Category: Equitablog

Must-Read: Drew Altman: The ACA Marketplace Problems in Context (and Why They Don’t Mean Obamacare Is ‘Failing’)

Posted on by Brad DeLong

Must-Read: Drew Altman: The ACA Marketplace Problems in Context (and Why They Don’t Mean Obamacare Is ‘Failing’):

There absolutely are problems in the marketplaces…

…Premiums will rise much more rapidly next year than they did this year…

…[19% of] marketplace enrollees may have a choice of only one plan next year…. The marketplaces are an important part of Obamacare. However, more uninsured people have been covered by Medicaid expansions than in the marketplaces, even though 19 states have not expanded Medicaid…. The law’s insurance reforms, including protections for people with pre-existing conditions, apply to people buying their own insurance outside the marketplaces as well…. A broad range of ACA reforms in Medicare payments to doctors and hospitals are moving ahead…. Many of these elements of the ACA are working imperfectly and can be strengthened, just like the marketplaces. But recent talk of “Obamacare failing” seems to conflate the marketplaces with the ACA overall….

The issues in the ACA marketplace are real problems that need to be addressed through greater enrollment and policy changes… [should] be treated much more like mundane implementation issues to be addressed by Congress than glaring headlines about failure.

Must-Read: Jonathan Portes and Simon Wren-Lewis: Issues in the Design of Fiscal Policy Rules

Posted on by Brad DeLong

Must-Read: Jonathan Portes and Simon Wren-Lewis: Issues in the Design of Fiscal Policy Rules: “The potential conflict in designing rules between the need to mimic optimal policy…

…where debt is a shock absorber and is adjusted only very slowly, and the need to prevent deficit bias…. It may therefore make sense to make different recommendations depending on… the nature of governments…. [In] governments… not… subject to deficit bias… simple debt feedback rules come close to reproducing the optimal fiscal policy… [if] the exchange rate is floating and there is little risk of hitting the ZLB…. [G]overnment[s] behav[ing] in a non-benevolent manner… need… operational targets… fixed for the end of the natural term of the government… [to] provide strong incentives… for cyclically adjusted primary deficits…. These targets should be set in cooperation with a fiscal council, which would monitor progress… [and,] in exigent circumstances… suggest that the target be revised….

These rules should not apply if interest rates have hit the ZLB. In that case, fiscal policy should focus on demand stabilization… the suspension of the rule while the ZLB constraint applies, and not its modification. This ‘knockout’ should be an explicit part of the rule…

Must-Reads: August 31, 2016

Posted on by Brad DeLong

Should Reads:

How often do Americans not pay federal taxes and receive government assistance?

Posted on by Bridget Ansel

During the last presidential election, a statistic from a distributional analysis of the U.S. tax code was the center of quite a bit of conversation. That statistic—47 percent—was the percent of tax units in 2009 that didn’t pay any federal income tax. The seeming prevalence of American tax payers who didn’t “pay into” the system had some participants in the conversation concerned that one portion of the U.S. population was permanently dependent upon the government for income. New research shows that concern is overblown.

A new working paper by economists Don Fullerton of the University of Illinois and Nirupama S. Rao of New York University looks at the question of the “47 percent,” but with an important difference. The original statistic was a snapshot in time, looking at how many households didn’t pay any federal income tax in 2009. What Fullerton and Rao look at instead is the persistence over time of households that did not not pay federal taxes and did not receive transfer income from the government in the form of government assistance. They use data from the Panel Study of Income Dynamics, which allows them to track households at different wage levels over time, with the PSID covering 40 years.

Fullerton and Rao end up finding quite a bit of movement among households, both in and out of non-taxpaying and receiving or not receiving transfers. According to their analysis, 77.9 percent of all households received some sort of government income transfers during the period they studied. But a large chunk of those households are older Americans who are receiving Social Security. We’d expect (and hope) that households receiving Social Security do so for many years.

About 42 percent of households never received a transfer that wasn’t Social Security. Of those that did receive income from one of those transfers, 30 percent did so for only one year and 76 percent for five years or less. A similar dynamic holds for paying federal income taxes, though there is much more persistence among non-tax payers. Only one-third of households owe income taxes during all of the sample years. Of those households that did not pay income taxes in every year, 52 percent do not pay for five or fewer years. And about 30 percent of households that do not pay income taxes don’t pay any income taxes at all for ten or more years.

So the data seem to show that the government income transfer system is working as an insurance system in which households seem to draw on the system temporarily before moving off the program. But for the income tax system, nonpayment seems to be more persistence. This could be due to programs such as the Earned Income Tax Credit, which significantly reduces tax liability for low-income households that would pay some federal income tax. The extent to which this is true might assuage concerns as the EITC is contingent upon the recipient working. We should also remember that many of the households that don’t pay federal income tax most likely do pay sales taxes and state and local income taxes.

This paper is a good reminder that snapshots of income, wealth, and other economic variables are important, but data that track them over time are even more useful.

Unpleasant Fiscal Dominance?

Posted on by Brad DeLong
Sims highlights fiscal dominance at Jackson Hole Gavyn Davies

Paul Krugman appears confused:

Paul Krugman: Chris and the Ricardianoids:

Here’s [Chris] Sims on fiscal policy:

Fiscal expansion can replace ineffective monetary policy at the zero lower bound, but fiscal expansion is not the same thing as deficit finance. It requires deficits aimed at, and conditioned on, generating inflation. The deficits must be seen as financed by future inflation, not future taxes or spending cuts…

I think he’s saying that fiscal expansion works only if it leads to a rise in expected inflation…. [That] is certainly something I’ve heard from helicopter money types, who warn that something like Ricardian equivalence will undermine fiscal expansion unless it’s money-financed. But this is a misunderstanding of Ricardian equivalence, on two levels. First, as I’ve tried repeatedly to explain, a TEMPORARY increase in government purchases of goods and services will NOT be offset by expectations of future taxes even if full Ricardian equivalence holds. The kind of argument people like Robert Lucas made sounded Ricardian, but wasn’t–it was Ricardianoid. Second, less relevant to Sims but very relevant to other helicopter people, a deficit ultimately financed by inflation is just as much of a burden on households as one ultimately financed by ordinary taxes, because inflation is a kind of tax on money holders. From a Ricardian point of view, there’s no difference. So I’m trying to figure out exactly what Sims is saying…

As I understand where Sims and company are coming from, they are working in a model in which there are no government purchases. Or perhaps government purchases are useless, and so are not part of “true” real GDP. But in any event, either there is no difference between government purchases and tax cuts–hence no balanced-budget multiplier–or fiscal policy consists entirely of changes in taxes and transfers.

They are also working in a model in which total spending is given by something like:

C = C(r, W)

where W is the real wealth of the representative agent, and r is the real interest rate. The more wealth the more spending. The lower the real interest rate, the more spending.

The real interest rate is the difference between the nominal interest rate i and the inflation rate π:

r = i – π

And the economy is in a liquidity trap with i=0.

Now as I understand Sims, W is given by something like:

W = Y/r – T/(r + ρ)

where Y is the flow of income, T is the flow of taxes, and ρ is some sort of risk premium–that the finances of the government will become unstable and the government will not manage to collect its taxes.

Then the only ways fiscal policy can affect spending and output now are if:

  • deficits raise expectations of money-printing and so raise inflation π.
  • deficits raise expectations of future fiscal collapse and so increase current wealth by increasing the rate at which future tax liabilities are discounted.

And as I understand Sims, quantitative easing is counterproductive: it reduces the risk premium ρ, and so raises the present value of future tax liabilities and so reduces household wealth without doing anything to alter the real interest rate.

I think this is what is going on.

Is this a consistent model? I am not sure. Is this the model that Chris Sims has in mind that lies behind his talk? I am not sure. Is this the right model for the questions at hand? I am pretty sure it is not one of the first five models I would write does as most relevant.

Cf.: Gavyn Davies: Sims highlights fiscal dominance at Jackson Hole

Must-Read: Gavyn Davies: Sims Highlights Fiscal Dominance at Jackson Hole

Posted on by Brad DeLong

Must-Read: Gavyn Davies: Sims Highlights Fiscal Dominance at Jackson Hole:

The most far reaching speech at the Federal Reserve’s Jackson Hole meeting last week was…

…the contribution on the fiscal theory of the price level (FTPL) by Professor Christopher Sims of Princeton University…. The subject is now moving centre stage…. It has important implications for the conduct of macro-economic policy, especially in Japan and the eurozone member states…. Government debt is an asset to the private sector. Prof Sims says that a reduction in future government deficits will make this debt a more attractive investment and this will induce the private sector to hold more of the debt, thus reducing demand for goods and services. This exerts a deflationary effect on the economy….

We are all familiar with… inflation if an irresponsible government (eg Brazil in the 1980s) persists in running excessive deficits…. Prof Sims reminds us that this can work in reverse, with all the signs changed. It is clear that this is directly relevant to the effectiveness of QE by the central bank…. Viewed in this light, the ineffectiveness of QE in offsetting a chronic shortage of private demand is not that surprising…. Prof Sims suggests that Japan can escape from its deflationary trap only by explicitly joining up fiscal and monetary policy, and making both subordinate to the inflation target…

Must-Read: Charlie Stross: Two Thoughts

Posted on by Brad DeLong

Must-Read: As I always say, the key to making it an an economy–pretty much any economy–is to find something (a) that you can do, that is also (b) scarce and hard to copy, and (c) for which rich people have a Jones. It doesn’t matter how useful the stuff you do or make is. You have a place in the economy only if you satisfy (a), (b), and (c) or control resources that satisfy (a), (b), and (c). It’s what the seventeenth-century proto-economists called the diamonds-and-water paradox: how can carrying the most useful stuff on earth to where it is needed be so poorly paid, while selling useless flashy gewgaws is so richly paid? Scarcity and a rich people’s Jones–or, as we say now as if it were an obvious and inescapable law of nature: supply and demand.

And as I have started saying more recently:

  1. Human thighs and backs as sources of value started going out in the fourth millennium BC with the horse, and then in the eighteenth century with the steam engine.

  2. Human hands and fingers as sources of value started going out in the eighteenth century with automatic machinery.

  3. But human brains as cybernetic control mechanisms for sources of power and manipulation retained their value–nay, increased their value, as every domesticated animal and machine required a human-level controller. (Although very few of the jobs that added value actually required a Turing-class cybernetic control mechanism.)

    • But now, increasingly, we have robots–and the demand for human brains as cybernetic control mechanisms for sources of power and manipulation is dropping fast.
  4. And human brains as information assembly and transmission mechanisms–cashiers, accountants, form-fillers, form-approvers, gatekeepers, database-enterers and so forth–gained enormously in value. (Although very few of the jobs that added value actually required a Turing-class cybernetic control mechanism.)
    • But now, increasingly, we have ‘bots–and the demand for human brains as information assembly and transmission mechanisms is dropping fast.
  5. That leaves smiles–direct personal services, plus human eyes, mouths, and voices as sources of motivation and persuasion.

  6. That leaves genuine creative thought, which is, you know, rather difficult…

Charlie Stross: Two Thoughts:

The effects [of] universal functional telepathy (lies and all)… on how we handle business…

The internet disintermediates supply chains, but… you have to be able to find your customers, or your root supplier…. Currently we’re seeing a land-rush by new middle-men trying to stake out their position as the Sultans of Search: Amazon… eBay… Uber… AirBNB…. To identify a new Silicon Valley start-up opportunity you just have to figure out what your mom no longer does for you now you’ve moved out of her basement and productize it.

But that’s not going to last forever…. It’s a race to the bottom and it ends when search becomes free at the point of delivery…. Ultimately most of those middle-men are doomed: they simply can’t add enough value to stay viable as information arbitrage brokers in a telepathic world. So where do we go from there?

Must-Read: Martin Wolf: Capitalism and Democracy: The Strain Is Showing

Posted on by Brad DeLong

Must-Read: Martin Wolf: Capitalism and Democracy: The Strain Is Showing:

Confidence in an enduring marriage between liberal democracy and global capitalism seems unwarranted….

So what might take its place? One possibility[:]… a global plutocracy and so in effect the end of national democracies. As in the Roman empire, the forms of republics might endure but the reality would be gone.

An opposite alternative would be the rise of illiberal democracies or outright plebiscitary dictatorships… [like] Russia and Turkey. Controlled national capitalism would then replace global capitalism. Something rather like that happened in the 1930s. It is not hard to identify western politicians who would love to go in exactly this direction.

Meanwhile, those of us who wish to preserve both liberal democracy and global capitalism must confront serious questions. One is whether it makes sense to promote further international agreements that tightly constrain national regulatory discretion in the interests of existing corporations…. Above all… economic policy must be orientated towards promoting the interests of the many not the few; in the first place would be the citizenry, to whom the politicians are accountable. If we fail to do this, the basis of our political order seems likely to founder. That would be good for no one. The marriage of liberal democracy with capitalism needs some nurturing. It must not be taken for granted.

Only a hint of new thinking at Jackson Hole

Posted on by Bridget Ansel
Federal Reserve Chair Janet Yellen, center, Stanley Fischer, left, vice chairman of the Board of Governors of the Federal Reserve System, and Bill Dudley, the president of the Federal Reserve Bank of New York, talk and view the Grand Tetons before Yellen’s speech to the conference of central bankers from around the world, sponsored by the Federal Reserve Bank of Kansas City, at Jackson Lake Lodge in Grand Teton National Park, north of Jackson Hole, Wyo., Friday, Aug 26, 2016.

This past weekend, economists and central bankers gathered in Jackson Hole, Wyoming for an annual conference hosted by the Kansas City Federal Reserve Bank. The conference is a combination of an academic forum with authors presenting papers and a place where the Federal Reserve chair can lay out thinking behind U.S. monetary policy. This year, the symposium was surrounded by a bit of hype. Its title, “Designing Resilient Monetary Policy Frameworks for the Future,” along with a recent paper by San Francisco Federal Reserve Bank President John Williams on rethinking monetary policy in a world of low interest rates, had some observers believing that the discussion in Wyoming might be the very beginning in a rethink of monetary policy.

That did not happen as envisioned. Federal Reserve chair Janet Yellen’s speech on Friday morning instead pointed toward a view within the Federal Reserve that the current monetary policy path is adequate to prepare for the next recession. With the federal funds rate still only at 0.25 percent, many observers fear that the central bank won’t have enough room to cut interest rates the next time the economy hits a downturn. Yellen, however, argues that the key interest rate is on pace to get to 3 percentage points, enough space to cut rates before the next time the central bank has to cut rates.

But getting to 3 percent might not be so easy. As a chart from Yellen’s presentation shows, the future path of short-term interest rates, based on the projections of Federal Open Market Committee participants, is incredibly uncertain. Given the uncertainty of the world, short-term rates might be at about 4.5 percent by the end of 2018, but they could still be sitting at 0.25 percent or somewhere in between those two levels.

Secondly, as Jared Bernstein points out, the financial markets don’t seem to believe the Federal Open Market Committee-implied path of interest rates. The markets are signaling that they think that rates will end up being much lower that 3 percent. Given that the FOMC has, as Larry Summers notes, consistently pushed down its estimates of the level of interest rates, the markets might be forgiven for thinking the federal funds rate won’t get to 3 percent.

Finally, it’s not clear that 3 percent is the correct resting place for the Fed’s benchmark rate. Several estimates of the natural rate of interest put it lower than 3 percent, with some people saying it’s at zero percent. If long-run inflation is 2 percent, this means the Federal Reserve should try to get nominal interest rates to 2 percent. So if those estimates are correct, the Fed can’t get to 3 percent without pushing the economy into a recession. But even if the Fed can’t cut from 3 percent, it still has quantitative easing—a program of purchasing longer-term assets—in its back pocket.

How many long-term assets would the Federal Reserve need to buy in the market in order to stimulate the economy with interest rates starting lower than they were in late 2007 at beginning of the Great Recession? Perhaps, as Yellen notes, the central bank could expand the kind of assets it purchases to include corporate bonds, stocks, real estate investment trusts or foreign currency as other central banks have. She also remarked that “some observers” have contemplated a higher inflation target or targeting the price level or the level of income growth. While it seems unlikely anytime soon, some observers hope Yellen and others are at the Federal Reserve will join in that contemplation.

Must-Read: Anna Aizer et al.: Do Low Levels of Blood Lead Reduce Children’s Future Test Scores?

Posted on by Brad DeLong

Must-Read: Anna Aizer et al.: Do Low Levels of Blood Lead Reduce Children’s Future Test Scores?:

Linking preschool blood lead levels with third grade test scores for eight birth cohorts of Rhode Island children born between 1997 and 2005…

…we show that reductions of lead from even historically low levels have significant positive effects on children’s reading test scores in third grade. Our preferred estimates use the introduction of a lead remediation program as an instrument in order to control for the possibility of confounding and for considerable error in measured lead exposures. The estimates suggest that a one unit decrease in average blood lead levels reduces the probability of being substantially below proficient in reading by 3.1 percentage points (on a baseline of 12 percent). Moreover, as we show, poor and minority children are more likely to be exposed to lead, suggesting that lead poisoning may be one of the causes of continuing gaps in test scores between disadvantaged and other children.