Must-Read: John Tang: The Engine and the Reaper: Industrialization and Mortality in Early Modern Japan

Posted on by Brad DeLong

Must-Read: John Tang: The Engine and the Reaper: Industrialization and Mortality in Early Modern Japan: “Economic development leads to improved health over time due to increased access to medical treatment, sanitation, and income…

…but in the short run the relationship may be negative given disease exposure from market integration. Using a panel dataset of vital statistics for Meiji Japan, I find mortality rates increased during the country’s early industrialization, with railroad access accounting for over five percent of average mortality between 1886 and 1893. Estimates from a triple-differences framework indicate that communicable disease mortality accounts for 91 percent of the additional incidence, which suggests that improved transport may have operated as a vector for transmission.

Must-Read: Barry Ritholtz: Lending to Poor People Didn’t Cause the Financial Crisis

Posted on by Brad DeLong

Must-Read: One of the forms racism takes in America today is the belief that whenever anything goes wrong it must have given money away to poor, shiftless Black people. Today this song is being reprised by–who else?–Larry Kudlow and Steven Moore.

The very sharp Barry Ritholtz does the intellectual garbage cleanup:

Barry Ritholtz: Lending to Poor People Didn’t Cause the Financial Crisis: “Lawrence Kudlow and Stephen Moore have revived an idea… that really should have been put to rest long ago…

…They lay the blame for the credit crisis and Great Recession on the Community Reinvestment Act, a 1977 law designed in part to prevent banks from engaging in a racially discriminatory lending practice known as redlining. The reality is, of course, that the CRA wasn’t a factor…. Here’s the heart of the Kudlow and Moore case:

The seeds of the mortgage meltdown were planted during Bill Clinton’s presidency. Under Clinton’s Housing and Urban Development (HUD) secretary, Andrew Cuomo, Community Reinvestment Act regulators gave banks higher ratings for home loans made in ‘credit-deprived’ areas. Banks were effectively rewarded for throwing out sound underwriting standards and writing loans to those who were at high risk of defaulting. If banks didn’t comply with these rules, regulators reined in their ability to expand lending and deposits.

They then argue that this was part of a broader campaign to make loans to unqualified low-income folk, which in turn caused the crisis…. The CRA… simply says that if you open a branch office in a low income neighborhood and collect deposits there, you are obligated to do a certain amount of lending in that neighborhood. In other words, you can’t open a branch office in Harlem and use deposits from there to only fund loans in high-end Tribeca. A bank must make credit available on the same terms in both neighborhoods. In other words, a ‘red line’ can’t be drawn around Harlem….

Showing that the CRA wasn’t the cause of the financial crisis is rather easy. As Warren Buffett pal Charlie Munger says, ‘Invert, always invert.’ In this case, let’s assume Moore and Kudlow are correct…. What would that world have looked like?…. (a) Home sales and prices in urban, minority communities would have led the national home market higher, with gains in percentage terms surpassing national figures. (b) CRA mandated loans would have defaulted at higher rates. (c) Foreclosures in these distressed urban CRA neighborhoods should have far outpaced those in the suburbs. (d) Local lenders making these mortgages should have failed at much higher rates. (e) Portfolios of banks participating in the Troubled Asset Relief Program should have been filled with securities made up of toxic CRA loans. (f) Investors looking to profit should have been buying up properties financed with defaulted CRA loans. (g) And Congressional testimony of financial industry executives after the crisis should have spelled out how the CRA was a direct cause, with compelling evidence backing their claims.

Yet none of these things happened. And they should have, if the CRA was at fault…. If that isn’t enough to dismiss the claim, consider this: Where did mortgages, especially subprime mortgages, default in large numbers? It wasn’t Harlem, Philadelphia, Baltimore, Chicago, Detroit or any other poor, largely minority urban area covered by the CRA. No, the crisis was worst in Florida, Arizona, Nevada and California. Indeed, the vast majority of the housing collapse took place in the suburbs and exurbs…. What’s more, many of the lenders that made the subprime loans that contributed so much to the collapse were private non-bank lenders that weren’t covered by the CRA. Almost 400 of these went bankrupt soon after housing began to wobble. I have called the CRA blame meme ‘the big lie’–and with good reason. It’s an old trope, tinged with elements of dog-whistle politics, blaming low-income residents in the inner cities regardless of what the data show…

Let’s see how much of the media picks up on this dog megaphone, and presents it to the public as trustworthy information intermediaries should…

Must-Reads: June 23, 2016

Posted on by Brad DeLong

Should Reads:

Making automatic stabilizers more effective for the next U.S. recession

Posted on by Bridget Ansel
Job applicants wait in a long line at a job fair in San Jose, Calif.

When the next recession hits, policymakers can take steps right then and there to fight the economic downturn. The Federal Reserve can lower interest rates and the legislative and executive branches can deploy fiscal stimulus by cutting taxes or boosting spending. But another way to counteract a recession relies on steps taken before economic growth begins to turn downward, relying on so called automatic stabilizers, which trigger on when the economy worsens. Think of unemployment insurance, which laid off workers collect, or the Supplemental Nutrition Assistance Program, which is eligible for workers under a certain income threshold.

These automatic programs were designed as forms of social insurance to help people weather the shock of losing a job. But they also boast the benefit of increasing consumer spending and therefore dampening the severity of a recession just as it begins to occur and then throughout the downturn. If policymakers considered these effects in designing these programs, would their design change? That’s the question considered in a new paper.

The paper, released earlier this week by the National Bureau of Economic Research, looks at the optimal design of both unemployment insurance and the income tax in light of their ability to act as automatic stabilizers. The two authors, Alisdair McKay of Boston University and Ricardo Reis of Columbia University, investigate how the generosity of unemployment insurance and the progressivity of the tax system would change if policymakers took into account their recession-fighting abilities. Would more generous unemployment insurance put more money into the hands of suddenly unemployed workers who are likely spend it? Might it also enable workers to save less out of fear of losing their jobs? Similarly, would a more progressive tax structure keep more money in the hands of those, again, most likely to spend it?

McKay and Reis build a model that is matched to data from the United States in recent decades to help figure out the answer to these questions. What they find is that an optimal unemployment insurance system would be more generous once we consider its automatic stabilizer role. In fact, a more munificent program derived from the model would be quite significant. The optimal “replacement rate,” or how much of a worker’s wage the benefit replaces, jumps from 36 percent to 49 percent once the program’s recession-fighting attributes are considered.

In contrast, the progressivity of the tax system doesn’t change much in their model. The optimal progressivity of the tax system doesn’t really influence factors that might help fight recessions.

Part of McKay and Reis’s efforts to the fit the model to U.S. data makes the assumption that unemployment insurance doesn’t have a significantly large effect on the unemployment rate. There’s good evidence for that proposition. And empirical work finds compelling evidence that unemployment insurance played a significant role as an automatic stabilizer during the Great Recession back in 2007 to 2009 and in previous recessions.

The next U.S. recession is probably not just around the corner. But it’s never too early to start preparing. If policymakers want to give themselves (or their future colleagues) a running start, they should take a look at strengthening automatic stabilizers such unemployment insurance and consider how other types of automatic-stabilizer programs might help the broader U.S. economy when it eventually takes another tumble.

The promises and perils of health care consolidation

Posted on by Bridget Ansel
Signage in front of Aetna Inc.’s headquarters in in Hartford, Conn.

The Obama administration’s signature law, the Affordable Care Act, set in motion a variety of reforms to the U.S. health care system, a number of which sparked health care providers to begin consolidating and integrating the industry. Yet more than six years after the implementation of the new law, policymakers still don’t know what the consequences of health care consolidation might mean for patients up and down the income ladder.

Low Medicaid reimbursement rates and the expanded coverage of Medicaid under the Affordable Care Act are often cited as justification for the need of health care providers to consider mergers and acquisitions. But health care finance scholars are now beginning to understand what major consolidation means for patients and costs as mergers-and-acquisitions deals proliferate, among them:

  • Aetna, Inc.—in an effort to reinforce its Medicare Advantage business, which is aimed at elderly and disabled patient—announced it would buy Humana Inc. for $37 billion.
  • Anthem Insurance Companies Inc. announced it would acquire Cigna Corp., currently valued at $53 billion.

The Anthem-Cigna merger would primarily consolidate employer health-plan options, but if Aetna and Anthem get the green light from the U.S. Department of Justice and state regulators, the two newly-merged companies would create a powerful “triumvirate” alongside UnitedHealth Group in the for-profit insurance market, says Bob Herman of Modern Healthcare.

Three recent papers take a closer look at the effects of greater consolidation in health services. A new study focusing on the changes in hospital prices from cross-geographic and cross-product market mergers suggests that these combinations can have significant effects on prices for privately insured patients. The report, by Leemore Dafny at the Kellogg School of Management, Kate Ho at Columbia University, and Robin Lee at Harvard University, finds that cross-market mergers in the same state result in price increases of roughly 6 percent to 10 percent. The existence of either a common customer or a common insurer appears to yield measurable market power, suggesting that cross-market mergers should be carefully evaluated by federal antitrust authorities.

With respect to the Aetna-Humana and Anthem-Cigna combinations, the Department of Justice is investigating how the mergers would affect costs to consumers and availability of care, costs to employers, as well as competition in all markets. Taken together, these mergers demand even tougher scrutiny than if they were evaluated in isolation to fully consider whether consolidating providers will take steps to improve services for their less profitable patients, like those insured by Medicaid.

Last month David Newman at the Health Care Cost Institute and co-authors released a study describing the geographical variation in prices of 242 common health care services for the commercially insured. The study compared 41 states and the District of Columbia, finding that prices for medical services differed by a factor of three in some cases. The ratio of average state prices to average national price varied from a low of 0.79 (in Florida) to a high of 2.64 (in Alaska). The authors say some of this variation is probably due to differences in underlying market dynamics, such as varying market structure, a lack of transparency, or the availability of alternative treatments.

Then there’s Zack Cooper of Yale University and his co-authors, who conclude that the consolidation of hospitals alone and the resulting decline in competition may be playing an important role in rising health care costs. Prices in markets with a single hospital, for example, have prices that are 15.3 percent higher than markets with four or more hospitals, implying that hospitals with more market power use it to raise prices. Cooper and his co-authors also find that prices were higher in markets where hospitals were larger, for-profit, located in a low-income area, or had more medical technologies.

These findings, by both Newman and Cooper and their co-authors, argue against the idea that health care consolidation and integration work to better serve patients across the board. Not surprisingly, then, federal regulators have moved to block many of the so called “horizontal mergers” of hospitals and healthcare providers in the same geographic area. In 2014, using the Clayton Antitrust Law of 1914, the Federal Trade Commission won it’s first-ever litigated case challenging a merger between St. Luke’s Health System, Ltd. and Saltzer Medical Group in Nampa, Idaho.

Yet the health care industry overall continues to consolidate through cross-market mergers of providers from different geographic or product markets in healthcare. Aetna and Anthem will have to establish a court defense for their deals to claim that the expected efficiencies of consolidation counterbalance their merger’s anti-competitive effects for regulators and consumers alike. Health care consolidation may offer some promise of improved operational and network efficiencies, but perhaps also some peril if the benefits of a more integrated health care system are not widely shared both up and down the income ladder and across the diverse ethnic and racial communities in the United States.

Must-Read: Tren Griffin and Friends: Gordon and Varian Approaches to Understanding the Ill-Named “Secular Stagnation”

Posted on by Brad DeLong

Must-Read: Storify: Gordon and Varian Approaches to Understanding the Ill-Named “Secular Stagnation”: Tren Griffin and Friends…

Must-Read: Ryan Avent: Expect the Worst

Posted on by Brad DeLong

Must-Read: the sharp Ryan Avent, I think, nails it:

Ryan Avent: Expect the Worst: “It wouldn’t make sense for the Fed to target real GDP growth, but then, the Fed is not really in that business…

…The Fed is also unable to control the long-run real interest rate, which is a function of global saving and investment. What’s more, it does seem clear that the global real interest rate has settled down to a level of approximately zero. But does it follow that the Fed should then either 1) set a high nominal interest rate in order to achieve higher inflation, or 2) keep its interest rate low and accept low inflation? I don’t believe so…. It is not the case that the Fed is choosing low rates and inflation expectations are therefore converging toward a low level…. The Fed has been targeting very low inflation, and falling inflation expectations imply much lower interest rates in future. This dynamic is there back in 2013. In its projections the Fed indicates that rates will rise steadily, even as it projects that inflation will be extraordinarily low, just over 1% in 2013, converging, finally, toward 2% by the end of 2015. Essentially every set of Fed projections since then has shown the same thing. It allowed its QE programmes to end despite too-low inflation, and it raise its interest rate in December despite too-low inflation. The Fed has signalled very strongly that markets should expect inflation to remain at very low levels, indeed, below target. It would be shocking if inflation expectations hadn’t trended inevitably downward….

Is there a route out?… Where in the past the Fed has promised to raise rates even as inflation stays low, it could instead promise to keep them low no matter what, even if, and indeed until, inflation rises above the target. If the Fed wants higher nominal rates in a world of low real rates, it must cultivate higher inflation…. The Fed can choose whether nominal rates get stuck near zero or rise to a higher, safer level. Right now, unfortunately, it is steering the American economy firmly into a low-rate rut.

Must-Read: Paul Krugman: A Question For the Fed

Posted on by Brad DeLong

Must-Read: As I was just saying yesterday: Take the rate of profit–typically 6% to 7% per year–on the operating companies that make up the stock market. Subtract the risk premium–typically 4%. Add on the expected inflation rate–2.5% on the CPI basis. Get 4.5% to 5.5%. That is what the nominal interest rate on Treasury bills is likely to be in normal times toward the end of a healthy expansion. That provides a healthy amount of room for the Federal Reserve to cut interest rates to encourage spending and support the economy when a recession comes. But note that 5% of sea-room to cut interest rates when necessary was not nearly enough back in 2007-2010.

Now suppose that we are entering an age of secular stagnation. It will have a higher risk premium–say 5-6%. Slower growth will have an impact on the rate of profit for operating companies–knock, say, 1-2% off their typical value. Go through the math, and we get a likely nominal interest rate on Treasury in normal times toward the end of a healthy expansion of roughly 1-3%, not 5%.

The dot-plots tell us that the FOMC now thinks that it is headed for a 3% Treasury Bill rate–at the upper end of this range, but still very far from a 5% rate. And if we do live in a semi-permanent age of secular stagnation, this will not be a temporary inconvenience but, rather, a permanent structural fact.

That means that if the FOMC keeps its current inflation target then it will have only 3% of sea-room when the next big recession comes, whether next year, next decade, or a quarter century from now.

That means that if the FOMC keeps attempting to raise interest rates back to a 5% normal–or even, unless it is lucky, to a 3% normal–it will find itself continually undershooting its inflation target, and continually promising that rates will go up more real soon now as soon as the current idiosyncratic fit of sub-2% inflation passes.

I do not know anybody seriously thinking about all this who thinks that 3% of sea-room is sufficient in a world in which shocks as big as 2007-2010 are a thing. And I do not know anybody seriously thinking about all this who thinks that pressing for a premature “normalization” of interest rates is a good idea: It will deanchor inflationary expectations on the downside, and with rational market inflation expectations 1-2% below the “target” that means an equilibrium late-expansion Treasury Bill rate of not 1 to 3% but rather -1 to 2%.

Therefore either (a) the Federal Reserve really should raise its inflation target, or (b) the Federal Reserve should right now be screaming to high heaven about how it is the necessary and proper task of the rest of the government to do something, something big, something now to resolve our secular stagnation problem. And under no circumstances should the Fed be (c) pushing for probably premature “normalization” of interest rates.

Of course, the Fed could and should be doing both (a) and (b). But it seems to be doing neither–it seems to be doing (c).

Perhaps Janet’s thoughts on secular stagnation are part of process of trying to assemble an FOMC coalition to… do something… or at least beg others to do something…

But this intellect, at least, is pretty pessimistc.

A Question For the Fed The New York Times

Paul Krugman: A Question For the Fed: “There is a near-consensus at the FOMC that rates must eventually move up…

….But… exactly?… Which component of aggregate demand do we believe will continue to strengthen in a way that will require monetary tightening to avoid an overheating economy? Here’s a look at two obvious candidates… as shares of potential GDP… deviations from the 1990-2007…. Nonresidential investment has basically recovered from the recession-induced slump. Residential investment is still a bit low by historical standards, but not as much as you might think…. So I don’t see an obvious reason to believe that current rates are too low. Yes, they’re near zero–but that in itself doesn’t mean too low. Like others, notably Larry Summers, I think the Fed is trying to return to a normality that is no longer normal.

Must-Read: Nancy LeTourneau: What Happens When One Party Doesn’t Care About Governing?

Posted on by Brad DeLong

Must-Read: I want to play the bipartisan-technocrat policy game.

The old conventional wisdom was that playing that game was productive and fun. You see, members of the Senate and the House. Thus, and so the two houses–everybody in them–shared the goal of trying to arrange things so that they each looked good to their local constituents. And good technocratic policies were an effective move in that win-win–or mostly win-win–game.

But now? The political-economy and political-structural questions are:

  1. Has this changed–is the game now to make the president of the other party look bad?
  2. Did the game change with the Democrats under Richard Nixon–who was genuinely bad–and have Republicans just been playing tit-for-tat since?
  3. Did the game change with the accession of Newt Gingrich–and his strange and false belief that he would have a better and longer career as a partisan bomb thrower than as a statesman?
  4. Did the game change with George W. Bush–and his decision that Democratic members of the House and Senate who supported him on policy would not be cut any campaign fund-allocation breaks at election time?
  5. Did the game change with the election of a Black man?

And how do we get back–if we can get back? And do we want to get back?

These are all the questions that I wish political scientists were trying to answer for me. Yet few are–save Tom Mann, Norm Ornstein, Rick Perlstein, and a very few others…

Nancy LeTourneau: What Happens When One Party Doesn’t Care About Governing?: “Over the course of the Obama presidency, we’ve watched as Republicans have thrown out many of the norms…

…[Not] just things like shouting ‘You lie!’ in a presidential address… not just a requirement that basically any vote (including presidential nominations) get a super majority… includes… overtly undermining the executive branch during complex negotiations with other countries… failing to give a Supreme Court nominee a hearing… threatening to not raise the debt limit…. These are the kinds of things a party does when it doesn’t care about governing…. I am reminded of something a blogger named mistermix wrote back in 2010 during the height of the budget negotiations.

As Tim F. posted earlier, Ezra Klein thinks that Obama’s a bad poker player…. The analogy isn’t helpful. Poker is a win/lose game. Negotiation is a win/win game…. Republicans aren’t playing poker or negotiating. They are playing another game, call it ‘You Must Lose’. They’re happy with win/lose, if they win, but they’ll tolerate lose/lose as long as Obama loses. The only analogy that springs to mind when I look at the Republicans’ recent behavior is a bad divorce…. Bob is so hell-bent on hurting Lisa that he doesn’t care about their kids or their bank account. Bob will deploy a hundred variations on the same tactic: put the Lisa in a bind where she has to choose between damaging the children and losing money. Lisa will lose money almost every time in order to save the children….

That caught my eye because, as a former family therapist I know the analogy well…. It actually becomes calcified and intractable when both parents buy in–which ensures that everyone always loses. Think about that next time you hear a liberal suggest that Democrats should employ the same tactics as the Republicans…. Here is how Mike Lofgren described it back in 2011:

A couple of years ago, a Republican committee staff director told me candidly (and proudly) what the method was to all this obstruction and disruption. Should Republicans succeed in obstructing the Senate from doing its job, it would further lower Congress’s generic favorability rating among the American people. By sabotaging the reputation of an institution of government, the party that is programmatically against government would come out the relative winner.

So what are the Democrats’ options in a situation like this? First of all, they shouldn’t take the bait and join in a guaranteed lose-lose game….At some point, voters have to decide if it is in their interest to elect politicians who are simply using them as their pawns in a power game. I know that as a family therapist, when I saw that a divorce wars situation was intractable, I would eventually go to the kids to begin the process of empowering them to make good choices (luckily in my practice they were adolescents)….

The old conservative vs liberal arguments aren’t much in play this election. That is obvious in the presidential contest. But it is also true in House/Senate races…

What’s behind the decline in male labor force participation in the United States?

Posted on by Nick Bunker

One of the most discussed problems in the U.S. labor market in recent years is the decline in the labor force participation rate, or the share of the population that’s employed or actively looking for a job. A big reason for this overall decline since 2000 is the aging of the U.S. population, but dig into the decline a bit more and there’s more to it than growing legions of retirees. The participation rate of prime-age workers, those 25-to-54 years old, also is falling. For women, this is a new trend in the 21st century, but for men the beginning of the decline dates back to the 1950s. Why are more and more men in their prime working years increasing not working? A new report from the President’s Council of Economic Advisers sheds some light on a potential answer, but first some context.

The U.S. labor force participation rate for prime-age men peaked in 1954 at just under 98 percent. The rate declined for the next decade before the decline accelerated around 1965. Over the next 50 years, the participation rate for these men declined by 8.3 percentage points as of last month. In May 2016, only 88.4 percent of prime-age men had a job or were actively looking for one.

What’s behind this decline? Economists divide the reasons into supply-side explanations (prime-age men are less willing to work) and demand-side explanations (employers are less willing to hire prime-age men). But the report by the Council of Economic Advisers finds relatively little evidence for the supply-side explanations. They find that increased reliance on programs such as Social Security Disability Insurance can explain, at the most, 0.5 percentage points of the 7.5 percentage point decline since 1967. And the share of men who are neither working nor seeking work and who also are married to a working spouse is low—less than 25 percent) and declining—meaning these men aren’t opting-out because they can rely on the earnings of their spouses.

Instead, the Council of Economic Advisers finds much more evidence for demand-side explanations. The decline in labor force participation is strongest among men with a high school degree or less (14 percentage points), which is also the group that experienced the most significant decline in their wages relative to other workers in the economy. Declining employment and declining wages indicates that demand-side issues are mostly to blame. Indeed, the report also shows that in states where the absolute return on work (wages at the low end) and the relative return on work (less low-end wage inequality) are higher, prime-age men are more likely to be in the labor force.

A decline in the demand for less-educated men in the United States seems to be part of longer-term trends such as technological change, globalization, or changing labor market institutions. What’s more, these same trends also have decreased demand for middle-skill workers, which in turn may have caused declining employment for low-skilled men. As these middle-skilled workers lost their jobs and moved into lower-paying occupations, they pushed less-educated men out of the labor force all together.

This “cruel game of musical chairs” can be seen in the wake of economic recoveries over the past five decades. The employment-to-population ratio for prime-age men has declined after every recession (except for one) since 1965 and never reached its previous high before the next recession. And the employment losses for prime-age men during a recession don’t bounce back as much amid each recovery. (See Figure 1.)

Figure 1

 

As the Council of Economic Advisers notes, the decline in male labor force participation is a sign of a longer-term decline in fluidity in the U.S economy. Less job creation by firms and less job movement by workers mean that the labor market is less able to bounce back from negative shocks. If the long-term trends mean less demand for middle and low-skill workers, then those at the bottom of the ladder have a hard time getting back on it. To help counteract some of the long-term trends then, policymakers should focus on strengthening the recoveries from recessions.