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

Chris Hayes Explains the PPACA for Fox and Friends

Obama Care for Fox News and Friends


Not that they have any interest in reality at the moment. The Republicans have worked themselves into a frenzy that resembles the adolescent girls who accused the Salem townspeople of witchcraft at this point. This is how they look:


Maybe it is time to take away the beer? Hat Tip to Digsby

Tags: Comments (2) | |

The Inflation game (part 2 and wonkish)

Whereas David Romer will say that the low inflation rate is a result of the zero lower bound. I would say that BOTH the low inflation rate and the zero lower bound result from the weak consumer liqudity due to very low labor share.

In the previous post, I wrote about how inflation is a game of cat and mouse between the prowess of consumers’ liquidity and firms’ prowess to manage products and prices. I presented the equation for inflation’s tendency to rise or fall…

Inflation tendency = liquidity prowess of consumer dollars/production prowess of firms

  • If the numerator and denominator are equal, then inflation will be constant. (Equal inflation tendency = 1)
  • If liquidity power of consumers is stronger, then inflation will tend to rise. (Positive inflation tendency > 1)
  • If production prowess of firms is stronger, then inflation will tend to go lower. (Negative inflation tendency < 1)

I want to go deeper into what shapes inflation. I will refer to this equation during the post, but first, a look at inflationary gaps.

Inflationary gaps define the top side of a business cycle, when real GDP is closer to its natural limit determined by the effective demand limit. It is called the inflationary gap because inflation was seen to occur with it, or at least that’s the way it was in the past. In the effective demand research, the inflationary gap occurs when capacity utilization is more than effective labor share. The downside of the business cycle is called the recessionary gap, but I might call it the anti-inflationary gap.

All graphs use quarterly data. Inflation is CPI less food and energy. (Link to inflation graph at FRED.)

Inflation 1

Link to graph #1: Inflationary gaps past and present.

In graph #1, the yellow dots identify the inflationary gaps, when capacity utilization (blue line) is higher than effective labor share (tan line). You can see that inflation (yellow line) increased after the peak of the inflationary gaps in the 1970’s. Inflation also fell in the recessionary gaps (anti-inflationary gaps). But inflation rose just a little after the inflationary gaps in the 1980’s, and barely at all for the last 20 years.

Why did inflation stop occurring with inflationary gaps?

Above I presented an equation for the tendency for inflation to rise or fall. Well… How do we know who has more prowess in the market, consumers or firms? The measurement I use comes from what I call the optimal level of the Super macroeconomic potential GDP. (If you want to read about it, here is the link. The explanation is wonkish.)

Here is the equation used for evaluating who has the greater prowess, consumers or firms…

Cu equil eq  Link to equation.

The equation gives the optimal level of capacity utilization (cu*) at any moment for the economy. The independent variables in the equation are effective labor share (els), real GDP (Y) and a business cycle amplitude constant (a) in terms of real dollars.

Since capacity utilization rises and falls through the business cycle, the optimum point represents the center of the business cycle, where capacity utilization is equal to effective labor share. If effective labor share is on balance above the optimal capacity utilization, capacity utilization will be over optimal. Thus, when labor share is too high for optimality, the implication is that the prowess of labor’s liquidity is greater than the prowess of firms to manage products. And inflation will tend to rise.

On the other side, when effective labor share is below the optimal level of capacity utilization, capacity utilization will be lower than optimal on balance and firms will have the greater prowess to make the inflation tendency negative. In this situation, real GDP rises upon a lower utilization of capital and labor which manifests as high corporate profits. Labor share falls to a level which is not optimal for the economy, but corporate profits will rise. The lower labor share means lower liquidity prowess for consumers, and greater prowess of firms in an atmosphere of high unemployment. As labor and capital become under-utilized, a dead-weight loss to society develops.

Inflation 2

Link to graph #2: Optimal level of labor share.

Optimal capacity utilization (brown line) has been rising through the years to currently around 88%. However, labor share has been falling. Effective labor share was above optimal in the 1970’s, which gave consumers the prowess edge in the market. The 1970’s was a time of positive inflation tendency. But ever since the 1980’s, effective labor share has been below the optimal level giving the edge to firms to control and subdue inflation. Effective labor share has fallen to around 74%.

The rising of the optimum level of capacity utilization to such a high level indicates that the US economy has matured. The focus since the 1980’s should have been on distributing more national income to consumers, and letting the consumers save their money for investment. Lessons to learn… Now monetary policy is dead, but that is another issue.

You can see at the end of 1990, that as effective labor share disengages from the optimal line, inflation begins to fall flat for years afterward.

Comparing effective labor share to the optimal level of capacity utilization allows us to identify a period when inflation tended to rise, and the current era when inflation tends to fall. Inflation was more volatile when effective labor share was higher than optimal. Consumers had the power to purchase at higher prices and the dynamic was harder to control. But there are other problems now.

(note: Milton Friedman’s complaints about the power of labor and the minimum wage came at a time when labor had more power than business. But the tables turned during the 1980’s and now his complaints would be inappropriate.)

So far we have looked at two factors that have affected inflation over the years.

  1. the inflationary gaps which used to have more effect.
  2. the optimal level of effective labor share which shows the shift in prowess from consumers (labor) to firms.

But there is another factor, which adds more insight into the shaping of inflation… The natural rate of interest.

Many economists use the real rate of interest and expected inflation in their models for inflation, as does David Romer. It is easier to determine the real rate than the natural rate. Yet, I have a way to determine the natural rate of interest from the effective demand monetary equation. (Here is a link for an explanation. Again wonkish.)

The equation for the natural rate of interest is…

Natural rate of interest (center of business cycle) = z * ((ea-un)2+e2) – (1-z) * (ea-un+e) – it

z = z coefficient to position monetary framework (z shifts as the effective labor share anchor shifts.)
ea = Effective labor share anchor (currently 74%)
un = natural rate of unemployment (assumed to be 5% in equation, 7% since 2009)
e = effective labor share
it = inflation target in Fed monetary policy (assumed to be 2% in equation)

The natural rate of interest is very helpful to have, if you can get it. The natural rate of interest that I calculate is for the center of the business cycle. To be clear, it is for the point in the business cycle between the recessionary gap and the inflationary gap. I could also calculate the natural rate of interest at the LRAS curve where real GDP hits the effective demand limit, but I want to focus on the inflationary and recessionary gaps in this post.

If the economy was in balance at the point between the recessionary and inflationary gaps, then the Fed funds rate would theoretically equal the natural rate of interest to keep the economy in balance. During a recessionary gap, the Fed funds rate would theoretically be below the natural rate of interest in order to support the economy to recover from a recession. During an inflationary gap, the Fed funds rate would theoretically be above the natural rate to control over-heating of the economy and to control inflation.

So what do we see when we compare the Fed rate to the natural rate of interest?

Inflation 3

Link to graph #3: The natural rate of interest and the Fed rate.

The Fed funds rate is the green line. The natural rate of interest (center of business cycle) is the brown line. Back in the 1970’s and 1980’s, the Fed rate was always above the natural rate of interest, whether in an inflationary or recessionary gap. Such was the fervor to control inflation. During the 1990’s, the Fed rate stayed close to the natural rate, even as it rose to battle the double inflationary gaps in 1995 and 1997, even when there wasn’t any inflation to speak of. Since the 2001 recession, the Fed rate is spending much more time below the natural rate, so is the inflation rate too.

You might notice that the natural rate of interest (brown line) mirrors the effective labor share rate (light tan line). The mechanism is as labor share rises, there is more liquidity for consumption, which gives consumers a greater prowess to raise inflation. The natural rate will rise to balance that effect and show that the Fed rate should rise a bit more to control that relatively positive inflation tendency.

I want to put all the lines into one graph and make a few more comments…

Inflation 4

Link to graph #4: All variables in one graph.

  • It is implied that if labor share was now at the same level it was at in the 1970’s, there would be less positive inflation tendency due to a higher level of optimal level of capacity utilization.
  • Inflation moved below the natural rate of interest near the end of 1997, the same time that capacity utilization fell for good below its optimal level.
  • In 2006 and 2007, the Fed rate was over the natural rate during the inflationary gap, which would have been normal in years past. However, inflation had hardly moved and the Fed looks to have over-reacted. The Fed could have kept the Fed rate lower and allowed a bit more inflation. Some criticize the Fed for being too tight. It depends on how you look at it.
  • Currently we are in an inflationary gap, and inflation has been ticking down. Labor share fell first, but now labor share will stay steady. Inflation will most likely stay steady and rise a bit from here. There is not much danger of deflation.
  • Just as the Fed rate stayed over the natural interest rate back in the 1970’s and 1980’s, the Fed rate will now want to stay below the natural rate due to a strong negative inflation tendency. The Fed rate will now be stuck on the zero lower bound, as long as the effective labor share stays so far below optimum. The inflation tendency will stay negative for quite some time it looks like.

And what will happen to the natural interest rate that seems to be falling? It will stabilize around 2%. The variables in the equation for the natural interest rate are stabilizing. However, if labor share starts to rise again, the natural interest rate will rise too. If labor share falls even more, the natural rate would push lower, which wouldn’t be advisable. A lower natural rate would represent a really sick economy.

Tags: Comments (0) | |

Cruz, Tea Party, Hostage-Taking Budget Tactics (and the IRS)

by Linda Beale

Cruz, Tea Party, Hostage-Taking Budget Tactics (and the IRS)

The House, dominated by Tea Party/GOP politicians (or those fearful of their impact on upcoming primaries) passed a bill that attempted to tie the continuing operations of the government to compliance with Tea Party ideas about getting rid of the health reform legislation duly enacted four years ago.  See Weisman, House Bill Links Health Care Law and Budget Plan, New York Times (Sept. 20, 2013). Ted Cruz has now run his non-filibuster filibuster in the Senate, and then voted against his own “principled” filibuster position (presumably out of a quite justifiable fear that he would be shown for the fool he is as the only one voting in support of his “principles”, since the Senate vote was unanimously on the other side). Ted Cruz Filibuster, NY Daily News (Sept. 27, 2013).

Tags: Comments (6) | |

Lunatic Centrist’s Alternate* Reality

Over at the almost always excellent Wonkblog, Lydia DePillis interviewed World Fuel Services chairman Paul Stebbins.

Stebbins was “involved with Fix the Debt from the very early stages” so it isn’r surprising that Paul Krugman is unimpressed. I am less favorably impressed. I believe the interview contains a 100% false extremely damaging accusation against the AARP and constitutes libel.

Stebbins “And AARP is telling every Democratic member of Congress, ‘if you even mention the word entitlement reforms, which is all that throw grandma into the snow stuff, we’re going to raise $5 million and beat you in a primary.’ ”

A screen capture from the AARP October 2012 code of conduct (warning big pdf)


Also note you can apply to be a member of the AARP board (warning smaller pdf) but must accept among other things, the following condition “AARP Board Members may not take part in any public political or partisan activity that we believe may be construed by the public as an AARP endorsement of political parties, incumbents or candidates for federal, state or major municipal offices.”

Since he lives in crazy centrist alternate reality, Stebbins just must claim that both sides do it. Thus he recklessly made a completely false potentially damaging accusation. I don’t think that people who have such contempt for the facts have a useful role in the policy debate.

DePillis unfortunately not only let the false asssertion pass, but also asserted in her own voice that the AARP funds candidates.

“LD: So now having realized your naivete, are you going to play the same game as the Club for Growth and AARP and fund candidates who agree with you?”

This would be conduct inconsistent with AARP’s tax status. They both casually accused the AARP of breaking the law. Googling during an interview is rude, but wonks at wonkblog should not make assertions of fact without checking (it took me less than 5 minutes of googling starting with AARP).

The interview contains false and potentially very damaging assertions. Stebbins demonstrates reckless disregard for the truth. DePillis didn’t have time to check the claim so wonkblog will only demonstrate reckless disregard fot eh truth if they don’t publish a correction. Wonkblog has very high standards. Interviewing people who have contempt for the facts is challenging, but this interview just isn’t up to their standards.

*typo corrected

Comments (8) | |

The Lone Star Strategy or The House that Conservatives built

Having heard Senator Sander’s discussion on the floor, I thought the outing of the republican vision for this nation in total should be preserved on the net in writing.  People hear bits and piece but never put the entire picture together.   Maybe reading the list will help people picture the finished house the conservative mind is working overtime to build.

It’s like the HGTV show Property Brothers.  I am always amazed at the inability of the people to see the potential results when they are shown a property that has the foundation needed to realize their desire of what a home should have and be. The new home owners have presented a list of wants.  They are unable to see how their wants fit with the properties shown.  Then the brothers show them the CAD visuals and the people get it.  Yet even during the building out of the project, the new owners struggle with accepting the completion will be what they envisioned and saw in the plans.

We’ll, here is the version of what the conservatives (not just republicans, but the libertarians and New Democrats) have in their minds for an ideal America. As you read it, keep in mind what you would like to see in the house, what you would like to have it feel like :

1. An orderly transition to individual private retirement accounts and the elimination of Social Security.

2. Privatization of Veterans health care.

3. Abolish all federal agencies who’s activities are not enumerated in the constitution including the department of education and the department of energy.

4. Oppose mandatory kindergarten

5. Abolish the EPA

6. Abolish the 16th amendment and thus get rid of the IRS to be replaced with a national, state collected sales tax.

7. Abolish the capital gains tax and estate tax.

8. Repeal the minimum wage.

If you are struggling with what this list means regarding the way your house will look, the way your house will flow as you walk in it you best start talking to people who might be able to help you imagine it.  You might want to ask these planners/builders exactly what the results will be and do not let them speak in generalities.

If this plan is not what you are envisioning, then you best inform the designers and builders.   There will not be a CAD plan presented so that you can have an idea of what this list results in, there will only be the reality of the list as the door is opened to this new home.

To help you imagine the experience of living in a home based on the above list of requirements I present Bill Moyers essay of 9/27/2013:  Joblessness is killing us

Bill Moyers Essay: Joblessness is Killing Us | Moyers & Company |

Tags: , , , , Comments (6) | |

Water, Mars. and curiosity

Curiosity’s SAM Instrument Finds Water and More in Surface Sample
Sept 26, 2013

The first scoop of soil analyzed by the analytical suite in the belly of NASA’s Curiosity rover reveals that fine materials on the surface of the planet contain several percent water by weight. The results were published today in Science as one article in a five-paper special section on the Curiosity mission.

“One of the most exciting results from this very first solid sample ingested by Curiosity is the high percentage of water in the soil,” said Laurie Leshin, lead author of one paper and dean of the School Science at Rensselaer Polytechnic Institute. “About 2 percent of the soil on the surface of Mars is made up of water, which is a great resource, and interesting scientifically.” The sample also released significant carbon dioxide, oxygen and sulfur compounds when heated.


Mosaic image of Curiosity.


Comments (1) | |

October 1st, A New Republican Proposal, and the Bad News Bears

October 1st, the country and government will once again be held captive by minority political interests seeking to force their will upon a country which did not endorse them or their beliefs in the last election. Radical House Republicans have come back with another proposal which seeks to delay the PPACA for one year, removes the medical device taxation to appease the healthcare industry, and adds Huelskamp’s “conscience clause” to the amendment limiting the coverage of preventative birth control. Funding for the military was included in the latest amendment. This is a radical change from John Boehner’s efforts to concentrate on setting a new Debt Ceiling rather than funding the PPACA. The Republican’s actions strip those of healthcare coverage who can least afford it. Much of what is proposed by the Republicans lends credence to Independent Senator Bernie Sander’s speech “Lone Star Strategy.”

Republicans’ efforts to cut food stamps and defund the Affordable Care Act are just “the beginning of the game,” Senator Bernie Sanders said.

“All of these issues are related to something that is much, much larger and that is the transformation of American society in a radically different way than it is today,” Sanders said. “And what my Republican colleagues, almost without exception, want to do now is take us back to the 1920s where working people had virtually no protection on the job at all.”

In the midst of all of this, the Federal Government is releasing preliminary information on PPACA subsidies and coverage by states.

Obamacare and The Bad News Bears; Maggie Mahar; Health Insurance Org.

Why is the mainstream media downplaying the good news about affordable insurance rates in the state health insurance exchanges?

Yesterday, when I read the new HHS report on premiums in the individual exchanges in 36 states, I was impressed by the good news. In the marketplaces where people who do not have access to employer-sponsored insurance will be purchasing their own coverage, rates will be much lower than expected. This is true even in Red States that have resisted Obamacare. For instance in Houston, Texas, a 27-year-old earning $25,000 would pay $81 monthly for the least expensive Bronze plan – after using his government subsidy – while a family of four with income of $50,000 would owe just $52. What we are seeing is “reverse sticker shock.”

Then I began to read what the press had to say about the report, and found myself frustrated by the misleading, fear-mongering response. It sometimes seems as if the mainstream media is bent on downplaying any good news about reform.

Was it wrong for HHS to focus on costs?

Even the New York Times – a highly-respected publication that is often viewed as “liberal” – took a dour view, warning that “the data” in the HHS report on premiums “provides only a partial picture of the reality that consumers will face  … The figures, almost by definition, provide a favorable view of costs, highlighting the least expensive coverage in each state.”

What Times reporter Robert Pear overlooks is the fact that the vast majority of individuals shopping in the exchanges live in middle-income or low-income households. (More affluent Americans tend to have access to comprehensive insurance through their employer, a spouse or their parents.)

What folks purchasing their own coverage in the state marketplaces want to know is what the least expensive Bronze and Silver Plans will cost. Those are the plans they will be buying, and that is why the HHS report focuses on those policies.

Ignoring ACA’s subsidies

Pear goes on to stress how much premiums will vary – even within a given state – and how high they will be in some cities: “… a 40-year-old buying the least expensive silver plan would pay $240 a month in Los Angeles, but $330 in Sacramento, about 38 percent more.”

True. But Pear doesn’t take into account the fact that most Americans shopping in the exchanges will be eligible for government subsidies. They won’t be paying $240 or $330 a month. Thanks to the government help, some 60-year-olds will have to pay nothing for insurance.

Indeed, after applying his subsidy, a 40-year-old living on $22,980 in either Los Angeles or Sacramento would pay only $120.65 a month for coverage. This is because the lawmakers who wrote the Affordable Care Act believed that someone earning $22,908 should not be expected to spend more than 6.3 percent of his income on insurance. As the table in this post shows, the IRS will calculate tax credits to make up the difference between the percentage of income that someone is expected to contribute and the “sticker price” on a Silver plan.

Forbes columnist Avik Roy also ignores subsidies when writing about the HHS report. This allows him to claim that the newly announced rates will force individuals buying their own coverage to shell out 99 percent more than they are paying today.

Moreover, when Roy compares today’s rates to the premiums that individuals purchasing their own insurance will pay next year, he overlooks the fact that many of the plans now sold in the individual market are “bare-bones” plans. Most don’t cover maternity benefits. Some don’t pay for chemotherapy. Many carry huge deductibles. When he compares the policies that will be sold in the exchanges to these plans, Roy is not making an apples-to-apples comparison. He is comparing apples to rotten apples.

Narrow networks

Meanwhile, Pear appeals to his readers’ worst fears by cautioning that, according to “consumer advocates … people shopping for health insurance should consider not only price, but also other factors like the list of covered drugs and the doctors and hospitals available in a health plan.”

Not long ago, the Times reported on the dangers of insurance plans with “narrow networks” that may not cover the doctors and hospitals that a patient knows best. The truth is that most of the currently uninsured and underinsured Americans who will be shopping in the Exchanges don’t have a list of favorite specialists. Many don’t have a doctor; when they receive care, they are treated in an ER or a community clinic.

Polls also show that the young Americans who will be flooding the exchanges are three times as likely to be willing to give up their choice of doctor for a lower premium.

Insurers are holding down premiums by excluding marquee healthcare providers who charge more than others for the even the simplest procedures. The Times has suggested that, in “narrow networks,” patients with “complex conditions” may not be able to get the care they need.

In fact, the Obama administration addressed that problem last year, issuing a “rule” that ensures that networks will not be too narrow. In order to win state and federal approval insurers will have to show that their network includes “a sufficient number and type of providers.”

Meanwhile, study after study shows that there is little correlation between what a health care provider charges an insurer and the quality of care provided. Pricing is all about market clout. Some hospitals charge more “because they can.”

But Americans can no longer to afford to pay exorbitant prices for brand healthcare. HMOs that charge less if the patient stays “in network” fell out of favor in the 1990s, but today they’ve become increasingly popular. Indeed when Consumer Reports ranks insurers, HMOs that rely on a network of providers to coordinate patient care receive the highest rates both for quality of care and consumer satisfaction. Networks represent the future of American medicine – and not just in the exchanges.

Tags: , Comments (3) | |

Matt Yglesias says the median household is probably richer than the median household in 1989

by Robert Waldmann

Matt Yglesias says the median household is probably richer than the median household in 1989.  Oh that we have come to this.  Take the mike Matt

Despite rising health care and education prices, we don’t have fewer people going to college or seeing the doctor and we do have bigger houses, more and better cars, better food, and much better gadgets and entertainment.

Your case is very strong. The point is that neither the BLS nor the Bureau of the Census consider the increase in living standards due to new cool gadgets at all.  See DeLong on Baker arguing this is no big deal for the median consumer

When a new good is introduced, it is as if the price declines from infinity (you just can’t buy it because it doesn’t exist is just the same as you can buy it for infinity dollars because it doesn’t exist). But the price indices assume that the introduction of a brand new good makes no difference.  Effectively they assume that there is an old good which is a perfect substitute for the new good so people are indifferent between buying the old good or the new good for it’s new price.

Comments (4) | |


Lifted from comments at Naked Capitalism,

September 21, 2013 at 4:33 am

Henry Maxey in April 2007. This is frigging amazing work, and by an equity analyst, working at a UK money management boutique. In other words, somebody with not much, and probably no access to the guys on fixed income desks who were cranking out CDOs : Gillian Tett was close, she saw the tremendous leverage and lack of equity in CDOs and was trying to get to the bottom of the “wall of liquidity” that traders and hedgies were discussing in early 2007.

The FT only lets you go 5 years back but in the early days of my blog, I was bad and took way more than what is fair use, but the upside is that I have really good archives from the period before the crisis started: you just read the financial press in 2007 you could see it was gonna blow.

I grabbed a few posts from early in that year: (FYI it took two years of chipping away and looking for experts for me to get decent info on the structures)Read more at

The wonders of google’s vast collection of servers. I have excerpted the heart of the article below; please read the whole item and then have a peach mimosa for breakfast-in fact have a couple.

Comments (1) | |

Comment sections debate

LOL….  ah well, I hadn’t read the comment section of Kenneth Thomas’s and Maggie Mahar’s posts  before I put up the Popular Science post.     Lifted from comments.
September 25, 2013 12:00 am

Anything is more affordable especially when someone picks up the tab..

I sorry Ms Mahar, but you are a dolt for the administration…

Bruce Webb
September 25, 2013 12:54 am

Yes Hans that is exactly how upper middle class people afford health insurance – someone else picks up the tab. And the person/company that does pick up that tab actually gets a tax deduction for doing so, meaning that THEIR tab is partially picked up by every taxpayer. In fact the people who are really getting screwed under the current deal are those who make enough to actually pay taxes but whose employers provide them sub-standard plans with high deductibles even as executives routinely get what are known as ‘Gold Plated Plans’.

Comments (7) | |