Thursday, June 28, 2012

Chief Justice Roberts to Fellow Conservatives: Drop Dead



Big news today, as many of you have no doubt heard. In a 5-4 ruling, the Supreme Court upheld the constitutionality of the individual mandate. I would have, amusingly enough, had a lot more to say today about the Supreme Court's decision had the ruling gone the other way, but it didn't, so I don't. All I can really say is that I'm happy it went the way it did. I know whoever is on the losing end of a court ruling will rail about unelected judges legislating from the bench, but had the mandate been struck down, it would have been pretty blatantly political. The way I see it is that if 19 out of 21 top constitutional scholars think that the mandate is constitutional, then there's a pretty good chance that there's something to what they say. But this blog is about economics and politics, not law. 


I'm not going to get into another argument about why the mandate is necessary, or why the Republican alternatives put forth so far won't work or are irrelevant. I've done that before at length. I guess what I'd like to do is to take a look at what Republicans are saying about the ruling.  Here's John Boehner:
"Today’s ruling underscores the urgency of repealing this harmful law in its entirety. What Americans want is a common-sense, step-by-step approach to health care reform that will protect Americans’ access to the care they need, from the doctor they choose, at a lower cost."
On the Senate side, here's Mitch McConnell:
"Today’s decision makes one thing clear: Congress must act to repeal this misguided law. Obamacare has not only limited choices and increased health care costs for American families, it has made it harder for American businesses to hire. Today’s decision does nothing to diminish the fact that Obamacare’s mandates, tax hikes, and Medicare cuts should be repealed and replaced with common sense reforms that lower costs and that the American people actually want."
In typical form, Rand Paul says something silly:
“Just because a couple people on the Supreme Court declare something to be ‘constitutional’ does not make it so. The whole thing remains unconstitutional. While the court may have erroneously come to the conclusion that the law is allowable, it certainly does nothing to make this mandate or government takeover of our health care right.” 
And just because an Ophthalmologist/politician from Kentucky says something is unconstitutional, does not make it the case, either. But I digress. In any case, these reactions are about what I expected--generic condemnations of a law that contains many provisions Republicans support, coupled with equally generic statements about what the American people want. 


Let's start with the fact that they all contend that the law is a government takeover of health care that will limit choices for consumers. The law tells states to set up their own insurance exchanges where private, for-profit insurance companies compete for your business in an online marketplace where consumers shop for the insurance plan they want. Nothing about this screams "limited choice" or "government takeover" to me. Does the law put forth regulations on the insurance industry? Yes, of course it does. How else are you supposed to enact health care reform? But it by no means looks like a government takeover of health care, a la Britain's health care system.


As for lower costs, I think there's a fair amount of research on this, which argues that premiums will be lower overall because of competition in the exchanges coupled with the fact that healthier people will be brought into the risk pool via the individual mandate. The idea that this law will somehow increase insurance costs for people seems patently false based on the credible research available to us.


As for businesses, as I've said time and time again, their main concern right now is demand. Government regulation complaints are fairly close to what they've been for the past decade. Moreover, polling suggests that the hype surrounding small business opposition to the law has been way overblown, and that a majority of small business owners polled support the law. Makes you wonder, doesn't it?


I think the Supreme Court made the right decision today (well of course I would, wouldn't I?). I think the Affordable Care Act, while far from perfect, is probably America's best shot at achieving a system of universal health care. Republicans, for all of their bluster and outrage towards the law, cannot deny that they once supported many of the provisions found within it. They can talk all they want about how they will "repeal and replace" the law, but so far their proposals leave a lot to be desired. 


The funny thing is that Democrats traditionally supported a single-payer system of health insurance, basically Medicare for all, with Republicans favoring something closer to Mitt Romney's health care plan in Massachusetts. Since Obama took a more conservative approach to health care reform in order to try to be bipartisan, Republicans have had their ideas co-opted and have put themselves in the intractable position of vehemently opposing ideas they once lauded. Let's see if they can come up with a credible alternative.


So far I'm not impressed.


Update: This post's popularity was so high that it put me over the 5,000 view mark! Thank you all for your readership! 

Sunday, June 24, 2012

The Incoherent Public

Scott Sumner has an excellent post up today about how the idea of "public opinion" is essentially meaningless when it comes to complex policies, since the framing of the question often dictates peoples' answers. Another reason, says Sumner, is the fact that most people either don't know about the policy, or don't understand it. Sumner mostly talks about this with regard to tax policy, but this could just as easily apply to something else--say, health care reform. 


In fact, this is something I've noticed more and more, especially when I've done research on the ACA and what people think of it. I can't even remember the number of times I've read a poll that says that the Affordable Care is reviled by the American public and then, not two minutes later, I read one that says that it is popular. So why this seeming schizophrenia about the ACA?


Well, from what I can tell, the disconnect stems from the fact that the law is unpopular to people who don't actually know much about it. For example, Ezra Klein did a piece on this a few years ago, and he found that people didn't like the law when they were just asked about it generally, but the individual components of the law polled very well!


You can spin this however you want, really. For me, it really comes down to the fact that people generally don't understand complex policy making because most of them don't really have the time to laze around and read about it in depth like yours truly. They have jobs. So the degree to which they're informed on the inner workings of something like Obamacare is probably pretty low. The fact that there's an enormous amount of misinformation flying around about it doesn't help matters either. 


In general, I don't put a whole lot of stock in polling about things like this. There are a few reasons for this. The first, of course, is because people probably don't understand a lot of it, and are forced to draw on what they've heard in passing. The second is that poll respondents can be influenced to change their answers very easily, so their answers are not necessarily reflective of their true beliefs.


I don't have anything to back this up, really, but my gut instinct is that if people were given an actual explanation of what the Affordable Care Act included, instead of, say, constantly hearing how the gub'mint is going to ration their care, the law would probably enjoy a greater degree of support.


All of this makes me think of a famous quote from my youth: "The only people who don't like krabby patties, have never eaten one!"




I'm such an intellectual, I know.

Thursday, June 21, 2012

In Which Ben Bernanke Turns me into William Jennings Bryan



On July 9, 1896, William Jennings Bryan gave a famous speech in which he uttered the words, "you shall not crucify mankind upon a cross of gold." In a nutshell, he was speaking out against the gold standard's deflationary effects on the American economy. Basically, he was complaining that the gold standard was constraining economic growth by not providing enough inflation. That's essentially how I feel after yesterday's FOMC (Federal Open Market Committee) statement. I'm not really going to delve into their extension of Operation Twist, because it likely won't do much to help the economy. Instead, I'm going to run through sort of a thought experiment on the trade-off between inflation and unemployment.


First, some basic economics. For those of you who don't know, there's something called the short-run Philips Curve, which looks a little something like this: 


Basically, the way it works (in theory) is that there's a short-run trade off in the nominal economy between the unemployment rate and the rate of inflation. So basically, higher inflation will yield lower unemployment, and higher unemployment will yield lower inflation. Generally speaking, this has held true over the past 50 or so years, with some exceptions (in which inflation was caused by real shocks to the economy, like the oil embargoes in the 1970s). Here's a graph of the unemployment rate (red) versus the inflation rate (blue):




You'll notice how, most of the time, spikes in unemployment correspond fairly well with dips in inflation. Like I said, exceptions to this exist, and the model has limitations. Economics isn't an exact science. But anyways, why is there such a trade-off?


During a recession, whether its caused by the Fed or by a financial crisis, unemployment goes up. When people don't have jobs, they obviously spend money less. Less money changing hands in the economy means that demand goes down for goods and services, so prices fall (or rise more slowly.) This is the basic Aggregate Demand/Aggregate Supply model that many of you have probably seen at some point. 


So when demand shifts to the left (drops) on the graph, you'll note that prices fall. Basically what I just said. On the flip side, when demand increases, prices go up because more people want limited amounts of goods. So raising prices is a way to ration limited goods. That's a pretty simplified version of the way things work. 

In any case, how is this relevant to Ben Bernanke, the Fed, or William Jennings Bryan? Well, think about it like this: Right now, the Fed has made an explicit promise to keep inflation at 2% basically no matter what. This is a self-defeating and stupid plan, given the circumstances. Think of it this way: in the 1980s, Paul Volcker, then Chairman of the Fed, clamped down on inflation, which had been running persistently high. He did this by tightening money  tremendously, causing unemployment to spike to 10%. Without getting too technical, he raised interest rates a great deal to kick inflation to the curb. Remember the Philips Curve? This is a perfect example of it in action. The costs of reducing inflation to a lower level were increased unemployment for a certain amount of time. That is to say, we were forced to tolerate a certain amount of elevated unemployment to bring inflation down.

Now let's imagine a world in which inflation is low, has been very low, and looks like it will remain low for the forseeable future. Let's also imagine that unemployment is elevated well above what we'd like it to be and has been for several years. We're not just imagining, though, because that's the situation we face today. So shouldn't we, like Volcker's Fed in the 80s, have to tolerate certain costs? Instead of higher unemployment, though, we would face a period of slightly higher inflation in order to bring down unemployment. Effectively, the situation has been reversed. Yes, elevated inflation is bad, and it is damaging in the long run for the economy, but so is persistently high unemployment.  

This brings be to the Fed's 2% inflation target. Having an explicit 2% inflation target makes a robust recovery a nearly impossible prospect. But that's basically what Ben Bernanke reiterated yesterday--a firm 2% target. That would be like Paul Volcker circa 1981 saying, "Oh, we're committed to keeping unemployment low, but we're also going to bring down inflation." It can't really be done, so far as I can tell. Keeping a 2% inflation ceiling in place serves only to keep any prospect of recovery a distant dream, at best. 

And before anybody jumps on me as some sort of a money-printing inflation-lover, let me point out that different circumstances often necessitate different policy choices. By all means, keep a 2% inflation target when unemployment is at 5% and the economy is doing just fine. However, the idea that we should cling to one whilst unemployment is at 8.2% seems, at best, foolish. So why are we doing just that?

Somebody? Anybody?

P.S. Matt Yglesias has an excellent post about how a jobs boom necessitates higher inflation for a period of time. I found in incredibly relevant to this post.

Monday, June 18, 2012

I Am Government Man, Round Two

Quick post today, as I've had a long day and don't much feel like writing more than I already have. I trust that many of you reading this remember my post last week about what I've been doing down at the Ohio Statehouse. If not, go read it here. If you have read that post, then I've got something that may interest you even more. Today I finished the proposal for implementation in Ohio, which you can all download an read right here. It should open up in a Google Drive window, but you can hit File > Download at the top left if you want to download it. It looks a lot cleaner and is easier to read when you download it, just saying.


In any case, the proposal isn't too long, and it mostly consists of  bullet points and charts. Basically, if you're interested in learning about a part of the Affordable Care Act that virtually no one knows about, you should read this proposal. If not, then, hell, I don't even know why you're here!


But seriously, you all should read it and give me feedback, because I could really use some feedback, as I'll be emailing this to various consumer and health care groups across the state to see what they think. 



Saturday, June 16, 2012

Jamie Dimon: Regulator Extraordinaire

Jamie Dimon is seen by a lot of people as the  "smart guy" of Wall Street. Personally, I'm not sure what to think of him. But anyways, quick post about this because I was floored when I read about it. When he was testifying in front of the Senate Banking Committee this week, many Republicans were asking him for advice on how they should regulate banks. On the face of it, okay, I guess I can see how they might ask him because he knows the banking system well. But seriously? Listen to these questions:
“What would you do to make our system safer?” Sen. Bob Corker (R-Tenn.) asked Dimon.
“What should the function of regulators be?” asked Sen. Mike Crapo (R-Ida.).
“How much have regulation costs increased?” asked Sen. Mike Johanns (R-Neb.).
“We’re honestly looking for some ideas as we look over [Dodd-Frank] in the next year,” Sen. Jim DeMint (R-S.C.) told him.
I don't know, is it just me, or is this practically the definition of regulatory capture? They're asking the head of a bank what he thinks is the best way to regulate banks. You know what? We should just cut to the chase and appoint him chairman of the New York Fed. Then he'll regulate all the banks good 'n' proper.


How asinine.



Oh, My. How Very Unexpected!

Hey there, everyone. What say we play a little game I like to call, "Who said it?"

"Collective bargaining in the years since [Gompers] has played a major role in America's economic miracle. Unions represent some of the freest institutions in this land. There are few finer examples of participatory democracy to be found anywhere. Too often, discussion about the labor movement concentrates on disputes, corruption, and strikes. But while these things are headlines, there are thousands of good agreements reached and put into practice every year without a hitch."
This might surprise you. It was Reagan. Ronald Reagan, the godfather of the modern GOP, extolled the virtues of unions. Can you imagine someone like Scott Walker or John Kasich saying something as, well, as downright reasonable as what you've just read above? Reagan basically just said that unions are often seen as corrupt, but many of them do a lot of good. Yet, somehow, amazingly, Ronald Reagan's legacy hasn't been cast out for such seemingly traitorous words. Instead, he's remembered as the small-government, tax-cutting, budget-balancing ideological icon of the modern Republican Party. 


The problem we now face is that the many who look to him for such a legacy either don't realize or refuse to believe that his time in office yielded almost none of these things. Yes, he did cut taxes in 1981. Then he raised them 11 times after that, including (at the time) the largest peacetime tax increase in history. As far as balancing the budget, I've talked about how that just isn't true. Remember this chart?


Even after we regained full employment after the recession of 1981-82, the deficit never did shrink back down, so the recession can only be blamed so much. The larger deficit was structural after that point. That is to say, it was not caused by the recession.

As far as small-government goes, federal employee payrolls expanded from 2.8 million to 3 million during Reagan's two terms in office, largely from his military buildup.

I don't want readers to get the wrong idea from this post--I'm not bashing Reagan just for its own sake--I'm trying to make a point. Well, actually, I guess I'm trying to make two. The first point is one I've made many times before, and its that Reagan's legacy is literally nothing like what many in the modern GOP seem to think it is. That is to say, his terms in office were not ones in which the budget was balanced and the size of government decreased. The second point I'm trying to make is largely that Reagan was very clearly not averse to accomodation. When he saw that the budget deficit was getting large, he was willing to raise taxes. Contrast that with Grover Norquist's anti-tax pledge. Reagan's legacy was not one of strict adherence to conservative principles, in spite of all of his rhetoric. He was a pragmatist. So instead of invoking some mythologized version of his legacy and stonewalling anything Barack Obama tries to do in the name of unachievable conservative principles, perhaps Republicans should emulate the real Ronald Reagan.

I think Reagan would be ashamed of his party if he saw it today.



Friday, June 15, 2012

Harder, Better, Faster, Stronger.

You might be wondering what I'm describing in the title. No, it isn't the economy. It might be health care in about 6 years, but that depends on the Supreme Court. But no, I'm mostly talking about this blog. The title kind of overstates it, but today I broke 4,000 views. Every subsequent 1,000 views I've gotten has taken less and less time. This go around, it only took 3 weeks to get another thousand views. 


Yes, I know that I'm probably making a big deal about very few total views, but hey, I take what I can get. I've noticed that people are also commenting more on my posts than they have in the past, which I'm thrilled about. Yes, even the critical ones. To be honest, when I started this blog, I didn't think that anyone would ever really read it besides a few close friends. But I have to say that I've been pleasantly surprised by the turnout, even if I wish I had a larger audience. I'll get there eventually, I suppose. 


In any case, I just wanted to, again, thank everyone who's read my blog since the start. New readers, I sincerely hope you stick around. It'll be a long, interesting summer, and I think I'll have plenty to write about in the coming months before the election. I'll keep writing if you keep reading. And if you really want to do me a solid, you can share my blog with your friends! 


Stay beautiful.





Thursday, June 14, 2012

I Am Government Man



Its been awhile, hasn't it? I didn't find anything particularly compelling to write about from the national or international stage that hasn't already been beaten like the dead horse it was. Instead, I thought I might write about Mitt Romney's plan for health insurance that wouldn't work, but I've already basically done that. No sense in repeating myself until he says something more about it, because his plan is frighteningly light on details. So I guess what I'll do today is give you all the lowdown on what I've been doing down at the Statehouse for the past few days.


Well, I'm drafting a legislative proposal for Ohio to implement something called a Basic Health Program. What is that, you might ask? Well, its one of Obamacare's lesser-known provisions (I didn't even know about it until I started working on this!). To understand how this would work, it might be prudent for me to explain how health care would be obtained under Obamacare based on where you are relative to the Federal Poverty Line (FPL from now on).


Basically, under the initial ACA plan, people under 138% of the FPL would be covered under traditional Medicaid. Legally present immigrants under 138% of the FPL would only be able to purchase insurance through their state's Health Insurance Exchanges, which, at their income levels, even with a subsidy, would be incredibly expensive, simply because they're too poor. For those between 138-400% of the FPL, they'd get a tax credit and a subsidy to purchase private health insurance through the Exchanges. Those above 400% of the FPL wouldn't get a subsidy, because presumably they wouldn't need one to afford insurance or would have it through their employer already, but they would still be able to buy it through the Exchange.


Now this is where the Basic Health Program comes in. Under Obamacare, the law says that states can, if they want to, set up a program that would cover people between 138-200% of the FPL instead of pushing them into the Exchanges. The program would work sort of like Medicaid, except instead of being very nearly free for enrollees, they would have to pay some modest level of premiums and pay certain co-pays. Basically, the entire idea of the BHP for Ohio is that it will sort of bridge the gap for people between 138%-200% of the FPL. When you become ineligible for Medicaid at 138%, you'd be facing a pretty sizeable jump in costs, from the nearly free Medicaid to facing costs of about $1,500 a year in premiums, which, for people at this income level, is about 1 month's worth of their yearly pay. The other problem is that, at lower income levels like this, people's yearly earnings can fluctuate wildly. This means that they could be lose Medicaid eligibility and regain it within the span of 6 months. This, needless to say, might cause a number of issues, like inconsistencies of care, higher administrative costs for Medicaid (because of the frequent loss-regaining of eligibility), not to mention the inconveniences! With a Basic Health Program, people would face somewhat higher costs per year over Medicaid, but it would be a modest increase in costs instead of a large jump. It would also aim to be a much more seamless transition, because the program is effectively Medicaid that they would have to pay for. The great thing about this program is that it does two things: it bridges the gap for poor people AND it saves states money.


Well, I should be clearer on that last part. Right now, state budgets are getting screwed over by Medicaid costs, because many of them have expanded eligibility from the Federal minimum (100% of the FPL prior to Obamacare) to 200% or in some cases 300% of the FPL! They've done this in many cases because there simply wasn't any other way for people to get insurance. But with Obamacare, the mandated minimum for states is 138% of the FPL, and above that point, people can buy insurance in the exchanges. So what a lot of states might (some already are) do, is start reducing the Medicaid eligibility to the minimum and pushing people into the Exchanges, where their expenses will be subsidized by the Federal government, rather than state governments. Needless to say, pushing them off of the state's books will save a lot of state dollars. Now, where does the BHP come in? Well, the way it'd work is that funding for the program would, again, come from the Federal government. 


The way it would work is like this: If, say, Ohio adopts a BHP, then any people who would have otherwise been getting tax credits and subsidies in the Exchange would get enrolled in the BHP. The Federal government would then take the money they would have given for subsidies to the states as funding for this program. Since Medicaid has much lower patient costs (largely because it doesn't pay health care providers very well), this means that the federal dollars paid to states would likely be something like 20-30% more than what it would cost to insure each person. The law prohibits surpluses to be used on anything else but the program, so what states might be able to do is to start paying health care providers higher rates. One of the biggest problems with Medicaid right now is that not very many doctors accept patients with it, simply because they don't make much money off of it. If states used the surplus federal dollars to pay doctors a bit more, people's access to care might increase as some doctors choose to accept Medicaid again. 


I never knew anything about this program before Tuesday, to be honest. But I'm pretty excited about the framework I'm putting together for it. I hope my explanation wasn't too rambling or dreadful. It just seems like the program would accomplish a lot of good things at once: it helps state save money, it helps poor people better afford insurance while simultaneously not just giving it away for free, and it potentially could increase payouts to doctors. 


Sounds like a win-win-win, if you ask me?


P.S. I'll put up my notes on the proposal in a future post for those interested.


P.P.S. Here are my whiteboard notes I was taking as I drew up the proposal:




Why yes, I have gone mad.

Sunday, June 10, 2012

News of the Day: Disco and Crucifixion

Dual purpose post for today. First up, the song of the week:




Apparently the video's uploader loves Ron Paul enough to advertise for him on a Bee Gees music video? Try not to let it detract from their splendor.


Anyways, here's a few links to interesting pieces I've read today:

  • Ezra Klein points out that when President Obama said that the private sector was fine, he really meant that he hates the private sector the public sector has been heavily downsized during his first term in office, and that we should aim to reverse this trend. I seem to remember writing about this somewhere...
  • Paul Krugman thinks that bailing out the Spanish banks, if successful, will only buy Europe time. Time that they will, as in the past, make poor use of.
  • David Frum joins the party when he likewise points out that the Op-ed by Phil Gramm and Glenn Hubbard was total crap an inaccurate and misleading comparison between two wildly different recessions. Glad to see I was so ahead of the curve on this? 
  • Noah Smith is disappointed by Robert Barro's seemingly robotic proclamations that all we ever need to do to fix our economy is cut all the taxes, all the spending, and go back to an age where snake oil was sold on every corner deregulate. 
  • Matt Yglesias is pleased with Christina Romer's new op-ed that urges the Fed to do something. Also, the title of his blog post is the best. Now you have to go and see it.
In other news, tomorrow I start my internship down at the statehouse, where I will be taking money from lobbyists left and right working for a representative on the finance committee. I'll be sure to post about the things I do down there if I do or see anything interesting.


Friday, June 8, 2012

Krugman on Reagan vs. Obama

I would say that great minds think alike, but I'm not arrogant enough to suggest that I'm anywhere near as intelligent as Paul Krugman. But anyways, I was looking at his blog/column today and I noticed that I may or may not have been just a hair faster than he was in getting my post out about the faulty comparison between the Reagan and Obama recessions. In any case, a few choice parts of today's column (ellipses added by me):
"I find it especially instructive to look at spending levels three years into each man’s administration — that is, in the first quarter of 1984 in Reagan’s case, and in the first quarter of 2012 in Mr. Obama’s — compared with four years earlier, which in each case more or less corresponds to the start of an economic crisis. Under one president, real per capita government spending at that point was 14.4 percent higher than four years previously; under the other, less than half as much, just 6.4 percent. . .
. . .So does the Reagan-era economic recovery demonstrate the superiority of Keynesian economics? Not exactly. For, as I said, the truth is that the slump of the 1980s — which was more or less deliberately caused by the Federal Reserve, as a way to bring down inflation — was very different from our current depression, which was brought on by private-sector excess: above all, the surge in household debt during the Bush years. The Reagan slump could be and was brought to a rapid end when the Fed decided to relent and cut interest rates, sparking a giant housing boom. That option isn’t available now because rates are already close to zero."
Hit the nail on the head, I think. Although the last sentence is technically arguable, if you think the Federal Reserve should adopt Nominal GDP targeting. But I digress. Like I said yesterday in my post, the Federal Reserve played a critical role in both the recession and the subsequent recovery--it wasn't all Reagan's policies of deregulation, tax-cutting, and budget-balancing. The latter of those three, of course, he didn't ever seem to do very well. But the point is, again, that comparing 1981 and 2008 is virtually meaningless--they're two entirely different ball games. 


There's this sort of mythological aspect to Ronald Reagan's legacy that I can't seem to wrap my head around, though. Sure, he was charismatic and popular, but Republicans seem to always invoke him when they talk about small government and balanced budgets, when his time in office yielded neither of those things.





Thursday, June 7, 2012

Why the Wall Street Journal's Op-Eds Suck

Some of you may know this already, but I have very little love in my heart for the Wall Street Journal nowadays. Especially the opinion pages. If you're ever looking to read something terrible, go there. What brought this tirade on, you might ask? Well, this piece (click here if the first link didn't work, go to the WSJ article at the top of the results) by Glenn Hubbard and Phil Gramm did. Let's take it apart, shall we?

First up:
"Twice in postwar America, deep recessions have driven the unemployment rate to 10%. In the 1981-82 recession, the unemployment rate soared to 10.8%. In the 2007-09 recession, it peaked at 10%."
Okay, that's a simple fact. But wait:
"Fifty-three months after the start of the 1981-82 recession, total employment in the U.S. was up 7.5 million, or almost 7.5% higher than when the recession began. The labor-force participation rate rose to 65% from 63.8%, as optimism about the future pulled potential workers into the job market. Real per capita gross domestic product increased by $2,870 and was 11% higher than when the recession started.
Fifty-three months after the start of the 2007-09 recession, however, total employment in the U.S. is still down four million jobs, or 2.7% lower than when the recession began. The labor-force participation rate has dropped to 63.8% from 66%, as discouraged workers have exited the labor market. Real per capita GDP has declined by $964 and is 2.2% lower today than when the recession began.
If the current economy had matched the job-creation rate of the recovery from the 1981-82 recession, there would be 15 million more Americans at work today, 8.3 million more Americans would be in the labor force, and per capita GDP would be $5,792 higher than it is today.
The superior job creation and income growth following the 1981-82 recession are all the more striking as they occurred against the backdrop of restrictive monetary policy. The Federal Reserve tried to beat back double-digit inflation in the early 1980s with tight money. Prime interest rates averaged 11.9%, and the three-year Treasury note rate averaged 11.2% during the recovery. By contrast, today's Fed has an expansive monetary policy with record low interest rates, a 3.2% prime rate and a 0.3% three-year Treasury note rate."
Okay now wait just a second. First of all, they're comparing two recessions that are fundamentally different. The recession of 1981-82 was brought on by the Fed raising interest rates to the stratosphere to fight inflation. The recession of 2007-09, by contrast, was not. Financial crisis, housing bubble, Fed didn't stabilize well enough--you know the drill.

I guess the thing that annoys me the most about this article is the paragraph where they say:  
"The superior job creation and income growth following the 1981-82 recession are all the more striking as they occurred against the backdrop of restrictive monetary policy."
This is highly misleading. They mention that yes, interest rates were relatively high (federal funds rate was 9% in late 1982), but they don't seem to mention that at their peak in 1981 they were at nearly 20%. That left a lot of room for the Fed to cut interest rates. That's a lot of monetary stimulus. By contrast, in 2008, interest rates were around 5%, which didn't leave a whole lot of room for the Fed to cut rates. So the superior job creation under Reagan is less impressive once you realize that interest rates were cut steadily throughout 1982. 

So, really, the job creation occurred in large part due to what happened with interest rates, not in spite of them. In other words, the economy started to rebound once Paul Volcker took his foot off the brakes. The Reagan tax cut surely helped, but to make it seem as if Reagan's policies were working in spite of such a tight monetary regime serves only to mislead people. The tax cut probably made the recovery faster, but to ignore the fact that rates were cut steadily throughout 1982 is to ignore a critical reason for why the recovery was so rapid. They also omit the fact that Reagan raised taxes consistently from 1982 to 1987.

They also seem to ignore the debt overhang in their comparison of the two recessions. In the early 1980s, private debt was not nearly as constraining as it is today. 



I know it may be slightly hard to see because of the scale, but you can make out how in the early 80s, household and business debts were all much lower than they are today as a percentage of GDP. In particular, take a look at the financial sector's debts. Simply put, debt wasn't nearly the constraint that it is today in the 1982 recovery.

Gramm and Hubbard also go on to claim that Romney, like Reagan, is a champion of lower deficits. Reagan the deficit-buster, eh?



Yes, deficits were large during the recession, just like they are now, but they didn't go back to pre-recession levels after it ended. In fact, this CBO report from 1983 shows that the structural deficit (that is, the deficit at full employment) dramatically increased during Reagan's term. I don't know where they get this whole idea that Reagan was a deficit-fighter during his term, because it sure doesn't look that way to me.

I guess my point in this post, besides showing you how crappy the WSJ's Opinion page has become, is that this particular article seems to ignore huge facts that differentiate the two recessions and subsequent recoveries. Do I think that the recovery under Obama has been lackluster? Yes, I really do. To some degree I think that's his fault for not always sticking to his guns. But this comparison by Hubbard and Gramm is just transparently misleading. It prescribes a cure for our current economic malaise that is based off of a demonstrably faulty comparison. Even Bruce Bartlett--one of the primary architects of of the 1981 Reagan tax cut--thinks that they're wrong! 

Wall Street Journal, you've done it again.



Monday, June 4, 2012

Yes, A Thousand Times Yes.

While taking a break from studying for finals, I came across this post by Scott Sumner entitled "What if Headline CPI rose 5.5% over the next 15 months?":
"In that case, the Fed would have fallen short of its 2% inflation goal over the past 5 years.  That’s right, if the CPI rose by a total of 5.5% (an annual rate of 4.1%) over the next 15 months, the CPI would still have risen by less than 2% per year between July 2008 and July 2013.   (April 2012 is the latest reading, that’s why I say 15 months.) 
That means that even if we were to have an extraordinary burst of inflation over the next 15 months, monetary policy over the past 5 years would have been too tight even if the Fed didn’t give a damn about the millions of unemployed.  It would have failed to hit its explicit 2% inflation goal over the past 5 years.  Something for the Fed to think about at its June meeting. 
How can that be?  Simple, inflation has average 1.22% over the past 45 months.  That’s headline inflation; I’m not tricking you by excluding food and energy.  Why do I start at July 2008?  Because that’s when NGDP started plunging fast, and unemployment starting rising fast.  And the Fed does in fact have a dual mandate.  One can debate exactly what the dual mandate means, but here’s something we can be 100% sure it does not mean.  It can’t mean that the Fed should always act as if it had a simple 2% inflation mandate, with no concern for jobs.  That would clearly violate the law. 
Some might argue; “But that low inflation is in the past, the Fed has to look to the future.”  OK, but TIPS spreads show less than 1% inflation over the next 2 years.
Sometimes when I read my fellow economists I simply can’t imagine where they are coming from.  They seem so uninterested in monetary policy.  Where’s the outrage?  Are they just apathetic, or are the ignorant of the data? 
Let me make the point even more forcefully.  If the unemployment rate were currently 5.6%, instead of the current 8.2%, I could easily walk into the next FOMC meeting and demand easier money, based on the inflation data alone.  That’s because if we were at the Fed’s definition of the natural rate (5.6%), then monetary policy decisions would hinge on one factor, and one factor only—inflation.  I’d walk into the meeting and say:
1.  Inflation averaged 1.22% over the past 45 months 
2.  The markets expect that to fall further to less than 1% over the next few years, based on current policy. 
3.  That means it’s a slam dunk for further easing. There is no conceivable argument that even the fiercest Fed hawk could use in opposition. 
And that’s if unemployment was 5.6%, but it’s actually 8.2%!!  Are people completely crazy, or am I the one who is missing something? 
Yes, I know that this isn’t how things work in the real world.  We have very complete minutes from the Riksbank meetings, and each time Lars Svensson comes in and very clearly explains what the board has to do to meet their legal mandate.  And each time they totally ignore him.  It’s basically a response of; “Facts? We don’t base our decisions on facts; we go with our gut instinct.” 
Just thinking about the irrationality of monetary policy makes my blood boil.
Keep telling everyone you know the following:
Even if the Fed drove the CPI up 5.5% over the next 15 months, inflation would have averaged below 2% over the past 5 years.  Policy would have been too tight even if the Fed didn’t care at all about the unemployed.
See what the inflation hawks say in response.
Bernanke says the Fed would cut rates right now if it could.  That means Bernanke agrees with me that money is too tight.  So don’t just sit there, do something else please. 
PS.  The previous 5 years (before July 2008) inflation averaged 3.6%.  And how did the Fed react to that high inflation, which occurred when unemployment was really low?  They cut rates sharply in late 2007 and early 2008, despite less than 5% unemployment.  And does anyone recall any Congressmen other than Ron Paul bashing the Fed back then?  Seriously, is they any respectable argument for the hawkish position right now?  An argument that isn’t transparently political?  I sincerely want to know."
He makes an excellent point. More substantial posting at the end of this week. 

Sunday, June 3, 2012

Do Zombies Pay Taxes?

You didn't misread that title. I guess a law professor at Arizona State University wrote a paper on the tax implications of a zombie apocalypse. I haven't had much time to read over it, but this article says that he references Count Chocula, Weekend at Bernie's II, and the Internal Revenue Code. 


Go read it.



Saturday, June 2, 2012

It's A-Me, Mario!



Oh Mario, my Mario. Nothing substantive in this post, just frustrated by central bankers on both sides of the Atlantic. Bernanke doesn't seem to be willing to do anything right now and (even more catastrophically, I think) Mario Draghi is Draghi(-ing) his feet on the Eurozone crisis. See what I did there? You do what you can to stay sane. Anyways, with yesterday's jobs report and the eurozone pulling itself to pieces, we can only hope that they do something. Brad DeLong hit it on the nose yesterday when he said that this headline should have read "Man With Power to do Something About the Euro Crisis Urges Others to do Something About the Euro Crisis."


Awesome.

Friday, June 1, 2012

Jobs Report? What Jobs Report?

Woooo, that jobs report is a doozy. Via Matt Yglesias:
"The latest jobs report is a total disaster. We got 69,000 new jobs in May which is well below already tepid expectations and is below the labor force trend growth rate. Terrible.
But it gets worse!
The change in total nonfarm payroll employment for March was revised from +154,000 to +143,000, and the change for April was revised from +115,000 to +77,000.” In other words, we gained 69,000 new jobs in May (estimated) but lost 49,000 in revisions. That leaves us with a net increase in employment of just 20,000. Disaster disaster disaster. 
The further internals are not very interesting. Just about everything except health care was flat, as part of the overall flatness. One exception was construction which fell despite some recent good housing news. That’s because we had substantial drops in “heavy and civil engineering construction” and also in “specialty trade contracts” which looks to me like the fracking boom slowing down. Even more fail as “average workweek for all employees on private nonfarm payrolls edged down by 0.1 hour.” That’s not terrible news on its own, but it further darkens and already bleak picture.
A lot of this is already getting fed through an election year politics lens, but it's important to remember that this is first and foremost a human tragedy for unemployed and underemployed people, and for employed workers who've been stripped of bargaining power due to persistent labor market weakness. If growth stays dismal and Barack Obama loses the election, he and Michelle and Jack Lew and Tim Geithner and all the rest will go on to have happy, healthy, prosperous lives. Other people's careers are much more in the balance. And the responsibility for addressing this crisis lies first and foremost with the Federal Reserve Board of Governors, the one institution in the U.S. government specifically charged with focusing on macroeconomic stabilization. For months now they've been dawdling instead of rolling up their sleeves and thinking as hard as they can about what to do to increase demand and employment."
Matt pretty much covers all of what I wanted to, but I still want to expand upon what he said about the Fed Board. He's dead-on that they've been dragging their feet for no good reason. Inflation isn't a major concern right now--in fact, we could use a few percentage points more. I know, I know, super taboo. Ideally, we'd take a leaf out of Scott Sumner's book and give Nominal GDP targeting a try. Not a whole lot of time to explain what that is for those of you who don't know, so I'll provide an excerpt from Christina Romer since this is the most concise (and non-wonkish) explanation of NGDP targeting I've been able to dig up:
"Nominal G.D.P. is just a technical term for the dollar value of everything we produce. It is total output (real G.D.P.) times the current prices we pay. Adopting this target would mean that the Fed is making a commitment to keep nominal G.D.P. on a sensible path.
More specifically, normal output growth for our economy is about 2 1/2 percent a year, and the Fed believes that 2 percent inflation is appropriate. So a reasonable target for nominal G.D.P. growth is around 4 1/2 percent.
It would work like this: The Fed would start from some normal year — like 2007 — and say that nominal G.D.P. should have grown at 4 1/2 percent annually since then, and should keep growing at that pace. Because of the recession and the unusually low inflation in 2009 and 2010, nominal G.D.P. today is about 10 percent below that path. Adopting nominal G.D.P. targeting commits the Fed to eliminating this gap.  
HOW would this help to heal the economy? Like the Volcker money target, it would be a powerful communication tool. By pledging to do whatever it takes to return nominal G.D.P. to its pre-crisis trajectory, the Fed could improve confidence and expectations of future growth.  
Such expectations could increase spending and growth today: Consumers who are more certain that they’ll have a job next year would be less hesitant to spend, and companies that believe sales will be rising would be more likely to invest.
Another possible effect is a temporary climb in inflation expectations. Ordinarily, this would be undesirable. But in the current situation, where nominal interest rates are constrained because they can’t go below zero, a small increase in expected inflation could be helpful. It would lower real borrowing costs, and encourage spending on big-ticket items like cars, homes and business equipment. 
Even if we went through a time of slightly elevated inflation, the Fed shouldn’t lose credibility as a guardian of price stability. That’s because once the economy returned to the target path, Fed policy — a commitment to ensuring nominal G.D.P. growth of 4 1/2 percent — would restrain inflation. Assuming normal real growth, the implied inflation target would be 2 percent — just what it is today. 
I think what I like most about NGDP targeting is that it hits both unemployment and inflation in one metric. Or maybe its the fact that it looks like it gets rid of the problem of the zero lower bound we currently face with interest rate targeting. I'm semi-new to the whole idea, but from what I've read, I really like it. I'll definitely be following it closely from now on. 

Anyways, I know I don't post much about monetary policy, but I think its pretty clear that the Fed has failed in its unemployment mandate. Perhaps you could argue that part of the reason for Fed inaction is political pressure from inflation hawks like Ron Paul. But the point of central bank independence is that it's not supposed to cave to political pressure. So what're they waiting for? 




PS. Sorry I couldn't get more technical in this post, finals week is upon us. Limited posting ahead.