Category: Equitablog

John Bogle: Achieving Greater Long-Term Wealth Through Index Funds: “Let’s start off with the obvious…

…Imagine a circle representing 100% of the U.S. stock market, with each stock in there by its market weight. Then take out 30% of that circle. Those stocks are owned by people who index directly through index funds. The remaining 70% are owned by people who index collectively. By definition, they own the exact same portfolio as the indexers do in aggregate, so they will capture the same gross return as the direct indexers. But by trading back and forth, trying to beat one another, they will inevitably lose by the amount of their transaction costs, the amount of the advisory fees they pay, and the amount of all those mutual fund management costs they incur: marketing costs, processing, technology investments, everything. When we look at the big picture of the costs of investing, including sales loads as well as expense ratios and cash drag, it is a foregone conclusion that active investors, in aggregate, will underperform index investors…. It’s the relentless rules of humble arithmetic…. In a 7% return market, indexing should deliver approximately 6.95% to investors. (A typical Vanguard all-market index fund charges 0.05%.) The remainder—those who are trading back and forth, hiring managers, and all that kind of thing—will incur costs, in round numbers, of about 2% per year. So, the indexers are going to capture pretty close to a 7% return in a 7% market, while the active investors, who also collectively own the index, are getting the same 7% gross return minus about 2% for all those fees and costs, a net return of 5%. It is definitional tautology that the indexers win and the traders lose.

Richard Mayhew: Any publicity is good publicity: “‘After controlling for other state characteristics…

…I observe a positive association between the anti-ACA spending and ACA enrollment… anti-ACA ads may unintentionally increase the public awareness about the existence of a governmentally subsidized service and its benefits for the uninsured.

I think this is a case of trying not to think about the elephant after being told about the elephant.  People in states that were getting Koch bombed, knew about the Exchanges, knew they existed and could do something about that, while people in states where the Kochs weren’t trying to block access to affordable, subsidized private market health insurance (doesn’t that sound absurd when it is put that way), awareness was lower as they were never told to not think about the elephant.

Should-Reads:

1. Noam Scheiber: Hillary Clinton’s Inequality Rhetoric Is Weak: “Let’s set aside the question of where she got it and sort out the fallacies that underlie it, the biggest being that it’s almost literally untrue. When it comes to inequality, the numbers show a tiny group of ultra-rich amassing a shockingly large and rapidly accelerating share of income and wealth. (To her credit, even Clinton has pointed this out elsewhere.)… The bottom 99 percent of us are in some sense very much ‘in this together’. But, in economic terms, we are emphatically not in it with the richest .1 percent or .01 percent…. Some have suggested we can solve the problem of inequality by growing the whole economy more and giving the poor and middle class a bigger share of the extra pie…. But given the rate at which the ultra-rich are increasing their earnings, there’s no plausible rate of economic growth that would allow the share of income going to the poor, middle class, and merely affluent to collectively gain on them…. Middle-class prosperity is a critical issue in its own right. And if Hillary Clinton wants to take a pass on the plutocracy question, that’s entirely her right. But she should have the courtesy to level with us rather than insult our intelligence.”

2. Richard Mayhew: Deep penetration is oh so good: “I think there are a couple of things going on. First, the awareness of the mandate and the massive marketing campaign (both for and against enrollment in health insurance (and yes, it is lunacy that there has been and will be a multi-hundred million dollar marketing campaign aimed at getting people to not enroll in health insurance)) has made plenty of people aware of their options. Secondly, and more importantly in my mind, is the fact that the federal government is picking up 100% of the cost of Expansion for the first three years. This removes the institutional incentive structure of state and county workers from not signing up everyone as legacy Medicaid would have seen the state pick up 40% to 50% of the costs of coverage. Now this is effetively “free” coverage from the point of view of the bosses of the field workers who process applications and find people who can benefit from publci programs. I’ll be curious to see if the 10% state cost-share in 2017 reintroduces creative and quasi-deliberate incompetence in outreach efforts.”

3. Shane Ferro (shaneferro) on Twitter: ‘Shane Ferro @shaneferro: Journalist Past / Ex-Husbands / Great Rooms / Cosmo Wisdom RT @mattlevine: A ton going on here: http://t.co/sEtNJt9l14 * @mattlevine Also when the lede is about what type of hydration was offered at an event * “There’s a lot of sex,” she said, twice, “and a lot of social dysfunction.” Also, “a stock-fixing scheme.” * I’m just going to keep live-tweeting my reading of this article * She “said the book has not really helped her dating life, as it attracts mostly female readers.” * “When you marry for money, you work for it every day.”’

4. Paul Waldman: The GOP’s problem: Governing requires working with Obama: “When congressional Republicans decided literally on the day Barack Obama was inaugurated to obstruct and oppose everything he wanted to do, it was a decision that could be justified both politically and substantively. Making the President’s tenure as difficult as possible would be good for them, because they were unlikely to get too much blame so long as he looked like he was failing to get things done, and most of what he wanted to do they disagreed with anyway. But they may not have realized at the time how a kind of absolutist fetish would overtake their party, making even the most basic kinds of legislating all but impossible…. But what do you do when there’s an acute problem that you claim to want to solve–and may even sincerely want to solve–but solving it means coming to an agreement with the President? That’s what Republicans are facing right now on these issues, and they have a rather profound choice to make…”

Should Be Aware of:

• Danny Vinik: The Long-Term Unemployed Are Not Finding Jobs as the Economy Recovers
• Henry J. Kaiser Family Foundation: Medicaid Enrollment: An Overview of the CMS April 2014 Update
• Nick Bunker: The potential hazards of a global savings glut
• Lisa Graves: Like His Dad, Cha (New Documents) | The Progressive
• Nicholas Johnson (2012): Kansas’ Big and Damaging Tax Cut
• David Beckworth: Inflation Targeting: A Monetary Policy Regime Whose Time Has Come and Gone
• Chris Lough: “Today marks the 158th birthday of Nikola Tesla, a man so bizarre and scientifically curious…. Tesla brought true advancements to the fields of electrical engineering, mechanical engineering, and talking about death ray urban legends while tipsy at parties… his scientific achievements are vital to the way we live today…”
• David Naimon: Between The Covers
• Cosma Shalizi: The Singularity in Our Past Light-Cone

And:

1. Barry Ritholtz: What to Do in a Market Correction: “1. Respond emotionally, giving in to your lizard brain. It does a good job of keeping you alive, so you might as well hand over management of your portfolio to it. 2. Rely on your gut instinct to lead you out of trouble. After all, your instincts helped you buy gold at $400 and sell Apple at $700, right? 3. Deviate from your plan, because really, what’s the point of having a plan if you can’t change it on a whim? 4. Aggressively overtrade, because all of those capital gains taxes are helpful in reducing the federal deficit. 5. Rely on the pundits’ market calls, because their sole interest is making sure you are comfortable in retirement. 6. Flail aimlessly, and with any luck, something you do will turn out well. 7. Hope is good. Hoping that things turn out for the best never did anyone any harm. 8. Panic is always an option, because that always works out so well for people…”

2. Cory Doctorow: Pickpocketing as applied neuroscience: “Sleights of the Mind, an excellent 2013 book, explored the neuroscience of magic and misdirection…. The BBC has an excellent summary of this work, with the latest word on the way that the systematic, experimental study of pickpocketing is revealing important truths about the biological limits of our attention. They talk to James Brown (no relation) a UK stage pickpocket, about his study of Romanian pickpocket gangs in London Bridge, and how a pickpocket who can select the most vulnerable victims can get by with very little skill indeed…”

3. Shadee Ashtari: Republican Calls Climate Change A Hoax Because Earth And Mars Have ‘Exactly’ Same Temperature: “In a condemnatory speech last week against the Obama administration’s new Environmental Protection Agency carbon emission regulations, Kentucky state Sen. Brandon Smith (R) claimed that man-made climate change is scientifically implausible because Mars and Earth share ‘exactly’ the same temperature. Smith, the owner of a mining company called Mohawk Energy, argued that despite the fact that the red planet doesn’t have any coal mines, Mars and Earth share a temperature. Therefore, Smith reasoned, coal companies on Earth should be exempt from emission regulations…. Smith, the Senate majority whip…”

Already-Noted Must-Reads:

1. Sarah Kliff: For millions who signed up, Obamacare is working: “The people who bought Obamacare during the law’s first open enrollment period are largely pretty satisfied customers, a big new study from the Commonwealth Fund shows. Most adults with new coverage have used it to go to the doctor; and about 80 percent say they’re satisfied with their purchase. That Obamacare’s new enrollees would be happy with their new coverage wasn’t necessarily a given. Many enrolled in plans with narrow networks, which limit which doctors and hospitals patients can see, restrictions that can frustrate subscribers. Others gained coverage through Medicaid, which pays doctors less than most private insurance plans–and has fewer providers to see patients as a result. But about six months into the insurance expansion, Obamacare’s buyers seem to be, on balance, not as much frustrated with these types of challenges as they are happy with having insurance coverage to begin with…”

2. Robert Waldmann: Flows From Unemployment to Employment & Extended Unemployment Insurance: “I have long thought that the best guess of the matching function is that hires of the unemployed are proportional to vacancies to the 0.7 times number unemployed to the 0.3. To be kind to the conservatives, I calculate the ratio of monthly flows from unemployed to employed to the square root of the product of vacancies and number unemployed. There isn’t any sign of a shift in January. One might claim that the increase in December was due to anticipation of the end of extended unemployment but I think that is nonsense (the failure to extend was a surprise). By the way, this shows I was wrong to be skeptical of claims that matching had worsened (based on the Beveridge curve) and that Krugman was right (I know you are shocked)…. There is little support for the conservative’s story. The data are noisy and I am looking at all of the unemployed not specifically those affected by the change, so Vinik is right it is hard to tell. But really, the conservatives don’t seem to have a case.”

3. Tim Duy: QEInfinity Not: “My own view is: 1. The existing mix of data and forecasts suggest the first rate hike in the second quarter of 2015 with a gradual increase in rates thereafter. This is my baseline. 2. If unemployment continues to drop at the same rate as recent months, bring forward the rate hike to the first quarter but continue to assume a gradual increase. 3. If core-PCE inflation exceeds 2.25% and wage growth is accelerating , expect first quarter liftoff and a steeper path of rate hikes. Obviously, the data could suggest a delay in the first rate hike, but I do not believe the risks are weighted in that direction. I think the risks are weighted toward tighter than expected policy. Bottom Line: Fairly straightforward minutes. Policy is data dependent. The Fed, like all of us, are simply waiting to see how that data evolves.”

4. Bill Davidow: The Invisible Economy: “Our techniques for measuring economic performance are obsolete. So we reach improper conclusions about the state of the economy. The economic recovery is probably more robust than we realize…. Many economists, policy makers, and politicians think otherwise, because they are using 20th-century methods to analyze our 21st-century economy…. Almost everything we do in the physical economy is paid for with money. We use dollars to measure most of the activity. If more dollars are spent or earned, we conclude that the economy is growing. The virtual economy is robust… and growing at staggering rates, everywhere.
    
   “A lot of the services provided to us in the virtual economy are free. If we paid dollars for those services, they would be counted as part of the GDP and would add to economic growth. But we don’t, so they are not counted…. Consumers can substitute Google News for their newspaper. The cost of a USA Today subscription is $275. His earnings will look the same, but he has more money at his disposal and more or less the same consumption. Essentially, he is earning more, but neither his income nor GDP will show it…. The virtual economy… has become very large and is having a broad impact…. The current measurement systems ignore our virtual salaries. We earn these salaries by selling our privacy and attention for zero and spending hours deleting targeted emails. Using those salaries, we purchase services that are worth billions….
    
   “If advertisers paid us directly for the sale of our privacy and attention and we turned around and spent the money to purchase Google searches, music, and phone calls, the government would count both our pay as income and the sale of the services as part of the GDP…. The annual cost of a Honda Civic used for, say, 7,500 miles per year, is around $6,500 per year, or 85 cents per mile. Using a Zipcar for 500 hours a year, approximately the same amount of driving, would cost only $4,250…. It is important to realize the effects of the virtual economy do not fall evenly across the economic spectrum. The lower your income, the more likely it is that you are paying a greater portion of your salary for essentials such as food and healthcare in the physical economy…”

John Quiggin thinks about search models, and points out that they–Diamond, Mortenson, and Pissarides and company–are not a good and promising path for modeling cyclical unemployment. Moreover, he questions whether they are a good and promising path for modeling frictional unemployment. Where is the decline in frictional unemployment that ought to have accompanied the rise of the internet, after all. Margins and search costs and inventories have tightened elsewhere in the economy. So why not in the labor market?

Taking search theories of the labor market as metaphors really does not help us very much. If, after all, as Kartik Arthreya says, “search is not really about searching” then what is search theory about?

It is a puzzle. And it is not one in which I have a great deal of insight: I am greatly disturbed by the fact that I do not think I understand either why our rate of frictional unemployment is so high, or where our cyclical unemployment comes from in any deep sense.

John Quiggin provides a precis:

John Quiggin: In Search of Search Theory: “The basics of search models…

…seemed… realistic. Workers… aren’t fully informed about the labour market, [so]… look… until you have a good idea what wage the market is willing to pay, then tak[e]… a job at that wage…. The Internet changes all of this…. With such a massive improvement in the efficiency of search we’d expect to see… (i) shorter time spent searching, and therefore lower unemployment; and (ii) better matches between workers and jobs, which should increase productivity and wages, and reduce subsequent quits and fires. Both predictions were made in the early years of the Internet and, at least until 2008, the general view was that they were proving correct, though more slowly than had been expected. But experience since 2008 has been completely the opposite of what a search model would predict…. What has been the response of academic macroeconomists? As far as I can tell, almost nil.

I was prompted to write this post by the debate over Kartik Arthreya’s Big Ideas in Macroeconomics. Responding to my observation that the word ‘unemployment doesn’t even appear in the index, Steven Williamson pointed out that Athreya spends several pages on the general properties of search models, presenting them as the primary basis of unemployment theory…. Athreya acknowledges the problem, sort of, by saying that “search is not really about searching” and observing that, if it were, the Internet should have reduced search costs. But if search isn’t about searching, what is it about? Athreya doesn’t say….

If search models aren’t the right way to think about unemployment, what is the right way?… There is still a puzzle here, one that search models were designed to solve. Why doesn’t competition between unemployed and employed workers work quickly to reduce wages to the point where demand equals supply and where there is no involuntary unemployment? The problem seems not be… that employers and potential workers don’t know about each other… [but] that employers can’t easily use the threat of new hires at lower wages to drive down the wages of existing workers (of course, this happens, but it’s clearly costly and risky in terms of worker morale). There’s quite a lot of literature looking at this, and I’ll try to post on it another time….

With his characteristic grace, Williamson also pointed out that another blogger had also observed the absence of standard macroeconomic topics in Athreya’s index and accused me of plagiarising this point for my own review. As any reviewer knows, the index is always the first place you look in a book, so its unsurprising that the oddity of Athreya’s jumped out at two of us…

Bill Davidow: The Invisible Economy: “Our techniques for measuring economic performance are obsolete. So we reach improper conclusions about the state of the economy. The economic recovery is probably more robust than we realize…. Many economists, policy makers, and politicians think otherwise, because they are using 20th-century methods to analyze our 21st-century economy…. Almost everything we do in the physical economy is paid for with money. We use dollars to measure most of the activity. If more dollars are spent or earned, we conclude that the economy is growing. The virtual economy is robust… and growing at staggering rates, everywhere.

A lot of the services provided to us in the virtual economy are free. If we paid dollars for those services, they would be counted as part of the GDP and would add to economic growth. But we don’t, so they are not counted…. Consumers can substitute Google News for their newspaper. The cost of a USA Today subscription is $275. His earnings will look the same, but he has more money at his disposal and more or less the same consumption. Essentially, he is earning more, but neither his income nor GDP will show it…. The virtual economy… has become very large and is having a broad impact…. The current measurement systems ignore our virtual salaries. We earn these salaries by selling our privacy and attention for zero and spending hours deleting targeted emails. Using those salaries, we purchase services that are worth billions….

If advertisers paid us directly for the sale of our privacy and attention and we turned around and spent the money to purchase Google searches, music, and phone calls, the government would count both our pay as income and the sale of the services as part of the GDP…. The annual cost of a Honda Civic used for, say, 7,500 miles per year, is around $6,500 per year, or 85 cents per mile. Using a Zipcar for 500 hours a year, approximately the same amount of driving, would cost only $4,250…. It is important to realize the effects of the virtual economy do not fall evenly across the economic spectrum. The lower your income, the more likely it is that you are paying a greater portion of your salary for essentials such as food and healthcare in the physical economy…

Sarah Kliff: For millions who signed up, Obamacare is working: “The people who bought Obamacare during the law’s first open enrollment period…

…are largely pretty satisfied customers, a big new study from the Commonwealth Fund shows. Most adults with new coverage have used it to go to the doctor; and about 80 percent say they’re satisfied with their purchase. That Obamacare’s new enrollees would be happy with their new coverage wasn’t necessarily a given. Many enrolled in plans with narrow networks, which limit which doctors and hospitals patients can see, restrictions that can frustrate subscribers. Others gained coverage through Medicaid, which pays doctors less than most private insurance plans–and has fewer providers to see patients as a result…

Let us focus on the macroeconomic costs of not expanding Medicaid. That is, let us leave to one side the question of exactly how much good getting people on Medicaid does for them. We know that it makes safety-net hospitals Financial stress level lower–there is less uncompensated care, and that flows through to corners that do not need to be cut. We know that it increases incomes of nurses and doctors somewhat. We know that patients on Medicaid go to the doctor more than the uninsured, and that by American standards at least the uninsured do not go to the doctor enough and do not take enough medicine. We know that the ex-uninsured are much happier, less stressed, and non-bankrupt.

We do worry that the money spent on Medicaid expansion might have had a bigger bang for buck had it been spent on barefoot doctors and free clinics. We fear that our fee-for-service acute-care medical system is the least efficient ever designed by the hand of human for dealing with an aging population suffering from chronic illnesses–stroke risk, sugar metabolism, and sludge in the arteries. (But we do recognize that the Republican wingnut howls against Obamacare as Kenyan Muslim socialism would have been much louder had Medicaid expansion been dropped for free clinics and barefoot doctors–which are, after all, socialistic in essence.)

But leave all that to one side.

Focus, instead, on the fact that so far Obamacare has been implemented in an economy with lots of slack where aggregate demand is scarce and a boost to spending is an unmitigated good to a local economy. How much of a boost to spending have the non-expanding states forgone, and what has been the impact on their economies? And focus also on the longer run: when the federal government spends money in some places and not others, the former places grow and become more prosperous and the latter places decline. Not expanding Medicaid is a way of telling the federal government anything that state politicians rarely do: that they do not wish the federal government to spend money in their region. What will be the effects of that?

Betsey Stevenson and company at the Council of Economic Advisers have just taken their cut at these issues…

I read the short-run macroeconomic costs of not-expanding Medicaid as likely to be close to double what the CEA does. Most of the non-expanding states are close to each other, and so much of the state-level demand spillovers flow to other non-expanding states. And all the evidence since 2007 suggests that the multipliers we had in our minds substantially understated the truth, at least at the zero lower bound.

And in the long run states that do not expand Medicaid will suffer more in terms of reduced economic activity–perhaps twice as much a relative GDP reduction as in the short run. Remember: only about 1/5 of jobs are regional-export jobs, and a regional-export job is anything that is paid for by a financial transfer into the region. Thus when the federal government pays for an extra nurse to see Medicaid patients, that is a regional export. When the same nurse has to be compensated by higher fees charged to local patients who do have insurance, that is not a regional export. Once labor and capital have moved and responded to the shift in demand, those states that have not expanded Medicaid will be short five jobs for each health-care job they did not let the federal government pay for through Medicaid.

Betsey Stevenson et al.: The Council of Economic Advisers: Missed Opportunities: The Consequences of State Decisions Not to Expand Medicaid: “24 States have not yet expanded Medicaid…

…The Urban Institute estimate[s] that… 5.7 million people will be deprived of health insurance coverage in 2016…. If the States that have not yet expanded Medicaid did so: 1.4 million more people would have a usual source of clinic care…. States that have already expanded Medicaid… 1.0 million…. 651,000 more people would receive all care they feel they need in a typical year….. States that have already expanded Medicaid will achieve this outcome for 494,000 people…. 829,000 people would receive cholesterol‐level screenings once expanded coverage was fully in effect. States that have already expanded… 630,000…. 214,000 women between the ages of 50 and 64 would receive mammograms…. States that have already expanded… 161,000 women…. 345,000 women would receive pap smears…. States that have already expanded… for 261,000 women…. 15.4 million physician office visits…. States that have already expanded… 11.7 million….255,000 fewer people will face catastrophic out‐of‐pocket medical costs in a typical year…. States that have already expanded… 194,000…. 810,000 fewer people will have trouble paying other bills due to the burden of medical…. States that have already expanded… 348,000…. 757,000 additional people would report being in excellent, very good, or good health… States that have already expanded… 575,000 people….

while the recovery from the 2007‐2009 recession…

…remains incomplete and slack remains in the economy, this increase in demand will boost overall employment and economic activity…. When a State elects to expand its Medicaid program, the Federal government finances additional payments to medical providers in the State in exchange for providing medical services to the new Medicaid enrollees. These additional Medicaid outlays are only partially offset by reduced Federal spending…. CEA estimates that if the 24 States that have not yet expanded Medicaid had done so as of January 1, 2014, that would have triggered an increase in Federal outlays in those States totaling $88 billion during calendar years 2014 through 2016. States that have already expanded Medicaid will generate additional Federal outlays of $84 billion during this period….

In order to quantify the effects of these additional Federal outlays on States’ economies and the economy of the Nation as a whole, CEA has undertaken a standard “fiscal multiplier” analysis. In brief, when the government purchases additional goods and services, that spurs hiring and purchases of investment goods and raw materials to produce those goods and services…. Increasing overall demand for medical goods and services… CEA uses a GDP multiplier of 1.5, consistent with CEA’s estimate of the multiplier for direct government spending…. For reductions in uncompensated care costs borne by State and local governments, CEA uses a multiplier of 1.1…. For other reductions in uncompensated care costs, CEA uses a GDP multiplier of 0.8, consistent with CEA’s estimate of the multiplier applicable to individual tax cuts…. A composite multiplier of 1.29….

State‐by‐State estimates of the effect on employment and total output if each State decides to expand Medicaid are reported in Tables 5 and 6….

While this subsection focuses on the short‐run macroeconomic benefits of expanded insurance coverage, States’ decisions to expand Medicaid could affect employment and economic activity over the longer run as well…

Robert Waldmann: Flows From Unemployment to Employment & Extended Unemployment Insurance: “I have long thought that the best guess of the matching function…

…is that hires of the unemployed are proportional to vacancies to the 0.7 times number unemployed to the 0.3. To be kind to the conservatives, I calculate the ratio of monthly flows from unemployed to employed to the square root of the product of vacancies and number unemployed. There isn’t any sign of a shift in January. One might claim that the increase in December was due to anticipation of the end of extended unemployment but I think that is nonsense (the failure to extend was a surprise). By the way, this shows I was wrong to be skeptical of claims that matching had worsened (based on the Beveridge curve) and that Krugman was right (I know you are shocked)…. There is little support for the conservative’s story. The data are noisy and I am looking at all of the unemployed not specifically those affected by the change, so Vinik is right it is hard to tell. But really, the conservatives don’t seem to have a case.

Tim Duy: QEInfinity Not: “My own view is:

…1. The existing mix of data and forecasts suggest the first rate hike in the second quarter of 2015 with a gradual increase in rates thereafter. This is my baseline. 2. If unemployment continues to drop at the same rate as recent months, bring forward the rate hike to the first quarter but continue to assume a gradual increase. 3. If core-PCE inflation exceeds 2.25% and wage growth is accelerating , expect first quarter liftoff and a steeper path of rate hikes. Obviously, the data could suggest a delay in the first rate hike, but I do not believe the risks are weighted in that direction. I think the risks are weighted toward tighter than expected policy. Bottom Line: Fairly straightforward minutes. Policy is data dependent. The Fed, like all of us, are simply waiting to see how that data evolves.