…How do they know this? Because people ‘close to the market’ keep telling them so. What can I do to show that this is wrong? The most obvious point is that interest rates on UK or US government debt have been falling since 2008, but the response I sometimes get is that rates have only stayed low because of austerity policies. So how about… the UK general election of 2010…. If there was any default premium implicit in yields on UK government debt, it should have fallen between 5th May and 13th May, either because Labour were defeated, or because the LibDems capitulated on the deficit…. As you can see, rates were higher on 13th May compared to 5th May… no noticeable decline in rates because fiscal consolidation was going to be greater….
The more sophisticated defence of austerity… is that there exists a ‘tipping point’ somewhere…. As we do not know where that tipping point is, it is best to stay well away from it…. The problem with this argument is that having your own central bank makes a key difference…. Markets could… begin to suspect default even when there is absolutely no intention within government to let this happen…. But… [with] Quantitative Easing… the cost of servicing government debt does not rise, because additional money is created…. There is no vicious circle. There is plenty of time for the government to take whatever action it wishes to take to reassure the markets…. Having your own central bank… undertaking Quantitative Easing… crucially changes the dynamics… [no] vicious circle…
Over at Grasping Reality: Simon Wren-Lewis on Faith-Based Macroeconomics
Things to Read on the Morning of March 22, 2015
Must- and Should-Reads:
- Morning Must-Read: : What happens When US Rates Rise?
- Nighttime Must-Read: : The New Mercantilist Challenge
- Evening Must-Read: Binyamin Applebaum: Richard Fisher, Often Wrong but Seldom Boring, Leaves the Fed
- : “Rent… is… a payment for a resource in excess of its opportunity cost…. There has been… a ‘big idea’… that these rents are growing…. [We must] test the rent hypothesis systematically…”
- : “If Obamacare were pushing people into part-time work, we would expect an increase in involuntary part-time work…. The opposite has occurred…. The serious problem in US economic debates where those with non-credible arguments hold far too much sway…”
- : “From the Peru of Alberto Fujimori to the Hungary of Viktor Orban, illiberal regimes have managed to consolidate power without fencing off their countries or resorting to mass murder…. New forms of dictatorship based on manipulating information rather than on mass violence… can survive… in the face of moderate economic underperformance… [via] an increase in censorship and propaganda…”
Might Like to Be Aware of:
- : “I think there are bits and pieces of truth scattered through all of these answers to the question of ‘why did New Zealand end up with a treaty rather than a genocide?’… I read quite a lot about the history of the Treaty of Waitangi, and the thought that kept on coming back to me was that this must have been exactly how things progressed during the English conquest of Wales back in the fourteenth and fifteenth centuries…”
- : How the Internet Scooped Science
- : “Gov. Rick Perry’s political action committee… hiring Jamie Johnson… a sexist… wrote surfaced in which he wrote, ‘The question then comes, ‘Is it God’s highest desire, that is, his biblically expressed will… to have a woman rule the institutions of the family, the church, and the state?’… Perry’s people actually have a good reason to think this is going to be no big deal, because this kind of overt sexism has become downright mainstream in conservative media as of late…”
- : The crisis in US-Israel relations is much bigger than Bibi Netanyahu
- : Obama’s Well-Earned Victory Lap on the Economy
Morning Must-Read: Duncan Weldon: What Happens When US Rates Rise?
1994… markets had not fully ‘priced in’ the extent to which the Fed was planning on raising rates. As the scale and pace of the tightening became apparent, bond rapidly repriced with the price falling and the yield rising. Long term interest rates rose sharply…. 1999 to 2000… ‘textbook’…. As short term rates rose, so did the 10 year yield… [which] ran slightly ahead of Fed Funds…. 2004 to 2006…. Despite the Fed raising rates from just 1.0% to 5.25%, longer term interest rates barely budged… a ‘conundrum’…. The big factor at work was foreign buying of USTs. Rising foreign demand (especially from foreign central banks that wanted to control the value of their currencies against the US dollar)…. So–what to expect in 2015 and beyond?…
What Are the Arguments Against ObamaCare These Days, Exactly?: Focus
Picking up on In Lieu of a Focus Post: March 2, 2015 (Brad DeLong’s Grasping Reality…): Janet Currie points out that the damage from a ruling adverse to the government in the King v. Burwell ObamaCare subsidies case is likely to carry a very heavy cost in terms of societal well-being along private health, public health, and economic growth dimensions.
Fifty years ago, Ronald Reagan argued against Medicare on the grounds that once we had Medicare we would find it financially unaffordable unless we drafted doctors into a low-wage socialist National Health Corps commanded by the Surgeon General, and that mass labor conscription could not be far behind. Ronald Reagan was, I think it is now generally agreed, overfearful and overwrought: the societal benefits to actually allowing the non-rich elderly to go to the doctor have outweighed the risks that we will start by drafting doctors, and end with Leon Trotsky’s industrial armies under the thumbs of Bolshevik bosses.
Today the rhetoric opposed to the individual mandate–excuse me, Mitt Romney’s “Republican Responsibility Principle” is much less heated: it is not that steps toward national health insurance will put us on a slippery slope to socialism, it is… what, exactly? How do you in any way enhance human freedom by causing an adverse-selection meltdown of the health-insurance markets for those who do not work for large bureaucracies? Economic freedom requires that there be a competitive marketplace and an associated prosperous division of labor for you to exercise your economic freedom in, for example…
I understand the argument that ObamaCare would be a policy disaster: it seemed wrong at the time, but I would have given a one-in-twenty chance that we would be sorry we passed ObamaCare because something would go badly wrong with the implementation and the subsequent market structure. But nobody sane makes such claims that it is a loser as a policy–that it is causing medical cost inflation or disrupting marketplaces–any more.
But what is the anti-ObamaCare argument now? Is it really just that it is in some invisible way a “job killer”, just as the Federal Reserve’s quantitative easing policies are “inflation bringers”?
- : Obamacare and Long-Term U.S. Economic Competitiveness https://equitablegrowth.org/research/obamacare-long-term-u-s-economic-competitiveness
Nighttime Must-Read: Dani Rodrik: The New Mercantilist Challenge
…Economic liberalism… is… dominant…. But its intellectual victory has blinded us to the great appeal–and frequent success–of mercantilist practices. In fact, mercantilism remains alive and well, and its continuing conflict with liberalism is likely to be a major force shaping the future of the global economy…. Mercantilists certainly did defend some very odd notions…. Adam Smith… masterfully demolished many of these ideas….
But… mercantilist theorists such as Thomas Mun were in fact strong proponents of capitalism; they just propounded a different model than liberalism…. The mercantilist model can be derided as state capitalism or cronyism. But when it works, as it has so often in Asia, the model’s ‘government-business collaboration”’or ‘pro-business state’ quickly garners heavy praise…. A second difference between the two models lies in whether consumer or producer interests are privileged…. The logic of the liberal approach is that the economic benefits of trade arise from imports…. Mercantilists, however, view trade as a means of supporting domestic production and employment, and prefer to spur exports rather than imports…. From the liberal perspective, these export subsidies impoverish Chinese consumers while benefiting consumers in the rest of the world…. From the mercantilist perspective, however, these are simply the costs of building a modern economy and setting the stage for long-term prosperity….
The liberal model has become severely tarnished, owing to the rise in inequality and the plight of the middle class in the West, together with the financial crisis that deregulation spawned. Medium-term growth prospects for the American and European economies range from moderate to bleak. Unemployment will remain a major headache and preoccupation for policymakers. So mercantilist pressures will likely intensify in the advanced countries. As a result, the new economic environment will produce more tension than accommodation between countries pursuing liberal and mercantilist paths. It may also reignite long-dormant debates about the type of capitalism that produces the greatest prosperity.
Evening Must-Read: Binyamin Applebaum: Richard Fisher, Often Wrong but Seldom Boring, Leaves the Fed
By far the most extraordinary and astonishing thing about ex-Dallas Federal Reserve Bank President Richard Fisher: in spite of being wrong ex post for eight straight years in a row on pretty much everything to do with the appropriate direction of and the risks to Federal Reserve policy, he not only never changed his mind, he never lost his dead-certain iron confidence that he was right:
Evening Must-Read: Binyamin Applebaum: Richard Fisher, Often Wrong but Seldom Boring, Leaves the Fed: “[Richard Fisher] was also among the last to understand the depth of the resulting financial crisis…
He warned throughout most of 2008 that inflation was the primary danger to the economy — a threat that has still not materialized — and that the bleak pronouncements of other Fed officials were fueling an unwarranted sense of panic. In August, as the financial system teetered on the brink of collapse, he voted to raise interest rates, which would have made the situation even worse. In December that year, when the Fed reduced its benchmark interest rate nearly to zero in a move to spur a recovery, Mr. Fisher cast the only dissenting vote. After the meeting, he decided the moment required solidarity and went to Ben S. Bernanke, the chairman, to change his vote.
But Mr. Fisher said in the interview here that he had not changed his mind. He said the Fed should never have pushed interest rates below 2 percent, nor bought so many bonds…. He says he simply does not believe the Fed is helping. He says holding down interest rates has mostly enriched the rich, like his own family. The middle class is being squeezed, he said, “but the Fed can’t fix that.”… The Fed’s portfolio, which has swelled to more than $4 trillion, is “an enormous amount of explosive fuel” and the danger is “an explosion of inflation.”
“My successors,” he said, “are going to have to be very careful in steering that ship.”
Weekend reading
This is a weekly post we publish on Fridays with links to articles we think anyone interested in equitable growth should be reading. 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.
Links
Tim Duy argues that Federal Reserve Chair Janet Yellen took a dovish tone during her press conference this week. [fed watch]
The Federal Open Markets Committee lowered its estimate of the long-run unemployment rate. Jared Bernstein writes about how this change is a good thing. [wa po]
Shane Ferro doesn’t buy the idea that the sharing economy will reduce income inequality. [business insider]
Ryan Cooper says that city governments have absolutely failed at tackling the problem of gentrification. [the week]
Izabella Kaminska on the limits of negative rates. [ft alphaville]
Friday Figure
The importance of shopping around in the U.S. health insurance market
Even well into the age of Google, search can be a difficult activity. Buying a car, looking for a job, or even figuring out the cheapest flight for vacation can get complex quickly. These problems are further compounded when we’re trying to shop around for extremely important and costly, health care services. The question of how consumers actually search for health insurance is very important given the creation of marketplaces for prescription drugs (Medicare Part D) and overall health insurance (the Affordable Care Act) in the past several years. A new paper shows that if consumers invested a greater amount of time comparing different plans- and thus shifting to those that are most cost effective, it could help reduce the premium for health insurance.
Let’s first look at Medicare Part D, a program created to help increase prescription drug choices for seniors. The idea was to give seniors more options—good in and of itself—but also to contain costs. Research finds that the actual costs for the drugs paid for by insurance plans did decrease since the implementation of Part D, but also that the decrease doesn’t appear to be showing up in the form of reduced premiums paid by seniors.
Why exactly that pass-through hasn’t happened is the question answered in a new paper by economists Kate Ho and Joseph Hogan of Columbia University and Fiona Scott Morton of the Yale School of Management. The authors focus on how insurance plans change premiums based upon the movement of seniors from plan to plan.
The idea is this: If seniors are inattentive and less likely to switch plans due to price changes, the insurers will notice and raise the price. The inaction by seniors signals to the plan administrators that these people are less sensitive to changes in prices. So the plans will raise prices, premiums go up, and profits per consumer increase.
Using data from Medicare Part D recipients in New Jersey, Ho, Hogan, and Scott Morton then try to figure out how much premiums would decline if seniors had less inertia and were more likely to shop around. According to their top-line result, the average senior would save $536 over the course of three years– or about 40 percent of the estimated “over-spending” per enrollee in Part D. Increased movement and shopping around would also have an effect on the fiscal cost of the program: an estimated decline of 8.2 percent of the cost of subsidies.
Of course, this research has implications beyond Part D. The Affordable Care Act depends upon a marketplace to bring down premiums for health insurance. Understanding how to best help adult customers of all ages navigate the changing prices of plans will become increasingly important. As the authors point out, a lack of pressure on insurers via “effective consumer choice” can make these kind of programs far more expensive than they need to be.
Things to Read on the Morning of March 20, 2015
Must- and Should-Reads:
- Today’s Must-Must-Read: : Risk Management for Monetary Policy Near the Zero Lower Bound
- Afternoon Must-Read: : Support for Redistribution in an Age of Rising Inequality: New Stylized Facts and Some Tentative explanations
- Afternoon Must-Read: : Macroeconomic Effects of Asset Purchases
- Today’s Must-Must Read: : If Economists Were Right, You Would Have a Raise by Now
- Morning Must-Read: : Closed-System Blockchains
- Morning Must-Read: : How Europe’s Easy Monetary Policy Crossed the Atlantic
- : “Grfiters Gonna Grift: And media organizations like Politico make it so damn easy because it’s their grift too. ‘The group’s website provides few details…. But the team behind the Progressive Coalition for American Jobs includes… Mitch Stewart… Lynda Tran… 270 Strategies… Jeremy Bird…”
Might Like to Be Aware of: