Things to Read on the Morning of March 22, 2015

Posted on by Brad DeLong

Must- and Should-Reads:

Might Like to Be Aware of:

Morning Must-Read: Duncan Weldon: What Happens When US Rates Rise?

Posted on by Brad DeLong

Duncan Weldon: What Happens When US Rates Rise?: “In the past 20 years the Fed has embarked on three tightening cycles… [these] give us three scenarios for 2015 and beyond….

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

Posted on by Brad DeLong

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”?

Nighttime Must-Read: Dani Rodrik: The New Mercantilist Challenge

Posted on by Brad DeLong

Dani Rodrik: The New Mercantilist Challenge: “The history of economics is largely a struggle between two opposing schools of thought, ‘liberalism’ and ‘mercantilism’…

…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

Posted on by Brad DeLong

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

Posted on by Nick Bunker

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

080814-Inequal-deflator

The importance of shopping around in the U.S. health insurance market

Posted on by Nick Bunker

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

Posted on by Brad DeLong

Must- and Should-Reads:

Might Like to Be Aware of:

Today’s Must-Must-Read: Charles Evans et al.: Risk Management for Monetary Policy Near the Zero Lower Bound

Posted on by Brad DeLong
Charles Evans et al.:: Risk Management for Monetary Policy Near the Zero Lower Bound: “Projections have inflation heading back toward target and the labor market continuing to improve….

…There is, however, substantial uncertainty around these projections. How should this uncertainty affect monetary policy? In standard models uncertainty has no effect…. [But] the zero lower bound on nominal interest rates implies that the central bank should adopt a looser policy when there is uncertainty… a delayed liftoff is optimal…. Raising rates early might lead to excessively weak growth… raising rates later might lead to inflation…. Near the zero lower bound, monetary policy tools are strongly asymmetric and can deal with the second scenario much more easily than with the first. We… provide a quantitative evaluation of this…. Finally, we present narratives from Federal Reserve communications that suggest risk management is a longstanding practice, and econometric evidence that the Federal Reserve historically has responded to uncertainty, as measured by a variety of indicators.

Afternoon Must-Read: Vivekinan Ashok et al.: Support for Redistribution in an Age of Rising Inequality

Posted on by Brad DeLong

“Keep the government’s hands off my Medicare!” was supposed to be a joke at the expense of a small uninformed fringe, not a typical and widespread reaction:

Vivekinan Ashok et al.: Support for Redistribution in an Age of Rising Inequality: New Stylized Facts and Some Tentative explanations: “Despite the large increases in economic inequality since 1970, American survey respondents exhibit no increase in support for redistribution…

…[with] substantial heterogeneity by demographic groups…. The two groups who have most moved against income redistribution are the elderly and African-Americans…. The elderly trend is uniquely American…. One story consistent… is that they worry that redistribution will come at their expense, in particular via cuts to Medicare. We find that the elderly have grown increasingly opposed to government provision of health insurance…. For blacks, controlling for their declining support of race-targeted aid explains a large portion of their differential decline in redistributive preferences…