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

Medical costs are going up; we have to cut our insurance

Some catching up on health care reform progress makes sense as we keep in mind these posts from Beat the Press Dean Baker writes:

Second, the story of massive huge future budget deficits has little to do with aging. It is a story of a broken private health care system. If the United States paid the same amount per person for health care as any other wealthy country we would be looking at huge budget surpluses, not deficits. Of course we can’t lower our costs because of the enormous power of the health care industry.

The big deal in national planning and in recent MA statements by planners, Gov. Patrick, and others is the ‘global payment method’ (of which there are many proposals of programs) to replace fee for service billing. Somehow a global payment system determined by a standard treatment sequence will cut an estimated amount of duplication and excess testing among a list of things. Estimates range from 4% to 14% ‘savings’ through a mechanism jointly approved by the Blue Cross insurers and hospital association is to accomplish this in MA, but no proposals are very concrete from my survey of MA articles. Michael Halasy will hopefully write more on this topic from the inside.

Pay for Performance Summit will happen in March where the many proposals of ‘global payments’ will be discussed among many items.

Lifted from comments on an Angry Bear post:

…the little observed fact that cutting Medicare will not cut your medical costs…just put you in the private market. It seems a little stupid to be running around saying “medical costs are going up; we have to cut our insurance.”

No one is using this model? Vermont will be worth watching.

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Wiggle Room

By Noni Mausa

Wiggle Room

In a claustrophobic economy where the lions share of the fruit of citizens’ efforts is funneled to a small number of beneficiaries, where institutions intended to intervene on their behalf have been rejigged to work backwards, what can the little guy do to gain some wiggle room?

The poorest Americans have many strategies that provide small amounts of wiggle room, like working off-the-books, juggling several bank accounts or using payday lenders, locking kids in a closet so they can go to work, and stiffing landlords and various debtors when and as they can. Some are chosen strategies, some are just the result of not having enough tokens to satisfy all the turnstiles.

And these skills are ancient. Being dirt poor is a venerable world sport, and the tactics have been practiced since before written records.

But in the past century we seem to have entered a new situation, where the great majority of people are in a closed system with very little wiggle room, and most wiggle choices leading to less, not greater freedom and prosperity.

The bumper sticker used to say, “If you are not angry, you’re not paying attention.” But now it should read “If you are not claustrophobic, you don’t understand the situation.”

In my city, a man went missing a few years ago, and was finally found dead in a basement space behind a false wall – a space that was narrower at the bottom than the top. He hadn’t been shot or stabbed – in fact, he had fallen prey to his own efforts to escape. Every wiggle wedged him lower, and made it harder for him to breathe, until he suffocated.

The great question facing ordinary Americans is not how to find further wiggle strategies, to make do with less, to work harder to try to tread water under increasing burdens. That way lies less freedom.

In a way, Americans do understand this. Otherwise, why would they have disdain for the model of the immigrant many Americans scorn? – living ten to a room, on rice and beans, sleeping in shifts to make use of scarce bedspace, and all for wages that a babysitter would refuse? Americans scorn these living arrangements, but that’s where they’re heading.

And many of the wiggle strategies in use even 80 years ago (raising chickens, cutting firewood for heat) are impossible now. Urging the majority to do more with less, (“austerity”) while the 1% do less with far more, is not the solution. But what is?

Going Galt isn’t an option. The poor are their own hostages, and dropping out of the labour market in large numbers is what’s happening now, anyway. But would it be possible to move into the “rice and beans” model while concurrently building solid economic walls to provide breathing space and room for more effective wiggling?

Could the model of the Beguines show us a direction?

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Yellin’ at Yellen II

First I would like to stress again that I have great respect of Janet Yellen. I try to only critize people whom I respect (my posts show just how respectful I am in general).

So this comment on her use of event studies is really a comment on event studies and not on Yellen in particular. I mainly objected to “Event studies can therefore be helpful.” That is not a strong claim and I don’t really disagree, but I would add “but not very helpful, because announcements can be declared non events on the grounds that they were anticipated, so conclusions based on event studies depend on judgment — something which they have in common with conclusions which aren’t based on data at all.”

More highly respectful verbal abuse* after the jump.

* that was meant as a joke.

I have the 7 year nominal treasury rate, the 7 year TIPS rate and the difference in this Fred graph which I don’t know how to embed. I see current rates are similar to those before the first announcement (August 2010). Looking at daily data, I think I see rates going up at the November announcement (that would correspond to investors thinking QE matters and there being less than expected). I don’t see much of any change pre-August to post November. The graph sure doesn’t look like a response to a larger open market operation than any in the 20th century. I think that money and 7 year notes are close substitutes now.

I had a methodological complaint about analysing four data points and ignoring two, because of an arguably valid claim that announcements were anticipated. Before moving on, I stress that, if QE has a fairly large fundamental effect, then the undetectably small response to the annoucement can be explained only if markets anticipated that QEII would be approximately half a trillion $ worth of purchases of long term treasuries. If the market had expected a trillion, and QE has a fairly large fundamental effect, then real interest rates should have jumped up. The actual market response to the announcement requires not only forward looking agents but also something fairly close to perfect forecasts of Fed policy.

I now ask myself if I can come up with another explanation of the data — one in which QEII would have had a small effect even if it hadn’t been anticipated ?

I have two explanations of the pattern. I present them partly to illustrate my objection to event studies.

The first is that the standard interpretation of event studies depends on the efficient markets hypothesis. The original idea is that the market knows the effect of policy, so we can learn what policy does by looking at the response of asset prices to the announcement. I don’t accept the premise, so I don’t accept the method.

It was clear that many people thought that the huge expansion of Fed liabilities would cause increased inflation. Some people predicted hyperinflation. Assume (as a modelling exercize) that about 10% of the risk bearing capacity of the market is controlled by people who believe in the quantity theory of high powered money — so a tripling of the supply of high powered money should cause almost a tripling of the price level some time soon. This implies a huge effect of QEI on expected inflation and on the spread between the return on regular nominal treasuries and CPI indexed TIPS.

Then inflation actually declined confirming Phillips curvaciouse predictions. No one admitted they had been wrong (people don’t do that) but people learned. The effect of QEI was not a fundamental effect. It wouldn’t have happened if people had rational expectations.

Then by last November people had learned and so QEII had a microscopic effect on asset prices.

It does not seem reasonable to assume that people know conditional expected values (I could stop there) conditional on events which have never occured in human history. That assumption is absolutely required in order to use two events to determine a structural fundamental effect of quantitative easing.

To try to summarize, the effect of QEI and QEI.5 could have been due to irrational belief in the quantity theory of money which no longer exists so they tell us nothing useful about the effect of future quantitative easing.

Was the effect in November microscopic because investors had correctly predicted something very close to half a trillion of purchases of 7 year notes or because they had decided that Fed purchases of 7 year notes matter very little ? I think there is no way to know.

A second problem with event studies is that one has to know which possible future events are like the past events in the data set. Yellen’s analysis and the analysis above depends on the assumption that quantitative easing is one thing. In particular it depends on the assumption that 7 year Treasury notes are just like Federal agency issued MBS which are just like commercial paper in 2008. QE involves the Fed issuing liabilities and purchasing assets, but the assets are different.

In Summer 2010, I saw no reason to think that it would matter much if the Fed bought hundreds of billions of 7 year Treasury notes. Nothing which has happened since should make me change my mind.

The effect of a given quantity of asset purchases on asset prices should depend on the elasticity of demand for those assets. The elasticity of demand for assets should depend on the covariance of their returns wwith that of the market portfolio. 7 year Treasury notes are perceived to bevery safe. MBS were not perceived to be safe at all when the Fed bought a $ trillion worth of them. Elementary theory suggests extremely different effects of QE I and QE II on asset prices. Yellen’s analysis is based on the assumption that the magnitude of the effects is known a priori to be similar. That makes no sense.

Also fall 2008 and winter 2008-9 were very different from summer 2010 and fall 2010. Many firms were desperate for liquid assets. They feared they might be subject to a run and didn’t wan’t to have to sell illiquid assets at fire sale prices. There was a huge spike in demand for high powered money. It is entirely possible that QE I was needed to keep the safe short term interest rate near zero. In other words, QE I might have been conventional policy which was extreme in scale, because market conditions were extreme.

In the end I don’t have a conclusion. I don’t claim that we can dismiss all evidence as irrelevant to the current policy debate because things were different then or because the policy is vaguely similar but not the same. But things were different then.

I believe that a sudden surprise announcement of another half trillion of purchases of 7 year Treasury notes would have a small effect on the real economy. That’s what I guessed last year and there certainly isn’t any new evidence that should cause me to change my view.

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Economics and Bosses

Peter Dorman at Econospeak, who is smarter and nicer than I am,* boils down the question:

[D]o you believe that managers normally make the right decisions over how to run organizations?

If you believe that premise, please explain:

  1. Why all those great managers of the late 1940s through the mid-1970s ran defined benefit contribution plans, but their successors—who supposedly are more capable—are only capable of offering defined contribution?
  2. That “underfunded pension benefits” are evil, but “overunded” pensions led to the LBO (now “Private Equity”) movement of the 1980s.
  3. That, in the 1980s, GM being $1B underfunded caused Congress to pass a bill allowing pensions to become fully funded over 20 years—and that most of those targets were missed?

If bosses are so good at managing “ongoing concerns,” why do they take their payments upfront? What does—and should—this tell us about discount rates?

*This is a fairly low standard, outside of people who work in finance.

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Another Look at Keynesianism and the Great Stagnation

by Mike Kimel

Another Look at Keynesianism and the Great Stagnation

Cross-posted at the Presimetrics blog

Last week I had a post noting that the US government followed more or less naive Keynesian policies (whether on purpose or not I cannot say) from the early 1930s to the late 1960s. The post also notes that what Tyler Cowen calls The Great Stagnation, a period of relatively slow economic growth, began just about when the government moved from naive Keynesian policies to a regime that could mostly be described as “all deficits all the time.”

In this post, I’d like to present a couple of graphs that are pretty self-explanatory. The data in the graphs comes from the BEA’s NIPA Table 1.1.5 The black line runs from 1929 to 1967, and the gray line from 1968 to the present.


Figure 1


Figure 2

I’ll be coming back to this topic in future posts, but I’d like to make a few quick comments:

1. The Great Stagnation Tyler Cowen comments on seems to, at a minimum, coincide very strongly with the period where the government quit Keynesian policy, where the private sector’s share of the economy stopped shrinking and began growing, and where the government’s role in the economy stopped growing and started shrinking.

2.  Even if you assume the growth of the private sector or the shrinking of the government isn’t causing or contributing to the Great Stagnation, the data still leaves libertarian and conservative economic views at a loss.  After all – shouldn’t growth increase as the private sector becomes more important and the government shrinks in size? 

3.  Bear in mind that marginal tax rates – reduced in 1964 and then reduced again multiple times since then – were lower during the Great Stagnation period than they had been since the 1930s.  Needless to say, this is yet another fact that makes the data inconsistent with libertarian and conservative economic theory.

4.  As always, if you want my spreadsheet, drop me a line. I’m at my first name (mike) period my last name (one m only in my last name!!!) at gmail period com. And don’t forget which post your writing about.

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The Event Horizon

When is an event ?

Yesterday Janet Yellen said

Event studies can therefore be helpful in gauging the financial market effects of such communications. [skip]

Last August, the FOMC announced that it would begin reinvesting principal payments on agency MBS and agency debt into longer-term Treasury securities, and over the subsequent couple of months or so, the public remarks of Federal Reserve officials made note of the possibility of a further expansion of the portfolio. Consequently, when the Committee announced in early November that it intended to purchase an additional $600 billion in longer-term Treasury securities, that decision was largely anticipated by financial market participants, and it occasioned only minimal market response.

So it seems that the event took place over months from August through November. If Yellen is using the words “Event” and “communications” consistently, she must be asserting that the FOMC just kept talking about it for four months and the message gradually sunk in.

More generally, if one is willing to argue that announcements are anticipated and, so, there is no event even though there is a communication, then one must conclude that event studies are not useful. A methodological approach in which one can decide ex poste which communications are events is one in which one can reach any conclusion one wishes based on any data.

Yellen notes two communications related to quantitative Easing II — an announcement in August and an announcement in November. The responses of asset prices to both announcements provide minimal support for her conclusion. So she decides that she can reinterpret the timing of the event as she pleases.

If this sort of argument is treated with respect, then there is no point in looking at data at all.

Yellen’s argument is reduced to the assumption that if the first $ Trillion and change had an effect, then the next $ 500 billion must have an effect on the same order — that something is roughly linear over a genuinely huge range. She must also assume that market conditions are similar in November 2010 and in 2008 and 2009 — that willingness to bear risk and demand for liquid assets was fairly normal at the height of the crisis. Finally, she must assume that RMBS are about like Treasury notes.

I’d say that the facts are that there was a small then a tiny response to the announcement of gigantic purchases.

If Yellen remains convinced that non standard monetary policy has an important role to play, what evidence could possible confince her that it doesn’t ?

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Republicans are like Expensive Oil — Washington Post

Do my eyes deceive me ? Is this the Washington Post ? Is Ezra Klein writing under the double pseudonym “Neil Irwin and Michael A. Fletcher” ?

Irwin and Fletcher warn of two threats to the US economy — high oil prices and tea partiers (call it the Texas tea party menace).

U.S. economic recovery threatened by events in Midwest, Middle East

The standoff over benefits for public employees in Wisconsin, pitting Gov. Scott Walker (R) against unions and their Democratic allies, presages battles in many state capitals that could lead to hundreds of thousands of public jobs being cut nationwide. And in Washington, congressional Republicans are demanding steep, immediate budget cuts that economic forecasters estimate would slow the pace of economic growth in 2011.

Obviously true, yet I couldn’t guess what two threats they had in mind. I knew that I consider cutting public spending when in a liquidity trap to be a threat to the economy, but I didn’t know that reporters were allowed to write that.

If this isn’t proof that the Washington Post works for Goldman Sachs, what could be that proof.

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Based on the German inflation print, the ECB may be less ‘hawkish’ next week than people think

Today the German Federal Statistics Office reported that the February Consumer Price Index is expected to mark a 2.0% (2.047% by my calculations, which is very close to a rounded 2.1%) annual pace in February 2011.

This is simply a ‘flash’ print, and the Statistics Office was very careful to discount the fact that inflation continues to be driven by energy. But the harmonised index of German consumer prices (HICP) increased a greater than expected 2.2% over the year, suggesting upward pressure to the headline Eurozone rate remains in play. Market participants are expecting ECB rate hikes this year – there are currently at least 2 hikes priced in through this year – based on an elevated Eurozone inflation rate, currently estimated at 2.4% in January.

The ECB is a devout inflation targeter (see first chart of this post); it’s a central bank that raised rates late in 2008 only to see Eurozone inflation plummet as the economy dropped into recession (see chart below). But I think that the ECB will be less hawkish than expected next week, because I’m noticing an interesting correlation between German-based inflation (supposedly not relevant, per se, to ECB policy), Eurozone HICP inflation (the ECB’s target rate of inflation), and the refi rate.

(Note that the ECB targets a weighted composite of harmonised index of consumer price inflation (HICP), rather than a composite of the domestic price indices. You can read about the measurement differences between domestic CPI and Eurostat’s Harmonised CPI here.)

The chart illustrates the German CPI, the German harmonised measure of the CPI (HICP), Eurozone HICP inflation, and the ECB’s policy rate. There are three things that jump out at me as relevant for ECB policy expectations: (read more after the jump!)

(1) The correlation between Eurozone HICP inflation is stronger with domestic German inflation (CPI) than with the German harmonised measure of inflation: 59% vs 88%, respectively.
(2) Related to number (1), the ECB policy rate appears to be driven more by the domestic measure of German inflation (CPI) rather than its harmonised measure. At least in the 2008 energy bubble, the German harmonised rate of inflation was falling well before the ECB hiked the refi rate.
(3) Therefore, it is possible, that with German CPI printing at a lower rate than the harmonized measure, currently 2.05% vs. 2.23%, market participants who expect a very hawkish ECB statement next week may be disappointed (the ECB announces its policy rate next week).

The exact reason for (1) is worth exploring.

Rebecca Wilder

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