Category: Equitablog

The piece of the launch of ObamaCare–Blue State ObamaCare, that is, for Red State ObamaCare has not really been launched yet, and the Red States look to be more than $100 billion/year poorer for it–that puzzles me the most is the extraordinary slowdown in the rate of growth of health care costs that accompanied it. None of our standard economic models have channels plausibly large enough to make such a slowdown a conceivable consequence of the ObamaCare launch, get the striking coincidence in time makes it very difficult to believe that ObamaCare is not in some way largely responsible…

Laura Tyson and Lenny Mendonca:
Obamacare and Effective Government:
“When historians look back…

…on the United States’ Patient Protection and Affordable Care Act… they will not devote much attention to its regulations, its troubled insurance exchanges, or its website’s flawed launch… [but] on how ‘Obamacare’ encouraged a wave of innovation that gradually tamed the spiraling costs of a dysfunctional system, even as millions of previously excluded Americans gained access to health insurance…

(1) If the US economy were operating at its productive potential, the share of 25 to 54-year-olds who are employed ought to be what it was at the start of 2000. Back then there were few visible pressures leading to rising inflation in the economy.

Does anybody disagree with that?

(2) Right now, 25 to 54-year-olds–both male and female–are employed at a rate lower by 5%-age points then they were at the start of 2000. That’s 6.5%, or 1/15, more 25-54 labor at work than we have today.

Does anybody disagree with that?

(3) Even if you think–in spite of the absence of accelerating inflation–that employment in 2000 was above the economy’s long-term sustainable potential, there is no reason to believe that a U.S. economy firing on all cylinders would not have 25-54 employment to population rates–both male and female–back at their 2006 levels, a full 3%-age points–and 4%, 1/25–higher than today.

Does anybody disagree with that?

(4) The U.S. economy’s convergence towards its potential is very slow: The 25-54 employment-to-population ratio has only risen by 1%-point over the past two years.

Does anybody disagree with that?

(5) Yet in spite of all these, the Federal Reserve believes that the U.S. economy is now close enough to its productive potential that unless some more things go wrong it is no longer appropriate for it to be buying assets and it will be appropriate for it in a year to start raising interest rates even though inflation is still below its 2%/year target.

The only way to square (1) through (4) with (5) is if the Greater Crash of 2008-2009 and the still-ongoing Lesser Depression really have pushed between 2 and 4%-age points of our 25 to 54-year-olds out of the labor force permanently, so that we can never get them back, or at least never get them back without an economy at such high pressure to produce inflation that the Federal Reserve regards as unacceptable.

This may be true.

But it does raise two questions:

1. What has made the Federal Reserve so confident that it is true that it is willing to make policy based on it–especially as current inflation is still below the 2%/year target?

2. If it is true that the missing 2 to 4%-age points of 25 to 54-year-olds now out of the labor force could not be pulled back in without allowing inflation to rise above it’s 2%/year target, isn’t that an argument for raising the 2%/year target rather than accepting the current 77% 25-54 employment to population ratio as the economy’s limit of potential?

Macroeconomics, Labor Force Participation, Federal Reserve, Monetary Policy, Lesser Depression, Greater Crash, Hysteresis

415 words

Must- and Shall-Reads:

• James Fallows:
  “The American public and its political leadership will do anything for the military except take it seriously. The result is a chickenhawk nation in which careless spending and strategic folly combine to lure America into endless wars it can’t win…”
• James Hamilton:
  “A few weeks ago I offered some calculations suggesting that lower demand for oil might account for about $20/barrel of the dramatic decline in the price of oil since last summer. Here I point to some other evidence consistent with that conclusion”
• Menzie Chinn:
  A Quick Note on Different Views of Potential GDP

1. Evan Soltas:
   Falling Labor Force Participation Update:
   “The top-line result is that, of the 3.1 percentage-point decline in the participation rate between March 2007 and March 2014, 1.9 p.p (three-fifths) is explained demographic change and 1.2 p.p (two-fifths) of it is unexplained by demographic change. Of the explained portion, almost all of that (1.6 p.p.) is aging…”
   

2. Kevin Murphy:
   How Gary Becker saw the scourge of discrimination:
   “The legal remedies sought by the [civil-rights] campaigners played no significant role in his analysis. From an economic perspective, legal remedies have corrected some problems but exacerbated others…. Firms intent on discriminating in their hiring practices can move to locations without significant minority populations…. If people have a tendency to discriminate on the basis of race, legislation cannot eliminate that tendency. Politicians cannot merely legislate a new outcome, or legislate preferences away. They can only change the way discrimination manifests itself…. One obvious question begged by Becker’s work was, who benefits from discrimination? While he did not directly address this, he did suggest that one beneficiary might be labor unions, which have traditionally represented white workers…”
   

3. Paul Krugman:
   Mysteries Of Deflation (2010):
   “Since Friedman and Phelps laid out the natural rate hypothesis in the 60s, applied macroeconomics has relied on some kind of inflation-adjusted Phillips curve…. But here’s the thing: the [Friedman-Phelps] inflation-adjusted Phillips curve predicts not just deflation, but accelerating deflation in the face of a really prolonged economic slump…. This doesn’t happen…. So what’s going on? There’s a body of work I’m surprised we haven’t been hearing more about: the downward nominal wage rigidity literature. I learned about the concept from Pierre Fortin; Mr. Janet Yellin, aka George Akerlof, and co-authors wrote quite a lot about it…. It’s important to take account of downward rigidity so as not to get fooled into accepting a persistently depressed economy as normal…. It’s time to start focusing on downward rigidity and what it implies. After all, all indications are that we’re going to be dealing with a depressed economy for a long time to come.”
   

4. Matthew Yglesias:
   Lyndon Johnson’s Aides Mad MLK Is Hero of Selma:
   “Selma doesn’t offer a hostile portrayal of Johnson… [but] tell[s] a story in which King and his collaborators are the key actors…. Johnson[‘s]… notion of doing the War on Poverty first and voting rights second isn’t obviously wrongheaded or pernicious, but King doesn’t agree…. Johnson tries a couple of times to talk them out of it… fails… swings around to King’s viewpoint…. Certainly one could image an excellent Lincoln-esque film that primarily highlighted the legislative machinations among white politicians and cast LBJ as the hero (I would watch). But the choice to make a different film that highlights activist demands and casts MLK as the hero isn’t a form of historical inaccuracy or grounds for dismissing the movie. The idea that a film should be ruled out for having the temerity to focus on black people’s agency in securing their own liberation is completely absurd. We’ve had too few such films in American history and everyone could stand to watch some more…”
   

5. New York Times:
   Prosecute Torturers and Their Bosses:
   “Obama… has failed to bring to justice anyone responsible for the torture of terrorism suspects…. Obama has said multiple times that ‘we need to look forward as opposed to looking backwards,’ as though the two were incompatible. They are not. The nation cannot move forward in any meaningful way without coming to terms, legally and morally, with the abhorrent acts that were authorized, given a false patina of legality, and committed by American men and women from the highest levels of government on down…. These are, simply, crimes…. No amount of legal pretzel logic can justify the behavior detailed in the report. Indeed, it is impossible to read it and conclude that no one can be held accountable. At the very least, Mr. Obama needs to authorize a full and independent criminal investigation… former Vice President Dick Cheney; Mr. Cheney’s chief of staff, David Addington; the former C.I.A. director George Tenet; and John Yoo and Jay Bybee… Jose Rodriguez Jr., the C.I.A. official who ordered the destruction of the videotapes; the psychologists who devised the torture regimen; and the C.I.A. employees who carried out that regimen…. Republicans… with one notable exception, Senator John McCain, they have either fallen silent or actively defended the indefensible…”
   

Should Be Aware of:

• Matt Bruenig:
  Right to Own
  
• The Bonddad Blog:
  An Entire YEAR of Incompetent Economic Analysis From Powerline
• LizardBreath:
  Liveblogging KitchenAid Repair
• John Quiggin:
  Consequentialist arguments for deontological claims
• Rebecca Schoenkopf:
  “GOP Looks To The Future, Thinks It Over, Sells Reagan/Bush T-Shirts Instead”

1. Barkley Rosser:
   EconoSpeak: More Piling On [John] Cochrane: Why He Cannot Go Back To Being Taken Seriously Even About Asset Pricing:
   “Piling on John Cochrane… nearly all his claims are not only laughingly bogus, but seriously unsupported even in his own column…. suggests… Cochrane… should just go back to working on asset pricing…. Even in that arena, he… should also be ignored…. What is his problem?  He… has simply ignored… ‘fat tails’…. The words ‘fat tails’ ‘kurtosis’ and ‘leptokurtosis’ simply do not appear…. Nowhere, nada, not at all…. Campbell, Lo, and MacKinlay… at least talk about this issue…. In 2008, when he was criticized for not talking about fat tails, Cochrane defended himself by noting that Eugene Fama… knew all about fat tails…. Indeed, Fama initially supported Mandelbrot’s argument that variances are asymptotically infinite, but then turned against him… although ignoring evidence that fourth moments (kurtosis) may actually be so…. Cochrane claimed… Fama… knew about asset returns having fat tails and that anybody who studied with him knew this.  Maybe this is so, but there seems to be might little evidence that Cochrane has been passing this on to  his students…. This makes him look pretty pathetic… even in his area of most basic research.”
   

2. David Adesnik (2006):
   Oxblog Volunteers to Write for the Old New Republic…: “At this point, the author pulls out a deck of cards and picks one at random. If the card is a ten or lower, the author concludes that the Democrats are right, but not for the reason given by some senator from Massachusetts. If the author draws a face card, he thinks to himself, ‘I must agree with the Republicans for no apparent reason in order to show that I’m open-minded.’ If the author draws an ace, it means that his thirtieth birthday is approaching and it’s time to either go back to grad school or work for McKinsey…”
   

3. Julian Sanchez and David Weigel (2007):
   Who Wrote Ron Paul’s Newsletters?:
   “Ron Paul doesn’t seem to know much about his own newsletters… says he was unaware… of the bigoted rhetoric about African Americans and gays that was appearing under his name… has ‘no idea’ who might have written inflammatory comments such as ‘Order was only restored in L.A. when it came time for the blacks to pick up their welfare checks’…. A half-dozen longtime libertarian activists… all named the same man as Paul’s chief ghostwriter: Ludwig von Mises Institute founder Llewellyn Rockwell, Jr….. Rockwell, Paul’s congressional chief of staff from 1978 to 1982, was a vice president of Ron Paul & Associates…. During the period when the most incendiary items appeared… Rockwell and… Murray Rothbard championed an open strategy of exploiting racial and class resentment to build a coalition with populist ‘paleoconservatives,’ producing a flurry of articles and manifestos whose racially charged talking points and vocabulary mirrored the controversial Paul newsletters…. To this day Rockwell remains a friend and advisor to Paul…. Besides Ron Paul and Lew Rockwell, the officers of Ron Paul & Associates included Paul’s wife Carol, Paul’s daughter Lori Pyeatt, Paul staffer Penny Langford-Freeman, and longtime campaign manager Mark Elam…. The publishing operation was lucrative… $940,000 for Ron Paul & Associates…. The tenor of Paul’s newsletters changed over the years. The ones published between Paul’s return to private life after three full terms in congress (1985) and his Libertarian presidential bid (1988) notably lack inflammatory racial or anti-gay comments. The letters published between Paul’s first run for president and his return to Congress in 1996 are another story—replete with claims that Martin Luther King ‘seduced underage girls and boys,’ that black protesters should gather ‘at a food stamp bureau or a crack house’ rather than the Statue of Liberty, and that AIDS sufferers ‘enjoy the attention and pity that comes with being sick.’… Paul’s inner circle learned between his congressional stints that ‘the wilder they got, the more bombastic they got with it, the more the checks came in. You think the newsletters were bad? The fundraising letters were just insane from that period.’ Cato Institute President Ed Crane told reason he recalls a conversation from some time in the late 1980s in which Paul claimed that his best source of congressional campaign donations was the mailing list for The Spotlight, the conspiracy-mongering, anti-Semitic tabloid run by the Holocaust denier Willis Carto until it folded in 2001. The newsletters’ obsession with blacks and gays was of a piece with a conscious political strategy adopted at that same time by Lew Rockwell and Murray Rothbard…”
   

Evan Soltas reports one of the smaller estimates of the permanent labor-side hysteresis damage done to the American economy by the Lesser Depression: 1.2/60 = 2% permanent decline in the American labor force relative to the previous trend. Something to make my less pessimistic on New Year’s Eve Eve…

Kevin Murphy:
How Gary Becker saw the scourge of discrimination:
“The legal remedies sought by the [civil-rights] campaigners…

…played no significant role in his analysis. From an economic perspective, legal remedies have corrected some problems but exacerbated others…. Firms intent on discriminating in their hiring practices can move to locations without significant minority populations…. If people have a tendency to discriminate on the basis of race, legislation cannot eliminate that tendency. Politicians cannot merely legislate a new outcome, or legislate preferences away. They can only change the way discrimination manifests itself…. One obvious question begged by Becker’s work was, who benefits from discrimination? While he did not directly address this, he did suggest that one beneficiary might be labor unions, which have traditionally represented white workers…”

That legislation cannot do anything other than change the way that racial discrimination manifests itself and that the first big beneficiary from racial discrimination one thinks of are (or were) (white) labor unions seems to me to have much more to do with Kevin Murphy’s views than Gary Becker’s…

Must- and Shall-Reads:

• Daniel Davies and Tess Reed:
  She Short Sells Shoes On A Shopping Site
• Daniel Davies and Tess Reed:: The Secret Life of Money: Everyday Economics Explained
• Robert Reich:
  “Some believe the central political issue of our era is the size of the government. They’re wrong. The central issue is whom the government is for…”
• Sam Ro:
  How Compound Interest Affects Retirement Savings: Every 25-Year-Old In America Should See This Chart
• David Frum:
  The Real Story of How America Became an Economic Superpower: Adam Tooze’s study of the two world wars traces a new history of the 20th century
• Daniel Drezner:
  “War did not break out in the Pacific Rim…. Bilateral deals on climate… and trade… a robust Sino-American relationship…. The longest post-Westphalian streak of ‘no great power war’… continue[s]…. [No] next U.S. recession…. Even in the parts of the world where bad things happened, the worst-case scenarios did not materialize…. Ebola… did not spread into Nigeria…”
• Arun Devnath:
  Rising Oceans Force Bangladeshi Farmers Inland for New Jobs

1. David Beckworth:
   Follow-Up to: The Fed’s Dirty Little Secret:
   “Monetary regime change is hard. But why do we think that fiscal policy would work any better given the Fed’s dedication to its low inflation target?… If the U.S. Treasury Department sent $5000 checks… and… [people] began to spend… we would begin to see inflation go up…. The Fed would tighten…. For the same reason QE was limited from the beginning it also true that fiscal policy was limited from the beginning. With highly-credible inflation targeting central banks, both monetary and fiscal policy require monetary regime change to work at the ZLB. So I am puzzled as to why Krugman put his energy into drumming up support for more fiscal policy rather than drumming up support for a change in monetary regimes…”
   

2. Noah Smith:
   Ten Investing Facts of Life:
   “Morgan Housel recently came up with an impressive list of 122 investing aphorisms…. Almost all… are good advice…. There was really only one I didn’t like: ’67. Finance would be better if it was taught by the psychology and history departments…’. As someone who teaches finance, I might sound a little self-serving for saying that academic finance has valuable things…. But… [many of] Housel’s… aphorisms… come from… finance professors!… 10 of my favorites…”

3. Robert Rubin and Nicholas Turner:
   The Steep Cost of America’s High Incarceration Rate:
   “Crime itself has a terrible human cost and a serious economic cost. But appropriate punishment… shouldn’t obscure the vast deficiencies in the criminal-justice system…. The U.S. rate of incarceration, with nearly one of every 100 adults in prison or jail, is five to 10 times higher than the rates in Western Europe and other democracies…. Long sentences have had at best a marginal impact on crime reduction. This is not only a serious humanitarian and social issue, but one with profound economic and fiscal consequences…. For the more than 600,000 people who leave prison and re-enter society every year, finding employment can be a severe challenge…. Up to 60% of formerly incarcerated people are unemployed one year after release…. It’s no surprise that 43% of people released from prison end up back behind bars within three years, according to a recent Pew study on recidivism. The costs of incarceration extend across generations. Nearly three million American children have a parent in prison or jail…. There is widespread bipartisan agreement that we are using prison for too many crimes and for too long…. The time has come to make sensible reform in these four areas—sentencing, parole, rehabilitation and re-entry—a national priority…”
   

4. Martin Feldstein:
   The Fed’s Needless Flirtation With Danger:
   “The risks involved in… quantitative easing…. [which] reduced long-term interest rates and raised… equities and real estate… caused lenders and investors to reach for yield… taking greater risks through lower-quality loans… and accepting narrower spreads…. The risks… were unnecessary. Well-designed tax policies… an enlarged investment tax credit… converting the deduction for business interest to a credit… allowing deductions for dividends on common or preferred equity…. The resulting revenue loss could be balanced by a temporary rise in the corporate income-tax rate… taxing more highly the return on old capital while stimulating new investment…. A direct tax incentive to home builders…. The… deduction of mortgage interest… extended to non-itemizers… converted to an optional tax-credit…. Quantitative easing increase[s] the risk of financial instability…. Increased government spending and reduced tax revenue increase budget deficits and national debt…. Changes in the tax structure could stimulate spending… without raising… deficits.”
   

5. Paul Krugman:
   Nothing Non-Gold Can Stay:
   “David Beckworth has a good post pointing out… the Fed has been signaling… the big expansion in the monetary base is… temporary… this vitiates the effectiveness of quantitative easing…. My only small peeve…. I made this point sixteen years ago…. I’m turning into one of those crotchety old economists…. Beckworth offers as an example of how it should be: FDR’s exit from the gold standard…. Effective monetary policy in a liquidity trap requires both an actual and a perceived regime change, and that’s very hard to engineer…. I get annoyed with… ‘the Fed has pursued a tight-money policy’…. [when] reality… is ‘The Fed hasn’t been willing to commit to a permanent regime change in the face of what it considers a temporary problem.’ And even if it had… would people have believed it?… Going off the gold standard isn’t something you get to do very often…”
   

6. Paul Krugman:
   1980 and All That:
   “Robert Waldmann is shocked, shocked, to find conservative economists not doing their homework…. I’m shocked that he’s shocked…. Why, he asks, didn’t they look up the data–which takes only a few seconds on FRED–before making their claims? But this… applies… across the board…. Why this failure to do even the simplest homework?… They hear everyone around them saying stuff, repeat it, and that becomes what everyone knows; the idea of checking the facts themselves never seems to arise, indeed is almost anathema…. Mainly, I suppose, it’s the epistemic closure that comes from serving the interests of big money… think tanks that don’t want too much thinking, partisan media that don’t do fact-checking, and for that matter professional journals that erect high barriers….

Should Be Aware of:

• Neil Gaiman:
  I, Cthulhu, or, What’s A Tentacle-Faced Thing Like Me Doing In A Sunken City Like This (Latitude 47° 9’ S, Longitude 126° 43’ W)?
• David Edwards:
  American Schools Are Training Kids for a World That Doesn’t Exist
• Star Trek Continues
• • Yael T. Abouhalkah:
    Ten Gifts for the Kansas City Area’s Naughty and Nice Leaders
• The Official Mystery Science Theater 3000 Website
• ProjectImplicit
• Christopher Wanjet:
  Imagination and Reality Look Different in the Brain

1. Alex Abad-Santos:
   The Holiday:
   “Why you should see this movie: Because you’re in the mood to see the greatest holiday-inspired romantic comedy ever made. This movie was made in 2006, so it’s unlikely it will be shown in theaters. If you somehow happen upon a theater showing it, check to make sure you haven’t time traveled. What you should know: This movie has Jude Law at his peak, a Nancy Meyers kitchen scene, and Kate Winslet. Chances of a sex scene that you and your parents will want to avoid: Even if it had the most jaw-droppingly erotic scene in the history of cinema, you would have to see it, just to experience the glory of The Holiday. (This may be an oversell. But you don’t know until you’ve watched!)”
   

2. Michelle Conlin:
   Off duty, black cops in New York feel threat from fellow police:
   “Reuters interviewed 25 African American male officers on the NYPD…. All but one said that, when off duty and out of uniform, they had been victims of racial profiling, which refers to using race or ethnicity as grounds for suspecting someone of having committed a crime… being pulled over for no reason, having their heads slammed against their cars, getting guns brandished in their faces, being thrown into prison vans and experiencing stop and frisks while shopping. The majority of the officers said they had been pulled over multiple times while driving. Five had had guns pulled on them. Desmond Blaize, who retired two years ago as a sergeant in the 41st Precinct in the Bronx, said he once got stopped while taking a jog through Brooklyn’s upmarket Prospect Park. ‘I had my ID on me so it didn’t escalate,’ said Blaize, who has sued the department alleging he was racially harassed on the job. ‘But what’s suspicious about a jogger? In jogging clothes?’…”