Dutch Vs American income distribution

Dani Rodrik has a post that compares the income distribution in US and Netherlands and asks whose citizens are better of. He writes,

The bottom 40% or so of the population is better off in the Netherlands, especially as we go lower in the distribution of income.  The bottom 5% have nearly double the income in the Netherlands.  The top 50%, by contrast, are significantly better off in the US. So are the Americans better off than the Dutch? I cannot tell you. But I can say that per-capita GDP or aggregate productivity numbers cannot answer the question.

I am not sure I agree with Dani's ambiguity on this. Consider the theoretical case. The question is to compare the relative "utility" or "happiness" levels of "America" and "Netherlands" in the aggregate. It is known that the marginal utility or happiness from every additional unit of income decreases with increasing income. Therefore, those in the lower half of the income ladder experience a much higher marginal utility from their additional incomes than those in the upper half. This means that the Dutch, with higher incomes for their bottom half, will have greater cumulative marginal utility than Americans, who have higher incomes for their upper half. In other words, controlling for the difference in per-capita incomes, in the aggregate, the Dutch are better off than the Americans.

Now let me illustrate the philosophical case from a Rawlsian perspective. Assuming you take birth in this world from a veil of ignorance, which distribution of income would you prefer? Since we would want to hedge for the worst case scenario, the Rawlsian answer would be the Dutch income distribution.

Therefore on both theoretical and philosophical grounds, the Dutch income distribution would appear to be superior or the Dutch better off than the Americans. 

World's biggest corporate arbitrage opportunity...

... is for corporates in developed countries to relocate or focus attention on emerging economy markets, says this McKinsey report.

The stimulus debate is getting really painful

Just when it appeared that the sheer weight of evidence indicating that the ARRA stimulus spending measures worked in promoting economic growth and reducing unemployment was enough to settle the debate, a group of distinguished economists have once again reminded us that we may be living in the dark age of macroeconomics.

The whole debate is now becoming ever more painful and a real torture. Clearly, ideological predilections have taken over the instincts and reasoning powers of even the most distinguished of economics professors. Even when faced with overwhelming evidence, they dig in and refuse to acknowledge the facts. Their theories become articles of faith.

Consider this. The economy is facing a liquidity trap, with interest rates locked in at near zero and expected to remain so for an extended time. Inflation remains very low and expectations too appear firmly anchored. Household balance sheets are some way off from regaining normalcy and therefore consumption is muted. This in turn keeps private investments away. In any case, banks, hobbled with several problems, still remain wary of normal lending, especially to the second-tier of corporates and small and medium enterprises. Fears of government borrowing "crowding-out" private investments is therefore largely illusionary. The disasters in Europe and weakening economic environment in many emerging economies, including China, makes the prospect of export-led growth remote. Hobbled with falling revenues, state and local governments continue to lay off workers and cut down on their ongoing programs.

In the circumstances, federal government is the only agent with the ability to power the economic growth engine. In other words, fiscal and monetary policy should take over. But monetary policy, even with quantitative easing and other accommodatory policies, has limited traction. However, the ultra-low interest rates makes borrowing cheap and fiscal policy potentially useful. And the poor state of America's infrastructure provides ample opportunities, indeed necessities, for public spending.

This logical case for another round of stimulus is supported by standard macroeconomic theory. The IS-LM model, which demonstrates the interaction between the goods and services and the money markets, leaves us with no doubts about the way forward. At close to the zero-bound, since cash and bonds become interchangeable, at the margins, money is just being held as a store of value, and changes in the money supply (say, by way of increased government borrowings) have no effect. Government spending results in economic expansion.




















In the absence of fiscal policy action, the economy risks being trapped in a deflationary, low growth, high unemployment equilibrium for an extended period. If there is any doubt, one only need to look at post-nineties Japan.  

Reducing healthcare costs

It is widely known that health care costs for the same treatment or procedure or test can vary by multiples across the United States. Atul Gawande's latest essay looks at ways to bend the health care cost curve by getting hospital chains to emulate commoditized fast food chains in managing consistency in cost and quality over a wide range of services when provided at locations spread out across the country.

He points to the success of Cheesecake Factory in providing over 300 dinner items with similar, standardized quality to 80 million customers each year at the same cost (for each item) across all its 160 odd American restaurants. He contrasts their success - in providing food with great variety and quality at affordable cost - with America's health care services market,

Our costs are soaring, the service is typically mediocre, and the quality is unreliable. Every clinician has his or her own way of doing things, and the rates of failure and complication (not to mention the costs) for a given service routinely vary by a factor of two or three, even within the same hospital.

In simple terms, Gawande's question is that if restaurant chefs can be trained to deliver standardized food quality across the country, then what is it that prevents doctors (in different hospitals) from delivering standardized care with consistency in quality and cost. He tells the story of Cheesecake Factory, 

If a restaurant were to stock too much, it could end up throwing away hundreds of thousands of dollars’ worth of food. If a restaurant stocks too little, it will have to tell customers that their favorite dish is not available, and they may never come back... The company’s target last year was at least 97.5-per-cent efficiency: the managers aimed at throwing away no more than 2.5 per cent of the groceries they bought, without running out. This seemed to me an absurd target. Achieving it would require knowing in advance almost exactly how many customers would be coming in and what they were going to want, then insuring that the cooks didn’t spill or toss or waste anything. Yet this is precisely what the organization has learned to do.

The chain-restaurant industry has produced a field of computer analytics known as "guest forecasting"... They have forecasting models based on historical data—the trend of the past six weeks and also the trend of the previous year. The predictability of the business has become astounding. The company has even learned how to make adjustments for the weather or for scheduled events like playoff games that keep people at home... Every six months, the Cheesecake Factory puts out a new menu. This means that everyone who works in its restaurants expects to learn something new twice a year. The March, 2012, Cheesecake Factory menu included thirteen new items. The teaching process is now finely honed: from start to finish, rollout takes just seven weeks.

The difficulty with creating Cheesecake Factories among hospital chains is with standardizing treatment regimes and universalizing best practices in diagnosis. Doctors and patients, atleast some of them, are certain to resist micro-managed commoditized treatment protocols. Gawande writes about the vast diversity in joint-replacement surgeries - different makes of artificial joints, different kinds of anesthesia, different regimens for post-surgical pain control and physical therapy - and about the efforts of Dr John Wright at Boston's Brigham and Women's Hospital in standardizing knee replacement surgery protocols.

Dr Wright gathered a group of people from every specialty involved—surgery, anesthesia, nursing, physical therapy—to formulate a single default way of doing knee replacements... they studied what the best people were doing, figured out how to standardize it, and then tried to get everyone to follow suit. They came up with a plan for anesthesia based on research studies—including giving certain pain medications before the patient entered the operating room and using spinal anesthesia plus an injection of local anesthetic to block the main nerve to the knee. They settled on a postoperative regimen, too... 

Wright had persuaded the surgeons to accept changes in the operation itself; there was now, for instance, a limit as to which prostheses they could use. Each of our nine knee-replacement surgeons had his preferred type and brand. Knee surgeons are as particular about their implants as professional tennis players are about their racquets. But the hardware is easily the biggest cost of the operation—the average retail price is around eight thousand dollars, and some cost twice that, with no solid evidence of real differences in results...

The surgeons now use a single manufacturer for seventy-five per cent of their implants, giving the hospital bargaining power that has helped slash its knee-implant costs by half. And the start-to-finish standardization has led to vastly better outcomes. The distance patients can walk two days after surgery has increased from fifty-three to eighty-five feet. Nine out of ten could stand, walk, and climb at least a few stairs independently by the time of discharge. The amount of narcotic pain medications they required fell by a third. They could also leave the hospital nearly a full day earlier on average (which saved some two thousand dollars per patient).

Gawande also draws attention to how the University of Michigan Health System standardized blood transfusions to patients, reducing the need for transfusions by thirty-one per cent and expenses by two hundred thousand dollars a month. However, their implementation on scale, country-wide and across specialties, is a massive challenge. Even where standards and treatment protocols were standardized, it has been difficult to get doctors to adhere to them.

Given the low-hanging fruits, it is appropriate that, despite all the attendant challenges and systemic resistance, some basic level of protocols based standardization should be made mandatory. Only some cutting edge discretion should be given to the individual doctors. However, such standardization and analytics is possible only if data collection is made a central focus in all health care activities. In medical care, this means electronic patient and hospital record management.

How do soda taxes reduce consumption?

The WSJ writes about the controversy surrounding the proposed new soda tax under consideration in Richmond City, northeast of San Francisco.

In May, Richmond's City Council agreed to put a measure on the November ballot to charge businesses a penny for every ounce of those beverages they sell in the city. If it passes, it would be the first city tax of its kind in the nation and the first to be approved by voters.

Now, I see two possible effects of a soda tax packaged this way, both of which will work towards reducing consumption of soft drinks. One, the standard "price effect" arising from the higher prices payable by the consumer due to incidence of taxation. Second, the more subtle "signaling effect" due to the negative imagery on soft drinks consumption conveyed by the reason underlying the decision to impose a tax. This signaling may be more effective if the tax is described as a "sin" tax, in so far as it would signal to the religious and moral sentiments of its consumers.

Which is of these two effects is more powerful in reducing consumption? What are their respective contributions? This has important implications for public policy. If the signaling effect is reasonably powerful, then it opens up possibilities for limiting certain negative externalities. More specifically, it would mean that even a small tax (and therefore more politically acceptable) can be effective in mitigating a negative externality if packaged appropriately. 

It would be great to explore this through a randomized control trial experiment (RCT), preferably at Richmond itself, to segregate the relative consumption reductions achieved by the two effects. 

Why India's power sector is a mess in a graph

The graphic below provides the best evidence that India's power sector is a national disgrace.

The most shameful thing is that despite two high profile national programs (the APDRP and R-APDRP), the aggregate technical and commercial (AT&C) loss percentage today is higher than at the beginning of the nineties. As I have blogged here, this has little to do with inadequate investments in infrastructure and other technical issues.

Transmission and distribution losses are a combination of technical losses and commercial losses. The former, consisting of line and transformer losses, is rarely more than 6-8%. It therefore means that the major contributor to AT&C loss is commercial in nature - theft and other unaccounted for supply like agriculture. Addressing this problem is simply a governance challenge. Unfortunately, Indian state does a very bad job of addressing them.

Interestingly, it is not just the government owned utilities, but the private utilities too suffer from the same governance problems. This is reflected in their respective AT&C losses - 19.89% for BSES Yamuna, 16.85% for BSES Rajadhani, and 12.39% for NDPL - for 2010-11. And all these figures are in the National Capital Territory area, with predominant non-agriculture services, after a decade of privatization. Further, it is all the more surprising since these utilities have spent massive amounts on technical loss reduction measures. These figures are comparable or even higher than that of the much larger distribution utilities in states like Andhra Pradesh and Karnataka.

As the disaggregated (division-wise) figures of BSES Yamuna shows, there are a number of persistent high loss divisions, most of them clearly being due to failure to control theft and other commercial losses. Clearly, apart from the formidable challenge of agriculture, controlling pilferage by way of outright theft, tampering of meters, and so on are not easily addressed.

Such micro-governance challenges can be tackled only through rigorous and intense, always politically difficult, local policing and enforcement, mostly beyond the powers of mere utilities, leave alone private ones. Technology and privatization will not deliver on these. More on this in later posts.

Unintended consequences of carbon credit trades

Consider the parable of a child who is prone to occasional misbehavior. To encourage him to change this bad habit, every time he misbehaves the parents offer a small cash reward if the child behaves well for a week afterwards. The child soon realizes the benefit from misbehaving as frequently as possible so as to maximize his reward payouts. The net result is that, far from reducing bad behavior, the cash reward actually ends up worsening the child's behavior.

In a similar context, Times has an interesting story that highlights how carbon trading to mitigate ozone-depleting greenhouse gas emissions (used in refrigeration and air conditioning) has had the unintended effect of actually increasing emissions. It shows how this has distorted the incentives of manufacturers of such gases

The more dangerous the gas, the more that manufacturers in developing nations would be compensated as they reduced their emissions... they could earn one carbon credit by eliminating one ton of carbon dioxide, but could earn more than 11,000 credits by simply destroying a ton of an obscure waste gas normally released in the manufacturing of a widely used coolant gas...That incentive has driven plants in the developing world not only to increase production of the coolant gas but also to keep it high...

Since 2005 the 19 plants receiving the waste gas payments have profited handsomely from an unlikely business: churning out more harmful coolant gas so they can be paid to destroy its waste byproduct. The high output keeps the prices of the coolant gas irresistibly low, discouraging air-conditioning companies from switching to less-damaging alternative gases. That means, critics say, that United Nations subsidies intended to improve the environment are instead creating their own damage...

The production of coolants was so driven by the lure of carbon credits for waste gas that in the first few years more than half of the plants operated only until they had produced the maximum amount of gas eligible for the carbon credit subsidy, then shut down until the next year... The manufacturers have grown accustomed to an income stream that in some years accounted for half their profits... Some Chinese producers have said that if the payments were to end, they would vent gas skyward.

In fact, these 19 plants producing HFC-23 have taken 46% of all carbon credits issued by the United Nations Environment Program.

This is yet another example of the challenge associated with effective enforcement of any emissions trading scheme. I have blogged earlier here, here, and here, about how carbon tax, being very simple, is a more realistic and therefore implementable strategy to reduce carbon emissions.