Subjecting technical efficiency to cost-benefit analysis

While I was at the Wall Street Journal:

In a small, damp factory here, blood-smeared men wring pulp from pig intestines, then heat it in concrete vats.

The activity at Yuan Intestine & Casing Factory is the first step in the poorly regulated process of making raw heparin, the main ingredient in a type of blood-thinning medicine that in recent days has come under suspicion in the deaths of four Americans.

More than half the world’s heparin comes from China. The chemical is often extracted from pig entrails in small factories — many as rudimentary as this one, which also manufactures sausage casings from intestines. The heparin eventually ends up in drugs used world-wide by patients having surgery or who need dialysis.

The growing concern over heparin’s safety brings to the forefront the question of whether the raw materials from which it is made — for that matter, the raw materials for any drug derived from animals — should be more tightly controlled. The FDA’s position is that the purification steps in the drug-making process are sufficient to produce a pure product from pig tissue, and that “companies are responsible for sourcing the materials” and “appropriately processing the material.”

The health of the animals from which heparin is extracted can be important to the safety of the drug. Drug makers in the U.S. and Europe stopped using cows — a once-common heparin source — after the discovery of bovine spongiform encephalopathy, or “mad cow” disease, amid concerns that the illness could be passed on.

In China, not all heparin makers answer to drug regulators. That’s partly because some are registered as chemical makers, not drug producers. It’s a legacy of a regulatory system that focuses on finished drugs, not their ingredients, says Shen Chen, a spokesman for the State Food and Drug Administration in Beijing.

This part was interesting:

Mr. Yuan, the owner of the heparin and sausage-casing factory in the village of Yuanlou, is a gregarious man who takes pride in the business he has built. Now 57 years old, he has earned enough money from heparin to send his two sons to university. Mr. Yuan himself never graduated from high school because his family was too poor to pay for school.

He launched the original business in the mid-1980s making sausage casings from intestines. Later he added heparin production.

Funnily enough (sort of), I was being asked, by colleagues, about a related matter just the other day. As a vegan, how do I respond to prescribed pharmaceutical treatments when those drugs may come from animals (the intestines of about 3,000 pigs are required to produce a kilogram of heparin)?

Honestly, I just didn’t know. I don’t know whether drugs are vegan. My guess is that I would ask, and try to find vegan, yet effective, alternatives. At the end of the day if I needed that antibiotic, I’d take it. I’m vegan – but I’m not an idiot. For now, I think I’ll just keep hoping I stay healthy as a (healthy) horse.

More generally, this is our issue: how do we weight technical/productive efficiency (producing things for the lowest possible cost/price/resource use) with, say the risk of harm being caused by the corners cut? For me, this is an issue relating to the value of information.

The known risk of negative side-effects (say, Adrenal, Ovarian or Retroperitoneal hemorrhage, if you’re taking heparin) can be, and are, built into the model for cost-effectiveness employed by health-care systems the world over (risk-adjusted adverse events are negative benefits).

However, there’s this issue: if we agree that a drug is cost-effective, then go and manufacture it (efficiently, productively) in a weird farmhouse in China (for example) and, as a result, suffer four deaths and around 350 allergic reactions among heparin consumers in the US, that is something not a part of the original information set or decision-making.

How, then, do we proceed? It would seem that complexity needs to be considered more fully. When we say “the cost-effectiveness of this compound is this much”, we should be adding “…if it is made for this much in facilities of this quality in these countries.” Pursuing the lowest costs of production overseas has the potential to devalue the information we already had gathered on the benefits vs. the risks of any given pharmaceutical intervention.

Stagflation

So, of all the posts I’ve ever made, this one is by far the most popular:

It routinely is the most popular post on any given day for the last month or more, and the fourth-highest ever (after one on the Phillips Curve, one on Minimum Efficient scale and my About Me page).

Well, and as the blog Big Picture detailed yesterday, the likes of the Wall Street Journal seem to catching on to the idea (my post was December 1st of last year – it was hardly the first time I’d thought about or mentioned it, nor was I anything like close to being the first to raise the issue).

A simultaneous rise in unemployment and inflation poses a dilemma for Fed Chairman Ben Bernanke. When the Fed wants to fight unemployment, it lowers interest rates. When it wants to damp inflation, it raises them. It’s impossible to do both at the same time.

Yes, it has taken this long for this basic fact of macroeconomics – one that we teach in Eco 1 (and that I’ve made a point of explaining in each of my last three semesters to date) – to start making the rounds amongst the grown-ups.

Should you ever be given pause to wonder how nobody saw this coming (and let us hope that you don’t) – some people just have a real blind spot for the trucks that hit them, I guess.

So much for the “short-term” Term Auction Facility

Like households with tax cuts, we internalise government concessions, and immediately integrate into our set of perceived entitlements. So this is really not a surprise:

US banks have been quietly borrowing massive amounts of money from the Federal Reserve in recent weeks by using a new measure the Fed introduced two months ago to help ease the credit crunch.

The use of the Fed’s Term Auction Facility, which allows banks to borrow at relatively attractive rates against a wider range of their assets than previously permitted, saw borrowing of nearly $50bn of one-month funds from the Fed by mid-February.

… the move has sparked unease among some analysts about the stress developing in opaque corners of the US banking system and the banks’ growing reliance on indirect forms of government support.

“The TAF … allows the banks to borrow money against all sort of dodgy collateral,” says Christopher Wood, analyst at CLSA. “The banks are increasingly giving the Fed the garbage collateral nobody else wants to take … [this] suggests a perilous condition for America’s banking system.”

I would remind you that this is public money. As well as all the attendant moral hazard problems, this devalues your money – either your stake in the public purse, or your own purse. More money means that money is of less value. More money means increasing inflationary pressure, meaning your income and wealth are of less value.

Do we get compensated for the risk? We do not. Invest in a risky stock and you demand a higher return. Here we get only the word of our government that it’s for the best – a decision made at a table at which no ordinary person is allowed a seat.

I want a bloody tax cut that explicitly represents the depreciation of my income and purchasing power caused by the Federal Non-Reserved Bank.

The clean-ness of nuclear energy

Nuclear power always wins the argument of what is most “green” by ignoring things like the cost of cleaning up afterwards (and wins economically by ignoring things like just how little Uranium there really is, in the world). Monbiot wrote an excellent article about this, a while ago now.

And today? Today:

Each circle entombs a nuclear waste canister near Aiken, S.C.

Forgotten but not gone, the waste from more than 100 nuclear reactors that the federal government was supposed to start accepting for burial 10 years ago is still at the reactor sites, at least 20 years behind schedule. But it is making itself felt in the federal budget.

With court orders and settlements, the federal government has already paid the utilities $342 million, but is virtually certain to pay a total of at least $7 billion in the next few years and probably over $11 billion, government officials said. The industry said the total could reach $35 billion.

The payments come from an obscure and poorly understood government account that requires no new Congressional appropriations, and will balloon in size, experts said.

The payments are due because the reactor owners were all required to sign contracts with the Energy Department in the early 1980s, with the government promising to dispose of the waste for a fee of a 10th of a cent per kilowatt-hour. It was supposed to begin taking away the fuel in the then far-off year of 1998.

Since then, the utilities have filed 60 lawsuits. The main argument — employing legions of lawyers on both sides — is when the government would have picked up the fuel if it had adhered to the original commitment, and thus how much of the storage expense would have fallen on the utilities anyway.

But the damage number is rising. If the repository that the government is trying to develop at Yucca Mountain, near Las Vegas, could start accepting waste at the date now officially projected, in 2017, the damages would run about $7 billion, according to Edward F. Sproat III, director of the Office of Civilian Radioactive Waste Management.

…

Each reactor typically creates about 20 tons of waste a year, which is approximately two new casks, at roughly $1 million each. If a repository or interim site opened, clearing the backlog would take decades, experts say. At present, waste is in temporary storage at 122 sites in 39 states.

Emphasis added.

Microfinance loans – for Americans

Bangladesh’s Grameen Bank has made its first loans in New York in an attempt to bring its pioneering microfinance techniques to the tens of millions of people in the world’s richest country who have no bank account.

The bank’s entry into the US, its first in a developed market, comes as mainstream banks’ credibility has been hit by the mortgage meltdown and many people are turning to fringe financial institutions offering loans at exorbitant interest rates.

…

Grameen has lent $50,000 in the past month to groups of immigrant women in Jackson Heights in New York’s borough of Queens. During the next five years, it plans to offer $176m in loans within New York city, and then expand to the rest of the US.

…

In the US, about 28m people have no bank accounts and 44.7m have only limited access to financial institutions. People often do not hold bank accounts because they have had credit problems, have no access to a local branch or they distrust the mainstream financial system, said Jonathan Morduch, a microfinance expert at New York University.

Some microfinance experts doubt that Grameen could make an impact in the US where credit is widely available, and businesses and tax systems are much trickier to navigate than in developing countries.

Very amusing. And to think of all the bad press Hugo Chavez got with his oil. From a previous article:

The US presents a ripe market for Grameen, Mr Yunus claims, because it has a large population that sits outside the formal banking system. As many as 28m people, earning $510bn a year, do not have any relationship with a financial institution, according to the Federal Deposit Insurance Corporation.

Those who have no bank accounts rely on fringe banking services such as cheque cashers, pawnshops and payday lenders.

Payday lenders can charge as much as 1,560 per cent for a week’s cash ad- vance against forward-dated cheques, according to the Consumer Federation of America. Payday lenders made $48bn (€33bn, £24bn) in loans last year, while pawnshops’ business has been soaring as the US heads into a slowdown.

“You have the payday loans, you have the cheque cashing companies, and they’re flourishing, and they are pretty bold, the big advertisements in the newspapers, big ads on television . . . so this shows how much [of a] gap there is in the system,” Mr Yunus said.

I can understand the argument about the greater complexity of the tax system here – although that supposes that recipients are engaging with the tax system fully. A decent proportion of those Americans without bank accounts are Americans without papers, too, I would expect. One hopes his doesn’t wind up leading to a load of poor dream-chasers simply having those hopes dashed by the cruelty of the tax system (you know, the one that now doesn’t chase rich tax-evaders/avoiders, just middle-class-and-lower tax-evaders/avoiders).

Corporate bonds, LIBOR and the Fed target rate

Speaking of Paul Krugman (he’s discussing financial crises at Google, here):

Ben Bernanke has cut interest rates a lot since last summer. But can he make a difference? Or is he just, as the old line has it, pushing on a string?

Here’s the Fed funds target rate (red line) — which is what the Fed actually controls — versus the interest rate on Baa corporate bonds (blue line), which is probably a better guide to what matters for actual business spending.

It’s pretty grim. Basically, deteriorating credit conditions have offset everything the Fed has done. Doubleplus ungood.

This is an aspect of modern monetary policy. As we’ve seen since the Summer in practice, Central banks actually control less and less of what counts as Money Supply (since Money moved from Fiat proper to debt-backed) – meaning markets can run away from stabilising control a little quickly – not that utterly absent regulation over didn’t contribute mightily.

Krugman also discusses the LIBOR – the London Inter-Bank Offering Rate. It’s what banks charge to lend to one another, and we compare it so what banks charge to lend to the govenrment. Funnily enough, after having run so high through 2007, it’s now below the Fed target reate:

Perhaps we will see yet more rate cuts, then (since, by rights, it ought to be higher – I think. What do I know about finance, anyway?).

Could it also make interest-only loans more (meaning, of course, too) attractive to distressed mortgagees? Man, I hope not. Krugman estimates, up in that video, that the US consists of around 40% of households with negative equity in their homes.

Why are people still ganging up on President Bush?

People just won’t leave him alone about the fact that he couldn’t manage an economy’s way out of a paper bag (into a few trillions dollars of debt, sure).

Mayor Michael Bloomberg has unleashed another flurry of jabs on Washington, ridiculing the federal government’s rebate checks as being “like giving a drink to an alcoholic” on Thursday, and said the presidential candidates are looking for easy solutions to complex economic problems.

The billionaire and potential independent presidential candidate also said the nation “has a balance sheet that’s starting to look more and more like a third-world country.”

…

His tirade against the candidates and the economic stimulus package on Thursday began when he was asked how that experiment is going.

In his answer, he praised Democrat Barack Obama for the plan the Illinois senator outlined on Wednesday that would create a National Infrastructure Reinvestment Bank to rebuild highways, bridges, airports and other public projects. Obama projects it could generate nearly 2 million jobs.

Last month, Bloomberg and Govs. Arnold Schwarzenegger of California and Ed Rendell of Pennsylvania announced a coalition that would urge more investment in infrastructure.

“I don’t know whether Senator Obama looked to see what I’ve been advocating, or not — you’ll have to ask him — but he’s doing the right thing,” Bloomberg said.

But then the mayor went on to say that while the presidential candidates appear to be talking more about the economy now, they are looking for quick fixes to please voters instead of focusing on the roots of the problem.

“Nobody wants to sit there and say, ‘Well there’s no easy solution,”‘ Bloomberg said. “They want to send out a check to everybody to stimulate the economy. I suppose it won’t hurt the economy but it’s in many senses like giving a drink to an alcoholic.”

I agree, certainly – although we should bear in mind that Bloomberg was, and could well still be, considering a Presidential run himself. Good thing he hangs out with Governor Schwarzenegger (“President of 12 percent of us” – none too subtle, but good luck with the constitution-change. If it succeeds it means I might be President, some day!).

To continue:

The mayor last month said the economic stimulus package was shortsighted, and presented his own views on where the federal government should be focusing its attention. Specifically, he said the government should adopt a capital budget to oversee long-term infrastructure spending, instead of the current year-to-year spending.

It should also offer financial counseling, modified loans, and in some cases, subsidized loans to homeowners who find themselves unable to afford their mortgages.

He says that the government should also think differently about immigration, and that bringing more workers in rather than keeping them out is the key to long term economic stability.

Funnily enough, he is the mayor of New York – whose rent control policies are a disaster for precisely the reason that they don’t over subsidies to people (as opposed to offering subsidies to property, which is far and away an inferior approach – see, for example, here, here and here). However that’s another issue (and it certainly does not prevent me liking him as a prospective President).

Trade deficits, multiplier effects and where Keynesian maths breaks down

So, from the Wall Street Journal:

The U.S. trade deficit narrowed sharply in December despite a record foreign oil price, shrinking to a gap smaller than expected as overseas sales rose and imports receded.

The U.S. deficit in international trade of goods and services decreased by 6.9% to $58.76 billion from November’s unrevised $63.12 billion, the Commerce Department said Thursday.

The December deficit was smaller than expected by Wall Street. Economists surveyed by Dow Jones Newswires estimated a $61.70 billion shortfall.

For all of 2007, the U.S. ran a trade deficit of $711.6 billion, $46.9 billion less than the 2006 deficit of $758.5 billion.

Remember our handy equation for the macroeconomy:

Aggregate Demand = Consumption + Investment + Government Expenditure + Net Exports

So the trade deficit is still, well, big: NX, or Net Exports, is still heavily negative in the US equation:

That is month-by-month: every month another big negative bar. However NX is not important: the change in NX is what is important. A decrease in NX of USD47bn(ish) means USD50b47bn back in the US economy.

The Multiplier Effect determines the scale of the contribution this will make to US equilibrium GDP. It is defined as 1/MPS, the Marginal Propensity to Save (Marginal Propensity to Save + Marginal Propensity to Consume = 1).

Now, what is the US’ MPC? According to my Eco 1 textbook (somewhere), it’s 97%. According to Kyle Mudry it’s about 97.87%:

Personal savings as a percentage of disposable income is described in column 5. U.S. personal savings rates have experienced a sharp decline over the period. From the 70’s through the mid-eighties, U.S. citizens saved steadily around 9%-11% of their disposable income. From the mid-eighties to the present there has been a drastic decline, with the sharpest decrease coming during the mid-nineties on, dropping below 5% and almost coming to a complete stop at 1% in 2000.

You will note a discrepancy between Consumption, proportional, and Consumption, Marginal Propensity of – think of it is expenditure on financial services (for example), interest on debt, etc. It’s money not saved, at any rate.

So what does this mean for our USD47bn decline in the trade deficit? Well, according to the Multiplier Effect, it means a 47bn/.02 = USD2.35tr increase in equilibrium GDP!

Ah. This would be where our Multiplier runs into problems. Like many things in statistics and economics, the laws of our physics rather break down, near the corners. In this case, as MPC becomes very close to 1, the Multiplier gets somewhat non-realistic.

Extrapolation! As of last December, total Consumer Credit Outstanding was USD2.52tr, having risen 5.5% over the year. Total household debt is USD12.8tr.

The US population is a little over 301 million people – that’s people, not consumers. With an average household size of 2.6 people, Consumer Credit Outstanding becomes something like USD21,000 per household (total debt USD110,000 or so, but that is mostly secured – i.e. a mortgage).

The punchline? In the United State, the Marginal Propensity to Consume is basically greater than 1. So – give us a USD600 cheque, and we’ll spend some USD800. For example.

Now – what happens to the Multiplier Effect when MPC > 1? It would appear that the increase in GDP is infinite (the limit of the Multiplier as MPS approaches zero). In fact equilibrium GDP decreases. Counter-intuitive? Not so much. The Multiplier Effect works on the long-run equilibrium GDP, and in the long run, we have to repay our debt. More income only invites more expenditure and more borrowing, meaning more money lost to interest payments.

So – just think about that, when you get your recession-fixing cheque, or you read about the trade deficit. As long as we’re not saving for our rainy days, we’re really only getting that little bit more rope with which we’re hanging ourselves.

Does Preventive Care Save Money?

Yes and no. Yes, because prevention is often worth a pound of cure, and no, because often preventive care can identify problems that are expensive to fix (as opposed to not spotting them, after which the patient’s death is less expensive. Look, I’m not a dick – that’s just the way the costs work).

That’s the short version of this quite well-argued piece in the latest New England Journal of Medicine, Does Preventive Care Save Money? Health Economics and the Presidential Candidates.

With health care once again a leading issue in a presidential race, candidates have offered plans for controlling spiraling costs while enhancing the quality of care. A popular component of such plans involves greater promotion of preventive health measures. The first element in Hillary Clinton’s plan is to “focus on prevention: wellness not sickness.” John Edwards has stated that “study after study shows that primary and preventive care greatly reduces future health care costs, as well as increasing patients’ health.” Mike Huckabee has said that a focus on prevention “would save countless lives, pain and suffering by the victims of chronic conditions, and billions of dollars.” Barack Obama has argued that “too little is spent on prevention and public health.”

Indeed, some evidence does suggest that there are opportunities to save money and improve health through prevention. Preventable causes of death, such as tobacco smoking, poor diet and physical inactivity, and misuse of alcohol have been estimated to be responsible for 900,000 deaths annually — nearly 40% of total yearly mortality in the United States. Moreover, some of the measures identified by the U.S. Preventive Services Task Force, such as counseling adults to quit smoking, screening for colorectal cancer, and providing influenza vaccination, reduce mortality either at low cost or at a cost savings.

Sweeping statements about the cost-saving potential of prevention, however, are overreaching. Studies have concluded that preventing illness can in some cases save money but in other cases can add to health care costs.[PDF] For example, screening costs will exceed the savings from avoided treatment in cases in which only a very small fraction of the population would have become ill in the absence of preventive measures. Preventive measures that do not save money may or may not represent cost-effective care (i.e., good value for the resources expended). Whether any preventive measure saves money or is a reasonable investment despite adding to costs depends entirely on the particular intervention and the specific population in question. For example, drugs used to treat high cholesterol yield much greater value for the money if the targeted population is at high risk for coronary heart disease, and the efficiency of cancer screening can depend heavily on both the frequency of the screening and the level of cancer risk in the screened population.

The focus on prevention as a key source of cost savings in health care also sidesteps the question of whether such measures are generally more promising and efficient than the treatment of existing conditions. Researchers have found that although high-technology treatments for existing conditions can be expensive, such measures may, in certain circumstances, also represent an efficient use of resources. It is important to analyze the costs and benefits of specific interventions.

I agree. I think the authors are a mite too involved with efficiency-based arguments (as opposed to equity-based arguments) and, as a result, run right past the fact that unversal health care (for example) is an intervention – possibly the intervention.

Their solution? A meta-analysis! Possibly useful, possibly not. Meta-analyses are often of little worth. The result:

Our findings suggest that the broad generalizations made by many presidential candidates can be misleading. These statements convey the message that substantial resources can be saved through prevention. Although some preventive measures do save money, the vast majority reviewed in the health economics literature do not. Careful analysis of the costs and benefits of specific interventions, rather than broad generalizations, is critical. Such analysis could identify not only cost-saving preventive measures but also preventive measures that deliver substantial health benefits relative to their net costs; this analysis could also identify treatments that are cost-saving or highly efficient (i.e., cost-effective).

The chart is interesting. I’m not so sure this is way to go: we are interested in the cost-effectiveness of preventive care, relative to palliative (or curative). This has dis-aggregated the studies along identified cost-effectiveness thresholds, but that is not what is of policy interest, surely. Moreover I see, in this, a big risk of Simpson’s paradox. Looking at the table they provide of “selected” studies, I also see a mis-match in the conditions to which preventive vs. palliative/curative care are being sorted. Can we compare colonoscopy screening with anti-retroviral treatment for HIV? ‘Cause I have a suspicion that is what might have occurred.

This is standard for systematic reviews: one is pulling together mis-matched data for retrospective analysis for which the data was never designed. This generates value-of-information problems across the board, and we ought to remember this as we ponder the results. Ultimately, too (and more importantly), I think this piece really mis-reads the point of so-called “socialised medicine”.

That said, the authors are up-front about their motive not being to solve the problem: they are commenting upon less-informed debate by Presidential candidates. Now, one (say, me) could easily reply that this is pointless: Presidential candidates are selling us themselves, not a policy – there is a big agency problem and we really shouldn’t take them too seriously. If a candidate trotted out his/her future cabinet and invited the country to openly and knowingly elect the lot of them, then I’d pay attention.

Retail surprise?

UPDATE: the Big Picture already beat me to this post. The bastard. Go there for his take on the affair also.

Surprising to whom, I wonder.

Retail sales in the U.S. unexpectedly rose in January, easing concern that the world’s largest economy has already slipped into a recession.

The 0.3 percent increase was led by spending on autos, clothes and gasoline, the Commerce Department said today in Washington. The figure followed a 0.4 percent decrease the previous month. Purchases excluding automobiles and gasoline were unchanged.

“Today’s report will diminish recession anxieties, but it doesn’t dispel them altogether,” said Richard DeKaser, chief economist at National City Corp. in Cleveland, who accurately forecast the sales gain. Federal Reserve Bank of St. Louis President William Poole said yesterday “the best bet” is the U.S. will avoid a recession.

A) Is this volume, is it revenue, what are retail sales? Previously we’ve seen this, discussing volume, and the volume has been on steeply-discounted goods at discount stores. This could very well (and, most likely, will) be the same – meaning there’s no ‘there’ here.

B) This is more likely than not to be inflation-driven, either (i) because prices are up, or (ii) because people expect prices to go up even further, so tomorrow’s consumers are entering today’s markets, trying to save a bit of money (the article specifically mentions gasoline and its appreciating prices at bowsers across the country)

C) This is according to Commerce department. The department whose job it is to sell us the economy, and a department in an administration known for selling many bad goods under fake bills, across the board. Which gets us back to part A).

Am I a cynic and a pessimist? No – this counts merely has having pulled-wool-proof eyes. When oh when will we learn not to believe the hype? Back at Bloomberg:

Department-store sales dropped 1.1 percent. Stores selling building materials showed a 1.7 percent decrease in sales, after falling 2.5 percent. Sales also fell at electronics, appliance and sporting goods stores.

Excluding autos, gasoline and building materials, the retail group the government uses to calculate gross domestic product figures for consumer spending, sales rose 0.2 percent, after a 0.1 percent decrease the prior month. The government uses data from other sources to calculate the contribution from the three categories excluded.

Today’s Commerce Department report on retail sales also runs counter to industry figures that show January sales fell at stores from Target to Nordstrom Inc. even as some retailers slashed prices by as much as 75 percent. Sales at stores open at least a year rose 0.5 percent from a year earlier, the worst January since 1970, according to the International Council of Shopping Centers.

D) Month-by-month data isn’t all that relevant. So what if January sales did increase .3% on December sales – by what percentage have previous Januaries out-done their Decembers? That’s the yard-stick.

Popping over to the Census Bureau:

Very non-sexy graphics, I’m afraid. What does it mean? Nothing, really. January’s CPI figures are due February 20th. PPI figures too, probably – although December’s were down which, in a soft economy, may also not mean much.

Don’t get me wrong – I’m not poo-pooing potentially good news. We’ve already seen only recently, however, how foolish it is to try to capture the macroeconomy in real-time. I don’t know why we persist.