…a group of prominent academics and hedge fund managers urged the central bank to stop its bond purchases known as quantitative easing…. With the Fed set to end its bond-purchase program today, it is clear those warnings were wrong…. The critics also argued the QE programs distort financial markets. It is hard to prove or disprove that point. Stock market price-to-earnings ratios look stretched by some measures, but not so stretched by others. Junk bond and leveraged loan issuance has taken off, but corporate balance sheets relatively healthy…. But it is easy to see what didn’t happen. Inflation hasn’t taken off and there has been no currency debasement. Perhaps it will happen someday, but the Fed has been experimenting with QE since 2009 and it clearly hasn’t happened yet. At some point, you need to declare the debate over…
Month: October 2014
Lunchtime Must-Read: Jordan Weissman: Don’t Let Anyone Blame Single Mothers for Economic Inequality
…skyrocketing CEO pay and Wall Street lucre…. They are, however, extremely at home talking about… single mothers…. In that vein, the American Enterprise Institute has released a new report…. I’m… skeptical… turn[ing] the inequality debate toward single mothers and absent fathers…. As Timothy Noah wrote in Slate years ago, the biggest changes in American family structure took place in the ’70s and ’80s, and they help explain why, for instance, the ratio between the 90th percentile of earners and 10th percentile is higher than it was 30 years ago. But the shift away from two-parent households doesn’t really factor into the concentration of wealth among the 1 percent. And the rise of the 1 percent, and the 0.1 percent for that matter, is the real story when it comes to how income inequality is evolving today…
Things to Read on the Morning of October 29, 2014
Must- and Shall-Reads:
- Management
- Is Economic Growth Permanently Lower?
- : An End to QE
- : Are Economists Ready for Income Redistribution?
-
: Lars Svensson: 1, Sadomonetarists: 0: “Lars Svensson quit Sweden’s Riksbank in a huff last year, frustrated by the central bank’s insistence on raising rates despite the deflationary dangers. His former employer has just tacitly admitted that the economist was right. The Riksbank earlier this morning cut its benchmark interest rate to an unprecedented zero per cent, and markedly moved out its forecast for when it will lift rates again until mid-2016, in an attempt to ease the deflationary forces gripping the Swedish economy. The Riksbank should arguably have listened more closely to its former deputy governor sooner…” -
: Getting Dropped Hurts: “Back in 2008, there was an excellent study on the cost of losing health insurance and then regaining it for people with chronic conditions…. $240 per member per month for Medicaid members in the mid-2000s is a massive number…. I am speculating that a decent chunk of the cost growth slowdown and differential for Expansion states compared to non-Expansion states is a more streamlined set of care…. In 2013, a person who made a few dollars too many, or had been on a program for a month too long would be dropped from Legacy Medicaid, and previously manageable conditions could become unmanaged. In 2014 in expansion states, that person would be dropped from Legacy Medicaid and instantly re-enrolled into Federally funded Expansion Medicaid. The only difference they would see in most expansion states was a different ID card in the mail three weeks later…” -
Climate change: Lessons for Our Future from the Distant Past: “Climate change has been the main driver of mass extinctions over the last 500 million years… provides a stark warning. Human activity is producing greenhouse gases, and as a consequence global temperatures and ocean heat content are rising. Such trends raise the risk of tipping points. Economic analysis offers a number of ideas, but a key problem is that distributions of climate variables can shift, invalidating stationarity-based analyses, and making action to avoid possible future shifts especially urgent…” -
Obamacare’s drip-fed success: “President Barack Obama’s… Obamacare is rapidly settling into America’s landscape. In politics, its virulence is receding: Republicans are far more muted in their attacks than anyone expected a few months ago…. Obamacare is messy and ugly. But it is starting to cover the map…. Republicans in the Senate… are adopting what can politely be called a pretzel stance–promising to keep those parts that voters like while vowing to kill the law ‘root and branch’, in the words of Mitch McConnell, Senate Republican leader. Mr McConnell has pledged that Kentucky, where he is battling to save his seat, will keep its healthcare exchange, ‘Kynect’, even after Obamacare is abolished…. John Kasich, the Republican governor of Ohio, is equally contorted…. After an outcry on talk radio, he ‘clarified’ that he would fight for the law’s full repeal but his state would still keep its Medicaid benefits, which has brought 330,000 Ohioans in from the cold…. There are roughly 10m fewer uninsured Americans than there were a year ago. That number will only grow…” -
: Big Brother’s Liberal Friends: “Sean Wilentz, George Packer and Michael Kinsley are a dismal advertisement for the current state of mainstream liberal thought in America. They have systematically misrepresented and misunderstood Edward Snowden and the NSA.”
Should Be Aware of:
- Still waiting for the Great Rotation? Stop
- Thinking About Bond Bubbles…
- Wonder Woman’s Kinky Feminist Roots
-
ERP Derp: “McCrum smackdown watch…. FT Short View…. ‘Over time, the average equity risk premium has been 3.5 per cent, and Goldman Sachs uses that figure to estimate the long term rate of earnings growth embedded in stock prices… the implied rate of real growth for earnings [on European equities]… is now negative…. “Since long-term growth and inflation expectations seem to have fallen in the bond markets, it would be logical that they have fallen in the equity markets too. But… it is hard to disaggregate the relative shifts between growth expectations and the risk premium…. Assuming a fixed 3.5% ERP… the implied real rate of growth… [is] around -4%… clearly pricing in some form of long-run stagnation…. But even if we assume the ERP does not revert to long-run averages of around 3.5% but converges to a long-run average of, say 5%, the market is still implying 0% pa earnings growth over the next 20 years….”‘ This sort of analysis is probably more of a starting point for an interesting conversation about the market, than fill your boots with stock conclusion. Which we mention as using the Equity Risk Premium for any sort of analysis is not without haters. Here, for one, is the Economist: ‘Equity risk premium and term premium sound like sophisticated economic concepts, but in reality they are statistical junk yards into which economists toss stuff they can’t explain with fundamentals… all the murky, unquantifiable factors traders study….’ Then there is also this FT blog from Andrew Smithers, scourge of stockbroker economics: ‘In some of my more gamesome moments I have challenged students to produce an article about the ERP which made a useful contribution to our understanding of the way financial markets work. So far the challenge has not been met…” -
Resetting the Urban Network: 117-2012: “Do locational fundamentals such as coastlines and rivers determine town locations, or can historical events trap towns in unfavorable locations for centuries? We examine the effects on town locations of the collapse of the Western Roman Empire, which temporarily ended urbanization in Britain, but not in France. As urbanization recovered, medieval towns were more often found in Roman-era town locations in France than in Britain, and this difference persists today. The re-setting of Britain’s urban network gave it better access to natural navigable waterways when this was important, while many French towns remained without such access. We show that towns without coastal access grew more slowly in both Britain and France from 1200-1800, and calculate that with better coastal access, France’s urban network would have been up to 20-30 percent larger in 1800.” -
-
: Facebook’s phony claim that “you’re in charge”: “In today’s New York Times… Ravi Somaiya visits with Facebook…a writes: ‘Mr. Marra said he did not think too much about his impact on journalism: “We try to explicitly view ourselves as not editors… don’t want to have editorial judgment over the content…. You’ve made your friends… connected to the pages that you want to connect to… are the best decider…. We’re saying, ‘We think that of all the stuff you’ve connected yourself to, this is the stuff you’d be most interested in reading.’”‘… I say a lie, not just an untruth, because anyone who works day-to-day on the code for News Feed knows how much judgment goes into it…. I’m not sure why it’s sitting there unchallenged in a New York Times story. For that doesn’t even rise to the level of ‘he said, she said.’ It’s just: he said, poof!… A more plausible description would go something like this: ‘The algorithm isn’t picking stories the way a home page or front page editor would…. Instead, it’s… recommending stories based on Facebook’s overriding decision rule… maximizing time on site…. The end-in-view is… a user base in constant contact with Facebook. As programmers we have to use our judgment–and a rigorous testing regime–to make that happen. We think it results in a satisfying experience.’ That would be a more truthful way of putting it…. Here is where journalists have to do their job better. It’s not just calling out BS statements…. It’s recognizing that Facebook has chosen to go with ‘thin’ legitimacy as its operating style, in contrast with ‘thicker’ forms…” -
: The worst possible case for the worst possible idea, the gold standard – The Washington Post: “Thiel might think that gold is the only ‘real’ money, and everything else is just a representation of it. That’s what Krugman calls the ‘Midas delusion’: the belief that the one true measure of money isn’t how many goods and services it can buy, but rather how much gold. This is just as nutty as it sounds. It’s saying that the only way to measure our standard of living is by the price of gold, but the price of the things we need to actually, you know, live. The dustbin of history is there for a reason.”
Obamacare Geographic Implementation Overview: Wednesday Focus for October 29, 2014
David Leonhardt’s Upshot is doing some very nice data-visualization work:
Key takeaways:
-
Having a state government that expands Medicaid is, of course, overwhelmingly the most important factor: look at Kentucky-WV vs. Tennessee-Virginia, or Arkansas-Missouri.
-
A state government that tries to hide the existence of the exchange-marketplaces from people can (largely) do so, and can cause a huge amount of damage in implementation: look at Wisconsin, Kansas, or Montana.
-
Even in states that did not expand Medicaid and where the state government did not lift a finger to inform people of the exchange-marketplaces, Hispanics have been signing up for insurance in numbers significantly greater than I had expected–look at the Texas-Mexico border.
-
With respect to what remains to be one, look at the Confederacy! (Minus Medicaid-Advantage Arkansas, of course.) At the end of the nineteenth century the Confederacy was taxed to provide pensions for the widows and orphans of Union-Army Civil-War veterans: now we have a similar pattern underway–although this time it is voluntary, produced not by northern Unionist-Republican votes but by southern neo-Confederate-Repubublican votes.
-
Given how broadly the money from Obamacare flowed not just to the poor and previously-uninsured but to all the different parts of the medical-industrial-financial complex, I am still amazed by how not ideology–ObamaCare, remember, is in its essentials a Cato Institute production–but mere partisanship (and anti-Obama racism?) trumps the material interest of the money flows. Given the centrality of the medical-industrial-financial complex to so much of so many local economies, this extremely sharp regional cutting-off-one’s-nose is an extraordinary shock.
-
What SL said about NFIP vs. Sibelius: : A Disgrace Even By Roberts Court Standards: “The effects of John Roberts re-writing the ACA’s Medicaid expansion are felt in Mississippi…. ‘”We work hard at being last”, said Roy Mitchell, the beleaguered executive director of the Mississippi Health Advocacy Program, when we met in Jackson. “Even a dog knows the difference between being tripped over and being kicked”‘. This reflects an infliction of pain and suffering and death than was eminently avoidable. If you’ll forgive me for reiterating, it’s nearly impossible to overstate how terrible this decision was. It would be one thing if this denial of access of medical care to millions of people was enforcing some explicit constitutional provision, but it wasn’t. If this judicially invented at least protected some meaningful individual liberty interest it might be a little more understandable, but it doesn’t. At best, the lives of millions of people have been made worse–with consequences up to and including death–in order to prioritize inferential states’ ‘rights’ [to ‘equal dignity’] over human rights. But here’s the kicker: Sebelius does not even provide any significant protection for state autonomy. Congress remains free to create a Medicaid program that requires everyone up to 138% of the federal poverty line to be covered and makes all Medicaid funding contingent on meeting these conditions. It simply would have to structure it by formally repealing the previous Medicaid and replacing it… thus evading the Supreme Court’s newly minted requirement that existing funding can sometimes be made contingent on accepting new conditions and sometimes can’t and we’ll let you know ex post facto…. The fact that so much misery was created for so little should permanently shame the justices who voted for it. It’s judicial review at its least defensible.”
At This Point in Time, a (Larger) National Debt Would Indeed Be a National Blessing: (Late) Tuesday Focus for October 28, 2014
There are two questions that must be answered in the process of figuring out weather having the government borrow money and spend is a good idea:
-
What is the money being used for?
-
How expensive is the money to borrow?
Back in the Reagan-Bush I years–the steep run-up in the debt-to-annual GDP ratio in the 1980s and the first third of the 1990s:
-
The money was used to rapidly build up the U.S. military to counter the Soviet Union’s overwhelming might–an overwhelming might that existed only in the fantasies of the neoconservatives who ran the “Team B” exercise initiated at the CIA by George H.W. Bush.
-
The money was used for tax cuts for the rich in the hope that increasingly incentivizing entrepreneurship would accelerate economic growth above the pace of the 1970s–a vain hope indeed.
-
The real interest rate at which the U.S. government could borrow was relatively high–between 3.5%/year and 8.5%/year, and averaging 5.5%/year in the 1980s. Plus there was the fear that as the debt-to-annual-GDP ratio rose further without any strategy for ultimately amortizing the debt, the real interest rate would rise higher. Plus there was the fear that the real interest paid on the debt understated the cost to the taxpayer of carrying it because a high debt would create expectations that inflation would rise–expectations that would require unemployment semi-permanently above the NAIRU to avoid another inflationary spiral.
Thus from the perspective of the start of the Clinton administration, back in 1993, a policy of borrow-and-spend looked extremely unwise: money at 5.5%/year in real interest was not cheap, and that number seemed likely to rise further with each year that the government failed to come up with a plan to stabilize the debt-to-annual-GDP ratio. Moreover, with Alan Greenspan promising to reduce the interest rates he controlled in order to keep unemployment at the NAIRU in spite of damping effects on demand exercised by fiscal contraction, it seemed to make a great deal of sense to say that federal-government fiscal policy needed to be based on “classical” principles. And, indeed, it is hard to read the strong high-investment recovery of the mid- and late-1990s–what Janet Yellen and Alan Blinder called The Fabulous Decade–as confirmation that those of us who made Clinton-administration fiscal policy knew what we were doing.
But do we know what we are doing now? Paul Krugman says: clearly not:
…Public projects, from the Erie Canal to the Interstate Highway System…. Incentives to the private sector, like land grants to spur railroad construction…. Broad support for spending that would make us richer. But nowadays we simply won’t invest…. And don’t tell me[, David Brooks,] that the problem is ‘political dysfunction’ or some other weasel phrase that diffuses the blame. Our inability to invest doesn’t reflect something wrong with ‘Washington’; it reflects the destructive ideology that has taken over the Republican Party…. More than seven years have passed since the housing bubble burst, and ever since, America has been awash in savings–or more accurately, desired savings–with nowhere to go…. And the mismatch between desired saving and the willingness to invest has kept the economy depressed…..
There’s an obvious policy response to this situation: public investment. We have huge infrastructure needs, especially in water and transportation, and the federal government can borrow incredibly cheaply–in fact, interest rates on [ten-year] inflation-protected bonds have been negative much of the time (they’re currently just 0.4 percent). So borrowing to build roads, repair sewers and more seems like a no-brainer. But what has actually happened is the reverse. After briefly rising after the Obama stimulus went into effect, public construction spending has plunged. Why?… The federal government could easily have provided aid to the states…. But once the G.O.P. took control of the House, any chance of more money for infrastructure vanished…. You can get a sense of this ideology at work in some of the documents produced by House Republicans under the leadership of Paul Ryan, the chairman of the Budget Committee. For example, a 2011 manifesto titled ‘Spend Less, Owe Less, Grow the Economy’ called for sharp spending cuts even in the face of high unemployment, and dismissed as ‘Keynesian’ the notion that ‘decreasing government outlays for infrastructure lessens government investment.’ (I thought that was just arithmetic, but what do I know?) Or take a Wall Street Journal editorial from the same year titled ‘The Great Misallocators,’ asserting that any money the government spends diverts resources away from the private sector, which would always make better use of those resources. Never mind that the economic models underlying such assertions have failed dramatically in practice, that the people who say such things have been predicting runaway inflation and soaring interest rates year after year and keep being wrong; these aren’t the kind of people who reconsider their views in the light of evidence….
The result, as I said, is that America has turned its back on its own history. We need public investment; at a time of very low interest rates, we could easily afford it. But build we won’t.
Now, of course, things look different. The government doesn’t have to borrow at 8.5%/year or 5.5%/year or even 3.0%/year in real terms, and next to nobody in the markets expects the U.S. government to have to pay more than 2.0%/year in real terms to borrow for the foreseeable future. The fruit as to what the government could do that would be useful, productive, and growth-enhancing is not just low-hanging. It is lying on the ground.
And yet it is impossible to get the chattering class in Washington to seriously ask the two questions:
-
How valuable would be the things we would be using the money for?
-
How expensive would the money be to borrow?
and reach the natural, obvious, inescapable conclusion that right now what the U.S. needs is not a smaller but a larger national debt. Instead, all we hear is:
DEBT! DEFICIT!! AIYEEE!!
Why can’t Washington do the math?
Afternoon Must-Read: Fast FT: Lars Svensson: 1, Sadomonetarists 0
…frustrated by the central bank’s insistence on raising rates despite the deflationary dangers. His former employer has just tacitly admitted that the economist was right. The Riksbank earlier this morning cut its benchmark interest rate to an unprecedented zero per cent, and markedly moved out its forecast for when it will lift rates again until mid-2016, in an attempt to ease the deflationary forces gripping the Swedish economy. The Riksbank should arguably have listened more closely to its former deputy governor sooner…
Youth unemployment, finding a career, and labor market churn
High levels of youth unemployment, particularly in the wake of the Great Recession, continue to be a concern in the United States. But why is the unemployment rate for young workers consistently higher than the rate for older workers? A new paper released yesterday by the National Bureau of Economic Research tries to find an answer and comes up with one: the search for the right career.
The paper, by economists Martin Gervais of the University of Iowa, Nir Jaimovich of Duke University, and Henry Siu and Yaniv Yedid-Levi, both of the Vancouver School of Economics, is built around a model of the labor market that seeks to understand what causes this generational inequality of unemployment. The kind of model they work with is “frictional,” meaning there are costs to finding a good match between worker and job.
In their model, the authors posit that younger workers aren’t sure what their “true calling” is in the labor market. Workers need to try out a few different kinds of jobs before they are sure that they want to stay in an occupation for the long-term. The authors find support for this view in the data, which is from the U.S. government’s Current Population Survey and covers from June 1976 to November 2012.
They find that what drives the difference in unemployment rates across ages is the difference in the rate at which workers leave jobs, also known as the job separation rate. Younger workers are more likely to lose or leave a job than older workers. Leaving a job allows a worker to find a better occupational match.
Interestingly, the authors find that the rate at which a worker can find a job doesn’t vary much across ages as much as the job separation rate does. In fact, younger workers are more likely than older workers to find a job. This finding suggests that explanations for high young unemployment that rely on overregulation or barriers to employment aren’t particularly strong.
The act of finding your “true calling” is just another way of looking at the role of labor market churn in the U.S. economy. Churn, or the rate at which workers leave jobs and enter new ones, has been on the decline in the United States since the 1980s. If workers are less likely to leave jobs then they may be less likely to find their best occupational match.
But this decline in churn also could be benign. A paper by economists Raven Molloy and Christopher Smith at the Federal Reserve and the University of Notre Dame’s Abigail Wozniak suggests that churn has gone down because the pay-off for switching jobs has decreased. Workers are better matched to employers than in the past, they find, so workers don’t have to move as much as to find their “true calling.”
Reduced churn might not be entirely a positive phenomenon, so better understanding its causes and consequences is incredibly important.
Morning Must-Read: Richard Mayhew: Getting Dropped Hurts
…and then regaining it for people with chronic conditions…. $240 per member per month for Medicaid members in the mid-2000s is a massive number…. I am speculating that a decent chunk of the cost growth slowdown and differential for Expansion states compared to non-Expansion states is a more streamlined set of care…. In 2013, a person who made a few dollars too many, or had been on a program for a month too long would be dropped from Legacy Medicaid, and previously manageable conditions could become unmanaged. In 2014 in expansion states, that person would be dropped from Legacy Medicaid and instantly re-enrolled into Federally funded Expansion Medicaid. The only difference they would see in most expansion states was a different ID card in the mail three weeks later…
Yes, the State-Level Benefits of the Medicaid Expansion Are Very Large. Why Do You Ask?: Afternoon Comment
An interesting catch by CBPP from KHN:
State Medicaid Spending Growing Slower in Expansion States Than Others: “States that have expanded Medicaid… expect their share of Medicaid spending to grow more slowly this year than states that have not expanded… 4.4% this year, compared to 6.8% among non-expansion states…
That is $6 billion in 2014 alone. If it is permanent–capitalize it at 4%–that is $150 billion more that the non-expanding states have lost. That is serious money. And there is more, because:
States expanding Medicaid also typically cited net state budget savings beyond Medicaid. States reported that expanded coverage through Medicaid could allow for reductions in state spending for services such as mental health, correctional health, state-funded programs for the uninsured and uncompensated care.
Why? It really does look like trying to get your health-insurance system in shape by greatly curbing the number of uninsured makes places where you can save money without harming quality of care very obvious.
Moreover:
The uninsured rate among non-elderly adults has fallen by 38 percent in expansion states but only by 9 percent in non-expansion states, an Urban Institute survey found. The fact that the federal government picks up the entire cost of newly eligible individuals under the expansion allows states to expand coverage while limiting their costs…
Afternoon Must-Read: David Hendry: Climate Change: Lessons for Our Future from the Distant Past
…over the last 500 million years… provides a stark warning. Human activity is producing greenhouse gases, and as a consequence global temperatures and ocean heat content are rising. Such trends raise the risk of tipping points. Economic analysis offers a number of ideas, but a key problem is that distributions of climate variables can shift, invalidating stationarity-based analyses, and making action to avoid possible future shifts especially urgent…