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

Greg Mankiw on Bond Returns

Greg Mankiw had an interesting post today pointing out that bond returns calculated by the economist were incorrect.

Mankiw wrote:

Here is a question for students who are learning about compounding.  What is wrong with the following passage from The Economist magazine?

Investors who bought Treasury bonds in 1946, when yields were around current levels, did not suffer a formal default. But over the following 35 years they lost money in real terms at a rate of 2% a year. The cumulative real loss was 91%. By that standard, Greek creditors, who recently suffered a 50% loss via default, were lucky.

Answer: The second number is inconsistent with the first.  Note that .98^35=.49, so we get only a 51 percent cumulative loss.

In fact, the price level from 1946 to 1981 rose by a factor of about 5, so holding currency with a zero nominal return led to a real loss of only about 80 percent.

But Mankiw forgot one important element of calculating bond market returns.  Much of the total return for bonds is the interest on the annual interest payments and in a period of rising rates the returns will rise  as the interest payments  are reinvested at higher yields.  It is a bond market convention to assume that all the interest payments will be reinvested at the current yield.  They do that so they can actually calculate a valid price for the bond. But that is just a convention, and in a period of rising rates the returns will be higher than Mankiw calculates.

By omitting this point Mankiw is making just as serious an error as he is accusing the Economist of making.



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Strange logic to expectations

James Hamilton at econbrowser has a fascinating post titled, “Why isn’t inflation lower?”

He presents a paper titled, Is The Phillips Curve Alive and Well After All? Inflation Expectations and the Missing Disinflation, written by Olivier Coibion at UT Austin and NBER and Yuriy Gorodnichenko at UC Berkeley and NBER.

It would not be easy to summarize the post, so I will just take a snip-it from the abstract of the paper to give you an idea.

“If firms’ inflation expectations track those of households, then the missing disinflation can be explained by the rise in their inflation expectations between 2009 and 2011.”

The logic is that we did not have as much “disinflation or deflation” as might have been predicted between 2009 and 2011, because households were expecting inflation due to oil price increases.

In addition, they give a model of the Phillip’s curve that is consistent through the decades. That is really good work.

James Hamilton makes 3 wonderful conclusions at the end of his post as to why then it would be difficult for the Fed to stimulate the economy. . I want to respond to them.

1. “First, it makes it much more difficult for the Fed to try to justify its actions to the public on the grounds that inflation is currently too low.”

It seems that people do not connect with “Fed-speak”. People are on another page. They don’t measure inflation without food and energy as the Fed does.

2. “Second, if makes it harder for the Fed to stimulate the economy without raising inflation, particularly if one byproduct of stimulus efforts is an increase in the relative price of oil.”

I start from the premise that the Fed cannot raise inflation because there is no transmission mechanism to put more money in the hands of labor. People may be expecting more inflation without much ability to afford it. This creates insecurity. They resist higher prices even as they expect them.

3. “Third, it implies that ex ante real interest rates, if we base that concept on the perceptions of large numbers of economically important decision makers, are extremely negative at the moment, casting doubt on the claim that a primary policy objective should be to make them even more negative.”

Exactly… This is a profound conclusion with a weird twist of logic. Raising inflation would lower the real interest rate. Yet, higher expectations of inflation imply a lower real interest rate already. And still there is little budge to markedly improve employment and output. Even if inflation rose, it might not change the expected real interest rate, or it might snowball into higher and higher expected inflation.

People have no return on their savings. They are afraid to spend money because they see their balances going down. Normally when interest rates are held low, people are supposed to put money into cash and then spend it. But we see that people are not spending their cash. Why? They resist spending cash when there is no return on their savings. People are insecure about the future. People need to feel some return on their savings in order to feel secure about spending a little more. So it makes sense for the Fed to raise the interest rate, in order to raise returns on savings, and encourage people to spend more money to raise output.

The logic then is for the Fed to raise the interest rate in order to coax real output up…. and to heck with the immature and immediate reaction in the financial markets. They will learn to deal with it once they see balance returning to economic output.

Strange logic we are in nowadays…

I will end with an intriguing sentence from the paper by Coibion and Gorodnichenko.

“Regardless of the methodology employed, successfully characterizing how firms form their expectations strikes us as central to understanding more deeply the link between the nominal and real sides of the economy.”

In many situations, expectations are irrational. One cannot effectively deal with irrational expectations by being rational. One has to be willing to perceive an irrational solution as being rational.

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What is the line between public and private spending?

Via the Washington Post:

Here’s David Cay Johnston, interviewed by Joshua Holland (link from Joseph Delaney), in response to a question about “why we have a very low tax burden overall, relative to other wealthy countries, but a lot of Americans feel that they’re being taxed to death?”:

Well, one of the reasons some Americans feel they’re being taxed to death is that if you add up our taxes, which are low compared to other modern countries, and then you add in private expenditures for things the tax system pays for in other countries — a lot of our health care costs, higher education costs, admissions and fees and tickets and licenses for a lot of things — lo and behold, we end up being a relatively high-tax country. But it depends on how you analyze the data.

And let me give you one killer figure: We spend so much money on our health care in this country — or as I prefer to think of it, sick care in this country — that for every dollar that the other 33 modern economies spend for universal coverage, we spend $2.64. And this is done using something called “purchasing parity dollars,” so they’re truly comparable. So we spend $2.64 per person and still have almost 50 million people with no coverage and 30 million with limited coverage, and these other countries spend far less with universal coverage.

But what interests me (and Delaney) here is the difficulty of putting a line between public and private spending…

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Time to Eliminate the Debt Ceiling

by Linda Beale

Time to Eliminate the Debt Ceiling

As the post-shutdown resumption of talking in Congress gets underway and the days start counting down to the next debt ceiling deadline (perhaps brought along sooner by the delay in the tax filing startup, as discussed in the last post), I suppose we must all at least hope that the Tea Party Republicans will be held in check by less reactionary members of their party. Or will they pursue their hostage-taking strategy yet again in connection with the debt ceiling, attempting to gain by economic terrorism what they could not win in the regular legislative process or the resumed budget negotiation talks?

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Big Business and the Tea Party

Lifted from Robert’s Thoughts:

Who said it ?  2013 edition

“that which the American people have been waiting for for the last 200 years, politicians listening to the people instead of the ruling class”

That would be far right tea-partier Raul Labrador (R-Idaho)

The mountain West is red.  Red Staters vs the capitalist class.

In the same post Dave Weigel quoted a Texas businessman in the 1930s:

“The capitalist system can be destroyed more effectively by having men of means defend it then by importing a million Reds from Moscow to attack it,”

It is true that reds from Moscow Russia are not much of a threat to the capitalists system.  But red staters from places like Moscow Idaho practically destroyed it last week.
And yes, of course I found the Republican against the ruling class contrarianism in Slate. What did you expect ?  The Daily Right To Worker ?

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Insurers “Had a Seat at the Table” when Reformers Hammered Out the ACA, but Things Didn’t Work Out Quite As They Expected . . . –

Maggie and I have discussed this topic on several occasions and she tackled it here at: The Health Beat Blog. In the general public, it always surfaces as accusations of a sell out to the insurance companies. It is unfortunate we could not have Medicare for all or single payor; but, the political environment at the time was not conducive to such a venture.

What This Means for Health Insurance Stocks–and Your Premiums

When Congress passed the Affordable Care Act (ACA) in 2010, liberal critics feared that the Obama administration had “cut a deal” with for-profit insurers. Single-payer advocates,were particularly incensed when reformers invited the insurers’ lobbyists to the table to help hammer out the details of the legislation. Some charged that, in return for the industry’s support, the administration agreed to a mandate that would force 30 million uninsured to buy private-sector insurance (or pay a penalty,) thus guaranteeing carriers millions of new customers, and billions in new revenues.

“It pays to be one of the few sellers of a product the government is going to force everyone to buy and provides subsidies to help them do it,” one Obamacare opponent sniped.

Why Health Industry Insiders Were Offered Seats at the Table

At the time, I didn’t believe that the administration was selling out to the health care industry. Reform’s architects offered insurers, drug makers and device-makers seats at the negotiating table, in part because because they hoped to persuade them to help fund reform – and they succeeded.

Ultimately, the industry agreed to shell out over $100 billion in new fees and taxes to help fund the legislation. Those contributions are critical to financing subsidies for low-income and middle-income Americans.

The Obama administration also did not want to watch re-runs of the “Harry & Louise” television ads that helped torpedo “HillaryCare.” Here too, they prevailed. In a new series of 2009 ads, the make-believe TV couple were all smiles: “A little more cooperation, a little less politics, and we can get the job done this time,” Louise declares.

Still, some feared that the administration was giving away the store. “No wonder the cost of reform keeps going up and up and up,” said Bill Moyers. “Could it be” he asked, “that Harry and Louise are happier because, this time, they’re in on the deal?”

But Didn’t the Administration Capitulate On the “Public Option”?

Skeptics on the Left also believed that reformers agreed to quash the “public option”—a government insurance plan that would compete with private sector carriers.

The truth is that Connecticut Senator Joe Lieberman ( sometimes known as “the Senator from Aetna”) almost single-handedly killed “Medicare for Everyone.” When Lieberman said “I’m not going to let this happen,” Congress was on the verge of passing legislation that would let Exchange shoppers choose between a public option and private sector insurance.

Then, in the fall of 2009 ,Lieberman, who was supposedly a Democrat, stood up and brazenly announced that if reformers didn’t drop the public option from the plan, he might join the Republicans in a filibuster that would stop the health care reform bill come to the Senate floor. In other words, he was threatening tote kill reform.(At that moment in time, Lieberman could have drummed up just enough votes from moderate Democrats to help him do this.)

In October of 2009, I wrote:: “This is vintage Lieberman. He’s an opportunist. I knew him many years ago, back in Connecticut, when I was working for a a reform candidate in New Haven who was challenging the Democratic machine. Lieberman wavered on the sidelines, waiting to see who was going to win. He didn’t want to risk picking a losing team.” For Lieberman, politics was not about issues and what might be best for his constituents. It was all about Joe.

Was he doing the administration’s bidding?

Hardly.Lieberman and Obama were never soul-mates.. Indeed, in 2008, Lieberman, nominally a Democrat, appeared at the Republican convention where he endorsed John McCain– and criticized Obama.

In 2009, many observers agreed that Lieberman wanted to stop the public option, not just out of loyalty to the Connecticut insurance industry, but out of spite. He was still furious that Democratic party leaders allowed liberal Ned Lamont to run against him in the state primary. Lieberman wanted to “show” the Obama administration what happens to anyone who dares to cross him.

What Investors Did Not Understand

In 2012, two years after President Obama signed the bill, the myth persisted that the administration had gotten into bed with the insurance industry,. As proof, critics pointed out that from 2010 to 2012 Aetna’s shares gained 33%, market leader UnitedHealth Group soared 65% and Humana climbed 76% Clearly Wall Street knew that in 2014, insurers were going to clean up.

But strangely, in just the past two months–on the eve of the Exchanges’ opening– investor confidence has weakened:

What is going on?

Wall Street is beginning to figure out that under Obamacare, for-profit insurers are not going to make out like bandits.

Investors who drove carriers’ shares to record heights were misled by media reports that the White House had “sold out” to insurers. Meanwhile, they overlooked the many ways that Exchange regulations would whack carriers’ profit margins:

  • Insurers can no longer shun customers suffering from “pre-existing conditions”—and they cannot charge them more.
  • All policies must offer free preventive care.
  • The amount that a carrier can ask patients to pay out of pocket is capped.
  • But insurers cannot cap the amount they pay out in a given year, or over the course of a life time.
  • All Exchange policies must cover the 10 essential benefits—no more “Swiss Cheese” policies filled with holes.
  • Perhaps worst of all, from the industry’s point of view, if carriers don’t spend at least 80 cents of every premium dollar on medical care for individual and small business policyholders (85 cents for large groups), must send rebates to customers, letting them know they were overcharged.

In order to keep their seats at the table, insurers also agreed to pay annual fees to help fund reform. The fees begin at $8 billion in 2014, grow to 14.3 billion in 2018, and then rise to track any growth in premiums.

Finally, Wall Street ignored the provision in the ACA that reins in overpayments to Medicare Advantage insurers. Last week, when UNH announced earnings, it cited this as a reason it is lowering projections for next year’s profits.

Virtually No One Actually Read the Bill

Why didn’t investors recognize the many ways the ACA would squeeze carriers? Like most Americans, they hadn’t taken in the details that make the ACA both strong and complicated, with checks and balances embedded on virtually every page.

Most of the reporters who spread the rumor that the administration had “caved” to insures also hadn’t read the legislation: “Too long, too complicated, too many details,” they groused. It was easier to simply repeat what the grand generalizations that the pundits offered.

To be fair, by 2010, print journalists were trapped on a high-speed information highway where they were trying to compete with bloggers working in “real-time.” Flogged by editors who wanted the story “Now” the just didn’t have the time to hunker down with the Affordable Care Act.

Meanwhile, by then, most publications had eliminated the fact-checkers who would have realized that the text of the legislation was their only reliable “red check.”

I Was Just Plain Lucky

Fortunately, in 2010, I was no longer on staff of a daily newspaper or a weekly magazine. Back then, the non-profit foundation where I worked was run by old-fashioned bosses who gave me great freedom to do in-depth research– and try to make sure that what I wrote was true. As a result, I had the time to read the Affordable Care Act, more than once. That was my job. (When I explained this to Lou Dobbs, at first he was incredulous, then he laughed. But ultimately, I think he was convinced.)

Because I understood how the ACA’s regulations would hem in insurers’ profits, in the Spring of 2010, I wrote that under Obamacare, for-profit insurers would not be big winners. Quite the opposite.

How the Insurance Industry Mis-Calculated

Okay, maybe investors and reporters did not read the bill. But the insurers’ lobbyists did. After all, they were “at the table.” Why, then, did they swallow the new rules and fees that would

“Because there is nothing the health insurance industry wanted more than an individual mandate to force people to buy their product,” explains Consumer Watchdog’s Carmen Balber.

As the Center for Public Integrity (CPI) points out, when the reform law passed in 2010, “the Democratic Party controlled the White House and both houses of Congress. By supporting the law, the industry was able to stay in the game on a very complex piece of legislation.”

Privately, the insurers’ lobbyists believed that Obama would not be re-elected in 2012. Down the road, they assumed that conservatives would help them overturn the parts of the bill that they didn’t like. This is why, even while loudly professing their support for Obamacare insurers were quietly funneling two-thirds of their campaign contributions to Republicans.

As they hoped, by October of 2011, the political environment had changed dramatically. “Democrats no longer hold a filibuster-proof majority in the Senate, the House is controlled by Republicans and the president is in a tight race for re-election,” CPI noted.

Insurers now began publicly criticizing Obamacare. At this point they openly lobbied for new legislation that “would effectively gut” the provision that insurers must spend 85% of premiums on medical care.

But to the industry’s utter chagrin, in November, President Obama won.

Ultimately, carriers would lose on every provision in the Affordable Care Act that they had hoped to see repealed.

State Regulators Develop Spine

Then came the final blow: Last summer, as carriers began proposing rates for the policies they hoped to sell in the Exchanges, state regulators flexed new muscles.

The ACA had set aside $250 million for state insurance departments to support an “enhanced rate review process.” Meanwhile the administration encouraged regulators to get tough– and many clamped down..

In response to the federal law, Colorado, Maryland, New Mexico and New York, all passed legislation giving their regulators more authority to review health insurance rates.

Insurers selling plans in Portland, Oregon ultimately were forced to reduce their rates by nearly 10% on average. Three of the 12 insurance companies in that market had to lower their rates more than 20% compared with what they requested.

In Maryland, Aetna filed a proposal with state insurance regulators to raise its rates 25.4 percent, the highest of any carrier. The rate the state approved July 26 was 29 percent lower than what Aetna sought, while other carriers saw their proposals cut back by as much as 33 percent.

Aetna backed out of Maryland.

In the end,, Aetna also fled California, New Jersey, New York, Georgia –-and Connecticut. “As corporate identity crises go, this is like L.L. Bean quitting Maine or Apple leaving California–for the Moon ”The Wall Street Journal commented.

Aetna is now participating in Exchanges in just 16 states.

Even in states where regulators didn’t reject bids, the Exchanges forced insurers to compete on price. Brand-name carriers who able counting on high premiums to offset the costs of the new regulations soon realized they couldn’t compete with non-profit insurers who don’t have to deliver profits to investors.

For consumers, this is good news. When it comes to the quality of the care that they deliver, and customer satisfaction, non-profit carriers get the highest marks..

In the end, the biggest for-profit insures backed away from the exchanges. WellPoint wound up participating in Exchanges in only eight states. UnitedHealth will be peddling policies in four. .

“It’s almost surreal to see the most dominant company in the industry completely sitting out the launch of the . . . exchanges,” observes Deutsche Bank’s Scott Fidel.

Reportedly UnitedHealth is now eying insurance markets overseas.

So much for having a seat at the table

(Note to readers: A shorter version of this post appeared on Health

Soon, I plan to write about how drug-makers, device-makers and hospitals will fare under Obamacare, and where there shares are likely to be headed over the long term.

Maggie Mahar at The Health Beat Blog

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Oh Mein Gott! President Obama Lied . . .

Click on the title to view the YouTube link.

If you like your plan and doctors, you can keep them . . . even if it will cost you twice as much as it might under the PPACA . . . huh??? What idiot would pay more for a plan with similar or fewer benefits than under the PPACA with lesser cost? I guess some might on Angry Bear and other places as well.

Florida Blue CEO Patrick Geraghty plays the straight man to Meet the Press David Gregory Sunday morning and defended Obamacare. Florida Blue is dropping 300,000 policy holders because the healthcare plans do not hold up under the scrutiny of PPACA requirements, and, and the policy holders may be able to obtain similar or better coverage at the same or lower insurance rates.

Maybe we should impeach?

HT Crooks and Liars”

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Influence legislation…end bank welfare

Hat tip reader rjs:

Reps. Alan Grayson and John Conyers Call for End to Bank Welfare, Tough Rules on Bank Capital – Yves Smith – Congressmen Alan Grayson and John Conyers have published a well-thought-out proposal on bank equity, with the objective of assuring that when banks do stupid things (which they do with great regularity, even before the era of casino banking, they’d embrace some new fad and run off the cliff together, like lemmings), they have enough capital to absorb losses. And that means a lot more capital than regulators are demanding they have now.  So I urge you to co-sign their letter (full text below) at It’s already at 15,300 signatures towards a target of 17,500. This letter relates specifically to proposed rules by the Office of the Comptroller of the Currency on how much equity systemically important banks should hold, which means defining how the ratio is determined and how it is applied to various bank entities. This is the sort of process in which public interest has an impact; Sheila Bair in her book Bull by the Horns said a petition by this site that garnered 12,000 signatures influenced a mortgage reform proposal.

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Health Care Thoughts…Tom’s avalanche theory

by Tom aka Rusty Rustbelt

Health Care Thoughts: Knowns, Unknowns, Unknown Unknowns, Unintended Consequences

Tom’s Avalanche Theory– once an avalanche is started there is no controlling it

Some of the probable unintended consequences (?) of Obamacare are started to play out.

The convergence of 1) a mediocre economy, 2) a weak labor major and the 3) health reform avalanche are causing a sea change in the relationship between employers and employees.

Current higher deductibles and higher co-pays will eventually lead to much higher deductibles and co-pays and employers dumping employees into exchanges. HSAs will likely become more popular.

This risk** and financial shift will weigh heavy on the working middle class.

So what if Obamacare flops? Is repealed? The avalanche has started and cannot be stopped.

The consequences for the provider side of the equation in another post.

**Jacob Hacker’s book on risk shift is well worth the read.

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Health Care Thoughts: If you like your health care plan……

by Tom aka Rusty Rustbelt

Health Care Thoughts: If you like you health care plan……

“If you like your doctor, you will be able to keep your doctor. Period. If you like you health care plan, you will be able to keep your health care plan. Period. No one will take it away. No matter what.”
quote President Obama

A bold claim when made, highly unlikely then and very demonstrably false now.

If you like your health care plan, if your health care plan fits your needs, if your health care plan is priced right but does not meet “essential coverage” requirements, it is being canceled (or repackaged and repriced). Up to 85% of the individual policy market may be in jeopardy, with policy holders scrambling to find coverage by January 1. Some small businesses will fall into the same trap.

The convergence of a mediocre economy, a weak labor market and ACA is causing employers to embark on a massive “risk shift,” pushing higher deductibles and co-pays down to employees. Maybe the same policy number, but decidedly different economics.

Can I keep my doctor? Maybe. As coverage networks are redrawn, and in many cases narrowed, many will not be able to keep their physician coverage. Period.

The blow up of may turn out to be one of our smaller problems.

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