Must-read: Richard Mayhew: “CHIPPING Away at Uninsurance”

Posted on by Brad DeLong

Richard Mayhew: CHIPPING Away at Uninsurance: “The Arkansas Times named its person of the year…

…all the Arkansans who are newly insured. There was one vignette that stuck with me:

The average high school senior isn’t too worried about insurance coverage, but for Fairfield Bay native Crystal Bles, it was a priority…. While many young adults now rely on their parents’ insurance to stay covered until age 26–thanks to another change created by the Affordable Care Act–Bles’ parents were uninsured…. She ‘most definitely’ knew she needed coverage, she said, given her chosen area of study. ‘In welding, people tend to get injured.’… For young Arkansans like Bles, the private option has already become a fact of life [my emphasis]— a vital government service, funded by taxpayers and provided for taxpayers, just like public schools and food stamps, highways and Pell grants, law enforcement and libraries.

There have been numerous liberal attempts to slowly build… by proposals to lower Medicare eligibility age. The theory… is that taking the most expensive people off of the private market… will save money systemically and not face significant opposition as employers and private insurers will want to dump their most expensive covered lives to someone else… anything that shifts people from the most expensive part of the covered system (employer sponsored insurance) to a less expensive part (Medicare) is a big win. The final part of the theory… is that the change to Medicare for 60 year old individuals works well and is not too scary so the next slice of the salami….

What if we are trying to cut the salami from the wrong end? Kids are adorable, sympathetic and, after they start crawling, dirt cheap to cover.  Kids use lots of low cost services but they are unlikely to need high cost services. What if  the Childrens’ Health Insurance Program (CHIP) was expanded to be the most probable insurance  to every kid between the ages of birth and nineteen?

How do we make sure savings become wealth?

Posted on by Bridget Ansel
Shou-Mei Li, left, wraps a scarf around her husband Hsien-Wen Li as their daughter Shirley Rexrode, right, looks on at their home in San Francisco in this photo taken Thursday, September 1, 2011. (AP Photo/Ben Margot)

Rising wealth inequality in the United States has several causes, one of which is the rise in savings inequality among Americans. Research by Emmanuel Saez and Gabriel Zucman of the University of California, Berkeley shows that the large increase in U.S. income inequality starting in the late 1970s corresponded with a widening gap between the savings rates of those at the top of the income distribution and those at the bottom. In fact, in the run-up to the Great Recession of 2007-2009, the bottom 90 percent of the U.S. population had a negative savings rate.

Policymakers have a number of options to help reduce wealth inequality. In light of this research, they should consider focusing on policies that would help improve the savings rates of most Americans.

First, it must be said that faster income growth would likely increase the amount of money most Americans could save. But for now, we will focus on policies that might be able to help Americans save a higher percentage of each additional dollar they earn.

Let’s start by looking at the U.S. retirement savings system. The system was once said to be a three-legged stool, resting upon the three “legs” of Social Security, traditional defined-benefit pensions provided by workplaces, and private savings. Traditional defined-benefit pensions, however, have all but disappeared now that employers have increasingly shifted toward defined-contribution plans such as 401(k)s. And while strengthening Social Security will be vital, we should improve upon private savings as well.

This new reliance on private savings has been troubling for a number of reasons. One is that take-up isn’t very high, primarily because access isn’t universal. Employers aren’t required to offer access to 401(k) plans, and even then actual participation in plans seems to be on the decline among younger workers.

With those problems in mind, researchers have pointed out the advantages of auto-enrolling workers into savings plans, which is quite effective at getting workers to actually save. The positive results are part of the reason why several state governments are setting up state-sponsored savings plans that would have workers automatically contribute 3 percent of their earnings.

While these programs are wisely focused on increasing contributions, state governments should also be aware of the potential problems with turning contributions into actual wealth for workers. In short, they should be aware of investment fees. When you contribute to a retirement plan, there are going to be fees that are charged as a percentage of the funds you have invested. And the amount of fees you pay can vary quite a bit. The average fee is about 1 percent but can be as low 0.25 percent. In the New York Times article cited above, the new program from the Illinois state government will have fees of 0.75 percent.

A fraction of a percentage point might not seem like that much, but it can make a huge difference over time. According to calculations by Jennifer Erickson and David Madland of the Center for American Progress, a 0.75-percentage-point difference can make a $100,000 difference over the course of a career.

Policymakers that are invested in helping workers save more for retirement should be aware that contributions don’t just need to be increased—the contributions that are made need to also not be wasted.

Must-read: Barry Ritholtz: “Hedge Funds Scramble to Reassure Investors”

Posted on by Brad DeLong

Must-Read: Barry Ritholtz: Hedge Funds Scramble to Reassure Investors: “Why is it that in the face of underperformance…

…investors still seem to love hedge funds?… This rather astonishing figure:

The 20 most profitable hedge funds for investors earned $15 billion last year while the rest of the industry collectively lost $99 billion. Those top managers have made 48 percent of the $835 billion in profits that the hedge fund industry has generated since its inception….

I suspect that… a large part of the reason for [the] inflows[is] an ill-advised pursuit of market-beating alpha by investors who seem to be desperate to find the next James Simons…. There are no signs of it slowing down. That isn’t to say a rotation within the hedge fund firmament is not taking place… the disappointed limited partners in hedge funds also seem to be a fickle group. Like speed daters looking for Mr. or Ms. Right, they table hop in pursuit of the one manager who has the secret sauce to make the wealthy accredited investor even wealthier.

Must-read: Cosma Shalizi (2011): “When Bayesians Can’t Handle the Truth”

Posted on by Brad DeLong

Must-Read: So I was teaching Acemoglu, Johnson, and Robinson’s “Atlantic Trade” paper last week, and pointing out that (a) eighteenth-century England is a hugely-influential observation at the very edge of the range of the independent variables in the regression, and (b) it carries a huge residual even with a large estimated coefficient on Atlantic trade interacted with representative government. The huge residual, I said, means that the computer is saying: “I really do not like this model”. The rejection of a null hypothesis on the coefficient of interest is the computer saying “even though the model with a large coefficient is very unlikely, the model with a zero coefficient is very very very unlikely”. But, I said, Acemoglu, Johnson, and Robinson do not let their computer say the first statement, but only the second.

And so I thought of Cosma Shalizi and his:

Cosma Shalizi (2011): When Bayesians Can’t Handle the Truth: “When should a frequentist expect Bayesian updating to work?…

…There are elegant results on the consistency of Bayesian updating for well-specified models facing IID or Markovian data, but both completely correct models and fully observed states are vanishingly rare. In this talk, I give conditions for posterior convergence that hold when the prior excludes the truth, which may have complex dependencies. The key dynamical assumption is the convergence of time-averaged log likelihoods (Shannon- McMillan-Breiman property). The main statistical assumption is a building into the prior a form of capacity control related to the method of sieves. With these, I derive posterior convergence and a large deviations principle for the posterior, even in infinite- dimensional hypothesis spaces, extending in some cases to the rates of convergence; and clarify role of the prior and of model averaging as regularization devices. Paper: http://projecteuclid.org/euclid.ejs/1256822130

Must-reads: February 1, 2016

Posted on by Brad DeLong

Must-read: Peter A. Petri and Michael G. Plummer: “The Economic Effects of the Trans-Pacific Partnership: New Estimates”

Posted on by Brad DeLong

Must-Read: Peter A. Petri and Michael G. Plummer**: The Economic Effects of the Trans-Pacific Partnership: New Estimates: “The new estimates suggest that the TPP will increase annual real incomes in the United States…

…by $131 billion, or 0.5 percent of GDP, and annual exports by $357 billion, or 9.1 percent of exports, over baseline projections by 2030, when the agreement is nearly fully implemented. Annual income gains by 2030 will be $492 billion for the world. While the United States will be the largest beneficiary of the TPP in absolute terms, the agreement will generate substantial gains for Japan, Malaysia, and Vietnam as well, and solid benefits for other members. The agreement will raise US wages but is not projected to change US employment levels; it will slightly increase “job churn” (movements of jobs between firms) and impose adjustment costs on some workers.

Must-read: Richard Mayhew: “The Nitty Gritty of Cost Control”

Posted on by Brad DeLong

Must-Read: Richard Mayhew: The Nitty Gritty of Cost Control: “This is not sexy, this is not lucrative…

…this is not the way political programs are built as the slogan ‘Minor administrative changes to marginally increase competition by redefining scope of service delivery laws when do we want them —NOW’ does not fit on a bumper sticker. However these are the types of gains that need to be made to reduce the guild power of high end medical providers. Most of the people, most of the time, don’t need high end care.  Their basic needs can be met by trained individuals who are not over-trained…. Basic dental services, basic primary care services, basic preventative services can often be performed perfectly adequately at the master or bachelor level clinician level instead of a doctorate level clinician level.  Those rules are overwhelmingly determined at the state level, so that is where the long slow slog of reform needs to come.

Must-read: Jed Graham: “The Fed’s Historic Rate-Hike Goof–in One Chart”

Posted on by Brad DeLong

Must-Read: The very-sharp Jed Graham has… strong views… about the Federal Reserve’s rather counterintuitive decision to raise interest rates in a quarter at which nominal GDP grew at a rate of 1.5%/year, at the end of a year in which nominal GDP grew at 2.9%. The Fed is placing an awful lot of weight on the unemployment rate, and not on either non-labor market indicators or the employment-to-population ratio, in its decision to raise. I don’t think we even have to reach for the (very true and powerful) arguments about asymmetric risks to find the interest-rate increase technocratically incomprehensible, and the failure to roll it back last month technocratically incomprehensible as well:

The Fed s Historic Rate Hike Goof In One Chart Stock News Stock Market Analysis IBD

Jed Graham: The Fed’s Historic Rate-Hike Goof–in One Chart: “Janet Yellen’s Federal Reserve has done something that no other Fed has done since Paul Volcker…

…aimed to quash runaway inflation in the early 1980s, even if it meant a recession–and it did…. Nominal GDP grew at a 1.5% annualized rate in the fourth quarter…. (Inflation-adjusted GDP rose just 0.7% in Q4.) With the exception of Volcker’s interest-rate hike in early 1982 amid a recession, no other Fed has raised rates during a quarter in which nominal GDP grew less than 3%, dating back to the early 1970s. In fact, a rate hike when nominal GDP is growing less than 4%… from 1983 to 2014, it only happened twice, and one of those times (the second quarter of 1986), the Fed cut rates by a half-point before retracting 1/8th of a point of the reduction…. The first quarter of 1995, when nominal GDP grew 3.7%, [is] the only time since Volcker that the Fed had, on net, raised rates in a quarter when nominal growth was running below 4%. After that early 1995 hike, it should be noted, the Fed proceeded to cut rates three times before the next rate hike…. If one looks at the pace of GDP growth from the year-earlier quarter, the Yellen Fed stands alone as the only Fed to hike rates when nominal growth was below 3%.

Must-read: Branko Milanovic: “Global Inequality: A New Approach for the Age of Globalization”

Posted on by Brad DeLong

Must-Read: This moves to the very top of the “to-read” pile this morning:

Branko Milanovic (2016): Global Inequality: A New Approach for the Age of Globalization (Cambridge: Belknap Press: 067473713X) http://amzn.to/1PMGNIG: “Global Inequality takes us back hundreds of years…

…and as far around the world as data allow, to show that inequality moves in cycles, fueled by war and disease, technological disruption, access to education, and redistribution. The recent surge of inequality in the West has been driven by the revolution in technology, just as the Industrial Revolution drove inequality 150 years ago. But even as inequality has soared within nations, it has fallen dramatically among nations, as middle-class incomes in China and India have drawn closer to the stagnating incomes of the middle classes in the developed world. A more open migration policy would reduce global inequality even further. Both American and Chinese inequality seems well entrenched and self-reproducing…

Cash [demand] rules everything around us

Posted on by Bridget Ansel
People walk past in front of Bank of Japan on Friday, Jan. 29, 2016. The Bank of Japan last Friday introduced a negative interest policy for the first time, and has signaled that it’s prepared to push rates further negative.

On Friday morning, the Bank of Japan broke a barrier that economists once thought was impervious: The central bank set its interest rate at negative 0.1 percent, below the “zero lower bound.”

The Bank of Japan isn’t the first central bank to enter this undiscovered country, though. The central banks of Denmark, Sweden, and Switzerland have also moved their rates below zero, and the European Central Bank has a negative rate on bank deposits. But Japan is the largest economy to go fully below zero as it tries to boost its long-ailing economy.

What’s more, the Bank of Japan has signaled that it’s prepared to push rates further negative. So how far can they push? And how much would they want to?

First, it’s worthwhile to work through why economists thought zero was a lower bound for interest rates in the first place. The answer has to do with how much people would demand cash once interest rates went negative. The belief was that if a central bank tried to set nominal interest rates below zero, then the population would shift their savings all into cash—which wouldn’t have a negative return—and would continue to demand cash. In other words, the demand for cash would be infinite.

But looking at the past few years, the demand for cash doesn’t appear to be infinite in the places with sub-zero interest rates. Now the question has shifted to the appropriate use of negative interest rates. That’s exactly the focus of a recent paper by Matthew Rognlie of the Massachusetts Institute of Technology.

In short, the effectiveness of negative interest rates depends on the demand for cash, and how that demand changes as interest rates go lower. Extremely high demand for cash, and the resulting glut of cash, can have negative impacts on the economy. Very high levels of cash demand with negative rates would mean the central bank is constantly losing money and would eventually need to be bailed out by taxpayers. At the same time, if too much money is being held as cash instead of as a bank deposit, that money can’t be lent out to borrowers—it’s just sitting under a mattress.

But the increase in aggregate demand for the economy spurred by the sub-zero interest rates can outweigh the negative aspects. It’s just a matter of how cash demand reacts. If demand for cash increases at a small rate as interest rates go lower (the interest rate elasticity of cash demand is low), then rates can go quite negative. But if the elasticity is high, then rates might not get very negative. The effective lower bound is then the interest rate where cash demand becomes infinite.

Rognlie’s model has interesting ramifications for one idea for that deals with the zero lower bound: eliminating cash. Rognlie points out that this idea makes more sense in a world where cash demand is very high and elastic. But if demand is low and inelastic, then interest rates can go negative without having to abolish cash. He also points out that there might be more intermediate ways to reform cash to reduce demand for it—the elimination of high-denomination bills, for example. When interest rates get lower, the demand for $100 bills will increase relatively more than the demand for $1 bills. By getting rid of $100 bills, you’d reduce cash demand and allow interest rates to go lower.

Storage costs are another way that reduce demand for higher denomination bills. Many people have tried to determine the feasible lower bound by looking at the storage cost of cash. If storage costs are higher, then banks can charge depositors more and the interest rate can go lower. As you can see in the table at the top of this piece by David Keohane from FT Alphaville, the lower the highest denomination of a currency, the more space the currency takes up. If the only form of cash is, say, $1 bills, then you’ll need a whole lot more storage space to store the same amount of money. So that reduces the demand for cash and further decreases the lower bound.

Rognlie’s focus on cash demand is illuminating but can only get us so far. The problem is that we don’t yet have good estimates of cash demand at negative interest rates. It’s something for the economics profession to figure out, but at least we now have a better idea of what to focus on.