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McKinsey Thought-Experiment: What If They Are Correct?

I’m not going to do this with graphics (at least for now), but the finger exercise seems intuitive.

Assume—against all evidence—that the “once we educated them, 30% said they would stop offering health insurance to their lowest-paid employees” study is accurate.

How does that, as John Boehner declares, cost America jobs?

From Boehner’s site:

At least 30 percent of employers would gain economically from dropping coverage even if they completely compensated employees for the change through other benefit offerings or higher salaries.

This should be intuitive. If the company is paying $1,000 a month for my family’s health care along with my $800 a month,* it can raise my paycheck by $1,000 a month—employee compensation is employee compensation—and cut back on its health care administration. If I’m not a health-care administrator, it’s win-win.**

Aside: Reality will interfere. If we make the Baumolian assumption that cost of health insurance will continue to grow faster than GDP—at a slower rate, probably, but still faster—I’ll give you odds that the labor share of revenues will decline, cet. par. over time. But we’re talking about jobs, not profits.***

Any economist worth her salt should know that lower costs of employment increase overall employment (assuming there is not a demand-side problem).

If the McKinsey “study” were accurate—again, not the way to bet—we should expect overall employment to increase. As with the Earned Income Tax Credit, the expansion of HIEs will benefit firms, allowing them to reallocate capital into more useful areas.

The follow-on effects in that universe: more people joining the HIEs than expected, improvements in the measurement of “real” wage growth, greater transparency in the current health-insurance system, and arguably a larger contingency of workers demanding something closer to a single-payer solution,**** all improve efficiency and provide opportunity for economic expansion.

Which is supposed to mean more jobs, not fewer.

If the McKinsey presentation accurately reflects what companies will do given the opportunity—think the Wal-Mart Effect Writ Large—then the prospects for employment will be, if anything, increased.

Greater political pressure for cost-reduction that leads to single-payer becoming more politically viable is just lagniappe.

*Not the real numbers, of course.

**If I’m a Benefits Coordinator, I don’t lose my job, and I get to spend more time working on ensuring that the firm is competitive in other areas. If I were doing an economic model of this against employment, I would bet that the coefficient would be small but positive, so let’s be generous and assume it’s equivalent to zero, i.e., no effect on employment supply.

As an aside, this was in part the reasoning behind the Bear Stearns “bag of rubber bands, box of paper clips, go buy all your own supplies” thinking. It didn’t necessarily save on corporate expenses directly, but it meant not having to manage that area of inventory.

***If anything, the extra profits, cet. par., facilitate business expansion and more hiring. That the multiplier effect will not be 1:1 simply reflects what a poor social investment private corporations are.

****More people forced to use the HIEs=> more people demanding similar plans across state lines => more demand for a larger uniform baseline (especially as families move from state to state) => more interest in cost controls => greater need to control Administrative expenses => disequilibrium in service demand and supply => demand for service efficiencies that result in either single-payer or, at worst, unified Servicer processing.

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Fo/u/r/ive Notes

For Mother’s Day, as it were, xkcd presents The Lawrence H. Summers Memorial History of Math and Science.

Buce at Underbelly does this, probably saving me the trouble of a post. (Consider this a SlothBear moment.)

The problem I want Drek the Uninteresting—or anyone else who knows the research—to address: if we assume that mercury in the vaccine wasn’t the cause of the rise in autism, what are the causes that have been identified?

Maligning Tony Kushner by the Trustees of CUNY while he is on the cover of the current issue of his alma mater’s alumni magazine probably was not a good idea.

Update: The one I left out earlier: the Second Quarter Kauffman Economic Bloggers Survey is out (warning: PDF). I’m especially thrilled by Mark Thoma’s victory (p. 12), though surprised that the margin was so small. Suggestions that the 35% who voted for the second-best option were desperately attempting to deny incompetence are, of course, beyond the pale.

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Is the President Reading Angry Bear?

AB, late Thursday:

If you want to stop a dictator from killing his people, freeze any of his personal assets that are held out of the country.

In cases where the dictator is likely to fall, it sends a clear signal to other countries. (In cases where the dictator is likely to succeed, the worst case scenario is that banking relationships will be damaged, a consideration that the domestic government would have considered before making the decision to freeze the assets in the first place.)

The purpose of financial in lieu of military intervention is to balance the tradeoff. A dictator whose funds will remain unencumbered no matter how many of his people he kills will not change his behavior. A dictator who stands to lose a large (and increasing) portion of $70 billion faces a scenario where extending his time in office may well appear too costly.

Treasury, Friday night:

On Friday evening, President Obama took decisive steps to hold the Qadhafi regime accountable for its continued use of violence against unarmed civilians and its human rights abuses and to safeguard the assets of the people of Libya.

The President issued an Executive Order freezing the assets of Muammar Qadhafi and four of his children, as well as the Government of Libya and its agencies, including the Central Bank of Libya and the Libyan Investment Authority – the country’s sovereign wealth fund.

I report. You decide.

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Cousin Brucie Bartlett Explains It All to You

In the context of Dan’s post below, I just want to repeat what Bruce Bartlett said so accurately yesterday:

[H]ere’s what I would be doing if I were organizing opposition to the Republican budgetary disinformation campaign. First of all, I would be holding hearings five days a week in the Senate Appropriations Committee and every other Senate committee on the impact of proposed Republican budget cuts. Whose benefits are going to be cut? What programs will be shut down? What are the real world consequences of the Republicans’ plans?

I have no idea and I have made an effort to try and find out. But there are undoubtedly people who know at the Office of Management and Budget and the various departments of government that are filled with assistant secretaries eager to testify before a congressional committee and respond in detail to the implicit Republican argument that spending can be massively cut without hurting anyone.

Another thing I would be doing is commissioning reports by the Congressional Research Service, the Government Accountability Office, and the Congressional Budget Office to provide data and analysis on the impact of Republican plans. And believe me, any request from the chairman of the appropriations committee gets the very careful attention of those who run these organizations for obvious reasons.

The next obvious step is to get all of the various organizations that represent farmers, defense contractors, health providers and so on to do their own analyses based on their intimate knowledge of how spending cuts will affect them. These people will also be more than happy to testify before a congressional committee on short notice.

Within a couple of weeks I think it would be very easy to put flesh on the bones of the Republican plans and mobilize the millions of people who will be affected but probably have no idea at this time that this is the case because no one has told them. I think the political dynamics could change quickly. But someone needs to get the ball rolling, get the analyses started, organize the hearings and so on. Why this isn’t already being done, is a complete mystery to me. [emphasis mine]

That no one has been willing or able to answer Mr. Bartlett’s question tells me all I need to know about who will be hurt by the cuts: the vast majority of the American people. We’re not just talking the people who scheduled a trip to DC after their kid was fascinated by Night at the Museum: Battle of the Smithsonian. We’re talking the kids, their parents, and their neighbors.

The silence from the DSCC members is deafening. And, in more than one sense of the word, Depressing.

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Math is Math: There Was No "Second Stimulus"

One of the best rules in mathematics is that, to determine the value of all the variables, you need only as many distinct equations as you have variables. (previous sentence edited for clarity.) So let’s combine a couple of recent articles (h/t Mark Thoma for the first, Digby for the second.)

Richard Florida finds three studies of State Government Spending Multipliers. The three studies find multipliers of 1.5, 1.7, and 2.12. Let’s be nice (in context) and use the lower one. StateMultiplier = 1.5

David Dayden notes that budget cuts in just two (large) states can be matched against the Fed’s “stimulus” monies. Let’s see how much, putting the best face possible on the data (i.e., taking the most optimistic projections). CADeficit (ignoring “reserve”): $26.4B (12.5 + 12 + 1.9). ILDeficit: $19B (13 + 6).

That gives us a CA-ILEconomyCost of (26.4 + 19)*1.5 = US$68.1B

The Federal Stimulus is $55-60B. Again, let’s be optimists and say $60B. The required multiplier is then:

FedMultiplier * FedStim = CA-ILEconomyCost

FedMultiplier * $60B = $68.1B

FedMultiplier = 1.135

That’s the minimum multiplier needed just to counter those two states. Add in Texas (whose shortfall appears to be on par with California’s, and is larger than Illinois)and you’re at 1.77.

Only 47 states to go.

The maximum multiplier needed just to solve the CA-IL gap is 1.71. Add in TX and you’re at 2.63 with 47 states to go.

The Right-Leaning Econ Bloggers (e.g., Tyler Cowen and Greg Mankiw; I apologize to the former for linking him to the latter) argued in 2008-2009 that Federal Stimulus has a multiplier of 1.3 or less.*

1.3 would put the economy at neutral if the multiplier is 1.7 (median estimate) and most but not all of the CA ambiguities break the wrong way.

And that’s just eliminating the effect of those two states. Add in TX and the multiplier goes to 2.64—rather close to Christina Romer’s 3.0 that was attacked continually by Mankiw et al.

Repeat after me: There was No “Second Stimulus.” If the economy is going to go into full recovery—i.e., can I have jobs with that?—it will have to be from Private Sector Investment, which has been (let’s be nice) on the sidelines so far,* and really doesn’t appear to be warming up to replace TARP.

*Strangely, this was not argued by them as an argument that the initial “stimulus” was too small for the even-then-obvious shortfalls in C and I; I can’t believe they thought MX was going to cover the difference, but that’s a side discussion, perhaps.

*We can quibble over whether that was and remains the correct decision. As has often been noted here, a lack of demand is not exactly an incentive to expand, unless you think that will be changing soon. A true recovery should have convinced firms that a change is gonna come.

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Can Either James Kwak or Mark Thoma Build This Model?

Update: Brad DeLong looks at the data and suggests that the problem may be that the current President is as innumerate as the previous one.

Mark Thoma quotes James Kwak:

So no, I don’t think Obama is abandoning his principles for political advantage; I think these are his principles. And while I’m upset at him, I’m upset at him for being wrong on the policy level, not for abandoning anything or selling out…I always thought Obama was a moderate who looked like a progressive.

I’m with Kwak on that; it’s one of the reasons I supported the relatively-more-progressive Hillary through the primaries.*

Where I’m less sanguine is the base from which Mark let him start:

Obama is certainly in a decent position politically, and I would bet on him to be reelected comfortably in 2012.

In 1996, Bill Clinton had the advantage of Bob Dole—the 1996 equivalent of Newt Gingrich—being his opponent. Dole had been a known quantity to voters for over a decade (“Do you want Grits and Fritz or a Ford Dole?”) who supported Clarence Thomas, talked about Hideo Nomo of the Brooklyn Dodgers, and fell off the front of a stage—and still garnered more than 40% of the vote, losing the popular vote by only slightly more votes than Ross Perot won. And that was after the advantage of a virtually-uncontested primary, which Mr. Obama may not enjoy.**

Kwak later backtracks a bit:

I think two years would be enough time for labor markets to recover if we could expect policy supporting employment along the way. But we are likely to get just the opposite, deficit cutting measures and other policies that work against employment and hence work against electoral success for the Democrats. Toss in a compromise on Social Security that angers the Democratic base, a possibility that cannot be dismissed as Obama follows up on what appears to be a successful move to the center, and the future does not look as bright. Obama may think he is playing the game well now, but the game is far from over.

This is at least far more accurate than the declaration that Obama won when his opening g4 was followed by the Republican’s e5. And Thoma follows up with his expectation of Obama’s next move being f3:

That would put an end to any stimulus due to the tax compromise. Stimulating the economy was never the intent of the GOP when they agreed to the tax compromise, it was all about the estate tax and tax cuts for the wealthy. They will do what they can to decrease government spending over the next two years, starting in January, and if they are successful it will reverse any benefit the economy might have received from the compromise.

Given that we all agree on the likely next two years, it would be nice to see an economic model from either Mark or James Kwak that justifies the expectation that Obama is in a position “to be reelected comfortably in 2012.”

At the very least, I want to offer to bet with Mr. Kwak, at even odds, with proceeds to go to the charity of the winner’s choice. Here’s my choice.

*The other being that she would know from the start that she was hated, and be ready for bear at the outset. (As an aside: sorry, Scott, but hiring Mark Penn, while a mistake, is not a revelation of policy preferences. Or, if you want to argue it is, tell us what replacing Howard Dean and the 50-State Strategy with Tim Kaine and Suborning Democrats such as Sibelius and Napolitano into the Administration is.)

**I say this not only because I would like to see him challenged—his doing a Specter in 2011 is about the only hope for my grandchildren—but also because it makes sense to prepare the field for 2016 and beyond. It would be dumber of the Democrats not to have someone challenge him in the primary, leaving only HRC and Joe Biden as probably 2016 candidates, than it would be to unite behind him in the hope that Republicans nominate someone who is unelectable a la Dole in 1996.

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He Gave at the Office

What Treasury under Geither does, according to the Washington Post:

“I think we are known as the front line,” said [Michael] Pedroni, 38, a former International Monetary Fund economist and Federal Reserve Bank of New York employee who has spent time at a Wall Street research firm. “Our analysis is meant to be very candid, very quick, very unvarnished.”

Fortunately, he left the FRB NY before Geithner did, so it’s not a question of nepotism, just the finance perspective.

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Fire Tim Geithner. Then Be a One-Term President.

I doubt even the Internet’s self-appointed Chief Geithner Apologist will be foolish enough to stand by him after this piece of shite:

Some people just don’t like movies with happy endings. How else to explain this week’s report by the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP)? Rather than focusing on the growing evidence we’ve seen in recent months that TARP will be far less costly than anyone expected, SIGTARP instead sought to generate a false controversy over AIG to try and grab a few, cheap headlines.

There are no “facts” in that paragraph, and there is no excuse for this coming from Treasury. Ignore that Treasury is deliberately including selling off its expected future value as part of its “break-even” calculation. Ignore that Treasury’s practice has been to count “TARP” (the first effort) as the only Government Subsidy to those institutions that have “paid back” their loans by ramping up debt and refusing to be “financial intermediaries” [Link updated] which was the half-assed justification for giving them that money in the first place. Ignore the billions of dollars of asset guarantees from the Fed that are still the only reason people pretend The Big C is solvent.

What we have is the Department of the Treasury impugning the purpose and the office of the Special Inspector General for TARP, that is the office charged with

the responsibility, among other things, to conduct, supervise and coordinate audits and investigations of the purchase, management and sale of assets under the Troubled Asset Relief Program (“TARP”). SIGTARP’s goal is to promote economic stability by assiduously protecting the interests of those who fund the TARP programs – i.e., the American taxpayers. This is achieved by facilitating transparency in TARP programs, providing effective oversight in coordination with other relevant oversight bodies, and through robust criminal and civil enforcement against those, whether inside or outside of Government, who waste, steal or abuse TARP funds. [emphasis mine]

If Tim Geithner wants to whine that someone doesn’t believe his lies, he’s welcome to do so—as a private citizen, reaping the fruits of his last few years fellating Goldman Sachs by accepting the Senior Management position that surely awaits him.

And he should do so sooner, not later.

And, by the way, Barry: you should request and then accept his resignation. Because only the thought of Joe Biden (Sen-MBNA/BofA) as President keeps me from pointing out that such releases are your responsibility, sent out as part of Enjoy your next two years, and the Palin/Huckabee Presidency you will have wrought.

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