June 26, 2009
How much is health insurance worth?
By Cindy Ivanac-Lillig
I recently attended an interesting seminar on Behavioral Economics presented by an economist who works at the Boston Fed’s Research Center for Behavioral Economics and Decisionmaking. It is the only center of its kind in the Federal Reserve System. In a nut shell, Behavioral Economics does not disagree with traditional economic theories, but rather attempts to apply psychology and sociology to explain the gap between what traditional economic theories would predict people would do and what happens in reality. At its essence, it tries to explain why we do not always behave ‘rationally.’
Personally, I think a lot of these studies wouldn’t hold much water if they accounted for relative wealth. Consider this example often used by behavioral economists: If you offered someone a choice of $95 today or $100 next month, many would take the $95 today even though waiting a month would result in annualized rate of return of over 60%. I haven’t researched it, but I would bet that folks with a lot of assets would be more likely to choose to wait a month, and folks with few assets would be less likely. The benefit of having the money sooner for someone who has less of a safety net is much higher than for the person who does not consider the money’s value part of his/her safety net. This is just a hunch (but I do remember my college checkbook).
As I was sitting in this lecture debating with the speaker (in my head, of course), this concept of ‘safety net’ value came to me and sparked the idea for this blog. We have just begun to talk about healthcare reform and it is a great opportunity for economists and those studying economics to consider the costs and benefits of a service that is quite difficult to value due to its complex social value. The easy parts of the healthcare reform valuation are: How many preventable conditions go to emergency rooms and how much does that costs taxpayers? What surgical costs could be eliminated with preventative care? How much will the program cost?
However, what is much more difficult to value, but much more interesting, is the value of the health care ‘safety net’ itself. Would this perceived value tilt the cost/benefit scale for individuals in jobs they currently don’t like or are undervalued, making the overall job market more flexible and more efficient? Would improved health lead to greater productivity gains, and even raise our potential growth levels? Would the reduced worry about health insurance, in fact, make people healthier? It may be easy to say ‘yes’ to these questions, but if someone were to sit you in front of a spreadsheet and ask by how much, this would be harder.
In conclusion, maybe what Behavioral Economics brings to the table for me is the idea that there is psychological and sociological value to decisions that are hard to measure. Although, I would still say that, on the whole, people are rational in weighing costs versus benefits, but their value judgments differ based on their life circumstances. What do you think?
June 16, 2009
What is a Special Drawing Right (SDR)?
By Cindy Ivanac-Lillig
During this financial crisis, there have been many abbreviations batted around that many of us hadn’t really heard of before. One of them, SDRs (Special Drawing Rights), has made some news recently. SDR is basically a form of “currency” that the International Monetary Fund (IMF) issues to its member countries based on a formula that includes the countries’ contributions to the fund. It is, more technically speaking, an asset that represents a basket of currencies. The current basket is made up of 44% USD, 34% EURO, 11% Yen, and 11% GBP (FOREX). It was originally designed to facilitate growth in trade. The SDRs were created in the late 60’s as a way to supplement reserves, which were basically the U.S. dollar and gold at the time (Investopedia.com).
According to the IMF, during the Bretton-Woods era, a member country needed to have official reserves (basically something widely acceptable for payment) that could be used to backstop their fixed exchange rate. As trade expanded, SDRs ensured that there were enough reserves in the system to backstop the exchange rate regimes. The Bretton-Woods system has since collapsed and many countries now allow their exchange rate to float thereby eliminating the need to have a backstop of foreign currencies /reserves to support the fixed rate. However, SDRs still remain a unit of account that IMF member countries can transact with including trading them for other hard currencies.
There have been calls to expand the use of SDRs and use them more widely as a reserve currency. One way to think about what that would look like, albeit imperfect, is to picture securitizing currencies. The idea would be that this basket would hold the blended risk of all the underlying assets (in this case the different hard currencies) and then by definition would insulate itself from any one country’s fiscal or monetary issues. There have been some “scare” signals thrown up about these proposals and what would happen to the value of the U.S. dollar if a large country decided to swap its U.S. dollar reserves for SDRs. There have been many theories as to what would happen, but I particularly liked FOREX’s Greg Michalowski’s quick take. As many have warned that the U.S. would experience very high interest rates and therefore a spectacular economic decline, Michalowski argues that the dollars received in exchange for the SDRs would also be looking to be invested as well and would likely be parked in US treasuries, thereby softening, if not, eliminating the threat of massive devaluation.
If nothing else, what we have learned in this crisis is that the underlying value of securities matters – and in this case, the health of the private and public sectors of these countries matters to all of them -- so SDRs or not, real investment patterns may not change that quickly regardless of the unit of account. What do you all think?
June 10, 2009
Global Trade Alert: A New Resource in Staving Off Protectionist Tendencies
By Cindy Ivanac-Lillig
There have been stimulus plans, social programs, targeted monetary policies and a whole host of other policy interventions during this crisis. Although as natural as it may seem to want to use these vehicles to protect our employees and our products, the theory of comparative advantage -- that provides the foundation for understanding the benefits of global trade -- would say that as a whole, we will make ourselves worse off in the long run by engaging in this behavior.
There is a great, new resource in this fight to maintain global trade and the benefits that it affords. It is called Global Trade Alert. It is coordinated by many organizations including, but not limited to CEPR, DFID, IDRC, and The World Bank. It lists policy actions of major world players and which other countries the policy is most likely to affect through reduced commerce. Check it out.
June 8, 2009
The cult known as “Economists” may be too small for its own good
By Cindy Ivanac-Lillig
I recently read Mankiw’s blog posting, Are B-school economists different? and thought it piggy-backed well on our last discussion (Is the study of economics too hard or too boring?). Mankiw’s post was inspired by an email David Brooks sent him that stated, “many of the best sources on the crisis teach at B-Schools, not Econ Departments.” Mankiw basically says that there isn’t much of a difference in training for economists that choose to teach at B-schools versus economists that choose to teach in Economics Departments. Rather, he states, it is self-selection -- simply put, the difference lies in the personalities that are attracted to the different cultures of B-schools versus Economics Departments.
Awhile back I wrote a blog pointing out that many of today’s banking issues lie in the non-banking sector (finance) and throwing out a suggestion that perhaps the Fed should begin looking at new asset-backed securities’ issues as an indicator of recovery. I am sure the post generated a chuckle, as the two worlds of macro-economic indicators and modern-day finance are often divorced. But I think if you take these two ideas – firstly, from Brooks, that B-school economists may be better suited to explain the crisis and secondly, the artificial separation of economics and finance, I think it highlights many of our educational challenges in the field of economics. In short, if we are encouraging a field that is relegated to the time-consuming rigors of research methods in order to say anything about the financial markets or the economy more generally, then perhaps it will be quite difficult to promote the study of economics in the future. On the other hand, if the field is thought of as a field that has a spectrum from policy research to global equity analysis to yes, of course, traditional research, than it will be much easier to inspire incoming first-year students to consider economics as a course of study – and to take it to the extreme -- to convince high schools and universities that a foundation in economics is imperative for a modern-day liberal arts education.
Although Mankiw basically states that it is a difference in personalities, I think it is also a difference of exposure. B-school economists are exposed to a more holistic picture of the economy – one that includes finance and a good dose of concrete experiences, which many B-school economists are required to have. I am hoping that we can use this blog space going forward to share/create/disseminate concrete activities that could anchor economic education in the classroom. Who knows, it might not only increase interest in the field of economics, but it also may be more valuable based on Brooks’s reflection. What do you all think?