of Africa (see the mission of the Institute for Economic Policy Studies, http://www.iespolicy.org/about.html). In addition, to IEPS conferences, the blog media offers me an outlet for airing out some of the problems and concerns I have about what is happening in the continent (see Ott’s Blog 2007-2010).
Two issues should be up front in addressing the leadership issue. A solution, a “viable” solution, must be found to deal with them otherwise, all writing and lecturing will be for knot. These two issues are: Length of executive tenure—how long the country leader stays in office—and corruption—especially external corruption. Let us look at these two issues starting with the length of tenure.
Citizens of the world are not unaware of the fundamental link between the institution of democracy and the length of the leader in office. In most democratic states, there is a “constitutional” limit on the tenure of the leader (president), but is absent or flaunted in non-democratic states. Many countries on the African continent have leaders “who won’t go”. This phenomenon was commented upon in an Economist’s piece: “Another President Who Won’t Go”. This piece in the Economist (March 15-17, 2008, pp 49-50) was in relation to a debate which was taking place in Cameroon regarding presidential tenure limits. The Economist reported that on February 24th and 25th , 2008, violent protests broke out in Douala, Cameroon’s commercial capital, in response to Cameroon’s President, Paul Biya’s declaration that he might stay for a third term of another 7 years. President Biya has presided over Cameroon for 25 years. The new constitution that came into force in 1996, limits the president to only two terms in office. For the president “not to go”, the constitution had to be changed. And as the story goes he did not go—Paul Biya still remains in office.
At the time this event was taking place, I wrote a blog (April 8, 2008) with the title “No, No, We Won’t Go: Why Some African President’s Refuse to Retire” (http://attiatott.blogspot.com/2008_04_01_archive.html). Old men in Africa, most of whom are in their late seventies or in their eighties have ruled for over two decades. Most of these rulers have come to power on the heel of independence or following the overthrow of dictators with the blessing of their citizens. Expectations ran high. But then expectations dimmed, hope dashed. What went wrong?
To be “scientific” one needs to examine a country by country experience. Two excellent books give an account of what has transpired: “The Fate of Africa From the Hopes of Freedom to the Heart of Despair: A History of 50 Years of Independence” (2005) by Martin Meredith, and “A Continent for the Taking: The Tragedy and Hope of Africa” (2004) by Howard W. French. The Ott’s Blog (2008) gives information on the relation between the ruler’s tenure and the Freedom House rating of freedom over the period of 1973-2006. The upshot of this analysis is to uncover the link between the state of democracy and the “won’t go” phenomenon. The findings are not unexpected: FREEDOM with all its ramifications is the most significant factor in determining the staying power of a ruler. Freedom is much more than conducting an election. It involves the guarantee of political rights and civil liberties. Few of these rights are guaranteed in many Sub-Saharan African countries. When elections are held, the current ruler most often either “wins not fairly and squarely”, the opposition either attacked, silenced or jailed (see French for examples).
There is a saying that “power corrupts”, and, the longer the tenure, the more power to the corrupt. So now I turn to the phenomenon of corruption.
Corruption and bad governance is as natural if not inevitable like birth and death. What makes us, more accurately, at least some of us “incorruptible” is civil education and good sense of what is in it for me vis a vis what is good for someone else. The concept of a leader as distinct from the people the leader is supposed to serve has evolved from being one of us, to one of himself. But what defines corruption and who is instigating the corrupt behavior?
There is a great deal of literature on corruption. For the sake of brevity it suffices to offer definitions for the two types of corruption: internal or domestic corruption and external corruption. The first type is relatively insignificant whereby an individual in one nation bribes an individual (most often a government official) in the same nation to facilitate action on an impending request. The second type, external corruption is the one talked about when the term corruption is used.
So what is it? External corruption arises as one individual or an official of one nation bribes another individual or an official of another nation.
Transparency International (1995) definition is one that is commonly used. It defines it as “abuse of public office for private gain”. Jain A., (2001), “Corruption: A Review”, Journal of Economic Surveys, 15(1): 71 -121 defines it as “an act in which the power of public office is used for personal gain”. In both definitions, what is stressed is who is being corrupted and for what purpose. Just as Freedom has been indexed, calculated and the results published for most countries in the world, so corruption scores are calculated for developed and developing economies. Corruption scores are good indicators for the quality of leadership and governance in the same way as economic variables like GDP and GDP growth are indicators of the growth path of the economy. Available data illustrates not only why many “bad” leaders are the product of corrupt practices in their countries, but also why once practiced it is difficult to get rid of, it persists (see N. Bissessar, (2009), “Does Corruption Persist in Sub-Saharan Africa?”, In International Advances in Economic Research, Special Issue: Developing the African Continent, pp. 336-350, Attiat F. Ott, guest editor).
Using corruption scores obtained from TI over the period 1989-2006 countries are ranked as highly corrupt (scores 0.00 – 3.59); middle corrupt (scores 3.60 – 4.19) and least corrupt (scores 4.20 – 6.00). The results obtained for 27 Sub-Saharan countries show that most of these African countries 63 percent – 100 percent (pp.336 – 350) fell in the most corrupt category while the percentage of countries in the low risk category was less than 7 percent. Of note is the fact that corruption which began to subside between 1984-1995 has taken a turn for the worst. The percentage of countries in the most corrupt category rose steeply and the percentage of countries in the middle corruption category fell dramatically (p. 339).
But corruption data, although stands on its own conveys little about societal structures—political, cultural, economics—that give rise to corruption and worse of all perpetuate its hold on society. Rather than “wring one’s hand in despair by pointing out that corruption is the “norm” rather than the “exception”, one needs to look closely at society’s make up and see how these “structures” made corruption not only tolerable but also persistent as well. Few data will help this search. Societal attributes such as ethnic, language, religion, literacy rate as well as the type of government (democratic, semi-democratic or authoritarian) in place help us understand why many leaders in Sub-Saharan Africa as well as elsewhere are corrupt and most of all why corruption is tolerated. In a paper “Is Economic Integration the Solution to African Development?” presented by Ott at a conference held on August 19-21 in Botswana (2008) sponsored by the Institute for Economic Policy Studies, these attribute along with corruption scores were compiled for 44 Sub-Saharan African countries over the period 1986-2005. From the data provided in Table 1 in the paper, it is clear that Sub-Saharan countries are quite diverse in terms of population profile—they are quite diverse in terms of ethnicity, language and religion. With respect to political structure there too, the democracy rating show the majority to be partly free or not free but the most disturbing finding perhaps is the level of education attained. The data shows a wide dispersion in the literacy rate, from a low of 22 percent for Burkina Faso (with high corruption score; partly free) to 84.4 percent for Mauritius (low corruption; free) and Namibia with a literacy rate of 85 percent (low corruption and free) (for more details see, www.iespolicy.org/files/Is%20Economic%20Integration_Ott.pdf) In short, by understanding the societal structure one may be able to pinpoint the factors that need to be addressed to promote good citizenship. After all, in post colonialism the leader is not the “stranger”, he/she is one of the people. What Africa deserves is good citizens with power to change the status quo. A good place to start is with education.

[1] Joachin Chisano received the Mo Ibrahim Prize for demonstrating good leadership.

How Much Public Debt?: The Sky is the Limit and Why Not?

2010-04-29T13:35:00.003-04:00

How much public debt a nation can withstand? In my previous blog (April 21, 2010), I discussed the fiscal deficit and its projected path over the next 10 years. The concern there had to do not solely with its size in relation to GDP but also in relation to the “expected growth” in federal spending with the full implementation of the Health Care Reform Act of 2010.

Economists are in the habit of making “prescriptions” for the economy by setting dosage levels that when exceeded, the patient’s health (in this case the economy) will falter if not die (become bankrupt). Those targets are neither pulled out of thin air nor set in stone. Moreover, one “target” does not fit all. Two such doses or “targets” are prescribed for world economies: one target for the deficit; the other for public debt.
Setting target levels does not mean strict adherence to these levels, except in such cases where it is mandated by some super national authority. For example, the admission to the European Union (EU) requires adherence to the union rules, two of which are the ratio of deficit to GDP and the second is a debt to GDP ratio (The Maastricht criteria are: The budget deficit must not exceed 3 percent of GDP and public debt not to exceed 60 percent or declining towards 60 percent. As I will discuss later on the first one is much more critical for admission than the second. Other countries (i.e. the US) may aim for the deficit or debt target but there is no mandate that requires the federal government to adhere to the target levels. Many state governments in the US however, cannot run deficits as their constitutions mandate a balanced budget. Before addressing the “economies” of deficit or debt targets, a bit of US history of deficits and debt along with some theorizing may be useful.
The Record:
In the US, talking about the fiscal deficit or the public debt makes news, good and bad. But the deficit and the debt numbers by themselves tell us nothing about budget issues or the fundamentals that shape their levels as well as their trends. Let me explain.
The fiscal deficit is a “byproduct” of fiscal actions reflecting both the “ideology” of successive administration as well as the historical path of the federal budget. As discussed in the earlier blog, the discretionary deficit reflects the decision of the “current administration” about its fiscal program—level of spending on federal programs and level of taxes on the national income.
To talk about the deficit and debt one needs to start with the federal budget. In democratic societies, the government is a political institution to which the public has assigned the task and the power of defining and protecting their property rights and, when necessary for the enhancement of the general welfare (i.e. the health care reform), the redistribution of these property rights. Since the government possesses no resources of its own, it must acquire them from private owners through taxes and by borrowing (debt). But how far can the government tax and borrow from the public? Put in another way what size should the federal budget be?
Back at the time of Adam Smith, the role of government was well defined and quite limited in scope; people then did not worry much about the size of the government. Two hundreds or so years later, the size of the budget, the budget programs, taxes, deficits and debts are issues that concern all societies and people of various persuasion.

One needs not go back to the days of Adam Smith to show the dramatic path the federal budget followed. It suffices to point out that its growth has been quite impressive—in 1794, for example, the federal government spent about $7 million; in 2009 federal spending reached $3,518 billion. Relative to GDP ($310 million in 1794), the ratio of spending to GDP was 2 percent; the corresponding figure for 2009 is 24.7 percent. Well! Going that far back is not very meaningful—nothing stays the same and no one (except maybe the Tea Party) would want to return to those days.[1]
So let us look at the numbers by five years interval over the past 59 years 1950-2009. From the data (Table 1) we discern the following: A critical imbalance between spending and receipts beginning in 1975 (except for a short span of time during the Clinton period), with receipts falling below their levels of the 1960’s. Note that in the 1960’s we had almost a balance budget followed by small deficits, except during the Reagan years (1981-89) where tax cuts coupled with an increase in defense spending produced an unprecedented level of deficits to GDP (5.1 percent) in the year 1985. After 1985, the deficit number was in the “tolerant” threshold of 3 percent. Today (2009) the deficit is blown off the chart at the unprecedented level of 9.9 percent of GDP.

But look closely at what is deriving this “out of experience” record. Budget receipts to GDP ratio between 2000 and 2009 are below their levels 50 years ago, (14.7 percent in 2009 compared to 17.8 percent in 1960) and a spending /GDP ratio in 2009 of 24.6 percent, only 2 percentage points above their level of 22.8 percent recorded during the Reagan years. The culprit then is not that spending is out of control, although this may be true, but that the government budget receipts have not kept up with the growth of spending. Both sides of the coin paint the deficit picture. To attack the deficit, one needs to change the fundamental thinking about its source. It is not uncommon to hear critics of the budget posture pointing to the growth of spending but few dare to point out the erosion in budget revenues. The conventional wisdom (proven again and again) is that it is easy to point out to a “runaway spending” than to point out the shortfall in budget receipts. Most of us feel the pinch of taxes, and only a few recognize the value of public spending. But to be serious about closing the budget gap, both sides of the equation have to adjust for it to come to a state of balance. This is easier said than done.
What about the debt? As shown in the table, the debt/GDP ratio over the period 1960-1990 oscillated between 30 percent and 55 percent, a level that did not depart much of what conventional (economics) wisdom suggests, around 60 percent. Once again we have an “out of experience” level of debt, a level equals to 83.3 percent in 2009. The values of these two indicators (deficit and debt) for 2009, where the trend continues bode ill for the growth of the American economy.
Why deficit and debt matter?
Recall that the debt evolves through deficits. Borrowing domestically (debt in the hands of the public) or from foreign countries (external debt) is not without cost. Borrowing entails interest payments on the debt which must be financed through budget receipts. An ever rising debt service requirements impairs the government’s ability to meet its budget spending and/or absorbs private income through taxation which would adversely affect private consumption and investment. A preponderance of evidence also shows that budget deficits raise interest rates and causes the inflation rate to rise by fueling inflation expectations. In short, a rising deficit and debt have repercussions over the short and the long run.
The ratios of 3 percent for the budget deficit to GDP and 60 percent of the public debt to GDP have been advocated for advanced economies and, in some instances, have been adhered to. When these indicators are discarded financial crisis occur and defaults are not far behind (experience of New York City in the 1970’s but one example).[2] A great deal can be said about the links between domestic debt and external debt. A most insightful account of debt crises domestic and external is given in a recent volume (2009), This Time is Different: Eight Centuries of Financial Folly by Carmen M. Reinhart and Kenneth S. Rogoff (Princeton University Press). Not only does the volume provide a historical account of crises arising from both domestic debt and external debt but also provide the theoretical underpinning of debt crisis.[3] Policy makers may do well to take their diagnoses to heart so that they may hit on the right prescription.

[1] For historical statistics see: http://usgornementspending,com/federal_debt_chart.html, Budget data and GDP data are also reported in the National Income and Product Accounts

[2]See Attiat F. Ott (1975), “The New York Financial Crisis: Can the Trend be Reversed? American Enterprise Institute (November), Washington, D.C.
[3] Concern today is voiced for the debt problem facing Greece, Spain and Portugal. The debt crisis may spillover affecting both the US and emerging economies.

The Fiscal Deficit…Is As Far As The Eye Can See

2010-04-21T15:29:00.005-04:00

For quite some time I thought about venting my frustration about what is written about the soaring fiscal deficit. Not that it is beyond the “norm”, if there is such a thing of what a “responsible” fiscal stand dictates but because of the latest claim as to why the budget deficit and hence the federal debt is soaring, uncontrollable, unsustainable or downright un-American.
What prompted me to get on with it and write this blog is an article about the deficit which appeared in the New England Journal of Medicine (April 1, 2010): “The Specter of Financial Armageddon-Health Care and Federal Debt in the United States” by Michael E. Chernew, Ph. D., Katherine Baicker, Ph.D. and John Hsu, M.D., M.B.A, M.S.C.E. All of the authors, one way or another, are involved in health care policy and/or health economics (see NJM p.1168 for affiliation). The authors’ main thesis is that the health care reform goals (which became law on March 21, 2010), although “laudable”, will have dire consequences in that spending on health care will “add substantially to our structural spending and thus necessitate more draconian fiscal austerity elsewhere” (NJM p. 1168).
Before going further, let me first congratulate the authors for explaining to the journal’s audience (after all not all readers of the NJM are likely to be versed in the field of public economics), that the term deficit and hence the size of the deficit is linked to the state of the economy. In other words, “not all deficits are equals”. The total deficit consists of two parts: autonomous and induced. Autonomous means discretionary while induced is not. When the government makes a decision to purchase an item (expenditure), just like you and I, it needs revenue to meet the purchase. If there is no revenue, it borrows the money and hence the deficit. This deficit was labeled “structural deficit”. The other component, the “induced” reflects what is happening in the economy. Just like the individual seller, when the economy falters and people lose their jobs, their purchases of certain goods are curtailed or eliminated, and hence the seller’s income falls not because of his own actions (i.e. he decided not to sell), but because the economic condition has worsened. The same with government revenues: when economic conditions falter, the Treasury tax collection falls, government spending on income support such as unemployment compensation rises and the deficit materializes. After the economy rebounds, the opposite takes place. In short, this part of the deficit is “induced” and not at the discretion of the government. Since the rise and fall in economic activity is labeled “the business cycle”, this deficit component was called the “cyclical” deficit.
There is not much policy makers can do about the cyclical deficit (at least in the short run) and should not be of concern. Obviously, if the business cycle can be “eliminated” this component will disappear and all we have is the discretionary deficit. I prefer the discretionary term rather than the structural term as it conveys the willful act of the public sector.
Having decomposed the deficit into its two components, any discussion about its rise or fall has to be clear about which deficit we are talking about and here lie the thesis of the NJM’s article. Since Health Care Reform entails discretionary federal spending, unless it is financed dollar for dollar by new federal receipts, or through reallocation of federal spending (cuts in other federal programs), no matter how you slice it the discretionary deficit will increase. This is true now as it has always been.
The history of federal deficits, which I will explore in a later piece, will convey this simple story. The budget process (where the determination of expenditures, revenues and the discretionary deficit take place) is invariant to the expenditure program initiated (whether that may be health care, defense spending, social security and so on), or taxes raised or lowered.
To form an opinion about the predicted dire consequences of the Health Care Reform on the deficit and whether “draconian” fiscal measures may have to be used to address them, a look at the actual and projected federal deficits may be enlightening if not useful. With respect to the public debt, its path follows the path of deficits since budget short falls have to be funded by issuing new debt which adds to the stock of the public debt in the hands of the public. A government that balances its budget will have no need to add to the stock of debt. The debt (a stock accumulation of flows of deficits) as a ratio of GDP (a flow) is a useful indicator of the capacity of the economy to sustain indebtedness.
Why accumulate deficits and debt?
There is an economic theory of deficits backed up by research suggesting that politicians behave strategically (Persson and Svensson (1989) and Alesina and Tabellini (1990)). The essence of this proposition is that the deficit and debt issues are used strategically by the current government to influence the fiscal decisions of those who will succeed them. In other words a Republican government may accumulate debt during its tenure to force its successor (presumably a democratic government) to curtail federal spending or raise federal taxes.
Getting back to Chernew et al’s article in the NJM (April 1, 2010), there is a need to examine the link between federal health care spending and the budget deficit, a link which is of great concern to the authors.
The authors provide data (obtained from a letter written by the director of the Congressional Budget Office to Senator Inouye, March 5, 2010) which purports to show that federal health care spending which amounted to 5 percent of the GDP and 20 percent of the federal outlays in 2009 is forecast to reach 12 percent of the GDP by 2050—a 41 year stretch.
The authors do not elaborate on whether or not this growth reflects the full implementation of the Health Care Reform Act neither do they inform the reader about the underlying reasons for the growth in health care spending, one of which is the aging of the population. A better indicator would be the growth of federal spending on health care per capita as compared to the growth rate of per capita GDP.
Even assuming that the only concern is with the growth rate, then one can translate the figure (7 percent increase from 5 percent to 12 percent) into an annual growth rate over the 41 year period. This growth rate is equal to 2 percent per year, not much if GDP is to grow at an annual growth rate of 3 percent which (hopefully) is achievable over the business cycle.
Calculation of growth rates aside, the concern should be over the “planning cycle” of the federal budget which is 10 years. The Congressional Budget Office (CBO, January 2010) provides projections of budget outlays, revenues and deficits over the period 2010-2020. It is perhaps useful to divide the period into two sub-periods 2010-2014 and 2015-2020. In the first sub-period, some but not all of the provisions of the Health Care Reform Act will be implemented. The second sub-period, 2015-2020, is the period where the full provisions of the reform would have been implemented. So let us look at the numbers (These are CBO’s projections based on the President’s Budget of 2009). The year 2009 is taken as the reference point.

What these numbers tell us and why the budget path matters.
Let us first look at the first period 2010-2014. Two numbers—deficits and debt—are of significance no matter what one’s political persuasion—fiscal conservative or fiscal liberal. CBO has been labeled as “bipartisan”. By that it meant that those who “crunch up” the numbers are professional (mostly economists) who do not inject their political views into the projection. That does not necessarily means that the actual numbers will exactly match projected numbers but this is the “best” given the uncertainty of the path of the economy. With this caveat one ought to take the projection in “the spirit” they are given. Now, what we have in the first period (2010-2014) is a steady decline in the deficit path from 10.3 percent of the GDP in 2010 to 4.1 percent of the GDP in 2014. This is a remarkable achievement indeed. Now comes the “horrifying” story of deficits for the period 2015-2020 and hence the overly pessimistic forecasts of what await us (expressed in Chernew’s article as well as by others) if these projected deficits turned out to be actual deficits.
The projected outlook shows a rise in the ratio of deficit to GDP from 4.1 percent in 2014 to 5.6 percent in 2020, an increase of 1.5 percent of GDP over a 5 year period. But then recall that in 2009 the actual deficit GDP ratio was 9.9 percent and the projection for 2010 is 10.3 percent. Remember what is being said earlier—the total deficit reflects both induced (discretionary budget action) and autonomous (reflecting the state of the economy) deficits. Given that we are in a “recession”, the economy’s lower path impacts the total deficit because of the fall in the level of economic activity and the rise in spending on transfer payments (for example unemployment insurance and stimulus packages).
The projection beyond 2010 clearly assumes a rebound in the level of economic activity and hence one would expect lower deficits to GDP ratios beyond 2010. Why then the deficit/GDP ratios are projected to rise in the 2015-2020 period?
The story lies in the projected path of spending and revenues. In the first period, revenues are projected to grow by 9 percent annual growth rate while spending growth is projected to grow at an annual rate of 2 percent. In the second period, revenues is projected to grow at 4 percent annual rate while spending growth is projected at 3.9 percent annual growth rate. The projection hence assumes an “increase” in the annual growth rate of spending in the second period by 2.7 percent (from 2 percent annual growth rate in the first period) while revenue growth falls from an annual rate of 9 percent in the first period to 3.9 percent annual growth rate. The increase in the annual growth rate of spending beyond 2014 is understandable as the growth must reflect the spending impact of the Health Care Reform Act. As to revenue projections many underlying assumptions may have to account for this such as the assumption about the state of the economy, a discretionary tax cut, or both perhaps enacted in the period. These assumptions should give the reader “food for thought”.
If our economic theory of deficits is correct, then the current administration in increasing, over its tenure, the growth path of the deficit will “tie” the hands of the next administration, especially if the new administration was “fiscally conservative”. By tying its hands it is meant that neither new spending initiatives can be undertaken nor “tax cuts” would be effected.
What about the public (or national) debt?
The projected debt numbers from 2015-2020 are “staggering” but what those numbers mean? And should they give up a pose? Because of the complexity of this issue, I will defer the answers to a follow up blog.
Where do the Health Care spending figures in all of this?
There are many sources which give projected levels of Health Care spending. According to the National Health Expenditure Projections, total National Health Care spending was to exceed $2.5 trillion in 2009 which put it at 17.6 percent of the GDP (see also Economic Report of the President, February 2010). CBO projections put the trend upward so that by 2020 National Health Care expenditures would be around 20 percent of GDP. The corresponding GDP figures for these two years are $14.3 trillion in 2009 and $22.4 trillion in 2020, an annual growth rate of GDP of 4.2 percent. Translating the growth rate of National Health Care spending into “levels” we get spending level for the year 2020 of $4.48 trillion—an annual growth rate of health care spending between 2009 and 2020 of 5.4 percent which (if the projection holds) mean a 1.2 percent difference in the projected annual growth rates of health care spending and GDP. This clearly suggests a shift in the spending growth in favor of health at the expense of other type of spending.
What about public sector (government) spending on health care (the culprit in all the debates on health care)? It is interesting if not “funny” that National Health Expenditure Projections (released by the Center for Medicare or Medicaid services) project health care spending to “decelerate” to 3.9 percent in 2010. CMS attributes this slowdown to a “deceleration in Medicare spending growth (1.5 percent in 2010 compared to 8.1 percent in 2009).” If this trend continues, then it would provide a cushion against the anticipated rise in health care spending under the Health Care Reform Act.
Obviously more can be said about these projections. This task has to wait until projected numbers are on a more solid footing as projected growth rates of health care spending impact the federal deficits and these in turn impact the projected path of the federal debt. These issues will be dealt with in my next blog. For now, a quotation from “Government by Red Ink” by Nobel Laureate James M. Buchanan, Professor Charles K. Rowley and Robert Tollison gives us food for thought:

“Many and varied are the perspectives on budget deficits offered by those who analyze them from a reformist standpoint. Some look for a return to the Victorian Prudent house hold ethic…others look for the election to office of the more responsible, less myopic politicians”
(In Deficits, 1986, p,3).

Good News For Africa: The Poverty Rate has Fallen

2010-03-25T15:17:00.002-04:00

Good News For Africa: The Poverty Rate has Fallen
“African poverty is falling”, so says Xavier Sala-i-Martin and Maxim Pinkovskiy in a recent NBER paper (National Bureau of Economic Research, working paper 15775, February 2010).
The study of poverty in general and African poverty in particular goes in cycle. During the Johnson and Nixon administrations the economics profession devoted a great deal of efforts to measure US poverty rates and to come up with solutions to poverty. These solutions ranged from a negative income tax (Milton Friedman) to the family assistance plans.
Measurements of poverty however, have remained an engaging subject for many in the economic profession and especially for those at the University of Wisconsin--Madison Institute for Research on Poverty, the Urban Institute and, the Brooking Institution.
The economics profession’s interest in the study of poverty although was dominated by the study of US poverty, development economists notably Amartya Sen have exerted great efforts in measuring poverty in developing counties, identifying its causes as well as advancing solutions to address it. Such efforts notwithstanding, eradicating or substantially reducing poverty here and elsewhere has remained beyond the grasp of politicians and their economic advisors.
In the past couple of years, measurement of poverty has taken central stage. For the most part, the focus was on US poverty (see AEI, “The Poverty of the Official Poverty” by Nicholas Eberstadt, November 2008, and Brookings, “Improving the Measurement of Poverty”, December 2008). Poverty rates and “poverty line” in the developing world and especially in Sub-Saharan Africa did not escape the attention of economists motivated in part by the goal set in the 2008 Millennium Development Goals Report (MDG) (UN, 2008). The report has set a target for reducing developing countries’ poverty rates by the year 2015. The MDG report was not very optimistic about reducing Sub-Saharan Africa poverty rate by that date citing many factors that hinder growth.
In his presidential address to the American Economic Association (January 17th, 2010), Professor Angus Deaton of Princeton University provided an exhaustive analysis of world poverty and inequality. Most of the discussion however was devoted to the role played by the purchasing power parity (PPP) price indexes in the measurement of global poverty and global inequality.1 The Deaton address (paper) is 60 pages in length and for the non professional economist it is a bit “boring” and cumbersome. The critique aside, the general tenet of the paper and hence comparisons of poverty rates hinges on the revision of the PPP indexes reported in the International Comparison Project (ICP). If one were to believe in the soundness of the ICP revision of the purchasing power parity.
Thus according to the ICP, “Global inequality has increased and this reduced the global poverty line relative to the US dollar”.
Before getting into the “nitty-gritty” of measurement, few numbers may be helpful. Deaton provides in Table 1 of the paper, poverty head count ratios and the global poverty line expressed in year X (say 2005) PPP international dollars. The information reported are note worthy in that it contrasts changes in poverty ratios since 1981 (¬¬¬¬Three data points are given 1981, 1993, 2005). Measurement of the percentage of people in poverty in each of these years has to be calculated on the basis of the poverty line derived from the PPP at a given date. Thus, using the year 2005, the poverty line is defined by a number, in this case $1.25. This means that if a person in country Y for example Ethiopia or Nepal received $1.25 a day in income (whatever the source), then he is not counted as poor. At $1.24 he is counted as a poor person. The poverty line hence is used to count the ratio of the population that is labeled as “poor”. Given the significance of the poverty line to the count of people who are in poverty, Deaton’s 60-page-paper engages the reader into an explanation of what this number means for the count of people in poverty and hence changes in global inequality over time.2
Not to get tangled in the “details”, the paper provides a “powerful” message. Global inequality has fallen over the past two and a half decades. The total percentage of people in poverty (using the $1.25 poverty line) has fallen from 51.9 percent in 1981 to 25.2 percent in 2005. This is good news to be sure. How do people in one country or a continent fare against people in another or others depend on where they live. For example, contrast the poverty profile of a person in East Asia Pacific with that of a person in Sub-Saharan Africa. In the year 1981, 77.7 percent of the people in East Asia Pacific were classified as poor at the $1.25 poverty line. This percentage has fallen to 16.8 percent, a decline of almost 80 percent.
Compare this rate of decline with that for Sub-Saran Africa. Again, at the $1.25 poverty line measure, the percent of population that would have been classified as poor in 1981 was 53.4 percent. By 2005 this percent has fallen to 50.9 percent, a decline of almost 5 percent—Great news for Sub-Saharan Africa.
Looking at the count rather than the percentage, the global poverty (measured at $1.25 poverty line), has fallen from a count of 1,900 millions in 1981 to 1,374 million in 2005, a fall of more than 27 percent in a two and one half decade. That is not bad or is it?
Deaton‘s paper goes beyond the statistics I have cited. It is worth the time and effort to expend to understand the magnitude of the problem. One issue that is worth investigating is the sample entities, the size of the population in each member of the sample and the economic progress attained there.
Back to Sub-Saharan Africa. As mentioned earlier, Deaton tells us that the poverty rate there has fallen from 53.4 percent in 1981 to 50.9 percent in 2005. Xavier-sala-i-Martin and Maxim Pinskovskiy (NBER, 2010) are much more upbeat about the prospects of poverty reduction in Sub-Saharan Africa. The authors focus exclusively on African poverty using three poverty lines; daily income of $1, $2 and $3. Translated into yearly income in US dollars, they get a value of $365 in 1985 dollars for a poverty line of $1/day. The authors provide extensive data analysis of the African distributions of income for 4 data points: 1970, 1990, 2000 and 2006. Because of this selection and the choice of the poverty lines, values, their findings are not totally comparable to those of Deaton. Nonetheless, their results on changes in the African poverty rate between 1970 and 2006 at $1/day poverty line augment what one learns from Deaton’s.
Taking the range of $1/day and $2/day poverty lines one may be able to contrast their findings with those reported by Deaton. African poverty rate for 1981 at $1/day is given as 39.4 percent. At $2/day, the rate is 64.8 percent. The number reported by Deaton is somewhere in between, at 53.4 percent for $1.25/day. The difference is not unreasonable. In 1993, according to Sala-i-Martin and Pinkovskiy the poverty rate (surprisingly) rose to 42.2 percent at $1/day and to 67.1 percent at $2/day. For 2005, the respective rates are 33.1 percent and 60.9 percent. Over the 1981 to 2005 period, the decline in the poverty rate measured at $1/day is 15.9 percent but at $2/day it is only 6 percent, which is a bit closer to Deaton’s rate of decline of 5 percent estimated at $1.25/day.
How great is the decline? Measured at $2/say, it is 6 percent over two and half decades. Good news but nothing to write Home about.
Fortunately, the story does not end there. Sala-i-Martin and co-author Pinkovskiy predict that by 2015 the $1/day poverty rate will be 22.8 percent, a decline of 10.3 percent over 10 year period (from 33.1 percent in 2005), a one percent reduction per year. That is indeed remarkable if true. What makes it so is that it is within the range reported for the previous 14 years where the rate has fallen 1.4 percent per year from 1981 to 2005. With such progress the authors predict that the poverty rate of 21.0 percent by 2015 set by the 2008 Millennium Development Goals (UN, 2008), is attainable but perhaps in the year 2017 rather than 2015.
What accounts for the poverty rate decline? Whether one accepts the numbers given in Deaton or Sala-i-Martin and Pinkovskiy the answer is simple and expected: a “decent” growth rate of per capita Gross Domestic Product (GDPP). The correlation between the two holds for all countries, whether the country is developed or developing in Africa or in the EU and the US. The question that has and continued to be asked is what accounts for economic growth and whether observed growth in any country over any period is sustainable. This is a topic for another essay. For now it suffices to point out that the driving force in the evolution of poverty “is an almost exact mirror image of the evolution of GDP per capita” (Sala-i-Martin and Pinkovskiy, p.10). If growth is sustained then the authors’ prediction for 2017 will be achieved, if not the MDG target will neither be met in 2015 or 2017.
Authors’ prediction clearly hinges on the state of affairs in the world following the global financial crisis of 2008. But there is room for hope as the world economy seems to be moving, albeit slowly towards a decent recovery.
A final note which I shall revisit in the future. The notion that $1.25/day, $2/day or $3/day as a benchmark for counting people in poverty worldwide is a “bare” and “unfeeling” statistic. Think about what $1.25 buy an individual in Timbuktu, Ethiopia or Nepal. The bold hard fact does not convey what that individual be a male, female, adult, child or an elderly consumes in terms of goods and services. The number is said to be obtained from household surveys. Given that household survey data are available what would be most enlightening is to use it to show the composition and the size of the basket of goods which the $1.25 buy in each of these countries compared to the “standard” for a decent living. Undoubtedly, one can set the rate at $5, $6, $7 or what a decent living implies.
Deacon gives us a glimpse of what a decent living means derived from data on well being measures from the Gallop World Poll (Table 8, p. 55). Using the year 2006 as the base, 37.9 percent of the world population reported “poor living standards” with the percentage rising to 38.6 in 2009. For Sub-Saharan Africa population the corresponding number is 61.4 percent in 2006 rising to 62.6 percent in 2009. These numbers tell a different story, perhaps closer to what poverty means than the sheer count of the numbers in poverty.
One can easily define what a decent living standard requires (for example BEA basket of goods and services used to determine the cost of living index in the US). What is not easy is how to get there. If indeed the world organizations and we as individuals in affluent societies care about global poverty then efforts should be exerted to enable Sub-Saharan African countries (the region with the highest poverty rate) to make substantial advances in reducing poverty. We should not be satisfied with 5, 6, 10 or even 15 percent reduction in the poverty rate over a decade with a standard of living set at $1 or even $2 a day.
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1 PPP are needed to translate purchasing power in one country’s currency into US purchasing power. In other words, if a good costs 16 rupees in India, with PPP exchange rate, the cost is expressed in terms of dollars.

2 To get a feel of the numbers in a comparative setting, the poverty rate in the US in 1981 was 14.0 percent at $12.65/day. In 2005 the corresponding figures are 12.6 percent at $27.32/day.

The Health Care Reform Saga: President Obama said: Get on with it and the Democrats did “Hallelujah”

2010-03-22T10:56:00.000-04:00

Representative George Miller, D. California put it best when he said:
“Tonight we answered the call”.
Sunday, March 21, 2010 will forever be remembered as the day where a “remarkable piece of legislation was passed without a single Republican vote”.
When the dust settles, I shall get back to take up the “nitty-gritty” of the legislation.

“The time for debate over Health Care Reform has come to an end” (President Obama -Health Care Summit, Thursday February 25, 2010)

2010-03-09T12:26:00.004-05:00

“Let us get it done”
(President Obama address, March 3, 2010)

At the Health Care Summit which has taken place on Thursday, February 25th, 2010, the President sought to elicit support for the health care reform bill before Congress in the hope that the deadlock over its passage may be broken. Another motive more significant perhaps is to gain the support of one or more Republicans so that the passage of the reform bill may be touted as “bipartisan”. To those of us who have watched the progression of the bills (The House and Senate) from their inception more than a year ago until their final resting place in the hands of the democratic majority in the House and the super majority in the Senate, it is not only disheartening to witness the dysfunctional public sector but worse than that the egotism and self promoting public servants at the expense of those they are supposed to serve.
Having said that, it does not follow that elected public servants do not serve their constituents in voting for or against a legislation. But the spectacle of the debate on the health care reform, if nothing else it has confirmed what ordinary Americans (not the health care experts, journalists as well as health economists) have maintained for decades—that the federal government is ‘BROKEN’ that changing the man at the helm does nothing to fix it.
The 2008 campaign put forth the priority to fix the nation’s health care system. At the February 2010 Summit and in speeches given by both Republicans and Democrats there and elsewhere the public is told that the US health care system is riddled with inequities and inefficiencies and that something has to be done to correct it.
Having acknowledged these deficiencies, politicians and experts alike do not go about the business of addressing those issues in a manner consistent with the public interest but rather to promote their own ideas or better yet, their self importance.
Being a Republican or a Democratic member of Congress should not be the overriding reason to accept or reject the reform because it is put forth by a Democratic President. Our newly elected Senator from Massachusetts in his critical assessment of the reform bills before congress argued that the Obama Health Care Reform is not so good for Massachusetts. Massachusetts after all passed over the objections of some Republicans Health Care Reform that requires all Massachusetts’ residents to have proof of insurance coverage and penalizes those who do not. It is interesting that Senator Brown uses Massachusetts as an example that the reform did reduce the cost of insurance. Most significant perhaps is the fact that the Senator’s remark that what is good for the nation is not good for Massachusetts flies in the face of what the “Constitution” stipulates: The United States public sector is a federal system comprising three levels of governments: National, State and local. The legal division of responsibility among the three levels is found in the Constitution and in court interpretation of the Constitution. The Constitution divides the powers of government: Those of the national government are specified in articles I, section 8, while those of the states and their subdivisions are residual. The federal government, through Congress, was given the power to levy and collect taxes, duties, imposts and excise, to pay the debts and provide for the common defense and general welfare of United States. During the 1930’s, amidst the problems and pressures of the greatest depression in US history, there developed a Judicial interpretation of the Constitution which accepted a reading of the general welfare clause that placed no discernable Judicial limits on the amounts or purposes of federal spending (for details on federal, state and local responsibilities, see Ott, D. and A. Ott, Federal Budget Policies, Third edition, The Brooking Institutions, 1978; see also, A. Ott, Public Sector Budgets: A Comparative Study, 1993, Edward Elgar Publishing, ch. 6) Hence, the federal government and not each state has a constitutional duty to enhance the welfare of the citizens. Given that medical care enhances welfare, the federal government has a responsibility to promote the welfare of all citizens.
Disinformation along with a “heap” of unsubstantiated claims has soured the public about health reform—any reform regardless of who has originate it. In an AEI commentary “Here’s the RX for a Bipartisan Health Care Reform Bill” (American Enterprise Institute, February 24, 2010), Norman J. Ornstein addresses both of my comments. First he states that “ The plan that Obama has put up on the White House website, while basically built on the senate-passed bill as amended by the House and refined by the President, is no radical leftist plan, much less a government takeover of our health care” . Second, that “The public unhappiness with health care reform is built not on the substance here but on the distrust of Washington polls, the messy and the rancorous powers and the unease about a leap of faith to get change”.
The media and the Republicans summiteers keep repeating that public opinion is against the reform. It would be enlightening if the media were to focus a bit more on how a majority who put Obama and the Democrats in Congress are turning against one of the pillars of the Democratic agenda. But this is another story.
Let me now turn to the “Summit”. Politicians and commentators are fond of using mega phrases for an event to signal not the importance of said event but of who’s who attending the event. Merriam-Webster dictionary defines the word “summit” as “the highest point attained or attainable”. That, it “implies the top most level attainable”. In the political arena the “summit” label is meant to confer a status of the event not in terms of the issue, of “the raison d’être” of the Summit but rather in terms of who is attending the Summit.
An event, hence, is called a summit if attendees are heads of states (like the G-20 Summit) or that the attendees are highest-level officials. The Health Care Summit is clearly an event that brought together congressional leaders—officials at the highest level of government. (A detail coverage one hour after hour and who’s who at the Summit from 10:00am until 5:25pm, is given in the Washington Post, February 26, 2010)
The Washington Post, The Wall Street Journal, The New York Times as well as Research Institutions such as the American Enterprise Institute have adequately dealt with the Summit not only in terms of producing excellent summary of the issues debated but also provided their “experts’” analysis of the “contestable” provisions in the reform plan. By now, those who watched the health care reform saga unfold, and those who are satisfied with “snips” of the debate are aware of the major elements of the reform:
• Requiring health insurance coverage with penalty for lack of coverage. (The state of Massachusetts requires it)
• Regulating the insurance market by creating an oversight body.
• Cost saving through changes in Medicare reimbursements and hence the “deficit” effect.
• Expand Medicaid coverage by subsidizing state governments for services to the uninsured people who cannot afford to purchase insurance.
These are simple provisions which ought not to have taken a year’s time to formulate and certainly not to have raised the blood pressure of so many of those “high government officials” attending the Summit. But then as someone put it, “the devil is in the details”. This is not surprising given the size of the bill which is put at some 2700 pages.
Where do we go from here?
One option embraced by the Republicans and few health experts and economists is to start over. (see for example Glenn Hubbart et al “A Better Way to Reform Health Care”, WSJ, February 25, 2010). Maybe it is good business for quite a few to start over (many speeches, articles and media blitz) but for some of us and in my view the public at large this is not an option, it is a “penance”. In his third of March address, the president urged the congress to vote the “Reform Bill up or down”.
“Now it is time to make a decision. Let us get it done”.
To that there is but one word: “AMEN”.

Getting the Facts, Just the Facts about Health Care Reform

2010-01-14T14:14:00.000-05:00

Information and misinformation is the name of the game. The plethora of articles and blogs that have been written or aired have and are still being written about the health care reform bills soon to be heading to the conference committee for reconciliation. Interest in the bill’s provisions is a good thing. Without scrutiny, debates, even falsification of facts and/or intended consequences democracy is blemished. Let me dwell a bit on that.
Some of you may recall a TV series where the actor utters the words: “facts, just the facts”. I suppose that was in relation to some narrative involving a complaint, a report on some thing or another. The idea was to cut to the meat of the issue in order to come up with the appropriate response, for without the facts and “just the facts” there would be many responses, some appropriate, others not.
The reason for this reminiscence is to assure one and all that we are indeed a democracy. One and all have the right, not only to applaud “rulers” for their efforts on our behalf but also to scorn these efforts. We are neither of the same mind, convictions, nor temperament. One may look at a picture and see a bright sky; another would see a storm looming on the horizon. No right or wrong there. One calls it as one sees it.
What prompted me to choose the title for this blog is the title of an article written by a fellow economist: Jonathan Gruber of MIT, “Getting the Facts Straight on Health Care Reform “, appearing in the New England Journal of Medicine (December 24, 2009). The author takes on the most common critiques levied against the health care reform bill passed by the House of Representatives and the bill that was then before the US Senate (since passed). The main thrust of the article is to refute these claims, but in particular the charge that the reform “represents a government takeover of the health care”. Other refuted claims (six in all), deal with some aspects of the bill(s), from cost containments, to erosion of the Medicare program. These “false” claims which are enumerated and analyzed by Dr. Gruber are not likely to go away any time soon. In a democracy they should not. False claims, if indeed false will die down eventually; their contribution is to sharpen the debate and the public awareness to the issues. Moreover, these claims and counter claims teaches us how to sort out the facts, the “just facts” from the myriad of claims for and against the reform.
Take for example the most serious attack on the reform bill: that it represents a government takeover of health care. One need not lose sleep over this claim. As Dr. Gruber (as well as few others) reminds the Journal’s readers that the Medicare program (defended by those worried about the government takeover) is a government run insurance program which started back in 1965. Had the government had a design on turning it into a national government health insurance program, it has surely failed, or better yet is taking it’s time (55 years) in doing so. But then the wheel of justice seems always to grind slowly!
As I have stated earlier about information being fundamental to the survival of democracy, one need not go too far back in the 19th and the 20th centuries to ascertain that the facts, the true facts chase the false facts out of circulation. In this New Year we shall embark on a new venture called Health Care Reform. In an earlier blog, I have put down the definition of reform as ‘to change or improve what was defective’, to ‘change for the better’. At this juncture our function as economists and the function of medical care providers is to sort out its “reform” features so that a judgment can be made as to whether one feels comfortable to call it a reform or a legislation. While waiting for such a judgment to be made, it is worthwhile to revisit the most fundamental issue that faces society today as it was faced many centuries ago: Defining the role of government and the limits to its power.
Economists, especially those of us who study and write about the role of the public sector are not of one mind. However, one thing we do agree on is that the role of the government is to address “Market Failure”. I believe that the question being debated is at the heart of this—whether or not there exists a market failure in the delivery of medical care in the US. If indeed there is a market failure, the issue then becomes: how far should the government go in dealing with the market failure.
This is the question that will be answered, not today or tomorrow, but by generations to come.

The Health Care Reform Bill: Round…?

2009-12-02T11:25:00.001-05:00

With the Senate Finance Committee Bill has finally reached the Senate floor, it looks that a bill (with or without a public option plan) will be heading for the conference committee to be reconciled with the House Bill. By the end of the year, if not sooner, a Reform Bill will be on its way to the White House which would certainly be signed by the President. Short of a “mishap” or a “disaster” (or for Republicans a ‘miracle’), an overhaul of the US Health Care system is in our future.
Judging the outcome as ‘Good or Bad’ will await implementation of the final bill. Such judgment is not however the intent of this Blog. Given the broad outline of the bill, the issue that I would like to address here, which is in my view has been overlooked or swept away under the congressional rug is “access to medical care”.
The fact that the bill, assuming its passage, mandates that “one and all” be enrolled in a health insurance plan and that it would penalize those without insurance, the expectation is that some 31 million uninsured persons will have access to the US Health Care System. The prospect of being insured does not automatically translate into access to medical care. Let me elaborate. Unless you are covered by an employer plan, providers of health insurance (at least in my city) insist that the would be insured individual or family , (a) has a primary care physician, (b) must be registered with the primary care physician and (c) that said physician be on the insurance company approved list of physicians. Whether applying for insurance by phone, e-mail or by letter, the application is terminated (no enrollment is activated) unless and until these three (a, b and c) questions are answered in the ‘positive’. As an example, let us say that a formally uninsured person heads the requirement of the new Health Care Law and contacts say BC/BS agent. After exchanging a few pleasantries, the agent will get to the heart of the matter: take down responses to a set of questions on the enrollment form. After a few questions such as age, sex, occupation, the next question is whether the would be enrollee has a primary care physician. If the answer is ‘no’, the enrollment process terminates. The applicant could come back for enrollment after securing a primary care physician and either be seen by said physician or be on his/her register. If indeed, by some ‘miracle’, ‘good luck’ or whatever an uninsured individual has a primary care physician and that the individual is indeed registered with said primary care physician, then the next question for enrollment is whether the primary care physician is on the approved list of the insurance company. If not the enrollment process terminates. Of course, the insurance company is more than happy to supply the applicant with names from their list for the applicant to contact and once again the company agent tells the would be enrollee that once any one of those physicians accepts the applicant and be registered, the applicant can contact the insurance company again to proceed with the enrollment process.
That does not sound to be such a difficult task. In the age of the internet, it is supposed to be quick and easy to contact your chosen primary care physician(s). No such luck. It is amazing for those of us in academia (most of us any way) to contemplate not responding even in the negative to someone who address us via e-mail, phone, fax or in other media. In the case of primary care physicians you may not be able to go that “minuscule” mile.+ Talking from experience, as I shall elaborate below.
Primary care physicians who have posting on the web (most of the time those physicians are staff members at some medical school), will enumerate their expertise, specialties, research and so forth but give no valid phone number or fax—and if valid, no one responds when you call and the fax is inoperative. But that is not so bad, what is bad is that almost all with those glorious “bio” end up the write up with the “standard phrase” (DO NOT ACCEPT NEW PATIENTS). So, the search continues. The next search vehicle is to go back to the list of providers that are listed on the web of the selected insurance carrier as accepting new patients. Unfortunately, it seems that such a list is not current because at the point of contact, once again the sentence (DO NOT ACCEPT NEW PATIENTS) dwarfs everything else.
How to circumvent this? Some of us who did research or writings about comparative health care systems (US and UK) in the 1980’s and the 1990’s were, back then, smug enough to point out to our British colleagues the deficiencies of their health care system. Most of said deficiencies had to do with access to medical care: the long waiting lists for registering with a physician; denial of some procedures like kidney dialysis or transplants to some patients (those over 55 years of age)—i.e. rationing of medical care. Well, with no access to a primary care physician you might as well not bother with the quality of access.
What I have put down here is not fiction or a made up story to knock down the reform. Rather the intent is to seek a fix to a problem that will plague the health care access in the US following the enactment of the reform bill.
I, an insured person for more than 30 years, had the same primary care physician over this period, with excellent insurance coverage faced the same problem—access to services of a “primary care provider”, following the retirement in October 2009 of my primary care physician. The Group practice or clinic that was willing to take on the patients of my primary care physician looked promising enough for me to seek the services of one of their “internal medicine” physician. Having settled on one of the four, I called the office to get an appointment or as the insurance company agent have put it “get registered”. I was told sorry: this physician does not take new patients, another one, my second choice was also unavailable. Thinking that well for the time being I should register with whoever was available, I was then informed that the group practice does not accept my insurance. At that point I was not willing to continue the dialogue—not my first choice and not my insurance! At first, the group practice (a clinic or whatever it is called) responses did not in the least bother me. As the saying goes: “don’t cry over the fish that got away, there are more fish in the sea”. My search for the “elusive” primary care physician proceeded with a vigor. I decided to find out, first of all, which insurance carrier in my city has the largest list of providers; which carrier (because of something or other) has a wide acceptance by physicians, hospitals, etc and which in addition provides the type of plan I seek (PPO or Preferred Provider). Having thoroughly identified such a company (call it X company), I called to switch insurance provider. I called and get the “X” company brochure. I looked at their coverage and was satisfied that it offered the plan I sought. So I contacted the representative. I was told I can enroll by phone. Delighted (no paperwork), the process began. Guess what? Can’t proceed without “a primary care physician”. I informed the agent that my physician has just retired. Sorry about that but get another , get seen by the new primary care physician, get registered then call back to get enrolled. I was given their website to look for a primary care physician who will take new patients. Once again, I did what was expected—contact those on the insurance company list. Waiting for responses from those who did not list by now the dreaded phrase (DO NOT TAKE NEW PATIENTS), I decided to expand my search by asking a few MD specialists who have known me over the years as well as friends for help. I was delighted with their responses. I got names of at least 20 primary care physicians. I e-mailed some (I felt that as professors at a medical school, and I am also an academic professor at a University, the chances for a response even in the negative is likely); called the numbers I was given, but the response turned out to be the same. A central agency operator answered my inquiries about all the physicians I wanted to contact: “None take, new patients but you can be ‘wait listed’ on one or two”. A total waste of my time. Fortunately, a family friend, a former professor at my university suggested I contact his physician. Haleluya—the physician was on the list of the insurance carrier I wanted to subscribe. His office staff was decent enough to register me over the phone and secure an appointment for me. Having done that, I contacted the X-company insurance agent to enroll and was accepted by the insurance company to proceed with enrollment.
As my appointment with the new primary care physician is a bit far in the future, I have asked his staff: suppose that I get ill between now and then; what do they suggest I should do? Well, you would have to go to the hospital’s emergency room to be seen by the ER physician on call.
That is what I mean about ACCESS. I am not or should not be viewed as a FORTUNE teller, but the access problem which is tough enough as it is will get worse, a lot worse unless the problem of access to services of a primary care physician is addressed. Many of us have heard of communities with no primary care physician in sight, of the waiting lists (some reported some 300 people on one physician’s waiting list), the long wait for an appointment, the delay in seeing the physician and so on, but until faced with it one does not appreciate the severity of the problem. There are several reasons for such shortages. Foremost, among them is the differential in pay, prestige associated with specialization and hence the decline in enrollment of medical students in internal medicine.
A recent GAO study, (February 12, 2008),: “Primary Care Professionals: Recent Supply Trends, Projections, and Valuation of Services”, provide information on supply of primary care professionals for 2 years, the base year of 1995 and the recent year, 2005. According to the study, there was 264,086 primary care physicians in 1995 compared to 208,187 in 2005, which gives 90 primary care physicians per 100,000 people in 2005. In 1995 the rate was 80, hence an annual rate of increase of 1.17. This obviously does not give a full picture. More recent data is needed as well as the regional distribution of physicians and, the number of enrollees, office visits and waiting time. Nonetheless, the growth although miniscule should mitigate the problem if it were to continue in future years. *
Hopefully, my experience is an aberration, that there are more primary care physicians out there—if so, well and good. If not, something should be done, and done soon. It is incumbent upon our law-makers to look into this problem before hospital ER are overloaded with patients who are simply there because they have no access to primary care physicians.
A more serious issue is how to get an insurance policy without being registered with a primary care physician. Maybe insurance carriers outside of my city do not have this requirement. If so, I wish to hear from them so perhaps this requirement would be eliminated. In such a case, specialists or other medical practitioners perhaps could fill the bill.
While writing this note, I thought of the British man who was poking the sand on some beach with his metal rod searching for gold. It took him a lifetime to find his gold; I hope it doesn’t take our newly insured citizens that long to get their gold.

+ To be fair, I got one reply. Unfortunately, the physician was not a general practitioner.
* In my next Blog, I shall provide more data on physician per capita, office visits and other pertinent information. Also, a video about the Health Care Reform Bill was suggested by rosa@newsy.com which can be accessed at http://www.newsy.com/videos/health_care_reform_in_2009.

The Continued Saga of Health Care Reform 2009

2009-10-21T12:26:00.000-04:00

Many of us or at least some of us watchers of the health care reform debate are pondering the question: will it ever end? Or put differently, when will it end?
During the presidential debate health care reform was at the top of the domestic agenda and with the democratic party wining both the White House and majorities in both houses, the expectation was that, the reform bill should have a clear sailing. The president even thought that he would be signing the reform bill by the end of August or early September.
Here we are at the end of the month of October and no Bill in sight. One could argue that we are almost there. But are we?
From the news account one needs to ask: Are we or are we not serious about reforming the health care system?
Without addressing the specifics of the Senate Finance Committee bill now before the Congress (that will have to wait until a bill garners a majority in both houses—a Herculean task), let me begin with defining the term reform. In doing so, one may perhaps be able to judge the essential character of the bill if not the expectation of what the bill is likely to achieve.
The Merriam Webster Dictionary defines the term reform as: “to make better or improve by removal of fault”, alternatively, “to correct, rectify, emend, remedy, redress and revise”.
If the health care bill is to reform the existing system, then legislators and their constituents (we the people) should be inspecting the bill to see that it meets the criteria set forth to earn the reform label. The first step then is to identify the shortcomings of the existing health care system and in light of these shortcomings look for improvements, redress, corrections the reform bill legislates.
The debate, at least in the media, in my view, is misguided in that it focuses on the “private” rather than the “public” good. Moreover it fails to address the fundamentals of reforms: The principles upon which reform is based.
Our legislators, if not the media should have sought to fathom the debate along the lines used in debating tax reform. Back in the 1960’s, the 1970’s and the 1980’s no discussion of reforming the federal income tax system was deemed “legitimate” without setting forth the principles that should guide tax reform. Before getting into the “Nitty-Gritty” of specific provisions, the principles had to be agreed upon first. Since then it has become the standard for any change proposed or enacted. The well known principles were: equity, efficiency and simplicity.
So what are the principles that ought to guide the reform of the US health care system?
From my readings (albeit not too carefully) of the 259 pages of Chairman’s Mark: America’s Healthy Future Act of 2009, I cannot discern those principles.
Title I (84 pages) deals with: Health Care Coverage. It spells out the proposed insurance market reforms. It goes into details about a wide range of issues from the current insurance system’s shortcomings to setting up new procedures that would replace or amend some of the existing provisions in insurance policies as well as outlining the role of the federal government in addressing these shortcomings. Title II: Promoting Disease Prevention and Wellness (86-96 pages) deals with Medicare and Medicaid. The objective is to insure that Medicare beneficiaries have “access to comprehensive health risk assessment”. For Medicaid recipients, this section outlines the requirement for “improving access to preventive services for eligible adults”. Title III: is about Improving the Quality and Efficiency of Health Care (pages 96-135). Titles IV and V deal with transparency and program integrity, frauds, waste and abuse. Title VI (pp. 231-258) spells out changes in the revenue items like fees, tax credits and itemized tax deductions.
The “meat” of the bill and controversies surrounding the bill is found in Title I and Title VI.
Before getting into controversies surrounding provisions in Titles I and VI, one needs to ask: What are the criteria that underline these provisions?
Title I, subtitle A spells out the proposed reforms to the insurance market. These perhaps are the most straight forward reforms and well understood, having defined reform as “correcting or rectifying” what is there, then one infers that the existing health care system is deficient in meeting either the criterion of “equity” or “efficiency” or both. The corrections deal with pre-existing conditions and guaranteed renewability of policies. No controversy there. What is debatable is the specifics about premiums, rating rules in individual markets to insure compliance with the new directives. If I were to choose a criterion for these reforms the one that is applicable is “equity”. The individual cases put before us during the Town Hall meetings on health care clearly documented the need for action to stave off either bankruptcy of afflicted individuals or families whose insurance was cancelled because of pre-existing conditions or denied coverage for same reason. To providers of insurance, the new regulations give rise to cost that has to be either absorbed by those insured or recouped from them through cost shifting—a rise in insurance premium.
It will come to no one’s surprise to learn that cost shifting is the rule rather than the exception whenever a “tax” is imposed on a product. The shift may occur over time and in many instances may be hidden. Even if cost shifting does occur the insured will not bear the full cost of being integrated in the insurance pool which was denied to him previously. On equity ground as well as efficiency (spreading the cost) this provision meets the definition of reform—redressing a need.
Subtitle B: State Exchanges and Coverage Assistance and Subtitle C: Making Coverage Affordable deserve a great deal of scrutiny. In this regard the on and off “public option” need to be integrated. In my next Blog I will examine these two in light of the criteria of reform set forth above. These need to be examined in conjunction with Title VI where the revenue implications of the reform provisions are spelled out.
For the moment, it suffices to say that the state of “America’s Healthy Future Act of 2009” is in jeopardy. Unless and until the competing interests of the various players in the market are reconciled—the public option in the exchange market, state rights (whether they can or cannot opt out), Private insurers and employers as well as health care providers (physicians and hospitals), the chances for a robust bill, a bill that would meet not only the equity and efficiency of the health care market but also the criterion of simplicity is but an elusive dream.
If I were to design a “Health Care Reform Bill”, I would begin with the following questions: Does the existing system meet the standards of equity, efficiency and simplicity? To answer this question, the system has to be reduced to its components: Access, affordability and efficiency. The three components must then be ranked in terms of priority and trade off made when conflicts occur. Legislators guided by their constituents must rank the three elements. For example should access take precedent over efficiency of delivery? Should affordability be the overriding criterion, or is it the efficiency of delivery. As an economist these are the questions which have to be addressed before a “blueprint for health care reform” is developed. This may be an easy task for an economist but a difficult one for a legislator.

Health Care Outcomes: Is Our System All that Bad?

2009-10-08T13:07:00.000-04:00

An article in the Washington Post: “U.S. Losing Ground on Preventable Deaths: Despite High Medical Spending, Results Trail Other Wealthy Countries”, (Ceci Connolly, Tuesday, Oct 6, 2009). Quoting a study by Common Wealth Fund the writer states:
“Although the Unites States now spends $2.4 trillion a year on medical care—vastly more per capita than comparable countries—the nation ranks near the bottom on premature deaths caused by illness such as diabetes, epilepsy, stroke, influenza, ulcers and pneumonia”. Comparing costs and outcomes may not be all that relevant unless everything else is held constant.
The U.S. health care system has always been costlier than other systems in the developed world. Ever since OECD (Organization for Economic Development and Cooperation) has been compiling data on comparative health care, we have been put on notice that as percent of per capita GDP, the U.S. spends more and consumers of health care do not fare better, perhaps worse. This means one of two things, maybe both: The American population are either sicker than the “comparative” population hence the low return of investment on their medical care or that health care providers in the U.S. are “greedier”, “less efficient” in the delivery of health care than providers in other countries.
Let us, for a moment, accept the proposition that our providers are less efficient. The question that arises is why are they? Given the innovation that emanates from the U.S. not only on the diagnostic front but also in the drug therapy, it is worth a moment of reflection to contemplate the failure of the system to meet the efficiency standards of other European health care systems. Such reflection invariably leads us to an assessment of the disease-specific cost of intervention and there lies an ocean of difference between the U.S. system and European Systems.
Economists, rightly or wrongly, when discerning the effect of an increase in the price of good X on the demand for good X, will always tell you, “everything else remains constant”. That may sound foolish since nothing ever remains constant, or at least not for long, when good X’s price rises. We do that to ascertain the direction of effect and not necessarily the exact change in the demand. The same logic should apply to the demand for health services and hence the cost. Comparing the “comparative” cost per service delivered in one country viz a viz another in relation to the corresponding outcomes make good statistics but unfortunately masks a great deal of differences between systems. I tried to emphasize, “everything else remains constant”. That translates into comparing “like” with “like”. How can one judge life/death outcome of a diabetic patient in the U.S. compared to a diabetic patient say in France? The statistics says, a “premature death” for the U.S. patient compared to the one in France. But is this information really telling? To compare outcomes, given cost one first of all need to keep constant the profile of the patient, the environment of the patient, and a host of other issues that frame the comparison. Or take the cost comparison: It may be true that our providers are “greedy” , it may also be true that pharmaceutical pay providers to over prescribe or prescribe expensive drugs, but it is also true that the patient in the U.S. expects and demands to receive the best available medical care.
The U.S. system promotes patient’s right to choose the medical care he/she is to receive. To so many in the U.S. this right is worth the cost society has to bear. To make the cost comparison worth while patients here and there have to hold similar expectations. To make health outcome comparisons, one needs to compare like with like. Neither of these two elements hold in the U.S., European comparison.
Having said that, one should not shrug aside the three critical issues that impact costs and outcome the Post article alluded to. These are:
· The “efficiency” of the delivery of medical services;
· Access to health services , and
· Patients’ expectations
I shall address these issues in conjunction with some of the Senate bill provisions for Health Care reform 2009. Once the bills gets out of the Senate Finance Committee as the bill provisions touches on the issues raised in the Post article.

Then and Now: The Saga of Health Care Reform

2009-09-24T15:01:00.000-04:00

The nation or more precisely the Obama Administration is consumed with the debate about health care reform. The debate is far from academic it is commingled with rhetoric, uncivil discourse, charges and countercharges. For those who are not directly involved, who are on the sideline so to speak, the foray is a bit out of place.
Health care reform was at the top of the presidential candidates’ agenda. One and all: democrat, republican, or independent heard the presidential candidates speak about the need to reform the nation’s health care system. Many articles were written comparing the candidates’ plans. Economists and journalists took aim at the specifics of the two major proposals: the Obama plan and the Clinton plan. Nothing was left to the imagination. Judging from the coverage, no one doubted that if either Clinton or Obama won the presidency, health care reform would be at the top of the new president’s agenda.
Given that this expectation has been realized one needs to ask: what soured the population (public opinion seems to be oscillating between for and against) on reform?
There are several reasons that may account for this: The first and foremost is a doze of reality. The president took office in the midst of a financial crisis that brought the country to the brink of economic disaster. Although the recession was already in place prior to the inauguration of the new president, the euphoria surrounding the election did mask the severity of the financial and economic collapse. Americans are optimistic by nature; hence the expectation was that with a new democratic president, a congress with democratic majority in both houses, things could only get better.
Then came the realization that this assessment was too optimistic, that the financial crisis is more severe, and that many people’s livelihood was on the line. When one’s livelihood is on the line, the first priority is “jobs”: putting food on the table. The second or the third, is to make sure that medical care is there when needed.
I believe the administration missed the opportunity to inform the people—those unemployed, those who lost their houses, those who had to file for bankruptcy, those who lost faith in the American dream—that the Administration’s first priority is “insuring” their livelihood. Bailing the financial market first, a sound action to be sure, did not tell the ordinary citizen (Mr. Joe the plumber of the campaign) that his welfare is the focal point of the rescue plan of the economic system. Although actions speak louder than words, in personal crisis words matter as much as concrete actions. People’s interests were not at the forefront, not in the words or deeds until later on in the administration rescue game plan (The cash for clunkers!).
Once the faith of the people in the administration’s ability to address their needs has weaned, critics found an entrée to challenge the administration in all fronts. The most critical and perhaps the most effective challenge is directed towards the Obama’s plan for health care reform. And the public seems to be listening so let me take a minute and raise a couple of questions:
First, do we need health care reform? If not, we can quit now and go our merry way. If the answer is yes, then the “battle” is worth fighting.
Second, how much support “Health care reform” garners? In a democracy the plurality rule of 51% must be satisfied. Public opinion seems to put the support at over 50%. According to CNN, “going into the speech (Obama’s speech on September 8th); a bare majority of his audience—53%--favored his proposals. Immediately after the speech, that figure rose to 67%.”
Third, if the reform is a “mandate”, all must have health insurance by a certain date, then the question of affordability arises. To figure this out one needs to focus on the 15 percent of the population who are without insurance. A bit of information from the presidential debate about health care reform may be helpful at this point.
On March 25, 2008 The Ott Blog discussed the health care reform issue under the title: The Biggest Dilemma: How to reduce America Health Care Costs and “Ensure” an Affordable Quality Health Care for All? The article briefly compared candidate Obama’s plan with candidate Clinton’s plan. Although these two plans differed, they had two themes in common: Expand coverage to the uninsured and “cap” spending on health care.
Having set these two straightforward goals, implementation as everyone is finding out is not so straightforward. As it is turning out, the “DEVIL” is in the detail.
What was candidate Obama’s blueprint for reform (Barack Obama’s Plan for a Healthy America)?
· Coverage: Expand insurance coverage to the uninsured. No need for mandate, except for coverage for children.
· Choice: Offer all Americans an enhanced choice in the selection of insurance coverage through a mix of private and public plans. A new public insurance program would be offered to those who neither qualify for Medicaid or SCHI, nor covered by employers’ plans. He also called for a “National Health Insurance Exchange.”
· Quality and costs: Improve quality and cut costs through monitoring of services and modernizing the system.
True to his platform, the president put into motion his legislative agenda: To reform the US Health Care System. His reform proposal in its broad outline departed very little from the blueprint of reform outlined in the “Barack Obama’s plan for a Healthy America.”
Why then has it taken so long to enact a plan? And why all those cheap shots and not so cheap shots are lunched against the reform?
To answer these questions one needs to look at the realities of reform—the players; the legislators; our representatives in congress who write the laws, The Providers: Insurance companies, hospitals, physicians and nurse practitioners.
The payers: Those with employer provided insurance; those with own private insurance and those on Medicare.
The uninsured: Those who must now buy coverage.
I shall discuss how each of these groups is likely to fare or believe they fare under the reform plan (once the bill sets out of the Finance Committee) in my next blog.

A Salute to the Assistant

2009-05-20T11:40:00.001-04:00

On this day in May (May 17) and on so many other days in May, I have witnessed the “crowning” of so many assistants. The assistants’ assistance, at least for me and for those like me, is indispensible to our work. We rely on the assistant’s skills for carrying out data analysis, word processing, typing draft, deciphering illegible hand writing, and above all doing the task with geniality, respect, love, and appreciation of the learning experience.

On this day in May, Clark University Economics Department graduated six new PhD’s and Seven MA’s. Over my tenure at Clark of more than 35 years I have the privilege not only of being involved in the education of our graduate students but to chair the doctoral theses of more than the number of those years. Most rewarding for me perhaps is the opportunity to work closely with so many assistants.

On this day in May, I have hosted a party to celebrate the achievements of some of our graduates. It has struck me then as it has in other occasions, that how many of our graduates were my assistants in one year or another. Some were with me for 3 or 4 years.
The celebration, which I have arranged in almost every year to follow the graduation ceremony, brings together the new graduates with some of their predecessors not only to celebrate their achievements but also to give them a taste of what await them out there. The celebration however could not be complete without my acknowledgment of the assistants’ contributions to my own scholarly achievements. Over so many years I have relied on them, worked with them and learned a great deal from them. Without the “assistant”, it would have been less pleasant for me to be my “own assistant”.
Rather than heaping on myself the praise for being their mentor and professor, I thought it is time for me, if not for all other who were privileged to have assistants to salute the “ASSISTANT”.

To all of you who worked with me as assistant at Clark University or elsewhere, I salute you. I pay you the highest regards one is able to convey. I wish you all the best.
As you depart and embark on your new carrier, remember the “Assistant”. One day you will be celebrating the “assistant’s” own accomplishments, but in doing so do not forget that in his celebration you are celebrating your own.
Good luck to the Assistant and to all graduates. Mille Merci.

The Financial Meltdown: Where were the Economists?

2008-11-25T11:55:00.001-05:00

“Like a good novel, each phase in economic history has its villains, heroes, and defining moments. Often, it is only with hindsight that we can identify them” (Borio and Whiter, August 2003).

At The inaugural conference of the Mosakowski Institute for Public Enterprise, Clark University which took place on November 13-14, 2008, The Honorable Michel Dukakis, former Governor of Massachusetts and currently a professor of Political Science, Northeastern University, gave Clark University President’ lecture: “Reality based Leadership: Putting ideas into action”. Given that the conference theme was “University Research and the American Agenda: Discovering Knowledge, Enabling Leadership”, it was more than befitting to gain insight about leadership from someone who held a leadership position as the governor of Massachusetts for three terms.

The talk was thought provoking to put mildly. Addressing an audience of students, faculty, and administrators as well as invited conference participants, governor Dukakis spent the better part of his speech talking about his administration accomplishments. And, while doing so he saw fit to chastise the “Academy” for its complacency in addressing national needs, social as well as economics. He described the Academy’s activities as given rise to “national failure” along the line one may ascribe to the market the concept of market failure associated with public sector provision of the public good. He forcefully pointed out that the learning experience at US colleges and Universities neither prepares students to participate in the public sector arena, nor instruct them about issues that affect theirs and their fellow citizens’ lives. He reserved his harshest critique for universities’ researchers in general and economists in particular.

Alluding to the US ‘financial meltdown’ he asked: Where were the economists while the financial storm was brewing? How come that few if any saw it coming, or voiced any warning about the implications of the assets price bubbles on the real economy? Why did those economists outside of the “liberal” stream acquiesce with the hands off the market policy pursued by politicians and their appointees during the 8 years tenure of the Bush administration? The “invisible hand” of the market is now very visible, with a near collapse of the financial sector and a slowdown in economic activities mimicking that of the “Great Depression”.

This harsh critique is well earned. One need not agree with governor Dukakis harsh critique of the Academy to acknowledge the academic failure in not making the contributions’ of its members heard, and heard not by fellow colleagues and students but by the community at large. If there is a failure, it is not a failure in teaching or research but rather in dissemination. But dissemination of finding outside the university gates is costly, both in time and money. Communications have benefits as well as costs, and the market for dissemination of information is imperfect to say the least (more on that in a follow up blog).As an economists among others in the audience, although not particularly welcoming Governor Dukakis harsh critique of the Academy (his full remarks are posted at the Mosakowiski Institute web page), I appreciated the concern eloquently expressed for the social needs of those who have fallen out of the “social net”.

Without touting one’s horn, I have always believed and acted upon the view that education must serve the public as well as the private interest. Throughout my academic career I have been fortunate enough to carry out this task, not only as a member of the Academy but also as a participant in research institutions whose function is to disseminate information to a wide audience as well as participate if not shape debates about the nation, economic policy. Institutions like the Brookings Institution, the American Enterprise Institute are most often identified as the Academy where public debates on issues originate and information about policy impact is disseminated. Researchers in these institutions are members of those colleges and universities for whom the governor directed his criticism. The fact that faculty members do not run to the State House or the halls of Congress to testify does not mean that they do not contribute to shaping public policy or inform their fellow citizens about the merits as well as the pitfalls of such policies. One should not loose sight of the fact that the ‘Academy’ is the store of value as well as the generator of these values. A look at who is who in the public sector, how policy is formulated, aired out and sometimes “killed” paint the full picture of the Academy. Indeed today there are more institutes that you can count on hands and feet compared to forty years ago. Institutes have replaced the Academy narrowly defined as referring to colleges and universities as the instrument for effective engagement in public policy debates. This development for the most part reflects the cost of dissemination of knowledge, both the time is required for the activities and the money needed to for effective delivery. The new Mosakowski Institute is an example as to why only at that level a member of a college and or a university can be heard, as it reduces the personal cost of participation.

With my partial response to Governor Dukakis critique out of the way, a bit of economics is in order. Putting the current crisis in historical perspective, one need not go further than the Nixon era. During Nixon’s tenure (1968- 1974), the phrase was coined “we are all Keynesian now”. Keynesian economics was named after John Maynard Keynes’s The General Theory of Employment, Interest and Money (1936). The Great Depression of the 1930’s convinced the majority of economists that the emphasis on the efficiency of “unfettered” markets is misplaced. Keynes argued that the source of economic fluctuations is aggregate demand and that active stabilization policy—government tax reductions and spending increases, are needed to stabilize the economy.

In the 1960’s, there was near consensus about Keynesian economics. This consensus however faltered in 1970’s with the emergence of the “New Classical Macroeconomics”. The New Classical economists argued for replacing Keynesian economics with “Macroeconomics” theory based on market efficiency, and that it should be grounded in microeconomics, that economic agents (you and I and our company)act in the economy in our best interest i.e. optimize.

The new Classical Macroeconomics was challenged and a new stream of developed by a school of thought referred to as the “New Keynesians. The major tenets of the new theory are: that fluctuations in nominal variables like money supply influence real variables like GDP and, that economic fluctuations are the product of market imperfections such as wage and price rigidities. Theoretical developments about sources of fluctuations, how policy monetary and fiscal affect the real economy, whether governments should pursue active policy (manipulating monetary aggregates and budget posture) or follow passive policy, like Milton Friedman fixed 3% monetary rule or John Taylor interest rate rule, and so on . The macro economics landscape had become so convoluted that most economists especially those teaching the undergraduate macro, unable to inject all these new developments (often highly mathematical) in the course materials to explain the phenomenon of economic fluctuations. Those of us who taught graduate macro had to run not only to catch up with developments in the field but also to figure out which side of the debate one has to declare oneself. Macro economics was comingled with monetary economics, high power modeling and empirical analysis. The central issue of fluctuations was debated and what to do about it depended on the model of the time. In short macro economics lost its innocence. We needed to know a lot more than we did during the phase of Keynesian macro economics.

What implications had these developments for the conduct of policy? Most significant perhaps, are the proliferations of innovations that had taken place in the financial markets some of which have barely been digested in the literature and or in policy debates. Ideology about the efficiency of the market still remained supreme; hence a laissez faire attitude prevailed at least among many in the economic profession. Today financial woes may in part reflect unshaken faith in the superiority of market outcomes. What went wrong is a complicated and lengthy scenario that would require as big a volume as the General Theory (I am confident that some economist will come up with an opus magnum on it like the one by Friedman and Schwartz: Monetary History of the US).[1] For now, and to answer the question posed earlier: where were the economists, let me emphasize that they were there, perhaps more so in print than in any other media.

Since the mid 1990’s economists have written about changes in the macro economy, especially about changes in the monetary transmission mechanism and especially about financial innovations such as securitization, the rapid growth of derivative markets and financial liberalizations.(see Federal Reserve Bank of New York Conference on monetary transmission, April 5-6, 2001, also papers in the Federal Reserve Bank of Kansas City’s Symposium on Monetary policy and Uncertainty: Adapting to a changing Economy, August 28- 30, 2003) just to name a few. Several papers dealt with the impact of financial innovations on the real economy as well as the liberalizations on the financial sector in general and the banking sectors in particular. There were many warnings of about dangers ahead but went unheeded.

The paper by Borio and White “Whither Monetary and Financial Stability? The implications of Evolving Monetary Regimes” is of particular interest. The authors make the following points:

Financial liberalization both within and across national borders which began in the mid 1970’s were virtually completed in 1990’s. For all intent and purposes, this produced a shift from a government-led to a market- led international financial system (p.140). The result is a rise in competitive pressures and easier access to external funding.
Advances in information technologies led to a wider spectrum of tradable instruments, in particular the rapid development of derivatives markets facilitated by the unbundling of risk into its constituent components (p. 143).
Increased focus of Central Banks on price stability. This shift implied a grater willing to accept volatility in short run interest rate.

Their conclusion in a nutshell is that: “changes in the financial and monetary regimes may have potentially increased the scope for financial imbalances to grow during expansionary phases. This makes the economy more vulnerable to boom and bust cycles (p.149). In a liberalized financial environment, the risk of episodes of financial instability is higher than in a more controlled system. The incidence of banking crisis was much more limited during the post war, a period where the financial system was much more regulated.

From the analysis they posit that: The policy challenge would be to put in place mutually supportive safeguards in the financial and monetary spheres to insure the necessary degree of financial and monetary stability.

With policy makers being hasty to rescue and bail out the financial sector and or the beleaguered auto industry, they should take a deep breath and see where their policies fit in light of the imposing changes in the financial structure and the transmission mechanism of monetary policy. They would do well to read Borio and White’s timely analysis.

One final note: Early on I have indicated that if there is a failure at the Academy it is in the transmission of the fruits of research. I believe this view is shared by many whose research is in the public interest yet it lacked public hearings. Good news on this front. A new publication in accessible format was launched October 2008: Economists Voice, www.bepress.com/ev. The objective is to make the economist’s views on current issues, events and policy heard in a format accessible to a wide audience I applaud this effort and hope that many members of the Academy follow suit.

[1] Friedman & Schwartz, A Monetary History of The United States, 1867-1960. Princeton: Princeton University Press (for the National Bureau of Economic Research), 1963.

“No, No, We Won’t Go”: Why Some African Presidents Refuse to Retire.

2008-04-08T16:09:00.003-04:00

The phrase “No, No, we won’t go” was chanted back in the 1960s. It came to mind as I read a piece in the Economist (March 15-17, 2008) about debates currently taking place in Cameroon on Presidential Term limits. The title of the piece is “Another President who won’t go” (p. 49-50). The Economist reported that on February 24th and 25th violent protests broke out in Douala, Cameroon commercial capital in response to Cameroon’s President, Paul Biya’s hint that “he might stay on for a third term of another seven years.” President Biya has presided over Cameroon for 25 years. A new constitution which came into force in 1996, limits the President to only two terms. For the 75 years old President “not to go”, the constitution will have to be changed to allow him to stay.

Aside from reporting about the Mayhem that followed the President’s hint and about the weakness of the opposition parties challenging the ruling party nothing is said to enlighten readers about why the President of Cameroon won’t go. This phenomenon is not endemic to Cameroon.[1] To understand this phenomenon, the hold on power, one has to put it in the proper context.

Old men of Africa, most of whom are in their late seventies or in their eighties have ruled for over two decades. Most of these Rulers have come to power on the heel of independence with the blessing of their citizens. Having one of their own with no clear tie and in opposition to the colonial power that ruled the country was hailed by one and all. Expectations ran high. Rulers and subjects had great hopes for their countries and at the beginning it looked that way. But then the hope dashed, the expectations were not fulfilled. What went wrong?

To be “scientific” one need to examine a country by country experience. This clearly is not the place. Two excellent books. “The Fate of Africa, From the Hopes of Freedom to the Heart of Despair: A History of 50 years of Independence” (2005) by Martin Meredith and “A Continent for the Taking: The Tragedy and Hope of Africa” (2004) by Howard W. French provide a clear picture and documentation of many a tragedy.

In this space what may be instructive is to show that the “hold” on power is to be expected. Data compiled by Banks[2] gives information on the ruler’s tenure for almost all countries in the world over the period 1815-1999. When this data is combined with the Freedom House rating of freedom over the period 1973-2006 (a range from 1 to 7: 1 is free and 7 is not free) a clear picture emerges. Consider the following nine African countries: Botswana, Cameroon, Ghana, Kenya, Mauritius, Mozambique, South Africa, Uganda and Zimbabwe. Botswana is rated as FREE with a score of 2.0; since 1980 it had two turnover of rulers. Cameroon has a rating of 6.0 (not free) with one turnover of power since 1980; Ghana gets the FREE label (score 1.5) with two turnover of tenure in 1981, 1984 although no change in tenure for 1990-1999. Kenya as classified as partly free with a score of (3.0) although it shows no change in tenure since 1978. Mauritius id FREE with 2.0 score and since 1980 had experienced two turnovers in rulers, in 1982 and in 1999. Mozambique is given the score of 3.5 as partly free with turnover in 1986, but no change in the period 1990-1999. South Africa gets a score of (2.0) with three turnovers over the period 1980-1999. Uganda is classified as partly free (4.5) with no turnover in ruler’s tenure over the period 1990-1999 although it shows four changes from 1980-1989. Zimbabwe had one change in 1980 and Mugabe’s tenure is 28 years and counting.

These examples highlight one of the fundamentals behind the “no go” phenomenon. FREEDOM with all its ramifications is the most significant factor in determining the staying power of a ruler. Freedom is much more than simply conducting an election. It involves the guarantee of political rights (electoral process, political pluralism, and participation) and civil liberties (free and independent media, freedom of assembly and open public discussion, rule of law and individual rights). Few of these rights have been met in many Sub-Saharan Africa countries despite the fact that elections are held, opposition parties participate but the outcome somehow is seen to be preordained. The present Ruler either “win” not “fairly” and squarely the opposition either attacked, silenced or jailed (see Howard French).

One needs to give details about what goes on before and during an election many African countries. There is a saying that “power corrupts”. This is true when one looks at executive tenure in undemocratic regimes as well as in some of the world democracies. The election for the office of President in the US, runs in the billions and more often than not it costs the contender millions of dollars in out-pocket, (not to mention the wear and tear the candidate undergo). Look no further than the rate of return on the investment reaped by Presidents and ex-Presidents. This return is much valued when a ruler is transformed from the status of an ordinary citizen with modest means to the status of a “mogul” with the nation’s wealth under his/her sole control. It is ironic that the Governors and ex-Governors would show no indignation at the outright “abuse” and “blunder” of the wealth by a ruler in a state where the phrase “no, no we won’t go” is heard. Exposing this abuse by insisting that the “net worth” of a ruler be revealed for his/her admission in the world community would go a long way in changing the behavior of those rulers who wouldn’t go.
[1] Remember what happened in the presidential election in Kenya and now it is Robert Mugabe of Zimbabwe to orchestrate a win in the run off election for President.
[2] Cross-National Time-Series Data Archive, Copyright (c) 2001 Arthur S. Banks.

The Biggest Dilemma: How to Reduce America Health Care Costs and “Ensure” An Affordable High Quality Health Care for All?

2008-03-25T13:48:00.004-04:00

The Biggest Dilemma: How to Reduce America Health Care Costs and “Ensure” An Affordable High Quality Health Care for All?

This blog is not written to enter the debate currently been waged in the Presidential race between Senators Obama and Clinton about their respective health plans. Rather, the purpose is to raise some issues that have been overlooked in both plans.

The Obama webpage gives a well “researched” outline of his plan: “Barak Obama’s plan for A Healthy America” www.barakobama.com/issues/healthcare/ (number of pages 14). I say well researched judging by the number of references (65) used as documentation. To an economist’s eye, especially those of us who at one time or another engaged in research and analysis of the delivery of health care in the US and the UK, the piece is a scholarly one.[1]

The Clinton plan: “The American Health Choices Plan: Ensuring Quality, Affordable Health Care for All Americans,” (www.hillaryclinton.com/feature/healthcareplan/Americanhealthcarechoicesplan.pdp) is an 11- page write up with 21 references. But unlike the Obama’s plan, Clinton backs up some of the plan provisions with data supporting the financial needs for health reform (p.11). The estimates are welcomed not only because they make scrutiny of the plan easier but also they shed light on the credibility of the proposal. The plan gives detailed provisions that if implemented would secure for the American people the elusive universal coverage and the quality of care that we all hope for but we seldom encounter.

As both plans are accessible with a click of the mouse, I shall not reproduce here all of their features. What I will attempt to do is to put the main features of both plans in the context of the current status of American health care system and raise few questions that are left unanswered. Let me first begin with a few statistics. [2]
· The US spends some 2 trillion dollars per year on medical care (US Consensus Bureau Health 2007). This amounts to $6,644 per capita.
· There are 46 million Americans who lack health insurance coverage (of which 9.7 million are children) (National Health Expenditures 2007).
· Over the period 2000-2006 Health Insurance premiums have risen four times more than wages (Kaiser Family Foundation 2006).
· 90,000 Patients die from medical errors in hospitals every year.[3]
· Spending on preventative care amount to less than 4 percent of health care spending. (Lambrew, J.M. The Hamilton Project Brookings 2007).
· Administrative costs as a percent of medical expenditures amount to 27% of Medicare/Medicaid and 16% of private insurance (The Prometheus Fact book/Health use).
· One in six uninsured person lives in a family with an increase between $50,000 and $75,000 (Ibid).
· Per capita health care cost in the US is twice as high as that of Canada, France, and Japan and 2.6 times that in the UK (OECD Health Statistics).

These statistics paint a picture not unfamiliar to Americans. Almost every one knows that we spend a significant proportion of gross national income on medical care (14.44 % in 2007), that patients die in hospitals due to errors, that nursing homes residents are abused more often than not, that malpractice suits are prevalent and costly and that health insurance premiums, deductibles and the cost of drug therapy and testing are rising much faster than the core inflation rate and/or the wage rate. Yet, there has not been sufficient indignation over the status of the US health care system to compel policy makers to address rising cost, the lack of universal coverage and most of all the “quality” of health care. Some of this may be explained by the fact that physicians and patients as well as the public at large, for the most part are convinced that universal medical care coverage would lead to nationalization of the health care system (a la British and the Canadian systems), a system that would limit medical care resources and constraint patient choices.

In this election cycle, something seems to be happening on the health care front. Interest in the Presidential race, especially the selection of the Democratic Party nominee has opened a window for the candidates to press for universal health coverage. The hope is that voters’ interests in a candidate can propel him/her to secure their support for a universal health plan.

Since health care is at the top of the Democratic candidates agenda, let us focus on what they offer, what their plans have in common and where they differ.

· Coverage: expand insurance coverage to the uninsured. Private insurers would be required to offer policies to everyone, regardless of medical history.
· Choice: offer all Americans an enhanced choice in the selection of insurance coverage through a mix of private and public plans including the Federal Employees Health Benefit Program (FEHBP).
· Affordability: make insurance affordable to low-income Americans.
· Quality: improve quality through monitoring of services and modernizing the system.

These salient features notwithstanding the “devil” is in the details. Take coverage for example: Hillary Clinton envisages a system that offers coverage for all (universal coverage), achieved by mandating that everyone have insurance. The question of affordability comes later. Barack Obama does not see the need for mandates (although he mandates coverage for children) on the ground that by making the plan affordable, the uninsured will buy coverage. This clearly is a point of contention not only between the candidates but also among health economists (see Krugman, P., NY times, op. Ed. March 4, 2008). The bottom line seem to be: if you want universal coverage, mandates is the way to go. Making insurance affordable does not guarantee purchase.
The question that arises is: “if insurance is affordable, why wouldn’t the uninsured buy coverage?” The answer is simple. Why buy coverage if there is a “third party payer”. Currently some uninsured persons receive medical care through the “uncompensated care pool”. Insurance companies shift the cost of providing this care to those who buy insurance by raising their premium. The same is true for auto insurance (it is estimated that 14% of drivers do not buy insurance). Despite the mandates, most auto insurance plans include provisions (with additional premium) to cover damages by uninsured motorists. The bottom line then is that mandates may not assure universal coverage but it is likely to reduce the cost to third party payers compared with a plan without mandates.

Aside from mandates, Clinton envisages a health care system that is not too different from the existing system…a private/public system, although the plan may end up expanding the public component if many Americans (currently insured and the uninsured) move to opt for coverage under the Federal Employee Health Benefit plan (FEHBP).[4] The Obama plan favors a bigger role for the government in the medical care market through the creation of a “new public insurance program” offered to those who neither qualify for Medicaid or SCHI, nor covered by employers’ plans. His plan also calls for a “National Health Insurance Exchange.” This organization is envisaged to be a ‘watchdog’ for the private insurance market protecting those who want to buy. Insurance and facilitates enrollment in the newly established public plan.

Reading the lines and between the lines, it is clear that the Obama plan comes down on the side of public provision. The question is: will there be one public plan or several like those offered by FEHBP? And what agency will administer the plan? Will it be part of the HHS department or an independent agency? And what is the cost of administration and who bears the additional costs? Above all, why the need for a new public plan given that the Obama health plan also calls for extending FEHBP to non-government employees?

Two fundamental elements not adequately addressee in both Obama and Clinton plans had to do with “measurements of health outcomes” and the phenomenon of “cost shifting”. ‘Quality’ needs to be defined in terms of “long term outcomes” and in relation to cost, monetary and time costs across generations. In talking about quality neither plan gave adequate attention to patients “waiting time”, “quality of access” (which doctor, procedure or hospital), and to “medical errors” committed by physicians, radiologists and hospitals (even though some of these errors carry with them monetary payments through ‘malpractice suits’). What about access to catastrophic insurance and quality of access to nursing homes. Another related issue is the status of those covered by Medicare. Will Medicare subscribers have the option to opt out of Medicare (part B) and join another plan, especially in view of the fact that the Medicare premium paid is progressive (rises with income) and for most Medicare beneficiary private insurance is needed to supplement medical coverage?

We have gone down this road before (several reform proposals made in the 1980s and the 1990s). Two options are usually debated. Keeping the private/public mix but change this or that provision or junk the system and nationalize (one payer) medical care. Past experience suggests that a private/public system is the preferred system. Piece meal changes are the way to go. There is nothing wrong with this approach as long as the contemplated reform ushers in at least one improvement. No one denies that there are many elements that need fixing in the US Health care system. Let us hope that reforming America health care system gets a fair hearing and not falls by the wayside once the presidential election comes to a close.

[1] Ott A. and Gray W. The Massachusetts Health Pan: The Right Perception? (1988).
Ott A. Choice and Incentives in Health Care: A Comparison between the US and the UK (two conference papers, Institute for Economic Studies (IEPS), Clark University and the University of York, UK).
Ott and Lin J.H. Equality of Access to Health Care: A Comparison of the US and UK systems (1986), IEPS.
[2] Some of these Statistics are cited in Obama’s plan.
[3] As Dennis Cortes, President and CEO of Mayo Clinic puts it “this is the equivalent of two 747 planes crashing every two days”. Talk covered by CSPAN 2, March 21, 2008.
[4] Although FEHBP is a Federal government program, it does not entail public provision of services. FEHBP offers federal employees some 10 plans such as Blue Cross/Blue Shield with different levels of premiums, contributions, benefits and deductibles. It differs from private employers plans in the level of government contribution towards the purchase of the chosen plan. For details see: US Office of Personnel Management webpage.

Good News for Africa: Another Day, Another Gain

2008-02-25T15:02:00.002-05:00

In my last blog “Why do Governments Engage in Mass Killing, February 18”, I wished Kenyans well in their strive for democracy and restoration of their faith in democracy. Wishes sometimes come true. The Wall Street Journal (Friday February 22), brought the good news.
According to the associated press: “Kenya’s government tentatively agreed to create a Prime Minister’s post to be filled by the opposition moving the East African country a step closer to ending weeks of deadly clashes over the disputed presidential election” (p. A8). In my piece, I wished for a sharing of power, which would ultimately lead to the restoration of the presidential office to the true winner. In the meantime, this sharing of power may be enough to assure Kenyan citizens that their democracy is not fragile, that it will endure. A sad note accompanying this good news, is that the ‘ethnic grievances and violence have left more than 1000 people dead”. Kenya violent conflict unfortunately, has put it in the book as given rise to Mass Killings (see http://attiatott.blogspot.com/ February 18, 2008 for definition of mass killing).
Over the past two years, we at the Institute for Economic Policy Studies have made efforts albeit modest, given our volunteerism efforts and our own resources (no outside support) to put forth the idea that developing ‘human resources’ should be at the forefront in the design, execution and funding for development. Education is and should be the building block for improving the economic conditions for the people. The development strategy often has been devoted to bricks and motors, not to human development or the right human development. It is not enough to throw money on education infrastructure (aside of the fact of being minuscule, compared to other infrastructures), rather it is much more important to ‘know’ how to make use of education infrastructure. Africa may surely lack education infrastructure but they surely have educators who can if challenged and channeled properly effect development.
The title of my piece today, Another Day, Another Gain was motivated by President Bush recent announcement. (Two Routes to Building Africa: Bush Visit (to Liberia) Emphasizes Human Development; Wall Street Journal, February 22, p.A8). US and Western powers are urged to focus more on human development. President Bush went further by announcing that the “US will provide one million text books for Liberia in the next year.” Clearly a step in the right direction. One may ask what text books and for what educational level: elementary, secondary or tertiary? The paper did not say. I am sure the details are now being worked out at the Agency for International Development.
It is a good step no matter what books or at what level. I have been taught that all books no matter how bad are good books in that they will make you think, they will make you see and feel what otherwise could not have been seen or felt and that what education is all about.
I have always wondered about what to do with the surplus of books many of us in Academia, especially those of us with long carriers, who will no longer have needs of these books. Even in the age of the internet there is still something about the wholesomeness of books. Hopefully, the President’s effort of building the reading capacity of Liberia’s people would extend beyond text books, and by opening the door for all who have books to channel these books to Africa would be users, he will indeed have succeeded in promoting knowledge, a vehicle often overlooked as the first building block for development.
Some of my former PhD students in Economics and myself are educators. We believe that education and the use of educators generated knowledge have been overlooked by development institutions, universities and donors. To that end, the Institute for Economic Policy Studies is sponsoring a conference to address this issue. We are encouraged by the President statements. Perhaps the day has finally come to put development on a sound footing.

Why do governments engage in civilian killings?

2008-02-18T16:21:00.001-05:00

In a paper published in the Journal of Defense and Peace Economics (2008, vol. 19(2)) by colleague Sang Hoo Bae and Attiat F. Ott, we have investigated theoretically and empirically the predatory behavior of government: the case of mass killing. As such journal papers go; the model and the empirical analysis are not for general consumption. Nonetheless, the story it tells is not difficult to follow and the conclusions it arrives at is worth highlighting.
Before I summarize our findings, I need to acknowledge a contribution to this topic made by Hugo Slim in his book: Killing Civilians: Method, Madness and Morality of War (Colombia University Press, 2008), reviewed by the Economist (February 16th, 2008, p.92). Although I have yet to read the book, the Economist’s review touches on a few of the issues we have addressed on our paper on mass killing. Our findings may go some way to answer the basic question raised: why kill civilians? Let me begin by citing few relevant statistics.
In the 20th century there were 109.7 million civilian killings by the state. This amounted to 4.35% of world population. In the 19th century, these were 19.4 million deaths or 1.65% of the world population, an increase of over 500 percent. According to the World Development Report 2005, most of the violent conflicts leading to civilian killings took place in low income developing countries, with 38% of these taking place in Africa.
Violent conflicts leading to mass killings of civilians fall into three categories: military conflict between states; between states and non-state groups; and between factions within a state. When we talk about civil war we are referring to the third category commonly referred to as “intra state” war. In this type, either the state (government) or a rebel group is the initiator. Examples of civil war include Angola civil war lasting 27 years with more than one million deaths, repeated wars in Sri Lanka with 500,000 deaths, Rwanda with over a million death to name a few. Mr. Slim gave reasons for civilian death including “a desire to exterminate an entire group of purportedly inferior beings; a lust for power and domination, necessity or plunder”, (The Economist, p.92). A student of violent conflicts especially civil wars can find not one but many causes for killing civilians. Sang Hoo Bae and myself being economists, we explain mass killings by the state by modeling the choice of a ruler of a country in which there are two distinct groups of populations (divided along ethnic, religion or other elements) by characterizing the decision as a three stage process. We investigate the ruler’s (assumed belonging to one group) options: engage in mass killings of the other group (initiate civil war); resolve the conflict by forming a coalition government; or do nothing.
Think of the current civil war in Kenya that started following the December 27 presidential elections. The ruler, President Mawai Kibaki is said to have lost the election to the opposition but refused to relinquish to Daila Odinga the presidency. The ruler, Mawai Kibaki options are those we have investigated in our paper. Our model solves for the optimal choice. We show that which option the ruler will choose depends on the “probability to remain in office which is derived from his political power; on the expected wealth from attacking the opposition group and the cost of the attack.” The cost can be of two types: military expenditures and cost of outside sanctions. In the Kenyan case, the flurry of activities by outsiders (the non-state group) including the US secretary of state, the former UN Secretary General, Kofi Annan may raise the cost and might tilt the choice towards a coalition government.
Using data on civilian mass killings over the period 1816 – 1997, we attempted to identify those factors that accounted for the choice of the mass killing option. But what mass killing constitutes? And who compile the data? The data is derived from the Correlates of War (COW) project. COW gives information on conflicts with more than 1000 battle related deaths. In the conflict studies, 1000 battle related deaths have been taken to signify mass killing. In our study we use this number and also redo the statistical analysis with 10,000 battle related deaths as defining a mass killing episode.
The statistical results of testing our model for the civilian mass killing that occurred between 1816 and 1997 give insight into the question raised earlier: the ruler’s choice of mass killing or as a Mr. Slim has put it: why kill civilians? Our findings reveal that “the length of executive tenure (how long the ruler held the office) plays a very significant role in civil war killings. In addition, it identified ethnicity, as a contributing factor, in that the “more fragmented the population – many ethnic groups – the less likely is mass killing and vice versa”. The results that were not unexpected had to do with spending on the military conflict and the income of the country. High military spending increases the probability of killings; the second the higher the income of the country the less likely the ruler is to engage in civilian mass killing.
The civil war in Kenya will hopefully come to an end before it belongs to the COW records where the civilian death rate reaches 1000. It would be a tragedy not only for the civilian population who are paying a heavy price for democracy but also for the world at large. The international community should persuade, cajole even compensate (bribe?) the ruler to restore democracy by opting for the power sharing arrangement for a limited period (to save face) and to restore the presidential office to the opposition if it turned out that Mr. Odinga was indeed the true winner.

WILL MONEY SOLVE AFRICA’S DEVELOPMENT PROBLEMS?

2007-10-29T15:05:00.000-04:00

“Ask a foolish question and you will get a foolish answer”. These words by Nobel Laureate Milton Freidman echoed in my mind as I read a piece in the African Executive (10/22/2007) under the banner “Will Money Solve Africa’s Development Problems?”
Few days later, the same question appeared in The Economist (October 27th) as an advertisement by the John Templeton Foundation. The African Executive’s piece gave snips of the conversations with eight (8) “leading Scientists and scholars” sponsored by the Templeton Foundation. Responses to the query were as follows: Five (NO); One definite (YES); Two are conditional. The full statements appear at the Foundation Web page.
The essays are quite short, and reflect as one might expect the background and or affiliation of the author. Whether the answer to the question can be put in the positive or negative column, the insight one gains from the response tell a great deal about the author’s own experience in the field of development. Without getting bogged down in the nitty-gritty of what is being said, let me focus on few issues highlighted in the essays.

First: The glaring indictment of “aid”. “Donner nations have spent billions of dollars for development schemes in post colonial Africa, yet there is little to show for this beyond dependency and corruption” (Edward Green); “After fifty years of trying and $600 billions worth of aid- giving, with close to zero rise in living standards in Africa, I can make the case for NO pretty decisively” (William Easterly); “Africa does not need aid from governments and international agencies” (James Tooley).

Second: Africa does not lack money or resources. “The problem in Africa has never been lack of money, but rather the inability to exploit the African Mind (HALALUWA) -- If money was key to solving the problems, banks would send agents in the streets to supply money to afflicted individuals” (They actually do, but this is another issue) (James Shikwati).
Third: Money does not create Wealth. “Big money to Africa – empowers bureaucracies, promotes statism, and weakens government incentives to increase tax revenues through economic growth” (Iqbal Z. Quadir).
True enough. If moneys treated as a consumption good — a pay off to corrupt politicians and institutions, it not only have a zero return to providers, but also waste precious resource by diverting them to conspicuous consumption which most often give rise to social and political unrest.
Let me turn briefly to the Friedman quote. Money can take a number of forms. It can be “fiat” money created by the Central Banks and governments This money creation, increasing the supply of domestic money does not add to resources, in effect it heats up an economy and destroys incentives and long term planning .Money In the Templeton Conversations obviously does not refer to a nation’s domestic supply. Think of it as outside money or more accurately a supply of real resources from countries other than the recipient countries. Put differently, the money affects a transfer of real resources from the donor’s country to the recipient country. The transfer of resources is the “wealth added”, it is the attributes of Money as an instrument for wealth creation.
The question then that needed to be posed at the outset is “In What Form Will IT BE GIVEN?” That is in the form of AID, or LOANS? Most of the conversations seem to revolve about money given in the form of aid. Easterly along with few others have questioned the values of foreign aid given by governments or international institutions. Others, notably Sachs, do not agree. Without getting bogged down into the nuances of this debate the appropriate question to ask perhaps should have been: “WHAT CONTRIBUTION AID WILL MAKE TO WARDS ECONOMIC DEVELOPMENT OF THE AFRICAN CONTINENT?” This question would have focused the discussion on the one aspect of development, namely economic growth and secondly gave respondents a way to assess based on their experiences the use to which aid resources were invested or dissipated. Conversations with scholars and practitioners should not leave the uninitiated with the feeling that all is lost that aid giving has no place in the arsenal against poverty and helplessness. Evaluating Aid relative to loans and foreign direct investment would have given the reader something to think in terms of the efficiency of instruments aimed at spurring economic development in the African continent.
If one were to think of economic development as an outcome to a process, then for every outcome or output there are inputs. Students in ECON 101 learned (hopefully) that to produce positive output requires certain levels of inputs — that output requires the combining of factors: labor, physical capital and know-how. Money given to a country in the form of aid simply adds to these factors if took the form of physical capital or know-how. So how the resource is given matter and not by whom it is given or by whom it is received. One need not forget that Aid add to resources without the requirement that a positive rate of return must be secured in the short or immediate run whereas loans and direct foreign investment require expectation of returns sufficiently high to both service the debt and in the case of foreign investment an after risk positive return. It is unquestionably true that augmenting a country’s resources through foreign aid, as long as not all of it was dissipated through remittances made by corrupt governments to their accounts outside the country, will increase the national output and employment. Let us not forget that economic development requires marshalling of resources, especially capital and know how. Irrespective of how corrupt are government and institutions in an African country the mere exposure to “FRESH AIR” called it the global economy improves its chances for economic development.

One needs to remember in conversation like the one initiated by the Templeton Foundation that DEVELOPMENT is multifaceted, not only economics but social , cultural and political also. To address African development problems let us first enumerate these problems and sort out those that our existing repertoire of knowledge can solve and those that require investment to acquire new knowledge. Second, it may be useful to prioritize developments objectives. Some form of ranking will help in assessing the efficiency of allocation in relation to expectations. In some cases investing extra resources has a measured outcome (access to clean water by every household), in other cases such as returns to good governance or ethnic tolerance may not have ones

The Templeton Foundation has embarked on a mission that hopefully will foster an understanding and not only the dialogue between citizens in the NORTH and the SOUTH. Expanding the base of knowledge is a conduit for problem solving. People and their knowledge matter. Through knowledge wealth is created. Access to knowledge is a prerequisite for not only creating wealth but for knowing how best to use it.

A final remark: It is gratifying to see in some of the responses to the Templeton Foundation question that the resource most in need of development in Africa is the “MIND” (see “Africa development needs development of the mind beyond the University’s border” at http://attiatott.blogspot.com/, March 22, 2007). Mr Quadir puts it best: “The time has come for us to stop pouring billions of dollars into bureaucracies. Instead we must cultivate the billion brains in Africa”.

How to develop the African’ mind? To that end The Institute for Economic Policy Studies will host a conference with the collaboration of the University of Botswana (at the University of Botswana in August 2008). The conference theme: “Developing a Continent: Who is in Charge?” Details will be posted at the Institute web site and by contacting Professor Lecha at the University of Botswana.

A Marshall Plan for Sub-Saharan Africa; A Common Market for East Africa; Star Power for Africa; A Zero Hand Out Approach in Africa

2007-09-12T13:13:00.000-04:00

These are but a few examples of what has become the most fashionable approach to rid oneself of guilt over the plight of those less fortunate than ourselves. The rich and famous, rich and not so famous, have discovered Africa, a discovery that warrant applause as well as critical evaluation.

Africa is a continent which for long has been labeled the “dark” continent. Since Dr. Levingston put a foot there in search of the source of the Nile, the world has looked upon Africa as some place out there one visits either to take home a “trophy” animal or mineral or to boost of being the first to claim a territory for “God and Country”. The scramble for African territory which began at the end of the 19th century gave European powers virtually the entire continent. All that remained was the division of spoils. At meetings in Berlin, Paris and London, European statesmen bargained over spheres of influences and traded lands and peoples to secure the desired outcome. “When marking out the boundaries of their new territories, European negotiators frequently resorted to drawing straight lines on the map, taking little or no account of the myriad of traditional monarchies, chiefdoms and other African societies that existed on the ground” (Martin Meredith, 2005, p.1). Africans for the most part were spectators. Those who opposed or resisted colonial rule died in battle, executed or shipped out to fight in European battles. No territory in Africa except Ethiopia escaped colonial rule. Africa emerged from the 19th century scramble, a continent divided with its people segmented according to the powers that have been there. There was British Africa, French Africa, Dutch Africa, Belgian Africa, Portuguese Africa, Italian Africa, as well as Arabian Africa. The haggling in Europe was over African territory with little attention to people – their ethnic identity, history or religion. Land and people were little more than pieces on a chess board.

As the world awoken to embrace through benevolent or violent acts the liberal order, people even in the Dark Continent were entitled to “life, liberty and pursuit of happiness”. Africa in the 21st century became theater for social experiments. Some would say it has become a playground for the rich and famous, the rich and not so famous. Africa also has become a theater for war among African themselves, poor and rich, between governments and those they govern.
Several scholarly books and hundreds of articles in scholarly journals have been written about Africa. A devastating assessment of the “goings on” in Africa since independence is given in two volumes: “A continent for the taking: The tragedy and hope of Africa” by Edward French (Alfred A. Knopt, 2004), and “The fate of Africa: From the hopes of freedom to the heart of despair” by Martin Meredith (Public Affairs, 2005).

The scramble for Africa in this century mimics the scramble for Africa at the end of the nineteenth century. Back then, European powers staked claims to Africa resources human and physical, in this twenty first century the scramble for Africa is not for men and gems (although that is true too) but for prestige and publicity. As Mandela’s wife, activist Graça Machel, the former first lady of Mozambique, has put it “what is uniformly true about celebrities is that they get attention for themselves, to some extent, but also for the issues they choose to highlight” (quotation from The Christian Science Monitor, August 22, 2007, p.11).
As the title of this piece suggests, there are several approaches to aid Africa. Scholars like Deepak and Raja Patirana examined the contribution of aid to Africa (it is the largest for any region, averaging 6.3 percent of GDP for all Africa, excluding South Africa and Nigeria, compared to 1 percent to South Asia and 0.3 percent to Latin America and the Caribbean). In their article “The Triumph of Hope Over Experience: A Marshall Plan for Sub-Saharan Africa?” (American Enterprise Institute, August 2007), Deepak and Raja Patirana discussed whether such a program, proposed by British Prime Minister Gordon Brown, is a viable alternative to current aid policies. Although most of the discussion is devoted to a comparison between the preexisting conditions in Europe and the current conditions in Sub-Saharan Africa, a prerequisite for assessment of such a program, the conclusion that emerges is that “European Marshall Plan and post-independence aid to Africa were responses to entirely different situations, so drawing parallels between the two is not justified” (p.3).
Africa statesmen (East African heads of state) offer an alternative to aid “a common market and a single currency for East Africa by 2012”*, again fashioned along the successful European experience.

A departure from aid and trade is “self help” or “a zero hand out approach in Africa” (The Christian Science Monitor, September 5, 2007). The idea behind this approach is capacity building and local control. A US based charity “Care for Life” reports success in promoting self reliant as a development strategy. All to the good, but one data point does not make a statistic.
Let me now focus on the “glamorous” approach to African development. A question that needed to be asked was put forth by a Tanzanian columnist, Ayah Rioba, a day after Bill Clinton visit to Africa: “is this really how to save Africa?” (quoted in the The Christian Science Monitor, August 23, 2007). Good question.

There are as many schools of thoughts about how to help Africa as there are clients and/or reformers. Leaving the academic debate aside for now, a subject for a later piece, the celebrities’ approach to development is a novel one that deserves the economists’ attention (at least this economist). Unlike academicians (except perhaps in the case of Jeffrey Sachs and the staff of the Agency for International Development), celebrities peddle glamour, beauty, riches to a captivated audience.

To gauge effectiveness of celebrities’ actions, let us first look at how celebrities have “carved” Africa among themselves. The Christian Science Monitor has devoted several issues (in August) tracking celebrities path into Africa: Bill Clinton: South Africa, Malawi, Zambia and Tanzania; Mia Farrow: Rwanda, Chad and Darfur; Madonna: Malawi; Oprah Winfrey: South Africa; and, of course, Angelina Jolie everywhere there are refugees as the United Nations High Commissioner for Refugees Spokeswoman. Unlike the European scramble for Africa in the 19th century, the celebrities scramble is far from complete. Why not say Burkina Faso, The Gambia, Guinea Bissau, Mali, Congo or Cameroon to list a few. One wonders how do African in these HIPCs Sub-Saharian countries feel about celebrities “neglect”**. There are 33 countries in Sub-Saharan Africa classified as HIPCs with per capita income of less than $2 per day. South Africa which has attracted celebrities’ attention is not one of them. One also ponders celebrities’ choice.
Pondering these questions is par for the course for an economist. In economics 101, one lays out the landscape of choice – examine the options available and the constraints faced in order to evaluate the choice outcome. The market is the place where such information is gained. Unfortunately, there is no market parallel for examining and/or evaluating celebrities choice, and their aid to Africa. Although one may speculate as to why South Africa was chosen and not the Gambia, it may perhaps be more useful in this instance to reverse the process – from the outcome back to the choice. Oprah Winfrey built a “Leadership School” in South Africa; The Counsel of Elders was initiated to address conflict resolution; the Clinton-Hunter development initiative aimed to expand access to water, sanitation, health care and agricultural markets in Malawi and Rwanda; the Clinton foundation works in 69 developing countries on initiatives ranging from expanding access to HIV/AIDS medication to reducing big cities greenhouse-gas emissions. These are but fragments about outcomes gained from newspapers accounts. From this information one could say that the choice of the country reflects the donor’s own perspective on Africa or on a particular cause he/she likes to advance. These outcomes notwithstanding what is missing is a true accounting of aid effectiveness – what is used to be called the “bang for the buck”. This accounting may hopefully be forthcoming soon. Bruce Sievers, a visiting scholar at Stanford University, is writing a book about the development of philanthropy. He is quoted as saying that for celebrities the bang of the buck is high in Africa (The Christian Science Monitor, August 22, 2007, p.11). But hopefully he can show that this is true as well for Africans.

* Bill Gates, Bono and economist Jeffrey Sachs share Brown in calling for a Marshal Plan for Africa and for a vast increase in aid. An analysis of the Marshall Plan and the common market proposals will be taken up in follow-up pieces.
**See August 2, 2007, blog for HIPCs definition.

What Africa needs now is benign neglect

2007-08-07T11:12:00.000-04:00

The new Millennium was welcomed not only with fanfare and fireworks but also with renewed sense of obligation, hope and good will towards those less fortunate countries of the world. Foremost among these countries are the so called HIPCs (for definitions and other info see my blog, August 2). As the majority of the HIPCs are located in Africa, 33 countries out of 41 as classified by the World Bank, the spotlight in the new Millennium was placed on Africa. From pronouncements by His Holiness POPE John Paul II calling on the international financiers to “cancel outright” the international debt of these countries, the Millennium Declaration, signed by 189 countries, to Bono’s private and passionate efforts on behalf of people in Africa, a fresh opportunity was opened for Africa to enter into a fair partnership with the industrialized countries of the world.

But the Millennium also spotlighted a dark picture of Africa. According to the World Development Report (2005), 40 % of the world’s violent conflicts are in Africa, including several of the bloodiest: the Rwandan genocide in 1994 killed almost 1 million people; the civil war in the Democratic Republic of Congo has killed some 7% of the population. In Sudan a 20 years war between the North and the South claimed 2 million lives and displaced over 6 million people. On the economic front, most of the HIPCs in Africa have per capita income of less than $2 a day; have unsustainable ratios of debt to GDP and to Exports, and a Growth rate of less than 2 per cent.

The news about Africa is not always grim. One day one hears good ones, other day bad ones. The good news comes from the awareness of people in the developed world of the plight of people in Africa, whether due to war, famine or disease and their genuine efforts to do something about it; the bad news comes with the same efforts exerted on African behalf not for the sake of African but to serve one’s own agenda.

In the past two weeks, few articles on Africa appeared in several news papers. Two in particulars are noteworthy. The first appeared on July 19 in The Christian Science Monitor. The Monitor reports: “Global elders launch new alliance”. The alliance brings together two former leaders: Nelson Mandela and Jimmy Carter. This high level gathering of the “elders” according to the Monitor, included in addition to Mandela and Carter, several former world leaders (see the Monitor, p. 7 for the list), the idea being initiated by Richard Branson and his friend the rock star Peter Gabriel. The Monitor quotes Branson as saying about the initiative “The elders will play a role in bringing us together to help unnecessary human suffering and to celebrate the wonderful world we are privileged to be part of”. Aside from its focus on human right, no agenda has yet to be set by the “elders”. The meeting closed with Gabriel singing “Biko”, a song about Stephen Biko, an apartheid activist who died in police custody in 1977. As the monitor tells it “tears flowed as the audience heard the music”.

The second article, an OP piece written by Mr. Uzodinma Iweala also appeared in The Christian Science Monitor, July 24^th with the title “ An African Plea: No More Saviors”(p.9).

My first reaction as I read the title of Mr.Iweala’s piece is that he did not care much about the “elders” initiative, I did harbor the same thought myself. But then as I read the article, I found a lot more to his chagrin than what a group of “elders”, free agents with no political responsibilities hope to do for Africans. In his article Mr. Iweala articulated (based on my interactions with scholars from Africa) what many African felt the way African are presented in the Media; about slogans, to quote Mr. Iweala, such as “ Save Darfur”, “Keep a child alive/ I am African”, and white men painting the I am “African on their white skins”.

A more damaging indictment of those would be “SAVIORS”, is Mr. Iweala’s contention that the saviors campaign smack of colonial ideology. In his words “Such campaigns, however well intentioned, promote the stereotype of Africa as a black hole of disease and death….. The relationship between the West and Africa is no longer based on openly racist beliefs, but such articles are reminiscent of reports from the heyday of European colonialism, when missionaries were sent to Africa to introduce us to education, Jesus Christ, and civilization”. Alluding to the G8 Summit meeting (see my blog August 2d), where an African declaration was made, he makes the plea: before the next Summit “I hope people will realize that Africa does not need to be saved”.

Sympathy with the sentiments expressed by Mr. Iweala’s aside there is no denying the fact that many countries in the African continent are in a much worse shape today than shortly after independence ( see Martin Meredith “ The Fate of Africa: from the Hopes of Freedom to the Heart of Despair ” NY, Public Affairs 2005). But there are also success stories, countries like Botswana, Madagascar, Mozambique, Cape Verde, as well as few others who have achieved positive growth rates of GDP, improved governance, improved education and infrastructure and so on (see World Development Indicators 2006). The improvements in the economic and social indicators were brought about by concerted actions on the part of the countries themselves with the financial and technical support of the World Community.

Perhaps donors, policy makers, movie stars as well as ordinary citizens are over eager in showing that they do care about Africa and African. A doze of neglect may hasten the cure, and if you must do good, you should perhaps head the advice I have received a long time ago from my grandmother: “Do Good, but expect nothing in Return”. To that I would like to add: “let the Do Goodder do their Thing, but do not Trumpet it nor Belittle it”.

TOO LITTLE OR TOO MUCH: THE G-8 SUMMIT 2007 DECLARATION, Growth and Responsibility in Africa

2007-08-02T11:00:00.000-04:00

“If you are interested in helping the poor, it makes sense for the developed world to forgive the debt, and that is what the United States will continue to do”. President Bush Speech to the Group of 8 (June 6-8, Heleigendamm, Germany).

At least for the past 10 years or so, at the summit meeting of the G 7-8 pledges are heard, commitments declared to help the poor, heavily indebted poor countries referred to as HIPCs rid themselves of the debt overhang, improve their living standards and achieve a sustainable rate of economic growth. The problem that is yet to be solved is how exactly these excellent goals are to be achieved. Good intentions aside, concrete measures need to be taken to lift HIPCs out of poverty and achieve a sustainable level of economic growth. One can use an example of a sick patient seeking relief. Prescription drugs or therapy require good diagnosis. This may not always be the case. Even in the best “milieu” diagnoses can err, drug therapy may not be followed or disrupted. Treating a patient with multiple illness is difficult enough, treating a country suffering from a multiple of diseases may border on the impossible.
To gain insight into the problems facing HIPCs and to evaluate the efforts exerted on their behalf, both in actuality and through pledges and pronouncements, a few statistics may be helpful. But first, who are those countries that are labeled HIPCs?

According to the World Bank, there are some 41 countries classified as HIPCs, 33 of which are in sub Sahara Africa (Angola, Benin, Burkina Faso, Burundi, Cameroon, Chad, Cote D’Ivoire, Democratic Republic of Congo, Eritrea, Ethiopia, Ghana, the Gambia, Guinea, Guinea–Bissau, Kenya, Lesotho, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, Niger, Republic of Congo, Rwanda, Senegal, Serra Leone, Somalia, Sudan, Tanzania, Uganda, Zambia, Zimbabwe). Non-African countries in the HIPCs group are mostly in Latin America.
The classification is based on three criteria: being poor with per capita income of less than $695 per annum, a present value of external debt to GDP ratio greater than 80%, a ratio of present value of external debt to exports greater than 220%.

To appreciate the enormity of the problems facing HIPCs and the efforts of the international community in addressing the debt issue one needs to look at the development of some of these indicators. For example, in all HIPCs, the external debt stock was at least twice the value of exports on average during the 1992-94 with several countries having ratios that exceeded 1000%. The present value of the debt service to exports was over 25%. The debt has grown so rapidly so that by 1995 (the eve of HIPC initiative), it stood at $406 billion or 9 times its value in 1970. As of 2004, the debt stock stood at $441 billion. The debt service which was equal to $1.8 billion in 1970 reached $35.7 billion in 2004 (the external debt consists of multilateral credits, official bilateral credits and private credits).

The call for debt relief (debt write-downs) for this group of countries came to fruition in the mid 1990’swhen the HIPC initiative was launched by the IMF and the World Bank. Earlier commitments towards debt relief were announced during the 1987 G-7 Summit in Venice, the 1988 G-7 Summit in Toronto where a menu of options, including partial forgiveness, lower interest rates to help poor countries meet their debt obligations. Additional debt relief measures were announced in subsequent Summits: the 1990 Houston Summit, and the 1991 London Summit. The Paris Club (the club of official lenders) also called for additional relief both in 1993 and 1994.

These waves of debt relief, from Venice to London were not sufficient to deal with the external debt problem of HIPCs. Thus, the HIPC Initiative was born. The initiative was put in place in 1996 and expanded in 1999. The initiative is a comprehensive program aimed at achieving “long term debt sustainability and poverty reduction”. But to be eligible a country must meet certain criteria such as a track record of macroeconomic policy that promote economic growth. The HIPC Initiative was supplemented in June 2005 at the G-8 meeting by a new program — the Multilateral debt Relief Initiative (MDRI). The program proposed that the three multinational Institutions, the IMF, the World Bank, and the African Development Fund, “cancel 100%” of their debt claims on these countries thus freeing their resources for development. Countries eligibilities for this program are spelled out in terms of completion of certain requirements under the HIPC Initiative. MDRI’s goal is to half the poverty rate by the year 2015.

Too Much or too Little? Whatever judgment one makes about the debt relief efforts, the debt problem of HIPCs and their poverty status had changed but little (for more details on this see W. Easterly “How Did Heavily Indebted Poor Countries Became Heavily Indebted? Reviewing Two Decades of Debt Relief’, World Development, 2002).

With all these expended efforts, what did the G-8 Summit has to offer? One interesting development is the group focus on Africa. This as it should be since the majority of HIPCs are Located in the African Continent.

“Today we underline once again our strong interest in a stable, democratic and prosperous Africa. We stress our firm resolve to implement the commitments on development made in Gleneagles (the 2005 Summit meeting). These include the historic Multilateral debt relief of up to $60 billion; increasing ODA (official development aid) to Africa by $25 billion a year by 2010.” With that the group of 8 made a number (63) of pronouncements and recommendations to improve African countries governance, Stability and developments (see Summit Declaration, June 2007). A short sample is given below:
- Good Governance in Africa is vital to Peace, Stability, Sustainable development and Growth. The G-8, with its Africa action plan, has provided a strategic framework for partnership based cooperation.
- The G-8 reaffirm their commitments to actively support countries that implement sound policies with the recommendation of the APRM (African Peer Review Mechanism).
- The G-8 reaffirm its support for infrastructure Consortium for Africa to address infrastructure shortcomings.
- The G-8 will support national and regional efforts to improve the investment climate by means of regulatory and administrative reform.
- The G-8 reiterate their commitment to education for all.

Good intentions may not always bring good outcomes. And wishing it does not make it so. No one doubts the good intentions that underlie the G-8 measures to promote sustainable development in Africa. Unfortunately a lot is wished for and little has been accomplished.

Debt relief like drug therapy is futile for a patient who lacks incentives to follow the prescribed treatment. No one belittle, or should belittle, the enormity of the problems facing the HIPCs. But, prescribing remedies may be necessary but not sufficient to secure good health outcomes. The same should be applied to HIPCs. Outcomes should be the criteria for extending debt relief or any other forms of aid. Multinational creditors should not set multiple tasks or grandiose schemes for eligibility, nor follow a protracted program of relief. As Easterly (2002) has argued: “a once and for all program is superior to a gradual program of increasing relief”. The once and for all program has to establish a credible policy that debt relief will only be given to governments with a shift in development orientation. IT MAY BE EASIER SAID THAN DONE. NEVERTHLESS IT SHOULD BE TRIED. NOTHING VENTURED, NOTHING GAINED.

The Income Tax and the Single Female: The Case for Gender Based Taxation

2007-05-16T11:34:00.000-04:00

A recent article in the Financial Times (April 18) written by two economists, Alberto Alesina and Andrea Ichino, advocated “gender based taxation”. The write-up is an extract from their research paper (March 2007). In the paper they make the case for differential taxation of income based on gender. The argument put forth is simple. Female labor supply is more “elastic” than that of males to after tax wage rates. Using “the Optimal Taxation Theory as the basic principle for allocating the tax burden “optimally”, they argued for “lower” tax rates on labor income of women, “higher” rates for men.

The proposal, irrespective of whether one agrees or disagrees with it, is timely since the US Congress (once our representatives get out of the Iraq war rut) is considering yet another change in the federal income tax code — a reduction in the minimum income tax and/or a change in the threshold. What makes the differential taxation issue worth revisiting is that it has surfaced THIRTY TWO YEARS after the famous Playboy Interview with then Secretary of the Treasury William Simon (May 1975).The Secretary, in one interview, was able to accomplish what many of us economists, tax experts and consultants have tried for many years — to reduce the tax rates on single person households. In the Playboy Interview, Simon used the phrase “the tax and the single man”. Some of you, the older generations, may remember that the Federal Income Tax had a tax rate on single persons that was 200% of that on married-couples households with the same income (the saying that “two people can live as cheap as one” did not sway the tax man). Differential rates much lower were imposed on other types of households — married filling separately, heads of households, and surviving spouse. Such tax treatment neither met any standards of equity nor was it based on efficiency measured by differences in the labor supply elasticity of single person or married couples. The Playboy Interview succeeded in prompting Congress to lower the rates on single persons, males and females. Without going through old issues, it suffices to say that since its inception the Federal Individual Income Tax has been evolving.

Enacted as an emergency measure during the Civil War, the tax was allowed to lapse in 1872 when the urgent need for revenues disappeared. For almost 20 years after the Civil War income tax, attempts at resurrecting the tax all but failed. The Sixteen Amendment to the Constitution ratified in 1913, gave a legitimate birth to the income tax. The Amendment gave Congress the “power to levy and collect taxes from whatever source derived”. The rate structure was progressive. Allocation of the tax bill among taxpayers under the guidance of the Sixteen Amendment would have meant that the FEDERAL INDIVIDUAL INCOME TAX SYSTEM does not DIFFERENTIATE AMONG EQUALS AND DOES SO AMONG NON-EQUALS. At the time, the tax unit was the INDIVIDUAL, HENCE THE NAME. The progressive rate was set in relation to income and income alone — not gender, not circumstances, or any other criterion. No good thing last for long! Over a span of 94 years and more than 20 reforms later, one would be hard pressed to find a semblance between the original intent and what the “reformers” have put on our plate.

With this brief history, let me return to the case being advocated for gender based taxation. Here we need to ask a couple of questions: is the proposal sound? Secondly, will such a proposal takes its “rightful” place in the tax code?
I will take up the second question first. My answer is unequivocally in the negative. It is unlikely to be acted upon at least in my lifetime. Reforms are slow and piecemeal. For over 25 years, I have written, testified before the US Congress House Way and Means Committee, consulted to the US Treasury Department about reforming the Federal Income Tax. I have learned through the years through such channels and experiences that reform is a slow process; it needs “powerful” advocates and persistence. And at the end what was advocated and what come to be are not one and the same. As the saying goes “you win some and loose some”. It is not only the PROCESS that makes implementation of reform lengthy but also the tax issues that have to be resolved are quite complex and far from easy. Think about the textbook principles of taxation which accompany any tax proposal: the tax and tax reform should be designed to meet three criteria — equity, efficiency and simplicity, a task beyond (thus far) the best efforts at reform (for a review see Ott and Vegari (2003), “Tax Reform Chasing the Elusive Dream”, in William Simon Contribution to Economic Policy, Atlantic Economic Journal, September 2003, 266-282). Even though the likelihood of passage of gender base taxation may be slim, it is worthwhile to see what it offers. The proposal is sound. The authors base it on two theses: taxes should depend on “non-modifiable characteristics of subjects that are related to their earning capacity” (Akerloff (1978), “The Economics of ‘Tagging’ as Applied to the Optimal Income Tax, Welfare Programs, and Manpower Planning”, American Economic Review, pp. 8-19), and taxes should be low on goods with high elasticity and high on goods with low elasticity (Ramsey (1927), “A Contribution to the Theory of Taxation”, Economic Journal, pp. 47-61; Mirrlees (1971), “An Exploration in the Theory of Optimum Income Taxation”, Review of Economic Studies, pp. 175-208).

What exactly “non-modifiable characteristics” means? The Federal Income Tax, levy taxes on US households. As mentioned above, the tax system classifies households for setting rates according to marital status and survivability. Clearly these are modifiable characteristics of the subjects. A single person household may become a married couple household; a married couple household may turn into a single person, a head of household, and so on. Thus, one needs to look for another characteristic — gender is a non-modifiable one. Gender based taxation fits Akerloff criterion. Note however that it does not state whether women should be taxed less, same or more than men. To differentiate we need the second theory.
Here I would like to pose to answer a question posted by someone to the Alesina/Ichino blog in relation to the optimal tax theory. The writer states: “As a complete and total non-economist, this is what I want to know: (1) is “goods with a more elastic supply should be taxed less” in fact a “general principle of public finance?” (2) What (briefly) is the force behind this general principle? How important is it, and why?”

These are very good questions. As a public finance economist, I shall briefly explain for the answer addresses the underpinning of gender based taxation. To (1), it is not a general principle of public finance, properly phrased it is a PRINCIPLE OF TAXATION, REFERED TO AS OPTIMAL TAXATION THEORY.
The theory was put forth back in 1927 by Frank Ramsey, who was asked by his professor the following question: If there are two goods, one has an elastic demand, the other inelastic demand and we want to raise a certain amount of tax revenues, what tax rates should you set on these goods, assuming that all persons have same preferences (utilities) for theses two goods (economists can’t answer questions without making simplifying assumptions). His answer was to impose a low tax rate on the good that is elastic and a high rate on the one with inelastic demand. Bravo. To see why this was a correct answer we need a bit more of economics. A good that has a high elasticity of demand (or supply) is characterized by two things: it has at least one substitute that is equally desirable and that a small rise in its price makes the consumer switch to the other good. If the switch is total, the good is said to have “infinitely” elastic demand or very high elasticity, if not total the elasticity is measured by the reduction in the quantity bought associated with the price increase. In short, an elastic demand for a good means that the reduction in the quantity bought as the price rise is quite large compared with the drop in the quantity associated with the same percentage change in the price of a good with inelastic demand. The same analysis applies to the supply. In the case of labor supply, the subject of discussion here, the price of offering one’s labor is the after tax wage rate. The change in the quantity of labor supplied due to a change in the after tax wage rate depends on a lot of things beside the wage rate (the measurement is a bit tricky), it depends on whether you can at least over the short hall get out of the market, cut the hours worked (under contract that may not be feasible), not enter the job market in the first place. Note again that a substitute activity has to exist. The substitute to labor is leisure, like fishing, playing golf, boating and so on. Leisure is valued by the after tax wage rate. Thus there are two steps. You either would enter the job market and the labor supplied changes, at least over the medium term with the change in the after tax wage rate or you do not enter the job market in preference for leisure.
Now we are ready to answer the question to whether the elasticity conclusions are correct, and why is it important to apply the optimal taxation theory — lower tax on the elastic supply relative to the inelastic supply. The response of the quantity to the price change based on the elasticity is correct. Since women labor supply is more elastic than the labor supply of men, a cut in their tax rate relative to men will increase their labor supply and income. Men, on the other hand have a highly inelastic supply so raising the tax on their wages will result in a very small drop in their labor supply. Why is this important?

Alesina/Ichino talk about “goals of society”, but for economists generally the reason given is “efficiency” of outcome. Economists use the term efficiency loss or excess burden to explain why the optimal taxation principle should be applied. The loss (which economists succeeded in measuring) arises due to the “tax induced behavior”. When the after tax wage falls and labor supply is reduced, the reduction is not voluntary — the individual is forced to substitute an activity that is not taxed to the one that is taxed. Since the choice is altered, there is a loss not only because work and hence output is reduced but also because of the substitution of a less desirable activity measured by the after tax wage rate for the activity (work) valued at the before tax wage. This is the efficiency loss. Think of having to use mass transport as the price of gasoline rises because of higher federal and excise taxes. In the case of labor supply, if the tax takes a big bite and your supply is elastic you might say the heck with it, I will go fishing. A working woman may decide to be a homemaker, a stay home mom, educate the kids at home and so on. The critical thing to remember here is that these were not the choices made before the tax is raised or imposed. Since labor is an important factor of production, when work is withdrawn capital or other factors are substituted and that (if you assume the best combination of factors were initially used) will result in less efficient outcome — output is lower and or prices higher. The loss to society is the sum of the loss in output and the loss associated with forced substitution of activities. If taxes are lowered on those with the elastic supply we get the opposite result. This is what optimal taxation is about (sorry economic theory takes a bit more space to explain even a simple idea).

The questions that need to be asked are: how does society value the input — the labor supply of women and labor supply of men? How each gender value its leisure time? And what valuation does society put on women’s alternative use of their time? I will not get into these issues. Alesina and Ichino (full paper) have a great deal to say about women making role models and children success and so on. They offer statistics to support their arguments for lowering the income tax rates on women (it is interesting that although single women have a lower elasticity of labor supply the proposal does not advocate an increase in their tax rates relative to married women!). To conclude, whether one accepts or rejects the case for gender taxation, and there is plenty on either side, it is well to remember that:
To strife for an optimal (efficient) tax structure in a many person economy, one needs to make specific assumptions about the nature of differences between individuals and the form of their utility or preference functions. Secondly, one needs to consider the implications of tax changes. As one reformer put it “when you close a loophole you end up opening a foxhole”.

To Be Eighty Years Young: Work, Health and Income of the Elderly

2007-05-09T10:53:00.000-04:00

On April 27 2007, I was one of 200 invitees to a party to celebrate the 80th birthday and retirement of a member of the James Buchannan Center for Public Choice, at George Mason University. The feted lady, by all accounts and for those of us who are fortunate to know her is a remarkable person. She exudes warmth, efficiency and good southern hospitality. Whether at the society meetings or during my stay at the Center, I have always marveled at how such an efficient person could be so warm and caring for all of us visitors at the Center and not just to members of the Center and the University. On The 27th of April all of us who came to celebrate the day had no need to tell her how much her warmth have touched us all. On that day a major event had taken place for her and for us as well. She turned “Eighty”, and she has “Retired”, thus concluding her tenure at the Center. At eighty years young, she is as vibrant as she was at sixty, happy and in good health.

The celebration prompted me to revisit an issue that has been festering in my thoughts for some time: “AGING”. This issue has occupied, still does occupy economists, gerontologists, health care professionals, cosmetologists, policy makers and the public at large. The inevitability of aging is something that stares us in the face on a daily basis. Our society is obsessed about it. The health and beauty market is saturated with products that claim to restore our youth, products that let us “deify” aging and prolong our life. Yet when everything is said and done, no one “thus far” has escaped the aging process.

Over the past few weeks, Brian Williams the News Anchor of NBC have been exposing his viewers to snippets of the perils of aging in the “Trading Places” segment of the broadcast. The program opened with a view of how some aging family members of the network are dealing with aging. In putting before us the experience of their parents as how they cope with aging, the program succeeded in reminding its viewers that “we shall all be there”. Most importantly perhaps, the program brought to the forefront the dilemma facing adult children in caring for their aging parents. In another segment of the program the problem facing childless single parents was briefly highlighted. Given that sooner or later we shall all be aboard this train, it is perhaps useful to put forth some statistics before enumerating some of the problems facing the elderly.

It is a common practice to use the term “elderly” to refer to person 65 years old and over. As of the year 2000 in the US there were 32.6 million in that age group; 13.9 million males and 18.7 million females (this year is chosen for availability of data which will be cited here). Classified by marital status, single persons constitute 3.9% (4.2% male, 3.6% female); married with spouse present 54.6% (72.6% male, 41.3% female), widowed 34.2% (male 14.4%, female 45.3%).

What are the survival probabilities for this group?

One can assess survival probability for everyone aged or not from three types of information: age, race and sex. Expectation of life at an age in the bracket (67-70) is estimated to be in the range of 16.9-15.5 years; (71-75) in the range of 14.2-12.3 years; (75-80) in the range of 11.7-9.4 years; (80-85) in the range of 8.4-7.0 years ; (85-90) in the range 6.6-5.1 years; (90- 95) the range is 4.8-3.7 years. After the age of 95 it is somewhere between 3.5 and 2.5 years. The numbers are somewhat different when the population group is broken down by race, with the difference is more between white and black males than between white females and black females (data from National Vital Statistics Reports, vol54, # 14, April 19, 2006).
According to The National Vital Statistics, a male who was 65 years of age in 2003 would have ahead of him 16.8 years to enjoy; a female would have 19.7 years. Ten years later, at the age of 75 the years are 10.5 for males, 12.5 for females. At 80 years young, the numbers are 7.9 for males and 9.5 for females. The years dwindle down so that once the age 90 is passed it is but a few years left (unless you are an economist, as reported in THE ECONOMIST: “Economists live longer”).

Year in and year out, the data show an increase in life expectancy of both males and females with the largest increase recently recorded for black females. It is interesting to note that the much talked about “obesity” of the US population did not impact the survival probabilities. The 10 year probability of death between the years 1999-2002 has fallen for all age groups. Among those aged 55-74, it fell from 25.7% to 21.7% based on the findings of Cutler, Glaser and Rosen (NBER, program Report Winter 2006-2007). According to the authors, the risk profile of the US population is healthier now than it was bock in the 1970’s.

Longevity has good and not so good implications. The “Trading Places” stories shown on NBC, although small in magnitude to be statistically significant, nonetheless they give the impression that it is the latter than the former. It is good to be alive one hears, but few would couple the sentiment with at what price. The quality of life falls by the wayside, but when compared to no quality at all – what can one say; after all we have yet to discover the “quality” of dying. Perhaps someday we shall.

Having put down the life expectation statistics, there is a need to enumerate the problems associated with ageing. Clearly the first and foremost among these are the work and health status; the second is income or wealth, and the third is the life style and the delivery of care.
Let me first begin with few of my prejudices about labels. I do not much care for the labels “Elderly” and/or “Retired”. These labels project images of frailty and zero productivity. Let us think a bit about the work- income experience of persons 65 years and older. Retirement laws, written and unwritten employment codes influence if not often dictate retirement decisions of workers irrespective of health, ability to perform tasks assigned or productivity. At the work place, there is “a silent majority” voice for easing the “elderly’ out to enhance the upward mobility of the young and to economize on the wage bill. Given the statistic that a 67-70 years old who has already retired has a survival probability of 16-15 years how might one measures the value of life for such a person? And, given that we are healthier than three decades ago the chances are pretty good that such a person is likely to be as productive or nearly so as a person much younger in earlier decades. But society does not enter that into its calculus. For a non economist, the question may not be relevant even down right silly. But for economists this is as much as relevant as our valuation of risk to life (health and safety in the work place and or in cases of accidents). Value of life estimates (the courts use them to make awards) are made on the basis of the person age, education, income and work history. This value measures the contribution of the individual to society. If the individual is retired (assuming he/she does not have a second carrier) what measure should we use to calculate his/her contribution? I have always wondered why when a person is retiring it is assumed that he/she will be taking up fishing. This probably is an activity for which productivity can be calculated – the number of fish caught, the price of the fish, the value of the leisure associated with the act of fishing (assuming of course that one can make a catch). Of course there are non societal valuations of the retiree’ activities such as the contribution to friends and family as well as the contribution to oneself in term of enjoyment of leisure. But there is a diminishing utility to the consumption of leisure, when that is the only use of one’s time. Moreover, as with any non market activities valuations are individual specific. Since the “retiring” population in the years ahead is likely to increase in numbers, I would like to put before you the following questions: How should society valuate retirement as a non-market activity? Does it really matter for the individual and social welfare if a social value (positive or negative) were to be placed on a year of retirement? These are questions worth thinking about.

Being engaged in a non market activity does not mean that no income is received. Through the public and private pension systems and insurance plans, most retirees will receive pension income. There are numerous studies about retirement plans and retirement income and wealth. If the lack of income or insufficiency of income is not an issue facing a retiree, then the question of meeting need whether for living expenses or health care or nursing care would not arise. However there are segments of the populations 65 years and older whose needs currently are not being met and most likely will not be in the future. A quick reference is to look at poverty statistics.

In the year 2000, 9.7% of people 65 years of age and older were below the poverty level with the percentage much higher for females (11.8% compare to 9.7% for males). Add to this the fact that the majority of this age group are women without partners — single, divorced and widowed (56.1% of the total number of females), this places a further hardship on this group, not only to meet basic needs but also their future health care need. This is a subject that needs to be addressed collectively and individually. In reforming the health care system in the US, a subject that is likely to be taken up by the presidential candidates on their run to the White House, it is worthy of discussion to get informed about the future health care need of an aging population and the special needs group. Personal and social responsibilities for care have to be identified and choices of various options for the future critically examined. For the moment, two pieces of information are of note. In the year 2000, 4.5 % (1,557,800 persons) of the 65 years of age and older are in nursing homes. Of this total, 574,908 persons are in the age group 75-85, and 772,737 in the 85 years and over group. The cost of care varies according to type of accommodation, quality of care, location and severity of condition. A 2006 study by Sheila M. Loboprablu et.al. (Care Giver in Dementia: A guide for Health Care Professionals), put the cost of informal care at $257 billion, home care at $32 billion and nursing care at $92 billion. A Harvard Medical school study (2004), reports that the Massachusetts Division of Insurance put the yearly cost of nursing care at $76,000, while the average yearly Medicaid nursing care is put at $ 12,000 ( Care Giver’s Hand Book: A Guide to Caring for the ill, Elderly and Disabled—and Yourself). That is the good and bad of it. The good news, we live longer than our parents and grandparents; the not so good news is that without planning for longevity, getting quality care turn out to be an elusive dream.

They Call It SPAM

2007-04-26T13:47:00.000-04:00

The World Wide Web has touched us all. It has enveloped us with its largess, mesmerized us with wonders. But like all good things there is a price to pay. The price is SPAM.
Spam is not a private good neither it is a public good, so what exactly is the spam good?
In the olden days, the word spam had one meaning. It referred to a can of meat, mixed with other ingredients. It is private good you have the option to buy or not to buy in the market place. Today when you hear SPAM, the word conjures up a most detestable image of unwanted and unsolicited e-mails, all pertaining to offer you a world of goodies if you would just let them in the door. The goodies are quite varied, from pleasure goods to not so pleasurable goods.
If you think about it you can’t help but appreciate the name SPAM. Whoever conjured up the name could not have come up with a name more fitting than Spam to describe the spammers’ activities. Any one who uses the WWW is spammed. So who are those spammers and how one may categorize the spam act?

Starting from Economics 101, students are apprised of the fact that economic activities give rise to two basic types of goods: a private good and a public good. And sometimes we have a composite good we call it a joint good. A candy bar is a private good because it possesses certain characteristics. First of all, it provides the user of exclusive right to the good, it yields benefit only to the user, it’s consumption we say gives pleasure or utility to the consumer. Note that there is no sharing of the benefit if I were to posses the candy bar and consume it. My consumption of the candy bar “excludes” all others from consuming this particular candy bar. We call this feature in defining a private good “The Exclusion Principle”. Because the consumption of the private good gives utility it commands a price. As every one knows the market price is determined by demand and supply of the good. What about the public good? Using the private good characteristics, for example the exclusion principle we define a public good as one where the Exclusion Principle does not apply. That is the use of the good by one person does not preclude its use by another. An example which is almost always used is the Defense Good say an Aircraft carrier. Defense goods are for the benefit of all. An aircraft carrier is presumably aimed at protecting us from invasion, foreign attacks and the likes. I derive utility from its provision but so does every one who lives in the country. My benefit does not exclude others from same benefits. Another feature is that the benefits or the good supply is not divisible. Because the exclusion principle does not apply and the good is not divisible, the market does not provide it. It is collectively provided by the public sector, with taxes imposed to cover the cost of provision. A joint good is a good that has two elements — Good-Good, like skin and meat from a cow, two products from one source; Good and Bad like Steel and air pollution. Here again the market set the price for this type of good when the two elements are good-good and both the market and the public sector set the prices when it is the latter. So where does SPAM fits in the private–public good space? Good question our textbooks should address. Absent that, let me use my own e-mail spam to place spam in that space.

Every day, I receive at least 500 SPAM even though our institution uses a SPAM BLOCKER. Somehow or other the spammers find ways to get around the blockade. Of this number there are usually 10 or so messages that are repeated over and over and over, with the objective are clearly to get a foot in the door by breaking down one’s resistance. I have always wondered: Who are these people? And if they have something worthwhile to sell why hide behind the veil of secrecy, most significantly perhaps why the over kill? Before I answer the last question, let me give you a sample of these spam. For two months I have been prompted to enroll in college to get a college degree. Finances are available. I am offered so many chances to win a $10,000 in scholarship money, and if I want a degree without the hassle of going to school, no problem I will be handed a degree on line. Of course I must need a car to go to school, so spammers tell me that they are committed to get me a car, no money is needed, I will never be turned down, and if I want a dream car (Hay, why not I am going to be a college graduate) no problem, I will never be turned down. Another offer that go with the car is cloth from Neiman Marcus (they hit it on target), cheap health insurance, I guess to insure my survival to get my college degree, and if I were to feel lonely or overworked they have “ring tunes”, whatever that is, and of course the too many fishes in the sea to find that one “that will take my breath away”. WOW. How can one not be impressed or grateful for such offers? I am neither impressed nor persuaded that SPAMMERS perform a service worthy of the time I spend divesting my computer from their pollution. The spam good should never occupy a spec in the private good/ public good sphere.

Economists for long have dubbed this kind of activity as the TRAGEDY OF THE COMMON. The common refers to grazing land where property rights are not assigned. Because no rights were assigned for the use of the grazing lands users behaving to maximize their income will over graze the common with adverse consequences for future uses. Had property rights been assigned, the users will ensure that the common is not over grazed. The price system will achieve then “efficient” use of the resource. Just as the overuse of the Common has been termed a tragedy, so as the over use by SPAMMERS of the World Wide Web. The tragedy here is not only a frivolous over use of a valuable resource, but also the time of internet users who are in this day and age “must” rely on this technology to carry out private good production.

An argument can be put in defense of spammers. Not unlike other private goods sellers spammers advertise their wares. True enough. But there is a vast difference between the two. There is a market established prices for using airways, posters and flyers to advertise private good wares. Merchants have to include advertising cost in the price of the good. As such the level of advertising will be affected by the effectiveness of the claim and the added cost. Sellers cannot ignore the effect of selling costs on the total cost as well as on the demand for their product. Moreover, advertisers do not hide behind a veil of secrecy. They want the buyer to know who they are, and hence the targeted individual exercises his market power by refusing to frequent a merchant whose products and or advertisements are unsatisfactorily. With spam, one has but one option — to invest one’s scarce resource to rid one’s space of spam.

Economists are the first to acknowledge that any activity, no matter how distasteful, can find a buyer or a user. Since spam activity utilizes a scare resource, the time of the spammer, it suggests that the rate of return to spam activities must be positive for spammers. As we have no data on this rate of return, the fact that it continues to persist suggests that it is positive. Hence it cannot be ignored. As yet we have no data on the spam output, or on the rate of return on this activity. Most of all we have no information on the private and social costs of spam. Hopefully, my small effort will induce others to take up the challenge.

David Stockman May No Longer Be Alone

2007-04-09T15:10:00.000-04:00

“There can be no proper motive for hurting our neighbour, there can be no incitement to do evil to another which mankind will go along with except just indignation for evil which that other has done to us”.
Adam Smith: The Moral Sentiments (1854, p. 119).

The Washington Post (March 26, 2007) had two eye catching headlines: “Reagan Budget Head Stockman is charged with Fraud”, and “Soldier of a Revolution: Stockman was the Face of the Reaganomics”. How the mighty has fallen.

These two articles brought back to me my assessments of Stockman’s budget policy during the early days of the Reagan administration where he was serving as the head of the Management and Budget. Back in the 1980’s and early 1990’s I wrote OP pieces published in the Worcester Telegram and Gazette. My articles focused exclusively on economic policies and most often on the federal budget policy.

When the Reagan Administration came into office, the landscape for making economic policy changed shape — from Keynesian economics to Reaganomics. The architect of this new religion was said to be David Stockman, although a great deal of the underlying philosophy belonged to others.

Having spent quite a bit of time in Washington D.C. writing about federal budget policies, I needed to learn about the new religion. This knowledge was quickly acquired during the deliberation on the first Reagan budget submitted to Congress. On February 2nd, 1982, I wrote a piece for the WT&G titled: “A little Knowledge is a Dangerous Thing”. I wrote then that David Stockman would do well to remember that. It might keep him out of trouble. Little that I knew then how apt this statement would turns out to be. My comment related to his economic policy, a field in which he had no formal training. Had he had that perhaps… I also wrote in the article that Stockman problem stems from his presumption that he knew how the world works. Stockman assumed that the world is like an “unassembled” toy and one only needs to know how to read the blueprints to assemble the parts. Unfortunately for Stockman he either failed to correctly read the blueprint or that the world is a bit more complex than a disassembled toy.
He ran into trouble applying his religion to the budget program – that cutting tax (supply side economics) would increase revenues, and eliminate the deficit over the short hall. Cutting taxes raise revenues by changing incentives. A rise in investment and a higher growth rate ultimately would raise revenues and change the deficit path. Unfortunately, the time framework is usually much longer than the political life of an administration.

Stockman as reported by the Post is accused of defrauding investors and banks during his stewardship of Collins & Aikman, a large Southfield, Michigan auto parts maker that gone into bankruptcy in 2005. According to the Post, Manhattan attorney Michael Garcia that “Stockman and a team of hand picked executives entered into secret agreements with suppliers, created false documents to fool auditors… “Stockman pleaded “not guilty” to the charges”. I hope he is not guilty. The country has had more than it’s share of high profile officials and corporate executives pursuing not only policies of self enrichments at the expense of the public but also of grandiose schemes of corruption that had soiled the nation’s image.

In the “Solider of a Revolution” piece, the writer bemoans the charge: “It’s a shame that a guy who made such a great contribution as a member of Congress and the Reagan Administration has this thing happening to him”. Pardonez moi! The plight of David Stockman falls squarely in his lap. One’s action or lack of action has consequences that cannot simply be laid at the feet of others.

The Stockman story is one of many that smell of corruption. By itself it does not warrant too much of a notice except of course from lawyers and prosecutors. What ought to be of note is the implications of this and similar acts on the nation’s standing. We in the US are quick to point out corruption in many developing countries particularly in Africa. Indeed the International Monetary Fund and The World Bank have devoted a great deal of efforts and resources to make countries recipient of their loans and aid comply with requirements of “Good Governance” in general and the reduction in corruption in particular. Beginning in the 1980’s this mandate took center stage in official documents not only of said agencies but also in US aid policies. This concern gave rise to compilation of corruption indicators. Indicators of worldwide corruption have been reported by Business International (currently named Economic Intelligence Unit), Transparency International and International Country Risk guide (ICRG). These groups publish corruption indices computed from measures such as bribes, red tape, accountability, rules of law and the like. Every country is given a score based on the value of the indices. From ICRG data over the period 1984-2003, one is able to trace the development of corrupt practices in over 100 countries. Based on the calculated scores, countries are grouped into three categories: High corruption (0.0-4.5), Middle corruption (5.0-6.9), and Low corruption (7.00-10.0). Of interest here is a comparison over time between countries. Between the years 1984-2003, there have been “minuses” and “pluses”. A minus suggest a worsening of corruption, a plus an improvement.

Let us look at the US viz a viz regimes that one associates with corrupt practices. It is disheartening to discover that over a 20 years period corruption has gotten worse. More countries have had a negative change (became more corrupt), than countries with a positive change. Out of a total of 101 countries, 67 countries had negative change (mean change of -0.0257), 12 countries with no change and 22 countries with positive change (Mean change of 0.596).

As I have mentioned earlier the presumption is that developing countries, especially those in Africa are riddled with corruption. To some extent this is true, but that is only half of the story. Almost all of the improvements in the corruption scores were recorded for the African countries. Examples are Mali, Congo DR, Uganda, Kenya, Liberia, Ghana, Zambia and the Ivory Coast. The US, which was ranked in the middle group, fell in the negative change group with a change of (-0.221), a change greater than those experienced by some African countries like Tanzania (-0.163), Senegal (-0.125), and Egypt (-0.063). Zimbabwe ranked at the top in terms of increased level of corruption with a score change of -0.745 followed by South Africa with a change of -0.524. For more on corruption scores and analyses of change in the corruption levels see (H.Seldady (2007), “Does Corruption Persist?”, paper presented at the Public Choice Societies meeting in Amsterdam, March 29-April 3).

The numbers reported in the Seldady’s paper paint a picture not very complimentary about the developed world. It is not only that the US score has worsened but so did scores of others like the UK and Canada. The findings bring to mind an old adage: “charity begins at home”. In this context the saying should be changed to “cleaning house should begin with one’s home”.

“Mother, Do Not Get Sick over the Loss: It Is Only Bushes"

2007-03-31T14:05:00.000-04:00

Whoever said education is a two-way street was quite right. I am an educator. I have educated so many. I have advised and counseled students throughout their Ph.D. studies in economics. I have always been on one side of the street – giving rather than receiving. A few days ago I was on the other side of the street, receiving advice and counseling. Let me explain.

Several days ago, a bunch of intoxicated twenty year olds missed their turn and instead plowed the car one of them was driving into my front lawn. The car landed in a densely covered frontage with bushes. The car crash caused the destruction of sixty bushes and the damage was put at something over $20,000. None of the people in the car were hurt.

Aside from a total wreck of a car, the only damage was the death of my lovely “BUSHES”. As in cases such as this, the driver was not insured, so I am left holding the bag. But this loss is not the motivating factor in my writing about the event. The destruction of my personal property, to be sure, was the catalyst that prompted me to write, but what made me rethink the value of the loss was the advice I have received from my daughter. Her statement, “it’s only bushes”, triggered the economist thinking about what determines “VALUE”.

David Ricardo back in the 1800s attributed the value to labor embodied in the good (Principle of Political Economy); hence, this became known as the “labor theory of value”. This clearly aroused a great deal of discussion, not only because of reducing all inputs that went into producing value to a single factor, but because of its neglect of why a good, produced by labor or other factor, would command a value. Alfred Marshall’s “Principle of Economics” (1890) provided an answer which remains in today’s economics textbooks. According to Marshall, “value is wealth”. There are two elements that determine value: value in use and value in exchange. Marshall has also stated (something that many of us seem to have forgotten!) that wealth consists of desirable things or goods. Desirable things are Material, or Personal and Immaterial (p.54). Material goods consist of useful things that satisfy human wants. Nonmaterial goods fall into two classes: one consists of a person’s own qualities and faculties for action and for enjoyment (he calls it internal goods). The second are called “external” goods because they consist of relations beneficial to the person with other people. The question then is, what constitutes a person’s wealth?

According to Marshall, “A man’s wealth is his stock of two classes of goods: those to which he has a property rights” (i.e., my bushes), and “those external immaterial goods”. Marshall goes on to say that we must also include as goods the benefits which one derives from living in a certain place, a certain environment. This is the essence of what has given rise in the economic literature (although not commonly attributed to Marshall) as “environmental amenities” and hence our theories of “hedonic” prices.

In the undergraduate texts of price theory, we often neglect this element of wealth in defining value. In the study of public economics and/or environmental economics, these amenities are captured in determining the valuation of housing and the choice of residence or environmental qualities. Even though these disciplines have developed excellent models for the valuation of said amenities, such as “the willingness to pay”, and “willingness to accept” models, it had struck me that we neither incorporate these amenities in determining the “replacement” costs for property damages or in the valuation of risk to life and limbs.

Take the first case (and the loss of my bushes) as an example. As I have mentioned earlier, it was not the monetary loss alone that made me “SICK”. As Marshall put it so many years ago, the value of a good is much more than that of exchange. Put differently, a man (or a woman, in this case) does not live by bread alone. We live by our environment. The human mind and feelings are quite complex. What triggers happiness, sadness, enlightenment, or sickness cannot be put down simply to the satisfaction of material goods. I am an early riser. A morning walk in my garden triggers happiness and excitement at the sighting of red cardinals, the sole blue jay, and the cotton tail rabbits, and, yes, my lovely bushes. I have lived with these bushes for some thirty years. I have fed them, nurtured them, and protected them from predators – they are part of my environmental amenities, a part of my every day living. Well, they could have died a natural death – old age or disease. I could accept that, but destruction due to reckless behavior of a young man is not acceptable.

Over the past few months, the news media have daily reported the prevalence of this type of destruction to people’s properties. Every other day or so, they report a car or a truck that went into the front lawn of a residence, the front of a convenience store, a restaurant, and so on. The story never goes beyond that. No one ever asks why this going is on, and what kind of penalties such behavior elicits. I got my answer yesterday. According to our local ABC station evening news, drunk drivers in the state have successfully been able to suppress the result of the breath analyzer from the jury in the trial. As a result, they reported a 26% increase in accident caused by drunk drivers and a 23% decline in the conviction rate. The report comes from the Worcester county district attorney’s office.

Thank you, my daughter, for your advice. Rest assured that I shall get over it, but most importantly I shall revisit the study of value. Perhaps we might be able to incorporate the values of these amenities in the insurance contract.

On the Question of Divestiture

2007-03-31T14:00:00.000-04:00

“State Moving toward Divestment from Sudan: Bill Would Affect Small Percentage of Pension System”, Worcester Telegram and Gazette, March 14, 2007.

On March 29, 2007, actress Mia Farrow appeared before the Massachusetts State House calling for state divestment from Sudan, citing the atrocities committed by the Sudanese troops against the people of Darfur. What is going on there is nothing short of genocide. The bloody war in the Darfur region has caused over 400,000 war deaths. According to the WT&G report, Massachusetts wants to become the eighth state to enact divestment legislation, part of an over all strategy to stop the Sudanese government’s systematic slaughter of Darfur citizens.

The sentiment behind this legislation is to be applauded. As the saying goes, “every little bit helps”. But will it? Let us look closely at what is being contemplated. Again according to WT&G, State Senator Edward M. Augustus Jr. believes that “Mr. Patrick would sign divestment legislation if it reaches his desk”. That is well and good. The next paragraph states, “The bill would allow the state to opt-out of divestment of a particular company, if it turns out that divestment has a NEGATIVE EFFECT ON INVESTMENT RETURNS”. About two-tenth of one percent of the state’s pension fund is invested in companies that do business in Sudan. Well, I am floored.

There was a time in relation of discussion about the looming federal budget deficits that the phrase “smoke and mirror” was coined. If it is for the show, then the legislation or the talk about the possibility for said legislation appease those, who are genuinely concerned over the plight of the Darfur people and lack the power to act on their own, would find the legislation to be the next best thing—to hit the attacker where it hurts the most, in his pocket book. Be real! Is the loss of two tenths of one percent of the state pension fund assets invested in companies doing business in Sudan going to make a dent in the Sudanese government war chest? Remember, they have the BLACK GOLD – oil. Perhaps, this could be so, if all 50 states were to divest. One can but hope.

Let me now turn to examine a most unpalatable provision in the legislation. As quoted earlier, the legislation would allow the state to opt-out of the divestment if pulling out would have a NEGATIVE IMPACT ON INVESTMENT RETURNS. It does not take economic training to figure out the implication of this provision. Companies diversify their investment portfolio to garner highest returns for their investors. In the business world the “bottom line is king.” Investment companies’ executives live and die by the bottom line. The State when investing its pension fund assets in Sudan expected returns on its assets equal if not higher than what it could have earned from different investments. When the State of Massachusetts made their investment decision, the overriding factor was returns for a given risk. The provision that the state would pull out if returns were to fall due to divestment struck me as naïve at best if not downright “erroneous”. All actions are either motivated by profit or social justice. However comforting it may be to believe that the state divestment would speed up the fall of the Sudanese government, or end the devastating effects of the mass killing in the Darfur region, we need to be honest about not only our motives but also our actions. Governor Patrick, if he were to sign the legislation, would further the cause in striking down the opt-out provision from the bill. Most significantly, perhaps, is to make an honest assessment about whether the state divestment will alter the behavior of the Sudanese ruler.

There are no nobler causes than these of restoring life, liberty, and dignity to oppressed people. We, the residents of Massachusetts, should be the ones to ask, “How may we help?” I for one have more questions than answers. Genocide and mass killing in such a far place should not prevent us from asking the question. Perhaps if many of us did, we may be able to change the political landscape. We may even find some answers.

Call it Free Enterprise

2007-03-22T15:11:00.000-04:00

The New York Times, Wednesday March 21, 2007, revealed on its front page what some of us already know (at least those of us who experienced it) the push drug companies make for physicians to sell their patients on the “new improved technology” – “A state’s files put doctors’ ties to drug makers on close view: debating whether payments affect patient care”. Nothing wrong with pushing new technology. What good are advances in technologies if they cannot be put to use to improve the personal and the national health? I am grateful that our society and our educational system generate technologies that protect us against deadly diseases, improve our life expectancy and the quality of our life. Not all societies can boost of what our technology have contributed to our quality of life. Having said that, I would like to address the issue in the article: Do payments to doctors by pharmaceutical companies affect patient care? My initial thought on this question is unqualified yes. One way or the other, patients’ health is affected by whatever the doctor prescribes. This question, I am afraid, is not all that informative. A more enlightened and pointed question is to ask: “Are payments to doctors “adversely” affect the delivery of care?”. A related question, which is much more critical, should be: “Do payments to doctors raise the cost of health care?”.

As an economist, I believe that my second question goes at the heart of societal problem of dealing with the ever rising cost of health care. Health economists have for long advocated the need to address the rising cost of health care associated with overuse of scarce resources, moral hazard and the resources expended through the use of up to date technologies during the last few months of life. Putting the cost issue aside (there are so much written on this), I would like to turn to the basic question raised by The New York Times. If there is a new drug that has been approved for a given illness, why do pharmaceutical companies have to pay doctors to prescribe new drugs that presumably are more beneficial for patients than old drugs? I will focus on rheumatoid arthritis, first because I have a first hand knowledge of what RA is all about, and secondly because the payment to the RA doctor is one of the highest – according to The New York Times, $6,053, which is 6 times as high as for internal medicine and 2 ½ times as high as for cardiologists, and given that these payments are not overt “bribes”, but most often are made to fund physicians’ research, which presumably will impact treatment, why should drug companies or doctors for that matter be apologetic about making or receiving such payments?

There are good uses as well as abuses arising from such practice. When a doctor, influenced by payments prescribes a drug that is more expensive, such as remicade or enbrel (the cost of monthly treatment ranges from $5,000 to $1,000), which for some patients has outcomes similar to a less expensive therapy (say prednisone or NSD such as celebrex), then the doctor like many other in society has an ethical problem. Overuse of drugs by doctors are not uncommon (see John Abramson’s “Overdosed America: The Broken Promise of American Medicine”, 2004) but so is the over demand placed by patients on doctors – whenever a new drug appears in the market. Drug companies saturate the market with advertisement (see ads for enbrel) that induces even the most enlightened among us to ask for it.

There are two salutary features arising out of the financial ties, reported by The New York Times. First of all, it warns us of possible “corruption” in the delivery of medical care; and secondly, it encourages us to be informed not only about our doctors but also about the various drug therapies out there. Knowledge is the most effective instrument the patient should seek. Unfortunately, many do not seek it either because they are intimidated by the “white coat bigger than life image”, or because of the cost of securing information.

The New York Times did their readers a great service, not just by making a “good expose of drug companies practice” but also in making patients (hopefully) aware of their responsibilities in managing their medical care. To make a choice one needs to be informed. Fortunately, today’s technology, the internet, has made the information accessible to all.

Africa development needs development of the mind beyond the University’s border

2007-03-22T12:20:00.000-04:00

In two previous notes I have welcomed the education reforms contemplated and/or being currently instituted in Burkina Faso and Ghana. I have argued there and I shall argue here that Africa’s development should not focus solely on improving the “material basket” of goods for the population, but should also address the need for cultivating the most significant source of wealth – the mind. Translating into simple terms, the development of human capital. Building schools to alleviate illiteracy and/or provide vocational training although a prerequisite to a developing society, it is by no means sufficient. What is needed is to address a much more powerful resource, the human mind. Universities are the host for such a development. There is an urgent need to focus on this pillar for development. It is not enough to boost that an African country has one or two universities within its border or that there are thousands of students enrolled in these universities. Rather we should be looking at the university not only as a vehicle to generate a higher level of education, which is salutary, but also as an engine for development.
The African Universities have to serve their clients, the students, but much more importantly the community and the country. As it currently stands, the African University is over burdened by lack of infrastructure and teachers. Most significantly is the lack of the freedom and/or capacity for students and faculty to participate in the development of their community and country.

With all the difficulties associated with Africa’s development, I am encouraged by news from Africa about academia’s reach to the community. In February 2007, students from the University of Nairobi (Kenya) visited four villages in a Matayos division (a hard core poverty area) to carry out community development outreach activities. The theme was: “taking the university to the village”. The underlying philosophy I believe is to develop a model for the university to reach out to the community and to learn from the community. Education is a two ways street. The university generates knowledge, but most African universities insulate themselves from active participation in their communities and most often play no role in shaping or formulating development policies. Knowledge is a “treasured” good but it should never be locked up within the walls of the university.

The Institute for Economic Policy Studies’ African Outreach Program is committed to expand the boundaries of the University by enabling college teachers and students to break new grounds in redefining the role of the university. We believe that the university not only is a generator and store of knowledge but also an active participant in dissemination and the use of this knowledge.

The Institute for Economic Policy Studies (see its activities at http://www.iespolicy.org/) is currently in the planning stage for a Conference on the “Role of the University in the Process of Development”. More on the program will be posted later.

Africa on the move

2007-03-01T13:48:00.000-05:00

News from Africa is most often grim. The never ending ethnic conflicts in Darfur, the mass killing in Rwanda, the children soldiers in Somalia, to cite a few, although have a shilling effect on our sense of justice and fairness, their frequency leave one to wonder if ever we will hear of good news coming out of Africa.

The African Executive, a magazine accessible online, has weekly features about development events in Africa. In its February 28th issue, two worthy news items were featured. The first, titled “Freedom: The way forward for Africa”, relays to their readers a very significant message that came out of the 2007 meeting of the Mont Pelerin Society hosted by Inter-Region Economic Network in Nairobi. The Society discourse focused on “The Institutional Framework for Freedom in Africa”. This is indeed good news. In my February 27 piece “Africa open for business: A Minister’s view on the role of African University in economic development”, I have made the point that we need to do more than to articulate the link between democracy or freedom and economic development. People in the developing world need to be shown that democracy is a “prerequisite” to economic development. The Mont Pelerin Society meeting in Nairobi is one such and effort. By facilitating exchange of ideas between African scholars, legislators and policy makers from Africa and other continents, they demonstrated that a prerequisite to understanding the link between freedom, political and economic is for the citizenry to be informed about the practice, the principles and the workings of a free society. Hopefully many more such meetings will advance the cause of freedom and economic progress in Africa.

The second news item is about education reform in Ghana. In my piece I have relayed what Minister Pare, the Minister of Education in Ouagadougou, have said about the need to reform the education system in Burkina Faso by linking the University to a house. The African University, in the words of Minister Pare, “was like a house with a roof which is not adapted to the house. To make the roof fit with the house, changes have to be made to the plans.” There is a reason to be optimistic about educational reform in Africa. The Ghanaian Minister of Education, Papa Owusu Ankomah has introduced a new education bill that link the education system to the economic development of Ghana. As reported in the African Executive under the heading “Rebranding our education system”, the Minister makes the case for “decentralization of education management and development” that “in the education planning and management, the respective Ghanaian communities should be involved in the sustainable development of Ghana.” Minister Papa Owusu Ankomah, like Minister Pare, has voiced the need to reform the education system in their respective countries. What is remarkable about this is that both ministers not only have articulated the link between education and economic development, but outlined steps to bring about changes that advance the cause of Africa’s progress.

Freedom and Education, let us hope will lead the way forward.

Africa open for business: A Minister’s view on the role of African University in economic development

2007-02-27T14:02:00.000-05:00

During two weeks in July 2006, a gathering of scholars from African and American universities took place at Clark University as part of the first African Outreach Program, sponsored by The Institute for Economic Policy Studies. The Conference theme was “Democracy, Liberty and Development”. One of the highlights of the Conference was the keynote speech delivered on July 20 by Professor Joseph Pare, the Minister of Education in Burkina Faso, West Africa. Appearing before an audience made exclusively of University teachers, administrators and students, Minister Pare’s talk was devoted to the role of the African University in the process of development.

Minister Pare’s talk was enlightening not only because of what he said but also for what he did not. He eloquently identified the problems facing the African University drawing on his experience as a teacher, vice president and president of Ouagadougou University before being elevated to the post of the Minister of Higher Education of Burkina Faso.

In most of the African countries higher education institutions (elementary and secondary as well) were created, administered and shaped during colonial rules. As such, the African University, in the words of Minister Pare, “was like a house with a roof which is not adapted to the house. To make the roof fit with the house, changes have to be made to the plans.”

Of course, plans can be changed, and a new structure can be erected. But “how and by whom?”. Viewed in the context of economic development, this is precisely the question that has baffled development economists for more than a quarter of a century. Unlike many others, Minister Pare did not dwell on the colonial past neither did he absolve his countrymen from the lack of progress in securing better living standards for the population.

Let me state from the outset that I am not a “development economist”. However, one need not be one to enumerate the failure of this branch of economics to solve the problems of poverty and backwardness that plague so many countries in the globe.

The North-South dialogue that begun during the 1970’s was viewed by many as the first step towards a meaningful dialogue between the have and have not. For awakening the world consciousness to the plight of the South. That of course did not happen. Neither the North-South dialogue nor its successors embodied in the G-7(8) have made much headway in treating, in the words of Pare (referring to Africa), “a continent of desolation, a sick person without a guarantee of recovery.”

Economists and non economists alike have come to recognize that “development” is a challenge confronting every society, although at different times. It is a multidimensional process and not purely economics. Yet, with all the knowledge Universities have generated whether through writing, publishing* and teaching about development, we seem to have failed. But perhaps we have not. Knowledge generated by writing about development, consulting for development, has advanced the cause of development. Collectively we have come to recognize that “poverty and deprivation have proved to be robustly sustainable”, that, as Tullock put it, “it is not enough to argue that democracy will lead to greater economic progress”. We need to show that it does.

* I have counted over 600 articles written about development in Africa just over the past five years.

Mandates and Bans: Is it Paternalism or “petty tyranny”?

2007-02-22T14:27:00.000-05:00

Two headlines are making the rounds in the media: New York City ban on trans fats effective July 2008; and the state of Texas mandates, beginning in September 2008, that girls entering the six grade – girls age 11 and 12 – will have to be vaccinated against the sexually transmitted virus that causes cervical cancer.

The two issues although differ in terms of their effects on the health of the intended subject, both reek of the smell of paternalism. What is wrong with paternalistic legislations? In the first case, the ban on trans fats protect us from artery-clogging artificial trans fats, helps fight “obesity”, cut down on the time and the cost of dieting, going to the gym, visits to weight watchers clinics, and so on. Just like “Popeye” telling kids to eat spinach to build their strength and mothers telling their kids to eat their vegetables, the government is telling us not to eat food cooked in trans fats. Both at the private and public level, the intent appears to be the same – to protect us from ourselves. What is wrong with that? I will address the question later.

The second case, mandating girls 11/12 years old to be vaccinated against cervical cancer, although at the outset appears to be no more no less than mandating school-age children to be vaccinated against chickenpox, typhoid, whooping cough, the acts are not one and the same. The mandate in the cancer vaccine case is predicated on the assumption that teen age girls need to be protected from themselves – cervical cancer is a sexually transmitted disease, whereas in the second case no such protection is the justification for the vaccine.

The debate in media, print, the airway and on the internet, provide us with the opportunity to look closely at ourselves in relation to our government.

Economists, like people in other walks of life, have entered into the debate for they do have a stake in the outcome. The concern goes beyond a debate over whether a ban on trans fats or a vaccine against cervical cancer promote good health, but it goes to the heart of what the economic discipline is all about. Put differently: is the individual rational? Is the individual choice optimal? Economists are not all of one mind. Some of us are libertarian, championing free choice and individual responsibility, others are somewhat paternalistic who have and continue to argue that the individual may not always make choices that are in his/her best interest.

The ban on trans fats and the vaccine mandate could not have come at a better time for our profession. Economists have long maintained that government intervention that falls under the heading of “paternalistic” intervention is justified when “externalities” or third party effects are present. Cases like banning smoking in buildings is for the protection of non-smokers once it was established that second-hand smoking affects the health of non-smokers. In this and other third-party effect cases, economists argued that government involvement may be called for in situations where the party to the act does not bear the full costs associated with the action. Even there economists, notably Nobel Laureate Ronald Coase, find the government case weak when the possibility of bargaining between the parties involved is possible.

Third-party effect is not present in either the trans fats or the cancer vaccine cases. Not everyone will agree with this assessment. The argument will be advanced that obesity has a third-party effect. It imposes cost on society in terms of “national image”, crowding out in the delivery of health care, and misallocation of the economy resources. Likewise in the case of cervical cancer, the third-party effect can be measured by the cost to society for the loss of life of young girls and the resources that need to be allocated for the afflicted individuals.

The third-party argument, whether or not one accepts it, does not fall under the “paternalistic” ideology. Paternalism is predicated on the assumption that someone else knows what is best for you. That someone may be your mother or father or “big brother”. For parent to mandate that their children eat vegetable or abstain from performing a certain activity they have to back their act by coercion when persuasion fails (which most often does). Paternalism, in the form of a ban or mandate, carry with it coercion. This is the question that ought to be at the heart of the debate.

A new generation of economists has put forth the proposition that paternalistic intervention by governments or other institutions are needed to correct problems of self control. Paternalism is advocated by this group with or without coercion and independently of whether or not self control problems give rise to third-party effects.

Individuals are said to exhibit “bounded rationality”, “lack of self control”, do not always act in their best interest and the faster the profession acknowledge this, the better we should be able to accept paternalistic intervention, whether that be asymmetric, optimal or libertarian.

The jury is still out on which of these views will end up in main stream economics. For my part, I cannot dismiss entirely the notion of paternalism. As a mother I often dictated for my daughter rules that have to live by. For me, on behalf of my daughter and myself, I do not accept paternalistic intervention by the state that overrides choices I make for myself or for my child, given that such choices do not infringe on the choices of others or place costs (deprive others from the benefits) on them because of my action or lack of action.

In banning trans fats and mandating vaccines we seem to have forgotten individual and parents’ responsibility.

For those of us who argue for freedom of choice we by no mean overlook the fact that freedom has a price. That price is the responsibility of the act that we have chosen. If the individual lacks self control, he/she is undoubtly not free. Mandates and bans, paternalistic or not, will not restore his/her freedom. What we should be worrying about is how to enhance and not to curtail the freedom of those who are not fortunate enough to be able to exercise it.

A Reflection on the life of a Teacher, Richard A. Musgrave (1910-2007)

2007-02-21T10:28:00.000-05:00

There is no higher tribute one can offer than a tribute to a teacher.

Professor Richard A. Musgrave was my teacher. I was privileged to be his pupil in 1959 at the University of Michigan. There I was fortunate to study Public Finance with one of the giants in the field. Indeed, Professor Musgrave was the father who, in my view, not only gave birth to the study of the Public Sector as a field, an important field in Economics, but also nurtured it to make it vibrant and exciting for students.

On January 22, I was on my way to attend a Memorial Service for Milton Friedman, the 1976 Nobel Laureate in Economics, when I learned of the passing of Professor Musgrave. I do not know how to describe the effect such news have had on me. Life and death are events we live with every day. We face and welcome new born and mourn those who leave us behind. As one moves through life stages, one looks backward with nostalgia and forward with anticipation. One’s death, although remains in the shadow, is never far away from one’s thought. But the death of a teacher was never in the card.

A Teacher, an inspiring teacher, always live. Live in the heart, soul, writing and teaching of his pupils. I as a student have never contemplated the death of such a teacher.

As I continued the drive towards the Stanford University Auditorium, I find myself transported back to the time and place where I have first met Professor Musgrave.

I arrived to the University of Michigan after graduating from Cairo University. I was quite versed in the field of Economics and I have learned something about taxation by taking a course at Cairo University Law School. Taxation or the theory of the Fisc as it was called was not in the proper province of Economics. It was something lawyers study, presumably to argue for or against tax laws and tax treaties. I found tax laws a boring subject and had no desire to pursue it further. My interest was in the study of Micro theory and business cycle theory. But then I met Professor Musgrave. He was assigned to be my advisor. I found out that he offered a seminar in Public Finance. I had no idea what Public Finance was about, but his enthusiasm, his brilliance touched me like nothing else before. I went to his seminar and like my fellow students we were in awe with his teaching. Not only did he teach us what the economics of the public sector is all about, but he did so with such passion bordering on religion. Looking back, I still remember him pacing back and forth in the class room trying to explain to us what has by now become the standard model in the study of the public economy – The Three Branch Model. We were taught that governments not only have the responsibility to address market failure, but must do so without sacrificing efficiency or adversely affect private initiative. But Professor Musgrave’s passion went beyond that. He saw government as a benevolent institution. Its scope of activities does not stop with the allocation of society resources or the stability of the economy, but also to insure a modicum of fairness and equity. True this was perhaps a difficult and most controversial role one would ascribe to the public sector, but Professor Musgrave’s passion for fairness and equity have spilled over to all of his students not only as they began to think about the role of the public sector, but throughout their academic life. Whether one accepted or rejected the role of distribution – one of the three branches in Musgrave’s model, one can neither shrug off such a role nor shy away from addressing it.

Professor Musgrave has inspired many of his students to pursue the study, teaching and writing about the economics of the public sector. His many contributions as a teacher, educator and scholar have shaped my professional interest in Public Economics. Like many of his students, I have tried to share with my students some of his enthusiasm for knowledge about public sector behavior and his dedication to improving the process of governance. Forty six years later, in 2005, I found myself calling on Professor Musgrave to share with us his reflection on his basic theory. Professor Musgrave graciously accommodated my request by contributing a paper (Chapter 1, Public Finance and the Three Branch Model, pp. 3-8) to the Elgar Companion to Public Economics (2006), which was co-edited by myself and Richard Cebula. In the contribution, Professor Musgrave have reopened “that treasure box of ideas that have stamped the development of Public Finance and (his) vision of what the field should be about”. Professor Musgrave have reiterated his belief that “the three branch model provides a useful framework in which to separate the basic concerns of Public Finance and their distinct analytic. This perspective, as I saw it half a century ago, still stands.” (p.7)

A personal note: Professor Musgrave, you shall be missed. But your words, your passion and enthusiasm for teaching and the pursuit of a just society will forever live. They still guide all of those who seek the knowledge about the public sector as they have guided me through my professional career. On behalf of my students I thank you.

Milton Friedman (1912-2006)

2007-02-21T10:24:00.000-05:00

The Global economy mourns the passing of a great man and an exceptional scholar.

Milton Friedman, more than anyone, brought the concepts of freedom, choice and the efficiency of the market into our everyday lives. As economists, we tend to view the world around us in a structured framework. Friedman taught us to reach beyond the discipline structure to engage the ordinary individual in a dialogue about his expectations of what the public sector “can” deliver, and what it cannot or should not. Above all, to impress upon him/her that liberty and freedom cannot be traded or sacrificed for nobler causes for there are none more worthy.
Milton Friedman not only taught us good economics, but also inspired us to teach good economics. His ardent support for political and economic freedom has changed the political and economic landscape of the international economy. It is not an exaggeration to state that in the last half of the 20th century, Milton Friedman name has been synonymous with freedom and democratic reforms that have swept so many nations in the international economy. Those of us who were privileged enough to know him shall miss him.

My thoughts and condolences go to his wife Rose Director Friedman. In this time of sorrow, Rose, his children, grandchildren and great-grandchildren hopefully will have comfort and solace in the knowledge that Friedman has touched so many lives in so many nations. He has brought to us light and enlightenment that shall endure. Great men do not die, neither do they fade away. His thoughts and teaching will forever endure.