Angry Bear

Open thread Nov. 29, 2009 (with GW)

2009-11-29T06:47:00.002-05:00

Open thread Nov. 28, 2009 (no GW)

2009-11-28T18:47:00.000-05:00

Dubai's work force...a side note on current events

2009-11-28T14:56:00.001-05:00

Rdan

No Sweat adds another facet to the crisis in Dubai...mobility of labor and wages. I cannot imagine what conditions are like to produce a strike in this city. If the players default in high finance, do they go to debtors' prison like most everyone else?

An estimated 700,000 Asians, mostly from India, Pakistan and Bangladesh, work as construction workers in the UAE, an oil-rich Gulf country experiencing an economic boom where only some 20 percent of the four million population have citizenship.

Sign of the times for the headlong pursuit of bargains?

Welfare vs Social Insurance in the USA

2009-11-28T09:41:00.001-05:00

Robert Waldmann

Among experts, there is a widespread view that people in the USA support social insurance an oppose welfare. It is a fact that they support social security old age and disability pensions and hated AFDC. It is suspected that describing social security as a pension plan with mandatory participation is part of the explanation of this. Therefore, some (including the Clinton treasuries first assistant secretary for policy analysis Alicia Munnell) argue that it is important to preserve some link between contributions and benefits in the social security system.

I think that we have performed and experiment which refutes this hypothesis.

It is called Medicare. Medicare part A is a social insurance program like social security old age and disability pensions. Medicare part D sure isn't – it's an unfunded entitlement. I don't know about parts B and C (I think they are basically funded from general revenues).

That's the point. Compared to many angrybears I am very ignorant about Medicare, but I suspect that I know about as much as the median voter. If the form of financing had such an important impact on public opinion, why doesn't the public know more about the form of financing ?

My reading of the evidence is that Medicare A through D is very popular, that different approaches to financing have so little effect on public opinion that it can't be detected.

Frankly, I think this is proof that the social insurance hypothesis is false. At least I don't see how the evidence could possibly conceivably be any stronger.

Inflation Detour II: Crisis and Recovery across Great "Fluctuations"

2009-11-27T22:08:00.014-05:00

We are now almost 24 months into the Great Recession. While many expect NBER will eventually say that The Great Recession ended several months ago, they have not yet.

By contrast, the recession that began The Great Depression, per NBER, lasted 43 months. It seems only fair to compare the two, so I trust I can be forgiven for not yet having declared The Great Recession over.

One of the problems is that of official government data. Many of the statistics we now consider "standard" were first tracked as part of the government funding and jobs created by FDR's Administration. (The irony of multiple economists and idiots arguing that the data shows that those programs should never have happened should not be lost on the reader.)

For an examination of Wall Street, though, reasonable proxy data is available. With some issues noted, we can use the change in Real Prices as a proxy. Comparing the two periods produces:

Fairly comparable. The market had a better six months prior to the October 1929 crash, which is rather neutralized by the drop about five months after the first Depression Recession begins, which is steeper than the comparable drop in the current period.

In spite of all the support for the banking system, the recovery is fairly comparable to the one from the Great Depression—at least so far.

Below the fold, let's look at Main Street.

As noted above, most of the data required for measuring Main Street—most especially a reliable measure of unemployment—is not available publicly. (If anyone wants to provide me with a copy of the Haver Analytics data, for instance, I won't complain. Meanwhile, see this post at CR for a graphic of that data from the Depression Era.)

So let's take another approach. Accept, for the sake of discussion, the traditional Republican argument that inflation reduces the ability of Main Street to grow business, borrow money, and generally live.

If we therefore take the inverse of the Annual Inflation Rate, we can see the "gain" the consumer makes. (Note that, in most periods, the consumer is deemed to have lost. Reality may be different, as smoothing hides may variances. But that is always true, and likely always shall be.)

So let's look at how Main Street fares, then and now:

Judging strictly by the two periods, it appears that Main Street did significantly better—speaking in terms of earning power—during the time leading up to and beginning the Great Depression than it has during the Great Recession. Indeed, the two paths track each other rather well.

It would appear—information that will surprise few other than perhaps Larry Summers and Tim Geithner—that all of the efforts of the Federal Reserve Board and the U.S. Treasury have had no positive effect on Main Street, leaving its purchasing power significantly lower than the same period of the Great Depression.

Probably more on this on a future rock. Comments and suggestions are rather welcome.

The Great Trade Collapse...VoxEU

2009-11-27T20:47:00.002-05:00

Richard Baldwin at VoxEU introduces a new book on “great trade collapse” before the WTO meeting occurring shortly.

Re-posted with attribution:

The Great Trade Collapse

World trade experienced a sudden, severe and synchronised collapse in late 2008 – the sharpest in recorded history and deepest since WWII. VoxEU today posts a new Ebook – written for the world's trade ministers gathering for the WTO's Trade Ministerial in Geneva – that presents the economics profession's received wisdom on the collapse. Two dozen chapters, written by leading economists from across the planet, summarise the latest research on the causes of the collapse as well as the consequences and prospects for recovery.

The world’s trade ministers gather at the WTO next week just as the world’s trade is starting to recover from the “great trade collapse” – the sharpest drop in recorded history and deepest since WWII.

Vox has today posted an Ebook “The Great Trade Collapse: Causes, Consequences and Prospects” that aims to tell the world’s trade ministers what economists’ know about the trade collapse.

The Ebook can be downloaded for free from http://www.voxeu.org/index.php?q=node/4297

Hard copies of the book may be ordered by emailing Anil Shamdasani: AShamdasani@cepr.org.

Establishing consensus on the cause

The two dozen chapters establish a consensus on what caused the collapse. In a nutshell, it was caused by the sudden postponement of purchases, especially of durable consumer and investment goods. Trade fell far more than GDP, since the demand shock was amplified by “compositional” and “synchronicity” effects.

•“Compositional effect”: In the 4th quarter of 2008 and 1st quarter of 2009, the Lehman-induced ‘fear factor’ caused consumers and firms around the world – but especially in the US and EU – to freeze; expenditures were postponed until things became clearer. The sales/production of “postponeables” plummeted, dragging down GDP growth rates. However, since the composition of GDP places much lower weight on postponeables than the composition of trade, the same shock had a substantially larger impact on trade than it did on GDP; the lion’s share of trade takes place in manufactures, mostly final durable consumer and investment goods, and related parts and components.

•“Synchronicity effect”: National drops in trade were large – many attaining post-war records – but the world trade drop was much larger than previous episodes, since almost every nation’s trade dropped sharply; there was no averaging out this time. The synchronisation was probably due to the global and instantaneous transmission of the ‘fear factor’, and partly due to the development of international supply chains that reacted “just in time” to the collapse in demand for postponeables.

Other factors
Some of the chapters find evidence for supply-side factors, but other do not. The supply shocks considered include: the impact of the credit crunch on the specialised financial instruments that grease the gears of international trade (e.g. letters of credit), bankruptcy-induced disruptions of international supply chains, and protectionism.

The best available evidence suggests that declines in global trade finance have not had a major impact on trade flows. Policy responses aimed at shoring up trade credit were early and massive; these may have prevented credit from being more of a problem than it was.

There is no evidence that protectionism played a direct role so far; there has been plenty of new protection, but is has been applied to small trade flows.

Finally, there is almost no evidence that supply chains have collapsed. Direct evidence from firm-level data shows that the exits of firms from trade relationships (i.e. the extensive margin) has not played an important role in this crisis.

If the global economy recovers, the recovery of global trade – which seems to have started in mid-2009 – is likely to be rapid, with pre-crisis growth rates being reached next year. This could foster growing imbalances.

Consequences
Several authors warn that the global imbalances are a problem for the trade system as well as for the macro and financial system. As unemployment in many nations is projected to rise, or at least remain high, pressures for a protectionist backlash could grow over the coming year or two. To avoid this, and to prevent laying the foundations for another global crisis down the road, the US, China and other nations with large trade imbalances should undertake the necessary macroeconomic adjustments, such as exchange rate realignments, and designing credible plans for long term fiscal sustainability.

This article may be reproduced with appropriate attribution. See Copyright (below).

Happy Thanks giving

2009-11-26T05:00:00.001-05:00

Have a good Thanksgiving folks.

From all the Bears

Inflation Detour: Trimmed Mean PCE

2009-11-25T21:35:00.009-05:00

Today's release by the Federal Reserve Bank of Dallas of October's Trimmed Mean Personal Consumption Expenditure gives us a chance to check this "alternative measure of core inflation."

The clearest thing is that it does what the FRB Dallas intends: generally reduces the measure of inflation:

For the graphic above, any value above the line shows where the 12-month Average of the Trimmed Mean PCE is greater that the Annualised CPI for that same period. With few exceptions, those points are places where the actual CPI is negative for the period. (Note also that all of periods where CPI is over 5.0-5.5% are below the line. While the 12-month average of Trimmed Mean PCE has a maximum of 8.7%, while CPI reaches slightly over 14.75% in the same time period.)

So the natural next step is to compare it to a measure of Consumer Sentiment. Let's do that below the fold

Comparing Trimmed Mean PCE to the University of Michigan Index previously referenced:

Again, the preponderance of data points are to the right of the line, indicating that the Michigan Consumer Inflation Expectations is higher than the monthly Trimmed Mean PCE. But there is much more balance: the largest cluster of Expectations Dominance is between 2 and 4%; that is, periods of normal inflation.

The two measures correlate rather well with each other (86.13%) while a simple fitted regression that excludes a constant term has an adjusted R-Squared of 94.1% and yields MICH = 1.0416*Trimmed Mean PCE.

Trimmed Mean PCE may well understate inflation, but it appears to compare fairly well with what people think of when they think about inflation.

Bashing Reagan on Social Security: Don't Go There

2009-11-25T12:57:00.005-05:00

by Bruce Webb

News that the Republicans are pushing two bills that would establish a 'Bi-Partisan Commission' to 'reform' Social Security and Medicare are stirring up a debate which mostly had run cold. And one myth is bubbling back to the surface, the one that claims that Reagan simply used the Greenspan Commission to generate "huge surpluses" for Social Security to fund tax cuts for the wealthy. Never happened. There were no huge Social Security surpluses under either Reagan or Bush I, instead the 1983 reform set in place a mechanism that would slowly rebuild the Trust Funds back to their mandated level. And it worked, in 1993 Clinton entered office with Social Security sitting with a Trust Fund ratio of just over 100 meaning that it met the Trustees' test for actuarial balance. But the overall outlook for Social Security actually deteriorated from 1993 to 1996 and the large surpluses that started in 1997 and accelerated through 2004 were neither planned for or anticipated by the 1981-83 Commission. They happened and on paper largely pre-funded Boomer retirement but this was not the product of any pre-existing plan. Inspect the numbers for yourselves.

http://www.ssa.gov/OACT/TR/2009/VI_cyoper_history.html#159726

This myth is particularly dangerous because it plays into the movement conservative message that you can NEVER trust big government, maybe ESPECIALLY when it is in Republican hands. Every second spent bashing Reagan or Bush II over Social Security is a second devoted to selling the message that 'Big Government is the Problem'. Yes for those of us who are accused of being infected with BDS or delight in mocking St. Ronnie all of this is good fun. But it is unproductive good fun if your intent is to keep Social Security out of the hands of the vultures. Reagan in 1981 and Bush in 2001 and 2005 DID try to kill Social Security. They failed, every penny is STILL exactly where it is supposed to be. Insisting that they some how succeeded in raiding the pantry just plays into opposition hands. Knock it off. If that is you want that retirement check.

UNEMPLOYMENT CLAIMS: 1975, 1982-83 and 2009

2009-11-25T10:11:00.007-05:00

By Spencer

The weekly initial unemployment claims are widely reported and various charts show how they have been falling since the peak.

But it is hard to compare the drop in claims this cycle compared to after other severe recessions in the standard charts showing claims over time.

So to make such comparisons easier I though readers might find a chart showing claims after the 1974 and 1982 recessions and this recession on the same scale.

Everyone can draw their own conclusions, but I am surprised to find that the drop this cycle is almost identical to the drop after the 1981-82 recession.

Comparative Effectiveness Research

2009-11-25T08:49:00.001-05:00

by Tom aka Rusty Rustbelt

Comparative Effectiveness Research (CER) may have inadvertently lost credibility even before health care reform is actually launched.

CER is the darling of the government-dominated health reform movement (not a government take-over, to be clear). The use of evidence-based medicine when combined with cost-benefit analysis has the potential to save a great deal of money while better serving the patients. Many see downsides though; too rigid protocols and interference with physician judgment, or the dirty “R” word, rationing.

The U.S. Preventive Services Task Force recently released a study on various breast cancer screening modalities, recommending more limited screening protocols, particularly delaying routine mammography until age 50 (except in women with unusual risk factors).

Kah – boom!

USPSTF points out film mammography does cut mortality, with the greatest reductions in women over 50, with the best results in the age 60 – 69 cohort. Film mammography does carry a risk of false positives and the pain and inconvenience of unnecessary biopsies.

USPSTF also recommends ceasing mammography on women over 74, citing a lack of reliable evidence of reduced mortality.

There was a huge backlash from women, physicians, cancer activists and some health care associations.

USPSTF also recommends against teaching women to perform ”breast self-exam” (BSE) which has been a standard tool for decades. More backlash.

USPSTF does point out that digital and MRI mammography do not show, at this time, significant improvement over film mammography, but do have greater costs.

None of the conclusion appear to have been made on strong and startling statistics, but on think pros and cons, as one might expect from quants and scientists.

Women apparently want a little less quantitative analysis and a lot more consideration.

USPSTF report

cross-posted at Health care think tank

Inflation and Expectations

2009-11-24T15:10:00.011-05:00

Ken Houghton follows up on his previous post.

One of the few honest statements that came out of the Reagan Administration was in late 1982, when the Volcker policies were working but the market was still spooked. "People expect that inflation will be higher than it will be."

The above compares the University of Michigan's Consumer Sentiment (prediction of the inflation rate one year forward) with the actual inflation that occurs over that period.

Several things are apparent.

The official inflation target was not really managed well from 2004-2006. (Alternate explanations welcome; I can think of a few.)
Consumers assumed the Fed targets were in effect during that period.
Consumers have consistently overestimated inflation from 2007 onward—and there is no sign of that changing.
There has been deflation since the beginning of 2009.
People still believe the Fed target can be hit.

Combining those last two leads to another clear conclusion that I hope has an alternate explanation: Consumers continue to try to believe the Fed target, even in the face of policy failure.

This may explain the "bizarre complacency"; people believe the economy is in a much different place than it is.

But for how long can they ignore the evidence?

To Be Continued...

China’s Industrial Policy vs. US Random Behavior...Firedoglake

2009-11-24T09:39:00.001-05:00

Rdan

Firedoglake presents a well written piece on US and Chinese trade policy:

China’s Industrial Policy vs. US Random Behavior

The U.S. China Economic and Security Review Commission has issued its annual report {giant .pdf}. Robert Borosage of the Campaign for America’s Future hosted a conference call for the Co-Chair of the Commission, Carolyn Bartholomew, and Clyde Presotwitz of the Economic Strategy Institute, who was U.S. Trade Representative under Reagan. The call offered these experts an opportunity to talk about China’s industrial policy.

Prestowitz said something that focused the entire issue for me. He pointed out that labor is not a significant factor in chip manufacture. Why then are so many chip manufacturing facilities located in China? He says it’s because the Chinese wanted these as part of their industrial policy, so they seized the land, built the infrastructure, provided low-cost loans, granted energy and water subsidies, trained a work force, and gave the manufacturers tax breaks. Now they offer more subtle incentives, funding for research and development, refunds of the value added tax and space in industrial parks. As Prestowitz said, the plants are there for financial reasons.

This is Chinese policy. They want to grow their economy by attracting foreign capital and foreign technology. They intend to maintain state control over crucial industries.

China’s overall industrial policy … is characterized by three main parts: (1) the creation of an export-led and foreign investment-led manufacturing sector; (2) an emphasis on fostering the growth of industries such as high-technology products that add maximum value to the Chinese economy; and (3) the creation of jobs sufficient to reliably employ the Chinese workforce, thereby allowing the Chinese Communist Party to maintain control.

Many Chinese subsidies violate the requirements of the World Trade Organization, and the US has sought sanctions, but the Commission says that the WTO rules are meant to deal with narrow issues, not the broad national practices of China. The WTO rules require consultations as well as litigation, and even after a victory, they are able to delay. By the time the US and Canada won a WTO ruling barring favoritism in manufacture of auto parts, many manufacturers had moved production to China, so those jobs were lost.

Don’t think that we will be able to compete with our high tech products. China uses industrial policy to achieve technology transfer. Here’s an example from the call. China had not mastered several crucial issues in the manufacture of jet propulsion blades.

Several thoughts come to mind:

1. Appeals to the notion that command economies fail is not re-assuring at best and grossly misleading at worst. Since 1992 Chinese leaders took a different turn from our old notions of 'command' economies of cold-war stories.

2. China is wrenching a pre-industrial economy into the 21st century, at a speed that is breathtaking. The US is struggling with shedding 20th century notions of what we think we are...

3. There is no reason to think that 'green shoots' industries are assured in the US as a jobs policy. Such industry building is already occurring in China (and Germany).

4. We insist China re-direct its drive to a domestic consumer orientation, and talk about how the government deliberately keeps the economy as an export platform, but if many times more money is made currently exporting due to high prices for exports than if sold domestically, would you change direction in a hurry? Who is getting the bargain overall? Many Chinese businesses are still learning new standards.

5. Chinese leaders are taking a big gamble. And Chinese society is taking a big hit overall, with great disruption in people's lives. The US is also experiencing great change...slower perhaps, but we haven't really accepted the fact nor figured out that we have change to no matter what.

6. Some of the unease on right and left is due to some sort of view of this change. Is it along the lines we are used to, and/or simply myopic?

Taxes and Private Sector

2009-11-23T20:02:00.000-05:00

by cactus

Regular readers know that (together with a currently un-named co-author) I recently wrote a book looking at how Presidents performed on a wide range of issues, everything from abortion to the economy. The book is currently scheduled to come out next year (more info as it becomes available), and I’m playing with ideas for a second book right now. Not a sequel since what I have in mind is very, very different, but I think there’s something to be said about looking at how things change over the length of a presidential administration as it kind of smoothes out bumps.

Think of it this way – even the most law and order president might decrease spending on law enforcement from, say, year five to year six of his administration, but you can bet that such spending over the length of his administration will increase. Even Reagan raised some taxes, after all.

And since I mentioned St. Ronald, I’d like to focus this post on an issue near and dear to the heart of folks who like to invoke his wisdom – the importance of taxes when it comes to providing incentives to the private sector. See, raising taxes causes the producers, the folks who make things happen (as opposed to losers like you and me) to retreat, armadillo-like, into their underground Galtian burrows in the sky. The end result is that the economy tanks and we all starve to death. That’s why economic disasters never start during Republican administrations.

So let’s take a jog with this puppy, shall we?

And before we lace up, a note - everything you’re gonna see below is in a Google spreadsheet you can access here. It also contains links to all the data I’m using, which come from a few Bureau of Economic Analysis (BEA) National Income and Product Account (NIPA) tables and a CPI table provided by the Bureau of Labor Statistics (BLS). I’ve also included links to all the data sources used in this post directly below.

A second thing to note before we set out – it’s easy to cheat on GDP. GDP includes Government Spending, so an irresponsible administration can artificially goose GDP simply by borrowing a fortune (thus making the national debt explode) and spending the money. In the past, I’ve dealt with this a number of different ways, but today I want to focus on the private sector.

We can pull the government consumption and expenditures (NIPA table 1.1.5, line 21) out of GDP (NIPA table 1.1.5, line 1), giving us something we can describe as the “private sector component of GDP.” Next, we can divide the amount the government collects in taxes (NIPA table 3.1, line 2) at all levels – federal, state and local – by the private sector component of GDP. (Both the private sector GDP and the tax collections are in nominal dollars, and all we’re interested in is the percentage, so this is tres kosher.) That gives us the percentage that the private sector (at all levels, from the lowliest panhandler to the most magnificent maharajah in the business world) pays in taxes in each year. If it isn’t obvious, there’s no point in including the government portion of GDP there since the government doesn’t pay taxes.

Since we’re interested in growth, we can adjust the private sector component of GDP for inflation – might as well put it in 2005 dollars, since when the BEA adjusts for inflation, these days that’s their base year.

With all of that, we can produce the following graph. (A reminder – all the data is in the referenced Google spreadsheet.)

FYI, since Ike took office, only three administrations (JFK, LBJ and Clinton) increased the percentage of the private sector GDP that goes to taxes; they make up three out of the four administrations with the fastest increases in the annualized real private GDP. Regular readers also may recall those are the three administrations with the fastest annualized increases in real GDP per capita, including the government portion of the festivities. (Regular readers may also recall I get very irritated when someone starts blathering about the “Kennedy tax cuts” without a. realizing that the so-called Kennedy tax cuts occurred while LBJ was in office, and b. one can cut marginal rates and increase enforcement at the same time, which is what happened. If you’re going to argue something in comments about the Kennedy tax cuts, please stick to what the data says and not what Glenn Beck tells you.)

The annual average increase in real private GDP is about 2.4% for administrations that cut share of private sector GDP going to taxes, and 4.2% to the administrations that increased it.

Go figure. Now, I dislike paying taxes as much as a Glenn Beck does, but the story line about big bad taxes choking off the private sector doesn’t add up. The “biggest government” president in our sample was LBJ with his Great Society and War on Poverty, and he’s the guy under whom the private sector grew the fastest. JFK was second on both counts. The reason is, without the government, and the taxes that fund it, there is nobody to build roads, provide a decent legal system or combat epidemics, and without things like this, the private sector grinds to a halt, the efforts of Anthony Mozillo and Paris Hilton notwithstanding. Which brings up one other thing – the argument you often hear is that the private sector is more efficient because of the profit motive and the fact that inefficient private parties go bankrupt. Of course, in the real world, inefficient private parties peddling silly ideas can do as well or better than their quality counterparts. The graph above contradicts everything you will ever hear or read in a Rupert Murdoch owned property, but Murdoch is in no danger of going under. Nor will his great, grand-children, even if they continue selling something that isn’t true for generations.
---
Now, in case you’re wondering, I generally start these sorts of analyses with Ike though data runs to 1929 because events like the Great Depression, World War 2, and the recovery from World War 2 tend to distort things. For instance, during World War 2, the private sector’s share of the economy was (purposely) reduced dramatically given that fighting the Nazis and the Empire of Japan was the main preoccupation for most people. Conversely, during Truman’s term, the pent up private sector demand bounced back.

However, if you’re interested in what that looks like, I’ve included the data going back to 1929 (as far as it will go) in the spreadsheet, and I’ve done the analysis going back to FDR’s first term. The analysis for the growth in real GDP itself (i.e., not just private GDP) is there.
--
Reminder: the spreadsheet is here.
Data sources..
Current Tax Receipts: NIPA Table 3.1
GDP and the Gov't piece of GDP: NIPA Table 1.1.6
CPI - U: BLS Table
---
Well, that’s it for now. All y’all shalom ‘til next time.
______________________________________
by cactus

Reform: Looking at the Glass Half-Full, Part 2

2009-11-23T05:02:00.005-05:00

November 12, 2009
Reform: Looking at the Glass Half-Full Part 2

by Maggie Mahar, Health Beat Blog

Reform: Looking at the Glass Half-Full, Part 2

The Truth about the Public Option

For reasons I don’t understand, progressive pundits have been swallowing Congressional Budget Office Director Douglas Elmendorf’s dispiriting speculation about the public plan, hook, line and sinker.

Elmendorf claims that in 2019 (six years after reform begins), less than 10 percent of the population will be shopping in the Insurance Exchange where they can choose between private insurance and the public plan. Elmendorf asserts few will choose the public plan and many of those who do will be in poor health. The government plan will be puny—giving it little market power when negotiating with providers. Thus, he declares, the public plan will be more expensive than private insurance. (This may be why Senator Joe Lieberman has claimed that the public option will somehow add to the deficit)

What is remarkable is that if you read Elmendorf’s commentary you will find that he has no hard evidence to back up his claims. His assessment is based on “probably’s.”

By contrast, what we actually know about who will be eligible for the Exchange, and what reform legislation says about the goals of the public plan, suggests that the public option will be much stronger, more attractive, and less expensive than the CBO director suggests.

Pundits who buy into the notion that the public plan will do little to reduce health care costs also have ignored the spending cuts that Medicare has proposed for 2010. These are not pilot projects; these are targeted changes in the fee schedule. Medicare would pay cardiologists less—while paying primary care doctors and nurse practitioners more Medicare Eases Next Year’s Cuts for Heart, Cancer Specialists, Bloomberg — In addition Medicare would slash fees for certain tests that many physicians say have led to an “epidemic of diagnosis.” Too often asymptomatic patients are diagnosed with “pre-disease,” and then are subjected to treatments that they don’t really need—products and procedures that expose them to the risks of side effects, with little or no benefit What’s Making Us Sick is an Epidemic of Diagnoses, NYT Here, Medicare is paving the way for a public plan that will offer better, safer care at a lower cost.

Elmendorf Reads Minds

Elmendorf laid out his assessment of the Public Option in an October 29 letter to Rep. Charles Rangel Elmenforf’s Letter to Rep Charles Rangel offering his opinion that “in 2019, only 30 million Americans” will “be enrolled in the Insurance Exchange” where they can choose between the public option and private insurance plans. And only about “one-fifth of the people purchasing coverage through the Exchanges” would enroll in the public plan resulting in a total enrollment in the Public Option of “roughly 6 million.” In the same letter, the CBO director also speculates that the public plan would “attract a less healthy pool of enrollees” than would private insurers.

How does Elmendorf know that only 20 percent of those shopping the Exchange for insurance will pick the public plan?

He doesn’t. No one knows what people looking for insurance will be thinking in 2013. None of us know what the public plan will look like, how it will be priced, or how it will compare to the competition. As I noted in part 1 of this post, Elmendorf is simply pretending that he can read the minds of millions of Americans and divine what they will choose.

Consider the reasons Elmendorf gives to back up his claim:

“That estimate of enrollment reflects CBO’s assessment that a public plan paying negotiated rates would attract a broad network of providers but would typically have premiums that are somewhat higher than the average premiums for the private plans in the exchanges. The rates the public plan pays to providers would, on average, probably be comparable to the rates paid by private insurers participating in the exchanges. The public plan would have lower administrative costs than those private plans but would probably engage in less management of utilization by its enrollees and [probably] attract a less healthy pool of enrollees. (The effects of that “adverse selection” on the public plan’s premiums would be only partially offset by the ‘risk adjustment’ procedures that would apply to all plans operating in the exchanges.”)

Elmendorf’s assessment is studded with “probably’s.” He offers no argument, no evidence, just one man’s guess as to how the public plan will operate. To assume such outcomes and reasoning based upon Public Option being a government plan and therefore it will make little effort to control costs and contain utilization, simply ignores Medicare’s efforts to rein in spending today. (Over the past 10 years, Medicare has held health care inflation down to under 6 percent a year—doing much better than private insurers who allowed reimbursements to soar by roughly 8 percent, each and every year for the past decade. (See chart on page 2 of my report on “Getting More Value from Medicare.

Six percent annual increases in the cost of care is still far too high, but the difference between Medicare, the proposed Public Option, and the Private Plans does demonstrate the interest government plans have in controlling costs. Unlike private insurers, they can’t simply pass spiraling premiums along in the form of higher premiums. And, under this administration, both President Obama and White House Budget Chief Peter Orszag have made it very clear that Medicare must do more to contain spending.

Moreover, as HealthBeat reader Dr. Fred Moolten observed when commenting on Part 1 of this post, Elmendorf completely ignores what the legislation says about the public plan:

“I find the CBO assumption that the Public Option would make no attempt to increase efficiency somewhat puzzling,” Moolten observed, “given that increased efficiency of care was one of its expressed purposes. In section 324 of the House version [of the bill], this intent is stated as follows:
’The Secretary may utilize innovative payment mechanisms and policies to determine payments for items and services under the public health insurance option. The payment mechanisms and policies under this section may include patient-centered medical home and other care management payments, accountable care organizations, value based purchasing, bundling of services, differential payment rates, performance or utilization based payments, partial capitation, and direct contracting with providers.’”

In other words, the Secretary is expected to use financial carrots and sticks to insist upon more efficient collaborative care, rewarding providers who offer better outcomes at a lower price. Dr. Moolten concludes:

“Why the CBO wants to dismiss these intentions is something they haven't chosen to explain.”

Here, I would point out that this is not the first time that Elmendorf has cast a cold eye on health care reform. As I noted In an earlier post: Who is Douglas Elemendorf and Why is he Throwing Cold Water on Reform . . . back in 1993 Elmendorf was part of a CBO team that nixed the Clinton Health Care Package on the grounds that it was too expensive and would involve too great an expansion of government. (Imagine how much cheaper universal coverage would have been back then.)

Elmendorf’s Guesses Are Accepted

Despite the holes in his logic, Elmendorf is, after all, the Congressional Budget Director, and, as a result, most who read his assessment of enrollment in the public plan assumed that there must be facts and figures behind his so-called “analysis.”

Thus, his words have had a powerful influence both in the mainstream media and in the blogosphere. Virtually no one has questioned his assumptions. At the end of October even the Washington Post’s estimable Ezra Klein quoted Elmendorf Will The Public Plan Have Higher Premiums? concluding that the public plan will be expensive.

It will pay prices equivalent to those of private insurers and may save a bit of money on administrative efficiencies. But because the public option is, well, public, it won't want to do the unpopular things that insurers do to save money, like manage care or aggressively review treatments. It also, presumably, won't try to drive out the sick or the unhealthy. That means the public option will spend more, and could, over time, develop a reputation as a good home for bad health risks, which would mean its average premium will increase because its average member will cost more. The public option will be a good deal for these relatively sick people, but the presence of sick people will make it look like a bad deal to everyone else, which could in turn make it a bad deal for everyone else. . . .

‘This, in sum, is why I'm pessimistic on the chances for the public option to substantially affect the insurance market.

Klein wrote:

“That isn't to say that the public option can't still do some real good, as I argue here: Expansion Team”. But there's also a chance for it to become a real disaster.”

Who Will Be In the Exchange?

The Real Numbers Elmendorf’s assessment of the public option begins by assuming that six years after the reform begins only 30 million Americans, or one-tenth of the population, will be shopping in the Insurance Exchange. This assumption flies in the face of everything we know about who will be eligible for the Exchange.

Reform legislation makes it clear that, from the very first year, the Exchange will be open to three groups: the self-employed and others who now buy their own insurance in the private market for individuals; the uninsured; and the owners and employees of small businesses.
Today, 7 percent of all Americans, Addressing Health Care Market Reform Through an
Insurance Exchange”, (or 21 million people) paid for individual insurance out-of-pocket. (Elmendorf confirms this number in his letter to Rangel.)

In the individual market, they pay sky-high rates. If they enter the Insurance Exchange, they automatically become eligible for group rates. According to MIT economist Jonathan Gruber, under the Senate Finance Committee’s reform plan, those who move from the individual market to the Exchange’s group market will enjoy savings ranging from several hundred dollars (for the youngest in the individual market, who get the best deal from private insurers) “The Senate Committee Propose Lower Non-Group Premiums” to over $8500 for families. It’s hard to imagine why any of these 21 million people wouldn’t join the Exchange in 2013. To sum the numbers up:
- 7% of all Americans (21 million) paid for Healthcare Insurance out-of-pocket.
- Add the uninsured-- some 25 million Americans, according to Elmendorf’s own numbers, minus 8 million who will wind up in Medicaid when it expands in 2013,
- Finally, the Exchange will open its doors to the owners and employees of small businesses (In the 2013, according to the House bill, this will include companies with up to 25 employees; in 2014, firms with less than 50 employees will be eligible, and in 2015, the tens of millions of Americans who work for companies with up to 100 employees will be able to join the Exchange Washington Business Journal, How Small Companies Fare Under House Healthcare Bill”)

Moreover, “in subsequent years,” the House bill suggests, the Exchange will continue to expand. If all goes well, ultimately all Americans—including those who now have employer-based insurance through a larger employer—will be able to join the Exchange, and, if they wish, choose the public option.

Of course, the fact someone is eligible to go into Exchange doesn’t mean that she will. Some will elect to pay the penalty rather than buy insurance. But when I look at the numbers, I cannot imagine how Elmendorf arrives at his prediction that only 30 million Americans will be in the Exchange six years after it opens.

Moreover, he is wrong when he suggests that this will be a sickly pool of relatively poor Americans. The 21 million who now buy individual insurance must be quite healthy; if they weren’t, carriers in most states would refuse to cover them. And, if they can afford the sky-high premiums that carriers charge for individual insurance, they must be quite wealthy.

Meanwhile, the poorest of the uninsured will be siphoned off by Medicaid. Here, it’s worth noting that not all of the uninsured live in low-income households. More than 14% of those Americans who choose to “go naked” earn $75,000 or more, Sources of Healthcare Insurance and the Characteristics of the Uninsured”. Many don’t buy insurance because they don’t consider it a good value. They just don’t trust private insurers to deliver on what they promise. Many might well choose a public plan. And finally, the many Americans who work for companies with up to 100 employees will represent a cross-section of the population.

I wouldn’t even try to predict how many will chose public plan. But it seems safe to assume that it will be a large, diverse group. Both hospitals and most doctors will want access to these customers. Make no mistake, when the public plan negotiates rates with providers, it will have muscle.

In Part 3 of this post, I will expand on how Medicare is already paving the way for a public plan that will lift the quality of care while reining in costs—and why cost-containment doesn’t have to be spelled out in the reform legislation. .

JP MORGAN: THE JOBLESS RECOVERY WON’T BE SO BAD

2009-11-22T08:42:00.000-05:00

Rdan

Pragmatic capitalist points us to thinking that works for some.

The strategy outlook at JP Morgan is little changed over the last week despite some sobering news out of the labor department last Friday. The bad news on jobs is no longer a surprise to investors and history has shown that past jobless recoveries were dealt with fine by most major asset classes. Although the jobless recovery creates some greater headwinds than most recoveries it is not an immediate headwind as JP Morgan analysts continue to see a flight into equities as portfolio managers chase performance in to year-end.

While many investors (including your truly) have expressed their dislike for the Fed’s liquidity induced “recovery” JP Morgan sees no issues with it. In fact, they see it as a normalization of the allocation of capital in the markets:

Rdan here...this doesn't look good for the jobless and the main street economy.

Photographing Phantom Invisible Bond Vigilantes

2009-11-22T08:02:00.002-05:00

Robert Waldmann

A specter is haunting Paul Krugman -- it is the specter of apparently sophisticated forecasters who predict a huge spike in US long term bond rates in the near future. He notes that most investors can't believe this or rates would already be high. He also notes that some of those who are predicting a spike seem to be top advisors somewhere in the Obama administration.

He is puzzled by this phenomenon. I just note that it is not new at all. Basically such apparently sophisticated people predicting a spike in long term US interest rates are (almost) always with us. So far they have always been wrong. This issue is extensively researched by Nazaria Solferino et al in an article forthcoming in the journal of forecasting.

The phantom invisible bond vigilantes are not a new phenomenon. Consider Blue Chip Forecasts TM an organization which aggregates forecasts of, among other things, rates on Treasury bonds.

Usually there are some forecasters who predict that long term US interest rates will spike in the near future. There isn't one such chicken little in the blue chip TM sample every month, but there is most months.

The interesting thing is that, so far, they have always been wrong. In an article forthcoming in The Journal of Forecasting Nazaria Solferino and I show that is it is possible to use a very simple formula to identify 1082 forecasts of US 30 year interest rates which are too high without one single solitary error so far. That's a record of 1082 to zero (so far). The vast majority of the forecasters in the sample made such an incorrect prediction of a long term interest rate spike at least once. See
http://ideas.repec.org/p/rtv/ceisrp/135.html

There is no such fat tail of always wrong bond doves and almost no such 100% (so far) identifiable errors in forecasts of short and medium term interest rates.

Basically, phantom bond vigilantes are always with us. Almost always someone is convinced that the US is heading to high sustained inflation and that everyone else will agree a few months from now. It is an astounding feature of forecast data.

How Do We Predict Inflation?

2009-11-21T23:59:00.004-05:00

Ken Houghton notes that playing with data is dangerous.

Predicting the future tends to be easy. There are several ways to do it. First, you can predict that everything will grow as it did this year—or last year, or the mean of the past x years. Or you can predict that it will be great if a Republican is in office, but horrible if a Democrat is. (Call this The Kudlow Effect.)

Or, you can just predict that everything next year will be the same as it is this year.

This appears to be fairly close to what consumers do, judging by this scatterplot of annual inflation (i.e., inflation over the previous twelvemonth) against the University of Michigan's median expectation from consumer surveys.

So the "Rational Agent" believes that nothing will change. Comments?

Comment woes.

2009-11-21T12:17:00.004-05:00

Js-kit has some comments embedded in the post, at the bottom of each post after clicking on the title of the post you want to read. There is a disconnect with the blue comment link at the top of the post (blogger comment format). Very inconvenient. Sorry.

Update: Blogger and js-kit are synchronized in 'below the post comment form'. I believe all comments have been included. Yeah me. I can synchronize in pop up window as well, but it lacks any versatility.
Any preferences for a day or two?

Open thread Nov. 21, 2009 (no GW)

2009-11-21T06:24:00.003-05:00

The Phantom Menace

2009-11-21T01:27:00.002-05:00

Robert Waldmann

The one by Paul Krugman is a must read.

what I hear is that officials don’t trust the demand for long-term government debt, because they see it as driven by a “carry trade”: financial players borrowing cheap money short-term, and using it to buy long-term bonds.

[skip]

the remedy should be financial, not fiscal. Have the Fed buy more long-term debt; or let the government issue more short-term debt.

That does sound rather obvious doesn't it ? Why aren't they doing that ?
My guesses after the jump.

I assume you have read Krugman's post. The very brief recap is that someone in the Obama administration does not want to count on carry traders to short short term bonds and hold long term bonds, yet they are not arguing that the Fed or the Treasury should do that directly.

I can only guess that the Treasury has strict taboos against this sort of thing and I further guess that the origin of the taboo is that fiscal honesty requires the Treasury to act like a private firm.

A private firm that issued a huge amount of short term debt to finance medium and long term liabilities is vulnerable to bankruptcy. The firm has to roll over it's short term debt. A prophecy that it will fail to do so will be self fulfilling. For a private firm, issuing a huge amount of short term debt and counting on being able to roll it over is reckless.

I guess that some permanent employees at Treasury have a very strong rule that the correctly stated Federal deficit is the deficit it would have if it followed similar rules to a private firm. Counting the cost of carrying debt long term at the short term interest rate is cheating. The Treasury has to constantly fight politicians who want to cheat and understate the deficit. This temptation can only be resisted by strong taboos and bogus arguments based on wildly overstating the risk the Treasury will go bankrupt.

Another issue is the perpetual war between the political staff which wants high spending and low taxes and economic advisors and the Treasury and which wants a low deficit. Polls are showing strong public concern about the deficit and a desire for lower deficits causing the political staff to switch sides. Economists who have been warning of the dangers of deficits are reluctant to reverse field. In particular, people are reluctant to admit that arguments which they made in support of low deficits are and were bogus. Economists are reluctant to admit that their predictions were dead wrong. They are tempted to argue “It hasn't happened yet, but it will soon.” A well known Obama administration economist has been predicting a sharp rise in interest rates on Treasury bonds for a while now.

Quantitative Easing

2009-11-21T00:25:00.002-05:00

Robert Waldmann

Can the Fed do any more to stimulate the economy ? The question is back. The answer is only by making credible promises about the fairly distant future. My view is that this means no. I review the issue after the jump.

Long ago Paul Krugman proposed that the Bank of Japan target inflation. In the new millennium this is called quantitative easing. The idea is that when an economy is stuck in a liquidity trap, the real interest rate can only be cut by causing expected inflation. The monetary authority can achieve this by promising to cause inflation when it can. It can only after the economy is out of the liquidity trap. So only if the monetary authority can pre-commit to high inflation when things are back to normal and it will want low inflation, can it stimulate investment in an economy in a liquidity trap.

The argument (due to Krugman of course) is that right now the monetary authority can only push on a string. Private agents are willing to hold unlimited amounts of money given the current short term safe interest rate of almost exactly zero. Only when agents want to do something else with their wealth will it be possible to cause inflation by pouring in more money than people are willing to hold at current prices.

The proposal is that the Fed pump huge gigantic amounts of money into the economy (oops it has already) *and* promise not to buy that money back when prices finally start rising. I quote Brad DeLong

Quantitative easing--pouring a whole bunch of cash in the system with the idea of never reversing the money stock expansion could boost spending and employment considerably by creating expectations of inflation and so reducing the spread--but the Federal Reserve is not going there, and regards the idea with horror, shock, and shame.

I note that the first step, pouring a whole bunch of cash, has been done already and that it isn't needed for the scheme to work. The Fed doing nothing with the idea of pumping a whole bunch of cash in the system when unemployment is back to normal would work just as well.

Brad also has another approach

I do wonder how much good would be done if the FOMC were simply to stand up and announce that they were raising their long-term GDP-deflator inflation target from 2% to 3%. It might do a lot of good. And it is certainly something the Fed could do without cracking its credibility as committed to low inflation.

It might, but it might not. The Fed can't keep inflation as high as 2%. The announcement is an announcement about policy in the distant future.

OK assume that the Fed has a precommitment technology so it can set future policy now. Should it commit to higher inflation ?

This is a purely academic deeply hypothetical question. I love those. I have two arguments for no.

1) First a major effect of promising inflation in the future is to drive down the dollar. This would help the US economy at the expense of other countries. One of those countries is called China which is investing huge amounts of Yuan in an effort to keep up the dollar. A Fed vs People's bank of China war over the exchange rate is a terrifying prospect. Basically the Fed might win, the PBC decide to cut it's losses by shifting to Euros and suddenly US nominal interest rates are very very far from zero.

Recall what Ben Bernanke used to do. He studied the depression. One lesson is that competitive devaluations were a very bad policy for everyone. He must be thinking of that lesson. I'm sure he is trying to maintain exchange rate peace in our time with the PRC.

2) Aside from that, the policy only works if managers and/or shareholders are smart and managers care about the long term interests of shareholders. That is it works if pigs fly.

The policy is to have inflation low to negative until the unemployment rate returns to normal (because there is no way to avoid this) then have high inflation once it returns to normal (by making unemployment lower than the NAIRU). This means that long term bonds will be cheap (have high yield) and that the return from holding them will be lower than the stated yield (their market price won't rise steadily as maturity approaches but rather will stay the same until the economy exits the liquidity trap).

The assumption is that firms decide how much to invest based on demand and long term real interest rates. This simple formula fits the post wwII data. However, for that period current inflation is a reasonable forecast of future inflation. The proposal is to make a rapidly changing path of expected inflation. The effect of such expectations on investment can't be determined from available data.

The argument for investing is that the firm can issue say a 10 year bond and invest in real capital and in 10 years, much of the real value of the bond will be inflated away. For this to work, managers have to believe what the Fed says about monetary policy 3 to 10 years from now *and* they have to care. That is not the way in which managers manage (and they admit it). Larry Summers did a survey once. Many CEOs actually responded. The average response was something like

" to decide whether to make an investment we construct an estimate of the effect of the investment on accounting profits equal to sales plus net inventory investment minus spending on labor, materials and excise taxes, then we discount that flow at an annual rate of 30% and see if the number is positive. If the result is positive we invest". 30% ! They said they had an extreme short term bias. They also care about accounting.

The inflation targeting proposal is that one should invest, even if one only cares about the short term, as one will gain as the value of debt rises less quickly than the calculated yield on debt. That one can write down the debt marking it to market. This does not work. Investors do not want shares of a firm which claims profits because its own debt has lost market value. The firm's debt loses market value as the risk of bankruptcy increases. In this case, it is losing value (compared to a silly forecast) because of increasing expected inflation. However, the approach to accounting is one to avoid like the plague.

The firms will gain overt the life of the bond, but they won't be able to tell investors this in the medium future. The policy should cause increased investment but, in the real world, I think it won't.

I Blame This on the NHL

2009-11-20T20:11:00.008-05:00

With all the talk of "Detroit," you would think that Michigan would have lost the most employees, as a percentage of same, on the year. After all, the scariest graph of the U.S. MSAs isn't scary for nothing.

But the Regional and State Employment data is out for October (h/t CR), and there's a different leader.

Apparently, the bursting of the Sunbelt Bubble (building expensive houses in the absence of a water table; what could go wrong?) compares well with destroying unionized automobile production. (Note to Senator Shelby: destroying Detroit didn't keep your state from being #10 on the list.)

Also note that #4 on the list is my favorite state for bank failures. (The three states with 20 or more bank failures since Bear Stearns failed are 4th, 9th, and 11th on the list. The only other state in double-digits right now, Florida, is 16th.) I'll wait patiently for Brad DeLong to explain again how "support of the banking system by the Fed and the Treasury [has] significantly helped the economy."

The third and biggest point is that many of those are large states that have leaned Democratic in the past several years. Anyone betting that they—and the next two states, North Carolina and Wisconsin, which both went for Obama in 2008—will be hard-pressed to support Democratic policies twelve months from now without a significant change in the trend.

New Jersey showed you what happens when you run a former Goldman Sachs CEO for Governor right now. Virginia showed what happens when the base isn't motivated. Paul Krugman makes the point directly:

The longer high unemployment drags on, the greater the odds that crazy people will win big in the midterm elections — dooming us to economic policy failure on a truly grand scale.

What are the odds of crazy people winning big? I'm not certain, but I make them much better than 20:1 based on the current data.

UPDATE: Via Mark Thoma, Free Exchange, of all places, also sees the danger:

[W]hat is clear is that it does no good for prominent, respected economists to continue heaping praise on a Fed that failed in its mission before the crisis and which [sic] is failing in its mission now.

Because as unpleasant as the prospect of Congressional intervention in monetary policy is, two more years of high unemployment might well lead to far worse.

Open thread Nov. 20, 2009 (with GW)

2009-11-20T18:24:00.003-05:00

Update:
Menzie Chin weighs in:

http://www.econbrowser.com/archives/2009/11/the_global_surf.html

Teaching that Contracts Should Be Broken is Rewarding

2009-11-20T17:27:00.002-05:00

Congratulations to Andrew Samwick of Capital Gains and Games for being named Professor of the Year in New Hampshire.