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

The Great Ricardian Equivalence Debate of 2011: Do Mainstream Economists Agree on Anything?

Krugman started it, in response to Lucas. Everyone piles on. Plutocracy Files has the list of links. (Plus don’t miss Nick Rowe’s, which includes a long comment thread.)

Here’s what wows me: all these world-classical economists are accusing each other of contradicting “textbook economics,” and circling through extraordinary contortions in their efforts to reconcile that school of economics with some version of reality.

There is no consensus. None.

Every one of these folks is bought into classical assumptions, or at least into the Keynesian/classical “synthesis” that’s embodied in the IS-LM model (a model that was created explicitly to render Keynes classical, i.e. without the the Keynes, and was later disavowed by its own creator, John Hicks, as nothing more than a “classroom gadget”).

And they’re all trying to do intergenerational macro in their heads, as a bunch of stylized and simplified thought experiments.

I just finished re-reading Lucretius, and the methodological similarities are striking.

Given that several of the world’s most notable “textbook” economists can’t agree on how to define what in physics would be the equivalent of angular momentum, some of us have to wonder if the whole discipline as taught today offers any useful macro-level insight or modeling utility at all.

I think it’s significant that an authoritative MMT voice has yet to weigh in (I think they all probably think it’s silly — or would be if it didn’t reveal such dysfunction), aside from a passing shot by Mike Norman.

Cross-posted at Asymptosis.

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Uwe Reinhardt: Unifying themes for healthcare policies

Uwe Reinhardt at Economix sums up health care policy proposals over the last decades(hat tip save the rustbelt)

To describe the unifying theme running through these past variants, it is helpful to enumerate the major economic functions any health system must perform:

  1. Producing health-care goods and services.
  2. Financing health care, which involves extracting money from households (which ultimately pay for all of health care) and funneling it to the producers of health care, usually through the books of private or public health insurers.
  3. Risk pooling by private or public insurers to protect individuals from the financial inroads of high medical bills through insurance policies.
  4. In most modern societies, assuring that every member of society has timely access to a defined set of health-care benefits.
  5. Purchasing medical treatments from the producers of health care, which includes determining the prices to be paid, claims processing for insured patients and controlling overall spending and the quality of that care with various forms of controls lumped together under the generic label “managed care.”
  6. Regulating the behavior of the various participants in the system to preserve the integrity of health care markets and the safety of health-care products and services.

Most of the debate over health policy in this country has been over two questions.

First, to what extent should healthier or wealthier members of society be asked to subsidize the health care received by their poorer or sicker fellow Americans? Second, influenced by the answer to the first question, who should perform the functions listed above: government, private nonprofit entities or for-profit entities?

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Fed’s Once-Secret Data Released to Public

Bloomberg notes:

Fed’s Once-Secret Data Released to Public By editor
Bloomberg News today released spreadsheets showing daily borrowing totals for 407 banks and companies that tapped Federal Reserve emergency programs during the 2007 to 2009 financial crisis. It’s the first time such data have been publicly available in this form.
To download a zip file of the spreadsheets, go to http://bit.ly/Bloomberg-Fed-Data. For an explanation of the files, see the one labeled “1a Fed Data Roadmap.”
The day-by-day, bank-by-bank numbers, culled from about 50,000 transactions the U.S. central bank made through seven facilities, formed the basis of a series of Bloomberg News articles this year about the largest financial bailout in history.
“Scholars can now examine the data and continue the analysis of the Fed’s crisis management,” said Allan H. Meltzer, a professor of political economy at Carnegie Mellon University in Pittsburgh and the author of three books on the history of the U.S. central bank.

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Topical thread: Tea Party politics

Via National memo comes a review of a book on the ‘Tea Party’.

One might imagine the changes that worry Tea Partiers to be primarily economic. But Tea Party members rarely emphasize economic concerns. The nightmare of societal decline is usually painted in cultural hues, and the villains in the picture are freeloading social groups, liberal politicians, bossy professionals, big government and the news media. Forces conspire, Arizona retiree Stella Fisher says, “to the breaking down of conservative society.” Kids today, she says, think “it’s not so important that you get married, even if you have a baby with somebody.” Members of the Tea Party peer out at a fast-changing society and worry. The public image of the Tea Party is one of anger. But in our experience, the more typical emotion is fear. (Theda Skocpol is a professor of government and sociology at Harvard University. Vanessa Williamson is a doctoral candidate in government and social policy at Harvard. This is an excerpt from their forthcoming book, The Tea Party and the Remaking of Republican Conservatism to be published Jan. 2 by Oxford University Press.)

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What’s a person to do? or ‘motivated avoidance’

What’s a person to do? or ‘Motivated avoidance’

 From the American Psychological Association comes two studies here and here.

Individuals are often confronted with information that they do not know how to comprehend or evaluate, even though this information can be of critical importance to the self (or society as a whole). In the case of energy, nearly 40% of respondents in a Public Agenda (2009) survey could not identify a fossil fuel. Nearly one third could not identify a renewable energy source and incorrectly believed that solar energy contributes to global warming. This lack of knowledge should be of concern to these individuals, as 89% of respondents worry about increasing fuel costs, and 71% worry about global warming.
 
The economy serves as another example.

Approximately half of surveyed adults did not know what an increase in gross domestic product meant and thought that “money holds its value well in times of inflation” (National Council on Economic Education, 2005). Worse still, in a national survey of American adults, 54% of respondents did not know what a subprime mortgage was (Center for Economic and Entrepreneurial Literacy, 2009), despite the fact that the subprime mortgage crisis was a significant contributor to the economic recession that began in 2008, and almost certainly affected some substantial portion of those surveyed. In short, it is apparent that a solid grasp of the basics (let alone the complexities) of these domains elude many people, and there appears to be a discrepancy between how much people know about social issues and their importance and relevance to one’s day-to-day life.

….
Given the psychological discomfort associated with epistemic uncertainty, one appealing way to deal with the anxiety of being unable to comprehend or manage information is to simply outsource personal responsibility to supposed qualified others. This strategy may, at times, be considerably more appealing than seeking
out knowledge and information for oneself, which assumes that people have the time and ability to sieve through challenging, and potentially threatening, information. The amount of information available to us to sort, comprehend, and assimilate has substantially increased due to technological advances, all of which compete for our time and attention. As a result, trade-offs have been made over time whereby society’s members have forfeited a certain amount of autonomy to have these burdens placed onto systems of power composed of knowledgeable others. Society has prescribed that, for example, our health is managed by health professionals, our buildings by engineers and contractors, and, relevant to the present research, our social and economic security is managed by the government. Indeed, survey data show that 88% of adult respondents thought it was very important for politicians to have a good understanding of economics,

only are people motivated to avoid social issues when they feel issues are complex—thus maintaining their present level of unfamiliarity— but this effect appears strongest for those issues believed to be most urgent and serious. It is at times when change is most needed, therefore, that people may become the most likely to
defend the status quo and agents of sociopolitical systems. As such, the present studies suggest that rather than ensuring those in charge are maximally qualified to be in charge, and rather than remaining especially attuned to any limitations of the system, the psychological processes that are instigated when issues are seen as both severe and complex may limit any criticism of the current system and its decision-making process. And, perhaps even more critically, they may also prevent the types of behaviors, such as information gathering, that are necessary to efficacious social action
(Attari et al., 2010; Larrick & Soll, 2008).

italics are mine

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Health Care Thoughts: Regulatory Bumbling

by Tom aka Rusty Rustbelt

Health Care Thoughts: Regulatory Bumbling

The people who daily manage health care services (and their advisers) have been shocked at the inability of the Obama administration to manage the administrative regs roll out process. The 2009 stimulus act contained multi-year funding for adopting electronic medical records (EMR/EHR) systems.

The funding required “meaningful use” and the published regulations were and are nearly incomprehensible, especially at the physician practice level. EMR/EHRs are making progress but it is largely due to the integration of physician practices into integrated delivery systems.

 Then there is PPACA. The first major regulatory effort were the SSP accountable care organization (ACO) regulations, and that was a disaster. Even the administration’s allies ran for the hills. The administration has spent the last half of 2011 creating new ACO sub programs and revising regulations, and has finally convinced some providers to jump on board the pioneer ACO program.
(Some of the desired innovation and integration is happening, but it is being pushed by fear of the future economics of health care rather than directly by PPACA.) .

 The C.L.A.S.S. long-term care financing program died in its crib. Early on Secretary Sebelius announced the program was not financially viable, and got into a shouting match with Congressional Democrats when she announced she could change the program without Congress changing the empowering statute. There were attempts at CPR, but the program now appears to be really dead.

 The most recent botch (already mentioned in an earlier post here) are the “essential benefits” regulations. As described in WAPO (12/16) the administration punted the decisions to the states. Depending on your perspective, this could be seen as “flexibility” or seen as “surrender.” We are still digesting these rules (it occurs to me multi state employers are going to freak on this). The 2200 pages of PPACA will be backed by many thousands of pages of administrative law.

At the provider and insurer level these regulations are the real meat of the act. A smooth roll out would certainly make PPACA more valuable. Lawyers specializing in health care administrative law are delighted. Consultants and writers are happy as well (I plead guilty). Tom aka Rusty Rustbelt

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Weapons That Didn’t Work Out

by reader ilsm
The Campaign to Preserve Pentagon Waste is in High Gear:

From Forbes, Defense Advocate Loren Thompson:
 
How To Waste $100 Billion: Weapons That Didn’t Work Out

One of the most unsettling facets of federal finance is the way the government devalues past investments. The political system is so focused on the next budget — and the next election — that it ignores sunk costs. Thus, every program termination is considered “savings,” without regard to the money that was spent to get the project in question to its current state.”
“This fiscal myopia is especially pronounced in the defense budget, where the government makes most of its capital investments. Cancellation of weapons systems that have been in development for a decade or longer is typically greeted as evidence that policymakers have made “hard choices” and had the courage to stand up to the “military-industrial complex.” The fact that previous administrations may have spent billions of dollars trying to satisfy a valid military requirement is barely mentioned — as is the fact that future administrations will have to spend additional money starting over on a replacement project.

Thompson is not an economist. More here.

What Thompson is advocating is to continue throwing good money after bad, which is poor economics; decisions on future “investments” need to be made on the performance of the project and the continued need for the projects’ performance. Neither are evident in the “defense” cuts that do indeed go against the jobs and PAC funding of the “military-industrial complex.”
For example, the F-35 should be killed based on failed tests, over runs delays and dangerous outcomes in several critical safety issues.
Walking away from the $50B is a problem for Thompson, but it will free up nearly $1000B in the next 20 years for uses that work, and benefit the US.
The “don’t throw good money after bad argument” was made in “Of Mice and Economics Dan Seligman, Forbes Magazine, Aug 28 1998 (Dan here…Also see Naked Capitalism US Wars are far from over)

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Ian Ayres on the Brandeis Tax

by Linda Beale

  Ian Ayres on the Brandeis Tax

I’ve often argued here that vast inequality is harmful to democracy, and that the kind of unequal society that we have today, reflected the Gilded Age of yore, is especially worrisome.  Much of what is happening in this country that threatens freedom and economic suffering for many is related to the vastly unequal incomes and wealth of the top 1% compared to the rest of us.  Oligarchy finds it easy to flourish in such a society, and democracy struggles to keep its head above water.  The corporatist agenda that favors big business (and its owners) facilitates the capture of the state for the benefit of the rich–lobbyists swarm legislators, and campaign funding by corporations floods the airwaves with repetitive (and hence believed even if untrue) messages favoring corporatist allies.

The main defenses that a society has against such developments are twofold:  1) a strong sense of community that incentivizes the uberrich to give a good bit of their wealth away to help the community and 2) a strong tax system–especially estate taxes and other taxes that fall primarily or exclusively on the uberrich as a way of skimming off the excess rents they have acquired because of their status and unrelated to genuine merit or hard work.  {As Elizabeth Warren said, nobody can claim to have earned all they earn without the help of the state, and the wealthy in particular depend on the state to protect their property and even their status.)  Hence I talk here of democratic egalitarianism and my view that equilibrium is not a realistic state so redistribution is always occuring.  Most redistribution will be ‘upwards’ for the benefit of those at the top, unless democratic institutions push for a rebalancing redistribution ‘downwards’ to assist those in the middle and lower income groups.

Ian Ayres has a series of postings on a proposed “Brandeis” tax intended to impose limitations on the inequality gap.   
Don’t tax the rich, tax inequality itself, New York Times, Op-Ed, Dec. 18, 2011.

In 1980, the wealthiest 1 percent of Americans made 9.1 percent of our nation’s pre-tax income; by 2006 that share had risen to 18.8 percent — slightly higher than when Brandeis joined the Supreme Court in 1916.

Congress might have countered this increased concentration but, instead, tax changes have exacerbated the trend: in after-tax dollars, our wealthiest 1 percent over this same period went from receiving 7.7 percent to 16.3 percent of our nation’s income.
What we call the Brandeis Ratio — the ratio of the average income of the nation’s richest 1 percent to the median household income — has skyrocketed since Ronald Reagan took office. In 1980 the average 1-percenter made 12.5 times the median income, but in 2006 (the latest year for which data is available) the average income of our richest 1 percent was a whopping 36 times greater than that of the median household.
Brandeis understood that at some point the concentration of economic power could undermine the democratic requisite of dispersed political power. This concern looms large in today’s America, where billionaires are allowed to spend unlimited amounts of money on their own campaigns or expressly advocating the election of others.

There will be rich always: finding a new way to think about income inequality, Freakonomics, Dec. 20, 2011.

The vast shift in national income toward our richest 1 percent is especially vivid if their income is expressed in terms of the median household income. Indeed, an important goal of our op-ed was to suggest a new unit of measure, “medians” to help us think about what it means to be rich. In 1980, if you earned 3.8 medians, you were in the top 1 percent, but by 2006 even the poorest in the 1 percent club earned 6.9 medians.
What we call the “Brandeis Ratio,” the average income of the richest 1 percent (which includes the billions earned by the lucky few) has grown even more disproportionate. As shown in the chart below, in 1980, one-percenters on average made 12.5 medians, but in 2006 (the latest year in which data is available) the average income of our richest 1 percent was a whopping 36 medians.

An inequality tax trigger: the Brandeis Ratio explained, Freakonomics, Dec. 21, 2011.

A central idea behind our Brandeis tax proposal was to have a tax that is triggered by increases in inequality. Our Brandeis tax does not target excessive income per se; it only caps inequality. Billionaires could double their current income without the tax kicking in — as long as the median income also doubles. The sky is the limit for the rich as long as the “rising tide lifts all boats.” Indeed, the tax gives job creators an extra reason to make sure that corporate wealth does in fact trickle down.
***
As emphasized by Lawrence Lessig in Republic, Lost (presaged somewhat in Ayres’ book with Bruce Ackerman, Voting With Dollars), the bulk of campaign finance dollars comes disproportionately from not just the 1% club, but the richest one-half of one-percenters.  Focusing on the average income of one-percenters is a good proxy for the rising political power of plutocrats.

Of lags and caps: possible implementations of a Brandeis Tax, Freakonomics, Dec. 26, 2011 (discussing potential ways to deal with bunching of income and the question of work disincentives–see my earlier post on Greg Mankiw).
originally published at  http://ataxingmatter.blogs.com/tax/2011/12/ian-ayres-on-the-brandeis-tax.html

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Guest post: Who Are the 1%?

Update: Mike Konczal also takes a  look at this question in Who are the one percent and what do they do for a living.


Update 2: Another source for historical trends on inequality is at The Center for Budget and Policy Priorities

by Taryn Hart 
    
Taryn Hart publishes at her blog Plutocracy files and has interviewed John Quiggen, Bill Black, Larry Mishal to name three economists

Guest post:    Who Are the 1%?

A week or so back, Dan from Angry Bear passed along this Boston Globe article. On its face, the article bemoans rising inequality through a comparison of two Massachusetts neighborhoods: Sherborn, the State’s wealthiest neighborhood and Springfield, a former working-class neighborhood that now resembles a globalized ghost town. Although the article quotes a Sherborn resident disavowing his status as a one percenter, the piece clearly implies that the upscale Sherbornites are one percenters.
However, as Dan correctly pointed out, Sherbonites are not the one percent: The median income of Sherborn is $190,000 per year; not peanuts, I know, but the lowest paid one percenters make $500,000 per year (even using a significantly narrower definition of income, one percenters make in excess of $330,000 per year). Moreover, the biggest gains over the past thirtyodd years have gone to the top .1%.
When Occupy Wall Street identifies its opposition as the 1%, it’s not talking about people who live in posh neighborhoods with great schools; it’s talking about people who can hire teams of lobbyists who live in posh neighborhoods with great schools. As Gordon Gekko put it:
I’m not talking a $400,000 a year working Wall Street stiff flying first class and being comfortable, I’m talking about liquid. Rich enough to have your own jet. Rich enough not to waste time. Fifty, a hundred million dollars, buddy. A player, or nothing.
And keep in mind, that’s 1980s dollars. Given the scandalous increases that have gone to the top 1% since then, the amount required to be a player these days is several times that amount. And the problem with that kind of concentration of wealth is that it inevitably undermines the incentive for collective action required for social well being.
As Matt Taibbi has pointed out in response to the one-percenter meme that those who are so poor they don’t pay federal income tax have “no skin in the game,” concentration of wealth creates perverse incentives that ensure most of the mega rich are terrible citizens:
The very rich on today’s Wall Street are now so rich that they buy their own social infrastructure. They hire private security, they live in gated mansions on islands and other tax havens, and most notably, they buy their own justice and their own government.
            *            *            *
Most of us 99-percenters couldn’t even let our dogs leave a dump on the sidewalk without feeling ashamed before our neighbors….
But our Too-Big-To-Fail banks unhesitatingly take billions in bailout money and then turn right around and finance the export of jobs to new locations in China and India. They defraud the pension funds of state workers into buying billions of their crap mortgage assets. They take zero-interest loans from the state and then lend that same money back to us at interest. Or, like Chase, they bribe the politicians serving countries and states and cities and even school boards to take on crippling debt deals.
Nobody with real skin in the game, who had any kind of stake in our collective future, would do any of those things.
Nobel Prize-winning economist Joseph Stiglitz made the same point in May of 2011 (well before Occupy Wall Street), in a must-read Vanity Fair piece entitled, Of the 1%, by the 1%, for the 1%”:
[A] modern economy requires “collective action”—it needs government to invest in infrastructure, education, and technology…. America has long suffered from an under-investment in infrastructure (look at the condition of our highways and bridges, our railroads and airports), in basic research, and in education at all levels. Further cutbacks in these areas lie ahead.
None of this should come as a surprise—it is simply what happens when a society’s wealth distribution becomes lopsided. The more divided a society becomes in terms of wealth, the more reluctant the wealthy become to spend money on common needs. The rich don’t need to rely on government for parks or education or medical care or personal security—they can buy all these things for themselves. In the process, they become more distant from ordinary people, losing whatever empathy they may once have had.
Be clear: This is who Occupy Wall Street is talking about – the small class of people who have amassed so much wealth that they have no need for the social infrastructure that is the life blood of the 99% (even the 99 percenters who live in swank neighborhoods like Sherborn, Massachusets).
And suggesting that Sherborn is the 1% and Springfield is the 99% – when they’re both the 99% – seems designed to falsely frame the problem of inequality as the poor (Springfield) versus the well-to-do (Sherborn). Of course, in the realm of those set on denying or deflecting inequality concerns, improperly defining the opponents of the 99% is fairly mild. (See discussions of income-inequality deniers here and here). However, this particular sleight of hand has made more than one appearance of late and therefore, is worth reviewing a bit more closely.
David Brooks recently distinguished what he termed “Blue Inequality” of the mega rich from “Red Inequality,” which Brooks claims results from an education gap and is “much more important.” According to Brooks: “The zooming wealth of the top 1 percent is a problem, but it’s not nearly as big a problem as the tens of millions of Americans who have dropped out of high school or college….”
As Dean Baker immediately pointed out, Brooks’s Blue Inequality/Red Inequality thesis is absolutely unsupported by the data:

David Brooks Complains That He Can’t Get Access to Inequality Data

Actually he didn’t complain about his lack of access to data, but he probably should have given the column he wrote today.
Let me just pause for a moment to say: Snap! Good on Dean Baker for pointing out that Brooks’s argument flat-out ignores well-known inequality data. Alright, back to Baker:
Brooks purports to lecture the Occupy Wall Street crew about how they are focused on the wrong inequality.
He tells them that that there are two inequalities in the U.S. On the one hand we have the CEOs, the Goldman Sachs crew, the lobbyists and the other members of the one percent who have done incredibly well in the last three decades. Brooks calls this the “blue inequality”….
Brooks tells us that this is less of a big deal than the red inequality, which he defines as the gap between college educated workers and those without a college degree….
This is where Brooks lack of access to data is so important….
[S]ince the 90s, the wages of workers with high school degrees have not departed much from the wages of workers with just college degrees, the vast majority of the economys gains have gone to the top 1 percent.
Despite the blatant lack of empirical support and Dean Baker’s decisive take down, Megan McArdle dutifully picked up on the trope. And, of course, the Boston Globe piece highlights the education gap between the residents of Springfield and Sherborn and implies the gap between two communities is the result of the “one percent phenomenon.” However, these arguments – and, more often, implications – are clearly undercut by the data.
The mega rich Occupy Wall Street opposes do not live in “neighborhoods,” not even well-to-do neighborhoods like Sherborn. The top 1% – and probably more accurately the top .1% – live in gated mansions with private security. As Joseph Stiglitz and Matt Taibbi have pointed out, the mega rich have reached a level of wealth that completely insulates them from society. So, don’t be fooled: Occupy Wall Street is not opposed to the affluent. Residents of Sherborn and similar affluent communities – like all citizens who still have a stake in our country’s well being – are part of the 99%.

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