NYT on zoning

Conor Dougherty in The New York Times has a good article on zoning laws,

a growing body of economic literature suggests that anti-growth sentiment... is a major factor in creating a stagnant and less equal American economy.

...Unlike past decades, when people of different socioeconomic backgrounds tended to move to similar areas, today, less-skilled workers often go where jobs are scarcer but housing is cheap, instead of heading to places with the most promising job opportunities  according to research by Daniel Shoag, a professor of public policy at Harvard, and Peter Ganong, also of Harvard.

One reason they’re not migrating to places with better job prospects is that rich cities like San Francisco and Seattle have gotten so expensive that working-class people cannot afford to move there. Even if they could, there would not be much point, since whatever they gained in pay would be swallowed up by rent. 

Stop and rejoice. This is, after all, the New York Times, not the Cato Review. One might expect high housing prices to get blamed on developers, greed, or something, and the solution to be government-constructed housing, "affordable" housing mandates, rent controls, low-income housing subsidies (which protect incumbent low-income people, not those who want to move in to get better jobs) and even more restrictions.

No. The Times, the Obama Administration, California Governor Gerry Brown, have figured out that zoning laws are to blame, and they're making social stratification and inequality worse.

In response, a group of politicians, including Gov. Jerry Brown of California and President Obama, are joining with developers in trying to get cities to streamline many of the local zoning laws that, they say, make homes more expensive and hold too many newcomers at bay. 

.. laws aimed at things like “maintaining neighborhood character” or limiting how many unrelated people can live together in the same house contribute to racial segregation and deeper class disparities. They also exacerbate inequality by restricting the housing supply in places where demand is greatest. 

“You don’t want rules made entirely for people that have something, at the expense of people who don’t,” said Jason Furman, chairman of the White House Council of Economic Advisers. 

This could be a lovely moment in which a bipartisan consensus can get together and fix a real problem.

The article focuses on Boulder Colorado, where

.. the university churns out smart people, the smart people attract employers, and the amenities make everyone want to stay. Twitter is expanding its offices downtown. A few miles away, a big hole full of construction equipment marks a new Google campus that will allow the company to expand its Boulder work force to 1,500 from 400.

Actually, The reason Google and Twitter are in Boulder is that things are much, much worse in Palo Alto! A fate Boulder may soon share:

“We don’t need one more job in Boulder,” Mr. Pomerance said. “We don’t need to grow anymore. Go somewhere else where they need you.”

Brexit or Fixit

Many commenters compare Brexit to the American revolution. I think the constitutional convention is a better analogy for the moment and challenge ahead. A first attempt at union resulted in an unworkable Federal structure. Europe needs a constitutional convention to fix its union.

The EU's first attempt was basically aristocratic/technocratic. Brussels tells the peasants what to do. The EU  needs a hardy dose of accountability, representation, checks and balances -- all the beautiful structures of the US Constitution. What little thought the EU put in to these matters is clearly wanting.

America did not wait for a state to leave. But, though even the Pope admits the EU structure wasn't working, the EU needed this wake up call. Bring the UK to the convention, and bring them back. Fixit. (#Fixit?)


Out of control economic regulation, labor laws, mandated social programs and "60% of British laws are made in Brussels" (I don't know the source of the widely quoted number, but the sentiment is as important as the fact)  are the most sensible arguments I heard for Brexit.

Fraser Nelson's WSJ essay expressed this well

The Brexit campaign started as a cry for liberty, perhaps articulated most clearly by Michael Gove, the British justice secretary... Mr. Gove offered practical examples of the problems of EU membership. As a minister, he said, he deals constantly with edicts and regulations framed at the European level—rules that he doesn’t want and can’t change. These were rules that no one in Britain asked for, rules promulgated by officials whose names Brits don’t know, people whom they never elected and cannot remove from office. Yet they become the law of the land. Much of what we think of as British democracy, Mr. Gove argued, is now no such thing.

The important point, I think, is not the outcome -- too much silly regulation, labor laws, and so on. The process is the important point.

America is, in my opinion, also a victim of stifling economic regulation, job-killing labor laws, incentive-destroying social programs. But, we still have a process in place -- in trouble, creaky, under attack by results-at-any-cost progressivisim.  But we have a process. Regulations are supposed to be authorized by Congress; should follow the Administrative Procedures act, with public comment, cost benefit analysis, and so forth; can be challenged administratively and then in court; and Congress itself can pass laws over-ruling regulators (which the President can veto, as he has).  Europe is missing this process; and european law is even worse than economic regulation here.

Last week's immigration ruling is an example of the same forces under strain in the US. I happen to agree with the Administration on policy grounds: People who have been here their whole lives, parents of US citizen children, should not face the constant risk of deportation, and should be allowed to work legally. (I had no idea there was such a thing as a "work permit" in the US, until President Obama mentioned it.) But, Congress passed silly laws mandating the opposite, and the Administration moved beyond its authority. When States are suing the Administration in the Supreme Court over its actions, we are in danger of Texit. But at least Texas can sue. Britain had no similar way to object to EU edicts.

Process matters, because democracy needs to form consensus and acceptance. When you force things down people's throats, they eventually gag.

Again quoting WSJ

Instead of grumbling about the things we can’t change, Mr. Gove said, it was time to follow “the Americans who declared their independence and never looked back” and “become an exemplar of what an inclusive, open and innovative democracy can achieve.” Many of the Brexiteers think that Britain voted this week to follow a template set in 1776 on the other side of the Atlantic. 

The answer for Europe is that it must allow people the option to change things they don't like. And 1787, not 1776 is the inspiration.

On economics, I think it's overblown.

Will this be a disaster for the British economy? Probably not. Norway, Switzerland, and Japan seem to get along.  If the UK decided to be a free economy free trade and open banking center, it could do wonders.

It is nice to see a consensus (though sometimes implicit) on the advantages of free trade. Leave did not argue for the importance of preserving British jobs with trade restrictions.  Alas, "free trade" now means "access to markets" or managed mercantilism.

The benefits of a continent-wide open labor market are easy to see in my business. As I visit universities around Europe, the typical smart young professor might come from Slovakia, have done an undergraduate degree in Spain, Masters' in the UK, PhD in Italy, is working in Sweden, with spouse working in London. The result is a resurgence of European universities, now dramatically better than they were two decades ago. The irony of Brexit is that English is the common language of Europe, making this integration possible.

So why are markets going so wild? I think political follow-on is very unstable. If Brexit leads to Britain becoming Norway it's not a big deal. If the UK breaks up, and the EU breaks up, we have big trouble ahead. Fixit instead.

Transport innovation

What is it?

I saw this in the parking lot of the hotel where I'm staying. Inspection: yes, it's the chassis of an early 1970s VW, with motor and transmission in place. The motor appears functional. It's connected to the gas cans. Yet, this is a trailer. Why? (Hint: it's parked next to a new Toyota CRV electric car.)

Answer: The owner has a nice new Toyota CRV electric. He extolled the virtues of the electric, its greenness, and the tax breaks and free charging options. But, it only has a 120 mile range, and sometimes he needs to drive longer distances on the freeway. This is Utah, after all.

So... the VW trailer. When in need, he puts the trailer in 4th gear, and turns on its electric system. The throttle is stuck full open. He pulls it to get going put, put put put... Then, the trailer pushes the car along. What if he needs to slow down? No problem, he hits the regenerative brakes on the Toyota, so now the VW is also charging up his batteries!

American ingenuity is still alive!

I did not ask if the highway patrol was aware of just how the trailer functions. Or the DOT, EPA, NHTSA, etc. etc.

Rajan on cash transfers and corruption

Raghu Rajan, who just announced he is stepping down as Governor of the Central Bank of India, gave a very interesting speech, that bears among other things on the question of social programs vs. cash transfers.

A big problem with government provided assistance in India is that the provision is corrupt:

Our [India's] provision of public goods is unfortunately biased against access by the poor. In a number of states, ration shops do not supply what is due, even if one has a ration card – and too many amongst the poor do not have a ration card or a BPL card; Teachers do not show up at schools to teach; The police do not register crimes, or encroachments, especially if committed by the rich and powerful; Public hospitals are not adequately staffed and ostensibly free medicines are not available at the dispensary; …I can go on, but you know the all-too-familiar picture.

Raghu has a thoughtful observation on what keeps this system going:

This is where the crooked but savvy politician fits in. While the poor do not have the money to “purchase” public services that are their right, they have a vote that the politician wants. The politician does a little bit to make life a little more tolerable for his poor constituents – a government job here, an FIR registered there, a land right honoured somewhere else. For this, he gets the gratitude of his voters, and more important, their vote.

...perhaps the system tolerates corruption because the street smart politician is better at making the wheels of the bureaucracy creak, however slowly, in favour of his constituents. And such a system is self-sustaining. An idealist who is unwilling to “work” the system can promise to reform it, but the voters know there is little one person can do. Moreover, who will provide the patronage while the idealist is fighting the system? So why not stay with the fixer you know even if it means the reformist loses his deposit?

So the circle is complete. The poor and the under-privileged need the politician to help them get jobs and public services. The crooked politician needs the businessman to provide the funds that allow him to supply patronage to the poor and fight elections. The corrupt businessman needs the crooked politician to get public resources and contracts cheaply. And the politician needs the votes of the poor and the underprivileged. Every constituency is tied to the other in a cycle of dependence, which ensures that the status quo prevails. 

The Mafia may have had a similar equilibrium

What to do? Cash transfers are an attractive option

... money liberates. Could we not give poor households cash instead of promising them public services? A poor household with cash can patronize whomsoever it wants, and not just the monopolistic government provider. Because the poor can pay for their medicines or their food, they will command respect from the private provider. Not only will a corrupt fair price shop owner not be able to divert the grain he gets since he has to sell at market price, but because he has to compete with the shop across the street, he cannot afford to be surly or lazy. The government can add to the effects of empowering the poor by instilling a genuine cost to being uncompetitive – by shutting down parts of the public delivery systems that do not generate enough custom.

Much of what we need to do is already possible. The government intends to announce a scheme for full financial inclusion on Independence Day. It includes identifying the poor, creating unique biometric identifiers for them, opening linked bank accounts, and making government transfers into those accounts. When fully rolled out, I believe it will give the poor the choice and respect as well as the services they had to beg for in the past. It can break a link between poor public service, patronage, and corruption that is growing more worrisome over time.

...if there is evidence that cash transfers are being misspent – and we should let data rather than pre-conceived notions drive policy -- some portion could be given in the form of electronic coupons that can be spent by the specified recipient only on food, education or healthcare.

 A good summary

 One of the greatest dangers to the growth of developing countries is the middle income trap, where crony capitalism creates oligarchies that slow down growth. [Just developing countries?!] ... To avoid this trap, and to strengthen the independent democracy our leaders won for us sixty seven years ago, we have to improve public services, especially those targeted at the poor. A key mechanism to improve these services is through financial inclusion, which is going to be an important part of the government and the RBI’s plans in the coming years.

Raghu's efforts to reform India's banking and financial system deserve more notice.

(PS: Blogging will be a little spotty for the next week and a half, as I'm off at a glider competition.)

Syverson on the productivity slowdown

Chad Syverson has an interesting new paper on the sources of the productivity slowdown.

Background to wake you up: Long-term US growth is slowing down. This is a (the!) big important issue in economics (one previous post).  And productivity -- how much each person can produce per hour -- is the only source of long-term growth. We are not vastly better off than our grandparents because we negotiated better wages for hacking at coal with pickaxes.

Why is productivity slowing down? Perhaps we've run out of ideas (Gordon). Perhaps a savings glut and the  zero bound drive secular stagnation lack of demand (Summers). Perhaps the out of control regulatory leviathan is killing growth with a thousand cuts (Cochrane).

Or maybe productivity  isn't declining at all, we're just measuring new products badly (Varian; Silicon Valley). Google maps is free! If so, we are living with undiagnosed but healthy deflation, and real GDP growth is actually doing well.

Chad:

First, the productivity slowdown has occurred in dozens of countries, and its size is unrelated to measures of the countries’ consumption or production intensities of information and communication technologies ... Second, estimates... of the surplus created by internet-linked digital technologies fall far short of the $2.7 trillion or more of “missing output” resulting from the productivity growth slowdown...Third, if measurement problems were to account for even a modest share of this missing output, the properly measured output and productivity growth rates of industries that produce and service ICTs [internet] would have to have been multiples of their measured growth in the data. Fourth, while measured gross domestic income has been on average higher than measured gross domestic product since 2004—perhaps indicating workers are being paid to make products that are given away for free or at highly discounted prices—this trend actually began before the productivity slowdown and moreover reflects unusually high capital income rather than labor income (i.e., profits are unusually high). In combination, these complementary facets of evidence suggest that the reasonable prima facie case for the mismeasurement hypothesis faces real hurdles when confronted with the data.

An interesting read throughout. 

[Except for that last sentence, a near parody of academic caution!]  

Financial Choice

If you're interested in policy rather than politics, the package of legislative proposals coming out of Congress are a lot more interesting than the Presidential race at the moment. Speaker Paul Ryan is rolling out "A Better Way" package and Rep. Jeb Hensarling has just announced a "financial CHOICE act" to fundamentally reform Dodd-Frank. (Most quotes are from Jeb Hensarling's speech at the Economic Club of New York. See also  NYT coverage.)

These efforts will, I think, become much more important later on. The presidential race will decide whether this agenda can survive the instant veto that it faces now.  (This is a non-partisan comment. Hilary Clinton could likely assure a landslide by announcing she will work with Paul Ryan to craft and pass it.)

In any case, it defines a clear program that may be the focus of economic policy under a presidency of either party. And I think that's healthy as well.  We are still living in the shadows of Franklin Roosevelt's 100 days, and an increasingly imperial presidency. But the current need is not for a flurry of new legislation and executive orders to address a crisis. We need a steady clean-up of the legal and regulatory mess of the last few decades. For that project, it may be better for policy leadership to come from Congress, and by careful and patient drafting of actual legislation.

The legislation is still being drafted, which is why it would be lovely if more of the media and blogosphere were paying attention rather than to the latest antics of the presidential candidates. The congressional staff writing these things are paying attention and the proposals can be refined!

Today, a look at the Financial CHOICE act.

More capital, and the carrot of less regulation

...there is a growing consensus surrounding the idea of a tradeoff between heightened capital levels and a substantially lower regulatory burden....[We] will relieve financial institutions from regulations that create more burden than benefit in exchange for meeting higher, yet simple, capital requirements...Think of it as a market-based, equity financed Dodd-Frank off- ramp... the option remains with the bank.

How to measure capital? This is a hard nut.

...banks that maintain a simple leverage ratio of at least 10 percent and, at the time of the election, have a composite CAMELS rating of 1 or 2 may elect to be functionally exempt from the post-Dodd-Frank supervisory regime, the Basel III capital and liquidity standards, and a number of other regulatory burdens that pre-date Dodd-Frank. 

This is an element worthy of more discussion. Leverage ratios have problems too, as they do not distinguish the riskiness of assets.  CAMELS ratings have their own problems.

As blog readers know, I think we can keep going well beyond 10% capital. I'd like to see steady incentives for more and more capital, rather than an arbitrary threshold.  My current thinking leads to reducing subsidies for debt, a fee on short term debt, and using ratios of market value of equity to debt. Or a schedule of regulatory reductions: so much for 10% capital, more for 20% capital, do what you want at 100%. But we're in danger here of repeating a Libertarian party sort of fight whether there should be drivers' licenses in Nirvana, so let's leave this as an open question for refinement.

It seems natural to ask for more capital on riskier assets, but a beautiful paragraph on risk-weights explains why that doesn't work.

Risk-weighting is simply not as effective. First, it is far too complex, requiring millions of calculations to measure capital adequacy. Second, it confers a competitive advantage on those large financial institutions that have the resources to navigate its mind-numbing complexity. Third, regulators have managed to get the risk weights tragically wrong, for example, treating toxic mortgage-backed securities and Greek sovereign debt as essentially risk-free. One myopic globally imposed view of risk is itself risky. Finally, risk-weighting places regulators in the position of micro-managing financial institutions, which politicizes credit allocation. Witness the World Bank recently advertising its zero risk rating under the Basel Accords for their “green bonds.”

The regulatory carrot: A bank with enough capital

would be deemed “well capitalized” for prompt corrective action purposes; It would no longer be subject to Basel Committee capital or liquidity requirements as implemented by the U.S. banking regulators;  It would be able to make capital distributions freely; and would additionally be able to consummate transactions without being subject to the regulatory challenge of increasing risk to the stability of our banking or financial system, or on grounds related to capital or liquidity standards of concentrations of deposits or assets. 

... no Federal rule establishing “heightened prudential standards” of the type provided for in Dodd-Frank would apply to qualifying banking organizations, including the living will requirement...In short, a strongly capitalized qualifying bank will be enabled to remove government bureaucrats from its boardroom and lend and invest freely.

From the executive summary,

Exempt banking organizations that have made a qualifying capital election from any federal law, rule, or regulation that permits a banking agency to consider risk “to the stability of the United States banking or financial system,” added to various federal banking laws by Section 604 of the Dodd-Frank Act, when reviewing an application to consummate a transaction or commence an activity.

A linguistic note: Not once in this speech, except while quoting others, does Rep. Hensarling use the phrase "to hold" capital. Every instance is "raise" capital. And explicitly, 

equity capital can be put to work no differently than debt or deposits. It is not money put under a mattress.

And as to the ballyhooed impossibility of raising capital, 

U.S. banks have raised hundreds of billions in new capital

Who says nobody in Congress understands finance!

Bankruptcy; no more "designation"  

The centerpiece of Dodd-Frank is the FSOC (Financial Stability Oversight Council's) ability to "designate" a firm as "systemically important," and then to "resolve" it, in place of bankruptcy.  This will go.

...bankruptcy, not bailouts. Recently the House passed the bipartisan Financial Institution Bankruptcy Act, which creates a new subchapter of the Bankruptcy Code tailored to specifically address the failure of a large, complex financial institution.....

The speech goes on with several good reasons bankruptcy is better than resolution.  I hear cheering from John Taylor's office already.

 Retroactively repeal the authority of the Financial Stability Oversight Council (FSOC) to designate firms as systematically important financial institutions (SIFIs) 

Fed Lending

...we impose on the Fed Bagehot’s famous dictum: lend freely, but only to solvent institutions, only against sound collateral, and only at interest rates high enough to dissuade those who are not genuinely in need. 

I'm a little leery of this one. Dictums are not analysis. If you want to stop a run, you have to lend pretty freely. Private institutions like a clearinghouse to do that once existed, but they have been put out of business by the Fed.  Nobody knows who is solvent vs. illiquid; the point of a run is that collateral that was "sound" yesterday is not today.  And if you want to stop a run, who cares if it's insolvent or illiquid? The Fed doesn't need quickly salable collateral, being super senior in bankruptcy is enough.  Bagehot's dictum is a great way to run a hedge fund. It's not necessarily the right way to run a central bank.

I worry that we are headed for the worst of all worlds -- people expect bailouts and free fed lending, but the government is legally constrained from doing so. All the moral hazard and none of the crisis mop. If we're going to go in this direction, it has to be crystal clear to people running banks that the government will not be able to step in next time, even stretching laws, and they'd better set things up carefully ahead of time. I'm afraid people are not going to believe any legal restrictions.

Rule of Law

Some of the most interesting parts of this proposal really belong together in "restoring the rule of law to regulation." That's a big project that I hear simmering in much of this Congressional planning. And, based on the daily news (for example the latest on the FCC takeover of the internet) not a minute too soon.

CFPB 

The "Consumer Financial Protection Bureau" is out of control.

fundamentally reforming the CFPB......task it with the dual mission of consumer protection and competitive markets, with a cost-benefit analysis of rules performed by an Office of Economic Analysis. 

 Replace the current single director with a bipartisan, five-member commission which is subject to congressional oversight and appropriations. 

... Repeal authority to ban bank products or services it deems “abusive” and its authority to prohibit arbitration. ... Repeal indirect auto lending guidance.

Federal Reserve 

One of the most thought-provoking proposals splits the Federal Reserve's regulatory power from its monetary policy power. It puts bank regulation, like all regulation, in the rule-of-law framework that is supposed to exist for regulation: cost-benefit analysis, Administrative Procedures Act, Congressional oversight, and so forth. Various quotes: 

Require that the different sets of conditions under which stress tests are evaluated subject to notice and comment period. 

... makes sure every financial regulation passes a rigorous cost-benefit test... 

We will put all the financial regulatory agencies on budget. The bare minimum level of accountability to “We the People” is to have their elected representatives in Congress control the power of the purse, as inscribed in our Constitution. 

But, wisely,

protects the Federal Reserve’s independence in conducting monetary policy by leaving that function off-budget. The Fed’s prudential regulatory and financial supervision activities, however, will now be subject to the normal and transparent congressional appropriations process.

SEC

...due process rights. Too many citizens have been “shook down” or abused by their government. Thus we will provide an immediate right of removal to federal court for respondents in administrative proceedings.  We will ensure that disciplinary proceedings are public, that all fines imposed by regulatory agencies are sent to the Treasury for deficit reduction, that regulatory entities created by Congress are subject to full congressional oversight, and that other due process rights are strengthened.

There is a curious section on increasing the SEC's power:

the Financial CHOICE Act will impose the toughest penalties in history for financial fraud, self- dealing and deception.

We will double the cap for the most serious securities law violations and will allow for triple monetary fines when penalties are tied to illegal profits. We will give the SEC new authority to impose sanctions more closely linked to investor losses – and increase punishments even more for repeat offenders. We will increase the maximum criminal fines for both individuals and firms that engage in insider trading.

I'm not aware of a big problem in the SEC (and DOJ) not being able to ruin people's lives adequately, or extort large enough settlements from banks. Perhaps this is an olive branch, which won't hurt much.

Broader project

A sense of the broader project to restore rule of law in regulation.

Dodd-Frank gives FSOC the ability to designate companies as Too Big to Fail if it “determines that material financial distress” at the company “could pose a threat to the financial stability of the United States.” But nowhere in Dodd-Frank, or anywhere else in the U.S. Code for that matter, are these terms defined. So by defining these vague terms in any fashion that pleases them, this “super-group” of regulators can exert ultimate functional control over almost any large financial firm in our economy, and do so with utter disregard for due process. This is not the rule of law; it is the rule of rulers, and it’s an anathema to a free and democratic society.... 

Next, we repeal the Chevron doctrine requiring the judiciary to give deference to financial regulatory agencies’ interpretation of the law. The doctrine is unfair and an affront to due process and justice. 

I've gone on long enough. Legislation needs a public comment mechanism too, as this is  a big package, which though on a very good track can surely be refined a bit.

Lottery Winners Don't Get Healthier

Alex Tabarrok at Marginal Revolution had a great post last week, Lottery Winners Don't get Healthier (also enjoy the url.)

Wealthier people are healthier and live longer. Why? One popular explanation is summarized in the documentary Unnatural Causes: Is Inequality Making us Sick?

The lives of a CEO, a lab supervisor, a janitor, and an unemployed mother illustrate how class shapes opportunities for good health. Those on the top have the most access to power, resources and opportunity – and thus the best health. Those on the bottom are faced with more stressors – unpaid bills, jobs that don’t pay enough, unsafe living conditions, exposure to environmental hazards, lack of control over work and schedule, worries over children – and the fewest resources available to help them cope. 

The net effect is a health-wealth gradient, in which every descending rung of the socioeconomic ladder corresponds to worse health.

If this were true, then increasing the wealth of a poor person would increase their health. That does not appear to be the case. In important new research David Cesarini, Erik Lindqvist, Robert Ostling and Bjorn Wallace look at the health of lottery winners in Sweden (75% of winnings within the range of approximately $20,000 to $800,000) and, importantly, on their children. Most effects on adults are reliably close to zero and in no case can wealth explain a large share of the wealth-health gradient:

In adults, we find no evidence that wealth impacts mortality or health care utilization.... Our estimates allow us to rule out effects on 10-year mortality one sixth as large as the crosssectional wealth-mortality gradient.

The authors also look at the health effects on the children of lottery winners. There is more uncertainty in the health estimates on children but most estimates cluster around zero and developmental effects on things like IQ can be rejected (“In all eight subsamples, we can rule out wealth effects on GPA smaller than 0.01 standard deviations”).

(My emphasis above)

Alex does not emphasize the most important point, I think, of this study.  The natural inference is, The same things that make you wealthy make you healthy. The correlation between health and wealth across the population reflect two outcomes of the same underlying causes.

We can speculate what those causes are.  (I haven't read the paper, maybe the authors do.) A natural hypothesis is a whole set of circumstances and lifestyle choices have both health and wealth effects. These causes can be either "right" or "left" as far as the evidence before us: "Right:" Thrift, hard work, self discipline and clean living lead to health and wealth. "Left:" good parents, good neighborhood, the right social connections lead to health and wealth.

Either way, simply transferring money will not transfer the things that produce money, and produce health.

Perhaps the documentary was right after all: "class shapes opportunities for good health."  But "class" is about more than a bank account.

Also, Alex can be misread as a bit too critical: "If this were true." It is true that health and wealth are correlated. It is not true that more wealth causes better health.  The problem is  not just "resources available to help them cope."

Why a blog post? This story is a gorgeous example of the one central thing you learn when doing empirical economics: Correlation is not causation. Always look for the reverse possibility, or that the two things correlated are both outcomes of something else, and changing A will not affect B.   We seldom get an example that is so beautifully clear.

Update:  Melissa Kearney writes,

"Bill Evans and Craig Garthwaite have an important study [AER] showing that expansions of EITC benefits led to improvements in self-reported health status among affected mothers. 

Their paper provides a nice counterpoint to the Swedish lottery study, one that is arguably more relevant to the policy question of whether more income would causally improve the health of low-income individuals in the U.S.

Thanks Melissa for pointing it out. This is interesting, but I'd rather not get in to a dissection of studies here -- just who takes advantage of EITC benefits, how instruments and differences do and don't answer these problems. The main point of my post is not to answer once and for all the question -- how much does showers of money improve people's heath -- but to point out with this forceful example for non-economists the possibility that widely reported correlations - rich people are healthier -- don't automatically mean that money showers raise health.