Things to Read at Lunchtime on March 6, 2014

Must-Reads:

1. Ryan Avent: Monetary policy: No cushion needed, apparently: “THE Federal Reserve basically never sees a recession coming (at least when it isn’t busily creating one to whip inflation)…. San Francisco Fed president John Williams spoke as if America’s most recent macroeconomic convulsion took place in the 1970s: ‘In his own economic forecast, Mr Williams said, the Fed will raise interest rates in the middle of next year with the unemployment rate at about 6 per cent, inflation at 1.5 per cent and “everything moving in the right direction”.“At that point if we don’t start to adjust monetary policy there’d be a risk of overshooting,” he said. “You don’t wait until you’re at full employment before you start to raise interest rates from zero.”’ That reads to me like the words of a man who has learned nothing at all from the experience of the past few years. That’s probably a little unkind; what is said in public never corresponds exactly to what is said in discussions with the rest of the FOMC or in private. But I find this very troubling…. Monetary policy appears to have consistently underreacted to weak demand—delivering too little stimulus with too long a lag. That underreaction is down partly to a lack of familiarity with ‘unconventional’ policy tools, and partly to FOMC members’ concerns that unconventional tools involve risks that normal interest rate policy does not. I don’t know exactly how much the zero lower bound has cost the American economy over the past half decade, but the bill probably runs to several trillion dollars. So you’re on the FOMC. You have plenty of recent, bitter experience with this important assymetry…. How do your views evolve? Not at all, it would seem, if you are Mr Williams, who appears to be suggesting that any risk of overshooting is intolerable. Better to put the current recovery at risk and court future disaster than treat the inflation target symetrically.
2. Tim Noah: The partisan divide over the Earned Income Tax Credit: “President Obama’s new budget increases spending on and expands eligibility for the Earned Income Tax Credit, the largest and most successful government assistance program for the working poor. The much-praised House GOP tax reform introduced last week would cut the EITC, even though a House GOP report excoriating most federal assistance to the poor singled out the program for applause. This new partisan difference over the EITC… speaks volumes…. Welfare reform should have ended the partisan scrimmage over welfare dependency. Instead, it merely shifted the goalposts. Previously, the GOP had praised the ‘deserving’ (i.e., working) poor even as it derided the ‘dependent’ (i.e., welfare-collecting) poor…. Republicans… rebrand[ed] as ‘dependent’ any low-income person who collected government assistance, even if that person also had a job…. House Ways and Means Committee Chairman Dave Camp’s tax reform… would in effect replace the EITC with a payroll-tax exemption up to $4,000 and impose various restrictions… would cut this highly-regarded program by $217 billion over the next decade. Robert Greenstein, chairman of the Center on Budget and Policy Priorities, a Washington nonprofit, calculates that a mother with two children working full-time at the minimum wage would lose roughly $2,000 per year once the change went fully into effect.”

Should-Reads:

1. Daniel Altman: The Inefficiency of Inequality: “Consider what happens when economic opportunities are in short supply…. Edward Glaeser and Erzo Luttmer made this point in a 2003 paper about rent control…. Letting the wrong people buy the scarce goods can be even worse for society than the scarcity itself…. To a great degree, access to opportunity in the United States depends on wealth…. Country club memberships, charity dinners, and other platforms for economic networking come with high price tags decided by existing elites. Their exclusion of a whole swath of society because of something other than human potential automatically creates scope for inefficient allocation…”

2. Paul Krugman: The Inflation Obsession – NYTimes.com: “Fed officials come across as essentially clueless about the gathering economic storm. But we knew that already. What’s really striking is the extent to which they were obsessed with the wrong thing. The economy was plunging, yet all many people at the Fed wanted to talk about was inflation…. In the meeting on Sept. 16, 2008 — the day after Lehman fell! — there were 129 mentions of inflation versus 26 mentions of unemployment and only four of systemic risks or crises. Historians of the Great Depression have long marveled at the folly of policy discussion at the time…. And it wasn’t just a bad call in 2008. Much supposedly informed opinion has remained fixated on the supposed threat of rising prices despite being wrong again and again. If you spent the last five years watching CNBC, or reading the Wall Street Journal opinion pages, or for that matter listening to prominent conservative economists, you lived in a constant state of alarm over runaway inflation, which was coming any day now. It never did…. Inflation obsession has persisted, year after year, even as events have refuted its supposed justifications. And this tells us that something more than bad analysis is at work. At a fundamental level, it’s political… it reflects the belief that the government should never seek to mitigate economic pain, because the private sector always knows best…”

3. David Cutler: The Three-Fold Path to Health Savings and Better Care: “With each passing month, evidence accumulates that health care spending growth has reset to a new, lower level…. A good deal has been written on the causes of the slowdown…. The recession…. More important are reduced patient demand, a slowdown in the technology of medicine, and incentives for clinicians and hospitals to become more efficient…. Consider a different issue. If health care spending growth remains low or falls even further, how will this affect the medical sector?… Stage 1: Hunker Down…. Stage 2: Reduce Clinical Staff and Their Wages…. Stage 3: Reimagine the Product…”

4. Jérémie Cohen-Setton: Blogs review: The 2008 FOMC transcripts

5. Mike Konczal: EITC completes Obama inequality agenda; GOP response is incoherent
6. Victoria Gregory et al.: Why Is the Job-Finding Rate Still Low?
7. Carlo Rosa and Andrea Tambalotti: How Unconventional Are Large-Scale Asset Purchases?

Jonathan Chait: Obama to GOP: You’re Right, Let’s Expand EITC | Dan Diamond: Obamacare Payment Pilots Are Struggling To Prove They Work. Here’s Why It’s OK |

Should Be Aware of:

1. Joshua Brown: The Relentless Bid, Explained: “The nation’s largest traditional advisory firms have accelerated their push toward fee-based management and away from transactional brokerage. This has a huge impact…. Most of this money is being run more passively – in the absence of a transactional commission incentive for the advisor to trade, why else would he? Edge? LOL…. This snowballing asset base… is being put to work in a calm and methodical fashion: long-term mutual funds, tax-sensitive separately managed accounts (SMAs) and, of course, index ETFs…. Each week advisors of every stripe have money to put to work and they’re increasingly agnostic about the news of the day. They’ve all got the same actuarial tables in front of them and they’re well aware that their clients are living longer than ever–hence, a gently increased proportion of their managed accounts are being allocated toward equities…. Stocks are increasingly the answer to this puzzle. Bonds, with their fixed rate of income, by definition cannot get the job done…. It means a relentless bid as the torrent of assets comes flowing in every day, week and month of the year… lighter volume… the depth-plumbing ratings of financial television. People are behaving differently with their assets, both individuals and the professionals who invest for them, and the TV networks haven’t figured out the right programming to cater to them…”

2. Austin Frakt: Studies relevant to proposed Part D changes: “Mary Agnes Carey provides a helpful, concise summary of the major changes to Medicare Part D that the Obama Administration has proposed…. CMS has given special protections to six classes of drugs, requiring that ‘all or substantially all drugs’ in the classes be included in the formularies…. These rules limit the negotiating power of Part D plans and make drugs in those classes more expensive. A Milliman study found that these six protected classes accounted for 16.8–33.2 percent of Part D drug costs by Part D plan administrators. Reversing this one rule would decrease prices… a projected Part D savings of $511 million per year. In a 2012 study published in Health Economics, Steven Pizer, Roger Feldman… asked how much could be saved if Medicare adopted a drug program similar to that offered by the Department of Veterans Affairs… sav[ing] $510 per beneficiary per year…. However, in tightening formularies, beneficiaries would lose low-cost access to many drugs. That loss of choice is worth something… we estimate the loss of choice to be valued at $405 per beneficiary per year. Because the savings ($510 per beneficiary) exceeds the loss of value to beneficiaries ($405), they could, in principle, be made whole with $105 left over (= $510 – $405). This could be done by lowering premiums, for example…. Though they are resisted by some stakeholders, there is evidence that reduction in formulary generosity and number of plan options could do more good than harm for beneficiaries, in general.”

And:

• Jack Hoadley: Assessing A CMS Proposal To Improve Competition Among Medicare Part D Drug Plans

Austin Frakt: Bridging the research-journalism gap | Jonathan Bernstein: There’s a Better Way to Cover Campaigns | Anne Laurie: Paul Ryan, Still Lyin’ | C.W.: Ukraine and Russia: Why is Ukraine’s economy in such a mess? | Timothy Jost: Beyond Repeal–A Republican Proposal for Health Care Reform |