Economist's View

Money Monopoly

Marshall Auerback says California is challenging the federal monopoly on money creation:

Schwarznegger to Obama: Watch and Learn, by Marshall Auerback: According to the San Diego Union-Tribune, Republicans and Democrats alike embraced legislation last Friday that would make California IOUs legal tender for all taxes, fees and other payments owed to the state.

Effectively, California is using its IOUs to create a currency. If this bill passes it would allow California to deficit spend just like the Federal Government and with the IOU's acceptable as payment of state taxes, it instantly imparts value to them. In effect, what you have is a state of the union creating a sovereign currency right under the noses of Treasury, Fed. They are stumbling their way into it... It will be viewed as a stop gap measure at first, and then could very well become entrenched as states realize they have a way to escape balanced budget requirements. ...

The ... Federal government retains this monopoly under our existing monetary arrangements. If California is successful here in allowing its IOUs to pay tax, it has profound constitutional ramifications. ...

It will be interesting to see what the exchange rate is between California IOU and US currency - the IOUs do offer a yield, so should be less than par by design. I wonder if NY is next.

This is like some sort of return to the 13 colonies with all kinds of ersatz currency floating about. It's hard to believe the Rubinite wing of the Democrats will just let it be, given the threat it represents to Wall Street's prevailing economic interests, but it is an understandable response...

There are political benefits for Obama...: If the Federal government allows this proposal of the state of California to go unchallenged, it would relieve the President of a major political quandary, which is, does he help California and then open himself to aid requests from other states?..., or, does he let California go and lose 56 electoral votes in the next election?

By allowing them to "solve" their own problem in the manner proposed by the legislation he avoids the quandary. And ... they just might let them do it until the import is fully understood.

It is true that this legislation represents a profound break from all federal laws. It is almost bound to incur some sort of constitutional challenge, representing as it does, a profound threat to the Federal government's currency monopoly powers. But this is another instance where Obama's inattentiveness to the ramifications of the states' respective fiscal crises has come back to haunt him. This situation would not have arisen had Obama embraced a simple revenue sharing plan with the states (so that the states' respective fiscal policies would be working in harmony with his proposals, rather than mitigating the impact of the Federal fiscal stimulus), as recommended by any number of prominent economists...

It will be interesting to see how this plays out. As California goes, will the nation follow? ...

Setting aside the particulars of the California case and whether or not the IOUs are actually functioning as money - that's debatable - very, very generally, the federal government has a budget constraint just like everyone else, well sort of like everyone else anyway -- most of us can't levy taxes or print money. Federal government finances must satisfy

G - T = ΔM + ΔB,

where Δ means "change in," G is government spending, T is taxes, M is the money supply, and B is bonds. The left-hand side is the deficit, and the right-hand is how it is financed. Thus, when G is greater than T so that there is a deficit in a given budget period, it must be financed by printing new money (ΔM) or issuing new bonds (ΔB). (If it helps, think of G as being 100 and T being 70 so that the deficit is 30. The deficit can be financed by printing 30 new dollars, by borrowing 30 dollars from the public, or some combination of the two)

Now, for states, ΔM is zero since that would be money creation, and they are not allowed to do that. Thus, a state's budget constraint is:

G - T = ΔB

This must be satisfied each budget period. Because this constraint must hold each budget period, notice what happens if there is a legal or political debt limit -- in some states it is effectively B=0 -- and B is already at the limit (which means ΔB cannot be positive since that would add to the debt). If the state's budget deficit rises in a recession due to decreased tax revenue and increased spending on social services, then G must fall to eliminate the deficit, or new taxes must be levied, and the cutback in spending and/or increase in taxes makes the recession worse.

But what if a state was suddenly granted the power to print money? Then it could pay for that year's deficit without increasing bonds (i.e. debt) any further, i.e. G - T could be financed solely by ΔM if it so chooses. That is, the state now has the constraint

G - T = ΔM + ΔB

If B is maxed out politically or legally so that ΔB must equal zero (or be negative), then a deficit, G - T, could still be financed with ΔM.

Having fifty different currencies isn't necessarily bad, there are pros and cons to having a single currency across all fifty states, i.e. to forming currency union. With a currency union, individual members lose the ability to conduct independent monetary policy - there is one money and one policy so everyone in the group gets the same treatment - but that is less costly when the the economic differences among the members of the union is small and the same policy is generally applicable. There are many advantages to having a single currency (no exchange rate uncertainty and lower transactions costs to name just two), and for countries considering forming a currency union, there is a list of factors that are cited as working for or against unification. Many of these factors involve social, political, economic, and geographic factors, and generally, though not always, the more similar the countries are, the more likely it is that a currency union will be beneficial (e.g. similar levels of development, a similar mix of products, similar legal institutions, same language). In the case of the fifty states within the U.S., I believe the advantages of a single currency far outweigh the disadvantages, and states should not be allowed to create their own currencies.

"Boiling the Frog"

What are we waiting for?:

Boiling the Frog, by Paul Krugman, Commentary, NY Times: Is America on its way to becoming a boiled frog?

I’m referring, of course, to the proverbial frog that, placed in a pot of cold water that is gradually heated, never realizes the danger it’s in and is boiled alive. Real frogs will, in fact, jump out of the pot — but never mind. The hypothetical boiled frog is a useful metaphor for a very real problem: the difficulty of responding to disasters that creep up on you a bit at a time. ...

I started thinking about boiled frogs recently as I watched the depressing state of debate over both economic and environmental policy. These are both areas in which ... it’s very hard to get people to do what it takes to head off a catastrophe foretold. ...

Start with economics: ...Most economic forecasters now expect gross domestic product to start growing soon, if it hasn’t already. But all the signs point to a “jobless recovery”...

Now, it’s bad enough to be jobless for a few weeks; it’s much worse being unemployed for months or years. Yet that’s exactly what will happen to millions of Americans if the average forecast is right — which means that many of the unemployed will lose their savings, their homes and more.

To head off this outcome — and remember, this isn’t what economic Cassandras are saying; it’s the forecasting consensus — we’d need to get another round of fiscal stimulus under way very soon. But neither Congress nor, alas, the Obama administration is showing any inclination to act. Now that the free fall is over, all sense of urgency seems to have vanished.

This will probably change once the reality of the jobless recovery becomes all too apparent. But by then it will be too late to avoid a slow-motion human and social disaster.

Still, the boiled-frog problem on the economy is nothing compared with the problem of ... climate change. ... At this point, the central forecast of leading climate models — not the worst-case scenario but the most likely outcome — is utter catastrophe, a rise in temperatures that will totally disrupt life as we know it... How to head off that catastrophe should be the dominant policy issue of our time.

But it isn’t, because climate change is a creeping threat rather than an attention-grabbing crisis. The full dimensions of the catastrophe won’t be apparent for decades, perhaps generations. ... Unfortunately, if we wait to act until the climate crisis is ... obvious, catastrophe will already have become inevitable.

And while a major environmental bill has passed the House, which was an amazing and inspiring political achievement, the bill fell well short of what the planet really needs — and despite this faces steep odds in the Senate.

What makes the apparent paralysis of policy especially alarming is that so little is happening when the political situation seems, on the surface, to be so favorable...

After all, supply-siders and climate-change-deniers no longer control the White House and key Congressional committees. Democrats have a popular president to lead them, a large majority in the House of Representatives and 60 votes in the Senate. And this isn’t the old Democratic majority, which was an awkward coalition between Northern liberals and Southern conservatives; this is, by historical standards, a relatively solid progressive bloc.

And let’s be clear: both the president and the party’s Congressional leadership understand the economic and environmental issues perfectly well. So if we can’t get action to head off disaster now, what would it take?

I don’t know the answer. And that’s why I keep thinking about boiling frogs.

links for 2009-07-13

• A Homespun Safety Net - NYTimes.com
• Chrome vs. Bing vs. You and Me - NYTimes.com
• Supply, Demand and Speculation - Greed, Green and Grains
• Modern macro even Paul Krugman will love - Greg Mankiw
• Now We May Perhaps to Begin? - Economic Principals
• Securitization and Structured Credit - Interview With Ann Rutledge
• President Obama, please be bolder - Richard Green
• Universal health care could boost economy - Jeff Gelles
• Catholicism as Antidote to Turbo-Capitalism - NYTimes.com
• Opaque Burma - Understanding Society
• Better Lightbulbs And Beyond - Mark Muro
• Brad DeLong - links
• naked capitalism - links
• Econbrowser - links
• Marginal Revolution - links
• Chris Martenson - links
• Abnormal Returns - links

"The Hottest Places in Hell are Reserved for Those Who, in Times of Moral Crisis, Maintain a Neutrality"

Tom Bozzo says to watch this video [parts of transcript below]:

Bill Moyers Journal: BILL MOYERS: Wendell Potter ... worked for CIGNA 15 years and left last year. ... why are you speaking out now?

WENDELL POTTER: I didn't intend to, until it became really clear to me that the industry is resorting to the same tactics they've used over the years, and particularly back in the early '90s, when they were leading the effort to kill the Clinton plan. ...

I was beginning to question what I was doing as the industry shifted from selling primarily managed care plans, to what they refer to as consumer-driven plans. And they're really plans that have very high deductibles, meaning that they're shifting a lot of the cost off health care from employers and insurers, insurance companies, to individuals. And a lot of people can't even afford to make their co-payments when they go get care... But it really took a trip back home to Tennessee for me to see exactly what is happening to so many Americans. I ... went home, to visit relatives. And I picked up the local newspaper and I saw that a health care expedition was being held a few miles up the road, in Wise, Virginia. And I was intrigued.

BILL MOYERS: So you drove there?

WENDELL POTTER: I did. ... It was being held at a Wise County Fairground. ... It was a very cloudy, misty day, it was raining that day, and I walked through the fairground gates. And I didn't know what to expect. I just assumed that it would be, you know, like a health-- booths set up and people just getting their blood pressure checked and things like that.

But what I saw were doctors who were set up to provide care in animal stalls. Or they'd erected tents, to care for people. I mean, there was no privacy. In some cases-- and I've got some pictures of people being treated on gurneys, on rain-soaked pavement.

And I saw people lined up, standing in line or sitting in these long, long lines, waiting to get care. People drove from South Carolina and Georgia and Kentucky, Tennessee-- all over the region, because they knew that this was being done. A lot of them heard about it from word of mouth.

Fiscal Policy: "The Right and the Obvious Thing To Do"

Two things seem relatively clear. First, given the projected baseline for the economy, the previous stimulus package was too small. It was big enough to help, but it won't give anything near the boost the economy needs. Second, the original baseline was far too optimistic.

So I agree:

Fiscal Policy: The Obama Administration Is Not Making Much Sense These Days, by Brad DeLong: ...Last December the Obama administration to be decided on a fiscal stimulus package which they believed would have minor effects on the economy in the first two quarters of 2009 and major effects--would push unemployment down below what it would other wise have been by more than half a percentage point--starting in the third quarter of 2009. They believed that the economy was not that weak, and that with the fiscal stimulus package taking effect unemployment would be peaking now at a rate of 7.9%.

Instead, unemployment is now probably in the 9.5-9.7% range--and without the stimulus package it would right now have turned out to be above 10%:

The financial crisis of last fall hit the economy's levels of production, spending, and employment much harder than people thought at the time. If we had known then what we know now, it would have been prudent then to propose twice as large a fiscal stimulus program as the Obama administration in fact did propose. ...

All in all, it looks like the unemployment rate in 2009 is going to average 1.2 percentage points above where the administration last December thought we would be. ...

It is interesting and important to note that the excess unemployment now forecast over 2009 relative to last December's forecast is of the ... magnitude ... of ... a $170 billion shortfall.

If I were running the government, I would be trying to make up that GDP shortfall right now: I would be rushing a clean $170 billion--$500 per citizen--aid-to-states-that-maintain-effort package through the congress this week. It would seem the right and the obvious thing to do.

At least that much, and the sooner the better.

The Caritas in Veritate: Justice

The only time I ever got an F on an exam, or even close, was in a religious studies course I took to fulfill general education requirements. You know how some of you don't get math? I felt the same way. I somehow managed to pass the course, but I had no foundation whatsoever in the topic going in, and I just didn't get it.

So I am going to let others comment on the Pope's Caritas in Veritate:

Mixing morals and money. by Christopher Caldwell, Commentary, Financial Times: To judge from his encyclical Caritas in Veritate, published this week, Pope Benedict XVI agrees with those who say that something has gone wrong with the way the world does business. ... The encyclical is not anti-global or anti-capitalist. ... Business and finance have not created new excesses. They have opened new routes for an arrogance already present in the hearts of men.

The Pope, in perhaps his most radical passage, laments the “hegemony of the binary model of market-plus-state”. ... Business and government have become specialised fields; each follows a logic that dispenses with the insights of religion. Globalisation can break down cultures, and with them the moral systems in light of which it can be judged. ...

Unfortunately, one of the lost insights concerns justice. The Pope would like us to think about justice as having three aspects. There is commutative justice (the idea of properly judging the prices of things), distributive justice and social justice. National governments, which used to address the second and third, no longer have full power to do so. The global institutions that have replaced them tend to be concerned only with commutative justice – and they do a bad job, the Pope thinks, of judging the value of labour. “If the market is governed solely by the principle of the equivalence in value of exchanged goods, it cannot produce the social cohesion that it requires,” he writes.

links for 2009-07-12

• Ed Lazear on the Stimulus Package - Econbrowser
• Rebuilding Something Better - Barack Obama
• Ben Stein Has Not Heard of Global Warming - Beat the Press
• Forced Sales and House Prices - NBER Digest
• Sled dogs to snowmobiles - Arctic Economics
• Negative Nominal Interest Rates Miss the Point - Economic Perspectives
• Who Said Economists Didn’t See The Crisis Coming? - Edward Hugh
• The Big Picture - links
• Brad DeLong - links
• naked capitalism - links

"Trumped by Darwin?"

Robert Frank returns to the point he made in Alpha Markets, i.e. that Charles Darwin provides the "true intellectual foundation" for economics. Though the example this time is male elk rather than bull elephant seals, the central point - and it's one worth giving more thought to - is that "Individual and group interests are almost always in conflict when rewards to individuals depend on relative performance." In these situations, which occur frequently in economic and social relationships, the assumption in neoclassical economic models that the maximization of self-interest is consistent with the maximization of social interest does not hold, and failure to recognize this has " undermined regulatory efforts ... causing considerable harm to us all":

The Invisible Hand, Trumped by Darwin?, by Robert Frank, Commentary, NY Times: If asked to identify the intellectual founder of their discipline, most economists today would probably cite Adam Smith. But that will change. ... Charles Darwin ... tracks economic reality much more closely. ...

Smith’s basic idea was that business owners ... have powerful incentives to introduce improved product designs and cost-saving innovations. These moves bolster innovators’ profits in the short term. But rivals respond by adopting the same innovations, and the resulting competition gradually drives down prices and profits. In the end, Smith argued, consumers reap all the gains.

The central theme of Darwin’s narrative was that competition favors traits and behavior according to how they affect the success of individuals, not species or other groups. As in Smith’s account, traits that enhance individual fitness sometimes promote group interests. For example, a mutation for keener eyesight in hawks benefits not only any individual hawk that bears it, but also makes hawks more likely to prosper as a species.

In other cases, however, traits that help individuals are harmful to larger groups. For instance, a mutation for larger antlers served the reproductive interests of an individual male elk, because it helped him prevail in battles ... for access to mates. But as this mutation spread, it started an arms race that made life more hazardous for male elk over all. The antlers of male elk can now span five feet or more. And despite their utility in battle, they often become a fatal handicap when predators pursue males into dense woods.

In Darwin’s framework, then,... [c]ompetition, to be sure, sometimes guides individual behavior in ways that benefit society as a whole. But not always.

Individual and group interests are almost always in conflict when rewards to individuals depend on relative performance, as in the antlers arms race. In the marketplace, such reward structures are the rule, not the exception. The income of investment managers, for example, depends mainly on the amount of money they manage, which in turn depends largely on their funds’ relative performance. Relative performance affects many other rewards in contemporary life. ...

In cases like these, relative incentive structures undermine the invisible hand. To make their funds more attractive to investors, money managers create complex securities that impose serious, if often well-camouflaged, risks on society. But when all managers take such steps, they are mutually offsetting. No one benefits, yet the risk of financial crises rises sharply. ...

It’s the same with athletes who take anabolic steroids. ...

If male elk could vote to scale back their antlers by half, they would have compelling reasons for doing so, because only relative antler size matters. Of course, they have no means to enact such regulations.

But humans can and do. ... Darwin has identified the rationale for much of the regulation we observe in modern societies — including steroid bans in sports, safety and hours regulation in the workplace, product safety standards and the myriad restrictions typically imposed on the financial sector.

Ideas have consequences. The uncritical celebration of the invisible hand by Smith’s disciples has undermined regulatory efforts to reconcile conflicts between individual and collective interests in recent decades, causing considerable harm to us all. ...

[And, again, for those who might be interested, see also Paul Krugman's: What Economists Can Learn from Evolutionary Theorists Synopsis.]

Average Weekly Hours

"Is Benefit-Cost Analysis Helpful for Environmental Regulation?"

 Robert Stavins notes that:

With an exceptionally talented group of thinkers - including scientists, lawyers, and economists - now in key environmental and energy policy positions at the White House, the Environmental Protection Agency, the Department of Energy, and the Department of the Treasury, this question about the usefulness of benefit-cost analysis is of particular importance

Here's his (balanced) discussion. Points four, five, and eight struck me as particularly noteworthy:

Is Benefit-Cost Analysis Helpful for Environmental Regulation?, by Robert Stavins: ...[Does] economic analysis - in particular, the comparison of the benefits and costs of proposed policies - play ... a truly useful role in Washington, or is it little more than a distraction of attention from more important perspectives on public policy, or - worst of all - is it counter-productive, even antithetical, to the development, assessment, and implementation of sound policy in the environmental, resource, and energy realms. ...

For many years, there have been calls from some quarters for greater reliance on the use of economic analysis in the development and evaluation of environmental regulations. As I have noted in previous posts on this blog, most economists would argue that economic efficiency — measured as the difference between benefits and costs — ought to be one of the key criteria for evaluating proposed regulations. ... Because society has limited resources to spend on regulation, such analysis can help illuminate the trade-offs involved in making different kinds of social investments. In this sense, it would seem irresponsible not to conduct such analyses, since they can inform decisions about how scarce resources can be put to the greatest social good.

In principle, benefit-cost analysis can also help answer questions of how much regulation is enough. From an efficiency standpoint, the answer to this question is simple — regulate until the incremental benefits from regulation are just offset by the incremental costs. In practice, however, the problem is much more difficult, in large part because of inherent problems in measuring marginal benefits and costs. In addition, concerns about fairness and process may be very important economic and non-economic factors. Regulatory policies inevitably involve winners and losers, even when aggregate benefits exceed aggregate costs.

Over the years, policy makers have sent mixed signals regarding the use of benefit-cost analysis in policy evaluation. Congress has passed several statutes to protect health, safety, and the environment that effectively preclude the consideration of benefits and costs in the development of certain regulations, even though other statutes actually require the use of benefit-cost analysis. At the same time, Presidents Carter, Reagan, Bush, Clinton, and Bush all put in place formal processes for reviewing economic implications of major environmental, health, and safety regulations. Apparently the Executive Branch, charged with designing and implementing regulations, has seen a greater need than the Congress to develop a yardstick against which regulatory proposals can be assessed. Benefit-cost analysis has been the yardstick of choice.

It was in this context that ten years ago a group of economists from across the political spectrum jointly authored an article in Science magazine, asking whether there is role for benefit-cost analysis in environmental, health, and safety regulation. That diverse group consisted of Kenneth Arrow, Maureen Cropper, George Eads, Robert Hahn, Lester Lave, Roger Noll, Paul Portney, Milton Russell, Richard Schmalensee, Kerry Smith, and myself. That article and its findings are particularly timely, with President Obama considering putting in place a new Executive Order on Regulatory Review.

In the article, we suggested that benefit-cost analysis has a potentially important role to play in helping inform regulatory decision making, though it should not be the sole basis for such decision making. We offered eight principles.

First, benefit-cost analysis can be useful for comparing the favorable and unfavorable effects of policies, because it can help decision makers better understand the implications of decisions by identifying and, where appropriate, quantifying the favorable and unfavorable consequences of a proposed policy change. But, in some cases, there is too much uncertainty to use benefit-cost analysis to conclude that the benefits of a decision will exceed or fall short of its costs.

Second, decision makers should not be precluded from considering the economic costs and benefits of different policies in the development of regulations. Removing statutory prohibitions on the balancing of benefits and costs can help promote more efficient and effective regulation.

Third, benefit-cost analysis should be required for all major regulatory decisions. The scale of a benefit-cost analysis should depend on both the stakes involved and the likelihood that the resulting information will affect the ultimate decision.

Fourth, although agencies should be required to conduct benefit-cost analyses for major decisions,... those agencies should not be bound by strict benefit-cost tests. Factors other than aggregate economic benefits and costs may be important.

Fifth, benefits and costs of proposed policies should be quantified wherever possible. But not all impacts can be quantified, let alone monetized. Therefore, care should be taken to assure that quantitative factors do not dominate important qualitative factors in decision making. ...

Sixth, the more external review that regulatory analyses receive, the better...

Seventh, a consistent set of economic assumptions should be used in calculating benefits and costs. Key variables include the social discount rate, the value of reducing risks of premature death and accidents, and the values associated with other improvements in health.

Eighth, while benefit-cost analysis focuses primarily on the overall relationship between benefits and costs, a good analysis will also identify important distributional consequences for important subgroups of the population.

From these eight principles, we concluded that benefit-cost analysis can play an important role in legislative and regulatory policy debates on protecting and improving the natural environment, health, and safety. Although formal benefit-cost analysis should not be viewed as either necessary or sufficient for designing sensible public policy, it can provide an exceptionally useful framework for consistently organizing disparate information, and in this way, it can greatly improve the process and hence the outcome of policy analysis.

If properly done, benefit-cost analysis can be of great help...

links for 2009-07-11

• Curbing instability: Policy and regulation - voxeu.org
• Lunch with the FT - Larry Summers
• Correcting Five Myths About the Stimulus Bill - CBPP
• The economy and employment: On the turn? - The Economist
• Are asset allocation models broken? - Abnormal Returns
• Administration Considers Bailout for Small Businesses - washingtonpost.com
• In Defense of the Fed's Independence - The Hearing
• New Deal 2.0 - links
• The Big Picture - links
• Matthew Yglesias - links
• The Stash - links
• Credit Writedowns - links
• Rortybomb - links
• FT Alphaville - links
• naked capitalism - links
• Brad DeLong - links
• Marginal Revolution - links
• Abnormal Returns - links

Haiku Economics

Why the sudden popularity of Haiku Economics??? This is from Steve Ziliak:

Dear Mark:

The economic recession -- something -- is bringing increased attention to "haiku" and "Haiku Economics."

The first fundamental assumption of haiku economics is: Less is more and more is better. The idea seems to be catching on with financial traders as much as with poets and political speechwriters.  The unemployed, it seems, can't resist it, and more than a few economists (heedless of Bentham) have put pens to verse.

"Are Depressions Necessary?"

Chris Hayes takes up a notion I've never been very fond of, that recessions are necessary and healthy since they clear out inefficient firms, and spur the development of new innovation during the recovery phase. (Why do I think this is unnecessary? The entry and exit of firms driven by innovation and the development of new products can be part of a full employment equilibrium, that is, cycles are not needed to clear out old firms and spur innovation. Imagine an economy where a new idea allows a slightly more productive firm to enter a market and displace a less productive firm, and the workers migrate from the old to the new firm over time. If this happens at a constant rate in aggregate over time, there won't be any cycles at all, but we still manage to clear out the inefficient firms and replace them with more innovative rivals. The displaced workers from the the innovation driven structural adjustment are part of the natural rate of unemployment in such an economy):

Are Depressions Necessary?, by Christopher Hayes, The American Prospect: ...Are economic contractions, like the one we're currently experiencing, a good thing? ... It would be career suicide for any elected official to suggest that the widespread stress, misery and heartache being wreaked by ... contraction were are a good thing. But scratch the surface a bit and you'll find a surprisingly vibrant school of thought, one that reaches back all the way back to the Great Depression, that holds precisely this view.

Famed economist Joseph Schumpeter said that "a depression is for capitalism like a good, cold douche," one that rinses off accumulated dysfunction. Robber baron Andrew Mellon (who served as Herbert Hoover's treasury secretary) welcomed the Great Depression with these infamous words: "It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people"

It's not hard to find this same view among bankers, financiers and sundry Wall Streeters today. ...

The stakes for this argument are very high: if steep economic contractions are like forest fires, a necessary part of the system's self-calibration, we should more or less let them burn. If they are more like five-alarms raging through dense city neighborhoods, we should call in the fire department.

Are Small Banks the Answer for Developing Countries?

This week at The Economist:

Justin Lin, the World Bank’s chief economist,... in his guest Economics focus column ... argues that developing countries should base their financial systems on small, local banks:

The size and sophistication of financial institutions and markets in the developed world are not appropriate in low-income markets. Small local banks are the best entities for providing financial services to the enterprises and households that are most important in terms of comparative advantage—be they asparagus farmers in Peru, cut-flower companies in Kenya or garment factories in Bangladesh. The experiences of countries such as Japan, South Korea and China are telling. Those countries managed to avoid financial crises for long stretches of their development as they evolved from low-income to middle- and high-income countries. It helped greatly that they adhered to simple banking systems (rather than rushing to develop their stock markets and integrate into international financial networks) and did not liberalise their capital accounts until they became more advanced.

Mr Lin concludes:

Leave the developed markets to worry about how to reform their highly evolved financial systems. To make sustained progress in lifting the weight of the extreme poverty that will remain after the crisis has subsided, low-income countries need to make their financial institutions small and simple.

Over the course of the next week, we will devote this blog to a discussion of Mr Lin’s column, posting responses from our correspondents, invited experts from the academic and policy worlds, and our commenters. We'll be collecting the entire series of posts here. Do stop by and contribute to the debate.

Here is the lead Essay: Walk, Don't Run by Justin Lin

Here are the responses so far:

• Big bank advantages, by The Economist: London
• Why favour local tiddlers?, by The Economist: London
• Is small really beautiful?, by Asim Khwaja
• Passive voice, by Tyler Cowen
• Difficult trade-offs, by Abhijit Banerjee
• Leave room for growth, by Luigi Zingales
• Function, not form, by Ross Levine
• Scale matters, by Antoinette Schoar

Here is my response:

Small banks need help, by Mark Thoma: I agree with many of the points in the article regarding the potential that small and simple banks provide. But while small and simple banks can help to overcome many problems, by themselves they may not be enough fully serve the financial needs within developing countries.

There are two issues here. The first is to determine the types of financial products that best suit the needs of people and businesses within developing countries, and the second is how to best deliver those products to the people and businesses who could benefit from using them.

Small banks and microfinance of the type emphasised in the article can meet many of the financial needs in developing countries, for example the need that farmers have to borrow funds to purchase seed and fertiliser, and then repay the loans at harvest, can be met in this way. But other needs require more sophisticated financial products. The ability to hedge price risk through futures markets, the need for insurance against crop failure, the need to purchase farm equipment through pooling arrangements that share the costs among end users, and the problems brought about by seasonality require more sophisticated products and arrangements. The point is that not all of the financial needs in agricultural, small scale manufacturing, and services are simple, even in developing countries.

Can these more complex financial needs be satisfied, or are there important barriers within developing countries that prevent these products from being used?

Paul Krugman: The Stimulus Trap

Everybody makes mistakes. But not everyone can admit their mistakes, and then take the steps needed to overcome them:

The Stimulus Trap, by Paul Krugman, Commentary, NY Times: As soon as the Obama administration-in-waiting announced its stimulus plan — this was before Inauguration Day — some of us worried that the plan would prove inadequate. ...

The bad employment report for June made it clear that the stimulus was, indeed, too small. But it also damaged the credibility of the administration’s economic stewardship. There’s now a real risk that President Obama will find himself caught in a political-economic trap.

I’ll talk about that trap, and how he can escape it, in a moment. First, however, let me ... ask how concerned citizens should be reacting to the disappointing economic news. Should we be patient, and give the Obama plan time to work? Should we call for bigger, bolder actions? Or should we declare the plan a failure and demand that the administration call the whole thing off? ...

When there’s an ordinary, garden-variety recession, the job of fighting that recession is assigned to the Federal Reserve. ... Reducing rates a bit at a time, it keeps cutting until the economy turns around. At times it pauses to assess the effects of its work; if the economy is still weak, the cutting resumes. ...

Normally, then, we expect policy makers to respond to bad job numbers with a combination of patience and resolve. They should give existing policies time to work, but they should also consider making those policies stronger.

And that’s what the Obama administration should be doing..., stay calm in the face of disappointing early results,... the plan will take time to deliver its full benefit. But ... be prepared to add to the stimulus now that it’s clear that the first round wasn’t big enough.

Unfortunately, the politics of fiscal policy are very different from the politics of monetary policy. For the past 30 years, we’ve been told that government spending is bad, and conservative opposition to fiscal stimulus (which might make people think better of government) has been bitter and unrelenting even in the face of the worst slump since the Great Depression. Predictably, then, Republicans — and some Democrats — have treated any bad news as evidence of failure, rather than as a reason to make the policy stronger.

Hence the danger that the Obama administration will find itself caught in a political-economic trap, in which the very weakness of the economy undermines the administration’s ability to respond effectively. ... The question is what the president and his economic team should do now.

It’s perfectly O.K. for the administration to defend what it’s done so far. ... It’s also reasonable for administration economists to call for patience...

But there’s a difference between defending what you’ve done so far and being defensive. It was disturbing when President Obama walked back Mr. Biden’s admission that the administration “misread” the economy, declaring that “there’s nothing we would have done differently.” There was a whiff of the Bush infallibility complex in that remark, a hint that the current administration might share some of its predecessor’s inability to admit mistakes. And that’s an attitude neither Mr. Obama nor the country can afford.

What Mr. Obama needs to do is level with the American people. He needs to admit that he may not have done enough on the first try. He needs to remind the country that he’s trying to steer the country through a severe economic storm, and that some course adjustments — including, quite possibly, another round of stimulus — may be necessary.

What he needs, in short, is to do for economic policy what he’s already done for race relations and foreign policy — talk to Americans like adults.

Don't Expect a Quick Recovery

One of the reasons I've argued this recovery will be slow is that we cannot simply bounce back to where we were before the problems started as we could in some past recessions. We need to move resources out of housing, out of finance, and out of autos, and those resources need to find productive employment elsewhere in new or growing industries, and that is not very likely until things improve. Consumers need to save more and consume less, as they are starting to do, and this too will require adjustment. So does this mean we should expect a U-shaped recovery instead of a V-shaped recovery? Robert Reich says it's neither, this is an X-recovery:

When Will The Recovery Begin? Never., by Robert Reich: The so-called "green shoots" of recovery are turning brown in the scorching summer sun. In fact, the whole debate about when and how a recovery will begin is wrongly framed. On one side are the V-shapers who look back at prior recessions and conclude that the faster an economy drops, the faster it gets back on track. And because this economy fell off a cliff late last fall, they expect it to roar to life early next year. Hence the V shape.

Unfortunately, V-shapers are looking back at the wrong recessions. Focus on those that started with the bursting of a giant speculative bubble and you see slow recoveries. ... That's where the more sober U-shapers come in. They predict a more gradual recovery...

Personally, I don't buy into either camp. In a recession this deep, recovery ... depends on consumers who, after all, are 70 percent of the U.S. economy. And this time consumers got really whacked. Until consumers start spending again, you can forget any recovery, V or U shaped.

Problem is, consumers won't start spending until they have money in their pockets and feel reasonably secure. But they don't have the money, and it's hard to see where it will come from. They can't borrow. Their homes are worth a fraction of what they were before, so say goodbye to home equity loans and refinancings. ... Unemployment continues to rise, and number of hours at work continues to drop. Those who can are saving. Those who can't are hunkering down...

Don't expect businesses to invest much more without lots of consumers hankering after lots of new stuff. And don't rely on exports. The global economy is contracting.

My prediction, then? Not a V, not a U. But an X. This economy can't get back on track because the track we were on for years -- featuring flat or declining median wages, mounting consumer debt, and widening insecurity, not to mention increasing carbon in the atmosphere -- simply cannot be sustained.

The X marks a brand new track -- a new economy. What will it look like? Nobody knows. All we know is the current economy can't "recover" because it can't go back to where it was before the crash. So instead of asking when the recovery will start, we should be asking when and how the new economy will begin. ...

"Cities and Stimulus"

Did cities receive too little of the federal transportation stimulus money?:

Lisa Schweitzer on Cities and the Stimulus, by Richard Greene: From her blog:

One of my fantastic students from Virginia Tech, Eric Howard, posted this piece from today’s New York Times on Facebook. The NYT author argues that:

Two-thirds of the country lives in large metropolitan areas, home to the nation’s worst traffic jams and some of its oldest roads and bridges. But cities and their surrounding regions are getting far less than two-thirds of federal transportation stimulus money.

The reporter goes on to quote outrage from mayors. They also get information from one of my favorite experts, Rob Puentes at Brookings. As usual, Rob has a very good point here: this package isn’t just about business as usual revenue allocation–which has always had a strong rural bias due to the structure of the Federal representative system (as Owen D. Gutfreund points out). This rural strength made way more sense 150 years ago than it does now.

So, of course all of these smart people are right in that cities aren’t treated very well in the stimulus, as they aren’t treated very well in Federal politics in general.

However, we have to ask ourselves: would it really be sensible to hand out this money on a per capita basis either?

links for 2009-07-10

• Bank Stock Warrants Undervalued, Panel Says - NYTimes.com
• Index Funds and Commodity Prices... Here We Go Again - econbrowser
• The relative dearth of recent household formations - Richard Green
• Do Unemployment Claims Show Hope? (No) - Economic Perspectives
• Win Bets at Parties: Simultaneous Chess - Cheap Talk
• Clearinghouse saved foreign exchange trading from the crisis - voxeu.org
• The Public Option in Healthcare Reform - Cheap Talk
• New Issue - Oxford University Economic Studies
• Has Globalization Made Forecasting Inflation More Difficult? - FRB Dallas
• Federal Reserve independence - FRB - Kohn
• Small Steps Could Mean Big Savings on Health-Care Reform - Michael Kinsley
• Are Speculators Driving Oil Prices? - The Stash
• Tax The Rich? - Bruce Bartlett
• Myths and Realities About How States Are Using Recovery Act Funds - CBPP
• Both Obama and his critics are wrong about the stimulus package - Daniel Gross
• How US History Unravels the American Myth of Free Markets - New Deal 2.0
• The effects of lending to households and firms - voxeu.org
• Felix Salmon - links
• Credit Writedowns - links
• Across the Curve - links
• FT Alphaville - links
• Paul Kedrosky - links
• naked capitalism - links
• Abnormal Returns - links
• The Big Picture - links
• New Deal 2.0 - links
• Matthew Yglesias - links
• Ezra Klein - links

"The Fall of the Toxic-Assets Plan"

I have the same worries, so I would like to hear why we shouldn't be concerned that banks are holding overvalued assets on their balance sheets. What's the counterargument to this?:

The Fall of the Toxic-Assets Plan,  by Lucian Bebchuk, Real Time Economics: The plan for buying troubled assets — which was earlier announced as the central element of the administration’s financial stability plan — has been recently curtailed drastically. The Treasury and the FDIC have attributed this development to banks’ new ability to raise capital through stock sales without having to sell toxic assets. ...

What happened? Banks’ balance sheets do remain clogged with toxic assets, which are still difficult to value. But the willingness of banks to sell toxic assets ... has been killed by decisions of accounting authorities and banking regulators. ...

Armed with ample government funding, the private managers running funds set under the program would be expected to offer fair value for banks’ assets. Indeed, because the government’s ... non-recourse financing, many have expressed worries that such fund managers would have incentives to pay even more than fair value... The problem, however, is that banks now have strong incentives to avoid selling toxic assets at any price below face value even when the price fully reflects fair value.

A month after the PPIP program was announced, under pressure from banks and Congress, the U.S. Financial Accounting Standards Board watered down accounting rules and made it easier for banks not to mark down the value of toxic assets. For many toxic assets..., banks may avoid recognizing the loss as long as they don’t sell the assets. ...

In another blow to banks’ potential willingness to sell toxic assets,... bank supervisors conducting stress tests ... explicitly didn’t take into account the decline in the economic value of toxic loans and securities that mature after 2010 and that the banks won’t have to recognize in financial statements until then.

Together, the policies adopted by accounting and banking authorities strongly discourage banks from selling any toxic assets maturing after 2010 at prices that fairly reflect their lowered value. ... [S]elling would require recognizing losses and might result in the regulators’ requiring the bank to raise additional capital...

While the market for banks’ toxic assets will remain largely shut down, we are going to get a sense of their value when the FDIC auctions off later this summer the toxic assets held by failed banks taken over by the FDIC. If these auctions produce substantial discounts to face value, they should ring the alarm bells. ... In the meantime, it must be recognized that the curtailing of the PIPP program doesn’t imply that the toxic assets problem has largely gone away; it has been merely swept under the carpet.

"Will Europe’s Economies Regain Their Footing?"

Kenneth Rogoff on the prospects for recovery in Europe:

Will Europe’s Economies Regain Their Footing?, by Kenneth Rogoff, Commentary, Project Syndicate: What will Europe's growth trajectory look like after the financial crisis? ...

True, things are pretty ugly right now. ... Yet, ugly or not, the downturn will eventually end. Yes, there is still a real risk of hitting an iceberg, beginning perhaps with a default in the Baltics, with panic first spreading to Austria and some Nordic countries. But, for now, a complete meltdown seems distinctly less likely than gradual stabilization followed by a tepid recovery, with soaring debt levels and lingering high unemployment.

It is not a pretty picture. Some commentators have savaged Europe's policymakers for not orchestrating as aggressive a fiscal and monetary policy as their U.S. counterparts have. ...

But these critics seem to presume that Europe will come out of the crisis in far worse shape than the U.S., and it is too early to make that judgment. An epic, financial-crisis-driven recession, such as the one we are still experiencing, is not a one-year event. So policymakers' responses cannot be evaluated by short-term measures... It is just as important to ask what happens over the next five years as over the next six months, and the jury is still very much out on that.

America's hyper-aggressive fiscal response means a faster rise in government debt, while its hyper-expansive monetary policy means that an exit strategy to mop up all the excess liquidity will be difficult to execute. ... Europe's more tempered approach, while magnifying short-term risks, could pay off in the long run, especially if global interest rates rise, making it far more painful to carry oversized debt loads.

The real question is not whether Europe is using sufficiently aggressive Keynesian stimulus, but whether Europe will resume its economic reform efforts as the crisis abates. If Europe continues to make its labor markets more flexible, its financial market regulation more genuinely pan-European, and remains open to trade, trend growth can pick up again in the wake of the crisis. If European countries look inward, however, with Germany pushing its consumers to buy German cars, the French government forcing car companies to keep unproductive factories open, etc., one can expect a decade of stagnation.

Admittedly, the past year has not been a proud one for policy reform in Europe. Recessions have never proven an easy time for ... reforms. ...

The recent recession has presented challenges, but European leaders were right to avoid becoming intoxicated with short-term Keynesian policies, especially where these are inimical to addressing Europe's long-term challenges.

If reform resumes, there is no reason why Europe should not enjoy a decade of per capita income growth at least as high as that of the U.S. Moreover, with growing concerns about the sustainability of U.S. fiscal policy, the euro has a huge opportunity to play a significantly larger role as a reserve currency.

One shudders to think what will happen if Europe does not pull out of its current funk. ...

European leaders argued they didn't need to be as aggressive as the U.S. at putting new fiscal policy in place because they had much larger social safety nets that would kick in automatically as the crisis deepened. In addition, Europeans noted, they already had much higher levels of government spending as a share of output than the U.S., so it was much harder for them to increase this share further. Another way to say this is that Europeans do not believe they have an inferior short-run response, especially when it comes to labor and providing jobs.

Thus, the very thing that Rogoff believes is Europe's biggest long-run challenge - the extensive social safety net, including provisions affecting adjustment in labor markets - is the reason why Europe was able and willing to choose a different strategy relative to the U.S. to attenuate the effects of the recession. If the U.S. had European levels of debt and, more importantly, the same degree of social protections for people affected by recession, then the U.S. would not have needed or been able (politically) to increase deficit spending as much as it did. I am among those who believe Europe could have reacted more vigorously, and should have, but I don't think it's correct to say they avoided Keynesian type policy (and see this post concerning France's stimulus package).

If, in the long-run, we look back and see that Europe's more extensive protections did, in fact, smooth the adjustment to the crisis, the motivation for long run change of the type Rogoff hopes for will diminish. If having European style social protections does lower growth - and that is a debatable assertion - that may be an insurance premium people are willing to pay to avoid more severe downturns. If the opposite happens, if the social safety net does not do its job (and that cannot be measured through unemployment rates alone), then the motivation for change could become stronger. But the crisis is far from over and the jury is still out.

"The New Kaldor Facts"

What does growth theory need to explain? Has there been progress?:

The New Kaldor Facts: Ideas, Institutions, Population, and Human Capital, by Charles I. Jones and Paul M. Romer, NBER WP 15094, June 2009 [open link]: 1. Introduction ...[I]t is easy to lose faith in scientific progress. ... In any assessment of progress, as in any analysis of macroeconomic variables, a long-run perspective helps us look past the short-run fluctuations and see the underlying trend. In 1961, Nicolas Kaldor stated six now famous “stylized” facts. He used them to summarize what economists had learned from their analysis of 20th-century growth and also to frame the research agenda going forward (Kaldor, 1961):

1. Labor productivity has grown at a sustained rate.
2. Capital per worker has also grown at a sustained rate.
3. The real interest rate or return on capital has been stable.
4. The ratio of capital to output has also been stable.
5. Capital and labor have captured stable shares of national income.
6. Among the fast growing countries of the world, there is an appreciable variation in the rate of growth “of the order of 2–5 percent.”

Redoing this exercise nearly 50 years later shows just how much progress we have made. Kaldor’s first five facts have moved from research papers to textbooks. There is no longer any interesting debate about the features that a model must contain to explain them. These features are embodied in one of the great successes of growth theory in the 1950s and 1960s, the neoclassical growth model. Today, researchers are now grappling with Kaldor’s sixth fact and have moved on to several others that we list below.

links for 2009-07-09

• Is Benefit-Cost Analysis Helpful for Environmental Regulation? - Robert Stavins
• De-speculating markets - Free exchange
• Markets work, even when they don’t - macroblog
• No evidence that older workers are crowding out younger ones - Peter Coy
• 'Invisible hand' guides evolution of cooperative turn-taking - EurekAlert
• Ontology of the French Revolution - Daniel Little
• How the potato got hot - Los Angeles Times
• Credit Writedowns - links
• Abnormal Returns - links
• Marginal Revolution - links
• The Stash - links
• Matthew Yglesias - links
• Chris Martenson - links
• naked capitalism - links
• FT Alphaville - links
• Brad DeLong - links

Was it Risk Concentration or Leverage?

Ricardo Caballero hasn't given up on his argument that it was the excessive concentration or risk, not leverage, that caused problems in financial markets (and it's an argument I'm sympathetic to):

Economic Witch Hunting, by Ricardo Caballero, Commentary, Economists Forum: Perhaps one of the economic phenomena most akin to witch-hunting is the diagnostic and policy response that develops during the recovery phase of a financial crisis. Understandably, pressured politicians and policymakers rush to find culprits... All too often they find a ready supply of these in preconceptions and superficial analyses of correlations. This time around the scapegoats are global imbalances and leverage.

Global imbalances are the victim of preconceptions: Many economists and commentators argued before the crisis that large global imbalances would lead to the demise of the U.S. economy... The crisis indeed came, but rather than destabilizing the US economy, capital flows helped to stabilise it, as flight-to-quality capital sought rather than ran away from US assets. ...

The fact that the actual mechanism behind the crisis had nothing to do with that which was used to explain the forecast of doom has long being forgotten, false idols have been erected,... global imbalances have been indicted for witchcraft, and ever more exotic rebalancing and currency proposals make it to the front pages of newspapers around the world.

Leverage is the victim of superficial analyses of correlations: In my view one of the main factors behind the severity of the financial crisis was the excessive concentration of aggregate risk in highly-leveraged financial institutions. Note that the emphasis is on the concentration of aggregate risk rather than on the much-hyped leverage. The problem in the current crisis was not leverage per se, but the fact that banks had held on to AAA tranches of structured asset-backed securities which were more exposed to aggregate surprise shocks than their rating would, when misinterpreted, suggest.

Thus, when systemic confusion emerged, these complex financial instruments quickly soured, compromised the balance sheet of their leveraged holders, and triggered asset fire sales which ravaged balance sheets across financial institutions. The result was a vicious feedback loop between assets exposed to aggregate conditions and leveraged balance sheets.

The distinction emphasized in the previous paragraph may seem subtle, but it turns out to have a first order implication for economic policy... The optimal policy response to this problem is not to increase capital requirements (or to deleverage), as the current fashion has it, but to remove the aggregate risk from systemically important leveraged financial institutions’ balance sheets. This should be done through prepaid and often mandatory macro-insurance type arrangements, which can accommodate valid too-big or too-complex to fail concerns, but without crippling the financial industry with the burden of brute-force capital requirements. ...

We shouldn't assume that the next potential financial crisis will be identical to this one in terms of how it comes about or how it expresses itself, so we need to ensure that the system can withstand different types of financial shocks. Given that these shocks can come from unexpected places, it's not clear to me that insurance discussed above will stop all of the ways in which financial market problems can lead to harmful deleveraging. Hence, we may want to put the type of insurance plan Ricardo Caballero would like to see instituted in place, and then buttress that protection with enhanced capital requirements to safeguard against unexpected causes of harmful deleveraging.

One Operating System to Rule Them All?

Google is moving forward with its plans to develop an operating system:

Google Plans a PC Operating System, Helft and Vance, NY Times: In a direct challenge to Microsoft, Google announced ... it is developing an operating system for PCs that is tied to its Chrome Web browser.

The software, called the Google Chrome Operating System, is initially intended for use in the tiny, low-cost portable computers known as netbooks... Google said it believed the software would also be able to power full-fledged PCs.

The move is likely to sharpen the already intense competition between Google and Microsoft... “Speed, simplicity and security are the key aspects of Google Chrome OS,” said Sundar Pichai ... and Linus Upson ... in a post on a company blog. “We’re designing the OS to be fast and lightweight, to start up and get you onto the Web in a few seconds.”

Mr. Pichai and Mr. Upson said that the software would be released online later this year under an open-source license... Netbooks running the software will go on sale in the second half of 2010.

The company likely saw netbooks as a unique opportunity to challenge Microsoft, said Larry Augustin, a prominent Silicon Valley investor...

“Market changes happen at points of discontinuity,” Mr. Augustin said. “And that’s what you have with netbooks and a market that has moved to mobile devices.” ...

Google’s plans for the new operating system fit its Internet-centric vision of computing. Google believes that software delivered over the Web will play an increasingly central role, replacing software programs that run on the desktop. In that world, applications run directly inside an Internet browser, rather than atop an operating system, the standard software that controls most of the operations of a PC.

That vision challenges not only Microsoft’s lucrative Windows business but also its applications business, which is largely built on selling software than runs on PCs. ... Google said Tuesday night that it still had work to do to develop a full-fledged operating system. ... [Here's Google's announcement.]

I resisted moving from DOS to Windows, and then got stuck on Windows once I did move, so I'm probably not the best judge of whether the model Google is using to challenge Microsoft will be successful, and perhaps both models can survive by serving different needs. However, I've also spent time on mainframe batch and time-share systems where you interact with the mainframe computer through a terminal (screen and keyboard), and Google's vision reminds me of an internet wide version of that system (if I understand it correctly, and I may not). If I want to do simulations of a theoretical model, will it be like graduate school where I had to work very late at night when the system had enough free resources to accommodate my requests without being so slow as to be nearly unusable? PCs freed me from that constraint (but not the late night work habit). It was hard to work at home then as well. It was possible to connect through a phone, but it was very slow, and this was also something PCs changed. You didn't have to be at school to do computer work. If we go to the Google model, will the internet be available broadly and reliably enough so that there won't be frustrating periods when lack of an internet connection means you can't get things done unless you do the equivalent of "going to school where there's a terminal"? And I also like having data backed up locally on my own disks or other media rather than trusting a centralized system to keep it safe for me, and with sensitive data it feels much more secure that way. I suppose this isn't a problem for people who use their computers mainly to browse the internet or send email, But if you use your PC for tasks that require lots of computing power or use sensitive data, I think you have reason to wonder if some of the speed, flexibility, and security PCs give you might be compromised with this system. For that reason, I wonder if Google's model will be able to capture some segments of the market, e.g. those that desire lots of computing power be available nearly on demand. But as I said, if people had listened to me, we'd probably still be using DOS.

"Administrative Costs in Health Care"

A follow-up to this post on administrative costs in health care:

Administrative Costs in Health Care: A Primer, by Ezra Klein: ...Paul Krugman, Greg Mankiw, Tyler Cowen and a handful of others began arguing about [administrative costs]... I'm not convinced any of them have it right.

Administrative costs are ... confusing... What counts as an "administrative cost" for a health insurer? We all agree that paying bills counts. But does ... disease management? Advertising? A nurse who dispenses health advice over the telephone? Hard to say. But all of them get grouped under administrative costs at various times. Indeed,... there's not perfect unanimity on how to measure any of this.

But most seem to think that Medicare's administrative costs are significantly undersold... An apples-to-apples comparison would not leave you with the 2 percent of total Medicare spending often bandied about in debate. That doesn't count, for instance, Medicare's premium collection, which is done through the ... IRS. Nor does it count most of Medicare's billing, which is outsourced -- and this might surprise people -- to private insurers like Blue Cross Blue Shield and listed under vendor services rather than program administration. A more straightforward estimate ... would be in the range of 5 to 6 percent.

Nor is it easy to measure administrative costs among private insurers. For one thing, which private insurers? ... Among employer-based plans, the largest firms had the lowest costs. Plans covering companies with at least 1,000 employees had a mere 7 percent in administrative costs. Those covering companies with fewer than 25 employees spent 26 percent of premiums on administration. And the individual market was a mess: 30 percent.

This tells us ... size matters. The most important predictor of administrative costs is not whether the plan is public or private, but whether it is large. ...

But administrative costs among ... insurers ... are only part of the story. And they may not even be the most important part. The hospitals and physicians ... are spending tremendous sums of money too. Hospitals ... employ people to argue over claims and navigate the rules of the dozen or so different insurance plans they contract with. And here the experts were unanimous: The problem is that the system is fractured. There's no standardization..., every insurer is complicated in its own way. And that complexity costs a lot of money.

As of now, no one I spoke with knew of good data separating the costs of dealing with Medicare and with private insurers. But there are studies comparing Canada and the United States that show a single payer vastly reduces administrative spending. ...

But ... slashing administrative costs ... will never be a panacea... Rick Kronick, a political scientist at the University of California at San Diego,... summed the situation up quite well. "The main question," he said, "is why are health care costs going up at 2.4 percent a year faster than GDP? And most of the answers to that question have nothing to do with administrative costs. The answers are that we do more stuff and have more technology. Even if we could wring administrative savings out of the system, which ... would be a good thing, we'd still be facing the question of how to slow the rate of cost growth."

links for 2009-07-08

• Introducing the Google Chrome OS - Google Blog
• Google Plans to Introduce a PC Operating System - NYTimes.com
• Don’t say colonialism! the debate on Paul Collier - Bill Easterly
• Health Reform’s Acid Test - NYTimes.com
• On Fire - Olivia Judson
• Exclusive Wireless Carriers: A Primer - Cheap Talk
• Overhaul of Food Safety Rules in the Works - washingtonpost.com
• Reports Calling for Estate Tax Repeal Seriously Flawed — CBPP
• What would a second stimulus package look like? - Christopher Beam
• The Carnage Continues: Time To Ramp Up the Stimulus - Randall Wray
• Do we need a second fiscal stimulus? Lessons from Japan - Business Week
• The Great Synchronisation: The trade crisis of 2008-2009 - voxeu.org
• The Stash - links
• Credit Writedowns - links
• Felix Salmon - links
• Ezra Klein - links
• Matthew Yglesias - links
• Free Exchange - links
• Chris Martenson - links
• Abnormal Returns - links
• Credit Writedowns - links
• New Deal 2.0 - links
• The Big Picture - links
• Macro and Other Market Musings - links
• FT Alphaville - links
• naked capitalism - links

"Economists on Trial"

This is part of an interview of heterodox economist Michael Perelman:

Michael Perelman, on Market Myths, Past and Present, by Seth Sandronsky: ...[Seth] Sandronsky The Depression of the 1930's changed the public policy views of some in the economics profession. In brief, what were the main changes, and how do they connect with the post-bubble economy of mid-2009?

Perelman The Great Depression severely tarnished economists' reputations. For example, The Economist published an article on 17 June 1933, entitled "Economists on Trial," which described a "mock-trial - not entirely mockery -" of "the economists." The trial was staged at the London School of Economics, with Robert Boothby, M.P., representing "the state of the popular mind." He accused the economists with "conspiring to spread mental fog," charging that they "were unintelligible; that they had in general proved wrong; and that in any case they all disagreed." The economists - Sir William Beveridge, Sir Arthur Salter, Professor T. E. Gregory, and Hubert Henderson - were all highly respected in the field. They answered Boothby's charges without wholly refuting them. The article concluded, "There was never a time when the advice of an expert was so often asked and so seldom followed as the present." According to the magazine, the problem was that the authorities did not listen to the economists.

At the same time, during the New Deal economists played a very prominent role. For the most part, they had not previously been among the doctrinaire defenders of laissez-faire. But keep in mind that, until the post-World War II era, the economics profession was much more diverse. A good number of progressive economists had been purged from academia, but some progressives remained. The more elite a university was, the less diversity it had. Yet, even in elite universities there was a modicum of diversity.

Although the discipline of economics became radically more conservative after World War II, during the 1970's economists who were active during the Depression tended to give me a much more sympathetic hearing, even if they had drifted considerably to the right.

Today, the makeup of the economics profession has changed dramatically. The economists who experienced the Great Depression are gone. On virtually any campus, the economics department will be among the most conservative. Dissenting views are rarely tolerated, except in liberal arts colleges. Catholic colleges also tend to be less fearful of unorthodox views.

However, the government's stimulus plans - under both Bush and Obama - have been so inept that a good number of very conservative economists have been highly critical in ways that do not entirely differ from my own.

Perhaps what is most surprising is how little influence economists have had in the policy realm. Virtually no Congressional hearings have called upon economists, whether they are conventional or radical. How much influence economists - other than Larry Summers - have had behind closed doors is an open question. ...

What Caused the Housing Bubble?

Ed Glaeser says that if people were as smart as he is, they would have realized housing price increases were unsustainable and there wouldn't have been a housing bubble:

In Housing, Even Hindsight Isn’t 20-20, by Edward L. Glaeser: ...[Is] the housing market ... starting to hit bottom? ... One major point of economics is that predicting asset prices is extremely hard... Moreover, the last seven years should make everyone wary about predicting housing price changes. ...

The housing price volatility of the last six years has been so extreme that it confounds conventional economic explanations. Over a four-year period — from February 2002 to February 2006 — the Case-Shiller index increased ... about 50 percent in constant dollars.

Certainly, those price increases cannot be explained by increases in average income. Income growth was quite modest from 2002 to 2006. Nor can the boom be explained by a dearth of new housing supply. Construction rose dramatically during the boom...

A number of pundits place the blame for the bubble on ... Alan Greenspan. They argue that loose monetary policy caused housing prices to rise. While lower interest rates are correlated with higher prices, the relationship is far too weak to explain the price explosion that America experienced. ... To get a 50 percent real increase in housing prices, real interest rates would have had to decline by more than ...10 percentage points..., which is not what happened. ... Real rates actually rose slightly between 2002 and 2006.

While low interest rates, on their own, cannot make sense of the bubble, perhaps the increased availability of credit to subprime borrowers has more explanatory power. ... Yet the correlation between housing price growth and subprime lending across markets is as likely to indicate that lenders took more risks in booming markets as that those risks caused markets to boom. ...

The most plausible explanations of the bubble require levels of irrationality that are difficult for economists either to accept or explain.

For many years, the creators of the housing index, Chip Case and Robert Shiller, have argued that housing bubbles were fueled by irrationally optimistic beliefs about future housing price appreciation. More recently, Monika Piazzesi and Martin Schneider have documented the rise in optimistic beliefs about housing price appreciation over the recent boom. Using some elegant algebra, they suggest that overly optimistic beliefs could cause a boom even if those beliefs were held by only a small share of the population.

It is hard to argue with this view. The only way that anyone could justify spending bubble-level prices in Las Vegas was by having the incorrect belief that those prices would increase.

I once thought that the Las Vegas housing market was so straightforward (vast amounts of land, no significant regulation) that no one could be deluded into thinking that prices could long diverge from construction costs, but I was wrong. I underestimated the human capacity to think rosy thoughts about the value of a house.

Yet even if ridiculously rosy beliefs are a major part of bubbles, we cannot say that we understand those bubbles until we understand the sources of such beliefs. Economists like to link beliefs to reality, but these views weren’t grounded in sound statistics. The housing boom was a great wildfire that spread from market to market, but it is hard to make sense of its flames. ...

I don't think people believed that housing prices would never, ever go down, what they thought is that housing prices would go up in real terms, on average, over time - that housing was a good long-run investment. They knew there would be variation around that trend, but they expected the variation to be relatively mild, they didn't expect the severe variation in prices and associated problems that actually occurred.

But as Shiller argues, the belief that real housing prices rise over time is false, the evidence suggests that real housing prices are relatively flat over the long-run. Because people expected prices to rise on average when they should have expected them to remain flat, the correction - the variation in prices - was far larger than anticipated and many homeowners weren't able to simply ride out the short-run variation like they thought they would be able to do.

But this still leaves a question unanswered. Why did people have this false belief about the long-run trajectory of prices? Shiller explains that this happened because people believed that both land and building materials were becoming relatively more scarce over time, a belief he says is false, but that just pushes the "but why did they believe that" question back one step from housing prices to the prices of land and raw materials.

So let me take a quick stab at an explanation (I'm not pushing this, it's just a quick thought). People are told (or were at that time) that stock markets are a great long-run investment. If you have the time to ride out the short-run fluctuations you can earn 8% per year. Just dump your money in an index fund that duplicates the market portfolio, and forget about it until many, many years later and you will do fine. Risk adjusted real returns on assets ought to equalize across markets through arbitrage, so shouldn't housing yield a real return similar to stocks (adjusting for risk)? Shouldn't there be a real return on housing just like in stock and other asset markets, and if so, doesn't that mean real prices will rise on average over time? This still requires beliefs about long-run prices at odds with (Shiller's) evidence though.

One more note. I may be wrong to assert that people thought that housing prices would rise forever. If you know that there is a bubble in an asset market, but you believe you can sell fast enough once the market hits a turning point to still make a profit, or at least not lose much in any case, then you may be willing to make an investment that tries to exploit the short-term surge in prices. But while I think that may apply to stock markets, or other markets where assets can be sold quickly (the belief that is, the reality is quite different when everybody tries to sell at once), I'm not sure this applies to housing where sales can be notoriously slow. But it's still possible that people would know there is a bubble in housing prices, but still be willing to make an investment because they believe that housing prices would fall so slowly that, if necessary, they could sell their house before taking a loss. It just doesn't seem to me that this explanation works as well in housing as it does in stock markets.

France is "Remarkably Effective at Deploying Funds Quickly"

The "cheese-eating surrender monkeys" say that when it comes to stimulus programs, “The country that is behind is the U.S., not France.”:

France, Unlike U.S., Is Deep Into Stimulus Projects, by Nelson D. Schwartz, NY Times: French workers normally take off much of the summer, but this month,... throngs of tourists will be jostling alongside stonemasons, restoration experts and other artisans paid by the French government’s $37 billion economic stimulus program.

Their job? Maintain in pristine condition the 800-year-old palace of more than 1,500 rooms where Napoleon bid adieu before being exiled to Elba and where Marie Antoinette enjoyed a gilded boudoir.

Besides Fontainebleau, about 50 French chateaus are to receive a facelift, including the palace of Versailles. Also receiving funds are some 75 cathedrals like Notre Dame in Paris. A museum devoted to Lalique glass is being created in Strasbourg, while Marseilles is to be the home of a new 10 million euro center for Mediterranean culture.

All told, Paris has set aside 100 million euros in stimulus funds earmarked for what the French like to call their cultural patrimony. It is a French twist on how to overcome the global downturn, spending borrowed money avidly to beautify the nation even as it also races ahead of the United States in more classic Keynesian ways: fixing potholes, upgrading railroads and pursuing other “shovel ready” projects.

“America is six months behind; it has wasted a lot of time,” said Patrick Devedjian, the minister in charge of the French relance, or stimulus. By the time Washington gets around to doling out most of its money, Mr. Devedjian sniffed, “the crisis could be over.” ...

As it turns out, France’s more centralized, state-directed economy ... is proving remarkably effective at deploying funds quickly and efficiently in bad times. ...

It is easier to find money for castles and cathedrals, of course, in a country that believes “art is equal to other investments, not secondary,” as Mr. Devedjian puts it. But the largess is driven as well by President Sarkozy’s support for more spending to combat the recession, even if it means borrowing more and running up big deficits.

That contrasts sharply with the commitment by the German chancellor, Angela Merkel, to hold down stimulus spending and move as quickly as possible to curb her government’s budget deficit.

So what about the criticism that Europe is not being as aggressive as the United States in combating the global slowdown, with only tepid stimulus packages? That’s not the way the French see it.

“You lost time with changing a president and no decisions were made in the last three months of 2008,” Mr. Devedjian jibed. “Nothing happened in January 2009, and in February, there was just a speech.”

“The country that is behind is the U.S.,” he said, “not France.”

While the scale, $37 billion versus close to $800 billion, is a bit different and probably ought to be accounted for in the comparison, there does seem to be a difference not just in the speed of deployment, but also in the focus of the policy. It will be interesting to see how that difference, which seems to place somewhat more emphasis on boosting employment and aggregate demand immediately than on long-run growth in France as compared to the U.S., translates into a differential response to the fiscal policy boosts in the two countries.

"U.S. Revives Section 2 of the Antitrust Act"

Since I've argued that the enforcement of antitrust law hasn't been strict enough many times in the past -- "the idea that markets 'self-police'" anti-competitive behavior always seemed much more of a hope than a reality in my view of the evidence -- to me this is good news (but it's not good news to everyone). It's not just the textbook economic effects of monopoly power that are worrisome, it's also the ability of large and powerful firms to tilt regulation and legislation in their favor:

Sherman Stirs: U.S. Revives Section 2 of the Antitrust Act, by Ashby Jones. WSJ: For nearly 120 years, the Sherman Antitrust Act has been the main vehicle through which the government and private parties have regulated the so-called anticompetitive behavior of corporate America.

The act's two main sections target vastly different types of behavior, though each may result in both civil liability and criminal punishment.

Section 1 largely addresses situations involving anticompetitive behavior of two or more entities working in concert. Cases involving price-fixing and market-division arrangements are typically brought under Section 1.

Section 2 cases typically involve the behavior of one firm, acting alone. Section 2 cases generally require a private party or the government -- either the Department of Justice or the Federal Trade Commission -- to show that a firm with a significant market share has done something anticompetitive in order to increase or maintain its monopoly. Monopolies, without evidence of anticompetitve behavior, aren't necessarily illegal.

While Section 1 cases are fairly common, the bulk of the headline-grabbing antitrust cases have been under Section 2... John D. Rockefeller's Standard Oil Co. ... AT&T... Microsoft ...

Enforcement of Section 2 went largely dormant under President George W. Bush. Toward the end of his second term, the administration issued a report which codified its views on Section 2. It took the position that the marketplace, not government regulators or courts, provides the ideal check on anticompetitive business practices.

In May, Christine Varney, President Barack Obama's pick to run the Justice Department's antitrust division, repudiated the Bush administration report, squarely placing some blame for the country's economic problems on the Bush administration's laissez-faire regulatory policies.

"Americans have seen firms given room to run with the idea that markets 'self-police' and that enforcement authorities should wait for the markets to 'self-correct,' " Ms. Varney said at the time. "Ineffective government regulation, ill-considered deregulatory measures and inadequate antitrust oversight contributed to the current conditions ... we cannot sit on the sidelines any longer."

Antitrust experts weren't surprised by Monday's news that with an initial review of conduct by large U.S. telecom companies [such as AT&T and Verizon], the Justice Department had started dusting off Section 2. ..

links for 2009-07-07

• Kinship and conflict - voxeu.org
• Banks Planning "Harry and Louise" Ads - The Stash
• Robert Shiller answers critics of housing "wealth effect" - Peter Coy
• CFTC Floats Rules Aimed at Speculation - washingtonpost.com
• Chinese Currency Used for Some Foreign Payments - NYTimes.com
• Automakers’ Swift Cases in Bankruptcy Shock Experts - NYTimes.com
• New research explores how -- and why -- music affects our brain - SciAm
• How to think about a jobless recovery - Free exchange
• Trade policy and the crisis - voxeu.org
• Physical reality of string theory demonstrated - EurekAlert
• "Internet Asperger's Syndrome" and "Austistic economics" - Language Log
• Stimulus is working, but may not be enough - EPI
• Ezra Klein - links
• The Stash - links
• Matthew Yglesias - links
• New Deal 2.0 - links
• Free Exchange - links
• Brad DeLong - links
• Paul Kedrosky - links
• Credit Writedowns - links
• Abnormal Returns - links
• Marginal Revolution - links
• Chris Martenson - links
• The Big Picture - links
• FT Alphaville - links
• naked capitalism - links
• Credit Writedowns - links

"Half of the World's Emissions Came from Just 700 Million People"

I'm on the run at the moment and have only given this a quick scan, hopefully the comments can take it up in more detail, but here is, according to the hype, the solution to all our global warming problems [Scientific American comments on the proposal here.]:

New Princeton method may help allocate carbon emissions responsibility among nations, EurekAlert: Just months before world leaders are scheduled to meet to devise a new international treaty on climate change, a research team led by Princeton University scientists has developed a new way of dividing responsibility for carbon emissions among countries.

The approach is so fair, according to its creators, that they are hoping it will win the support of both developed and developing nations, whose leaders have been at odds for years over perceived inequalities in previous proposals.

The method is outlined in a paper, titled "Sharing Global CO2 Emissions Among 1 Billion High Emitters," published online in this week's Proceedings of the National Academy of Sciences. According to the authors, the approach uses a new fairness principle based on the "common but differentiated responsibilities" of individuals, rather than nations.

"Our proposal moves beyond per capita considerations to identify the world's high-emitting individuals, who are present in all countries," the team says in the introduction. The authors include Stephen Pacala ... and Robert Socolow... Pacala and Socolow's concept of "stabilization wedges," a strategy that proposed concrete ways to prevent global emissions of greenhouse gases from rising for the next five decades, was featured in "An Inconvenient Truth," former Vice President Al Gore's 2006 film about climate change. The concept has given the climate change policy community a common unit for discussing how to reduce emissions and for allowing a comparison of different carbon-cutting strategies.

Taking Complete Leave of their Senses

Some examples of economists who "write a piece for public consumption," and in doing so, seem to "take complete leave of [their] senses":

Example 1:

Missing the Point on High-Speed Rail, by Ryan Avent: Ed Glaeser is a fantastic economist. He has done magnificent work analyzing the economics of urban growth and written indispensable papers on the connection between housing regulations and migration.

But when the man picks up his pen to write a piece for public consumption, he tends to take complete leave of his senses. I realize that this is a common affliction among economists, but Glaeser suffers from a severe case of the syndrome.

In a Friday piece in the Boston Globe, Glaeser takes on the administration's push to fund construction of high-speed rail corridors around the country. In doing so, he combines the cognitive failures of every amateur train hater with a serious lapse in critical thinking. ...

Example 2:

Administrative Costs, by Paul Krugman: Whenever you encounter “research” from the Heritage Foundation, you always have to bear in mind that Heritage isn’t really a think tank; it’s a propaganda shop. Everything it says is automatically suspect.

Greg Mankiw forgets this rule, and approvingly (yes, it’s obvious he approves -no wiggling out) links to a recent Heritage attempt to explain away Medicare’s low administrative costs...

Well, whaddya know — this is an old argument, and has been thoroughly refuted. ...

You should always remember:

1. Don’t believe anything Heritage says.

2. If you find what Heritage is saying plausible, remember rule 1.

[Note: Krugman follow up here.]

Continuing with Example 2, Andrew Gelman can't understand why Greg Mankiw quotes the Heritage Foundation instead of someone from "Harvard's world-class Department of Heath Care Policy" with the authority and credibility to speak on these issues (hence the "Eagle Scout" reference):

Does Medicare actually have higher administrative costs than private insurers?, by Andrew Gelman: Greg Mankiw links to an article that illustrates the challenges of interpreting raw numbers causally. This would really be a great example for your introductory statistics or economics classes, because the article, by Robert Book, starts off by identifying a statistical error and then goes on to make a nearly identical error of its own! ...

I'm no expert in health policy. These are just my impressions as a teacher of statistics. It's great to find such examples that are so relevant to policy. I was surprised to see Mankiw quote the above article without criticism; but I'm pretty sure he's studied these issues in a lot more detail than I have, and so perhaps he has additional knowledge that makes him confident in the substance of Book's reasoning.

In particular, I expect that Mankiw has spent some time talking with the faculty at Harvard's world-class Department of Heath Care Policy. I don't know if any of their professors are Eagle Scouts, but they do have this guy, who was the founding editor of the Journal of Health Economics, a member of the editorial board of the New England Journal of Medicine, vice chair of the Medicare Payment Advisory Commission, etc etc. Also on the board of directors of Aetna so it looks like he has experience on both sides. Perhaps Newhouse or one of his colleagues has done a more detailed study that support's Book's conclusions.

Paul Krugman: HELP Is on the Way

We can afford health care reform:

HELP Is on the Way, by Paul Krugman, Commentary, NY Times: The Congressional Budget Office has looked at the future of American health insurance, and it works.

A few weeks ago there was a furor when the budget office “scored” two incomplete Senate health reform proposals — that is, estimated their costs and likely impacts over the next 10 years. One proposal came in more expensive than expected; the other didn’t cover enough people. Health reform, it seemed, was in trouble.

But last week the budget office scored the full proposed legislation from the Senate committee on Health, Education, Labor and Pensions (HELP). And the news — which got far less play in the media than the downbeat earlier analysis — was very, very good. Yes, we can reform health care. ...

[A] look at the U.S. numbers makes it clear that insuring the uninsured shouldn’t cost all that much, for two reasons.

"The Perpendicular"

I'm not sure how to introduce this, other than to say thank you to David Warsh of Economic Principals. This is the introduction to a much longer article on econoblogging:

The Perpendicular, by David Warsh: The morning that I visited him last week, Mark Thoma had fielded back-to-back calls first thing from Reuters and Bloomberg. The day before, The Wall Street Journal had sought to arrange for a photograph; the day after, N. Gregory Mankiw, of Harvard University, proudly pointed on his blog to a Thoma item about a speech that Mankiw had made some years before, as former adviser to George W. Bush. Paul Krugman, of The New York Times and Princeton University, had done as much the week before. No wonder, then, that during a recent meet-and-greet, the president of Thoma’s university, upon discovering himself to be shaking hands with the proprietor of Economist’s View, made a fuss and introduced the self-effacing professor to the assembled throng.

Not too shabby, considering that we were lunching in the leafy little city of Eugene, where the 52-year-old Thoma teaches at the University of Oregon. The WSJ last week was preparing to include Thoma in an article about the most popular economic bloggers. Earlier in the year he had been an invited guest at Kauffman Foundation and Milken Institute conferences. How did Thoma achieve a position of influence three times zones and a world away from the financial and political capitals back East?

The first part of the answer is, of course, the Internet. Thoma is an economic blogger of an unusual sort – a mostly disinterested editor and re-publisher of a selection of items from the daily torrent of informed opinion available on the Web.  There are many other highly-rated economic bloggers:  Tyler Cowen and Alex Tabarrok, of George Mason University, conduct a peripatetic patrol at Marginal Revolution; J. Bradford Delong, of the University of California at Berkeley, dispenses caustic wit and insight at Grasping Reality with Both Hands; Stephen Levitt, of the University of Chicago, and Steven Dubner and friends hold forth at  Freakonomics; Yves Smith (a clever nom de net for a former lady banker) writes on Naked Capitalism from Wall Street; Dani Rodrik’s Weblog dispenses common sense on development economics; Baseline Scenario badgers governments with an above-the-fray sensibility rather like that of the International Monetary Fund. Krugman and Mankiw on their blogs are talking heads much more timely and topical, and only a little more gray, than when they began taking turns with one another at two-week intervals at Fortune magazine fifteen years ago. The ranking of these and other bloggers is continually appraised by the powerful collaborative filtering mechanism that is the heart of the custom of exchanging links. ... [...continue reading...] ...

links for 2009-07-06

• Plenty of countries get healthcare right - The Boston Globe
• The world must learn to live and farm sustainably - FT.com
• Court Ruling Clears Path for New G.M. - NYTimes.com
• The (mythical?) housing wealth effect - voxeu.org
• Animal Spirits - Brad DeLong
• The Tragedy of the Millennium Development Goals - Aid Watch
• Off-balance-sheet federal liabilities - Econbrowser
• Abnormal Returns - links
• The Big Picture - links
• Chris Martenson - links
• Brad DeLong - links

Another Boost for the Economy?

Paul Krugman wonders what the vice president is thinking:

What didn’t the vice president know?, by Paul Krugman: And when did he not know it?

Seriously, the economy isn’t doing all that much worse than a number of people warned was probable. And the whole political economy thing was, sadly, predictable:

This really does look like a plan that falls well short of what advocates of strong stimulus were hoping for — and it seems as if that was done in order to win Republican votes. Yet even if the plan gets the hoped-for 80 votes in the Senate, which seems doubtful, responsibility for the plan’s perceived failure, if it’s spun that way, will be placed on Democrats.

I see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says “See, government spending doesn’t work.”

Let’s hope I’ve got this wrong.

Apparently I didn’t.

But never mind the hoocoodanodes and ayatollahyaseaux. What’s important now is that we don’t compound the understimulus mistake by adopting what Biden seems to be proposing — namely, a wait and see approach. Fiscal stimulus takes time. If we wait to see whether round one did the trick, round two won’t have much chance of doing a lot of good before late 2010 or beyond.

Brad DeLong:

Joe Biden Misses the Point..., by Brad DeLong: If the Obama fiscal boost program has its anticipated impact on the economy as its main effects take hold over the next year, it is still half the size of the program it now looks like we need. Only if it magically turns out to be twice as strong as we think--only with simple Keynesian multipliers of 3 rather than 1.5--is it the right size.

And, of course, if the situation deteriorates further we will need an even bigger stimulus, while if the situation improves having too-big a stimulus is not a problem because we can soak up the demand through monetary policy.

So Vice President Joe Biden completely misses the point when he says:

I think it's premature to make that judgment [that we need a larger stimulus]. This was set up to spend out over 18 months. There are going to be major programs that are going to take effect in September, $7.5 billion for broadband, new money for high-speed rail, the implementation of the grid -- the new electric grid. And so this is just starting, the pace of the ball is now going to increase.

Of course, he is paid to miss the point. Which is one reason why being Vice President is a really lousy job.

Sam Stein reports:

Biden Ignores Warnings Of Krugman, Stiglitz, Roubini And Others: During his interview with ABC's This Week on Sunday, Vice President Joe Biden made what will be a much-discussed admission in the week ahead. The Obama administration, he said, had "misread" the extent of the economic catastrophe it inherited. "The truth is, we and everyone else misread the economy," declared Biden. "The figures we worked off of in January were the consensus figures and most of the blue chip indexes out there. We misread how bad the economy was, but we are now only about 120 days into the recovery package," the vice president said later in the interview. "The truth of the matter was, no one anticipated, no one expected that that recovery package would in fact be in a position at this point of having to distribute the bulk of money."

Certainly, the Obama administration's acknowledgment that it misjudged the crisis it inherited is rife with possibilities for its political opponents. ...

But equally problematic is Biden's assertion that "everyone" - not just the White House - was off in their prognostications. This is simply untrue. Host George Stephanopoulos pointed out that "a lot of people were saying that you needed to do something bigger and bolder" when it came to the stimulus package. He named New York Times columnist Paul Krugman as one example. There are many others. The prize-winning Columbia University economist Joseph Stiglitz not only warned that the stimulus was too small during its construction, the day after Obama signed it into law he predicted how its shortcomings would make themselves apparent. ... Stiglitz was joined by a whole host of liberal economists -- from the University of Texas' James Galbraith to Dean Baker of the Center for Economic and Policy Research -- who warned that the stimulus package inexplicably underestimated the size of the crisis.

Several weeks after the stimulus passed, economist Nouriel Roubini, known affectionately as Dr. Doom, made the case that the administration's approach to stabilizing the economy lacked an effective international component. ...

The day that June's job numbers came out, meanwhile, Nassim Taleb, principal of Universa Investments and author of 'The Black Swan,' offered a far more grim interpretation of what was transpiring, though one relatively consistent with what he had said in the past. "We're in the middle of a crash," said Taleb during an appearance on CNBC. "So if I'm going to forecast something, it is that it's going to get worse, not better." ...

To be fair, the process of economic forecasting is, as Taleb noted in his CNBC segment, an inherently tricky proposition. In October 2008, for instance, Roubini was arguing that the government needed a $400 billion stimulus package, which ended up being just more than half of what the Obama White House settled on.

But among those who were sounding the loudest alarms about the potential inadequacies of the economic recovery plan, the consensus seems to be emerging that more now needs to be done. Later in his ABC segment, Biden - who is responsible for overseeing the stimulus - was asked if a second package was in the offing. No, he replied, without dismissing the possibility outright. "I think it's premature to make that judgment. This was set up to spend out over 18 months. There are going to be major programs that are going to take effect in September, $7.5 billion for broadband, new money for high-speed rail, the implementation of the grid -- the new electric grid. And so this is just starting, the pace of the ball is now going to increase."

That pretty much covers it, so I will just add that all of this also applies to Bruce Bartlett's commentary today in the Financial Times:

We do not need a second stimulus plan, by Bruce Bartlett, Commentary, Financial Times: As the US unemployment rate has risen to 9.5 per cent from 8.1 per cent since the $787bn fiscal stimulus package was enacted in February, many Democrats have become very nervous. They say that another large stimulus may be needed to keep unemployment from rising well beyond the 10 per cent rate that President Barack Obama has predicted will be reached this year.

Another stimulus would be a grave mistake. The first one was justified by extraordinary circumstances. But it must be given time to work. People should not allow their impatience to lead to the adoption of policies that will not only fail to reduce unemployment this year, but could stoke inflation in the not-too-distant future.

The problem is that the Obama administration was much too optimistic about how quickly stimulus spending would affect the economy. Christina Romer, chair of the Council of Economic Advisers, and Jared Bernstein, chief economist to vice president Joe Biden, forecast in January that the stimulus would reduce unemployment almost immediately. ...

As for inflation fears, see here for one of the many arguments that have appeared here explaining why those fears are overblown. And, on the claim about the administration's forecast, back to Brad DeLong:

The quotes from the Hon. Christina D. Romer are:

• We do not want to repeat the mistake Japan made in the 1990s, when the moment things started to improve they tightened policy...

• [Stimulus spending is] going to ramp up strongly through the summer and the fall. We always knew we were not going to get all that much fiscal impact during the first five to six months. The big impact starts to hit from about now onwards...

• [Stimulus spending] should make a material contribution to growth in the third quarter...

• I am more optimistic that we are getting close to the bottom...

• I still hold out hope it will be a V-shaped recovery. It might not be the most likely scenario, but it is not as unlikely as many people think. We are going to get some serious oomph from the stimulus, there is the inventory cycle, and I believe there is some pent-up demand by consumers...

As Krugman says above, and as I stressed in a recent interview, if we "wait to see whether round one did the trick, round two won’t have much chance of doing a lot of good." Here's what I said in April in response to talk of green shoots:

...I don’t think we’ve reached the beginning of the end, and caution is in order, particularly for policymakers. It is not at all unusual for the economy to tick upward temporarily during a slowdown, only to have it return to its previous, stagnating state. So policymakers must consider the possibility that this is nothing more than a temporary blip in the data, and continue to plan and set the stage for further action, if necessary.

Did they start setting the stage? Not as far as I can tell.

Update: Paul Krugman:

Bruce Bartlett misstates the problem, by Paul Krugman: He says:

The problem is that the Obama administration was much too optimistic about how quickly stimulus spending would affect the economy. Christina Romer, chair of the Council of Economic Advisers, and Jared Bernstein, chief economist to vice president Joe Biden, forecast in January that the stimulus would reduce unemployment almost immediately.

Um, that’s totally false. Did Bartlett even look at the Bernstein-Romer paper? Here’s the key graph [link to graph]... We’re now at the very beginning of 2009Q3; they predicted that the unemployment rate right now would be only a fraction of a percent lower now than it would otherwise be. The impact wasn’t supposed to be really noticeable until late this year, and wasn’t supposed to peak until late 2010.

The problem, in other words, is not that the stimulus is working more slowly than expected; it was never expected to do very much this soon. The problem, instead, is that the hole the stimulus needs to fill is much bigger than predicted. That — coupled with the fact that yes, stimulus takes time to work — is the reason for a second round, ASAP.

Bruce Bartlett, in comments:

The chart clearly shows the unemployment lines diverging in the second quarter, suggesting that the stimulus was expected to impact on the economy within two months of enactment. That's a pretty damn fast effect. And needless to say, we haven't seen any impact of the stimulus on unemployment yet. So I don't understand what Paul is disagreeing with me about when I say that the administration was too optimistic. It seems self-evident that it was.

"The Next Great Global Industry"

Thomas Friedman says the race to develop clean-power technologies is on, and if we lose it we won't be able to afford health care reform:

Can I Clean Your Clock?, by Thomas Friedman, Commentary, NY Times: Over the past decade, whenever I went to China and engaged Chinese on their pollution and energy problems, inevitably some young Chinese would say: “Hey, you Americans got to grow dirty for 150 years, using cheap coal and oil. Now it is our turn.”

It’s a hard argument to refute. Eventually, I decided that the only way to respond was...: “You’re right. It’s your turn. Grow as dirty as you want. Take your time. Because I think America just needs five years to invent all the  you Chinese are going to need as you choke to death on pollution. Then we’re going to come over here and sell them all to you, and we are going to clean your clock ... in the next great global industry: clean power technologies...”

Whenever you frame it that way, Chinese are quizzical at first, and then they totally get it:... E.T. — energy technologies that produce clean power and energy efficiency — is going to be the next great global industry, and China needs to be on board. Well, China has gotten on board — big-time. Now I am worried that China will, dare I say, “clean our clock” in E.T.

Yes, you might think that China is only interested in polluting its way to prosperity. That was once true, but it isn’t anymore. China is increasingly finding that it has to go green out of necessity because in too many places, its people can’t breathe, fish, swim, drive or even see because of pollution and climate change. Well, there is one thing we know about necessity: it is the mother of invention.

And that is what China is doing, innovating more and more energy efficiency and clean power systems. And when China starts to do that in a big way — when it starts to develop solar, wind, batteries, nuclear and energy efficiency technologies on its low-cost platform — watch out. ...

“China is moving,” says Hal Harvey, the chief executive of ClimateWorks, which shares clean energy ideas around the world. “...Sustainable technologies in solar, wind, electric vehicles, nuclear and other innovations will drive the future global economy. We can either invest in policies to build U.S. leadership in these new industries and jobs today, or we can continue with business as usual and buy windmills from Europe, batteries from Japan and solar panels from Asia.” ...

This is a major reason I favor the climate/energy bill passed by the House. If we do not impose on ourselves the necessity to drive innovation in clean-technology ... we will be laggards in the next great global industry.

And this is why I disagree with President Obama when he signals that he has to focus on extending health care and put the energy/climate bill — now in the Senate — on the backburner.

Health care and the energy/climate bill go together. We need both now. Imagine how poor we would be today if U.S. firms did not dominate the top 10 Internet companies. Well, if we don’t dominate the top 10 E.T. rankings, there is no way we are going to be able to afford decent health care for every American. No way.

I don't want to underplay the necessity of developing technology that will help to reduce greenhouse gases, and competition between countries and between firms ought to help with that development, but is that true? Is domination of the E.T industry the only way we can afford "decent health care for every American"? Other countries manage to provide decent health care for every one of their citizens, and they don't seem to need to dominate the major industries in the world to do it.

links for 2009-07-05

• Mortgages Made Simpler - News Analysis - NYTimes.com
• Embezzlement Leads to Bank Run in Virtual World - Cheap Talk
• Uncertainty over the size of the output gap - The Economist
• House prices and the wealth effect - The Economist
• Majority of Eastern Germans Feel Life Better under Communism - Spiegel
• Property Tax Appeals Take Toll on Governments - NYTimes.com
• naked capitalism - links
• The Stash - links
• The Baseline Scenario - links
• Credit Writedowns - links
• Brad DeLong - links
• ataxingmatter - links
• Marginal Revolution - links
• naked capitalism - links

Created Equal

William Easterly:

Fourth of July Edition, Aid Watch:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.

What a turning point in history this statement was on the first Fourth of July 233 years ago. Yet this bold ideal was proclaimed long in advance of any practical chance of fulfillment. The author of these words was an owner of African slaves. Nobody at the time worried whether “men” was a generic term that also included “women.” Nor did anyone give any thought to whether it applied to people known at the time by words like “barbarians” and “savages.” Yet it worked pragmatically in the long run as an ideal that reformers could appeal to again and again.

So 87 years later, another eloquent writer and speaker could appeal to these words to fight for the end of slavery in the United States:

Four score and seven years ago our fathers brought forth on this continent, a new nation, conceived in Liberty, and dedicated to the proposition that all men are created equal. Now we are engaged in a great civil war, testing whether that nation, or any nation so conceived and so dedicated, can long endure.

And slavery did indeed end, yet legal equality for African-Americans did not arrive. So 100 years later, another great American would say:

I have a dream that one day this nation will rise up and live out the true meaning of its creed: "We hold these truths to be self-evident: that all men are created equal."

And thanks to the efforts of the civil rights movement he led, African-Americans achieved legal equality.

“Created equal” is a principle yet to be accepted in most of the world, which perhaps has a lot to do with why most of the world is still not developed. Inequality of rights between elites and majorities, between ethnic and religious groups, between men and women is pervasive. But perhaps we can hope that this ideal still serves as a beacon that crusaders continue to cite in their ongoing struggle for the dignity and rights of every man and woman.

Climate Change Legislation and Protectionism

Martin Feldstein opposes border adjustments related to cap-and-trade:

Will Cap-and-Trade Incite Protectionism?, by Martin Feldstein, Commentary, Project Syndicate: There is a serious danger that the international adoption of cap-and-trade legislation to limit carbon-dioxide emissions will trigger a new round of protectionist measures. ... 150 countries are scheduled to meet in Copenhagen in December to discuss ways to reduce CO2 emissions.

Governments have ... focused on a cap-and-trade system as a way of increasing the cost of CO2-intensive products... The cap-and-trade system ... imposes a carbon tax without having to admit that it is really a tax.

A cap-and-trade system can cause serious risks to international trade. Even if every country has a cap-and-trade system and all aim at the same relative reduction in national CO2 emissions, the resulting permit prices will differ because of national differences in initial CO2 levels and in domestic production characteristics. Because the price of the CO2 permits in a country is reflected in the prices of its products, the cap-and-trade system affects its international competitiveness.

When the permit prices become large enough to have a significant effect on CO2 emissions, there will be political pressure to introduce tariffs on imports that offset the advantage of countries with low permit prices. Such offsetting tariffs would have to differ among products ... and among countries (being higher for countries with low permit prices). Such a system of complex differential tariffs is just the kind of protectionism that governments have been working to eliminate since the start of the GATT process more than 50 years ago.

Worse still, cap-and-trade systems in practice do not rely solely on auctions to distribute the emissions permits. ... Such complexities make it impossible to compare the impact of CO2 policies among countries, which in turn would invite those who want to protect domestic jobs to argue for higher tariff levels.

There is no easy answer to this problem. But before rushing to impose tariffs, it is important to remember that cap-and-trade policies would not be the only government source of differences in competitiveness. Better roads, ports, and even schools all contribute to a country’s competitiveness. No one attempts to use tariffs to balance those government-created differences in competitiveness, and there should be no such attempts if a cap-and-trade system is introduced.

If an international agreement to impose a cap-and-trade scheme is adopted in Copenhagen, the countries there should agree as well that there will be no attempt to introduce offsetting tariffs that would ultimately threaten our global system of free trade.

Paul Krugman on what to do if other countries refuse to participate:

Climate, trade, Obama, by Paul Krugman: I think the president has this wrong:

President Obama on Sunday praised the energy bill passed by the House late last week as an “extraordinary first step,” but he spoke out against a provision that would impose trade penalties on countries that do not accept limits on global warming pollution. ...

The truth is that there’s perfectly sound economics behind border adjustments related to cap-and-trade. The way to think about it is in terms of a well-established theory — the theory of non-economic objectives in trade policy — that owes its origins to Jagdish Bhagwati, who certainly can’t be accused of being a protectionist. The essential idea is that if you have a non-economic objective, such as self-sufficiency in food production, you should choose policy instruments to align incentives with that objective; in normal circumstances this leads to consumer or producer intervention, rarely to tariffs.

But in this case the non-economic objective is to reduce greenhouse gas emissions, never mind their source. If you only impose restrictions on greenhouse gas emissions from domestic sources, you give consumers no incentive to avoid purchasing products that cause emissions in other countries; as a result, you have an inefficient outcome even from a world point of view. So border adjustments here are entirely legitimate in terms of basic economics.

And they’re also probably OK under trade law. The WTO has looked at the issue, and suggests that carbon tariffs may be viewed the same way as border adjustments associated with value-added taxes. ... Because it’s essentially a tax on consumers, it’s legal, and also economically efficient, to collect it on imported goods as well as domestic production; it’s a matter of leveling the playing field, not protectionism.

And the same would be true of carbon tariffs.

What’s happening here, I think, is that people are relying on what Paul Samuelson called an economic “shibboleth” — they’re relying on some slogan rather than thinking through the underlying economics. In this case the shibboleth is “free trade good, protection bad”, when what the economics really says is that incentives should reflect the marginal cost of greenhouse gases in all goods, wherever produced — which in this case happens to imply border adjustments.

___________________________________________________________

Update: On the effects of climate change legislation, this is from a July 4 post at the CBO Director's blog:

Estimated U.S. Emissions under the House-passed Bill

links for 2009-07-04

• Conceptual revolutions in twentieth-century art - voxeu.org
• The Internationalization of U.S. Doctorate Education - NBER Digest
• A funny thing happened on the way to the federal funds market - macroblog
• Asian Officials Push Back Against Savings Glut Theory - WSJ.com
• New Deal 2.0 - links
• FT Alphaville - links
• Abnormal Returns - links
• naked capitalism - links
• Credit Writedowns - links

Malthus "Would have been Very Much at Home in the Blogosphere"

In Thomas Malthus' time, there was a dispute over the corn laws (which were tariffs on imported grains imposed in the early 1800s). Landlords favored the corn laws, and though the landlords were the most powerful class at that time, they were coming under increasing attack from the rising merchant and industrial capital classes. Why the conflict?

The tariffs raised the price of corn, something the landlords favored, but since corn was a key component of the subsistence workers relied upon to survive, the price of labor - the wage rate - would reflect the price of corn. If the price of corn was high, wages would be high, and when the price of labor rises merchants and capitalists would have a more difficult time selling their goods profitably. The fear was compounded by the end of the Napoleonic wars and the threat of large imports of cheap grain from France.

So what was the effect of the corn laws on the price of corn, on wages, on the welfare of the poor, and so on? Finding an answer to this question, as well as the answer to what impact poor laws have, and what causes gluts (recessions) drove both Malthus and Ricardo to develop theoretical models that could guide them to the answer and hence to the correct policy prescription. Thus, their analytical contributions to economics were driven primarily by the important social questions of the time.

Here's more on Malthus:

Malthus blogging on the Corn Laws, by Daniel Little: I think that Thomas Malthus would have been very much at home in the blogosphere. He weighed in on the issues of the day, bringing careful logical analysis of economic theory to bear on the policy issues that were up for debate. And he was very interested in making the connection between economic principles and real empirical evidence. This is particularly true in his contributions to the debate on the Corn Laws in 1814 and 1815. Malthus authored pamphlets on these issues in 1814 ("Observations on the effects of the corn laws"; link) and 1815 ("Grounds of an opinion on the policy of restricting the importation of foreign corn"; link), and they repay scrutiny today; they are powerful instances of a very smart economist probing the theory and the facts surrounding a complex policy issue. (Here is a nice survey of Malthus's theories; link.)

The Corn Laws might be thought of as a form of "stimulus package" for the British economy in the early nineteenth century. By setting a high tariff on the import of wheat and other grains, Parliament aimed to protect the agricultural sector and to encourage the expansion of grain production to make Britain more independent from external grain providers. One might also compare the debate to the NAFTA debate or to policy deliberations in the 1960s concerning "import substitution" strategies. Opponents argued that removal of the tariffs would bring down the price of grain, a central component of the wage basket; this would help the poor and would also permit a significant reduction of the wage as well. So the issue divides the interests of land owners, industrialists, and the poor.

Malthus's position in the two essays is somewhat different. In the first article he promises to lay out the issue dispassionately, dispelling false opinions about what the effects of the proposed policy might be and diving into the advantages and disadvantages of the policy. He writes that "some important considerations have been neglected on both sides of the question, and the effects of the corn laws, and of a rise or fall in the price of corn, on the agriculture and general wealth of the state, have not yet been fully laid before the public." A bit further on, he writes:

My main object is to assist in affording the materials for a just and enlightened decision; and whatever that decision may be, to prevent disappointment, in the event of the effects of the measure not being such as were previously contemplated. Nothing would tend so powerfully to bring the general principles of political economy into disrepute, and to prevent their spreading, as their being supported upon any occasion by reasoning, which constant and unequivocal experience should afterwards prove to be fallacious.

So--"let's do rigorous and systematic analysis based on the principles of political economy and our best understanding of the facts." Good advice for a policy debate.

Quite a bit of the analysis is devoted to refuting an idea that Malthus attributes to Adam Smith ... [...continue reading...]

Does Lack of Insurance Distort the Market for Romance?

[Suggested by email]

Obama Economic Forecast

Spencer at Angry Bear:

The right is having a lot of fun commenting about the economic forecast by the Obama team being too optimistic. ... I guess they are right, Obama along with everyone else has massively underestimated the damage Team Bush did to our economy.

Rationing Health Care

Uwe Reinhardt:

‘Rationing’ Health Care: What Does It Mean?, by Uwe E. Reinhardt, Economix: As the dreaded R-word — rationing — once again worms its way into our debate on health care reform, it may be helpful to relearn what is taught about rationing in freshman economics.

In their well-known textbook Microeconomics, the Harvard professor Michael L. Katz and the Princeton professor Harvey S. Rosen, for example, put it thusly:

Prices ration scarce resources. If bread were free, a huge quantity of it would be demanded. Because the resources used to produce bread are scarce, the actual amount of bread has to be rationed among its potential users. Not everyone can have all the bread that they could possibly want. The bread must be rationed somehow; the price system accomplishes this in the following way: Everyone who is willing to pay the equilibrium price gets the good, and everyone who does not, does not. [Italics added.]

In short, free markets are not an alternative to rationing. They are just one particular form of rationing. ...

Many critics of the current health reform efforts would have us believe that only governments ration things.

When a government insurance program refuses to pay for procedures that the managers of those insurance pools do not consider worth the taxpayer’s money, these critics immediately trot out the R-word. It is the core of their argument against cost-effectiveness analysis and a public health plan for the non-elderly.

On the other hand, these same people believe that when, for similar reasons, a private health insurer refuses to pay for a particular procedure or has a price-tiered formulary for drugs – e.g., asking the insured to pay a 35 percent coinsurance rate on highly expensive biologic specialty drugs that effectively put that drug out of the patient’s reach — the insurer is not rationing health care. Instead, the insurer is merely allowing “consumers” (formerly “patients”) to use their discretion on how to use their own money. The insurers are said to be managing prudently and efficiently, forcing patients to trade off the benefits of health care against their other budget priorities. ...

One must wonder where people worried about “rationing” health care have been in the last 20 years. Could they possibly be unaware that the United States health system has rationed health care in spades for many years, on the economist’s definition of rationing, and that President Obama and Congress are now desperately seeking to reduce or eliminate that form of rationing?

Let me remind rationing-phobes what they would find in the huge body of research literature and media reports on our health system, should they ever trouble themselves to read it ...[list here]...

As I read it, the main thrust of the health care reforms espoused by President Obama and his allies in Congress is first of all to reduce rationing on the basis of price and ability to pay in our health system.

An important allied goal is to seek greater value for the dollar in health care, through comparative effectiveness analysis and payment reform. ...

To suggest that the main goal of the health-reform efforts is to cram rationing down the throat of hapless, non-elite Americans reflects either woeful ignorance or of utter cynicism. Take your pick.

I tired to make the same basic argument here: "Health Care Rationing Rhetoric".

Bruce Bartlett:

Health Care: Costs And Reform, by Bruce Bartlett, Commentary, Forbes: When asked about the federal government's long-term budget problem, Barack Obama always responds that it is essentially a health issue. Unless we fix the health care system, he says, we cannot get control of the budget. This is the key reason why Obama has stressed the need for health reform this year.

There is certainly truth in this proposition. ... According to CBO, spending for Medicare has risen 2.3% per year faster per beneficiary than growth of nominal GDP per capita since 1975. Obviously, this is a trend that cannot be allowed to continue or Medicare will eventually eat up 100% of currently projected tax receipts.

The problem of health care spending growing faster than incomes is also a problem that plagues the private sector, which explains why total spending on health care in the economy has doubled over the last 30 years to a current level of about 16% of GDP. CBO estimates that this percentage will double again over the next 25 years to 31% of GDP.

Americans widely believe that while the our health system is expensive it is nevertheless the best in the world. However, a new report from the Organization for Economic Cooperation and Development suggests otherwise. ...