Thursday, March 29, 2012

Less Tyranny is More Tyranny

David Frum, former Bush speechwriter and one of my favorite conservatives, made a very interesting point in one of his blog posts recently about constitutional opposition to Obamacare:
"The crazy thing about the litigation over the Affordable Care Act is this, (a point made yesterday on Twitter by many including Josh Marshall of Talking Points Memoand also myself) because of Helvering v. Davis, nobody disputes that Congress has full authority to set in motion a national healthcare program. Congress could tax all American at any rate—or any schedule of rates, no matter how confiscatory for those at the top—and then use the money to fund a British-style National Health Service.

The question we're debating is whether Congress can constitutionally go less far, enact a less interventionist, less statist, and less centralist program, one that leaves more scope to private enterprise and more choice to the states.

In this, the analogy is strong to the Militia Acts of the 1790s: instead of creating a large, permanent national army (as it had power to do), Congress told the states to raise militias, and ordered private persons to buy the equipment necessary to serve in those militias."
Again, the same point that I've made day in and day out about this entire case. No one questions Medicare's constitutionality, and Medicare constitutes something that is actually socialist and more "tyrannical," if you will. But heaven forfend if the government tries to pass a more modest, not socialist system of health care. Logically speaking, if the court chooses to overturn Obamacare, it must then overturn Social Security and Medicare, too. That'll go down well, I'm sure.

Wednesday, March 28, 2012

What's At Stake?

Many of you have no doubt been following the Supreme Court's deliberations about Obamacare. Chances are, if you read this blog regularly, you know where I stand on the law. As such, I feel like there's a lot at stake in this case, and that a genuinely good law might be struck down on some, quite frankly, dubious grounds.

The more minor section of the case is the idea that the federal government is effectively forcing states to expand their Medicaid coverage as part of the law. If they do not, they will be denied Federal grants to help pay for the program. This, people say, is unconstitutional. But we see this all the time. States won't get highway funding if they choose to lower their drinking age. States won't get college funding if they discriminate against women. This is common practice, and has been for decades. As such, this part of the case effectively falls to pieces right from the get-go.

The crux of the court case, however, surrounds the individual mandate--whether the federal government can make you buy health insurance. This, the law's opponents say, is unconstitutional. Defenders of the law say that the Constitution's Commerce Clause and Necessary and Proper Clause allow the mandate. As you've all no doubt heard me say before, Obamacare, and indeed nearly any form of working universal health care that's seen throughout the world involves coercion. Medicare effectively forces people to purchase health care, and yet no one questions its constitutionality. Social Security likewise forces people to effectively pay for old-age pensions whether they want to or not, and yet it was ruled constitutional by the Supreme Court. Obamacare pretty much would do the same thing as an expansion of Medicare. In some form or another, everyone would be required to purchase insurance through taxes. Instead, everyone has to buy private insurance, get subsidies if they can't afford it, and has to pay for it with a tax if they don't buy insurance, so that the cost of their hospital visits wont be pushed off onto someone else. Obamacare, as Paul Krugman says, "is just a klutzy form of single-payer (i.e. Medicare)." So what's the big deal? 

Well, in the oral debates, the main point that was often brought up is, "if the government can use the Commerce Clause to justify requiring you to purchase insurance, what can't it require you to purchase against your will?" In other words, every sort of activity can be justified as having an effect on interstate commerce. The Obama Administration's justification for this mandate (and, admittedly, Mitt Romney's when he passed Romneycare), was that everyone uses health care at some point in their lives, and the absence of universal coverage creates costs that get imposed on those who do buy insurance by those who cannot or refuse to. Since Congress has the authority to regulate insurance, the act of not buying insurance affects something Congress can regulate (insurance) and is as such subject to regulation. If you get right down to it, there really isn't anything stopping the government from using the Commerce Clause in such a way. Well, except the small matter of our political process. If you don't want such laws enacted, then don't vote for people who advocate them. The fact is, the ACA was enacted just like every other law was. King Obama didn't decree it the supreme law of the land. It was put to a vote in Congress, and it passed.

Justices Alito and Scalia quickly countered this argument by saying that by this logic, anything generates costs on other people: "If I don't buy a Volt, I raise the price of Volts." They went on to ask what would stop the government from mandating all manner of other activities--like making people Buy broccoli or purchase burial insurance. And so it went, on and on, with product after product being thrown out there. Well, there's a key difference that makes health insurance and health care as a whole quite different from these other examples. When someone doesn't buy a Chevrolet Volt, it doesn't create the problem of free-loading like insurance does. If a person doesn't buy insurance and gets hit by a bus, their $20,000 medical bill is paid for by people with insurance. If, say, Bob doesn't want to buy a Volt, it isn't as if Hakim, who did buy a Volt will end up paying for Bob to have a Volt if he later decides he needs one but can't afford it. With health insurance, however, the case is quite different, as I've explained. As far as burial insurance goes, that isn't a major social problem, it imposes very small, one-time costs on people, whereas health care in the ER is potentially an open-ended and very expensive cost.

The questions posed by Alito and Scalia are particularly troubling to me because they don't seem to understand why health care is such a difficult and special problem to address. If this law gets overturned, 30 million fewer people won't get access to health insurance, people with insurance will continue to foot the bill for those who do not, premium costs will rise, rather than fall, and our federal deficit will increase. 

To those who make the argument that this is about freedom and liberty, I make this next point. John Stuart Mill provides the traditional definition of freedom as being, "Over himself, over his body and mind, the individual is sovereign." However, he also says, "That the only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others." So, by the classical definition of freedom and liberty, the Affordable Care Act serves to preserve and enhance liberty, in that it prevents those who choose to not purchase insurance from imposing costs on those who do. A person is free to do as he or she pleases, so long as their actions do not effect others adversely. I don't think a stronger argument could be made for this law on the grounds of individual freedom.

Speaking of the law's opponents, what would be put in the law's place by the current GOP candidates? Well, Rick Santorum hasn't said a thing, which leads me to believe he has no plan. Ron Paul doesn't want universal health care and has never advocated it to my knowledge. Newt Gingrich used to be for mandated health coverage but now is not; who knows what his current idea is, maybe hospitals using the light of the moon to cut electricity costs? The only candidate who has presented any semblance of a plan is Mitt Romney, the very man who signed into law the template for Obamacare. His plan is to give individuals tax breaks with which to purchase insurance and to allow them to purchase it across state lines to find the best deal. This sounds an awful lot like what Obamacare does. Moreover, he wants to provide states waivers from complying with the law in order to allow them to form their own health care plans. You know, that sounds familiar, because guess what? Obamacare does the same thing! The only difference is that the waiver stipulates that in order to get federal funding for their program, the state must come up with a plan that covers at least as many people as Obamacare and has similar cost savings. Sounds pretty reasonable, right? It only makes sense that the federal government encourage states to only go forward with plans provided that they work. No one wants to waste taxpayer dollars on programs that don't.

My point in fleshing this all out is to emphasize how much we have to lose if this law gets overturned. Are we really going to toss out a genuinely good law on the basis of spurious arguments made by the very same people who previously proposed the idea? Are we really going to deny millions of Americans access to health insurance? Are we really going to leave health care reform in the hands of barnyard economists like Paul Ryan, whose only plan for bringing down Medicare costs is to make old people pay for more of their medical procedures? No, we can't. There's too much at stake.

Friday, March 23, 2012

The Death Panels that Never Were

No doubt many of you have heard at least something about "death panels" with regard to Obamacare by now. No doubt many of you are also aware of the rapid growth in Medicare spending that our country is going to go through over the next several years as the baby boom generation retires. Health care costs have been and are going to continue to balloon out of control in the United States, and something must be done about this. So what can we do? Well, for starters, we can let Obamacare go into effect. The law has a number of actual cost-saving provisions in it, one of which is the Independent Payment Advisory Board, i.e. our "death panel." Contrary to what Sarah Palin would have you believe, it is not, in fact, a board of stern bureaucrats haphazardly choosing whether your grandmother may live or die.

So what is the IPAB? Well, it's a board of 15 health care experts appointed by the President and confirmed by the Senate. The experts will range from physicians to health care economists and patient advocates who are nationally recognized in their respective fields. Hardly the bureaucrats that many like to make them out to be. This board is charged with the task of controlling the growth of Medicare spending, should it cross a certain threshold. The board puts together certain recommendations for controlling costs and submits them for review to Congress. Congress then has the power to accept or reject these recommendations. If Congress rejects the recommendations, and Medicare spending crosses that threshold, Congress must either take steps to achieve equal savings or let the Secretary of Health and Human Services follow the recommendations of the IPAB. 

Now here's where the death panel thing comes in. Republicans claim that this board will lead to a rationing of care on the unfounded theory that that it would cut off access to valuable, life-saving treatments. Let me be perfectly clear: this is a lie. The law specifically states that the IPAB's recommendations for controlling costs "cannot include any recommendations to ration health care, raise revenues or Medicare beneficiary premiums, increase Medicare beneficiary cost sharing, or otherwise restrict benefits or modify eligibility criteria." So there are no death panels and Democrats aren't trying to ration out Medicare coverage. The IPAB will primarily put forth recommendations that offer long-run solutions, like incentivizing better primary care, eliminating waste, and cracking down on Medicare fraud, to name a few. The projections on how much this will save through 2021 range from $14 to $28 billion. This is a very small percentage of the total Medicare spending during that period. Some might say that this means the IPAB will be ineffective, but what you have to take into account is the fact that Medicare spending won't cross the spending threshold during this period of time, so the IPAB theoretically would have to take no cost controlling measures, but projections show that the board would attempt to cut costs regardless. Moreover, Obamacare has a number of provisions in it that reports have shown will actually produce substantial savings and control costs; the IPAB is just a backstop that supplements these measures.

The IPAB exists because it can do what politicians all too often don't have the courage or will to do. Many members of Congress are subject to the influence of lobbyists and the overall political process, which makes budgetary decision-making difficult, especially when you've got a lobbyist hounding you. The members of the board cannot be employed outside of this board, with the idea being that this will make them much less susceptible to campaign lobbying by the pharmaceutical or health care industries.

Now, some of you might ask, what's the Republican alternative to this plan? Well, it basically is the privatization and eventual dismantling of Medicare as we know it. The plan would subsidize seniors' health care and give them vouchers that are indexed to increase with either inflation or GDP growth, depending on the plan you read. The seniors are then supposed to purchase private insurance out of a number of plans, one of which would be the traditional Medicare. The difference now is that Medicare would be paid for as private insurance. 

Reports have already shown that these vouchers are found to be far too small, forcing seniors to pay up to $6,400 more in costs from day one. What's more, by 2030, these vouchers will be so inadequate that seniors will have to pay up to 68% of the cost of their medical care, compared to 25% under current Medcare law (which includes Obamacare provisions). Adding insult to injury, the report also found that compared to the cost-saving provisions found in Obamacare (those apart from the IPAB), the Paul Ryan plan for Medicare would produce very little in actual savings. Republicans like to  say that the private insurers would compete to lower the costs of insurance in a marketplace under this plan, which would lead to savings for seniors. The problem with this is that the private insurance industry already does compete, and it very clearly hasn't led to lower costs. What's more, Medicare is actually much better at holding down costs than private insurers.

So on the one hand, you have a board of experts charged with controlling long-run Medicare costs and a law that actually does control costs with guaranteed coverage for seniors, and on the other you have a voucher system that provides seniors with ever-more inadequate sums of money with which to buy insurance.


Awesome.

Sunday, March 18, 2012

Crooks and Liars

So I've been hearing a whole lot from Paul Krugman and Ezra Klein lately about a recent Congressional Budget Office report that was released. In the report, the CBO provides updated cost estimates for Obamacare. Pretty run of the mill stuff, right? Wrong:
“The longer the president’s health care law remains on the books, the greater the threat it poses to our nation’s health care and our fiscal wellbeing,” said Chairman Price.  “The CBO’s revised cost estimate indicates that this massive government intrusion into America’s health care system will be far more costly than was originally claimed.  The law’s true cost to American taxpayers is part of a series of promises President Obama and Democrats in Congress made that will be broken.  Both fiscally and for the sake of our health care system, Americans cannot afford the president’s health care law."
That was a statement from the Chairman of the House Republican Policy Committee, Tom Price. The falsehoods in his rhetoric aside, there are a number of things wrong with what you just read. He was saying that because the CBO revised the cost estimate to $1.76 trillion up from the initial $940 billion estimate, the true cost of the law was obscured by Democrats and the books had been cooked. What Tom Price is ignoring is the fact that the first cost estimate was for the time period between 2010 and 2019, while this latest estimate spans from 2012 to 2021. That means that two more years in which Obamacare is operating are included in the latest cost estimate. Of course the cost is going to be higher, it costs more money to insure more people for a longer period of time!


But looking at the costs alone simply doesn't give you the full picture. With those two additional years of operation come two additional years of increased revenues from the law's provisions. So, really, what you want to look at is not the gross total cost of the law, but what the surplus/deficit change is compared to previous estimates. So what does the report have to say about this? Well, on the first page of it, the report says
"CBO and JCT now estimate that the insurance coverage provisions of the ACA will have a net cost of just under $1.1 trillion over the 2012–2021 period—about $50 billion less than the agencies’ March 2011 estimate for that 10-year period."
The cost of Obamacare is actually less than was initially thought. So, no, the law's true cost was not a broken promise, and is in fact more affordable to Americans than ever. Maybe if Tom Price had read the report a little more carefully, he would have said something different. Funny how he seemed to miss that paragraph on the first page when he was reading over the report, isn't it?

Thursday, March 15, 2012

Supply-side Economics: An Exercise in Fantasy

In 1981, President Ronald Reagan passed into law a series of tax cuts that heavily reduced marginal tax rates. This, he said, would be highly stimulative to the economy and that it would pay for itself. Today, Mitt Romney, Newt Gingrich, and Rick Santorum all are espousing similar plans for taxes. Who doesn't like the idea of paying less in taxes? I definitely like the idea, but shouldn't we examine the evidence for said tax cuts before proclaiming them a magic bullet for the economy? Since none of the people pushing for these policies will provide any evidence, I guess I will.


The original idea of supply-side economics was that cutting taxes could plausibly raise revenues under certain special circumstances. This isn't a ridiculous proposition, and it was tested by the Kennedy Administration in 1964 when the top marginal tax rate was cut from 91% to 70%. Yes, top rates used to be 91% under Eisenhower (compared to today's top rate of 35%). So next time you complain about how high taxes are, well, don't. Anyways, back to the Kennedy tax cut. When they cut the rates, revenue actually rose, which is what the original supply-siders asserted. Then, despite warnings of large budget deficits, Reagan and Bush 43 went on to cut taxes as well. The outcomes on revenues, however, were simply not good at all, to say nothing of their economic effects. However, like Reagan and Bush 43, today's Republican presidential candidates are all attempting to push this idea to its logical extreme. Every single one of them has released economic plans that involve cutting taxes. They argue that all tax cuts under all circumstances raise revenues by broadening the base and simultaneously lead to much faster economic growth. 


Without getting too nitty-gritty, I'll attempt to break down their logic as best as I can. The entire idea behind this is something called the Laffer Curve, which basically says that increasing taxes will only increase government revenues up to a certain point. After that point, revenues actually would decrease because people had less incentive to work harder, as their money would be taxed at high rates. Conversely, cutting taxes from a higher rate to a lower rate would make people work harder because they'd pay less of their profits in taxes. In so doing, more people would work harder, and thus create more taxable income (i.e. broadening the tax base). Let me be clear in stating that this idea makes sense in theory. However, pushing this idea to its logical extreme makes precisely no sense.


My point in fleshing all of this out is to try to overturn the idea that tax cuts are somehow always highly stimulative to an economy. The evidence simply isn't there, and every conservative I've seen speak on the issue doesn't seem to offer any. I'm not trying to be biased when I say this, but they seem to accept it as a simple fact of life that cutting taxes will create prosperity (never mind the budgetary implications) and that any rise in tax rates will cause the economy to tank. It just isn't that simple. Make no mistake, I'm not saying that we have free reign to raise taxes as high as we want either. There's simply something to be said for looking at the evidence.


During the postwar period, top tax rates were anywhere between 70 and 91 percent, and yet average GDP and median family income growth during that period was higher than it was post-1980! So the greatest period of broad-based prosperity the U.S. has ever seen was characterized by high minimum wages, high taxes, strong unions, and tight regulations. I'm not saying that correlation equals causation, but the fact that a period of strong growth like this happened with those conditions seriously calls into question the Republican assertion that any tax increases will be tantamount to Armageddon.


Moving on then. In 1982, after cutting top rates from 70% to 50%, Reagan was convinced by budget advisers that he needed to raise taxes again because of a growing deficit (the tax cuts didn't pay for themselves, as you may recall). The U.S. Chamber of Commerce had this to say about his plan to raise taxes:
“If H.R. 4961 is passed in these troublesome economic times, we have no doubt that it will curb the economic recovery everyone wants. It will mean a lower cash flow as more businesses pay more taxes, with a depressing effect on stock prices. It will reduce incentives for the increased savings and investment so badly needed to improve productivity and create more jobs. It will mean higher prices for many products and services. It will increase government costs in caring for those who, because the economy is held down, cannot find employment.” 
How did this prediction pan out? Well, Bruce Bartlett (former adviser to Reagan) tells all: 
"Looking at real gross domestic product, it grew 4.5 percent in 1983 and 7.2 percent in 1984 – an exceptionally strong performance. The stock market had one of its best years ever in 1983 – both the Dow Jones Industrial Average and the S&P 500 Index rose 35 percent. . .The unemployment rate fell from 10.6 percent in December 1982 to 8.1 percent by December 1983 and 7.1 percent in December 1984."
Another swing and another miss. In the 1990s, similar predictions were made when President Clinton wanted to raise taxes. Conversely, when President Bush cut taxes in 2003, we were promised prosperity and rapid job growth. Well, how did these years pan out? According to the BLS, average job growth during Clinton's terms was 240,100 jobs added per month. During George W. Bush's terms (I've excluded the recessions of 01-03 and 08 for clarity) job growth was around 148,036 jobs per month. 


So, all in all, this evidence blows a gaping hole in assertions that all tax cuts lead to prosperity and that all tax hikes slow economic growth. The fact is, tax policy is much more complicated than that, and pretending it isn't only hurts any policy discourse that we might have as a nation. You might say that simplifying it for voters is all that's going on, but that's no excuse to tout economic policies that, quite frankly, are unsubstantiated.

Sunday, March 11, 2012

Hell Week

Very limited chances of me blogging much in the next few days, but I'll do my best between exams and studying to get something in here. Thanks go out to everyone for their feedback on my Obamacare post!

Thursday, March 8, 2012

In Defense of Obamacare

I know a lot of Americans, many of you included, have reservations about the Affordable Care Act. Some of you may even think it's a gross imposition by the government into everyday life. Throughout this post, I'm going to offer an economic and logical defense and analysis of Obamacare. Some of you may feel turned off just from the title, but I implore you to continue reading, if only just to know the reasoning behind many of the provisions of the law. Who knows? You might even be won over.

Allow me to begin by explaining a few things that are instrumental to my overall argument. Free markets are amazing things, capable of efficiently allocating resources and maximizing overall societal gains. They can process an unthinkable amount of information and distill it down into one simple number--a price. However, it is important to realize that free markets can sometimes fail. The reason, in the case of the insurance industry, is due to two economic anomalies--asymmetric information and adverse selection. Bear with me, as I'm going to explain those in context in just a second.

Essentially, the problem boils down to one of balancing risk in insurance plans. For those of you who don't know much about health insurance, here's a quick primer. A health insurance plan is basically a bunch of policyholders who pay premiums that all go to the same place--the insurance company. All of these policyholders are put into one big risk pool as a means to "balance out" the healthiness of the pool as a whole, because they don't know for sure how healthy everyone is (people sometimes lie, that's where the asymmetric information comes in). So everyone pays and the company basically uses the premium money to pay for hospital procedures where it is needed. Where's the problem, you ask? Well, let's say that the younger people decide that, hey, I'm healthy, why do I need to pay thousands of dollars for this health plan? I'll talk about the problems with this later, but what this does is that the overall level of risk is driven up in the pool as the healthy leave it. With higher risk, comes higher expected costs for the insurer, so they have to raise premiums. That in turn leads to more younger people who value the insurance less to drop coverage, raising riskiness, raising the premiums again, and so on. Eventually, the premiums rise to a point that even those who desperately need insurance will be priced out of the market. That's what's known as an insurance death spiral. Congrats, the market for insurance has just collapsed.

So why don't we see this in everyday life, you may ask? Well, to be quite honest, we do see it. However, insurance companies nowadays take steps to try to slow this down by denying coverage to people with pre-existing conditions, etc, as a means to lower overall risk levels. This is the problem with saying that health care reform can be achieved by simply saying that insurers cannot discriminate or charge preposterously high premiums. Regulating the industry in that way without mandating that everyone purchase insurance will simply lead to a much faster death spiral. 

This isn't just the theoretical ramblings of an economics student, states have tried regulation without a mandate. The results were quite disastrous:
"A classic example is New Jersey. In 1993 the state implemented guaranteed insurance issuance and community rating in its direct-purchase market—where individuals buy health insurance directly from an insurer, not through their employer. Older, more costly individuals enrolled in coverage, and premiums rose by up to 155 percent from 1996 to 2000. Even the premium of the state’s Health Maintenance Organization plan—which more aggressively manages costs—rose by 48 percent over this period. As a result, overall enrollment declined by 41 percent in the same period—consistent with a death spiral caused by adverse selection."
The report goes on to say that 7 other states tried this same thing and they all have led to much, much higher premiums relative to the national average. This is why participation in the health care system needs to  be universal. In so doing, the nationwide risk pool can be balanced between the healthy and the sick. No death spiral, no adverse selection, no market collapse. 

So how can we do this? Well, there's a single-payer system, in which people pay taxes like they do for Medicare and are all covered in return. However, it seems that this just isn't politically feasible in America, despite the fact that it is more cost-effective. The other option is, of course, the individual mandate. Obamacare has one of these, as you all know. It says that all who can afford insurance should have it, all who can not will be given a tax credit or a subsidy with which to purchase it, and if you're still unable to after that, you're already probably enrolled in Medicaid. 

Obamacare's many critics (even though the individual mandate was a Republican idea put forth as an alternative to Clinton's health care plan) claim that mandating that people purchase something is a violation of liberty. Yes, I get it, it does kind of suck to be required to purchase something, but the alternatives are no better:

An alternative to this is single payer health care, which would address the problems I've talked about, but that also effectively requires people to buy insurance through the tax code. It's also politically unfeasible, as I've said before. If we chose to stick with what we have, people who voluntarily choose not to be insured end up going to the emergency room and their is care paid for by insured people in the form of higher premiums. Because you chose not to be insured, you're effectively violating another person's liberty by making them pay for your care. This problem is in addition to the millions of uninsured people, rapidly rising costs, etc. So there's that. In order for no one's liberty to be violated under our current system, basically what would have to happen is that we, as a society, would have to let uninsured people die on an operating table rather than be forced to pay for their treatment. Needless to say, mandating health insurance coverage is preferable to that. If Americans want a health care system that doesn't discriminate based on certain pre-existing conditions, (and there are a lot of them) then the only way to ensure that it actually works is through mandated coverage. That's simply an economic fact.

In addition to solving the problems above, Obamacare reduces the federal deficit by over $200 billion in the next decade. Not a bad deal, considering the number of uninsured people will be reduced by 32 million. What's more, the Congressional Budget Office estimates that with a mandate, the average premium will drop by about 10%, whereas without it, premiums will rise 20%. Effectively, everyone wins in this situation. Those who already have insurance will benefit from lower premiums and those who can't afford it will now be able to get coverage. Only those who can afford it but choose not to purchase it will be charged a penalty. The justification for this initially came from The Heritage Foundation, a conservative think-tank that said, “each household has the obligation, to the extent it is able, to avoid placing demands on society by protecting itself.” Which, to their credit, is precisely the point I made earlier.

I guess the way I see it is that from an economic point of view, (and a logical one, I might add) there really isn't any downside to Obamacare that any of the alternatives could realistically mitigate. It isn't socialist, as it utilizes the existing private insurance market. It saves money in terms of the deficit as well as individual premiums. It covers millions of people who wouldn't be covered otherwise. As far as religious liberty goes, Obama's compromise provides exemptions to religiously affiliated institutions while still covering contraception directly through insurance companies, so I don't see a problem. Moreover, 28 states already have similar contraception laws already. People are complaining that they don't want their tax money to pay for women to have sex. Well, aside from the fact that the pill has other uses, taxpayer money, by and large, won't be paying for it, because people will be buying their own insurance most of the time. That kind of slippery-slope "I don't want my tax dollars paying for X" argument simply doesn't hold up under scrutiny. I don't want my tax dollars paying for oil subsidies, but they are. And so it goes. All the law says is that contraception must be covered under insurance plans. This seems perfectly appropriate to me, because birth control is a boon both for women's health and  their economic prosperity. Mandating contraceptive coverage doesn't carry with it the ethical issues that abortion does, and it allows women to time and space out their children, thus allowing them to more easily have careers. What's more, easier access to contraception will severely cut down on unplanned pregnancies, (almost half of all pregnancies in the U.S.) which will in turn save money otherwise spent on expensive natal and pre-natal care, further driving down premiums. Taken together, these facts present a strong economic case for the birth control mandate.

How does Obamacare stack up against other free, first-world nations' health care systems? Well, Switzerland and the Netherlands have a similar system, and by three different measures done by three different organizations, they're ranked even more highly than the United States is in terms of how free those countries are. This is even more impressive given the fact that tax rates in both of those nations are much higher than in the U.S. and that Obamacare achieves the same coverage with much lower tax rates. Hardly what I'd call a tyrannical system. So remind me again, what's wrong with Obamacare?

Wednesday, March 7, 2012

We're Not Out of the Woods Yet

Some more good news for today! ADP released its monthly private sector payrolls report, and guess what? Pretty decent news! The private sector added 216,000 new jobs this past month. Now this is just ADP's report--the official Bureau of Labor Statistics report doesn't come out until Friday morning, but still, encouraging news. 

So what exactly does the ADP report measure? Well, it notably excludes government payrolls, so this is just covering strictly the private sector. So when Friday's news comes it'll include government payrolls, which unfortunately, due to cutbacks at state and local levels, are liable to actually put a bit of a drag on the report, but not by very much, hopefully.

Anyways, how does this month's jobs report measure up to average job growth during periods of prosperity? Well, let's take a look at average job growth under the past two administrations, Clinton's and Bush's. All of my data are from the BLS, should you be interested.

First, let's start with Clinton's job numbers, which, for the sake of clarity, I'll be measuring from January 1993 to January 2001. Throughout that time, the economy added a grand total of 23.05 million jobs, averaging out to about 240,100 jobs per month created.

The Bush years are a bit more complicated, because the dot-com bubble burst and there was a recession between 2001 and 2003, and the economy started shedding jobs in late 2008 as the financial crisis was reaching fever pitch. So here's what I'm going to do: first, I'll do the pure, unadulterated numbers from January 2001 to January 2009. Then, I'll cut out the job losses from the dot-com recession and the 2008 financial crisis, so that people get an idea of the "good years" of job growth between 2003 and 2007.

Anyways, here's how the data measure up: 

January 2001 to January 2009: 1.08 million net jobs created, with an average of 11,250 jobs added per month. Now, this is obviously muddied by both recessions, so the next bit of data will be from June 2003 to December 2007, effectively cutting out both recessions.

June 2003 to December 2007: 8.142 million net jobs created, with an average of 148,036 jobs added per month. 

So, just for the sake of comparison, we're beating the Bush year job creation average while still technically being in a recession, which is a good sign, but we've not topped the Clinton years average. Hopefully Friday will likewise yield encouraging news in the labor markets. Even at this rate of job creation, however, it should be noted that it would still take years to return to full employment. There's more work for us yet.

Tuesday, March 6, 2012

Atlantis and the Housing Market


With Congressional gridlock and the fact that it's an election year, some of you may be frustrated by the sheer lack of progress made by the U.S. government in bringing down unemployment. Although  in recent months, the job reports have been pretty encouraging, it would still take more than 5 years to bring unemployment down to around 5% at the rate we've seen the past few months. The reports are good, but not astoundingly so. Now, back to my original point, what can be done by the government given the congressional gridlock? Well, precisely what President Obama came out and did today: he's further easing the process by which homeowners with federally-provided mortgages that are worth more than their houses can refinance at the very low interest rates of today.

So, what does this mean for the average homeowner whose mortgage is more underwater than Atlantis? Well, here's what the FHA had to say about it:
"The changes could increase the reach of FHA's streamlined refinance program by 3.4 million households paying interest rates higher than 5 percent, the agency said. A typical borrower would save about $1,000 a year in premiums and $3,000 a year including savings from lower rates, the FHA said."
So the average borrower would save about $4,000 a year. Considering the median income of the U.S. is right around $50,000, that's around 8% of their income. That's hardly an insubstantial amount of money they save, which would presumably be put towards other forms of consumption. As some of you may know, spending money has a multiplier effect--if I, as a result of refinancing, now have enough money go out and buy 26 hammocks full of Snuggies, that creates an increased demand in the hammock and Snuggie markets. With this increased demand, the artisans of the hammock and Snuggie industries will have to hire new workers to meet the new aggregated demand levels. So the money flows in large cycles, with the newly hired Snuggie and hammock technicians spending their newfound income on some other random stuff. A whimsical anecdote, to be sure, but a more or less accurate one, according to macroeconomic theory.

In any case, this move by the Obama Administration looks even better when you consider the fact that one of the main factors constraining our recovery is an incredibly high level of household debt (since it constrains spending). Given that the housing bubble drove household (especially mortgage) debt through the roof, allowing underwater mortgages to be refinanced (and thus reduce household debt levels) will be instrumental to our recovery.

Make no mistake, however, in reading what I've just said--high levels of household debt are the problem right now, not high levels of government debt. If high levels of government debt were the problem, we'd see interest rates on T-bills start to rise. So that's my good news for the day. Hopefully we'll see those underwater mortgages rise from the briny deep, and with them, perhaps, our economy. I call poetic license on that dramatic flair.


Friday, March 2, 2012

You're Doing it Wrong, EU Leaders Edition

As I was glancing through the headlines today, I saw that EU leaders are, once again, trying to pass a treaty that would effectively lock individual EU nations' fiscal policies up in a straitjacket. The treaty calls for balanced budgets for all, and limits budget deficits in a recession. Should any nation exceed the deficits, they get sanctioned. What's more, any nation that fails to ratify the treaty is barred from accessing any additional bailout funds. Well that's just about the worst thing I've ever heard. They're clearly committed to this discourse that somehow the current crisis in Europe was caused by excessive government spending, which, as I've said before, is precisely wrong. As you may or may not notice, my argument is virtually the same as Krugman's, so a lot of this is from his blog. Full disclosure and all. Let's take a look at some handy graphs I lifted from him, that illustrate what actually happened in Europe:


So, was it the size of the welfare state, as the American Right likes to argue?



Swing and a miss, Germany has a bigger welfare state as a percentage of GDP than any of the GIPSI nations and it doesn't have a debt crisis on its hands. So was it high budget deficits, like the Germans say?


To the extent that this is true, it only really applies to Greece. Italy's deficits are barely higher than France's, Portugal had lower deficits than Germany, and Ireland and Spain ran surpluses. So that's not a good fit either. How about flows of capital from the wealthier northern countries to those in the south, like Krugman and others argue?

Now we're cookin'. I know I'm effectively paraphrasing Krugman's argument about the Eurozone, but I happen to agree with it, so there's that. In any case, my point in explaining this is that this new EU fiscal pact is yet another mistake made by Eurozone leaders who have turned this into a story about fiscal discipline, when the real story is one of capital flows from northern to southern Europe. In short, here's what happened: creating the Euro created a false sense of security among investors, which led to unsustainable flows of money in the form of private investment to go into southern countries. As prices and inflation rose, their goods became less and less competitive on the world market, so they started running huge trade deficits. Then the recession hit and the housing bubble burst. Poof, private investment took a dive off a cliff, and countries were forced to run massive deficits to keep the recession from getting deeper, which is what any economist would argue needed to happen. Since the ECB raised interest rates last spring, weak economies took a nosedive and Greek bond yields spiked, and investors flew into a blind panic as they realized that the ECB wouldn't pursue policies conducive to growth in anywhere but Germany.


Instead of addressing the problem of huge trade deficits and price levels, the Germans are insisting upon keeping inflation very low with unemployment at intolerably high levels. The ECB has slowly begun infusing more cash into the Eurozone and continues its bond-buying programs, but the policies are halfheartedly pursued, at best. What the ECB needs to do is print a boatload of cash and infuse it into the Eurozone, the Germans need to accept a higher rate of inflation, so that southern countries with weaker economies don't have crippling deflation (which increases debt levels) and can slowly begin to balance their trade and current account books. Instead, the Germans, forever scarred by Weimar Republic hyperinflation, are pushing for dangerously low levels of inflation. At the same time, they're insisting that harsh austerity measures be taken by not only GIPSI nations, but by everyone! They argue that GIPSI nations will recover by running huge trade surpluses, but who are they going to trade with if everyone in the Eurozone is forced to cut back by a treaty like this one? Contrary to what Angela Merkel and company may think, when you spend less money, fewer, not more, things are bought.


How's all that austerity treating them, you may ask? The EU just was officially declared to be in another recession. So this new fiscal pact represents yet another step down the road to ruin for the Eurozone. If monetary policy in Europe, as we've seen, is pursued primarily to benefit the Germans and ruin everyone else, how the hell will locking everyone's fiscal policies up in a similarly Germanic manner help? The short answer is this: it won't.

Thursday, March 1, 2012

What's the Matter with Gas Prices?

A few days ago, I saw this picture posted on Facebook that gave me the urge to launch into a bit of a tirade, so what better place to do so than on here? In any case, the picture was of a post-it note on a gas pump that said the following:
"Hey there voter! Do you remember that on Inauguration Day 2009, the national average for a gallon of gasoline was about $1.78? How's that "hope and change" working out for you?"
Well, the long and short of it is that this statement is misleading and wrong in a number of ways. It also made me look into the back-and-forth debate about rising gasoline prices going on right now. I'd like to clear a number of things up about that. Right now, there are a number of misconceptions floating around that blame the rise in gas prices on one of two things: President Obama's policies, or the Federal Reserve. Well, let's take a closer look at each argument, shall we?


For starters, let me quickly explain why the statement above about cheap gas in 2009 is false. Deep recessions cause huge shortfalls in demand. As any economics student would know, a slack in demand leads to lower prices. The rise in gas prices reflects in part an increase in demand as the global economy slowly recovers. There are a number of factors that play into the price of gas, but first let's look at what factors aren't behind the recent rise in prices.


Well, right now, the argument against President Obama is that a number of his policies are driving gas prices up. Before I take a closer look at the specifics, let me be very clear about one thing: Presidents have very little control over gas prices. Which is why I think criticizing the President for high gas prices is unfair, whether it be Obama right now or Bush in mid-2008. Well, the first attack on Obama is the assertion that his blocking the Keystone XL pipeline from being built is driving up gas prices. Well, first of all, how would blocking a pipeline from being built drive prices up? If anything, they would stay the same. It isn't as if, upon the pipeline being blocked, all oil refineries decided to raise prices out of spite. It just doesn't work like that. What's more, if he had approved the pipeline, gas prices wouldn't have gone down immediately, building a pipeline takes time. More importantly, though, is the fact that building the pipeline would actually increase gas prices in many states, according to a study by Cornell's economics department. The reason behind this is the fact that the pipeline would allow oil to be piped south to the coast and sold for a higher profit in export markets rather than in the U.S. So the idea that the Keystone XL pipeline is some sort of panacea for higher gas prices is dubious, at best. 


Another assertion against Obama is that he's cut domestic oil production. Well, that's simply not true, domestic oil production is at an eight year high. The degree to which Obama can take credit might be debatable, but he certainly hasn't cut domestic drilling. Republicans also like to criticize Obama for wanting to end subsidies and tax breaks for large oil companies. While this is somewhat unrelated, a study by Loyola University suggests that, historically, for every $1 billion spent in subsidies on oil and gas companies, we'd get a $150 million return. Yup, we're really getting our money's worth there, huh?


Next up, people blaming the Federal Reserve's monetary policy for the rise in gas prices. They say that the low interest rates have caused the exchange rate of the dollar to decline relative to foreign currencies, making imported oil more expensive in dollars. There are a number of things wrong with this, so I'll take it one at a time. First: the Federal Reserve does NOT CONTROL PRICES. There's such a thing as price theory. Markets generally determine prices of things, we're not living in a centrally planned economy, contrary to what some would have you believe. Comrade Bernanke isn't trying to pull a fast one on us. Supply disruptions due to the Arab Spring are still going on, tensions with Iran are on the rise, and increased demand for oil in rapidly developing nations like China, India, and Brazil are driving prices up. Who knew that when people get richer they actually want to drive more? Well I sure didn't. When demand for gas goes up, so does price, when supply decreases, price goes up. If you don't believe me, take someone else's word for it: the Energy Information Administration says that world crude oil prices account for 76% of the price of a gallon of gas. What's more, here's what they have to say about the Fed's secret agenda to raise gas prices:
"Despite these many possible explanations, the actual correlation between oil prices and exchange rates has not been stable over time, and was close to zero for more than half of the last decade."
That evidence is really starting to pile up, isn't it? Even if the Fed was driving (heh, puns) up gas prices, raising interest rates right now would be incredibly disastrous. High gas prices might be a drag on the economy, but raising interest rates, as any economist would tell you, is contractionary for an economy. In other words, I hope you like double-dip recessions.


So the next time you hear someone griping about gas prices and blaming Obama or the Fed, here's what you need to know: they have no idea what they're talking about.