Is It Nuts to Give to the Poor Without Strings Attached?

That’s the title of this New York Times Magazine article. As a long-time advocate of replacing Western welfare states with a negative income tax, I obviously don’t think it’s nuts at all, and it’s encouraging to see that this idea is getting some traction in international aid circles (if not in domestic policy making).

There’s evidence that this works.

After Mexico’s economic crisis in the mid-1990s, Santiago Levy, a
government economist, proposed getting rid of subsidies for milk, tortillas and other staples, and replacing them with a program that just gave money to the very poor, as long as they sent their children to school and took them for regular health checkups.

Cabinet ministers worried that parents might use the money to buy alcohol and cigarettes rather than milk and tortillas, and that sending cash might lead to a rise in domestic violence as families fought over what to do with the money. So Levy commissioned studies that compared spending habits between the towns that received money and similar villages that didn’t. The results were promising; researchers found that children in the cash program were more likely
to stay in school, families were less likely to get sick and people ate a more healthful diet. Recipients also didn’t tend to blow the money on booze or cigarettes, and many even invested a chunk of what they received. Today, more than six million Mexican families get cash transfers.

A new charity called GiveDirectly is pushing the idea further. They’re giving away money to villagers in Kenya with no conditions attached at all. The initial results are encouraging and http://www.givewell.org, which ranks charities by their effectiveness, puts them as #2, just under the Against Malaria Foundation.

But most aid is still of the traditional teach-a-man-to-fish variety, with bloated expense ratios to pay the salaries of all those upper middle class graduates too righteous to work in the private sector. After all, someone has gotta teach the wretched how to fish.

I don’t know why the paternalistic assumptions regarding the poor still dominate. It just seems natural to the non-poor that the poor are where they are because they were brought up with the wrong habits or beliefs or something, so helping them out requires elaborate schemes (eg food stamps, training programmes) to save these people from themselves. Perhaps paternalism regarding the poor comes from the fact that it flatters the rest of us. After all, the corollary of that view is that we’re well-off because we have the right habits and beliefs.

The Fed’s September Surprise

The Fed surprised the markets yesterday by keeping the rate of QE asset purchases on hold, contrary to the widely telegraphed intention to taper them this month. The Fed’s forward guidence says that the fed funds target will not move from where it is now until unemployment goes below 6.5%. Given that ending QE must precede any change to the fed funds target (technically, they could raise the IOR rate and keep QE going, but that would be pointless as the extra cash would just wind up in excess reserve balances), it stands to reason that the current unemployment rate near 7% gives ample reason for the fed to at least slow down the pace of asset purchases. Fed speak over the summer signaled such an intention pretty clearly, hence all the taper talk and the focus on this month’s meeting.

So why didn’t the FOMC taper yesterday? One aspect of their reasoning surely has to do with the employment numbers themselves. U/E is a poor proxy for underlying growth when most of the recent reductions have been due to a decline in the labour market participation rate rather than the creation of new jobs. Recent downward revisions to the payroll numbers also point to a less robust labour market than previously assumed.

But there is a more interesting dimension to this decision. In the first paragraph of the statement the committee says (my emphasis):

Some indicators of labor market conditions have shown further
improvement in recent months, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen further and fiscal policy is restraining economic growth.

Fiscal policy is mentioned again in the third paragraph. My bet is that when the minutes to this week’s meeting are published at the end of October they will reveal an FOMC very concerned that recent political events have increased the odds of a drawn out budget showdown later this year.

There is a theory that the fed alters policy to offset what congress does to the budget, rendering the fiscal multiplier impotent (regardless of your neoclassical or Keynesian theoretical preconceptions). I think that this is true, at least for the last five years, and what this means is that Fed policy today is influenced by what happens on Capital Hill far more than is commonly supposed.

If you adopt this perspective, today’s decision makes allot of sense. What has changed over the last month? A foreign policy circus by the Obama Administration, and a huge realignment of priorities with respect to how the administration intends to spend its dwindling political capital.

Larry Summers’ withdrawal from the Fed chair job was the first signal. Well, actually, the first signal was the leak on Friday, 13 September to an Asian paper that the Administration would announce Larry’s appointment the following week, a piece of information that should have actually lowered one’s probability of his appointment. Why would the White House feel the need to telegraph if they weren’t concerned that Larry might not get through congress?. Days later, Larry withdraws. These are signs of a weakened Obama administration.

No, the shift in the Fed’s stance had nothing to do with anticipating a Yellen chairmanship instead of a Summers one. It had everything to do with the failure of POTUS to get his man through congress and what that signals for the budget fight with House Republicans later this year (according to the CBO the debt ceiling will need to be raised by October or November of this year). That, I gather, is the reason why fiscal policy has such prominent place in this month’s FOMC statement.

So there you have it folks, a gambit by Obama on Syria caused the fed to taper the taper talk. This brings new meaning to the term “macro economics”, but I think that it is true, and interpreting Fed policy is going to have allot more to do with the budget than the economic stats for the next quarter or two at least.

Hospital death rates in the UK

The headline in the Guardian reads “Hospital death rates in England 45% higher than in US, report finds”, and the story reports on Channel 4 coverage on Wednesday of a new study by Brian Jarman, a professor of health statistics at Imperial College London.

Jarman devised an index called the Hospital Standardised Mortality Ratio (HSMR), which compares a hospital’s mortality rates to expected mortality (given diagnosis). According to a paper by Dr Foster (an indpendent group devoted to providing health care data to the public):

The HSMR is a method of comparing mortality levels in different years,
or for different sub-populations in the same year, while taking
account of differences in casemix. The ratio is of observed to
expected deaths (multiplied conventionally by 100). Thus if mortality
levels are higher in the population being studied than would be
expected, the HSMR will be greater than 100. For all of the 56
diagnosis groups, the observed deaths are the number that have
occurred following admission in each NHS Trust during the specified
time period. The expected number of deaths in each analysis is the sum
of the estimated risks of death for every patient.

The HSMR has become a controversial index. It was credited with bringing to light the Stafford Hospital scandal, which continues to grab the headlines of UK papers with grim stories of how patients were left in their own urine and forced to drink water from flower pots for lack of nursing care. It’s controversial because many people (and not just NHS staff) refuse to believe things can be so bad. Sophisticated apologists for the Trusts poke holes at the methodology of the HSMR index. For example, it’s obviously very sensitive to the way patient’s diagnoses etc are coded, e.g., someone with cancer may be coded as a death from pneumonia.

The latest concerns a cross-sectional HSMR study of the UK and 6 other countries including Canada, Holland, Japan and the US. The UK’s hospital mortality rates are 22% higher than the average of the 7 countries and 45% higher than the US. The comparison with the US is enough for many to dismiss the results right away, as America has a lower life expectancy and its healthcare system is widely distrusted by Brits.

No statistical model is without flaws and data must be interpreted. But what rankles me are those who criticize a quantitative metric that produces uncomfortable results without offering up an alternative. Hospitals must be held accountable to some objective, quantifiable proxy for “quality care” or else the are accountable to nothing at all. The coding-error thesis is particularly pathetic, as that is itself a hospital failure. Imagine a company defending its poor performance by saying that the financial statements are misleading because there were errors in the data provided to the auditors!

And “coding errors” might reveal a different aspect of the problem all together. Maybe it’s not just fat fingers at the keyboard and other flaws in reporting procedures.. maybe patients aren’t being diagnosed properly.

Goldman Sachs v Russian Programmer

If you haven’t already read it, you should read Michael Lewis’ story on Vanity Fair about Goldman’s prosecution of Sergey Aleynikov in 2009. I recall the case when it first hit the wires, thinking that Goldman’s complaint that the code Sergey took when he left the firm could destabilize the financial system was incredibly silly. But like most people, I assumed that Sergey must have nicked Goldman’s HFT strategies and was guilty of theft.

That’s clearly what we were supposed to think. But in fact, Sergey wasn’t involved in the trading side of things at all. He was the brilliant back-end programmer who was brought in to speed up the uncompetitive latency of GS’s HFT systems.

There were many problems with Goldman’s system, in Serge’s view. It
wasn’t so much a system as an amalgamation. “The code-development practices in IDT were much more organized and up-to-date than at Goldman,” he says. Goldman had bought the core of its system nine years earlier in the acquisition of one of the early electronic-trading firms, called Hull Trading. The massive amounts of old software (Serge guessed that the entire platform had as many as 60 million lines of code in it) and nine years of fixes to it had created the computer equivalent of a giant rubber-band ball. When one of the rubber bands popped, Serge was expected to find it and fix it.

After studying its system, Sergey concluded it was such a mess that they should just scrap it and build something again from scratch, but his bosses vetoed that plan. So Sergey set out to fix the latency of GS’s systems by decentralizing it.

But most of his time was spent simply patching the old code. To do this he and the other Goldman programmers resorted, every day, to open-source software, available free to anyone for any purpose. The tools and components they used were not specifically designed for financial markets, but they could be adapted to repair Goldman’s plumbing.

So lots of little patches where put into GS’s code base, most of them hacked from code under an open source license, and GS’s managers would go in and strip OS licenses off and replace it with Goldman legalese.

Anyway, Sergey’s name starts to circulate around the street as one of the best HFT programmers in NYC, and he gets poached by a new hedge fund startup to build an HFT system from scratch. Double the sallary and the opportunity to do something cooler than constantly fix Goldman’s dogfood system.

Before leaving, he uploads a bunch of code to a subversion repository. Not the strats–he didn’t work with those–just a collection of patches and fixes that he used, most of it OS code taken from the internet. It was like taking a notebook, a collection of reminders for solving IT plumbing problems. It was of no use to anybody else and certainly wasn’t Goldman’s secret sauce. Arguably, it wasn’t even Goldman’s property.

What transpires is a total miscarriage of justice. One can’t help but speculate that GS’s motives were to use Sergey’s prosecution to create the impression that its systems were better than they actually were. Who knows. Read the whole story.

Healthcare Costs and Technology

There is an excellent article in the MIT Technology Review this month (The Costly Paradox of Health-Care Technology) pointing out how healthcare is the only industry where technological progress appears to raise rather than lower costs.

The reasons are not a mystery:

Unlike many countries, the U.S. pays for nearly any technology (and
at nearly any price) without regard to economic value. This is why, since 1980, health-care spending as a percentage of gross domestic product has grown nearly three times as rapidly in the United States as it has in other developed countries, while the nation has lagged behind in life-expectancy gains.

Other researchers have found that just 0.5 percent of studies on new medical technologies evaluated those that work just as well as existing ones but cost less. The nearly complete isolation of both physicians and patients from the actual prices paid for treatments ensures a barren ground for these types of ideas. Why should a patient, fully covered by health insurance, worry about whether that expensive hip implant is really any better than the alternative
costing half as much? And for that matter, physicians rarely if ever know the cost of what they prescribe—and are often shocked when they do find out.

Yet the article concludes when some policy recommendations that range from vague (organisational change, innovations in health care delivery) to downright dumb (“drug container caps with motion detectors that let a nurse know when the patient hasn’t taken the daily dose.”).

The solution, as I seed it, is straightforward: health insurance that pays out a lump sum of cash per diagnosis, to be spent however the patient sees fit (some sort of trust/trustee mechanism needs to exist for those too ill to make the decision themselves). The current framework, whereby insurance pays for whatever treatment doctor thinks best, provides absolutely no incentive to make the inevitable tradeoffs between cost and expected benefit.

Perhaps when healthcare inflation eventually leads to rationing, patients in America will reconsider the wisdom of this paternalistic model and demand the right to make those decisions themselves.

Big Data and Price Discrimination

There is an article in Forbes on how big data is brining about more first degree price discrimination. It summerises a recent paper by Reed Shiller at Brandeis on the subject, who studied Netflix’s pricing.

Simulations show using demographics alone to tailor prices raises
profits by 0.14%. Including web browsing data increases profits by much more, 1.4%, increasingly the appeal of tailored pricing, and resulting in some consumers paying twice as much as others do for the exact same product.

Even the price is tailor-made for you, Sir.

Crowdworking

I’m a big fan of this concept, so this bit of anecdotal evidence is discouraging. A BBC reporter spent a week trying to earn a living from crowdwork. In total: 37 hours worked, 19.16 GBP earned. I’m sure others can do better (and this was only an experiment), but still.. does anyone know of some proper stats on the hourly pay distribution of crowdsourced work?

I can’t help but think that these skills would be renumerated better if they were hired as employees or contractors. If that’s correct, I have some guesses as to why:

  • Buyers of the skills get less value from the workers because of the quasi-anonymity and one-off nature of the relationship.
  • The middle-man doesn’t add much value.

In light of the news of Ronald Coase’s recent passing away, we might want to consider whether this crowdworking phenomena can be understood in terms of his transaction cost analysis of firms.

I’ve had some limited experience as a consumer of crowdwork. My impression so far is that you have to wade through a sea of rubbish before you find someone worth paying. And when you’re there, you’d really rather deal with the person one-on-one in an on-going, no-commitments basis. What makes all of this work is search and reputation, and a fragmented hodge podge of different crowdwork platforms doesn’t really perform either of those functions very well.

Indeed, the very term “crowdwork” suggests the wrong framework, in my opinion. Most work takes place over time and needs to be integrated by the entrepreneur or manager with other work to make the whole. Both of those factors require lots of tacit knowledge on the part of both worker and employer. Tacit knowledge is the sort of knowledge that only really exists in the minds of individuals or small groups. You can’t share it with a paid “crowd”.

To make this empowering vision work, I think we need a protocol rather than crowdworking platforms.

Oh, and the highest paying gig the journo did was.. getting paid to click “likes” on websites, something that requires no skill at all!