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June 5, 2009

Economist's View - 4 new articles

"The Bond War"

What is the bond market telling us?:

The Bond War, by Daniel Gross, Slate: It's fair to say that 10-year and 30-year Treasury bonds are not subjects that enthrall the American public... In the last six months, however, the state of those bonds has become the subject of feverish argument in the economic elite. The interest rate of the 10-year Treasury bond has spiked from 2.07 percent in December 2008, when the world was falling apart, to a recent high of 3.715 percent on June 1... Now factions led by economist Paul Krugman and historian Niall Ferguson are feuding bitterly about the import of these charts. In late April, Krugman and Ferguson squared off at a New York Review of Books/PEN panel, and they've continued with an op-ed war in the Financial Times and New York Times (Ferguson here and Krugman here).

In a nutshell, Ferguson and his allies believe that the rising bond yields prove that markets are worried about the inflation that will inevitably result from the fiscal policies of the Obama administration and the Fed. ... Ferguson's fears have been echoed by the planet's leading inflation-phobe German Chancellor Angela Merkel and by influential Stanford economist John Taylor. Turn on CNBC, and you're likely to hear talk about bond-market vigilantes, the mass of traders who sell bonds and push interest rates up in order to warn governments not to spend freely.

Krugman and his fellow travelers couldn't disagree more. Far from being a sign of failure and impending disaster, they say, the rising bond yields actually signal success and impending improvement. ... Clear-headed as always, Martin Wolf of the Financial Times notes: "The jump in bond rates is a desirable normalisation after a panic. Investors rushed into the dollar and government bonds. Now they are rushing out again. Welcome to the giddy world of financial markets." This line of argument makes sense...

In ... this instance, the Fergusonians lack credibility. H.L. Mencken tagged the Puritans as people possessed of the "haunting fear that someone, somewhere, may be happy." Ferguson represents a strain of intellectual Toryism bedeviled by the haunting fear that someone, somewhere may be getting social insurance. ... Their solution to the problem of large deficits always seems to be to cut entitlements and never to raise taxes.

As for the bond vigilantes, have you noticed that they seem to surface only when a Democrat is in the White House? Stanford's John Taylor didn't write many articles about the inflationary aspects of rapidly expanding deficits when the Bush administration and Congress were turning surpluses into huge deficits, massively increasing government spending, and creating a new Medicare prescription drug entitlement. He was working in the Bush Treasury Department. ...

Federal Reserve Chairman Ben Bernanke, seemed to split the difference yesterday. "However, in recent weeks, yields on longer-term Treasury securities and fixed-rate mortgages have risen," he told Congress. "These increases appear to reflect concerns about large federal deficits but also other causes, including greater optimism about the economic outlook, a reversal of flight-to-quality flows, and technical factors related to the hedging of mortgage holdings."

"An Umbrella that Melts in the Rain"

Medical problems contribute to a large proportion of bankruptcies. I wonder how much a health care plan that protects people from losing everything when serious illness hits would have helped to soften the economic crisis:

Illness, medical bills linked to nearly two-thirds of bankruptcies, EurekAlert: Medical problems contributed to nearly two-thirds (62.1 percent) of all bankruptcies in 2007, according to a study in the August issue of the American Journal of Medicine that will be published online Thursday. The data were collected prior to the current economic downturn and hence likely understate the current burden of financial suffering. Between 2001 and 2007, the proportion of all bankruptcies attributable to medical problems rose by 49.6 percent. The authors' previous 2001 findings have been widely cited by policy leaders, including President Obama.

Surprisingly, most of those bankrupted by medical problems had health insurance. More than three-quarters (77.9 percent) were insured at the start of the bankrupting illness, including 60.3 percent who had private coverage. Most of the medically bankrupt were solidly middle class before financial disaster hit. Two-thirds were homeowners and three-fifths had gone to college. In many cases, high medical bills coincided with a loss of income as illness forced breadwinners to lose time from work. Often illness led to job loss, and with it the loss of health insurance.

Even apparently well-insured families often faced high out-of-pocket medical costs for co-payments, deductibles and uncovered services. Medically bankrupt families with private insurance reported medical bills that averaged $17,749 vs. $26,971 for the uninsured. High costs – averaging $22,568 – were incurred by those who initially had private coverage but lost it in the course of their illness.

Individuals with diabetes and those with neurological disorders such as multiple sclerosis had the highest costs, an average of $26,971 and $34,167 respectively. Hospital bills were the largest single expense for about half of all medically bankrupt families; prescription drugs were the largest expense for 18.6 percent.

The research, carried out jointly by researchers at Harvard Law School, Harvard Medical School and Ohio University, is the first nationwide study on medical causes of bankruptcy. ...

Subsequent to the 2001 study, Congress made it harder to file for bankruptcy, causing a sharp drop in filings. However, personal bankruptcy filings have soared as the economy has soured and are now back to the 2001 level of about 1.5 million annually.

Dr. David Himmelstein, the lead author of the study and an associate professor of medicine at Harvard, commented: "Our findings are frightening. Unless you're Warren Buffett, your family is just one serious illness away from bankruptcy. For middle-class Americans, health insurance offers little protection. Most of us have policies with so many loopholes, co-payments and deductibles that illness can put you in the poorhouse. And even the best job-based health insurance often vanishes when prolonged illness causes job loss – precisely when families need it most. Private health insurance is a defective product, akin to an umbrella that melts in the rain." ...

According to study co-author Dr. Steffie Woolhandler, an associate professor of medicine at Harvard and primary care physician in Cambridge, Mass.: "We need to rethink health reform. Covering the uninsured isn't enough. ... Only single-payer national health insurance can make universal, comprehensive coverage affordable... Unfortunately, Washington politicians seem ready to cave in to insurance firms and keep them and their counterfeit coverage at the core of our system. Reforms that expand phony insurance – stripped-down plans riddled with co-payments, deductibles and exclusions – won't stem the rising tide of medical bankruptcy."

Dr. Deborah Thorne, associate professor of sociology at Ohio University and study co-author, stated: "...Families who file medical bankruptcies are overwhelmingly hard-working, middle-class families who have played by the rules of our economic system, and they deserve nothing less than affordable health care." [A copy of the study is available at here.]

Since we're on the topic:

May Bankruptcy Filings Climb to Over 6,000 Per Day, by Bob Lawless: According to data from Automated Access to Court Electronic Records ("AACER"), there were over 120,000 U.S. bankruptcy filings in May 2009 or 6,020 for each of the 20 business days in May. That is the first time daily bankruptcy filings have topped the 6,000 mark since the 2005 bankruptcy law was adopted. ...


It is important not to make too much out of the month-to-month changes in the bankruptcy filing rate. It is the long-term trend that matters, and the graph ... shows how the long-term trend is heading us back toward the daily filing rate before the 2005 law was enacted. ...

Today vs. the 1980-82 Recession

Menzie Chinn:

Output, Employment and Industrial Production in the "1980-82 Recession", econbrowser: In today's NYT, Casey Mulligan presents an interesting picture of GDP during the "1980-82 recession" -- the conjoining of the two NBER defined recessions in 1980 and 1981-82. Based on the comparison with the current recession, he concludes:

While the job losses, foreclosures, stock declines and other casualties of the current recession have been very painful, substantially more bad economic news is needed to make this recession worse than the downturns of 1980-'82, at least in G.D.P. terms.

Here is Professor Mulligan's graph.

Here, without comment, are three graphs of employment and industrial production, but normalizing the start date instead of the end date. Why one would want to normalize on the trough especially when the trough date is unknown, I'm not certain, but there's nothing to stop one from doing so. But, as I say, I'll normalize on the start date in the graphs below.

Figure 1: Log real GDP normalized on 2007Q4 (blue), May WSJ mean survey forecast (teal x), log real GDP from "1980-82 recession" normalized on 1980Q1 (red). Source: BEA, preliminary 2009Q1 release, WSJ May survey, NBER and author's calculations.
Figure 2: Log nonfarm payroll employment normalized on 2007M12(blue), log NFP from "1980-82 recession" normalized on 1980M01 (red). Source: BLS via FREDII, NBER and author's calculations.
Figure 3: Log industrial production normalized on 2007M12(blue), log NFP from "1980-82 recession" normalized on 1980M01 (red). Source: Federal Reserve via FREDII, NBER and author's calculations.

One observation, regarding data revisions. NBER doesn't place central import to GDP, in part because GDP is subject to sometimes substantial revisions that alter not only the level, but contour of GDP. This is important to the extent that Professor Mulligan's graph (and my Figure 1) compare preliminary 2009Q1 data to final (and repeatedly revised) GDP figures. I suspect (although have no independent validation) that recent GDP figures will probably be revised downward. In this latest episode, I also wonder about the large contributions to overall GDP growth coming from the finance sector (think about how easy it is to calculate real value added in that sector), when the "F" in FIRE accounts for something like 5% of GDP (see an interesting article by Ed Leamer here).

links for 2009-06-04

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