Relevant and even prescient commentary on news, politics and the economy.

The Current Health Care Reform Compromise

So the Sen Ten have reached a secret deal. The main points seem to be that the public option is replaced by an sub – exchange of private non profit insurers (which is very close to nothing at all) and people from 55 to 65 can buy into Medicare.

I was going to give a post about why I like this compromise. Ezra Klein beat me to it. I have little to add to his post. He argues that the compromise is actually better than a level playing field public option assuming that extended Medicare pays Medicare rates. The idea is that if people see how cheap insurance is if the insurer pays health care providers Medicare rates, they will eliminate artificial barriers, such as the age limit of 55. His key sentences are “Right now, Medicare’s rates are largely hidden, as no one pays the full premiums, and so no one can really compare it to private offerings. But if the premiums become visible, and Medicare’s superior bargaining power is capable of offering rates 20 to 30 percent lower than its private competitors can muster, we’ll see how long it is before representatives begin getting calls from 50-year-olds who’d like the opportunity to exchange money in return for insurance as good as what 55-year-olds can get. “

This is why I proposed opt-out and accepted limited access to the public option to people on the exchanges. I agree with Klein that if the public sees what a good deal they can get from the US government, provided it uses its bargaining power with providers, the compromise will not last, since people and firms which provide their employees with insurance will demand the option to buy it from the US government. He has, by the way, been arguing this since Edwards proposed a reform with a public option.

I only add a Leninist argument for centrist compromise. The worse it is the better it is. The 55 year limit is totally arbitrary and unfair. I don’t think that’s an easy line to hold once 54 year olds see how much extra they are paying to keep private insurance companies in business. The 65 year minimum for Social Security old age pensions and Medicare is arbitrary too, but it is now so long standing and familiar that tea partiers can sincerely argue that government run health insurance is unacceptable because it isn’t good for Medicare.

I can’t even imagine how people will argue that it was OK to let people over 55 buy in but not to let people under 55 buy in.

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Cap and Trade and Horse Trading

Robert Waldmann

Has a thought about how to get votes for a cap and trade bill in the Senate without giving a windfall to incumbent polluters. The problem is that it seems to be necessary to buy the votes of coal state legislators. The House’s solution is to give C02 permits to current polluters. This is a pure transfer. It will be very relevant to shareholders of those firms, but not so important to anyone else.

The idea, such as it is, is to give to agents in states which would otherwise bear more than their share of the burden of reducing greenhouse gas emissions, that is, states with coal or states where lots of coal is currently burned.

My idea is to auction all of the permits and set up a fund to compensate overburdened states by giving money to the state government. The formula would be uhm complicated and negotiated endlessly but basically close to cap and trade revenues from the state.

The advantages of this approach is that a transfer from Federal to state governments is desperately needed right now. That means it would be important to transfer funds now based on expected future revenue.

The problem is that once the market for votes in the Senate is made explicit it will be even less restrained by shame or hypocrisy than it is now.

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EconTalk Jumps the Shark

Russ Roberts could at least pretend that Amity Shlaes (B.A., English Literature) had written a book related to economics, no matter how badly contrived and poorly researched it was.

But what’s his excuse for this (B.A., English Literature, Penn; MBA Chicago)?

Sadly, it appears he has stopped even pretending to be interested in economics, and has just decided to shill for the cheapest huckster.

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Comparing Presidents – Real GDP per Capita, late 2009 edition

by cactus

Comparing Presidents – Real GDP per Capita, late 2009 edition

Every so often I find I have to rewrite a post about how well Presidents have done at producing economic growth. See, over time, we get new readers, and some of the, based on what I read in comments or in e-mails I get sent, don’t seem to have much knowledge of what actually happened. There’s a lot of what Stephen Colbert refers to as truthiness, or what Fox refers to as “facts.” Interestingly enough, folks who write this sort of $&^ seem to feel it is important to lecture everyone else on the evils of being ignorant about economic history.

So to do my part to help reduce the incidence of people being ignorant about economic history, below you’ll find a graph below shows the annualized growth rate in real GDP per capita for every President going back to 1929. Before I put up the graph, some housekeeping notes:

1. I’m only going back to 1929 because 1929 is the first year for which data is available. Blame Simon Kuznets for not getting started sooner if it bothers you.

2. The methodology used is simple – I’m looking at the annualized change in the real GDP per capita from the last full year before a President took office to his last full year in office. Think of it this way – the last full year before he took office is what the economy looked like before he showed up. His last full year in office is the last point at which his policies are affecting the economy without someone else being in a position to start undoing or changing those policies. Reagan and GW both cut taxes their first year in office; Clinton raised taxes in his first year in office.

3. A few Presidents didn’t make it through their entire terms. I’m going to call the “last full year” the year President died (or resigned) in the second half of the year. Alternatively, if the President died (or resigned) in the first half of the year, I’m going to call the calendar year before that happened his last full year. Thus – FDR is measured from 1932 to 1944, JFK from 1960 to 1963, and Nixon from 1968 to 1973.

4. If you think lags matter, wait a bit. I’ll write that post next. If you think other things matter, wait a bit… and I’ll get to that too as time permits.

5. All the data for the post comes from line 10 of the BEA’s National Income and Product Accounts Table 7.1.. I like to get things straight from the horse’s mouth, not from the Heritage Foundation.

6. I’ve also included all the data plus the analysis itself in this nifty google spreadsheet.

7. The graph below is a variation of one that appears in my book coming out next year. Of course, in the book the graphs are done by a first rate professional – Nigel Holmes. What you see below are my own best efforts in Excel. There is a difference.

OK. Chega de lero lero (“enough yadda yadda”) as they used to say in Brazil. Here’s what it looks like, sorted from fastest growth to slowest:

I can comment, but there isn’t much point. Since I’ve had this post before (maybe three times), I know the first reaction from certain quarters – “the data ain’t right.” After all, this isn’t exactly what the WSJ is peddling or the National Review are peddling these days. To which I respond – I’ve provided links to the data. Do it yourself. Or follow along with the google spreadsheet. I don’t care.

The next argument tends to focus around FDR. All other insults the graph seems to imply pale by comparison with the idea that the economy grew so quickly under FDR. Heck, I remember my own introductory macro prof back in college telling us how FDR destroyed the American economy. And there are plenty of college profs today who seem to be making a living stating that today – this dude who teaches at my old alma mater being a prime example.

What you’re likely to get from people like that is something along these lines: “FDR was making a hash out of things, but when World War 2 started, the economy picked up.” There’s usually something about communism or socialism thrown in to boot.

And that’s fine excuse. It sounds good. And while talk is cheap, to be honest, these days so is checking data. Since the folks who peddle the line about the commie bastard taking America apart brick by brick until we wuz all saved by the Japanese attack on Pearl Harbor don’t put up the data, I’ll do it. In fact, I’ll do better than that. I’m going to measure the growth rate from 1932 (the year before FDR took office) to 1938. That was not just before the War, it was before Lend-Lease, before the Destroyers for Bases agreement, and before just about any American preparation for the war whatsoever.

Furthermore, outside of the depression, the ’37-’38 recession was the worst economic problem between 1929 and the start of World War 2. In fact, real GDP per capita declined from 1937 to 1938, and real GDP per capita was about the same in 1938 as it was in 1936.

So 1938 accomplishes two goals, a) it avoids the influence the war and b) is about the best year you can pick as an “ending” to FDR’s administration if your want to make FDR look bad. And for giggles, let’s leave out Hoover altogether. Here’s what it looks like:

There isn’t much to say about this graph except that it clearly isn’t part of the Gospel According to Amity Shlaes. But it is more than enough heresy for one night, so I’m shutting down. But on my way out the door, let me just share one thought, for those who think this somehow can be reconciled with a “Republicans know what they’re doing when it comes to the economy” story-line: if just about every data point is a special case, your model sucks.
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by cactus

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PSA: Worth Reading

While Henry and Brad DeLong noted some more silly prattling from a brain-dead economist, AB readers and those wanting to maintain their sanity* will prefer The New Decembrists, and new blog from The Epicurean Dealmaker and, presumably, others.

Worth it for TED’s Reformist Manifesto alone.

*I do not necessarily assume that either of these sets fully contains the other.

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Too efficient NOT to consolidate

Cross-posted at News N Economics blog, by Rebecca

Here’s yet another historical record broken in 2009:

“Only three insured institutions were chartered in the [third] quarter, the smallest quarterly total since World War II.”

This fact is from the FDIC’s latest Quarterly Banking Profile. There are probably non-economic reasons for this, i.e., the application process to qualify as a new charter institution (see the types of charters here) is likely much more stringent than in previous years; but nevertheless, this fact reiterates the trend in the number of banking institutions, most definitely down.

The FDIC is awash in problem institutions. The well reported number of bank failures jumped to 132 in 2009 (as of November 20, and you can find the data here). However, that’s just share of the much larger “problem”. According to the same quarterly profile, there are now 552 “Problem” institutions in the FDIC charter system holding $346 billion of assets on balance – that’s 2.4% of nominal GDP.

As such, it seems that consolidation is all but a foregone conclusion. But watch out, because the new 4-letter-style phrase, “too big to fail”, is heavy on the tongues of US policymakers. Senator Bernard Sanders (Vermont) introduced the “Too Big To Fail Is Too Big to Exist” bill last month, which defines such an institution as (see the bill here):

“any entity that has grown so large that its failure would have a catastrophic effect on the stability of either the financial system or the United States economy without substantial Government assistance.”

Ahem, so how big is that? Peter Boone and Simon Johnson at the Baseline Scenario define “too big to fail” as bank liabilities amounting to 2% of GDP (roughly):

“So to us, 2 percent of G.D.P. seems about right. This would mean every bank in our country would have no more than about $300 billion of liabilities.

A large American corporation would still be able to do all its transactions using several banks. They would even be better off — competition would ensure that margins are low and the banks give the corporates a good deal. This would help end the situation where banks take an ever-increasing share of profits from our successful nonfinancial corporations (as seen in the rising share of bank value added in G.D.P. in recent decades).”

But there are economic efficiencies, like scale economies, that need to be considered. David C. Wheelock and Paul W. Wilson at the St. Louis Fed find statistically significant increasing returns to scale (i.e., bigger banks, lower costs) in the US banking system. They use a non-parametric estimator to estimate a model of bank costs and find the following (link to paper, and bolded font by yours truly):

“The present paper adds to a growing body of evidence that banks face increasing returns over a large range of sizes. We use nonparametric local linear estimation to evaluate both ray-scale and expansion-path scale economies for a panel data set comprised of quarterly observations on all U.S. commercial banks during 1984-2006. Using either measure, we find that most U.S. banks operated under increasing returns to scale. The fact that most banks faced increasing returns as recently as 2006 suggests that the U.S. banking industry will continue to consolidate and the average size of U.S. banks is likely to continue to grow unless impeded by regulatory intervention. Our results thus indicate that while regulatory limits on the size of banks may be justified to ensure competitive markets or to limit the number of institutions deemed too-big-to-fail, preventing banks from attaining economies of scale is a potential cost of such intervention.”

Better put: the cost of consumer and firm loans will be higher in the long run if too much intervention prevents the banking system from capturing scale economies. Furthermore, they suggest that even the largest institutions experience increasing returns (i.e., these).

I should say that I have absolutely no experience in non-parametric estimation and cannot vouch for the econometrics. However, the results are timely; and furthermore, the Federal Reserve Bank of St. Louis’ economics research is well-regarded. Point: I trust it.

As a note, David Wheelock wrote a very interesting piece a while back about the inefficiencies of mortgage foreclosure moratoria during the Great Depression …interesting stuff (paper link here).

Rebecca Wilder

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Sunday Basket O’ Questions

by Noni Mausa

Sunday Basket O’ Questions

1. The Climate Change memos have opened up some interesting questions. Like, who are the thieves, and when will we see them in court? And if the thieves are shown to be employees of Big Oil or Big Coal, are the Bigs profiting from this crime? The proceeds of crime can be seized by the government — I will be interested to see how the amount of extra profit might be measured, and how a fungible asset is seized.

A criminal conviction might not be necessary, either. Wiki tells us: “In civil forfeiture cases, the US Government sues the item of property, not the person; the owner is effectively a third party claimant. Once the government establishes probable cause that the property is subject to forfeiture, the owner must prove on a “preponderance of the evidence” that it is not. The owner need not be judged guilty of any crime.”

If the data thieves don’t end up in court, then does this mean e-mail archives in general are fair game for worldwide publication?

We’ve been told that there is no real privacy on the Internet — what if it’s true? “If you could read anyone’s complete email archives, completely safe from legal punishment, which archives would those be?” The question is bound to bring a dreamy expression to the thoughtful person’s face. It’s even rather Biblical: Luke 12:3 “Therefore whatsoever ye have spoken in darkness shall be heard in the light; and that which ye have spoken in the ear in closets shall be proclaimed upon the housetops.” Hackers, start your engines.

2. A financial “bubble” is usually thought of as a thin skin of substance surrounding … nothing. But no real-world bubble surrounds nothing — if there was nothing inside, it would be a droplet, not a bubble.

So what inflates a financial bubble? And when the bubble collapses, what happens to the “filler?”

3. The missing phrase in discussing taxes is “for what?” High taxes in themselves are no burden. Low taxes in themselves are no comfort. Arguing tax size without addressing its use is like knitting with only one needle.

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Update: Russia and the KGB? Curiouser and curiouser.
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by Noni Mausa

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