Category: Equitablog

Must-Read: Dani Rodrik: The Future of Economic Transformation in Developing Countries

Posted on by Brad DeLong

Must-Read: Dani Rodrik: The Future of Economic Transformation in Developing Countries: “Economic transformation in low-income countries is changing…

…For years, developing countries have tended to transition from agriculture to manufacturing to services. Yet recent evidence suggests that countries are running out of industrialisation options much sooner than expected. Is this a cause for concern? Or are there opportunities in agriculture and services that are just as effective at generating growth and ending poverty?

Weekend reading

Posted on by Nick Bunker

This is a weekly post we publish on Fridays with links to articles we think anyone interested in equitable growth should be reading. We won’t be the first to share these articles, but we hope by taking a look back at the whole week, we can put them in context.

Links

Derek Thompson imagines a world without work. [the atlantic]

David Leonhardt reports on new research on the intersection of race and neighborhoods. [the upshot]

The homeownership rate is declining and seems like it will keep going that way, according to Emily Badger. [wonkblog]

Adam Ozimek crunches the data on the changing sources of immigration to the United States. [moody’s]

Matthew C. Klein looks at household debt since the Great Recession and finds evidence for its “socialization.” [ft alphaville]

Friday figure

inequality-survey-webart3

Figure from “What Do Americans Think Should Be Done About Inequality?” by Ilyana Kuziemko, Michael Norton, Emmanuel Saez, and Stefanie Stantcheva.

The benefits of more information when applying to college

Posted on by Nick Bunker

Applying to college can be an exciting yet overwhelming process. Students try to figure out what schools might be a good fit for them both educationally and for their longer-term career goals. It’s easy to visit a campus. But figuring out the long-term benefits of a school can be tricky, as is narrowing down an area of study once they arrive.  So how would these decisions change if students had more information? A new working paper from the National Bureau of Economic Research tries to figure that out.

In partnership with Chilean government, Economists Justine Hasting of Brown University, and Christopher Neilson and Seth D. Zimmerman of Princeton University, did an experiment in which students were given information about the earnings  of previous students who a variety of schools and areas of studies as well as the “net value” of those programs. In Chile, students apply for student loans on a centralized website. Of some of the students who applied, the experiment tested their knowledge of how much certain schools cost and how much graduates of those schools subsequently earned.

The three economists find that many students were quite in the dark about how much different programs cost and how much they could expect to earn once they finished the program. Importantly, there was a large knowledge gap among students depending upon their family backgrounds. Students from the lower end of the earnings ladder were significantly less knowledgeable about tuition costs and the potential for future earnings. The share of those students unsure of tuitions costs was 6 percentage points higher, and the share saying they didn’t know what they’d earn after finishing their program was 8 percentage points higher among these low-income students compared to their better off peers.

The tax data on earnings, which the researchers also had access, show just how significant these differences could be. Hasting, Neilson, and Zimmerman find that a poor student will earn about 13.5 percent less than a rich student with identical test scores. According to the economists, about half of the gap is because students from low-income backgrounds are more likely to choose lower-paying areas of study.

Yet the decision to enroll in a lower-paying academic program is not necessarily because of a preference for the future career paths. After being informed of the differences in outcomes and returns on different programs, students are more likely to enroll in programs that have a higher return upon entering the workforce. And this effect is strongest for students from low-income backgrounds.

Of course, these results from the Chilean experience might not be directly applicable to the situation in the United States as the two countries have different higher educational institutions and post-graduate career trajectories. But it’s also important to note the Chilean higher education system is similarly expensive compared to other high-income economies. And other research shows that there are large gaps in knowledge among Americans up and down the income ladder about the college application process and outcomes of different programs. Information, it seems, can be a very powerful thing.

Things to Read on the Morning of June 26, 2015

Posted on by Brad DeLong

Must- and Should-Reads:

How Long Is the Short Run This Time?

Posted on by Brad DeLong

How long does it take to go from the short run to the long run? As I say repeatedly, I used to teach my students that the “short run” was the next couple of years, that the long run was from seven years from now on out, and that in between were interesting and confused medium-run transition dynamics–plus there is always the possibility that forward-looking expectations can lead the long run to come like a thief in the night, suddenly, immediately, long before you expect it to.

This set of beliefs on my part led to a crude and rough analytical strategy: Use the fixed-price macroeconomics of Hicks (1937), Modigliani (1944), and Metzler (1951) to make your forecasts of what will happen over the next two years. Use a classical full employment model to make your forecast what will happen starting seven years from now. Wave your hands and connect the dots to make your forecast for the intermediate period.

This analytical strategy has been very wrong for the past decade. And while David Beckworth has found one quantitative yardstick–the liquid asset household portfolio share–that says we are now back to or near normal and that the “short run” is over, there are others–interest rates and asset prices–that tell us the short run is still very far from over.

The very sharp David Beckworth:

David Beckworth: The Long Unwind of Excess Money Demand: “Two years ago… I…

…[made] the case that the economy was still being plagued by excess money demand… [a] problem [that] occurs when desired money holdings exceed actual money holdings. This imbalance causes a rebalancing of portfolios toward safe assets away from riskier ones… causes a decline in aggregate demand…. is one way to view the long slump. My argument back then was that even though the excess money demand problem peaked in 2009 it still was being unwound in 2013 and therefore still a drag on the economy….

I thought I would update the chart…. The figure  below shows… how long it has taken for household portfolios to return to more normal levels of liquidity. It has taken six years and appears not completely done yet! Remember this the next time someone tells you that the aggregate demand shocks were all were worked out years ago…. The fact that a large portion of the liquid share of household assets has declined over the past six years shows that its elevated rise was not a structural development but a cyclical one. It also suggests that more could have been done to hasten its return to normal levels…. It should not take this long for a business cycle to unwind.

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With Each Year, Robert Gordon’s Pessimism Looks More and More Likely to Be Right

Posted on by Brad DeLong

The thoughtful Matthew Klein, over at FT Alphaville:

Matthew Klein: The changing nature of Americans’ income: “Consider what this has meant for consumption…

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…This strikes us as the strongest argument that something fundamental changed with the housing bust. Consumption growth in excess of income growth was sustained by persistent declines in the savings rate, massive borrowing against appreciating — but illiquid — assets, and loosening credit conditions. That process couldn’t continue forever, and it didn’t. (Redistribution of income from those with relatively high savings rates to those with lower savings rates probably would have helped, though.) The result has been a recalibration of consumption towards income.

Had real consumption per person kept growing at its 1952-2006 trend, we would all be spending about 18 per cent more right now than we actually are. Two years ago, economists at the Dallas Fed concluded from this that the financial crisis cost the US economy as much as $30 trillion in present value. If that’s not a good justification for significantly different approaches towards macroeconomic policy and financial regulation, then nothing is.

The trend growth in consumption was maintained and driven after the late-1970s beginning of the American productivity-growth slowdown by two things:

  • Most importantly, the sharp rise in female labor-force participation–itself the rise primarily of feminism and secondarily of pressure on family budgets as male wage growth fell below expectations.

  • Secondarily, reductions in savings.

The sharp break in trend consumption growth as of 2008 was, itself, also driven by two things:

  • Most importantly, the collapse in output relative to potential, and the failure thereafter to put American workers back to work at what had been normal levels of economic intensity.

  • The (partial) reversal of the decline in the savings rate.

Matt is thus right in saying that there has been “a recalibration of consumption towards income”. But by far the bigger action has come from:

  • The fall in the trend of income.
  • The end of the feminist era in which labor-force participation rose from decade and decade.
  • The fact that the late-1990s productivity-growth rate speedup was not the end of the productivity-growth rate slowdown that had begun in the 1970s, but only a temporarily blip.

With each passing year, Robert Gordon’s growth pessimism looks more and more likely to be true, at least for measured real GDP growth…

Why Did the Supreme Court Decide Yet Another ObamaCare Case Today?

Posted on by Brad DeLong

This morning, Republican-appointed Supreme Court Chief Justice John Roberts wrote and five of his colleagues — Democrat-appointed Breyer, Ginsburg, Sotomayor, and Kagan, and Republican-appointed Kennedy — agreed that:

Section 18031 [of the Affordable Care Act–i.e., the ObamaCare Law–] provides that “[e]ach State shall . . . establish an American Health Benefit Exchange…” [But] if [a] State chooses not to do so, Section 18041 provides that the Secretary [of Health and Human Services] “shall . . . establish and operate such Exchange…” (emphasis added [by Roberts])…. The phrase “such Exchange”… instructs the Secretary to establish and operate the same Exchange that the State was directed to establish…. Black’s Law Dictionary 1661… (defining “such” as “That or those; having just been mentioned”)…. State Exchanges and Federal Exchanges are equivalent—they must meet the same requirements, perform the same functions, and serve the same purposes…

A simple matter of black-letter law, no? The plain meaning of the phrase “such Exchange” means that anything legal that is true of a health-insurance exchange established by, say, the state of New York is also true of a health-insurance exchange established by the federal government for, say, the state of Florida if the state of Florida fails to establish its exchange, no?

Yet a great many right-wing lawyers, right-wing think-tank talking-points warriors, right-wing partisan journalists, and others have spent the past several years trying to convince the Supreme Court to ignore the plain meaning of *”such Exchange”* and to rule, instead, that while the IRS can pay taxpayers tax credits to help cover their health-insurance costs if they purchase insurance on exchanges established by state governments, it cannot do so if they purchase insurance on exchanges established by the federal government. That was the claim made by David M. King–or at least made by his lawyers–and by his co-plaintiffs–or at least made by the same lawyers.

Why would anyone want to ask the Supreme Court to block the IRS from providing tax credits to health-insurance exchange purchasers in those states–red states and reddish states, plus a few weirdo political outliers like Maine–that rely on federally-run exchanges?

As John Roberts put it, because then:

the combination of no tax credits and an ineffective coverage requirement could well push a State’s individual insurance market into a death spiral. One study predicts that premiums would increase by 47 percent and enrollment would decrease by 70 percent…. And because the Act requires insurers to treat the entire individual market as a single risk pool, 42 U. S. C. §18032(c)(1), premiums outside the Exchange would rise along with those inside the Exchange…

And if that could be made to happen via Supreme Court ruling, the plaintiffs’ lawyers, the think-tank talking-points warriors, the partisan journalists, and the others hoped, they would “win”. With health-insurance premiums spiking and large numbers of people unable to afford health insurance dropping coverage, ObamaCare would be seen to have failed — in red states at least — to the partisan political advantage of the Republican Party, and perhaps the policy advantage of the right wing. Never mind that a great many more people–in red states, ruled by Republican and right-wing governors and legislatures–would then face a choice between either failing to go to the doctor or going broke.

And never mind that the partisan calculus did not quite seem to compute. Blaming the Democrats for the collapse of ObamaCare in red states *and only in red states* as a result of an activist legal strategy pursued by right-wing think tanks and validated solely by Republican-appointed justices–that would be a political strategy that might not come off.

And never mind that ObamaCare is, in its essentials, RomneyCare: the health-insurance reform policy designed and successfully implemented by Mitt Romney’s administration in Massachusetts. Unless Mitt Romney was deeply mistaken about what Republican principles and policy are, ObamaCare is, in its essentials, a relatively conservative health-care reform, based on principles that the Republican Party has, historically, been very comfortable with.

It is true that President Obama and his Democratic allies have been selling ObamaCare’s success as a success of Democratic policy and Democratic governance based on Democratic principles. But their saying that does not make it true. There is no substantive policy or governance reason why the Republican Party is not now taking victory laps over the largely-successful adoption and implementation by the liberal President Obama of what is a largely conservative health-care reform and pro-market restructuring of health-care finance.

By this time, Gentle Reader, your reaction should be: “Huh?!?!” Why would anyone think the Supreme Court would make such a ruling? Why did three justices — the three horsemen of the right wing Scalia, Alito, and Thomas — agree with plaintiffs’ lawyers in their dissent that the IRS should be prohibited from paying tax credits for policies purchased on federal exchanges?

Why? Because there is a drafting error in the Affordable Care Act. In “a sub-sub-sub section of the Tax Code” the Affordable Care Act states that the amount of tax credit is tied to the taxpayer’s enrollment in an insurance plan offered by “an Exchange established by the State under section 1311 of the Patient Protection and Affordable Care Act…” The phrase should have been “Exchange established in the State” or “Exchange established for the State”.

The “plain meaning” of this portion of the bill is that the IRS can only pay tax credits for a state exchange. But the “plain meaning” of the portion of the bill directing the Secretary of HHS to step up and establish “such Exchange” is that it does not matter whether a state’s Exchange was established by the state or by the federal government: they are the same exchange.

So which “plain meaning” wins?

John Roberts — and the other five justices who agree with him — write that:

Congress “does not alter the fundamental details of a regulatory scheme in vague terms or ancillary provisions.”… [A] limit [of] tax credits to State Exchanges… would have done so in the definition of “applicable taxpayer” or in some other prominent manner… not… [in] such a winding path of connect-the-dots provisions about the amount of the credit…

And that:

In a democracy, the power to make the law rests with those chosen by the people… We must respect the role of the Legislature, and take care not to undo what it has done. A fair reading of legislation demands a fair understanding of the legislative plan. Congress passed the Affordable Care Act to improve health insurance markets, not to destroy them… Section 36B can fairly be read consistent with what we see as Congress’s plan, and that is the reading we adopt…

After all, the beginning of the Affordable Care Act is:

Quality, Affordable Health Care for All Americans

The beginning of the Affordable Care Act is not:

Quality, Affordable Health Care for Americans Who Happen to Live in States That Establish State Health Exchanges

But all’s well that ends well, right? There was a drafting error in the tax credit session, and congressional gridlock has so far prevented the kind of “technical corrections” bills that pass by unanimous consent that usually correct such drafting errors. But the inclusion of the phrase *”such Exchange”* inoculated the law against this particular drafting error’s having major consequences. And six justices headed by John Roberts were willing to read the law with rather than against the grain–as a plan “to improve health insurance markets, not to destroy them”.

But all is not well. For one thing, lots of people are angry:

The University of Chicago’s Harold Pollack is angry:

I remain saddened…. Cases such as King v. Burwell… are naked invitations to crude judicial activism…. It was obvious… that subsidies were intended to be provided to [all]…. Conservative Wisconsin Gov. Scott Walker stated the obvious on this point in 2013. Especially early on, many Republicans privately acknowledged the weak and opportunistic nature of the plaintiff’s argument….

[But] the best health policy minds in the Democratic and Republican parties were bogged down for months battling over a conspicuously weak case that should never have reached the Supreme Court. This brought huge costs…. Both parties need measures that could grant them ownership over key components of health coverage and health care delivery to address these concerns in a politically dignified fashion…. Hospitals and insurers want to break the political logjam that has locked almost five million impoverished Americans out of Medicaid, mostly in southern states….

Briefly put, King was one of the great trolling exercises in the history of American health policy. Thank goodness it has been resolved. Good riddance to it.

There are no prospects that we here in America will make up the year spent not figuring out how to better regulate and structure health-care financing that has been King vs. Burwell’s gift to all of us.

George F. Will is angry:

The paramount injury [from Roberts’s decision] is the court’s embrace of a duty to ratify and even facilitate lawless discretion exercised by administrative agencies…. Rolling up the sleeves of his black robe and buckling down to the business of redrafting the ACA, Roberts cites a doctrine known as “Chevron deference.”… The doctrine is that agencies charged with administering statutes are entitled to deference when they interpret ambiguous statutory language. As applied now by Roberts, Chevron deference obligates the court to ignore language that is not at all ambiguous but is inconvenient…

One problem is that George F. Will seems not to have read John Roberts’s opinion before writing. He decided to attack John Roberts for expanding the deference that the Supreme Court offers the President. But Chief Justice John Roberts says expressly that he is not — repeat NOT — deferring to the IRS in the manner of the Chevron case. He is not expanding the deference that the Supreme Court offers the President: he is, in fact, narrowing it:

John Roberts:

We often apply the two-step framework announced in Chevron…. “In extraordinary cases, however, there may be reason to hesitate before concluding that Congress has intended such an implicit delegation” [to an agency.] This is one of those cases…. Whether… credits are available on Federal Exchanges is… central to this statutory scheme…. It is especially unlikely that Congress would have delegated this decision to the IRS, which has no expertise in crafting health insurance policy…. This is not a case for [deference to] the IRS. It is instead our task to determine the correct reading of Section 36B…

Because of Roberts, no future President with a different IRS can change the implementation so that tax credits flow only to state exchanges.

The honest thing for Will to have done — after he got around to reading Roberts’s opinion — would have been to pull an Emily-Litella-“never-mind” and pulled his piece.

Instead, he has tried to silently edit it — at least the version appearing in National Review Online:

George F. Will:

Rolling up the sleeves of his black robe and buckling down to the business of redrafting the ACA, Roberts cites a doctrine known asinvents a corollary to “Chevron deference.”… It says that agencies charged with administering statutes are entitled to deference when they interpret ambiguous statutory language. As applied now by Roberts, Chevron deference obligates the court to **While purporting to not apply Chevron, Roberts expands it to empower all of the executive branch to** ignore or rewrite congressional language that is not at all ambiguous but is inconvenient…

The rest of National Review is angry: Quin Hilyer:

With today’s Obamacare decision, John Roberts confirms that he has completely jettisoned all pretense of textualism. He is a results-oriented judge, period, ruling on big cases based on what he thinks the policy result should be or what the political stakes are for the court itself. He is a disgrace. That is all.

And Nino Scalia is very angry:

Words no longer have meaning…

Faced with overwhelming confirmation that “Exchange established by the State” means what it looks like it means, the Court comes up with argument after feeble argument to support its contrary interpretation…

The Court’s next bit of interpretive jiggery-pokery involves other parts of the Act that purportedly presuppose the availability of tax credits on both federal and state Exchanges…. Pure applesauce…

The somersaults of statutory interpretation they have performed… will be cited by litigants endlessly, to the confusion of honest jurisprudence. And the cases will publish forever the discouraging truth that the Supreme Court of the United States favors some laws over others, and is prepared to do whatever it takes to uphold and assist its favorites…

We should start calling this law SCOTUScare…

The only observer I can find who is happy is vox.com‘s Ezra Klein:

This wasn’t a ‘win for Obamacare.’ Obamacare is words written on paper. This was a win for the more than 6 million people who will keep their health insurance. It’s a win for parents who can be sure their children can go to the doctor, and for minimum-wage workers who can call an ambulance without worrying about debt. Basic health security for millions of people was on the line in this decision. Everything else was secondary to that.

[the Court] ever took the case…. This was a ridiculous case, based on a ridiculous argument, where the only hope of victory was that the Supreme Court had become an irreversibly partisan institution….

The correct reading of the law, Roberts writes, is the government’s reading…. In the end, the basic finding here isn’t very complicated: Obamacare was designed to work the way everyone understood Obamacare was designed to work… the only way Obamacare actually will work…. The plaintiffs, and many Republicans, were asking the Court to engage in judicial activism of breathtaking scale–using an unclearly worded sentence to upend the clear intent of one of the most significant laws passed in the last generation. In the end, the Court’s four Democratic appointees, and two of its Republicans, refused. We should all be glad they did.

But I am not so happy: three of the Republican justices were eager to become what the court was in Bush vs. Gore–an openly and unrestrained partisan institution.

That is at least three too many.

In the past — think of Marbury vs. Madison, or McCulloch vs. Maryland, or Dred Scott vs. Sanford, or Lochner, or Plessy, or Brown — justices who have ruled against the grain of legal doctrine, tradition, and history have done so in the service of some deeply-held conception of justice. This time is indeed different. This time the three horsemen whose dissent runs so strongly against the grain have no deeply-held conception of justice behind them — only the belief that they are against Team Obama…

As Harold Pollack said:

Naked invitations to crude judicial activism… [are] nihilistic approaches to statutory interpretation [that] might render unworkable complex legislation in the divided institutional turf of American democracy. President Barack Obama was vulnerable to legal/partisan guerilla warfare this time…. Had the plaintiffs prevailed, the hallmark legislative initiative of some conservative Republican successor would prove equally vulnerable on something else. Shakespeare reminds us: Such instructions, once taught, have a way of returning to plague their inventors…

Read more: http://www.politico.com/magazine/story/2015/06/health-care-supreme-court-king-burwell-119446.html#ixzz3eA4BkjCg

https://readfold.com/read/delong/why-did-the-supreme-court-decide-yet-another-obamacare-case-today-mCvy8Qnp

The limits of reforming the U.S. private-sector retirement system

Posted on by Nick Bunker

Looking at the future of retirement in the United States doesn’t reveal a pretty picture. Life expectancies are on the rise as the personal savings rate falls. Participation in employer-sponsored savings plans are on the decline, and fewer households are approaching retirement with enough savings stashed away. Clearly, we need policy reforms that encourage greater retirement savings. A new paper from the Hamilton Project by John N. Friedman, an economist at Brown University, proposes important steps in reforming the current private retirement-savings system, but are they comprehensive enough given the depth of the problems?

Without a doubt, the current private savings system is inefficient and inequitable. The system depends on personal tax deductions to spur private savings in employer-sponsored plans, such as 401(k) plans. But, as Friedman notes, two-thirds of these tax benefits go to taxpayers at the top 20 percent of the income ladder, or those earning more than about $90,000 a year. Research by Friedman, Harvard University economist Raj Chetty, and others find that tax incentives for retirement savings are incredibly inefficient. And employer-sponsored plans are not portable from job to job.

Friedman’s proposal takes aim at those problems. The Hamilton Project provides a summary of the proposal, but here are the reforms in short: Friedman suggests the creation of new savings plans that are portable across jobs and encourage investments in low-cost index funds. Workers would be automatically enrolled in these plans unless they earn under a certain threshold. And to encourage employers to enroll employees, Friedman would introduce an employer-side tax credit that increases in value with each employee added to the plan. The increase in that credit, however, would decrease as more employees are added. For the first 10 employees, an employer gets a credit of $1,000 per full-time worker, but for the next 15 workers the extra credit is only $500, and the credit continues to decrease until it’s only $25 for every employee over 100.

This proposed employer-side credit would be paid for by limiting the personal retirement savings tax deduction for high-income earners, or those making more than $90,000 a year. According to calculations by Friedman, the distributional impact of the reform would be sizable as more of the value of all tax benefits for saving would go to low- and middle-income households. Yet among earners in the top twenty percent, some would also see an increase in the value of the benefits they receive because some of the value of the tax credit would be captured by the firms and therefore their shareholders. Still, the system would become more progressive as many more workers would presumably start to save more if encouraged to do so by their employers.

Friedman’s proposal would do quite a bit to improve the current private savings system. But a well-functioning and efficient private system would not be a cure all for the overall retirement savings problem. The reason: too many low- and middle-income households simply can’t afford to save while also paying for everyday necessities out of wages that are growing only slowly if at all.

Prior to the Great Recession, which began in December 2007, the personal savings rate was already on a steady downward trend. But there was–and still is– a lot of variation in the savings rate. In 2011, the average savings rate of the top 10 percent of taxpayers by wealth was 26 percent, according to research by economist Emmanuel Saez of the University of California-Berkeley and Gabriel Zucman of the London School of Economics, while the average rate for the bottom 90 percent was 0 percent.

So, some households are clearly saving. It just isn’t the vast majority of U.S. households. The concurrent rise of inequality in the savings rate and income leading to rising wealth inequality in the United States suggests that savings is very much a function of what workers earn. Declining savings rates for the segment of the workforce that has experienced falling-to-stagnant real wage growth (after factoring in inflation) shouldn’t be surprising. Reforming the system into which savings flow is important, but increasing income growth seems just as vital as a part.

But is that asking too much of the private-sector retirement savings system? Even if income growth picks up, the possibility that a low-interest rate future for savings plans means individuals would have to save more to meet their savings goals as they live longer. So again savers would have to tuck away even more of their income. This may be too much to ask of the vast majority of households today.

As Eduardo Porter points out in The New York Times, the federal government plays a major role in retirement savings via the Social Security program. The government has more resources to call upon through taxation to help provide an adequate retirement for an aging population that is going to grow in size and longevity in the coming decades. The program could be expanded and become a much stronger base on which private savings could rest.

Reforms along the lines Friedman proposes would be a big step forward for the private U.S. retirement system, but are unlikely to fully tackle the larger issue at hand.

Must-Read: Viral V. Acharya and Hassan Naqvi: On Reaching for Yield and the Coexistence of Bubbles and Negative Bubble

Posted on by Brad DeLong

Must-Read: Viral V. Acharya and Hassan Naqvi: On Reaching for Yield and the Coexistence of Bubbles and Negative Bubbles: “We develop a model of financial intermediation characterized by an inside agency problem…

…such that managers ‘reach for yield’ by overinvesting in risky assets and concurrently underinvesting in safer assets when they have access to high enough liquidity. The investment preferences of managers follow a certain pecking order whereby their first preference is to invest in risky assets; their second preference is to hoard on to liquid assets (i.e. cash and cash equivalents) so as to provide a buffer against runs; and their last preference is to invest in medium-risk assets. The reaching-for-yield behavior of managers is conducive to the formation of bubbles in the market for risky assets and concurrently ‘negative bubbles’ in the market for safer (i.e. medium-risk) assets. We show that loose monetary policy reduces the cost of covering any liquidity shortfalls suffered by the intermediary which induces further ‘reaching for yield’ culminating in the coexistence of bubbles and negative bubbles in risky and safer assets respectively.

Reevaluating Head Start

Posted on by Nick Bunker

Policymakers across the political spectrum are turning to the expansion of early childhood education as a potential solution to low economic mobility and slow growth within the United States. Research broadly demonstrates that a good pre-Kindergarten experience can raise academic achievement and help close educational gaps that appear even before a child ever enters a Kindergarten classroom. Yet proponents of investing more in pre-K programs have had to contend with other research arguing that Head Start, the federal preschool program created in the 1960s, isn’t as effective as proponents would hope. A new paper, however, shows that once one factors indifferences in children’s care arrangements prior to entering Head Start, the long-term returns on investment are higher than previously believed.

Economists Patrick Kline and Christopher Walters of the University of California-Berkeley reevaluate Head Start in light of findings from the Head Start Impact Study, known as HSIS. This study initially found that some of the positive effects of Head Start (mostly improvements in test scores) were short-lived, eventually fading away over time, and that the rate return on the program was quite low. The key insights by Kline and Walters is that the rate of return on the early childhood educational investments depends on whether these very young children were cared for at home, or were enrolled in other preschool programs. The two authors find that the differences in the costs and benefits of the program for these different groups of children lead to a different evaluation of Head Start.

First, there are the costs of the program. If all the children were entering into Head Start directly from home care, then the cost of each additional child would be the full cost of the program. But not all children move directly from the home into Head Start; many shift from other forms of pre-school, such as programs run by state governments in Oklahoma. About 23 percent of the children in Head Start children in the data Kline and Walters use are moving from these kinds of preschools. Importantly, many of these programs are also subsidized by the government and are more expensive than Head Start for the government. Shifting these children into Head Start saves the government money, and the savings are quite large. If the shifting isn’t accounted for, then it appears that the program about breaks even. But once figured in, the benefits are twice as large as the costs.

On the benefits side, Kline and Walters show that the differences in childcare before pre-Head Start also matter. The positive effects are much higher for children who previously were in home care. The economists also show that the children most likely to get most benefits from Head Start are the least likely to enroll in the program. In other words, expanding the program to a wider group of children would increase the benefits and the rate of return, assuming the increase in costs isn’t too large.

Does looking at Head Start in this new, more positive light mean that the program is sufficient or fine as is? Certainly not. Previous research by Walters finds that the variation in the effects of Head Start depends upon the specific center, and that those variation among the center is quite large. So there is certainly room for improvement. Yet this new research, if it holds up, means that the concerns about the infeasibility of mass early childhood education should be tempered. Figuring out how to creating a truly universal, high-quality program will take quite a bit of work, but we shouldn’t scrap or disregard what appears to be an effective program already in place.