Thursday, August 20, 2009
Wednesday, August 19, 2009
Kenneth Rogoff warns us not to believe those who argue that the crisis was largely due to government failure, and hence that regulating the financial sector is counterproductive and unnecessary:
Why we need to regulate the banks sooner, not later, by Kenneth Rogoff, Commentary, Financial Times: When in doubt, bail it out,” is the policy mantra ... after the ... collapse of Lehman Brothers. With the global economy tentatively emerging from recession, and investors salivating over the remaining banks’ apparent return to significant profitability, some are beginning to ask: “Did we really need to suffer so much?”
Too many policymakers, investors and economists have concluded that US authorities could have engineered a smooth exit from the bubble economy if only Lehman had been bailed out. Too many now believe that any move towards greater financial regulation should be sharply circumscribed since it was the government that dropped the ball. Stifling financial innovation will only slow growth, with little benefit in terms of stemming future crises...
Certainly the US and global economy were already severely stressed at the time of Lehman’s fall, but better tactical operations by the Federal Reserve and Treasury, especially in backstopping Lehman’s derivative book, might have stemmed the panic. Indeed, with hindsight it is easy to say the authorities should have acted months earlier to force banks to raise more equity capital. The March 2008 collapse of the fifth largest investment bank, Bear Stearns, should have been an indication that urgent action was needed. Fed and Treasury officials argue that before Lehman, stronger measures were politically impossible. There had to be blood on the street to convince Congress. ...
[C]ommon sense dictates the need for stricter controls on short-term borrowing by systemically important institutions, as well as regularly monitored limits on oversized risk positions, taking into account that markets can be highly correlated in a downturn. ... There should also be more international co-ordination of financial supervision, to prevent countries using soft regulation to bid for business and to insulate regulators from political pressures.
...The view that everything would be fine if Hank Paulson, then US Treasury secretary, had simply underwritten a $50bn bail-out of Lehman is dangerously misguided. The financial system still needs fundamental reform...
I think that even if Lehman had been bailed out the economy would still have been bad, just not as bad, so either way there are substantial economic costs and a case for regulation.
If you are going to criticize people for their economics and professional standards, shouldn't you try to live up to your own expectations? Richard Posner says:
I am concerned with the fact that academic economists, when they become either public officials or public intellectuals (like Paul Krugman), leave behind their academic scruples.
This raises the question of the ethical responsibility of academic economists, such as Romer (and Krugman, and Lawrence Summers, and many others), who write for the media or join the government, either to adhere to academic standards in their nonacademic work or to make clear to the public that they are on holiday from those standards...
I disagree with his claims, and I think one of his assertions about Romer is wrong (that her current position on the stimulus package differs from what is in her academic work), but in any case, where are his standards? In his discussion of macroeconomic policy, he doesn't even get the basics right (to name just one obvious example, his definition of investment in Y=C+I+G includes financial assets, something principles of macro courses make abundantly clear shouldn't be done, and he talks about foreign demand for US goods, but doesn't include NX in his definition of output). Yet, nowhere does he say “I don’t know what I am talking about because I am a judge, not a macroeconomist.” Instead, in his role as a public intellectual, he acts like he is an expert in the field. Ethics indeed.
Update: Brad DeLong has much more.
Some very rough notes on co-ops I jotted down just before a radio interview yesterday. The main questions I was interested in addressing were the feasibility of co-ops, whether they would lower costs, and whether co-ops would broaden coverage so that it is practically universal. This was a last minute effort, and likely incomplete, so please don't hesitate to add to the list in comments:
1. Co-ops are not very well defined.
2. It is not clear that Co-ops will lower costs. For one, you need at least 500,000 members to have enough bargaining power to matter, and even then it just puts you on an even keel with existing companies. That isn't enough bargaining power to lower costs. Also, will co-ops lower administrative costs? Probably not much.
3. Some reports say the plan would come with 6 billion in start-up funds. But there are still large barriers to entry.
4. This was an eye opener. Blue Cross-Blue Shield, which already has substantial market share in some areas (e.g. 90%), is a non-profit and would likely qualify as a co-op. Though they would likely come under some new regulations in terms of who they must cover if they did change to a co-op, as well as other restrictions, it doesn't seem like this would bring about much change.
5. Some states already allow co-ops, e.g. Iowa, and they have not generally been successful.
6. On coverage, how will that work? Will these co-ops be like Savings and Loans (to which they are often compared) where membership is restricted to certain groups, or will they be forced to provide insurance to anyone who wants it? If so, how do you stop firms from subtly using non-price mechanisms to discourage high cost patients from joining? Exactly how coverage will be regulated is vague in the reports I read, though perhaps there's an actual proposal somewhere that is more informative.
7. Republicans won't support this either, so why are we bothering with it?
[Update: Tyler Cowen asks What are health care co-ops?]
Tuesday, August 18, 2009
The liars are winning:
Do we blame ineffective messaging, effective liars, or an ineffective and complicit press? All bear responsibility, but it's not clear that even the best messaging effort can penetrate the cloud of disinformation and untruths that is allowed to persist so long as it is good for ratings. Tell lies to scare people, then when the other side howls, count on the press turning it into a circus that is more of a series of gotchas than anything resembling a debate or a search for the truth. The press needs to take a long, hard look at it's role in destroying public debate. But it won't.
...Majorities in the poll believe the plans would give health insurance coverage to illegal immigrants; would lead to a government takeover of the health system; and would use taxpayer dollars to pay for women to have abortions — all claims that nonpartisan fact-checkers say are untrue about the legislation that has emerged so far from Congress.
Forty-five percent think the reform proposals would allow the government to make decisions about when to stop providing medical care for the elderly. That also is untrue...
Social Security: Time to Uncap FICA..., by Brad DeLong: For nearly thirty years--ever since the Republican congressional barons of 1982 begged Reagan to allow them to increase taxes and then figured out that a tax increase that would "save Social Security" was one that he would accept--the rest of the federal budget has ridden on the back of Social Security and its operating surplus. Those days were coming to an end, and it looks like the magnitude of the current crisis means that that end comes... now.
The Congressional Budget Office reports that the era of Social Security Trust Fund services is over:
The smart thing to do would be for congress this fall to (a) uncap FICA--apply it to all of wage-and-salary income rather than just the bottom 90%--starting in 2012 and raise the retirement age to 70 in 2030, thus hitting those born in 1960 and later (i.e., me). And then revisit the system in a decade and see what shape it is in.
Adding-on some tax-preferred properly-incentivized individual accounts as an add-on, not a carve-out would be a good idea as well.
Some day the Social Security program will have to be tweaked. It doesn't need radical restructuring, but it does need to be nudged in the right direction. When that happens, I would rather have Democrats sitting in the driver's seat than Republicans. But it has to be Democrats I can trust.
The health care reform process will tell me a lot about whether I can trust the Obama administration to negotiate Social Security changes on my behalf. Right now, the tendency to give too much away in order to make a deal along with a tendency toward centrist or even conservative policies makes me hesitant to put full faith in the administration as my bargaining agent. For example, Brad says he would favor individual accounts that are an "add-on, not a carve-out," but once private accounts are on the table, will they be willing to give on this point and allow a small carve-out just to get a deal done (though the financial crisis has made this less worrisome since it will be a much harder sell)? I wish I could say no, never, but I can't. The administration seems willing to make such deals, and once that door is open, it could lead to further erosion in the program down the road. Maybe after I see then hold the line in the health care debate, I'll feel more confident, but that hasn't happened yet.
One final thought. If we are going to consider changing the retirement age, I hope we don't limit the discussion to people who spend most of their working lives sitting in a chair, i.e. that we allow people whose bodies have been broken by years and years of hard manual labor to have a voice in the discussions. I also hope that we consider more than simply how long people live in making this choice, and that whatever we do, people from all walks of life can still reasonably expect to enjoy a few years of active retirement after working for so many years. I'm not sure a retirement age of 70 meets this goal.
Tim Duy turns from Fed Watcher to Press Watcher. Will more regulation in mortgage markets lead to outcomes like Vermont's?:
Odd WSJ Story on Vermont, by Tim Duy: The Wall Street Journal has an odd piece on the Vermont mortgage market today. Odd in that the thesis appears to be completely unsupported by the rest of the piece. The story begins:
In plenty of other states, Andrea Todd would have been a homeowner years ago. Here, she bought just this month -- a difference that helps explain how Vermont avoided the housing bust, and shows the possible pitfalls in President Barack Obama's plan to tighten mortgage regulation…
...Vermont's strict mortgage-lending laws largely prevented the state's residents from signing the types of dubious home loans written in other markets across the country. Its 1990s legislation made mortgage lenders warn customers when their rates were relatively high, and put the brokers who arranged loans on the hook if their customers defaulted. Now, by at least one measure, the state has the lowest foreclosure rate in the U.S.
It came at a cost. The rules also kept some Vermonters like Ms. Todd from buying homes, keeping this rural corner of New England on the sidelines of the housing boom and the economic bonanza that came with it. Vermont's 10-year growth trails the national average.
The tenor of the article is that Vermont has overregulated the mortgage market preventing…wait for it…the unforgivable error of restricting loans to those who can prove an ability to repay. Worse yet, consumers receive explicit notice of high rates and brokers are held accountable:
In laws passed between 1996 and 1998, Vermont required lenders to tell consumers when their rates were substantially higher than competitors', with notices printed on "a colored sheet of paper, chartreuse or passion pink." And in what officials believe is the first state law of its kind, Vermont declared that mortgage brokers' fiduciary responsibility was to borrowers, not lenders. This left Vermont brokers partly on the hook for loans gone sour.
The insanity. The horror. Encourage personal responsibility? Hold people accountable for their behavior? Unthinkable. While of course such policies would limit defaults, the economic consequences would be disastrous:
Vermont's economy grew 60% in the 10 years ending in 2008, just behind the 63% rate nationally, according to the Commerce Department. Vermont lagged Arizona, Nevada and California over the decade but outpaced most of its New England neighbors.
That's right, Vermont's growth trails the national average by an astounding 3 percentage points over a decade. They truly missed the economic boom. Why surely Vermont would have outpaced Arizona had it not been for the stunningly tight mortgage markets. The snow didn't have anything to do with it.
Of course, homeownership rates in Vermont are dismal. A state of renters, virtual serfs in this medieval land. The author forges bravely ahead:
Vermonters didn't see the same sharp rise in home ownership that swept much of America in recent decades, which, despite the bust, buoyed economic growth. And while part of the increase in U.S. home ownership reflected excesses in lending and borrowing, some of it represented real progress in the form of more Americans achieving the cherished goal of getting -- and keeping -- a home of their own. By 2007, the percentage of owner-occupied households as a whole reached 68.1%, up from 63.9% in 1990, according to U.S. Census data. Vermont started at a higher base but saw ownership rise just 1.1 percentage points in that span, to 73.7%.
The according to the article, the "pitfalls" amount to: Informed consumers, fewer foreclosures, healthier banks, higher rates of homeownership, and virtually no impact on average growth. Those are some "pitfalls" - truly, greater consumer financial protection would spell ruin for us all.
Should firms be forced to adopt fair-value accounting?:
Disclose the fair value of complex securities, by Robert Kaplan, Robert Merton and Scott Richard, Commentary, Financial Times: Banks and other financial institutions are lobbying against fair-value accounting for their asset holdings. They claim many of their assets are not impaired, that they intend to hold them to maturity anyway and that recent transaction prices reflect distressed sales into an illiquid market, not what the assets are actually worth. Legislatures and regulators support these arguments, preferring to conceal depressed asset prices rather than deal with the consequences of insolvent banks.
This is not the way forward..., allowing financial institutions to ignore market transactions is a bad idea. ... Markets function best when companies disclose valid information about the values of their assets and future cash flows. If companies choose not to disclose their best estimates of the fair values of their assets, market participants will make their own judgments about future cash flows and subtract a risk premium for non-disclosure. Good accounting should reduce such dead-weight losses.
This already happens in another financial sector. Mutual funds in the US now use models, rather than the last traded price, to provide estimates of the fair values of their assets that trade in overseas markets. ... In this way, the funds ensure that their shareholders do not trade at biased net asset values calculated from stale prices. ... Obtaining fair-value estimates for complex pools of asset-backed securities, of course, is not trivial. But these days it is possible for a bank’s analysts to use recent market transaction prices as reference points and then adjust for the unique characteristics of the assets they actually hold...
Legislators and regulators fear that marking banks’ assets down to fair-value estimates will trigger automatic actions as capital ratios deteriorate. But using accounting rules to mislead regulators with inaccurate information is a poor policy. If capital calculations are based on inaccurate values of assets, the ratios are already lower than they appear. Banks should provide regulators with the best information about their assets and liabilities and, separately, allow them the flexibility and discretion to adjust capital adequacy ratios based on the economic situation. Regulators can lower capital ratios during downturns and raise them during good economic times.
No system of disclosing the fair value of complex securities is perfect. ... But reasonable and auditable methods exist today to incorporate the information in the most recent market prices. Investors, creditors, boards and regulators need not base decisions on biased values of a company’s financial assets and liabilities.
When we are experiencing an asset price bubble, we would prefer that firms value their assets at the intrinsic (true) value rather than the inflated bubble values, values that will crash when the bubble pops. However, bubbles do not always have to be positive, it's also possible for prices to deviate from intrinsic values on the low side, i.e. it's possible to have a negative bubble. In such cases, if you believe firms should use true prices rather that bubble prices when prices are above their intrinsic values, then you should also believe that the same is true when prices are below their intrinsic values. So one way to look at the question of whether current market prices are the right prices to use to value the assets on bank balance sheets is to ask whether there's reason to believe that we are in a negative bubble, i.e. if there's reason to believe that prices are artificially suppressed below their true values.
I'm not convinced that they are, but that's not a position held with much certainty, and the valuations that regulators are allowing implicitly assume that current market prices are, in fact, too low. The problem is that the true prices are not known, it's not even clear they can be estimated with any precision, and this leaves open the possibility of substantially upwardly biased valuations (the fact that we never know for sure if prices are deviating from true values is a reason to make fair-values available to those who want to use the information these valuations provide).
So there are two ways that banks balance sheets can present an overly optimistic picture. First, if the current market prices are correct, but we believe falsely that they are too low and allow firms to carry higher values on their books, then the values will be too optimistic. Second, even if the belief that current market prices are below true values, i.e. that we are in a negative bubble, is correct, it's not clear what prices we should use instead since the true price is not known. There's lots of room for firms and regulators looking to present best case scenarios to endorse overly optimistic valuations.
- Clawbacks Coming? - The Big Picture
- Utilization-adjusted Productivity and the Output Gap - Econbrowser
- Potential Output: Worrying About What Cannot Be Observed - IMF Direct
- The problem with professors becoming presidents - Richard Green
- The Case for a 5% Inflation Target - Modeled Behavior
- Annoying Habits of College Professors (c. 1935-1937) - Scientific American
- EconTech - links
- Credit Writedowns - links
- Marginal Utility - links
Monday, August 17, 2009
What do prediction and financial markets have to say about the prospect of dropping the public option and replacing it with health care co-ops? Arin Dube has an answer (which is a follow-up to this post):
Public Option versus “Co-ops”: The Market Test, by Arin Dube: President Obama says he is serious about making sure we have a competitive alternative to the private health insurance companies to drive down costs. However, he is now apparently open to the idea of “health co-operatives” that will be regional purchasing pools operating independently of the federal government. How well will these co-ops achieve his stated goals? To assess this, we can start with his own words and those of his subordinates. Well, to be precise, how various investors reacted to these words.
Exhibit A shows how investors in the Intrade prediction market reacted to signals from the Obama administration on Sunday August 16 that they are willing to ditch the public health insurance option. In the market’s assessment, the likelihood of a federally administered health plan passing fell from around 35% to around 20%, the biggest one-day drop since the prediction market started in June.
So as the public option’s condition went to critical, and “co-ops” started looking increasingly likely, how did investors in the top 4 private health insurance companies react? As exhibit B shows, champagne bottles were popped.
On a day when the broader stock market took a hit (dropping 2.2% at the time of writing), these four companies with a combined market cap of $80 billion saw their prices rise an average of 3%. Actually, if you dot the i’s and cross the t’s in calculating “abnormal returns”** for these four companies, it comes to be 5.8%. All in all, statements by the Obama administration over the weekend helped investors of private health insurance markets make around $4.6 billion.
So, as the market’s assessed likelihood of the public option passing dropped by 15 percentage points, share prices rose by around 6 percentage. If you are willing to extrapolate based on this event, going from a public option to “co-ops” would be worth around 40% of the value of these companies, or around $32 billion. This is similar to the results from my previous analysis of how market reacted to announcements by members of the Senate Finance Committee.
President Obama may have harsh words for the insurance companies. But those are not the words investors in these companies are paying attention to. They are paying attention to whether President Obama will sign a bill with vague “co-ops” or demand a public option. And the reaction by these investors bodes poorly for “co-ops” fulfilling their role as a serious competitive alternative to private insurance companies.
** Abnormal returns are calculated as [Raw Return] – beta * [Index Return]. Betas for AET, UNH, WLP and CI are 1.3, 1.14, 1.15 and 1.88 respectively (from Google Finance).
Arindrajit Dube is an economist at UC Berkeley Institute for Research on Labor and Employment who is joining the Department of Economics at the University of Massachusetts, Amherst. His work focuses on labor and health economics topics, as well as political economy.
More from Paul Krugman on the public option:
The public option as a signal, by Paul Krugman: Look, it is possible to have universal care without a public option; Switzerland does. But there are some good reasons for the prominence of the public option in our debate.
One is substantive: to have a workable system without the public option, you need to have effective regulation of the insurers. Given the realities of our money-dominated politics, you really have to worry whether that can be done — which is a reason to have a more or less automatic mechanism for disciplining the industry.
The second is what the option debate says about Obama.
If progressives had real trust in Obama’s commitment to doing the right thing, the administration would have broad leeway to do deals. But the president doesn’t command that kind of trust.
Partly it’s a matter of style — as many people have noted, he has been weirdly reluctant to make the moral case for universal care, weirdly unable to show passion on the issue, weirdly diffident even about the blatant lies from the right. Partly it’s a spillover from his other policies: by appointing an economic team that’s Rubin redux, by taking such a kindly attitude to the banks, he has squandered a lot of progressive enthusiasm.
Add in the dealmaking as part of the health care process itself, and progressives can be forgiven for having the impression that Obama (a) takes them for granted (b) is way too easily rolled by the other side.
So progressives have their backs up over one provision in health care reform that’s easy to monitor. The public option has become not so much a symbol as a signal, a test of whether Obama is really the progressive activists thought they were backing.
And the bizarre thing is that the administration doesn’t seem to get that.
I think there's another factor as well. It's not just that Democrats don't trust Obama's commitment to progressive issues, and it's not simply a matter of style, or a spillover from other appointments, though I do agree these are issues. It's also the sense that the same old right-wing crazies are driving the public debate to a much greater extent than is justified by the last election. This was supposed to be a new era, one where progressive ideas would dominate public policy, not an era where a false charge of "death panels" would dominate the public discourse, and certainly not an era where misrepresentations from the far right extreme would cause the public option to be dropped from the legislation.
Whether the administration simply does not have the political power, lacks sufficient will, doesn't understand the political significance, or what, it's hard for supporters to watch the same political game unfold once again in what was supposed to be a new era in progressive politics. It's a frustrating slap in the face for progressives who support the administration, and it's the sense of powerless against the right-wing false message machine that is driving that frustration.
The administration needs to take a stand against something important - and win. And not just for what is signals to supporters. Compromise will never appease the crazies on the right, strength is the only way to beat them.
Update: Robert Reich isn't ready to give up on the public option:
The Public Option's Last Stand, and the Public's, by Robert Reich: I would have preferred a single payer system like Medicare, but became convinced earlier this year that a public, Medicare-like optional plan was just about as much as was politically possible. Now the White House is stepping back even from the public option...
Without a public, Medicare-like option, health care reform is a bandaid for a system in critical condition. There's no way to push private insurers to become more efficient and provide better value to Americans without being forced to compete with a public option. And there's no way to get overall health-care costs down without a public option that has the authority and scale to negotiate lower costs with pharmaceutical companies, doctors, hospitals, and other providers -- thereby opening the way for private insurers to do the same.
It's been clear from the start that the private insurers and other parts of the medical-industrial complex have hated the idea of the public option, for precisely these reasons. A public option would cut deeply into their current profits. That's why they've been willing to spend a fortune on lobbyists, threaten and intimidate legislators and ordinary Americans, and even rattle Obama's cage to the point where the Administration is about to give up on it.
The White House wonders why there hasn't been more support for universal health care coming from progressives, grass-roots Democrats, and Independents. I'll tell you why. It's because the White House has never made an explicit commitment to a public option. ... If Obama tells Senate Democrats he will not sign a healthcare reform bill without a public option, there will be enough votes in the United States Senate for a public option.
I urge you to make it absolutely clear to everyone you know, everyone who cares about universal health care and what it will mean to our country, that the bill must contain a real public option. Tell that to your representatives in Congress. Tell that to the White House. If you are receiving piles of emails from the Obama email system asking you to click in favor of health care, do not do so unless or until you know it has a clear public option. Do not send money unless or until the White House makes clear its support for a public option.
This isn't just Obama's test. It's our test.
I'm not sure this is the place for the administration to take a stand, perhaps it is, but I am sure that they need to take stand on something. Let me ask a question. Can you articulate with a simple statement what the administration's primary goal for health care reform is? Is it to make coverage universal? To control costs and reduce future deficits? To stop the insurance companies from taking advantage of people who already have coverage? All of the above? Something else? I don't think you can take a solid stand on the issues until you've clearly articulated the main goal, and that has not been done. I suspect that the goals will be defined after reform is passed - if it is - and the goals will be defined as whatever they were able to get. We got the main things we were after we will be told, whether that is true or not. But if, in the end, reform is mostly cosmetic, I don't think that strategy will work.
To say that your goal is whatever you can achieve, whatever that is, would be fine if what is possible is independent of how clearly and forcefully the administration articulates its goals, but what can be achieved is not independent of the administration's articulation of its goals. When the goals are vague, it allows the other side to define reform, and do so on their terms and with their terminology, and that limits the possibilities that are available, perhaps fatally.
If health care reform happens, it looks like it will be "Swissified." Like the cheese, it has some holes, but gets the job done:
The Swiss Menace, by Paul Krugman, Commentary, NY Times: It was the blooper heard round the world. In an editorial denouncing Democratic health reform plans, Investor’s Business Daily tried to frighten its readers by declaring that in Britain,... the handicapped physicist Stephen Hawking “wouldn’t have a chance,” because the National Health Service would consider his life “essentially worthless.”
Professor Hawking, who was born in Britain, has lived there all his life, and has been well cared for by the National Health Service, was not amused. ...
Investor’s Business Daily would like you to believe that Obamacare would turn America into ... a dystopian fantasy version of Britain. The screamers on talk radio and Fox News would have you believe that the plan is to turn America into the Soviet Union. But the truth is that the plans ... would, roughly speaking, turn America into Switzerland — which may be occupied by lederhosen-wearing holey-cheese eaters, but wasn’t a socialist hellhole the last time I looked. ...
Every wealthy country other than the United States guarantees essential care to all its citizens. There are, however,... three main approaches...
In Britain, the government itself runs the hospitals and employs the doctors. We’ve all heard scare stories about how that works...; these stories are false..., over all it appears to provide quite good care while spending only about 40 percent as much.... By the way, our own Veterans Health Administration, which is run somewhat like the British health service, also manages to combine quality care with low costs.
The second route to universal coverage leaves the actual delivery of health care in private hands, but the government pays most of the bills. That’s how Canada and, in a more complex fashion, France do it. It’s also [how]... Medicare...[does it]... Again, you hear a lot of horror stories about such systems, most of them false. ... And Medicare is highly popular, as evidenced by the tendency of town-hall protesters to demand that the government keep its hands off the program.
Finally, the third route to universal coverage relies on private insurance companies, using a combination of regulation and subsidies to ensure that everyone is covered. Switzerland offers the clearest example: everyone is required to buy insurance, insurers can’t discriminate based on medical history or pre-existing conditions, and lower-income citizens get government help...
Massachusetts health reform more or less follows the Swiss model; costs are running higher than expected, but the reform has greatly reduced the number of uninsured. And the most common form of health insurance in America, employment-based coverage, actually has some “Swiss” aspects:... employers have to follow rules that effectively rule out discrimination based on medical history and subsidize care for lower-wage workers.
So where does Obamacare fit into all this? Basically, it’s a plan to Swissify America, using regulation and subsidies to ensure universal coverage.
If we were starting from scratch we probably wouldn’t have chosen this route. True “socialized medicine” would undoubtedly cost less, and a straightforward extension of Medicare-type coverage to all Americans would probably be cheaper... That’s why I and others believe that a true public option competing with private insurers is extremely important: otherwise, rising costs could all too easily undermine the whole effort.
But a Swiss-style system of universal coverage would be a vast improvement on what we have now. And we already know that such systems work.
So we can do this. At this point, all that stands in the way of universal health care in America are the greed of the medical-industrial complex, the lies of the right-wing propaganda machine, and the gullibility of voters who believe those lies.
Sunday, August 16, 2009
One question I am asked fairly often is how we will know when the economy turns the corner and we are on our way to a solid recovery. My answer is that we will be able to detect upticks in the data, though this may come with a bit of a lag, the important but harder task will be to understand why the data are showing improvement.
In order to be convinced that the economy is on solid footing and headed to better times, I will want to see several things. First, though not necessarily foremost, that banks are being recapitalized with private sector funds, and that this is happening without the aid of government guarantees or other such programs that encourage capital infusions (which is hard to determine while the government programs are in place). Second, I will want to see private sector non-residential investment improving, another sign that private sector funds are moving back into circulation. Presently, this hasn't even started heading back upward, though there are signs the decline is slowing:
And there are other important factors too, e.g. consumption rebounding (though not to pre-crisis debt sustained levels), stabilization in housing markets, and so on. The point is that a self-sustaining recovery will require that the private sector be the primary driver of new economic activity, and that is what I will be looking for.
Once the economy does start to recover, the hard but critical part will be to determine how much of the recovery is self-sustaining (as it will be if private sector funds are driving the activity), and how much is being driven by government stimulus programs. If the recovery is self-sustaining, and we are fairly certain of that, then we can begin to carefully wind down the government programs supporting the economy. But if the recovery is mostly due to government stimulus and there is little sign that the financial and real sectors are attracting robust levels of private sector funds, then pulling back on government programs could be disastrous and plunge the economy right back into recession. In fact, in such a case, we may need to provide even more stimulus to fully bridge the gap until the private sector can support the economy on its own.
So, in answer to the question, we will have a pretty good idea when the economy turns the corner, but it will take awhile to determine why, and we cannot risk pulling back on government programs until we are sufficiently certain that the private sector can support normal economic activity without the government's help.
Update: Nouriel Roubini:
A Phantom Economic Recovery, by Nouriel Roubini, Commentary, Project Syndicate: Where is the US and global economy headed? ... Data from the US ... suggests that the US recession is not over yet. A similar analysis of many other advanced economies suggests that, as in the US, the bottom is quite close, but it has not yet been reached. ...
Moreover, for a number of reasons, growth in the advanced economies is likely to remain ... well below trend for at least a couple of years.
This was in today's links and received quite a few comments, so I'll put it into its own post in case people want to continue the discussion (I think the post below this one refutes some of the main points, e.g. that the public sector can never win a fair fight or be innovative):
A Public Option Isn’t a Curse, or a Cure, by Richard Thaler, Commentary, NY Times: [T]he question of whether a “public option” should be part of the health care solution ... is a red herring, and is getting in the way of genuine reform.
In debating the public option — that is, an insurance option run by the government — the politicians themselves are making exaggerated claims about its pros and cons. We hear from the right that an insurance plan run by the government will drive all private-sector insurers out of business and be the first step toward socialism, if not communism. The left claims that only a public option can give evil insurers the competition they need to create much-needed reform.
The public option for health care appears to be dead, so this is a bit late, but I keep hearing that there are no examples of public-private competition, let alone successful ones. But there are examples of this, and they have been successful.
We are used to the argument that the private sector can discipline and usually beat the government in terms of providing services at minimum cost (though I should note that is not always true). What is harder to find is anything written on how the government can do the same to the private sector, force them to provide innovative services at minimum cost (the point of the public plan in health care), partly because nobody ever seems to ask that question. Thus, an important part of this description of public-private competition to provide garbage collection services in Phoenix to note is that the discipline runs both ways, government forces the private sector to lower costs and be innovative, and the private sector forces the government to do the same (e.g. see the part at the end where the private firm loses the contract to the government and vows to win the next contract with its experimental truck).
This article was written in 1984, so it is untainted by the current debate, but this was also a time period when there was a lot of enthusiasm and interest in privatization. Hence, many of the articles written around this time are slanted toward examining how the private sector can discipline the government, not the other way around. Still, the story below makes clear that the city did force the private sector to continue to innovate and improve. Another interesting point is that the private sector contractor claims that the bidding process is much improved when the city is forced to participate (e.g. in specifying specs, see the full article for more on this point), a benefit of public-private competition that is often overlooked (I couldn't find much written on the Phoenix experiment more recently, so I don't know for sure how well the program has performed since the 1980s and 1990s when most of the articles on the Phoenix experiment appeared, but it does appear that currently the city won contracts in two of the three regions where private sector competition is present):
Entrepreneurs Can Do Everything Government Can Do, Only Better, by Eugene Linden, Inc., Dec. 1, 1984: Chuck Walbridge and Ron Jensen both see themselves as solid businessmen. There is a certain irony in this perception: Although both may be solid, Jensen is not a businessman at all, but a government bureaucrat.
That hasn't kept him from competing with Walbridge, however. Last year, for example, the two bid on the same contract, with Walbridge coming up the winner. Jensen has vowed that it won't happen again."We will be analyzing every cost to see where we might have gone wrong," he says. Walbridge, for his part, admits that Jensen is a tough competitor...
Jensen is director of the Public Works Department of Phoenix -- a city that regularly invites private companies to bid against its own agencies on various contracts. It was such a contract, the one for garbage collection, that was awarded in the summer of 1983 to Walbridge's company...
Saturday, August 15, 2009
Bruce Bartlett argues that the conservative position that governments "do nothing in the face of the greatest economic downturn since the Great Depression" would endanger the very thing free market ideologues are trying to preserve, the capitalist system itself. This was something that Keynes understood very well.
Though this argues that Keynes was a conservative, I don't think it much matters what label we attach to Keynes, it is the idea that government intervention preserves rather than destroys the capitalist system that is important. If we had no government intervention at all, no automatic stabilizers such as unemployment compensation and food stamps, no Social Security for the elderly to fall back upon when equity and stock values plummet, no stimulus package, and no financial bailout package, conditions would be much, much worse and the calls to overthrow the basic capitalist system would be amplified far beyond what we hear even with these programs in place.
Keynes is right that these programs help to make the cyclical swings in capitalist systems less devastating and hence help to preserve the system that we have. But that's not the only reason to provide social insurance. The capitalist system is unmatched in its ability to provide goods and services, and to respond to changing demand, but it is also highly cyclic and the swings in the economy can cause great misery for people who have done nothing to deserve the misfortune the system has bestowed upon them. The people who have lost their jobs and their ability to provide for their families deserve our collective help not just because that's the only way to preserve the capitalist system, but also because it's the right and moral thing to do:
Keynes Was Really A Conservative, by Bruce Bartlett, Commentary, Forbes: Conservatives continue to decry the $787 billion stimulus package... At best, they think it accomplished nothing because the additional federal borrowing took as much out of the economy as the stimulus put in. At worst, the deficits and enlargement of government will lead to slower growth and inflation not too far down the road.
Those on the right have been making this same argument ever since ... John Maynard Keynes popularized the idea of using budget deficits to stimulate growth in ... 1936... For this reason, Keynes, even more so than Karl Marx, is the principal bête noire of free market economists. They believe governments should never do anything to counteract economic downturns. ...
What Keynes understood is that ...[i]n really severe downturns, such as we suffered in the 1930s and are suffering today, government action is essential to turn the economy around; the private sector simply can't do it on its own. He also understood that democratic societies cannot long tolerate high levels of unemployment. At some point, people will jettison capitalism for some sort of socialism, which would threaten democracy as well.
Keynes' efforts were motivated by a strong desire to maintain the liberal capitalist order. Honest conservatives have always understood this. In 1945, economist David McCord Wright noted that a conservative political candidate could easily run a campaign "largely on quotations from The General Theory." The following year, economist Gottfried Haberler, of the conservative Austrian school, conceded that the specific policy recommendations of Keynesian economics were not at all revolutionary. "They are in fact very conservative," he admitted.
Peter Drucker, a conservative admirer of Keynes, viewed him as not merely conservative, but ultraconservative. "He had two basic motivations," Drucker explained in ... 1991... "One was to destroy the labor unions and the other was to maintain the free market. Keynes despised the American Keynesians. His whole idea was to have an impotent government that would do nothing but, through tax and spending policies, maintain the equilibrium of the free market. Keynes was the real father of neoconservatism, far more than [economist F.A.] Hayek!"
John Kenneth Galbraith, whose politics were well to the left of Keynes,... agreed with this assessment. "The broad thrust of his efforts, like that of Roosevelt, was conservative; it was to endure that the system would survive," he wrote. But, Galbraith added, "Such conservatism in the English-speaking countries does not appeal to the truly committed conservative." ...
It was obvious to those on the political left ... that Keynes was one of socialism's greatest enemies, even if some on the right still view Keynes as a crypto-communist. ... Keynes told playwright George Bernard Shaw that the whole point of The General Theory was to knock away the Ricardian foundations of Marxism. ...
Indeed, the whole point of The General Theory was about preserving what was good and necessary in capitalism, as well as protecting it against authoritarian attacks... In order to preserve economic freedom..., which Keynes thought was critical for efficiency, increased government intervention ... was unavoidable. While pure free marketers lament this development, the alternative, as Keynes saw it, was the complete destruction of capitalism and its replacement by some form of socialism.
"It is certain," Keynes wrote, "that the world will not much longer tolerate the unemployment which … is associated--and, in my opinion, inevitably associated--with present-day capitalistic individualism. But it may be possible by a right analysis of the problem to cure the disease whilst preserving efficiency and freedom."
In Keynes' view, it was sufficient for government ... to use monetary and fiscal policy to maintain total spending (effective demand), which would both sustain growth and eliminate political pressure for radical actions to reduce unemployment. "It is not the ownership of the instruments of production which is important for the State to assume," Keynes wrote. "If the State is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that is necessary."
One of Keynes' students, Arthur Plumptre, explained Keynes' philosophy this way. In his view, Hayek's "road to serfdom" could as easily come from a lack of government as from too much. If high unemployment was allowed to continue for too long, Keynes thought the inevitable result would be socialism--total government control--and the destruction of political freedom. This highly undesirable result had to be resisted and could only be held at bay if rigid adherence to laissez-faire gave way, but not too much. As Plumptre put it, Keynes "tried to devise the minimum government controls that would allow free enterprise to work."
The threat of totalitarianism may not be as great today as it was in the 1930s. But it would be naïve to believe that it was possible for the government to stand by and do nothing in the face of the greatest economic downturn since the Great Depression, as many conservative economists advised. The alternative to stimulus could ultimately have been something far worse from the conservative point of view, as Keynes well understood.
Friday, August 14, 2009
Why has the increase in involuntary part-time work been so much higher in this recession as compared to past recessions?
What's really different about this recession?, by Menbere Shiferaw, Macroblog: The short answer to the question posed in the title of this blog post is, of course, "lots of things." One of those things is featured in the latest edition of Economic Highlights, the Atlanta Fed's weekly digest of newly released economic statistics. Here, specifically, is a chart reflecting the trajectories of individuals working part-time for economic reasons in the current and past recessions.
As the chart clearly shows, the increase in people reporting that they are involuntarily working part-time rather than full-time is considerably higher in this recession than in past recessions. Although the increase in these workers has moderated some since the spring of this year, the number of people in the category of working part-time for economic reasons remains at 8.8 million, well above the level of past contractions in both absolute and relative terms.
This recession has given us many puzzles to mull over. Now we can add the unusual pattern of part-time work to the list.
Why is this happening? Here's one explanation:
Lawrence Katz...: This recession has been so bad, that even after businesses have laid off workers, they've been forced to reduce many of their remaining employees from full-time to part-time status. That's what happens when you have to cut to the bone. And then keep cutting.
As the economy recovers, this slack will likely be taken up before firms begin to hire new workers, yet another reason to think that employment will lag far behind the recovery in output.
This is a follow-up to the recent discussion between Brad DeLong and Greg Mankiw on the effects of giving away rather than auctioning carbon permits under a cap and trade system (see, e.g., here, here, here, and here). Mankiw begins with the premise that:
Rather than auctioning the carbon allowances, the bill that recently passed the House would give most of them away to powerful special interests.
But is it correct to classify the program as "giving most of them away to powerful special interests"? Here's Harvard's Robert Stavins who knows a thing or two about this topic. He notes that "it is remarkable (and unfortunate) how misleading so much of the coverage has been of the issues and the numbers surrounding the proposed allowance allocation." He also says that "we should be honest that the legislation, for all its flaws, is by no means the 'massive corporate give-away' that it has been labeled. On the contrary, 80% of the value of allowances accrue to consumers and public purposes":
The Wonderful Politics of Cap-and-Trade: A Closer Look at Waxman-Markey, by Robert Stavins: ...Now, let’s go back to the hand-wringing in the press and blogosphere about the so-called massive political “give-away” of allowances. Perhaps unintentionally, there has been some misleading press coverage, suggesting that up to 75% or 80% of the allowances are given away to private industry as a windfall over the life of the program, 2012-2050 (in contrast with the 100% auction originally favored by President Obama).
Given the nature of the allowance allocation in the Waxman-Markey legislation, the best way to assess its implications is not as “free allocation” versus “auction,” but rather in terms of who is the ultimate beneficiary of each element of the allocation and auction, that is, how the value of the allowances is allocated. On closer inspection, it turns out that many of the elements of the apparently free allocation accrue to consumers and public purposes, not private industry.
What's the best way to respond to the lies that are being used to scare people into opposing health care reform?:
Republican Death Trip, by Paul Krugman, Commentary, NY Times: “I am in this race because I don’t want to see us spend the next year re-fighting the Washington battles of the 1990s. I don’t want to pit Blue America against Red America; I want to lead a United States of America.” So declared Barack Obama in November 2007, making the case that Democrats should nominate him ... because he could free the nation from the bitter partisanship of the past. ...
So, how’s it going? Sure enough, President Obama is now facing the same kind of opposition that President Bill Clinton had to deal with: an enraged right that denies the legitimacy of his presidency, that eagerly seizes on every wild rumor manufactured by the right-wing media complex. This opposition cannot be appeased...
Right now, the charge that’s gaining the most traction is the claim that health care reform will create “death panels” (in Sarah Palin’s words) that will shuffle the elderly and others off to an early grave. It’s a complete fabrication...
And not long ago, some of the most enthusiastic peddlers of the ... smear, including Newt Gingrich ... and Mrs. Palin herself, were all for “advance directives” ... the event that you are incapacitated or comatose. That’s exactly what was being proposed — and has now, in the face of all the hysteria, been dropped from the bill.
Yet the smear continues to spread. And ... Senior G.O.P. figures, including so-called moderates, have endorsed the lie. Senator Chuck Grassley, Republican of Iowa, is one of these supposed moderates. I’m not sure where his centrist reputation comes from..., his role in the health care debate has been flat-out despicable.
Last week, Mr. Grassley claimed that ... Ted Kennedy’s brain tumor wouldn’t have been treated properly in other countries because they prefer to “spend money on people who can contribute more to the economy.” This week, he told an audience that “you have every right to fear,” that we “should not have a government-run plan to decide when to pull the plug on grandma.”
Again, that’s what a supposedly centrist Republican, a member of the Gang of Six trying to devise a bipartisan health plan, sounds like.
So much, then, for Mr. Obama’s dream of moving beyond divisive politics. The truth is that the factors that made politics so ugly in the Clinton years — the paranoia of a significant minority of Americans and the cynical willingness of leading Republicans to cater to that paranoia — are as strong as ever. In fact, the situation may be even worse ... because the collapse of the Bush administration has left the G.O.P. with no real leaders other than Rush Limbaugh.
The question now is how Mr. Obama will deal with the death of his postpartisan dream. So far, at least, the Obama administration’s response ... has had a deer-in-the-headlights quality. It’s as if officials still can’t wrap their minds around the fact that things like this can happen to people who aren’t named Clinton...
What, then, should Mr. Obama do? It would certainly help if he gave clearer and more concise explanations of his health care plan. To be fair, he’s gotten much better at that over the past couple of weeks.
What’s still missing, however, is a sense of passion and outrage — passion for the goal of ensuring that every American gets the health care he or she needs, outrage at the lies and fear-mongering that are being used to block that goal.
So can Mr. Obama, who can be so eloquent when delivering a message of uplift, rise to the challenge of unreasoning, unappeasable opposition? Only time will tell.
Maybe the answer is to scare people with the truth. Without health care reform that reduces the growth in costs, we won't be able to sustain the level of health care we are delivering now let alone cover those who don't have access to the care they need. Other countries have demonstrated conclusively that it's possible to deliver high quality universal care at a much lower cost than in the US, so a failure to implement reform is also a failure to maximize the availability of high quality health care. For that reason the people trying to block reform are -- to put it in their terms -- the death squads. They are the the the ones putting health care at risk, particularly care for those reliant upon government programs such as Medicare that will face budget pressures if costs aren't controlled, so lets hope the fabrications and other antics don't deter us from implementing the changes that are necessary to ensure that we can meet our health care needs.
Thursday, August 13, 2009
How will the crisis change these numbers, if at all?
Update: Brad DeLong:
That means that the top 1-10,000 of the American income distribution receives 6% of pretax household income--meaning that their average income is 600 times that of the average.
Time for a more progressive income taz, is what I am saying...
Bruce Bartlett argues that conservative anger is misplaced, it ought to be directed at George Bush rather than the current administration. That may be, but I don't blame conservatives for trying to hang our problems on the Obama administration. If they can get away with it, why not? I suppose you could argue that displacing the blame delays adjustments the GOP needs to make, the argument below is that conservatives will not reestablish credibility until they begin holding Republican Party memebers publicly accountable for transgressions of conservative ideals. I'll let conservatives figure out what is best for their own party, public blame of themselves or public blame of the current administration, my concern is that they can falsely blame the current administration and make questionable assertions without getting called on it in the media. It doesn't hurt your credibility to say false or misleading things about the Obama administration if there is no accountability for it from the major media (who instead seem to fan the flames of outrage irrespective of the underlying truth in their attempt to grab viewers). If the media carries the message without effective rebuttal, why not make outrageous claims?:
The GOP's Misplaced Rage, by Bruce Bartlett: ...Does anyone believe the economy would be growing faster or that unemployment would be lower today if John McCain had won the election? I know of no economist who holds that view. The economy is like an ocean liner that turns only very slowly. The gross domestic product and the level of employment would be pretty much the same today under any conceivable set of policies enacted since Barack Obama’s inauguration. ...
I think conservative anger is misplaced. To a large extent, Obama is only cleaning up messes created by Bush. ... Conservative protesters should remember that the recession, which led to so many of the policies they oppose, is almost entirely the result of Bush’s policies. According to the National Bureau of Economic Research, the recession began in December 2007—long before Obama was even nominated. ...
[T]he extremely poor economic performance of the Bush years really set the stage for the current recession. This is apparent when we compare Bush’s two terms to Bill Clinton’s eight years. ...
Throughout the Bush years, many conservative economists ... extravagantly extolled Bush’s economic policies. As late as December 21, 2007, after the recession already began, he wrote in National Review: “the Goldilocks economy is outperforming all expectations.” In a column on May 2, 2008, almost six months into the recession, Kudlow praised Bush for having prevented a recession.
But the truth was always that the economy performed very, very badly under Bush, and the best efforts of his cheerleaders cannot change that fact because the data don’t lie. Consider these comparisons between Bush and Clinton... [list of comparisons] ...
Conservatives delude themselves that the Bush tax cuts worked and that the best medicine for America’s economic woes is more tax cuts; at a minimum, any tax increase would be economic poison. They forget that Ronald Reagan worked hard to pass one of the largest tax increases in American history in September 1982 ... even though the nation was still in a recession that didn’t end until November of that year. Indeed, one could easily argue that the enactment of that legislation was a critical prerequisite to recovery because it led to a decline in interest rates. The same could be said of Clinton’s 1993 tax increase, which many conservatives predicted would cause a recession but led to one of the biggest economic booms in history.
According to the CBO, federal taxes will amount to just 15.5 percent of GDP this year. That’s 2.2 percent of GDP less than last year, 3.3 percent less than in 2007, and 1.8 percent less than the lowest percentage recorded during the Reagan years. If conservatives really believe their own rhetoric, they should be congratulating Obama for being one of the greatest tax cutters in history.
Conservatives will respond that some tax cuts are good while others are not. ... According to the supply-side view, temporary tax cuts and tax credits are economically valueless. Only permanent cuts in marginal tax rates will significantly raise growth.
On this basis, we see that Bush’s tax cuts were pretty much the opposite of what supply-side economics would recommend. The vast bulk of his tax cuts involved tax rebates—which failed in 2001 and again in 2008, because the vast bulk of the money was saved—or tax credits that had no incentive effects. While marginal rates were cut slightly—the top rate fell from 39.6 percent to 35 percent—it was phased in slowly and never made permanent. Neither were Bush’s cuts in capital gains and dividend taxes.
I could go on to discuss other Bush mistakes that had negative economic consequences, such as ... starting unnecessary wars in Iraq and Afghanistan, which will burden the economy for decades... But there is yet another dimension to Bush’s failures—the things he didn’t do. In this category I would put a health-care overhaul.
Budget experts have known for years that Medicare was on an unsustainable financial path. ... In 2003, the Bush administration repeatedly lied about the cost of the drug benefit to get it passed, and Bush himself heavily pressured reluctant conservatives to vote for the program.
Because reforming Medicare is an important part of getting health costs under control generally, Bush could have used the opportunity to develop a comprehensive health-reform plan. By not doing so, he left his party with nothing to offer as an alternative to the Obama plan. Instead, Republicans have opposed Obama's initiative while proposing nothing themselves.
In my opinion, conservative activists, who seem to believe that the louder they shout the more correct their beliefs must be, are less angry about Obama’s policies than they are about having lost the White House in 2008. They are primarily Republican Party hacks trying to overturn the election results, not representatives of a true grassroots revolt against liberal policies. ...
Until conservatives once again hold Republicans to the same standard they hold Democrats, they will have no credibility and deserve no respect. They can start building some by admitting to themselves that Bush caused many of the problems they are protesting.
I think he's right that the real anger is about losing the White House, but they only have themselves to blame for that. They do need to recognize this, it wasn't Democrats acting like they are acting that caused the downfall, it was their own choices. But that doesn't mean they can't be effective in tearing down the current administration in the face of a complacent and enabling media that refuses to analyze and report on the veracity of the claims and the true underlying causes of the anger from the right.
Dani Rodrik wants the Anti-Greenspan - someone who truly distrusts financial markets and the ideology that surrounds them - to be the next Fed Chair:
Let finance skeptics take over, by Dani Rodrik, Commentary, Project Syndicate: ...Federal Reserve Chairman Ben Bernanke’s term ends in January, and President Barack Obama must decide before then: either re-appoint Bernanke or go with someone else...
[I]n recent decades central banks have become even more significant as a consequence of the development of financial markets. Even when not formally designated as such, central banks have become the guardians of financial-market sanity. The dangers of failing at this task have been made painfully clear in the sub-prime mortgage debacle. ...
This is a job at which former Fed Chairman Alan Greenspan proved to be a spectacular failure. ... As a member of the Fed’s Board of Governors under Greenspan..., Bernanke can also be faulted...
What hampered Greenspan and Bernanke as financial regulators was that they were excessively in awe of Wall Street... They operated under the assumption that what is good for Wall Street is good for Main Street. This will no doubt change as a result of the crisis, even if Bernanke remains at the helm. But what the world needs is a Fed chairman who is instinctively skeptical of financial markets and their social value.
Here are some of the lies that the finance industry tells itself and others, and which any new Fed chairman will need to resist.
Prices set by financial markets are the right ones for allocating capital and other resources to their most productive uses. That is what textbooks and financiers tell you, but ... there are far too many “market failures” in finance for these prices to be a good guide for resource allocation. ... Implicit or explicit bailout guarantees, moreover, induce too much risk-taking. ... So the prices that financial markets generate are as likely to send the wrong signals as they are to send the right ones.
Financial markets discipline governments. This is one of the most commonly stated benefits of financial markets, yet the claim is patently false. ... If in doubt, ask scores of emerging-market governments that had no difficulty borrowing in international markets, typically in the run-up to an eventual payments crisis.
In many of these cases ... financial markets enabled irresponsible governments to embark on unsustainable borrowing sprees. When “market discipline” comes, it is usually too late, too severe, and applied indiscriminately.
The spread of financial markets is an unmitigated good. Well, no. Financial globalisation was supposed to have enabled poor, undercapitalised countries to gain access to the savings of rich countries. It was supposed to have promoted risk-sharing globally. In fact, neither expectation was fulfilled. ...
Financial innovation is a great engine of productivity growth and economic well-being. Again, no. Imagine that we had asked five years ago for examples of really useful kinds of financial innovation. We would have heard about a long list of mortgage-related instruments... The truth lies closer to Paul Volcker’s view that for most people the automated teller machine (ATM) has brought bigger benefits than any financially-engineered bond.
The world economy has been run for too long by finance enthusiasts. It is time that finance skeptics began to take over.
My view is that Bernanke should be reappointed.
The administration has been trying to sell health care reform by reassuring people that if they are satisfied with the coverage they have now, they can keep it.
That is, so long as it's still available. Given the way employers have been shedding responsibility for health care and the way escalating costs have been reducing affordability, it's unlikely that it will be. And, of course, if you do get sick, you may find you don't have the coverage you thought you had.
So the message should be that health care reform is the only chance people have to keep the coverage they have now.
Wednesday, August 12, 2009
I was curious about the degree to which health care has been universally available historically, and I stumbled upon this brief history of hospitals that gives some information on the question. Based upon bits and pieces of information from other sources, I had speculated that, particularly after the Black Death, societies saw a need for health care for all strata of society to prevent the spread of disease. Diseases such as the plague did not discriminate by income, and this gave the wealthy an incentive to keep the poor free of deadly, contagious afflictions. That would result in fairly universal care for diseases that could spread throughout society (though perhaps separation from society is a better description). I think that's part of why care was established for the poor and for the sick more generally, but the social relationships appear to be a bit more complicated than that:
Medicine and Society in the Medieval Hospital, by Tatjana Buklijaš, Croat Med J. 2008 April; 49(2): 151–154: Hospitals today are places where medical treatment is provided, but also places where major life events, such as birth and death, occur. Yet, their history is relatively short; they were born, together with modern medicine, some two hundred years ago in the revolutionary Paris (1,2). Around 1790, large hospitals and pioneering research blossomed throughout Europe, replacing the Hippocratic model of disease with the localizationist paradigm. The rise of the modern hospital began in Paris when the social change brought about by the French Revolution provided the momentum for the transformation. For the first time in history, cure of the body and care for the soul were separated, and physicians, rather than the church and rich lay patrons, took charge of medical institutions. Medical treatment was no longer a privilege of the rich (at home) or charity for the poor (in hospital), but an indispensable human right. This article discusses the influence of social changes on the history of the pre-modern hospitals between the late Antiquity and early modern period. Using examples from Southern Croatia, it illuminates the subtle differences in socio-political organization, which shaped the history of hospitals.
[If all goes according to plan, this will post at 11:30.]
I was lucky enough to draw jury duty today, and I'm assuming blogging from my iPhone won't be allowed, so I (probably) won't be able to post or talk about the press release from the FOMC meeting today until much later.
Is there anything in the press release that should be noted?
Update: Yahoo, after a long wait a plea bargain settled the case and I've been released. A quick scan of the news reports on the meeting indicate that two statements in the press release (see below) caught people's attention, the statement that "economic activity is leveling out" and the notice that the Fed will "gradually slow" its purchase of Treasury Securities and "anticipates that the full amount will be purchased by the end of October." The first statement is a slight nod toward recent improvements, and the second is an extension of earlier plans to end the purchases in September. This will keep options open, and recognizes that there is still considerable uncertainty about the path the economy will take:
Press Release Release Date: August 12, 2009: Information received since the Federal Open Market Committee met in June suggests that economic activity is leveling out. Conditions in financial markets have improved further in recent weeks. Household spending has continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing but are making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.
This sounds familiar:
Ecology is one of the hardest branches of biology, possibly of all science. Real ecological communities are fantastically complex ... and hard to dissect and understand. Experiments in the wild are difficult to control, and important variables are often hard to measure. ... Experiments in the laboratory are problematic too. ...
Much of the uncertainty in economics derives from our inability to do laboratory experiments, and that includes uncertainty about which model best describes the macroeconmy.
When the present crisis is finally over, those who advocated fiscal policy, those who advocated monetary policy, and those who advocated no policy at all will all say "I told you so" based upon their reading of the evidence.
Some New Keynesians will cite fiscal policy as the important policy response, and the timing of the policy relative to the recovery will likely support that argument. Other New Keynesians along with Monetarists (e.g. Lucas and others who believe monetary policy can help, but fiscal policy is ineffective) will insist it was monetary policy that saved us. The timing of the monetary policy response will support their position as well.
Still others, those such as Prescott who believe in Real Business Cycle models, will say the economy recovered despite policy, and would have recovered all that much faster if government hadn't gotten in the way. Without a baseline to refer to showing what would have happened without policy, it would be hard to refute this argument.
Once this is all over, there will be ways to tease this out of the data, e.g. the pattern of the response of key macroeconomic variables may be most consistent with one of the policies, but there will still be considerable uncertainty due to the high correlation in the timing of the monetary and fiscal policy responses (cross-country studies could help too since the policy response varied by country, but other differences across countries that are difficult to control for making these estimates uncertain as well).
Ideally, we would go to the lab and run the economy with the same initial conditions, say, 1,000 times with no policy intervention at all to establish the average non-intervention response (and its variance), i.e. the baseline, an important missing piece of information when all you have is non-experimental data. Then, we would run the economy again with a monetary policy response to the crisis 1,000 times (or do several experiments with different monetary policy responses to see which is best), and yet again 1,000 more times with fiscal policy (or, as with monetary policy, perhaps several fiscal polices involving different levels of spending and taxes), then compare the results to see how well each policy attenuates the cycle. (I would also want to run the economy with several combinations of the two polices in case there are important interaction effects the experiments with individual treatments might miss.)
That would probably give us a pretty good idea about which policy works best. However, without the ability to do experiments, the best we can do is to build a model of the economy based upon historical data, and then use the model to simulate the experiments above. That is, estimate the model based upon actual data, then run it with various combinations of monetary and fiscal policy and see how the outcome varies with differences in policy. Unfortunately, the answers you get are only as good as the model used to get them, and considerable uncertainty remains over which macroeconomic model is best (which is why we have Real Business Cycle, New Keynesian, and Monetarist type macroeconomic models along with all their various sub forms, though more recently questions have arisen over whether any of the existing theoretical structures are satisfactory).
Here's another way to think about it. Macroeconomists know all of the major historical episodes and correlations that a model must explain. We can't do experiments, so there is just one set of data, and of course any model that is built will be able to explain how these data evolve over time. And it's possible to build different models that explain the data equally well. If we could do experiments, we could test these models in ways that would potentially rule some of them out, but with just one set of data and models built specifically to explain the data such testing is not possible.
So we have to wait for time to bring us more data and then see if the model can explain them, test the models across countries, find things we didn't know about when we built the model and test the model against those -- and there are other ways to get at this -- but for the most part it's time that settles these issues. The models either do or do not continue to explain new data as they arrive.
But at any point in time, it will be difficult to distinguish between different models because those models are built to explain everything that is known about the historical macro data. Perhaps some time in the distant future when we have much more data than we have now, it will become more difficult to construct competing models and we will begin to converge on a common theoretical structure -- it seemed like we were headed in that direction prior to the recent crisis -- but for now we are stuck arguing about which model is best without the means to turn to the data and clearly distinguish one from the other.
A plea for health care reform:
Even though we are a nation that places a high value on health, we have done very little to insure that quality health care is available to all of us at a price we can afford. We have allowed rural and inner-city areas to be slowly abandoned by doctors. We have allowed hundreds of insurance companies to create thousands of complicated policies that trap Americans in gaps, limitations, and exclusions in coverage, and that offer disastrously low benefits which spell financial disaster for a family when serious illness or injury strikes. We have allowed doctor and hospital charges to skyrocket out of control through wasteful and inefficient practices to the point where more and more Americans are finding it difficult to pay for health care and health insurance. We have also allowed physicians and hospitals to practice with little or no review of the quality of their work, and with few requirements to keep their knowledge up to date or to limit themselves to the areas where they are qualified. In our concern not to infringe on doctors' and hospitals' rights as entrepreneurs, we have allowed them to offer care in ways, at times, in places, and at prices designed more for their convenience and profit than for the good of the American people.
When I say "we have allowed" I mean that the American people have not done anything about it through their government, that the medical societies and hospital associations have done far too little about it, and that the insurance companies have done little or nothing about it.
I believe the time has come in our nation for the people to take action to solve those problems -- Edward M. Kennedy, In Critical Condition: The Crisis in America's Health Care, pp. 16-17, 1972.
That was written nearly forty years ago.
The Confidence Game, by Kenneth Rogoff, Commentary, Project Syndicate: Next month marks the one year anniversary of the collapse of ... Lehman Brothers. The fall of Lehman marked the onset of a global recession and financial crisis the likes of which the world has not seen since the Great Depression of the 1930’s. ...
The overwhelming consensus in the policy community is that if only the government had bailed out Lehman, the whole thing would have been a hiccup and not a heart attack. Famous investors and leading policymakers alike have opined that in our ultra-interconnected global economy, a big financial institution like Lehman can never be allowed to fail. ...
Unfortunately, the conventional post-mortem on Lehman is wishful thinking. It basically says that no matter how huge the housing bubble, how deep a credit hole the United States (and many other countries) had dug, and how convoluted the global financial system, we could have just grown our way out of trouble. Patch up Lehman, move on,... and nothing bad ever need have happened.
The fact is global imbalances in debt and asset prices had been building up to a crescendo for years, and ... there was no easy way out. The United States was showing all the warning signs of a deep financial crisis long in advance of Lehman...
The entire financial system was totally unprepared to deal with the inevitable collapse of the housing and credit bubbles. The system had reached a point where it had to be bailed out and restructured. And there is no realistic political or legal scenario where such a bailout could have been executed without some blood on the streets. Hence, the fall of a large bank or investment bank was inevitable as a catalyst to action.
The problem with letting Lehman go under was not the concept but the execution. The government should have moved in aggressively to cushion the workout of Lehman’s complex derivative book, even if this meant creative legal interpretations or pushing through new laws...
The right lesson from Lehman should be that the global financial system needs major changes in regulation and governance. The current safety net approach may work in the short term but will ultimately lead to ballooning and unsustainable government debts, particularly in the US and Europe.
Asia may be willing to sponsor the west for now, but not in perpetuity. ... Within a few years, western governments will have to sharply raise taxes, inflate, partially default, or some combination of all three. As painful as it may seem, it would be far better to start bringing fundamentals in line now. ...
The "hiccup not a heart attack" sets up a false comparison. Had Lehman been bailed out things might not have been quite so bad, or followed a slower downward trajectory, but it wouldn't have been just a hiccup. I don't think many people make the claim that "Patch up Lehman,... and nothing bad ever need have happened."
But the main thing I want to know is if he saying we should start balancing the budget and tightening monetary policy right now, at the trough of the cycle. It seems like that's the message at the end, but I must be reading it wrong.
I just noticed Ben Stein on CNN talking about health care reform. There had to be a better choice.
Lou Dobbs is still on CNN. I thought he should have been shown the door long ago, way before his latest antics.
I turn it on out of habit, but CNN has been going downhill for some time now, and it's time for that habit to change.
Tuesday, August 11, 2009
Saying that Social Security reform is on the agenda is not the way to get the elderly on your side for health care reform:
Overhauling Social Security on the Agenda, Summers Says, by Edmund L. Andrews: About the same time that President Obama was at a town-hall meeting in New Hampshire, pitching the benefits of a health care overhaul, one of his top economic advisers was fielding questions about what might come next.
Lawrence Summers ... told a conference of economists in Washington on Tuesday that President Obama would probably start addressing the needs of Social Security before the end of his term.
“Over the course of the president’s term, the president will, I am confident, address Social Security,” Mr. Summers said in a response to a question at a conference of the National Bureau of Economic Research.
Mr. Summers said the top priority in overhauling Social Security would be to make sure that people could rely on their benefits. ... Mr. Summers seemed intent on signaling that Mr. Obama’s idea of “reform” would be to strengthen the program rather rather than to partly privatize it.
But Mr. Summers said the big cost problems for the government are in health care. Reducing the growth of Medicare costs by just a few tenths of a percent per year, he said, would over a period of decades save enough money to fill the projected shortfall for Social Security. ...
Why announce this now? Will 'cut health care costs to save Social Security' work as a message?
A few passages from a much longer discussion between Paul Krugman and science fiction author Charlie Stross (via):
Anticipation World Con, Transcription by Edwin Steussy: ...PK: [T]his is different for me, but it should be a lot of fun. … What do you really think the world is going to look like, say, 30 years from now? ... I was thinking about this coming up – and thinking that – maybe it was just my age or something, but things don’t seem to have changed as much in the last 30 years as myself as a sci-fi reader would have expected them to. And I don’t know if I’m missing something... There is no question that things have changed, but ... I still have the sense that the transformation in the quality of life that I thought would be happening by now... If I can veer off into something I allegedly know something about, in case you haven’t heard, we have a global economic crisis. What’s amazing about it is how much it’s traditional.
CS: A good, old fashion banking crisis.
PK: They happen to involve complicated institutions that are not called banks, they do rely on IT, you no longer have to have rows of tellers to provide people fast access to cash, not subject to standard bank regulation, they can manage to have bank runs all the same. You read John Maynard Keynes‘ The Great Slump of 1930, and with just a few words changed it’s a very fine description of what’s happened to the world in the past year. We haven’t actually changed the structure of how we do things to anything like the extent one might have imagined.
CS: Working hypothesis. It’s a working hypothesis that I’m trying to get my head around. Back to 1970-ish, do you remember the book by Alvin Toffler called Future Shock?
CS: My working hypothesis is that we are living in a future shocked civilization in fact the future shocked globe. There is a lot of evidence of it all around. The ascendancy of religious fundamentalism in all sorts of cultures is one particular response. People don’t like rapid change when it’s applied to them against their will, when it’s coercive, and when people don’t like something, an external stimulus, they tend to kick back against it. Religious fundamentalism boils down very largely to one thing: certainty in life. ... And to people who are disoriented and distressed by the way the world around them is changing that’s got to be a source of … a very attractive offer of mental stability.
PK: You know, I think this is where being an American makes a difference. And knowing that we’ve had these crazies with us consistently as a major feature of our political scene. Going back to certainly the 1920’s.
CS: Don’t they seem to be a bit louder now?
PK: They have their ups and downs. But, a lot of what we see now is … read H.L. Menken on the fundamentalists and it’s the same … it sounds very similar. In a lot of ways, I think that the modern world began in the 20’s with radio and the penetration of mass culture into places that previously had been comfortable with their bibles. So this is not so new. They got louder … I’m about to go off onto a discourse on US … it’s not clear that the fundamentalists got any more fundamentalist … what happened was that we had a political shift in the United States at least that empowered them … the break up of the old weird coalition between basically Northern labor unions and Southern segregationists … created a place where the religious right had power again but I don’t think that there’s … I’m about to switch sides here … there has been a rise in religious fundamentalism among unusual groups there are … amazing number of relatives of mine who have ... kids ... have suddenly turned orthodox and that was not something anyone quite envisioned … maybe some kind of future shock.
CS: I’ve noticed in the UK over the past decade there has been an increasing (small “c”) conservatism in the electorate fostered by a feedback loop with some newspapers. Standard headline is, “Threatening entity here going to do something hideous to you.”
PK: That’s my column for tomorrow’s New York Times actually. ...
CS: There’s a huge latency in ... technology. ...
PK: ...There’s a favorite story about this among the economic historians and it’s about electricity. Which is that electrification … widespread electrification is a phenomenon of the 1880’s and particularly factories were electrified in the 1880’s and it did nothing much for productivity because they were still building factories the way … a 19th century factory was a five story brick building … very tight spaces … which has a steam engine in the basement … driving trains and pulleys and shafts and it took about 30 years for them to figure out that, hey!, with each machine having it’s own electric motor, we can have a wide spread out single story floor plan with lots of space and we don’t have to be moving stuff up and down these stairs and we can have plenty of room for material flow and … we saw a little bit of that in IT, but the thing was it was terribly disappointing because although it actually does show in the GDP numbers, what was the first place where people really figured out what do with IT in a way that was productive, and the answer was Wal-mart. It turns out that all this unglamorous stuff like inventory management, basically knowing what exactly is left on the shelves the moment it is checked out of the counter being able to plan your whole system for something big box stores brought in and actually you can see that’s where the GDP growth …
CS: Logistics is vastly underrated. It’s invisible.
PK: That’s right. That’s the other thing, with globalization … about the outsourcing … about the Internet and the IT … but that’s a relatively minor thing so far, probably much bigger in ten years so, but the big thing was the freight container.
CS: Oh yeah, the freight container and the fork lift and pallet.
PK: Right. And the big cranes and the bar code on the side of the container.
CS: ...I think one of the things logistics is going to … well, computers are going to give us, is much tauter supply chains between production and consumption.
PK: That’s by the way one of the mysteries … we don’t quite know why there’s so much stuff being shipped long distances, particularly … its one thing when we’re talking about oil because oil is where it is, it has to be shipped to get to other places, but … there was a time, again thinking of the United States, a time when we knew what Detroit did for a living, we knew Troy, New York was the detachable collar and cuff center of America and all these local specializations and you could explain why stuff was being shipped back and forth. These days, it’s very very hard to figure out what’s different about the economies of different cities and so if … why is there so much … who are all those people on the plane today. Why were they traveling and … better still, when you’re flying between Cleveland and Atlanta, what is it that Cleveland has that Atlanta needs? What is it that Atlanta has that Cleveland needs? Actually, what is that Atlanta has that anyone needs? I actually did try to figure out what Atlanta’s economy is about … it seems to be about the airport. We’re not quite getting it. ... If we can all have short supply chains why don’t we have that now for all of the services that cities generate and yet we have all of this trucking going back and forth among seemingly very similar US cities.
CS: Because I reckon that complexity, the number of different components, the number of different of different specialties that you need to run a modern, high tech civilization has mushroomed by orders of magnitude over even the past 50 years. And all of this stuff is really small, very, very specialized, there’s only a very few people who do it in one place and it has to get shipped about even though it looks similar.
PK: That’s the working hypothesis, something like that. ...
I think it's difficult to see how much things have changed when you are living through it. It's like kids. When you are with them everyday, you hardly notice that they are changing, but if you don't see them for several years, the large amount of change is obvious. I don't think we fully realize yet how much of a revolution information technology - the internet in particular - is bringing about. It's not as spectacularly obvious as underground cities or flying cars, but I think the change it brings is far more pervasive both socially and economically. In the future, when people look back at this time period, they will see it as a time that brought about vast change to the world, on the order of the industrial revolution. The change has not yet been fully realized, it's only been a couple of decades or so since the internet began, which isn't that long as these things go, and we are still getting wired up at both the extensive and intensive margins (i.e. the technology is still spreading, improving, and becoming more mobile, and we are increasingly interconnecting ourselves with links, RSS feeds, Facebook, Twitter, and the like). But even so, even though this is just the beginning, the changes that have occurred already are far more extensive than we understand as we live through them. I was thinking about getting old the other day, and one of the things that disappoints me most about the prospect of my time ending is that I won't get to see how this all plays out, future shock and crazies included. I think we are living through a time of vast, important change and what the world will look like hundreds and thousands of years from now fascinates me. I wish I could stick around to see what happens.
Alan Blinder says the stimulus package is working according to plan:
Stay the Stimulus Course, by Alan S. Blinder, Commentary, Washington Post: Apparently not bothered by facts, some congressional Republicans are already claiming that President Obama's $787 billion stimulus package has failed and are even advocating that some of the remaining scheduled steps in the legislation be canceled. ... In reality, we need to stay the course.
The course now includes "Cash for Clunkers,"... an idea that I advocated more than a year ago. At first blush, "clunkers" seems to be the quintessentially successful stimulus program... But that's not quite right.
First, the images of car dealerships and crushed vehicles that have been blanketing newspaper pages and TV screens do not depict real stimulus. .... The stimulus to employment comes only when automakers respond to the higher sales and depleted inventories by boosting production. Everything takes time...
So it is with most of the stimulus measures in the American Recovery and Reinvestment Act. The effects are there, but they will take a while to be felt, and they don't usually lend themselves to photo-ops. One good example is fiscal relief for state and local governments... Just over 20 percent of the $174 billion in federal funds appropriated for the states has been spent, and that cash infusion is limiting -- though not eliminating -- ...cutbacks. The other 80 percent is on the way. But we won't see photos of public servants not being fired.
Critics claim that the stimulus program is running way behind schedule. Is it? Well, no. ... Spending ... is running pretty much in line with what the Congressional Budget Office projected...
These are still early days for a bill Congress passed only six months ago, but the stimulus has already had a notable impact. The average estimate of three private forecasting firms is that the stimulus added about 2 1/2 percentage points to the annualized GDP growth rate in the second quarter..., about half of the improvement from the first quarter to the second.
We are now in the third quarter, when the importance of the stimulus is likely to be even greater. In fact, its estimated growth impact (about 3 percentage points) actually exceeds the consensus forecast...
Cartoonists may scoff at lights at the ends of tunnels, but our economy does, finally, seem to be growing again. The Recovery Act is by no means the only reason. Chairman Ben Bernanke and his colleagues at the Federal Reserve have certainly done a great deal, and the economy's self-curative powers also have helped. But what six months ago looked like an economy plunging into an abyss is now an economy on the mend. And the stimulus deserves some of the credit.
I'm hesitant to put too optimistic a face on the current economy. The economy is declining slower than before (and policy has played a crucial role in putting on the brakes), but we haven't hit bottom yet. We are still in recession. Once we do hit bottom, there's no reason to believe that we are more likely to bounce back toward full employment immediately than we are to stay stuck at the bottom for awhile as we catch our breath and recalibrate. My view is that we are likely to remain at the trough of the cycle awhile before the economy takes a strong upward turn, but exactly how long we will remain stuck near the bottom of the cycle is hard to gauge. I hope it isn't long at all, but a sustained period of sluggishness is a possibility policymakers have to take seriously.
So we aren't at the bottom yet, when we do get there we could remain at the bottom for some time, and once the recovery phase finally arrives, the upward climb is almost always slower than the fall. I agree that stimulus deserves some of the credit for where we are, things could be much, much worse. But the economy has a long way to go before this is over, and it can still use all the stimulus help it can get.
David Warsh on how attitudes toward authority have changed over time:
Public Turmoil, Then and Now, Economic Principals: ...The protests of the ’60s and ’70s – not just in the West, but in the communist countries as well – were mainly criticisms of overbearing governments, dedicated to modernist principles of growth by means of administration and planning, but subject to capture by special interests of every sort, and often completely uninterested in obtaining the consent of the governed. The dissent of that time was remarkably effective. In the end Jane Jacobs and Milton Friedman (and Rachel Carson, Martin Luther King, Betty Friedan and the Stonewall generation, for that matter) had pretty much the same effect. The world has become much more alert to the problems involved when regulation is top-down.
Today, we are in the early stages of very different times – an era of reconstruction of authority. The broad symbols of this are everywhere: an American president seeking to govern by bipartisan consensus, a Russian premier bare-chested on horseback in a Siberian stream, Chinese central bankers chiding their American counterparts about responsible borrowing (while conjuring a worrisome financial asset bubble of their own). The subtler mechanics of impending changes – in health care, in climate change, in national security – are harder to grasp. ...
Meanwhile, don’t worry overmuch about those raucous meetings, as unpleasant as they are. They’re a sideshow, further signs of the breakup of the traditional Republican Party. It will take another generation to work out the colossal differences of opinion that exist today within its ranks. Something new and worthwhile will replace today’s GOP, though not without a good deal more travail. But that’s a story for another day.
Monday, August 10, 2009
John Schmitt and Nathan Lane of the CEPR:
An International Comparison of Small Business Employment, by John Schmitt and Nathan Lane, CEPR: Contrary to popular perceptions, the United States has a much smaller small-business sector (as a share of total employment) than other countries at a comparable level of economic development, according to this new CEPR report. The authors observe that the undersized U.S. small business sector is consistent with the view that high health care costs discourage small business formation, since start-ups in other countries can tap into government-funded health care systems. [Note: Click on figures for larger versions]
There's another factor that could also be contributing besides competitive disadvantages with countries that have government funded health care systems. A more extensive social safety net can reduce the risk of attempts at entrepreneurship. If there is an extensive social safety net to fall back upon if things don't work out, you might be more willing to quit the job you hate (the one with health insurance for the kids) and sink everything you have into a small business that you've always wanted to run. But I'm not sure the data above support this interpretation, i.e. that there is an obvious positive association between the strength of social insurance and the prevalence of small business. But it is highly suggestive, and regressions that control for other cross-country differences could help to settle the issue. In any case, one thing is clear, according to these measurements the US has low numbers relative to other countries in the sample.
Great. Organized, paid blog trolls:
Make no mistake: GOP is paying trolls to "blog attack", by Politics and Technology: This is unbelievable. We always knew that there were right-wing political hacks trolling the blogosphere, but this is a new low.
There's a company called Advantage Consultants that's offering up "professional blog warriors" to "flood the zone" with comments. In short, astro-turf trolls for the blogosphere.
Click to zoom on their ad..., but here's the text:
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...Incidentally, who are these people? Who is Advantage Consultants? Their president is Doug Guetzloe, a right-wing radio host and anti-tax activist in Florida.
The marketplace of ideas is far from ideal. This goes on in a variety of different formats, people are paid to call into radio shows, to write letters to the editor at local papers, to attend public meetings, if there's a public forum on an important issue you can bet someone, somewhere is doing their best to figure out how to manipulate the discussion in their favor. This is just the extension of an old technique to a new format (e.g. here's the same consulting group explaining how to manipulate talk radio).
But the basic dishonesty of it all bugs me.
I've seen lots of objections to the Cash for Clunkers program based upon the fact that all the program does is shift consumption intertemporally, it doesn't actually create sales that wouldn't have occurred anyway.
But that is not, in and of itself, a valid objection. Shaving the peaks in output and consumption to fill the valleys stabilizes the economy. When the economy is in recession, creating brand new things that wouldn't have existed otherwise to lift the economy back toward full employment is preferred, but generally there aren't enough opportunities along these lines to give the economy the help it needs. In the cases where we cannot create enough new output and consumption to bring the economy back to health, moving consumption from a time when the economy is overheated to a time when it is underperforming helps by bringing both time periods closer to the long-run trend.
Now, Cash for Clunkers is not the the best way to shift consumption from the future to the present, or anywhere close since the intertemporal shifting is generally only for a month or two rather than from good times to bad, so this should not be interpreted as a defense of the program on this basis. But that doesn't mean the idea of intertemporal shifting is inherently flawed.
There seems to be an idea that policy must create something new, that simply rearranging consumption intertemporally is of no value. But there is value in avoiding large cyclical swings in the economy, i.e. value in stability, and when we have the opportunity to shave the peak of housing and other booms - times when the overheating is dangerous as it could result in bubbles, inflation, and other problems - and then use the "shavings" to fill the troughs of recessions, we should do so. [Again, let me stress that I am not supporting the Cash for Clunkers program with this argument, I simply wanted to use that program as a lead in to make a general point about stabilization policy and intertemporal substitution. Also, because I had a very simple model in mind, one, for example, without inventories, I wasn't as careful as I should have been and used the term consumption rather than output.]
[Note: The actual column, "Averting the Worst" by Paul Krugman, is here.]
I heard you say that we aren’t going to have a second Great Depression. What saved us?
The answer, basically, is Big Government.
So the government fixed things? Does everyone go back to work tomorrow?
Just to be clear: the economic situation remains terrible. We haven’t yet reached the point at which things are actually improving; for now, all we have to celebrate are indications that things are getting worse more slowly.
We're still skidding towards the cliff, but we'll stop in time? I'll feel better when we're actually stopped, or better yet, headed in the other direction.
The latest flurry of economic reports suggests that the economy has backed up several paces from the edge of the abyss. A few months ago the possibility of falling into the abyss seemed all too real.
So what was so special about the way government reacted?
Probably the most important aspect of the government’s role in this crisis isn’t what it has done, but what it hasn’t done.
Okay, then what didn't the government do that was so special?
Unlike the private sector, the federal government hasn’t slashed spending as its income has fallen. (State and local governments are a different story.) Tax receipts are way down, but Social Security checks are still going out; Medicare is still covering hospital bills; federal employees, from judges to park rangers to soldiers, are still being paid.
All of this has helped support the economy in its time of need, in a way that didn’t happen back in 1930.
This means that budget deficits — which are a bad thing in normal times — are actually a good thing right now.
I can buy that the government had an “automatic” stabilizing effect through its normal expenditures and by supporting increased demand for programs such as unemployment insurance, food stamps, those sorts of things. I can also see how running a deficit is the only way to support these programs. But the financial bailout, surely you aren't going to tell me that was helpful too? Look how it was handled!
You can argue (and I would) that the bailouts of financial firms could and should have been handled better, that taxpayers have paid too much and received too little. Yet it’s possible to be dissatisfied, even angry, about the way the financial bailouts have worked while acknowledging that without these bailouts things would have been much worse.
The point is that this time, unlike in the 1930s, the government didn’t take a hands-off attitude while much of the banking system collapsed. And that’s another reason we’re not living through Great Depression II.
So what you are telling me is that the bailout worked, and was necessary, but we could have bailed out the system in a way that cost taxpayers less and the people responsible for the problems more? You're right about it being possible to be dissatisfied even though it worked. Anyway, since we're talking about poorly structured programs, above when you talked about automatic stabilizers, you didn't mention the stimulus package. Is that because it hasn't helped much yet?
From the beginning, I argued that the American Recovery and Reinvestment Act, a k a the Obama stimulus plan, was too small. Nonetheless, reasonable estimates suggest that around a million more Americans are working now than would have been employed without that plan — a number that will grow over time — and that the stimulus has played a significant role in pulling the economy out of its free fall.
So automatic stabilizers, an imperfect but effective enough financial bailout, and an imperfect but at least helpful stimulus package are all working together to overcome the problems in the economy?
Ronald Reagan was wrong: sometimes the private sector is the problem, and government is the solution.
That's not the only thing he was wrong about.
And aren’t you glad that right now the government is being run by people who don’t hate government?
Speaking of which, how do you think things would have been different if McCain had won the election?
We don’t know what the economic policies of a McCain-Palin administration would have been. We do know, however, what Republicans in opposition have been saying — and it boils down to demanding that the government stop standing in the way of a possible depression.
Yeah, Republicans aren't exactly fans of the stimulus package. They'd reverse it right now if they could.
I’m not just talking about opposition to the stimulus. Leading Republicans want to do away with automatic stabilizers, too. Back in March, John Boehner, the House minority leader, declared that since families were suffering, "it’s time for government to tighten their belts and show the American people that we ‘get’ it." Fortunately, his advice was ignored.
Ignoring Boehner's advice is a good idea in general. Ignoring him saved the day.
I’m still very worried about the economy.
There’s still, I fear, a substantial chance that unemployment will remain high for a very long time. But we appear to have averted the worst: utter catastrophe no longer seems likely.
And Big Government, run by people who understand its virtues, is the reason why.
Tim Duy reviews the state of the economy in anticipation of the Federal Reserve meeting scheduled for Tuesday and Wednesday of this week:
The Recovery Edges Forward, by Tim Duy: Data flow continues to support those who argue that if the recession is not already over as of July, it soon will be. The July jobs report - while not exactly cheery news for those still losing their jobs - is another clear indicator that the employment picture is turning. Still, excitement over the end of the recession aside, the data also reveal that the economy is recovering in fits and starts, with tell-tale signals that the consumer orgy of this decade is not likely to be repeated.
The July employment report in many ways spoke for itself. Possibly most important is the clear improvement in the pace of job losses:
This serves as confirmation of what we already knew from initial claims - the worst damage to the job market is in the rearview mirror. Other positive signs included a rise in manufacturing hours and stability in aggregate hours. To be sure, not all is perfect. The decline in the unemployment rate was driven by an exodus from the labor force - not exactly a sign of improving conditions. And a key leading indicator of employment, temporary help payrolls, continues to decline. If the recession did in fact end in June, and we see evidence of that end in the July industrial production report to be released this week, the decline in temporary help employment is clearly a disappointment. Indeed, coupled with rising production, it would simply reek of jobless recovery.
Other data supported the notion of weak recovery as well. While industrial activity may be close to turning a corner on the back of inventory reduction and the cash for clunkers program, not all is well in the service sector. The ISM read on nonmanufacturing activity actually edged downward for the month, with declines in not only the headline number, but also business activity, new orders, and employment. Better than the freefall of last year, but nothing to suggest that a V-shaped recovery is imminent.
Perhaps the lack of enthusiasm in the service sector is a reflection of what is clearly a subdued consumer. The June personal income and outlays report reveals that consumer spending declined in for the month:
Sunday, August 09, 2009
Robert Reich says the administration's promise not to use the government's purchasing power to lower the price of drugs in return for a large, pharmaceutical industry sponsored ad campaign in support of health care reform undercuts and threatens the democratic process:
How the White House's Deal With Big Pharma Undermines Democracy, by Robert Reich: I'm a strong supporter of universal health insurance, and a fan of the Obama administration. But I'm appalled by the deal the White House has made with the pharmaceutical industry's lobbying arm to buy their support.
Last week,... the White House confirmed it has promised Big Pharma that any healthcare legislation will bar the government from using its huge purchasing power to negotiate lower drug prices. That's basically the same deal George W. Bush struck in getting the Medicare drug benefit, and it's proven a bonanza for the drug industry. ... Let me remind you: Any bonanza for the drug industry means higher health-care costs for the rest of us...
In return, Big Pharma isn't just supporting universal health care. It's also spending a lots of money on TV and radio advertising... Big Pharma has budgeted $150 million for TV ads promoting universal health insurance, starting this August (that's more money than John McCain spent on TV advertising in last year's presidential campaign), after having already spent a bundle through advocacy groups like Healthy Economies Now and Families USA.
I want universal health insurance. And having had a front-row seat in 1994 when Big Pharma and the rest of the health-industry complex went to battle against it, I can tell you first hand how big and effective the onslaught can be. So I appreciate Big Pharma's support this time around...
But I also care about democracy, and the deal between Big Pharma and the White House frankly worries me. It's bad enough when industry lobbyists extract concessions from members of Congress, which happens all the time. But... [a]n industry is using its capacity to threaten or prevent legislation as a means of altering that legislation for its own benefit ... at the highest reaches of our government, in the office of the President.
When the industry support comes with an industry-sponsored ad campaign in favor of that legislation, the threat to democracy is even greater. Citizens end up paying for advertisements designed to persuade them that the legislation is in their interest. In this case, those payments come in the form of drug prices that will be higher than otherwise...
I don't want to be puritanical about all this. Politics is a rough game... Perhaps the White House deal with Big Pharma is a necessary step to get anything resembling universal health insurance. But if that's the case, our democracy is in terrible shape. How soon until big industries ... have become so politically powerful that secret White House-industry deals ... are prerequisites to any important legislation? When will it become standard practice that such deals come with hundreds of millions of dollars of industry-sponsored TV advertising designed to persuade the public...? (Any Democrats and progressives ... should ask themselves how they'll feel when a Republican White House cuts such deals to advance its own legislative priorities.)
We're on a precarious road -- and wherever it leads, it's not toward democracy.
In discussing proposed climate change legislation below, Greg Mankiw says:
To those who view climate change as an impending catastrophe and the distorting effects of the tax system as a mere annoyance, an imperfect bill is better than none at all. To those not fully convinced of the enormity of global warming but deeply worried about the adverse effects of high current and prospective tax rates, the bill is a step in the wrong direction.
He then goes on to say "As for me, I hope the president refuses to sign a bill that fails to auction most of the allowances..., sometimes good is not good enough" which, given his categorization of those supporting and opposing the bill, I interpret to mean that he is more worried about distortions from taxes than he is about global warming:
A Missed Opportunity on Climate Change, by N. Gregory Mankiw, Commentary, NY Times: During the presidential campaign of 2008, Barack Obama distinguished himself on the economics of climate change, speaking far more sensibly about the issue than most of his rivals. Unfortunately, now that he is president, Mr. Obama may sign a climate bill that falls far short of his aspirations. Indeed, the legislation making its way to his desk could well be worse than nothing at all. ...
The textbook solution for dealing with negative externalities is to use the tax system to align private incentives with social costs and benefits. ... A carbon tax is the remedy for climate change that wins overwhelming support among economists and policy wonks.
When he was still a candidate, Mr. Obama did not exactly endorse a carbon tax. He wanted to be elected... What Mr. Obama proposed was a cap-and-trade system for carbon, with all the allowances sold at auction. ... Such a system is tantamount to a carbon tax. The auction price of an emission right is effectively a tax on carbon. ...
So far, so good. The problem occurred as this sensible idea made the trip from the campaign trail through the legislative process. Rather than auctioning the carbon allowances, the bill that recently passed the House would give most of them away to powerful special interests.
Continuing with the discussion on the state of macroeconomics, this is Robert Solow from an October 25, 2003 address at Joe Stiglitz' 60th birthday conference. Solow gets extra credit for saying these things before the crisis hit, e.g. " I start from the presumption that we want macroeconomics to account for the occasional aggregative pathologies that beset modern capitalist economies, like recessions, intervals of stagnation, inflation, "stagflation," not to mention negative pathologies like unusually good times. A model that rules out pathologies by definition is unlikely to help." (Let me also point to a comment by Ping Chen at Free Exchange in response to the Lucas essay which I may highlight more explicitly later. Update: See also Jamie Galbraith's remarks at the Stiglitz conference):
Dumb and Dumber in Macroeconomics, by Robert M. Solow: So how did macroeconomics arrive at its current state? The answer might provide a lead as to where it ought to go.
The original impulse to look for better or more explicit micro foundations was probably reasonable. It overlooked the fact that macroeconomics as practiced by Keynes and Pigou was full of informal microfoundations. (I mention Pigou to disabuse everyone of the notion that this is some specifically Keynesian thing.) Generalizations about aggregative consumption-saving patterns, investment patterns, money-holding patterns were always rationalized by plausible statements about individual--and, to some extent, market--behavior. But some formalization of the connection was a good idea. What emerged was not a good idea. The preferred model has a single representative consumer optimizing over infinite time with perfect foresight or rational expectations, in an environment that realizes the resulting plans more or less flawlessly through perfectly competitive forward-looking markets for goods and labor, and perfectly flexible prices and wages.
How could anyone expect a sensible short-to-medium-run macroeconomics to come out of that set-up? My impression is that this approach (which seems now to be the mainstream, and certainly dominates the journals, if not the workaday world of macroeconomics) has had no empirical success; but that is not the point here. I start from the presumption that we want macroeconomics to account for the occasional aggregative pathologies that beset modern capitalist economies, like recessions, intervals of stagnation, inflation, "stagflation," not to mention negative pathologies like unusually good times. A model that rules out pathologies by definition is unlikely to help. It is always possible to claim that those "pathologies" are delusions, and the economy is merely adjusting optimally to some exogenous shock. But why should reasonable people accept this? During the past three years, unemployment has increased by three million with real wages stagnant and productivity growing, possibly abnormally fast. Capacity utilization has fallen by 10 percent, with trivial inflation and some prices falling. Real business investment in equipment peaked in the third quarter of 2000, fell by 20 percent to the first quarter of 2002, and has risen by a scant five percent since then. Is this a stagnation pattern? Does it reflect large-scale, perhaps irrational, overinvestment in the 1990s? Should it not be studied as such? Why should anyone take it as the solution of an Euler equation? It would not be hard to imagine a better path for the economy. Why should the burden of proof fall on those who see an ordinary standard pathology here? The odd thing is to regard this history as the working out of an other-worldly model.
What is needed for a better macroeconomics? My crude caricature of the Ramsey-based model suggests some of the gross implausibilities that need to be eliminated. The clearest candidate is the representative agent. Heterogeneity is the essence of a modern economy. In real life we worry about the relations between managers and shareowners, between banks and their borrowers, between workers and employers, between venture capitalists and entrepreneurs, you name it. We worry about those interfaces because they can and do go wrong, with likely macroeconomic consequences. We know for a fact that heterogeneous agents have different and sometimes conflicting goals, different information, different capacities to process it, different expectations, different beliefs about how the economy works. Representative-agent models exclude all this landscape, though it needs to be abstracted and included in macro-models.