…The ill-considered sales tax hike of the spring is still doing major damage…. So contractionary policy is contractionary. I could have told you that, and in fact have told you that again and again. But some people still don’t get the message. In Germany, the Bundesbank president opposes expansionary monetary policy because it might reduce the pressure for fiscal austerity: ‘Such purchases might create new incentives to run up debt, besides adding to the reform fatigue in a number of countries’….
That’s actually quite an awesome concern to express at this moment. European recovery has stalled, largely thanks to fiscal contraction; inflation is far below target, and outright deflation looms; and the political basis for the European project is coming apart at the seams. And Weidmann worries that monetary expansion might make life too easy for debtors. But as Wolfgang Munchau says in a terrific column today, ‘German economists roughly fall into two groups: those that have not read Keynes, and those that have not understood Keynes’….
How does this end? We have to keep pounding on the issues, and I’m reasonably sure that Draghi and co get it. But with the largest player on the European scene living in a fantasy world, the best guess has to be that nothing much is done until there is complete political crisis, with anti-European nationalists taking over one or more major nations.
Category: Equitablog
Afternoon Must-Read: Ron Fournier of the National Journal Writes the Worst Two Paragraphs You’ll Read Today
…is frustrated with the state of American politics…. He explains that the big problem with Obama’s approach was failing to take a page from the Massachusetts universal health care program that is in fact the model for Obamacare:
On health care, we needed a market-driven plan…. Just such a plan sprang out of conservative think tanks and was tested by a GOP governor in Massachusetts, Mitt Romney. Instead of a bipartisan agreement to bring that plan to scale, we got more partisan warfare. The GOP resisted, Obama surrendered his mantle of bipartisanship, and Democrats muscled through a one-sided law that has never been popular with a majority of the public.
It is true that we did not get a bipartisan agreement. It is true that the GOP resisted. It is true that the law is unpopular. But Obama didn’t surrender his mantle of bipartisanship. The GOP took it away from him. They took it away from his as part of a deliberate strategy. They knew, as Fournier says right in this very column, that a big bipartisan health reform would be more popular than a big partisan health reform. So since Republicans didn’t want Obama to be popular, they had every incentive to refuse to reach a bipartisan agreement. And thus no agreement was reached.
But… Obama and congressional Democrats delivered exactly the kind of reform Fournier says America needed. Shouldn’t they be congratulated?… In substance, you still have a program… on the Massachusetts model…. It’s also not something Obama bungled. It’s a consequence of mismatched incentives in Washington…. The opposition party would like the president to not be associated with bipartisan initiatives…. If you don’t understand that, you’ll never understand today’s politics. Worse, you’ll be consistently making bipartisanship less likely. It’s precisely because of columns like this one that it made narrow political sense for the GOP to abjure compromise. Why bargain if any failure to reach agreement will be blamed on the president?
Financial leverage and where to find it
Financial leverage is a bit like caffeine. You can get by without it, but using it sparely can help you get through a rough batch. Constant usage, however, can result in overdependence—and the resulting crash is not pretty.
On their blog today, Stephen G. Cecchetti of the Brandeis International Business School and Kremit L. Schoenholtz of New York University’s Stern School of Business detail the role of debt in financial crises. The two academics note that the equity-driven recession of the early 2000s—the so called “dot-com recession”—did not drag the U.S. economy into a prolonged downturn because companies had not loaded up on piles of debt. This lack of leverage among companies rendered the 2000 recession mild compared to the Great Recession of 2007-2009, when imploding mortgage debt among individual homeowners, financial institutions, institutional investors, and other financial intermediaries that purchased these mortgages sank the global economy.
In their piece, Cecchetti and Schoenholtz note that they have yet to find any source that reports the risks that some financial intermediaries are taking in today’s real estate market. That means researchers and regulators are most likely unaware of many of the leveraged risks being taken in the real estate sector. Our understanding is further hindered because we also lack a real-time source of information of the distribution of household leverage.
How is it that such information about leverage and its role of as a financial accelerant is largely missing? After all, researchers and regulators spend a large amount of time figuring out how to measure bank balance sheets. The issue, though, is the amount of debt and assets that are off-balance sheet. Cecchetti and Schoenholtz mention the development of special investment vehicles in the years before the housing and financial crises in the previous decade. These off-balance sheet investments allowed banks to take on even more debt, but their leverage appeared unaffected. In short, the banks could make investments that could reap great returns but hide the risk.
Cecchetti and Schoenholtz focus their piece on the role of leverage in companies, but the story of increasing household debt can be even more important. As Atif Mian of Princeton University and Amir Sufi of the University of Chicago document, prior to the Great Recession household leverage increased dramatically as households took on more and more mortgage debt. The areas that saw housing prices drop the most then saw significant reductions in consumer spending. And the increase in household leverage was evident across the rich economies in the run up to the Great Recession.
Considering how intertwined the housing market has become with the financial system, the twin increases in leverage can be a toxic mix. We would all be better served if these dangerous gaps in our knowledge were filled.
Things to Read at Nighttime on November 16, 2014
Must- and Shall-Reads:)
- U.S. Expects $5 Billion From Program That Funded Solyndra
- : Why Keynes is important today
- : A safe asset for Eurozone QE: A proposal
-
: There is privilege, then there is privilege…: “…and then there is whatever this is: George W. Bush: ‘You have to earn your way into politics,’ nothing ‘is ever given to you’](http://www.rawstory.com/rs/2014/11/george-w-bush-you-have-to-earn-your-way-into-politics-nothing-is-ever-given-to-you/) -
: The UNC Coup and the Second Limit of Economic Liberalism: “There was a quiet revolution in the University of North Carolina higher education system in August, one that shows an important limit of current liberal thought…. The UNC System Board of Governors voted unanimously to cap the amount of tuition that may be used for financial aid for need-based students at no more than 15 percent…. As a board member told the local press, the burden of providing need-based aid ‘has become unfairly apportioned to working North Carolinians,’ and this new policy helps prevent that…. The problem for liberals isn’t just that there’s no way for them to win this argument with middle-class wages stagnating…. The far bigger issue for liberals is that this is a false choice, a real class antagonism that has been created entirely by the process of state disinvestment, privatization, cost-shifting of tuitions away from general revenues to individual, and the subsequent explosion in student debt. As long as liberals continue to play this game, they’ll be undermining their chances…” -
: The wacky economics of Germany’s parallel universe: “German economists roughly fall into two groups: those that have not read Keynes, and those that have not understood Keynes. To describe the economic mainstream in Germany as conservative misses the point…. As compelling as a comparison between the German mainstream and the Tea Party may appear, it does not survive scrutiny…. A good example of orthodox dogma was last week’s annual report of the Council of Economic Experts…. They did not criticise a lack of investment, excessive current account surpluses or overzealous fiscal rectitude. Instead they criticised the minimum wage and some minor relaxation to the retirement age. In other words: they want the government of Angela Merkel, chancellor, to be even tougher…. Macroeconomics in Germany and elsewhere are tantamount to parallel universes. In practice, German macroeconomic exceptionalism did not really matter all that much–until recently, when it started to matter a lot. When you have your own currency and engage with the rest of the world mainly through trade, a wacky ideology is your problem. That changes when you enter a monetary union, which is when policy makers have to work together…” -
: People Who Use Obamacare Sure Do Like It | Mother Jones: “Jonathan Cohn points us today to a Gallup poll with yet more good news for Obamacare…. The people who are actually using Obamacare… 74 percent said the quality of health care they received was good or excellent, and 71 percent said the overall coverage was good or excellent. What’s remarkable is that these numbers are nearly the same as those for everyone else with health insurance, which includes those with either employer coverage or Medicare. Here’s the bottom line from Cohn: ‘You hear a lot about what’s wrong with the coverage available through the marketplaces and some of these criticisms are legitimate. The narrow networks of providers are confusing, for example, and lack of sufficient regulations leaves some patients unfairly on the hook for ridiculously high bills. But overall the plans turn out to be as popular as other forms of private and public insurance. It’s one more sign that, if you can just block out the negative headlines and political attacks, you’ll discover a program that is working.’ Republicans can huff and puff all they want, but the evidence is clear: despite its rollout problems, Obamacare is a success…” -
: What the Beveridge Curve may tell us about the U.S. labor market: “Tthe Federal Reserve Bank of Cleveland used historical data on printed job advertisements to create a jobs opening rate for years prior to 2000. And if you look at their Beveridge Curve for economic recoveries going back over 60 years, you see the current shift is actually quite typical. The curve appears to shift quite a bit (up and over to the right) after large recessions and shifts back (down and over to the left) after the labor market recovers from the large shock…” -
: Mexico’s Growth Problem: “When Mexico’s then-[Usurper] President Carlos Salinas de Gortari and his American counterpart, Bill Clinton, signed the North American Free Trade Agreement (NAFTA) more than 20 years ago, the hope was that the Mexican economy would be swept forward by a rising wave of globalization. By many measures, that hope has been amply fulfilled. Mexico’s foreign-trade volume… climbed… roughly doubling, to more than 60% of GDP. Net foreign investment inflows relative to GDP tripled… manufactured exports have led the way, as the economy has become ever more tightly integrated into North American supply chains…. Like so many other countries, Mexico was initially hit hard by Chinese competition in global markets…. Nonetheless, Mexico’s proximity to the US market and its conservative monetary, fiscal, and labor-market policies have provided significant protection…. Remarkably, Mexico’s exceedingly high levels of inequality have begun to fall since 1994, thanks in large part to reforms in social policy and educational improvements. Mexico’s success shows up everywhere, except where it counts the most over the long term: overall productivity and economic growth. In both areas, there has been disappointment galore… growth in total factor productivity… has been negative since the early 1990s… living standards in Mexico have fallen further behind the US and most emerging-market economies. Probably no other country in the world presents a starker contrast between external success and domestic failure…” -
: The evolution of class-based gaps in young children’s home environments: “The racial gaps in test scores are narrowing…. Yet there is an even larger skills gap between children in low and high income households… sizeable before they even enter kindergarten. In fact, the achievement gap between the rich and the poor is widening dramatically, so much so that income is now a better predictor of test scores than race…. Ariel Kalil… will document and examine whether and how these class-based gaps in parenting have changed over the past 25 years, and if so, whether these changes contribute to the growing income-based achievement gap. It is clear that the fate of low- and high-income Americans has diverged in terms of educational attainment and cognitive skills, such as memory, reasoning, perception and intuition. Can the same be said for non-cognitive skills, such as resilience, motivation and attentiveness, necessary precursors for cognitive skill acquisition?…” -
: The Halbig Challengers’ Biggest Textual Obstacle: “The challengers have a big textual obstacle standing in their way: the statute’s provision for federal exchanges in section 1321…. Unlike the ACA’s Medicaid provisions, the exchange provisions have a federal fallback…. This isn’t Medicaid; it’s the Clean Air Act (CAA)…. If the state turns down the ACA’s inducement to create an exchange, then under the challengers’ view the state’s ‘punishment’ is not merely the withholding of funds—it’s the withholding of funds and the creation of a federal exchange to operate in the state. This is an odd kind of inducement. Without the availability of subsidies, the federal exchange is an empty shell…. For devotees of the Cato Institute, perhaps this would be a convincing pitch: ‘If you don’t create a state exchange then we’ll set up a costly, ineffective, useless federal program in your state’…. ‘Attention states! You need to set up a program to provide health care to low-income individuals. If you set up such a program, then the federal government will give you lots of money to help run it. However, if you decline, then you don’t get the money. Moreover, if you decline we’ll spend millions of dollars on a totally useless web portal for low-income individuals to purchase health care in your state. But the health care on the portal will be too expensive for those folks to afford. And the website won’t even work well.’ Under the challengers’ view, that is the system of incentives and cooperative federalism that Congress intended to create in the ACA. It doesn’t make a whole lot of sense…. Alternatively, we could avoid all of this assumed ineffectiveness and just adopt a reading of section 1321 that allows federal exchanges to stand in the shoes of state exchanges. Then the ACA’s ‘fallback’ structure actually makes sense…”
Should Be Aware of:
- Amazon and Hachette Resolve Dispute – NYTimes.com
- Obama Plans to Protect Up to 5 Million From Deportation – NYTimes.com
- : “Good Enough” Tanks Won WWII
- : Obamacare subsidies as textualism’s big test
- : How to meet someone on TV
- : The ‘90s Had It Right
-
: Rage of the Traders: “I really, truly expected that even Wall Street would consider PeterPaul Singer’s hyperinflation in the Hamptons rant embarrassing, and try to pretend that it never happened. But no; apparently it’s being passed around eagerly by traders and big shots who think it’s the greatest thing since sliced foie gras…. Jesse Eisinger at ProPublica tries to make a case for the rage of the hedgies… argu[ing that]… the government and the Fed have created a fake sense of financial health…. Eisinger is imputing a reasonable analysis to the likes of Singer based on no evidence…. I’d suggest that when Singer talks about a debased currency and fake economic growth, that’s because he really believes that we have a debased currency and fake growth, not as a metaphor for some other kind of economic deception. And where is that perception coming from? I still think that Brad DeLong’s analysis has it right…. Traders… concluded that low interest rates would surely rise back to historical norms. When those rates did no such thing, they looked at the Fed’s intervention… [as] a big trader distorting markets, London Whale-style, by making huge bets that would surely go bad. So they sat back and waited for the collapse. And the collapse keeps not happening, because the Fed is not a rogue trader and historical norms for interest rates aren’t relevant in a persistently depressed, deleveraging economy. But rather than acknowledge that they were wrong, let alone that, er, Keynesian macroeconomics has something to teach them, these guys lash out…. [And they] have no idea when they look ridiculous. After all, who in their entourage is going to tell them?” -
: The Ramsey model: “Friends have reminded me that much of the effort of ‘modern macro’ goes into the incorporation of important deviations from the Panglossian assumptions that underlie the simplistic application of the Ramsey model… wage and price stickiness, gaps and asymmetries of information, long-term contracts, imperfect competition, search, bargaining and other forms of strategic behavior…. But… why do so many of those research papers begin with a bow to the Ramsey model and cling to the basic outline?… Attaching a realistic or behavioral deviation to the Ramsey model does not confer microfoundational legitimacy on the combination. Quite the contrary: a story loses legitimacy and credibility when it is spliced to a simple, extreme, and on the face of it, irrelevant special case…. Adding some realistic frictions does not make it any more plausible that an observed economy is acting out the desires of a single, consistent, forward-looking intelligence…. The theory is neat, learnable, not terribly difficult, but just technical enough to feel like ‘science’…” -
: Surfing, Drowning, Diving: A Brief History of Inventing New Media: “15 years ago, the surface cracked open. The glossy patina of digital television ruptured, revealing its polar opposite: bewildering depth…. Blogger (1999) forecasts a future where every person creates their own content empire. This triggers a decade of schizoid seizures in old media companies…. Napster (1999) transforms your computer into a music database server, as the history of human recording becomes instantly available. Wikipedia (2001) turns human knowledge into a massive data repository…. Google News (2002) is invented to capture all the content that media companies were moving to digital platforms…. The Long Tail (2004)…. YouTube (2005) begins to archive every moving image ever created…. In 2010, NYT licenses FiveThirtyEight, one of the first attempts to control the data deluge. Netflix Streaming (2007) shifts Netflix from a superficial ‘surfing’ technology (three DVDs, no more) to a ‘drowning’ experience…. By 2010, we were drowning…. We are now in the era of the deep dive. Consider the media buzzwords of this moment: think piece, longform, recap, and binge watch. All of these terms suggest a break from the era of big data into the epoch of deep exploration. The most successful recent innovations illustrate the shift…. Phase One: Surfing…. Phase Two: Drowning…. Phase Three: Diving…. The water is warm, come on in.”
Nighttime Must-Read: Scott Erik Kaufman: There Is Privilege, Then There Is Privilege…
…George W. Bush:
You have to earn your way into politics, nothing is ever given to you](http://www.rawstory.com/rs/2014/11/george-w-bush-you-have-to-earn-your-way-into-politics-nothing-is-ever-given-to-you/)
Evening Must-Read: Mike Konczal: The UNC Coup and the Second Limit of Economic Liberalism
…higher education system in August, one that shows an important limit of current liberal thought…. The UNC System Board of Governors voted unanimously to cap the amount of tuition that may be used for financial aid for need-based students at no more than 15 percent…. As a board member told the local press, the burden of providing need-based aid ‘has become unfairly apportioned to working North Carolinians,’ and this new policy helps prevent that…. The problem for liberals isn’t just that there’s no way for them to win this argument with middle-class wages stagnating…. The far bigger issue for liberals is that this is a false choice, a real class antagonism that has been created entirely by the process of state disinvestment, privatization, cost-shifting of tuitions away from general revenues to individual, and the subsequent explosion in student debt. As long as liberals continue to play this game, they’ll be undermining their chances…
Evening Must-Read: Wolfgang Munchau: The Wacky Economics of Germany’s Parallel Universe
…and those that have not understood Keynes. To describe the economic mainstream in Germany as conservative misses the point…. As compelling as a comparison between the German mainstream and the Tea Party may appear, it does not survive scrutiny…. A good example of orthodox dogma was last week’s annual report of the Council of Economic Experts…. They did not criticise a lack of investment, excessive current account surpluses or overzealous fiscal rectitude. Instead they criticised the minimum wage and some minor relaxation to the retirement age. In other words: they want the government of Angela Merkel, chancellor, to be even tougher…. Macroeconomics in Germany and elsewhere are tantamount to parallel universes. In practice, German macroeconomic exceptionalism did not really matter all that much–until recently, when it started to matter a lot. When you have your own currency and engage with the rest of the world mainly through trade, a wacky ideology is your problem. That changes when you enter a monetary union, which is when policy makers have to work together…”
Morning Must-Read: Kevin Drum: People Who Use Obamacare Sure Do Like It
Weekend reading
This is a weekly post we publish every Friday with links to articles we think anyone interested in equitable growth should read. 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.
Traders behaving badly
Izabella Kaminska puts the foreign exchange market-rigging scandal into context [ft alphaville].
Paul Krugman tries to understand the roots of the rage among the hedge fund set [ny times].
Labor market issues
Nick Timiraos looks at the high level of part-time employment and asks if it’s the post-Great Recession norm [wsj].
David Leonhardt argues that one fact is hanging over politics and policy: the great slowdown in wages [the upshot].
Savings and capital accumulation
Felix Salmon points out that share buybacks don’t benefit just capital but also the top management of firms [medium].
Don’t worry too much about Millennials when it comes to saving, says Catherine Rampell. Every generation saves relatively less when they are young [wapo].
What’s the value of health insurance?
The Congressional Budget Office earlier this week released a new report on the distribution of household income and federal taxes in the United States. The report contains data on household income from 1979 to 2011, which shows the impact of taxes and transfers (government income-support programs) on incomes. The data paint a different picture from the U.S. Census Bureau income data released earlier this year: the CBO shows a 47 percent increase in the median household income from 1979 to 2011 compared to a 5.3 percent increase according to Census Bureau data.
But is this latest snapshot of the distribution of U.S. incomes necessarily the right picture?
The CBO data account for a variety of factors including federal taxes, the decline in household size and the increasing importance of health insurance as a form of compensation, and transfer programs. It’s the combination of the last two categories—health insurance and transfer programs—that causes the most difficulty when measuring income.
The problem boils down to this question: how much is government-provided health insurance, Medicaid and Medicare, worth to a household? (The Affordable Care Act does not factor into this calculation, as that program did not expand health insurance coverage in earnest until 2013.)
CBO answered that question using the so-called “average cost” method. The calculation is quite easy: take all the spending on, say, Medicaid, and then divide that number by the number of Medicaid enrollees. That “average cost” is designated as the value of Medicaid to the household. Any increase in spending on the program gets registered as an increase in the value.
But CBO didn’t always answer the question this way. Prior to 2012, the agency calculated the value of government-provided health insurance by looking at the “fungible value” of health insurance. This process looks at how much money a household has compared to its basic needs for food and housing. If the household has more income than its basic costs, then the valuation process assumes that government-provided insurance would free up this money for other purposes. So that amount of money (up to the average cost) is called the fungible value.
The difference between the two methods is quite large. In their 2012 report explaining the change from the fungible value process to the average cost method, CBO noted the average cost method increased the average income of a household in the bottom 20 percent of the before-tax distribution by $4,600, or by about 25 percent. Using data from the 2013 report, which covers 1979 to 2010 and was released last December, we can see the average income of the bottom 20 percent grew by 49 percent from 1979 to 2010 using the average cost method. But using the fungible value method, the average income of that group grew by only 23 percent.
Sadly, the new 2014 report (with the latest 2011 data) doesn’t include income data using the old methodology. This means that going forward economists and policymakers will be have one less data set by which to evaluate income inequality.
Now this isn’t to say that CBO is definitely using the wrong method by dropping the average cost method. Nor is it clear that the fungible value is the correct method—after all, calculating the value of health insurance based on how much money is freed up relative to the cost of food and housing isn’t exactly intuitive. The average cost method has the merit of being consistent with the method of valuing employer-sponsored health insurance, which calculates the full value of employer-paid insurance into household income. In both cases, though, every dollar that employers spend on insurance is assumed to increase the households’ income on a one-for-one basis.
The main takeaway here is that we need to be cognizant of the difficulty of measuring the world around us. Ewe Reinhardt, a health care economist at Princeton University, admits that he and his colleagues in the profession don’t have the answer to this question yet. Government programs have certainly boosted incomes at the bottom, but we still aren’t sure by how much. If we want to understand how to improve the lot of households at the low-end of the income ladder, it’d be useful to know exactly what rung they are standing on.