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Of Course the Safety Net Redistributes Income…That’s Why It Works

Via Economist View comes Mark Thoma’s statement

My latest column:

Of Course the Safety Net Redistributes Income…That’s Why It Works: Many conservatives have attacked social insurance programs such as Social Security and Obamacare because they redistribute income from the rich to the poor, the young to the old, or from makers to takers. But there is nothing unusual about the fact that insurance programs redistribute income among participants. If they didn’t, it wouldn’t be insurance.

Consider, for example, a case you may not think of as insurance at first, risk pooling in financial markets. …

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More On the Real Reason Healthcare Insurance Companies Are Now Encouraging Obamacare Enrollment

In light of some of the comments to my post yesterday arguing that that the real reason that healthcare insurance companies are now madly encouraging Obamacare enrollment is fear of a pro-public-option or pro-single-payer political juggernaut, I want to make clear that by single-payer I do not mean Medicare-for-all.   Single-payer would be, in essence, “the public option” extended to everyone rather than limited to the 5% of Americans who have private healthcare insurance through the non-group (i.e., non-employer-provided) market.  It is not tax-funded identical-for-all healthcare insurance, which is what Medicare is.  I do think that eventually this country will have Medicare-for-all-type healthcare insurance, but not in the near term.  If single-payer works well, then of course that would be the longterm solution, with no need for Medicare-for-all.

I also want to make a point about federalism as it relates to the ACA insurance-market exchanges and, especially, to Medicaid and, for that matter, to any other federal social-safety-network program.  I said in my post yesterday what I think is obvious: that federalism has been a disaster for Obamacare.  But I want to point out that the only reason that Medicaid works under current pre-Obamacare Medicaid is that that program came into being and was effectuated before the hard-right turn of the Republican Party.  Ditto for food stamps.  The really weird, but successful, argument by rightwing governors and state attorneys general to the Supreme Court in the ACA litigation on the Medicaid-expansion provision in the ACA is that, well, y’know, now that traditional Medicaid has been a part of each state’s law for decades, and is popular, it would be politically impossible for state legislators to end that program–the result under the ACA as the statute was written, if a state refused to agree to the ACA Medicaid expansion.  This, they argued–successfully!–meant that the ACA was effectively coercive of state  legislators and therefore infringed upon state sovereignty.  On that “ground,” the Supreme Court struck down that part of the Medicaid portion of the ACA.

That’s also known as the  conservatives-having-their-cake-and-eating-it-to theory of constitutional law.  The argument was so deeply hubristic that its actual success is stunning and outrageous.  But I have no idea why anyone would think that federalism must be a part of a national healthcare insurance law. It does not.

As for whether or not the public will catch on that the main problems with the Obamacare-exchanges-and-private-policies part of the Act is a failure of the healthcare insurance market and of the healthcare market itself–a question that several commenters raised–well, that was what my post was about.  Yes, the public will catch on, once the Dems have a smart, committed, knowledgeable and articulate spokesperson with a high enough national profile to educate them about it.  I expect that that will happen fairly soon.

Finally, although this should be the subject of a separate post, a hallmark of the current Supreme Court is how many really weird, outlandish rightwing arguments the current conservative-legal-movement five-member majority have made the law of the 50-state-soverign-lands.  As I said in an ignored post here last weekend, the Court’s neo-federalism-on-steroids jurisprudence has quietly but profoundly and thoroughly upended federal-in-relation-to-state constitutional law as it had existed since the post-Civil War era. This is a deeply dangerous juggernaut.

I wish more readers would read that post.  It does deal with really important stuff. Honestly.

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Tapering would raise borrowing… Forward guidance needs some psychological bite

An article came out in the WSJ web site called Lenders Look to Fed Tapering to Lift Business Borrowing.

One would think that tapering would discourage borrowing. Yet, we are in a situation where long-term low interest rates suppress borrowing. Here is the key line from the article referring to tapering…

“Such a move would bring “some degree of certainty back to the” corporate market, Mr. Demchak said, adding that businesses could “see that as a sign of the economy coming back,” giving them more confidence to borrow.”

The Fed would do better to have forward guidance to normal monetary policy in the near-term. Business would respond better to such a policy. Instead, forward guidance has been pointing toward a far away negative real interest rate with the implication that the US economy is in long-term decline… not a good message to motivate business.

People respond better with deadlines and constraints …

  • Students study more right before a test.
  • People do not feel comfortable to cross a bridge without side railings.

As it is, I already see that a tighter monetary policy fits better due to a fall in the natural level of real GDP. But, psychologically businesses would feel more secure with a rising Fed rate. It is a sign of growth that would generate more and more investment. Remember, businesses invested just fine during the unnaturally high real interest rates of the 1980’s.

The Fed needs to start putting some psychological bite in monetary policy.

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Antonio Fatas Has 4 Excellent criticisms of Current Macroeconomic Research

The post is too good to excerpt so just go read it.

To edit ruthlessly

1. The business cycle is not symmetric.
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2. As much as the NBER methodology emphasizes the notion of recessions (which, by the way, is asymmetric in nature), most academic research is produced around models where small and frequent shocks drive economic fluctuations, as opposed to large and infrequent events.

[skip]

3. There has to be more than price rigidity.
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4. The notion that co-ordination across economic agents matters to explain the dynamics of business cycles receives very limited attention in academic research.
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I am aware that they are plenty of papers that deal with these four issues, some of them published in the best academic journals. But most of these papers are not mainstream. Most economists are sympathetic to these assumption but avoid writing papers using them because they are afraid they will be told that their assumptions are ad-hoc and that the model does not have enough micro foundations

My thought is that the problem isn’t just insistence on micro foundations. Especially on points 3 and 4, there was an active literature in which coordination failures cause business cycles. The cycles could be asymmetric and recessions could be rare. Google scholar Benhabib and Farmer.

In general it is quite possible to micro found models of coordination failure and, more generally, models in which the deviation from a real business cycle model isn’t price rigidity. For one thing, general equilibrium theory has moved on from the models which macroeconomists adopted for micro foundations. In particular, general equilibrium models with incomplete markets can have spontaneous fluctuations. Now economics doesn’t get more micro founded than general equilibrium theory, but these models are ignored by macroeconomists.

Fatas mentioned that these literatures exist. I think there must be a quite different reason why none is the main stream.

I think the problem is that with coordination failures, multiple equilibria are possible. Not just two or two hundred either, but a large infinite number. There is no theory which tells us how likely different equilibria are. Worse, policy shifts can cause the economy to jump from one equilibrium to another in unpredictable ways.

This does not strike me as an argument against the validity of models of coordination failure. In fact recessions are hard to predict and, well, look like panics. The problem is that models which say that macroeconomists will not be able to predict well are not popular.

In any case, I’m pretty sure that the limit isn’t just that macroeconomists are required to micro found. There are agreed assumptions about the proper behavior of models (of the conclusions not the assumptions) which are very strong even though they are not based on evidence. In particular it seems to me that it has been assumed that the macro turf can be divided up into cycles and growth so that the factors which cause cycles are required to have only temporary effects.

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The Latest Never Ending Adventures in Corporatism Via the TPP

From the Economic Populist:

The Latest Never Ending Adventures in Corporatism Via the TPP –  Wikileaks has published more secret Trans-Pacific Partnership Agreement documents, revealing more and more how the United States represents large corporations and not the citizens of the nation.  The Huffington Post published a large front page story is on the Trans-Pacific Partnershiptrade treaty.

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The Real Reason Healthcare Insurance Companies Are Now Encouraging Obamacare Enrollment: Fear of a pro-public-option or pro-single-payer political juggernaut

I’ve expected this for some time, and here it is: The Wall Street Journal reports that insurance companies are set to unleash hundreds of millions of dollars in advertising to entice potential customers on to the exchanges created by Obamacare. As the Journal puts it: Insurers … are capitalizing on an unprecedented opportunity in a shifting health-care market. Some seven million Americans are expected to buy health coverage on the new consumer exchanges, where people can compare insurance plans side by side.

— Greg Sargent, Washington Post, this morning

Sargent goes on to say that these plans were long in the works but were delayed because of the dysfunction of the federal website.  I assume that’s accurate, but elsewhere in Sargent’s column, in the form of two new polls are hints of why this project has taken on real urgency.  One poll, by Pew, published today in USA Today, shows a dramatic drop in support for Obama and Obamacare among 18- to 29-year-olds, results similar to those in another recent poll.  Undoubtedly, although this won’t occur to most pundits, this drop reflects fallout from the Snowden revelations and also anger at Obama’s less-than-progressive (and certainly less-than-energetic) agenda.  But there also is this: Only 41% of members of this age group approve of “his signature health care policy, while 54% disapprove.”

But also there is this, from the other poll released this morning, taken for the Associated Press:

In the survey, nearly half of those with job-based or other private coverage say their policies will be changing next year – mostly for the worse. Nearly 4 in 5 (77 percent) blame the changes on the Affordable Care Act, even though the trend toward leaner coverage predates the law’s passage.

Sixty-nine percent say their premiums will be going up, while 59 percent say annual deductibles or copayments are increasing.

Each time I read something of that sort I am struck momentarily by dismay that Obama has failed to tell the public, as often as is necessary to halt the effect of the disinformation, which as it happens is coming mainly from employers and … insurance companies.  Something along the lines of: Gosh, folks, listening to these people, you’d almost think that your employee contributions, co-pays and deductibles had remained steady and fine until the fall of 2013.  Maybe a few statistics would drive home the point.

But we are after all talking about Obama, not, say, a normal president.  And Obama just doesn’t do refutations, much less refutations citing actual statistics.

But one of these days a genuine progressive who has been fighting in the congressional trenches for progressive legislation–Sherrod Brown, I hope, or maybe Jeff Merkley–will show signs of interest in running for president in 2016.  And–who knows?–the press might even begin paying attention to what he (Elizabeth Warren is not going to run) says.  And what he says will include specific refutations to employer and insurance company claims that Obamacare is to blame for what Obamacare is not to blame for.  And then he’ll propose … the public option or even single-payer, leaving Obamacare in place until one of these now-quite-real options begins.  And this time there will not be an absurdly long four-year delay before implementation.

I expect that the experience with Obamacare as sabotaged by Republican state legislators and governors and unremitting campaigns of disinformation, and by shortsighted insurance carriers engaged in their own campaign of deception and trickery toward their current premium holders, will make possible (in fact, likely) what was not possible when Obamacare was being drafted and negotiated.

Republicans and, almost certainly, nearly all mainstream pundits see the 2014 and 2016 political debate as between Obamacare repeal and Obamacare “fixes”.  They don’t consider that the public will recognize a failure of Obamacare for what it is: a failure of “federalism” and, like the pre-Obamacare system, a failure also of the free market regarding healthcare.  And they certainly don’t consider that many , many of the people who have turned against Obamacare now in large part because of the gamesmanship of employers and insurance companies–young people, and employees who’ve seen their employer-based insurance benefit deteriorate annually in key respects–are likely to elect candidates who propose to change the system dramatically, to add a public option or to convert the system to single-payer.  They now know, after all, that the system really can be dramatically changed.

Employers would benefit from single-payer, if not from a public option, so they’re concerted scapegoating of Obamacare might serve their interest.  But the insurance companies are drastically overplaying their hand.  The Democrats have no competent spokesperson right now; that’s certainly true.  But that is temporary; they likely soon will.  Once this epiphany occurs to the insurance industry, they might start reining in their members in order to give Obamacare some chance to succeed.  By then, though, it may well be too late, and the previously impossible will be on its way to fruition.

UPDATE: In light of some of the comments to this post, I want to make clear that by single-payer I do not mean Medicare-for-all.   Single-payer would be, in essence, “the public option” extended to everyone rather than limited to the 5% of people who have private healthcare insurance through the non-group (i.e., non-employer-provided) market.  It is not tax-funded identical-for-all healthcare insurance, which is what Medicare is.  I do think that eventually this country will have Medicare-for-all-type healthcare insurance, but not in the nearterm.  If single-payer works well, then of course that would be the longterm solution, with no need for Medicare-for-all.

I also want to make a point, in light of EMichael’s comment, about federalism as it relates to Medicaid and, for that matter, any other federal social-safety-network program.  Federalism has been a disaster for Obamacare, and the only reason it works under current pre-Obamacare Medicaid is that that program came into being and was effectuated before the hard-right turn of the Republican Party.  The really weird but successful argument by rightwing governors and state attorneys general to the Supreme Court in the ACA litigation on the Medicaid-expansion provision in the ACA is that, well, y’know, now that traditional Medicaid has been a part of each state’s law for decades, and is popular, it would be politically impossible for state legislators to end that program–the result under the ACA as the statute was written, if a state refused to agree to the ACA Medicaid expansion.  This, they argued–successfully!–meant that the ACA was effectively coercive of state  legislators and therefore infringed upon state sovereignty.  On that “ground,” the Supreme Court struck down that part of the Medicaid portion of the ACA.

That’s also known as the  conservatives-having-their-cake-and-eating-it-to theory of constitutional law.  The argument was so deeply hubristic that its actual success is stunning and outrageous.  But I have no idea why anyone would think that federalism must be a part of a national healthcare insurance law. It does not.

As for whether or not the public will catch on that the main problems with the Obamacare-exchanges-and-private-policies part of the Act is a failure of the healthcare insurance market and of the healthcare market itself–a question that several commenters raised–well, that was what my post was about.  Yes, the public will catch on, once the Dems have a smart, committed, knowledgeable and articulate spokesperson with a high enough national profile to educate them about it.  I expect that that will happen fairly soon.

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Fed policy is heading into trouble

The future of monetary policy is troubling. I present a video to explain. (Part 4 of a series on the journey of the Fed rate from 1978 to the present.)

Since the 1960’s, the Fed rate has consistently reacted to the natural level of real GDP  (in terms of labor and capital utilization). Effective demand sets the natural level. The natural level of real GDP has fallen since the crisis. Monetary policy so far does not recognize this. This graph from the video shows how the natural level of real GDP is determined.

setting nat rgdp 1

There are 3 red trend lines. The point where each trend line crosses the x-axis sets the natural level of real GDP (in terms of labor and capital utilization). The trend line on the right is from the 1970’s to 2003. The trend line in the center is from 2003 to the crisis. The trend line on the left points to the current natural level of real GDP. The Fed funds rate has recognized and responded to these levels consistently over the years. The trend line shifts with core shifts in labor share.

A problem is that the Fed along with other economists, like Paul Krugman and Larry Summers, still see a large output gap to bring the economy back to full employment. In effect, they still see the economy returning to the middle trend line above, but with a negative real rate to get us there. As Larry Summers said yesterday, “Indeed, US real rates are substantially negative at a five year horizon.”

The natural real interest rate at full employment is roughly determined by adding productivity growth, population growth and a time preference variable. As people put off consumption into the future, the time preference variable declines. Productivity growth is low, population growth is low and people are preferring to consume less currently.  So it might seem reasonable that the natural real interest rate has fallen from its historic range of around 3%.

But has the natural real interest rate gone negative? No… It should be positive when the natural level of real GDP is reached in about a year, but not quite as high as 3%. In the video, I say 1.5%. Pimco said that the Fed forecasts reaching its target with a 2% natural real rate by 2019! Well, we won’t have to wait that long.

Note: In the video, I say there is price stabilization when the natural real interest rate and the current real interest rate curves cross under the Fed rate. This concept is related to the neutral real interest rate, which is defined as monetary policy which is neither expansionary nor contractionary. (Bernhardsen 2007, Wu 2005)

Related sources…

Bernhardsen, Tom, Karsten Gerdrup. The Neutral Real Interest Rate. Monetary Policy Department, Norges Bank. 2007.

Escolano, Julio, Anna Shabunina and Jaejoon Woo. The Puzzle of Persistently Negative Interest Rate-Growth Differentials: Financial Repression or Income Catch-up? IMF working paper. November 2011.

Collignon, Stefan. Implications of the Low Interest Rate Environment for the Real Economy. European Parliament. Draft paper. February 2013.

Lambert, Edward. Series of videos on the Journey of the Fed rate. Part 1 (1978 to 1988)… part 2 (1988 to 1997)… part 3 (1997 to 2008). Youtube.com. December 2013

Summers, Lawrence. Why stagnation might prove to be the new normal. larrysummers.com. December 15, 2013.

Wu, Tao. Estimating the “Neutral” Real Interest Rate in Real Time. Federal Reserve Bank of San Francisco. October 2005.

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Neo-Paleo-Keynesians Krugman and DeLong

I can’t resist commenting on the discussion between Paul Krugman and Brad DeLong on the young Stanley Fischer (part of the problem is I can’t get the equitablog comment system to work).

The one minute summary is that Brad discussed the history of thought and noted that way back when new Keynesian macro was new, it was largely based on the thought of Milton Friedman. Brad only discusses thought up until 1985 (which happens to be the year I became an economist). Krugman politely notes that since 1985 Keynesian economists have continued to study economies and they are less sure that Friedman was right and tend more to agree with uh Keynes. He calls this a neo-paleo_keynesian counter-counter-counter-revolution. Krugman’s post is excellent as usual (read it). It amounts to “no it’s not just the zero lower bound — we now disagree with Friedman about other things too.”

Krugman’s conclusion “we’re also seeing, within the Keynesian camp, a distinct if polite rise of neopaleo-Keynesianism.”

The discussion is ironic, since Brad is very neopaleo. My pointless comments.

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Social Security: Trust Fund Ratios, Solvency and the Reagan ‘Raid’

What does or would it mean to say that Social Security was ‘solvent’? Under the rules that govern the Trustees of Social Security the test for any given year is pretty simple: did or will the year end with all obligations/cost met while still retaining assets equal to the next year’s cost. To determine this you take the year end Trust Fund Balance and divide by Cost to get a Trust Fund Ratio where 100 = 1 year. If the TF Ratio is 100 or above Social Security is solvent for that year, 99 or under not. It is important to note that a TF Ratio under 100 doesn’t mean any change in benefits being paid out, instead benefits can and under current law must be paid in full as long as there are any assets to draw on, that is a TF Ratio greater than 0. Still any number between 0 and 100 is worrisome.

Is Social Security ‘solvent’ today? By this test certainly, at least for the Old Age/Retirement (OAS) Trust Fund, at years end 2012 OAS had a TF Ratio of 391. Has Social Security OAS always been ‘solvent’. Well no, and we can track its performance since 1937 in the following Table for the 2013 Report.
Table VI.A1.— Operations of the OASI Trust Fund, Calendar Years 1937-2012
By this simple TF Ratio test OAS was solvent every year from 1937 to 1965 and again from 1967 to 1970 only to fall under the 100 mark in 1971 enroute to its lowest year end point in 1982 at 14. At that point full payments of benefits were at serious risk, literally SOMETHING had to be done. And lo! the Greenspan Commission. More below.

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