03 | June | 2008 | Mostly Economics

Archive for June 3rd, 2008

Using behavioral economics to better healthcare

June 3, 2008

I have written a number of posts lamenting the fact that behavioral economics isn’t used much in public policy. Moreover, most of work so far is limited to field of finance.

I came across this speechby CBO Director Peter Orszag where he discusses how BE could be used to better healthcare amongst people. Peter Orszag in his Blog says:

I am delivering a talk on behavioral economics and health care later today at the National Academy of Social Insurance. Today’s event is being held in honor of Peter Diamond’s winning the Robert Ball awardfrom NASI. Peter is not only brilliant but also a wonderful friend and colleague, and I am thrilled that he has won this award.

Peter has been interested in behavioral economics, which combines insights from psychology with those from economics, for almost 40 years. The talk emphasizes my belief that effective policy design, including policies affecting health care, must reflect more of the insights from behavioral economics — that is, we need a bit more “Psych 101″ in addition to “Econ 101″ in the design of public policies.

It is an excellent speech where Orszag discusses how defaults etc can be used to reduce overall costs while maintaining the quality of healthcare services. The speech also discusses how healthcare services are faring in US. It is quite an important industry as the speech tells us and can’t be ignored:

Put simply, health care costs are the single most important factor influencing the federal government’s budget trajectory—and they already exert a major influence, larger than most of us perhaps realize, on our paychecks. According to the Congressional Budget Office’s (CBO’s) projections, without any changes in federal law, total spending on health care will rise from being 16 percent of the economy in 2007 to being 25 percent in 2025 and almost 50 percent in 2082, and net federal spending on Medicare and Medicaid will rise from being 4.1 percent of the economy to being almost 20 percent over the same period.

The primary driver of future costs will be the increasing cost for treating each beneficiary, rather than the increased number of older beneficiaries.

This is good stuff.

Posted in Behavior Eco/Fin, Economics - macro, micro etc, Economist, Speech / Interviews | 2 Comments »

A new bond maths from Citi and Merrill

June 3, 2008

I came across this story from Economic Times which I found to be another crazy practice in financial markets. I don’t know this but financial firms also do mark to market accounting of their liabilities!

The rule was enacted after lobbying by New York-based companies, led by Merrill, Morgan Stanley, Goldman Sachs and Citigroup, which wrote letters to FASB arguing that it wasn’t fair to make them mark their assets to market value if they couldn’t also mark their liabilities.

One may ask- so what does this mean?

Here’s how it works, according to Richard Bove, an analyst at New York-based Ladenburg Thalmann. A company decides to designate $100 million of its subordinated bonds as subject to mark-to-market accounting. The price of the bonds drops to 80 cents on the dollar from 100 cents. So the firm books $20 million on the presumed savings taht you have on your own liabilities

Now, as most firms debt has been downgraded and bond prices have fallen the liabilities of firms like Citi and Merrill has gone down. Hence, they have actually booked profits as much as USD 12 billion. So with this rule, one can boom profits even if the creditworthiness suffers. This is simply crazy!!