Year: 2018

QALY is an abbreviation for \”quality-adjusted life-year.\” It refers to gains in health, which combine a time dimension and an adjustment for quality of life. Peter J. Neumann and Joshua T. Cohen offer a quick overview in \”QALYs in 2018—Advantages and Concerns,\” a \”Viewpoint\” article written for the Journal of the American Medical Association (May 24, 2018). Thus, even if you strongly dislike the idea of a QALY, you might want to be aware that your doctors and health care administrators are paying attention to them.

Here\’s an explanation on the basic concept:

\”A year in the hypothetical state of “perfect health” is worth 1 QALY. Being deceased is worth 0 QALYs. Other health states fall between these bounds, with less desirable states closer to 0. QALYs are useful because they combine mortality and morbidity into a single metric, reflect individual preferences, and can be used as a standard measure of health gains across diverse treatments and settings.

\”Consider, for example, calculation of QALYs accrued by a hypothetical individual after age 70 years who develops cancer at age 74 years and who dies at age 76 years. If the health utility weight for a typical healthy individual in his or her 70s is 0.95 and the health utility weight while living with this particular cancer is 0.75, then after age 70 years, this individual accrues (4 years × 0.95) + (2 years × 0.75) = 5.3 QALYs. If screening leads to elimination of the cancer before symptom onset and extends the individual’s life from age 76 years to age 80 years, then with screening, the individual accrues 10 years × 0.95 = 9.5 QALYs.\”

Notice that a QALY is a more flexible tool than just talking about the value of a statistical life saved (discussed here and here), because a QALY includes both a measure of how long life expectancy is extended and what the quality of life is during that time.

The Institute for New Economic Thinking has posted video of a six-part series: \”What Money Can\’t Buy.\”  The series revolves around philosopher Michael Sandel, who has thought about the intersection of economic motivations with other values as deeply as anyone. At times, Sandel discusses questions with prominent economists (Greg Mankiw, Richard Posner, Joseph Stiglitz, Lawrence H. Summers, and others). But most of the videos are a seminar-style discussion with Sandel and 12 students.

Episode 1: Sex Sells, But Should It? (Should We Be Able to Discriminate Based on Looks?)
Episode 2: The Body Market (Should You Be Able to Sell Your Kidney?)
Episode 3: The Walrus Quota (Should We Be Able to Sell Refugees?)
Episode 4: Supply Shock (Should You Be Able to Sell Water In A Disaster?)
Episode 5: The Golden Door (Should We Pay People to Vote?)
Episode 6: The Death Pool (Should We Be Able to Profit Off of Death?)

For an example of Sandel\’s style, one starting point is his article in the Fall 2013 issue of the Journal of Economic Perspectives, \”Market Reasoning as Moral Reasoning: Why Economists Should Re-engage with Political Philosophy\” (27:4, pp. 121-40). When it comes to ideas, Sandel is a poker and a prodder, putting forward possible hypotheses and pushing their edges, always on the lookout for potential qualifications, exceptions, and counterbalancing factors. His answers, to the extent that he offers any, are often provisional and hedged. But you can learn a lot about the terrain of these arguments and about philosophical reasoning by following along.

The US unemployment rate has been less than 4% for the last couple of months, which might seem sufficient reason for breaking out the champagne. But the sense of celebration has been generally restrained.

Or consider the concern that although unemployment has dropped, a substantial portion of the decline is due to adults who have become discourage, left the workforce and are no longer looking for jobs, or who have taken part-time jobs but would prefer full-time. Here\’s a figure from the Bureau of Labor Statistics showing several different measures of unemployment. The red line at the bottom is the standard unemployment rate. The light green line just above it adds the \”discouraged\” workers who would like a job. and looked for a job in the previous year, but have stopped looking because they don\’t think one is available. The teal line above that adds both discouraged and \”marginally attached\” workers, who looked for a job in the previous year and have stopped looking (even though they recognize that jobs are available). The top purple line includes the unemployed, discouraged, marginally attached, and those who are working part-time but would rather work full-time.

Overall, there are a lot of ways to look at unemployment, but whatever measure you choose, the measure is essentially back to what it was before the Great Recession.

Or here\’s the employment rate for 25-54 year-olds, with separate lines for males (red line), females (green line), and total (blue line). The focus here is on \”prime-age\” workers, leaving out young adults who are attending college at increasing rates and near-retirees. There is a downward trend for men and an upward trend for women over the decades. But the current levels have rebounded back pretty much to where they were before the Great Recession. 

What about growth of wages and employee compensation? Here\’s a figure showing percentage growth in the last 12 months in the Employment Cost Index (blue line), which is commonly used because it covers all civilian workers and their benefits. The green line is a measure of the inflation rate faced by consumers called the Personal Consumption Expenditures Index, Less Food and Energy, which is the measure of inflation to which the the Federal Reserve pays attention.  Yes, growth in compensation is not as far above inflation as it was in the years before the Great Recession. But the gap does seem to be widening. 

What about the concern that although overall unemployment rates are down, those who are unemployed are more likely to be long-term unemployed. This concern still has some bite, but less than a few years ago. This figure shows median (blue line) and average (red line) duration of unemployment. Median is the number where half are above and half are below. The average is higher than the median because those who are unemployed for a long time pull the average higher. The median duration of unemployment is back to what it was before the Great Recession, and comparable to what it was in the mid-1990s. 

The share of unemployed who had had been out of a job for more than 27 weeks spiked much higher during the Great Recession than during previous recessions. But even that share has come down to levels that are at least comparable to the highs of the past, although not yet the lows. 

There is no heaven on Earth, and there is no ultimate perfection to be found in real-world labor markets. But the current US labor market situation is really quite good. After looking at the recent numbers, the New York Times ran a headline \”We Ran Out of Words to Describe How Good the Jobs Numbers Are\” (in a story by Neil Irwin, June 1, 2018). Among the descriptors suggested there are \”splendid,\” \”excellent,\” and \”salubrious.\” 

The Council on Foreign Relations has published The Work Ahead Machines, Skills, and U.S. Leadership in the Twenty-First Century, which is an Independent Task Force Report chaired by John Engler and Penny Pritzker,  Some of the discussion goes over familiar ground: innovation is needed, technology is changing work, economic growth is important, we should redesign unemployment assistance and sick leave for the modern work force, we should do more to assist displaced workers, and so on.  But I want to focus on one chapter of the report, \”Education, Training, and the Labor Market,\” and its discussion of that how the interaction between education and job training has been shifting.

Early in the 20th century, for example, the US experienced an enormous surge in high school completion rates, and for most of those graduates, the high school education was good and sufficient preparation for moving into the workforce. The report notes (footnotes omitted):

\”From 1910 to 1940, just as modern techniques of mass production were being spread across the country, the number of fourteen- to seventeen-year-old Americans attending high school rose from 18 to 73 percent, and high school completion rose from 9 to 51 percent. No other country even came close to achieving these levels until decades later. Most of the progress was led by state and local governments and citizen groups seized with the urgency of extending free education to as many young people as possible, not by the federal government. The lack of accessible educational opportunities that are clearly and transparently linked to the changing demands of the job market is a significant obstacle to improving work outcomes for Americans. Most of these students did not go on to college but rather went directly into the workforce, with high school completion marking the essential credential needed for most to succeed.\”

\”Employers, for their part, have been slow to develop or expand their own training systems to fill in the gaps from the educational system. …  Personnel hiring decisions may be the most important ones that any employer makes, yet most employers make those decisions entirely on the spot market. No company would leave its acquisition of critical raw materials or components to the last moment, but most hiring decisions are made as jobs come open. Employers find themselves competing for often scarce pools of talent, without developing and deepening those talent pools themselves. According to a Harvard Business School survey, just one-quarter of  companies have any type of relationship with local community colleges to help prepare employees with the skills they need. Not surprisingly, given their lack of involvement, many companies complain that too few graduates leave school with skills that employers are demanding.  … A successful workforce model for the twenty-first century will require a different mind-set. Employers need to think about not just competing for talent, but also how to develop the pipeline of talent they need to build their workforce. That will require greater collaboration not just with educational providers but also with other, even competing, employers. Employers should embrace collaborative approaches to talent development; big gains could be made, for example, by industry sectors working together to ensure a steady flow of properly educated and trained students for their future workforce. … Such work-experience programs are too rare—just 20 percent of adults report having received any sort of work experience as part of their education, and most of that was concentrated in health care and teaching.\” 

The marshmallow test is one of those legends of social science that a lot of non-social-scientists have heard about. Relatively young children are offered a choice: they can either eat a marshmallow (or some other attractive treat) right now, or they can wait for some period of time (maybe 15-20 minutes) and then have two marshmallows. If you follow up on these children some years later, the legend goes, you find that those who were able to defer gratification early in life will have more success later in life. A satisfyingly moralistic policy recommendation follows: If we could teach young children to defer gratification, that skill might help them as they advance in life.

It\’s a great story. Is it true? Tyler W. Watts, Greg J. Duncan, and Haonan Quan call it into doubt in their  study \”Revisiting the Marshmallow Test: A Conceptual Replication Investigating Links Between Early Delay of Gratification and Later Outcomes,\” just published in the journal Psychological Science (2018). 

They go back to the original 1990 study: Shoda, Y., Mischel, W.,  and Peake, P. K. (1990). \”Predicting adolescent cognitive and self-regulatory competencies from preschool delay of gratification: Identifying diagnostic conditions.\” Developmental Psychology, 26(6), 978-986.  The original sample for this study was collected over a period of six years (1968-1974) among preschool students at the Bing Nursery School at Stanford University, described in the study as \”mostly middle-class children of faculty and students from the Stanford University community.\” The studies included 653 preschool children, average age about four years. About 10 years later, surveys were mailed to parents whose addresses could be located, ending up with follow-up data on 185 children.

The study found that there was a positive correlation between children who were more likely to defer gratification at age 4, and those who were later rated by their parents as \”more likely to exhibit self-control in frustrating situations, less likely to yield to temptation, more intelligent, and less distractable\” compared to their peers. There was also some mild evidence (because there wasn\’t data for many of the students on this point) that SAT scores were higher for those who deferred gratification at age 4.

The more recent study used data from the National Institute of Child Health and Human Development (NICHD) Study of Early Child Care and Youth Development (SECCYD). This study draws on 10 different sites around the country, and tracks and studies a group of children up to age 15. Using this data, the researchers could look at children who had done a delay-of-gratification test by the age of four years, six months, and where they had follow-up data on behavior and educational achievement at age 15. The total sample size was 918. Of that group, the mothers of 552 of the children had not completed college when the child was one month old, which allows the researchers to split the sample into children whose mothers had completed college, and those who had not.

Before describing the results, just consider the samples. The second study is not a nationally representative sample. But it\’s larger in size and more representative than a single nursery school on the Stanford campus.

The follow-up study did find positive correlations between deferred gratification and some later measures, but the correlations were small, when they existed at all. In addition, the follow-up study was able to study whether the differences in deferred gratification might instead be picking up other factors. For example:

\”[D]elay of gratification was strongly correlated with concurrent measures of cognitive ability … This implies that an intervention that altered a child’s ability to delay but failed to change more general cognitive and behavioral capacities would likely have limited effects on later outcomes. If intervention developers hope to generate program impacts that replicate the long-term marshmallow test findings, targeting the broader cognitive and behavioral abilities related to delay of gratification might prove more fruitful.\”

The follow-up study did have problems of its own. For example, the study asked children to defer gratification for 7 minutes, rather than the 15-20 minutes in the earlier studies. But for the group of children whose mothers had completed a four-year college degree, most of the children waited the full seven minutes. Thus, it wasn\’t possible within this group to draw meaningful conclusions about deferred gratification and later behaviors.

Of course, this finding suggests that a higher education for the mother can be relevant to whether a four-year-old can defer gratification, but even in this case, \”most of the achievement boost for early delay ability was gained by waiting a mere 20 s.\” In other words, in the part of the sample for mothers who had not completed college, children who barely waited at all did perform less well, and waiting even 20 seconds was mildly associated with later gains for this group.

The short lesson here is not to freak out if your four-year-old gobbles some candy. The longer lesson is that level of mother\’s education is relevant to children\’s development, and that improving cognitive skills at younger ages can matter. Fpr some additional discussion of the results, see these short pieces in the Atlantic and the Guardian.

Sweden seems headed toward a cash-free economy. Here are some comments from Stefan Ingves, Governor of Sveriges Riksbank, the central bank of Sweden, in a short essay called \”Going Cashless:
The governor of the world’s oldest central bank discusses his country’s shift toward digital money\” (Finance & Development, March 2018, 55:2, pp. 11-12):

\”Sweden is rapidly moving away from cash. Demand for cash has dropped by more than 50 percent over the past decade as a growing number of people rely on debit cards or a mobile phone application, Swish, which enables real-time payments between individuals. More than half of all bank branches no longer handle cash. Seven out of ten consumers say they can manage without cash, while half of all merchants expect to stop accepting cash by 2025 (Arvidsson, Hedman, and Segendorf 2018). And cash now accounts for just 13 percent of payments in stores, according to a study of payment habits in Sweden (Riksbank 2018). …

I am convinced that within 10 years we will almost exclusively be paying digitally, both in Sweden and in many parts of the world. Even today, young people, at least in Sweden, use practically no cash at all. This demographic dimension is also why I believe that cash’s decline can be neither stopped nor reversed. While the Nordic countries are at the forefront, we are not alone. It is interesting to see how quickly the Chinese payments market, for instance, is changing.

Ingves mentions some issues that are likely to arise with this transition. One is that \”it will likely further limit financial access for groups in society that currently lack any means of payment other than cash.\” Other issues are the extent to which the new payments infrastructure, which may shift in substantial part from central banks to private firms, will be safe, secure, rapid, and low-cost.

Japan is aging fast. Here are some trends on total population and age distribution, according to projections from the National Institute of Population and Social Security Research in Japan,

Many of the public policy disputes over education, whether at the K-12 level or at the higher education level, quickly turn into disputes over how much to spent, or whether \”enough\” is being spent. For some international perspective on these issues, the Condition of Education 2018  has just been published by the National Center for Education Statistics (May 2018). It\’s chock-full of useful tables and figures, but here are a few from the \”International Comparisons\” part of the volume.

First, look at spending per student in OECD countries, as compared with per capita GDP. As the figure shows, the relationship is pretty much a straight line, in which countries with higher per capita GDP spend more on K-12 education. This makes some intuitive sense, given that  teachers are one of the main expenses in any K-12 system, and when a country has higher capita GDP, wages in general and pay for teachers in particular will be higher, too. The figure shows that while a few countries spend a little less than one might expect on K-12 education based on their per capita GDP (Mexico, Ireland) and some spend a little more (Korea, United Kingdom), most countries are quite close to the predicted line, like the United States.

Of course, this doesn\’t prove whether the US should dramatically change its level of K-12 education spending. But it suggests that US K-12 spending is not out-of-line with the rest of the world in this area.

What does a similar figure look like for higher education spending? Some interesting patterns emerge. For example, Mexico spent less on K-12 than one would predict from per capita GDP, but spends more on higher education. Conversely, Korea spent more on K-12 than one would predict based on per capita GDP, but spends less on higher ed. The United States spend way more than any other country on higher education on a per capita basis, and way more than would be predicted based on per capita GDP.

Of course, this doesn\’t prove whether the US should dramatically change its level of higher education spending, or how US higher education is delivered. But it suggests that the US higher education experience is different from most of the rest of the world.

Here\’s one more comparison, looking at the share of adults who have a postsecondary degree of some kind. In the figure, the light blue bars show the share in the 55-64 age bracket who have such a degree, while the dark blue bars show the share in the 25-34 age bracket with such a degree. One would generally expect that as higher education expands, a larger share of those in the younger group should have postsecondary degrees, compared with those in the older group, and this pattern holds for most countries.

But notice that for the US, the age 55-64 group was in general more educated than the rest of the world, with the exception of Canada. But for the 25-34 group, the US is still above the OECD average in share with a postsecondary degree, but a number of other countries are now substantially ahead, and the US is much more middle-of-the-pack. When combined with the previous figure, this makes some sense. Given that the US spends vastly more on a per person basis for higher education, it\’s more costly for the US to provide a big expansion of higher education for the young adults of today.

\”Germany’s economic performance is impressive, supported by prudent economic management and past structural reforms. Growth is robust. The unemployment rate has fallen to levels not seen in decades and employment is rising. Household and corporate balance sheets are strong and the public debt ratio is declining rapidly. Inflation remains low but wage growth is picking up, reflecting the strength of the labor market.\”

For a more detailed overview from the IMF, see \”Germany : 2017 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Germany (July 7, 2017).  Sure, the IMF expresses concerns about how Germany\’s economy will adapt to an aging population, how it can encourage greater business investment and reduce its gargantuan trade surpluses over time. But these problems, like most economic problems, are a lot easier to address in the context of an economy with solid growth, low unemployment, and declining debt levels.

So what are the roots of Germany\’s strong economic performance? Are there some lessons for other countries? Are there reasons for concern? Dalia Marin has edited a useful e-book, Explaining Germany’s Exceptional Recovery with a group of 10 readable essays looking at various aspects of German economic experience  (May 2018, published by the Centre for Economic Policy Research, available from the Vox.eu website with free registration). 

There\’s no one magic answer, of course. One set of arguments emphasize that Germany reformed it labor institutions in the late 1990s and intoe the early 2000s in a way that led to greater flexibility and a drop in labor costs (defined here not as an outright fall in wages, but as greater productivity for the cost of a unit of labor). This flexibility in Germany\’s labor market was combined with an willingness to reach across national boundaries and to build international production chains with nations of eastern Europe, so that German production could  focus on higher value-added tasks. Marin describes one of the essays along these line in the intro: 

Christian Dustmann, Bernd Fitzenberger, Uta Schoenberg, and Alexandra Spitz-Oener argue that the transformation of the German economy was due to an unprecedented process of decentralisation of wage bargaining to the firm level that led to a dramatic decline in unit labour costs, and ultimately to an increase in competitiveness of the German economy. Wage decentralisation was made possible, they claim, by the specific governance structure and autonomy of the German labour market, not rooted in legislation but laid out in contracts and mutual agreements between employer associations, work councils, and trade unions. This decentralisation of the wage-setting process was driven by a sharp decline in the share of workers covered by union agreements and an increase in opening clauses that strengthened the role of firm-based work councils in wage determination relative to trade unions. The decline in union coverage and the increase in opening clauses, in turn, were both triggered by a more competitive global environment. In particular, the new opportunities to move production to the emerging market economies of Eastern Europe changed the power equilibrium between trade unions and employer federations and forced unions and work councils to accept deviations from industry-wide agreements.

Here\’s a figure from their paper, showing how \”unit\” labor costs in Germany have fallen over time, compared to a number of competitors.

[The Dustman et al. paper in this volume is a condensed version of their paper in the Winter 2014 issue of the Journal of Economic Perspectives, available at  Christian Dustmann, Bernd Fitzenberger, Uta Schönberg, and Alexandra Spitz-Oener. 2014. \”From Sick Man of Europe to Economic Superstar: Germany\’s Resurgent Economy.\” Journal of Economic Perspectives, 28 (1): 167-88.]

Other essays explain how this shift in Germany\’s labor markets, together with the rise of economies in eastern Europe and a trend toward more decentralized German business management, helped the German economy to adapt more readily than many other countries when China entered world markets in force in the early 2000s.

Germany has its economic problems, of course. For example, one essay emphasizes that it has historically tended to lag behind in business entrepreneurship and research and development efforts. But when it comes to Germany\’s economic success, perhaps the single biggest question is how to interpret its very large trade surpluses — at almost 8% of GDP in 2017, the largest in the world.

We live in a time when a large trade surplus is sometimes treated as a mark of shining success, but that\’s a misunderstanding of what it actually means. A trade surplus just means that a country has domestic saving higher than domestic investment. As a result, the domestic saving is flowing to othre countries. (If the domestic saving was instead being spent on imports, then the trade surplus would be eliminated.) A couple of essays in this volume focus on Germany\’s trade surplus. For example, here is Marin\’s summary of one of them

Guntram Wolff focuses in Chapter 6 on the import side of the current account. From a national accounts perspective, a country will face a current account surplus if its savings exceeds its investments. He looks at the difference between savings and investments for the different sectors of the German economy, and finds that the German current account surplus is mainly driven by the corporate sector, where savings have gone up (by around 3 percentage points of GDP), while corporate investment has been falling (by around 2 percentage points of GDP). He dismisses the argument that the ageing of the population has contributed to the current account surplus, as many observers have argued, as the savings of the household sector have not contributed significantly to savings in the economy. His data show that the corporate sector has been deleveraging for more than 15 years, resulting in lower corporate investment in manufacturing in Germany compared to Italy and France. He concludes by advising that the German government should pay attention to Germany’s current account surplus, and suggests that the government should increase public investment (to address the low intangible capital stock that he documents) and encourage private investment.

This volume has a lot of useful background, but it also seems to me to sidestep the question of the euro. One reason for Germany\’s enormous trade surplus is that other nations within the euro-zone have offsetting large trade deficits. In the old pre-euro days, a small or mid-sized European economy with a large and sustained trade deficit with the other European countries would watched or engineered a decline in the foreign exchange rate of its currency, which would have reduced the trade deficit by making the exports from that nation cheaper on world market and making imports more expensive for consumers from that country.

But the euro-zone is locked into a single currency, and so exchange rates can\’t adjust. When exchange rates can\’t move, there is instead a slow and painful process of \”real depreciation\” in which wages and prices within a country face downward pressure over time, often in a context of depressed growth. While Germany is booming with its outsized trade surpluses, Italy and Greece and others are staggering. In that sense, Germany\’s indubitable economic strengths are under an ongoing shadow of what will happen across the euro-zone as a whole. For example, here\’s Paul Krugman in the New York Times from a few days ago (May 21, 2018):

Many of Europe’s problems come from the disastrous decision, a generation ago, to adopt a single currency. The creation of the euro led to a temporary wave of euphoria, with vast amounts of money flowing into nations like Spain and Greece; then the bubble burst. And while countries like Iceland that retained their own money were able to quickly regain competitiveness by devaluing their currencies, eurozone nations were forced into a protracted depression, with extremely high unemployment, as they struggled to get their costs down. … Some of the victims of the euro crisis, like Spain, have finally managed to claw their way back to competitiveness. Others, however, haven’t. Greece remains a disaster area — and Italy, one of the three big economies remaining in the European Union, has now suffered two lost decades: G.D.P. per capita is no higher now than it was in 2000.

For some other discussions of the euro, often with a skeptical twinge, see:

• \”Is the Euro Out of Danger?\” (February 1, 2018)
• \”The Eurozone Crisis: Crystallizing the Narrative\” (October 9, 2015)
• \”Will We Look Back on the Euro as a Mistake?\” (February 28, 2014) 

The Soho Forum \”features topics of special interest to libertarians, and the series aims to enhance social and professional ties within the NYC libertarian community.\” For the rest of us, lwhat\’s interesting is that they host regular and lively debates, a number of them on topics related to economics, and then post video and podcasts. Here are some of the recent tussles that caught my eye–more are available at the site. I\’ve written down the debate resolution, the names of the participants, and the date, with a link to the video:

“All government support of higher education should be abolished.\”