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Questions I haven't made much progress on
1. If you are in a liquidity trap, is your exchange rate indeterminate? Under what conditions? Along what range?
2. Does it matter if the other currency is also in a liquidity trap?
3. What will result from the intersection of two possible trends: insistence on a greater equality in health care outcomes, and the development of new technologies -- some at the genetic level for the individual -- which will lead to a greater inequality of health care outcomes?
Posted by Tyler Cowen on October 24, 2009 at 09:39 AM in Economics, Medicine | Permalink
Comments
On 1 and 2 -- not indeterminate, but carry trades are far riskier since liquidity traps can end with sudden flips from savings to consumption -- sudden meaning a period of months. Aren't currency markets liquid enough to handle such a shift? Sure there will be big winners and losers, but how would the exchange rate be indeterminate in a liquidity trap? I don't know the numbers well enough to know the answer.
Posted by: Michael F. Martin at Oct 24, 2009 10:23:31 AM
re #3:
These two trends don't necessarily work against each other if genetic health, the second inequality, is uncorrelated with income, the first inequality. If they are correlated, which I imagine they are, maybe encouraging gene therapy and other genetic interventions in low income parents is one way to fight income inequality.
Posted by: ao at Oct 24, 2009 10:37:48 AM
I'm going to stick with #3 for this one. I think ao is spot on in this case, it's not a zero sum game.
At root for this question is what obstacles are in place for greater equality. Naturally, the frontier of medicine will be significantly more expensive (increasing marginal cost?). If we treat this as the only factor, it's settled.
However, this expense is only looking at half the equation. If genetic modification were to be so successful that, even at its great cost, it still saves money over the course of the person's life, the game changes completely.
The ultimate issue then becomes a question of capital. Even at a lower overall cost, it is a significant cost at one time. It's almost identical to buying a house with cash or mortgage.
In the end, if the genetic solution does save costs overall (a reasonable assumption unless we're willing to measure utility by a different variable) it does not have to crowd out equality.
Posted by: Brian at Oct 24, 2009 11:07:00 AM
What is the true cost of genetic modification. If I cure my health with genetic modification and transmit my genes to my offspring, should the cost of genetic modification include the cost of helping my offspring as well. Should I get a bonus or payment for not transmitting my genes, or a penalty if I do, or an obligation to pay for my offspring.
Posted by: Bill at Oct 24, 2009 11:45:43 AM
#3 - technology brings mostly greater equality in health outcomes due to severely diminishing returns. The same about of money and technology will make far more significant difference to people who would otherwise be the most unhealthy. We can even make people with HIV live four time longer, but barely add a few years to lifespans of an average person.
It would be highly surprising if this diminishing returns curve reversed itself, or even flattened.
(and this isn't tautological; by contrast with people, money applied to a mid-healthy country like China works a lot better than applied to a low-health country like most of Africa, or high-health country like most of Western Europe).
Posted by: Tomasz Wegrzanowski at Oct 24, 2009 12:32:58 PM
#3.
The death of blockbuster drug model, would be the best thing to have happened for medical cost control. No need of prescribing unnecessary tests/drugs/treatments which will not cure a patient, with wrong genetic profile..
I for one am not advocating greater equality in outcomes, only greater equality in access to basic/routine care. And I don't think I am alone.
Posted by: JSIS at Oct 24, 2009 2:03:09 PM
There would have to be a complete breakdown in the forex market. The dollar value of a day's forex trading exceeds that of the NYSE Euronext in a month, so it's not going to happen.
Posted by: Anne T. Positivist at Oct 24, 2009 6:47:54 PM
To answer number 3:
I think in the short term, it will lead to a higher natural rate of unemployment, and eventually the insistence will end.
Reason:
In the short run:
The "insistence on a greater equality in health care outcomes" means that fixed costs for an employer are higher, thus they will hire fewer people on the low end, and pay people less in the middle scale workers.
In the long run:
The NARU will continue to get higher as people insist on equality of outcomes and new-technologies continue to be invented. Eventually, a sudden shift will happen that removes the "insistence on a greater equality in health care outcomes."
Posted by: Doc Merlin at Oct 24, 2009 8:14:49 PM
I for one am not advocating greater equality in outcomes, only greater equality in access to basic/routine care. And I don't think I am alone.
please forgive me for being dense. i believe i understand what you're saying in its format--it's a popular defense of property rights, we are all equally entitled to pursue property, but not have an equal division of it.
in this case, however, i think i may misunderstand something. it seems that access to care, by its nature, means an amount of care. one cannot have meaningful access to care without having more care.
unless of course you're saying that all people of meaningful variables should be treated equally. that is, all non-smokers should be treated similarly, but different from all smokers (or whatever other set of variables you choose).
the problem i'm seeing with this is that it's difficult to determine what variables should count. do we count only genetic, but not environmental factors? do we use a sort of excise tax for insurance?
i'm very curious to see how this would pan out. i used to be a john locke type property theorist, so i am interested in how it would apply in this case.
Posted by: brian at Oct 24, 2009 11:03:24 PM
Re #3 - the first of the two components is not insistence of equality of outcomes - it is merely a question of who pays for health care inputs
in essence, a portion of the wealth derived from all sorts of technological innovation is getting allocated by society towards making certain forms of medical technology available without regards to the financial means of the individual who is consuming. this is very different from ensuring that medical outcomes are equivalent.
because the economic rewards to medical innovation are large, and the platform for generating said innovations is robust and stable, all sorts of innovation will continue. the tax on innovation created by this allocation of medical resources to individuals without regard to cost may slow the second process, but there is no inherent conflict.
the general form is that one mechanism will not stop the other, although they will certainly interract.
Posted by: David Riffer at Oct 24, 2009 11:05:45 PM
my take on #3 - auto evolution is something we must undertake; this species is woefully incapable of deling with the problems it faces:
the human race is almost finished
here's another take, which includes specific genetic proposals: - the moral imperative of our future evolution
Posted by: rjs at Oct 25, 2009 5:11:30 AM
1 and 2: People mean different things when they say liquidity trap. Some people mean that demand to hold currency is so high that money added will not affect PY, it'll just cause V to do down. But that doesn't make any sense. Why would people horde money from helicopter drops and not from wages and capital income? If demand to hold currency really is perfectly elastic, ALL prices, not just exchange rates, are indeterminate. I don't think this version of the liquidity trap makes any sense. Surely there is some amount of money people want to hold, and after that they'll start spending it again. Maybe we can be in a situation where 90% of money is held and not spent, but 100% is unrealistic.
Another definition of liquidity trap is if the central bank engages in OMOs, the nominal interest rate won't go down. This seems like a far more reasonable definition and one which does not cause prices to be indeterminate. If you have 5% deflation and the natural real rate of interest would be 3%, you will get 0% interest rates, and they will stay there until the central bank creates enough money to reduce deflation below 3%. Exchange rates would be determined by the ratio of export and import prices plus some risk factor just like they usually are.
I don't think the other country being in a liquidity trap makes a difference. All one should care about is how much their exports cost and if their currency will change in value in the future.
Posted by: azmyth at Oct 25, 2009 2:36:14 PM
