This site has moved to
The posts below are backup copies from the new site.

June 23, 2010

Latest Posts from Economist's View

Latest Posts from Economist's View

US Ranks Last among Seven Countries on Health System Performance

Posted: 23 Jun 2010 01:17 AM PDT

The only good news I can find here is that we have a chance to be "most improved player." But that won't happen unless we continue to reform the health care system:

US ranks last among 7 countries on health system performance, EurekAlert: New York, NY, June 23, 2010—Despite having the most expensive health care system, the United States ranks last overall compared to six other industrialized countries—Australia, Canada, Germany, the Netherlands, New Zealand, and the United Kingdom—on measures of health system performance in five areas: quality, efficiency, access to care, equity and the ability to lead long, healthy, productive lives, according to a new Commonwealth Fund report. While there is room for improvement in every country, the U.S. stands out for not getting good value for its health care dollars, ranking last despite spending $7,290 per capita on health care in 2007 compared to the $3,837 spent per capita in the Netherlands, which ranked first overall.


Provisions in the Affordable Care Act that could extend health insurance coverage to 32 million uninsured Americans have the potential to promote improvements to the United States' standing when it comes to access to care and equity, according to Mirror Mirror On The Wall: How the Performance of the U.S. Health Care System Compares Internationally 2010 Update, by Commonwealth Fund researchers Karen Davis, Cathy Schoen, and Kristof Stremikis. The United States' low marks in the quality and efficiency dimensions demonstrate the need to quickly implement provisions in the new health reform law and stimulus legislation that focus on realigning incentives to reward higher quality and greater value, investment in preventive care, and expanding the use of health information technology.
"It is disappointing, but not surprising that, despite our significant investment in health care, the U.S. continues to lag behind other countries," said Commonwealth Fund President and lead author Karen Davis. "With enactment of the Affordable Care Act, however, we have entered a new era in American health care. We will begin strengthening primary care and investing in health information technology and quality improvement, ensuring that all Americans can obtain access to high quality, efficient health care."

Earlier editions of the report, produced in 2004, 2006, and 2007, showed similar results. This year's version incorporates data from patient and physician surveys conducted in seven countries in 2007, 2008, and 2009.


Key findings include:
On measures of quality the United States ranked 6th out of 7 countries. On two of four measures of quality—effective care and patient-centered care—the U.S. ranks in the middle (4th out of 7 countries). However, the U.S. ranks last when it comes to providing safe care, and next to last on coordinated care. U.S. patients with chronic conditions are the most likely to report being given the wrong medication or the wrong dose of their medication, and experiencing delays in being notified about an abnormal test result.
On measures of efficiency, the U.S ranked last due to low marks when it comes to spending on administrative costs, use of information technology, re-hospitalization, and duplicative medical testing. Nineteen percent of U.S. adults with chronic conditions reported they visited an emergency department for a condition that could have been treated by a regular doctor, had one been available, more than three times the rate of patients in Germany or the Netherlands (6%).
On measures of access to care, people in the U.S. have the hardest time affording the health care they need—with the U.S. ranking last on every measure of cost-related access problems. For example, 54 percent of adults with chronic conditions reported problems getting a recommended test, treatment or follow-up care because of cost. In the Netherlands, which ranked first on this measure, only 7 percent of adults with chronic conditions reported this problem.
On measures of healthy lives, the U.S. does poorly, ranking last when it comes to infant mortality and deaths before age 75 that were potentially preventable with timely access to effective health care, and second to last on healthy life expectancy at age 60.
On measures of equity, the U.S. ranks last. Among adults with chronic conditions almost half (45%) with below average incomes in the U.S. reported they went without needed care in the past year because of costs, compared with just 4 percent in the Netherlands. Lower-income U.S. adults with chronic conditions were significantly more likely than those in the six other countries surveyed to report not going to the doctor when they're sick, not filling a prescription, or not getting recommended follow-up care because of costs. ...

[Link to report page and report. Interactive comparison.]

Is the Fed's Caution Justified?

Posted: 23 Jun 2010 01:08 AM PDT

Why doesn't the Fed take more aggressive action to help the economy?:

When Caution Carries Risk, by David Leonhardt, NY Times: Ben Bernanke believes that he and his Federal Reserve colleagues have... "...considerable power to expand aggregate demand and economic activity, even when its accustomed policy rate is at zero," as it is today. Mr. Bernanke also believes that the economy is growing "not fast enough"... He has predicted that unemployment will remain high for years and that "a lot of people are going to be under financial stress."
Yet he has been unwilling to use his power to lift growth and reduce joblessness from near a 27-year high... How can this be? How can Mr. Bernanke simultaneously think that growth is too slow and that it shouldn't be sped up? There is an answer — whether or not you find it persuasive. ...
Fed officials are ... not so much worried about inflation, the traditional source of Fed angst, as they are about upsetting the markets' confidence in Washington. Yes, investors remain happy to lend the United States money at rock-bottom interest rates, despite our budget deficit and all of the emergency Fed programs that will eventually need to be unwound. But no one knows how long that confidence will last.
In effect, Mr. Bernanke and his colleagues have decided to accept ... high unemployment ... for years to come — rather than risk an even worse situation — a market panic, a spike in long-term interest rates and yet higher unemployment. As the last few years have shown, market sentiment can change unexpectedly and sharply.
Still, you have to wonder if the Fed is paying enough attention to the risks of its own approach. ... The main historical lesson of financial crises is that governments are usually too passive. They respond in dribs and drabs, as Japan did in the 1990s and Europe did in 2008. Or they remove support too quickly, as Franklin Roosevelt did in 1937, and then the economy struggles to escape its funk.
Look around at the American economy today. Unemployment is 9.7 percent. Inflation ... has been zero. States are cutting their budgets. Congress is balking at spending the money to prevent state layoffs. The Fed is standing pat, too. Bond investors, fickle as they may be, show no signs of panicking.
Which seems to be the greater risk: too much action or too little? ... In the end, Mr. Bernanke's ... decision comes down to weighing the probabilities and the possible outcomes. Let's just be clear about the risks and costs that the Fed has chosen. It is ... willing to accept a jobless rate of almost 10 percent, with all of the attendant human costs.
"About half of the unemployed have been unemployed for six months or more, which means that they are losing skills, they're losing contact with the job market," a prominent economist said at a public dinner in Washington this month. "If things go on and they simply sit at home or work very irregularly, when the economy gets back to a more normal state, they're not going to be able to find good work."
That economist happened to be Ben Bernanke, one of the few people with the power to do something about the situation.

I wish I had a better sense why the Fed is so worried about a market panic when there is no evidence indicating that financial markets are near the tipping point. Is there actual evidence that has them worried -- if there is, how about sharing it? -- or is it just some general sense that we must be getting near the threshold?

I think the economy needs more help, and that fiscal policy is the best choice right now. But given the present inclination toward policy timidity, I'll take what I can get, and I wish that the Fed would be more aggressive. However it doesn't look at all likely that monetary or fiscal policy policymakers are going to make any significant moves toward further stimulus, we'll be lucky if they don't do the opposite before the economy is ready, so it appears that Bernanke's forecast that unemployment will remain high for years may come true. But unworried financial markets -- and those who benefit the most from them -- won't have to worry about worrying.

links for 2010-06-22

Posted: 22 Jun 2010 11:08 PM PDT

Brief Note

Posted: 22 Jun 2010 07:03 PM PDT

I will be on the Paul Mann Show (KHSU), Arcata, CA from 7:30-8:30 p.m. Tim Duy will be on the show as well.

Keynes and Social Democracy

Posted: 22 Jun 2010 03:33 PM PDT

Was Keynes in favor of big government? Do Keynesian policies necessarily lead to big government?:

Keynes and Social Democracy Today, by Robert Skidelsky, Commentary, Project Syndicate: For decades, Keynesianism was associated with social democratic big-government policies. But John Maynard Keynes's relationship with social democracy is complex. Although he was an architect of core components of social democratic policy – particularly its emphasis on maintaining full employment – he did not subscribe to other key social democratic objectives, such as public ownership or massive expansion of the welfare state. ...
Until The General Theory was published in 1936, social democrats did not know how to go about achieving full employment. Their policies were directed at depriving capitalists of the ownership of the means of production. How this was to produce full employment was never worked out. ...
Keynes demonstrated that the main cause of bouts of heavy and prolonged unemployment was ... fluctuating prospects of private investment in an uncertain world. Nearly all unemployment in a cyclical downturn was the result of the failure of investment demand.
Thus, the important thing was not to nationalize the capital stock, but to socialize investment. Industry could be safely left in private hands, provided the state guaranteed enough spending power in the economy to maintain a full-employment level of investment. This could be achieved by monetary and fiscal policy: low interest rates and large state investment programs.
In short, Keynes aimed to achieve a key social democratic objective without changing the ownership of industry. Nevertheless, he did think that redistribution would help secure full employment. A greater tendency to consume would "serve to increase at the same time the inducement to invest." ...
Moderate re-distribution was the more politically radical implication of Keynes's economic theory, but the measures outlined above were also the limits of state intervention for him. As long as "the state is able to determine the aggregate amount of resources devoted to augmenting the instruments [i.e., the capital base] and the basic reward to those who own them," there is no "obvious case" for further involvement. ...
Today, ideas about full employment and equality remain at the heart of social democracy. But the political struggle needs to be conducted along new battle lines. Whereas the front used to run between government and the owners of the means of production – the industrialists, the rentiers – now, it runs between governments and finance. ...
Being too big to fail simply means being too big. Keynes saw that "it is the financial markets' precariousness which creates no small part of our contemporary problem of securing sufficient investment." That rings truer today – more than 70 years later – than in his own day. ...
This, once again, calls for an activist government policy. ... Keynes's main contribution to social democracy, however, does not lie in the specifics of policy, but in his insistence that the state as ultimate protector of the public good has a duty to supplement and regulate market forces. If we need markets to stop the state from behaving badly, we need the state to stop markets from behaving badly. Nowadays, that means stopping financial markets from behaving badly. That means limiting their power, and their profits.

On Keynesian policy and big government, as I've explained many times (e.g.), there is no necessary connection between the size of government and Keynesian stabilization policy. Want the government to grow? Then cure recessions by increasing spending, and pay for it by raising taxes during the good times. After a few business cycles under this policy, government will be larger. This is the strategy that Democrats are accused of playing.

Want the opposite result? No problem, just use tax cuts to stimulate the economy during a recession, then pay for the cuts by reducing government spending during the subsequent boom. A few cycles later, and government is much smaller. This is the Republican starve the beast strategy that they fully admit to playing (I am abstracting, of course, from the political difficulties with either strategy).

Want to keep government the same size? Then simply use the same policy tool on both sides of the business cycle. Increase government spending in a recession, then reverse it in the good times, or, alternatively, cut taxes during the bad times, then raise them when things improve.

Summarizing: Using a different policy tools on each side of as recession changes the size of government, while using the same policy tool does not. But the main point is that, contrary to what you may have been led to believe, there is nothing inherent in Keynesian economics that connects stabilization policy to the size of government. There are, I think, political considerations that make it easier to cut taxes or raise spending when times are bad than to do the opposite when things improve (e.g. the argument that it will kill job growth!). But there is nothing in the underlying economics that says Keynesian policy necessarily leads to a change in the size of government.

"Time to Get Tough on Defense Spending"

Posted: 22 Jun 2010 11:07 AM PDT

Calling all budget hawks:

Time to get tough on defense spending, by Katrina vanden Heuvel, Commentary, Washington Post: With the fixation on shrinking the budget deficit, why is over $700 billion in annual defense spending almost always off-limits for discussion? The ... bipartisan Sustainable Defense Task Force's June 11 report recommending over $1 trillion in Pentagon cuts over the next 10 years is an indication that some sanity might arrive inside the Beltway. ... Some of the report's big-ticket items for savings over a 10-year period include $113 billion by reducing the U.S. nuclear arsenal; $200 billion by reducing U.S. military presence abroad and total uniformed military personnel; $138 billion by replacing unworkable, costly weapons systems with better alternatives; and $100 billion by cutting unnecessary command, support and infrastructure funding.
But, the report argues, "significant savings" may depend on rethinking "our national security ... goals..." It goes on to describe "a strategy of restraint -- one that reacts to danger rather than going out in search of it.... We need not stick around in foreign lands often. "Our military budget should be sized to defend us. For this end, we do not need to spend $700 billion a year... We can be safe for much less... Our principal enemy, al-Qaeda, has no army, no air force, and no navy . . . . The hunt for anti-American terrorists is mostly an intelligence and policing task."
A reorientation of security policy will not come easily in light of ... the hawkish Democratic foreign policy advisers, the neocons, the think-tank specialists, and pundits who ... crowd out alternative policies and arguments. Lobbyists for defense contractors with hundreds of billions of dollars at stake are also formidable opponents to change.
This ... is abetted by a mainstream media that offer little exposure to new security ideas... Indeed, few in the media have covered the task force's report. Add to that mix the oft-used argument -- especially potent in an economy with double-digit unemployment -- that defense cuts are a jobs killer, and the prospect for the broader debate Americans need and deserve are dim. Defense spending, however, is one of the worst ways to create jobs per dollar spent. It makes far more sense to cut an increasingly bloated Pentagon budget than to reduce much-needed investment in jobs, clean energy, transportation and support for state and local governments...

Making significant cuts in defense spending will ... require rethinking our role in the world, as the task force report suggests. Is America Globocop or responsible Republic? As Globocop, we have spent over $1 trillion on the wars in Afghanistan and Iraq alone. Isn't it time we had an honest and open debate on that question?

Seniors will trade chickens for health care and have their Social Security payments reduced before "hawkish Democratic foreign policy advisers, the neocons, the think-tank specialists, and pundits" will even consider rethinking our military strategy. Even then, they'd likely conclude that there are many other things that must be cut first.

"US Fixed Rate Mortgages ... are Weird, Stupid, and Dangerous"

Posted: 22 Jun 2010 09:10 AM PDT

More on 30 year fixed rate mortgages. Nick Rowe disagrees with Richard Green:

US fixed rate mortgages aren't fixed rate mortgages; they are weird, stupid, and dangerous, by Nick Rowe: Americans aren't really insular, like the English. But they live in a very big country, and that can have the same effect. If there's something peculiar about the US, Americans sometimes won't realise how peculiar it is. US mortgages are peculiar. "Weird" is a better term.
Patrick Lawler, as described by James Hagerty, has tried to explain to Americans that their 30-year fixed rate mortgages aren't 30-year fixed rate mortgages, and that they are weird, stupid, and dangerous. He failed, perhaps because he ran out of time.  Richard Green didn't get his point (H/T Mark Thoma). So I'm going to try.
First off, American 30-year fixed rate mortgages aren't 30-year and aren't fixed rate. The term is variable, and the rate is variable. That's because they are "open" mortgages, rather than "closed" mortgages. A 30-year 6% closed mortgage really does have a fixed term and a fixed rate. You know exactly how much you will be paying per month for the next 30 years. An open mortgage means you have the option to pay off or refinance that mortgage at any time over the next 30 years. And you will of course exercise that option at any time when the market interest rate for the remaining term falls below the rate you are currently paying. And exercise it again, if the market rate falls again. So the actual term is whatever you want it to be, and the interest rate you actually pay will vary, if market rates for the remaining term ever fall below the initial rate, as they almost certainly will (as I shall explain).
The option to renew sounds good. It's like a one-way bet. Heads, and interest rates fall, you exercise the option and win the bet. Tails, and interest rates rise, you stay locked in and the bet's off.
If the option were free, of course you would want an open mortgage. You can't lose. But, of course, there must be someone taking the other side of the bet. The lender won't sell you that option for free. You have to pay for it, and you pay for it in higher interest rates.
The longer the remaining term to maturity of the mortgage, the greater the chance that market rates will fall, the more that option is worth, and the higher the interest rate premium you would pay to buy that option. If you only have a couple of months left on the mortgage, interest rates won't move very far in that short time, so an open mortgage will have only a slightly higher interest rate than a closed mortgage. So even if interest rates on closed mortgages have no trend up or down as the remaining term to maturity shortens over time, interest rates on open mortgages will tend to trend down as the remaining term to maturity shortens. So the option to refinance will probably be exercised again and again.
I can understand the argument in favour of 30-year fixed rate mortgages, if they are truly 30-year and fixed rate. Which means a closed mortgage. A risk-averse person borrowing to buy a house knows exactly what he will be paying until the mortgage is paid off. But why would such a risk-averse person ever want to buy an option that interest rates will fall?
That's what's so weird about open mortgages. It's not just weird, it's stupid. It's like an insurance company bundling lottery tickets with its insurance. "Sorry, but you can't buy fire insurance unless you buy a lottery ticket at the same time". Actually, it's even stupider than that, because at least the lottery and fires are independent probabilities. The reason you didn't chose a variable rate mortgage is presumably because you wanted to insure against interest rate risk. So why buy a one-way bet on interest rate risk at the same time?? It's really stupid.
It's equally weird and stupid from the lender's point of view. Lenders aren't always risk-neutral; they care about interest rate risk and liquidity risk. If you are about to retire, and want a safe income for the next 30 years, or if you are a pension plan looking for an asset that provides a safe return to match your fixed payouts to retiring clients, a 30-year fixed rate mortgage looks like a good investment, if it were truly 30-year and truly fixed. Why would you ever at the same time want to write an option on interest rates? Why would you ever agree to write a one way bet that you lose if interest rates fall? Falling interest rates are the one thing that retirees and pension plans want to insure against, not bet that they won't happen! It's really stupid.
It's equally stupid from the liquidity risk point of view. The job of banks is to convert illiquid assets into liquid liabilities. It's not an easy job. But it's an even harder job if you don't know how liquid your assets are. You know in advance when a closed mortgage will be paid off, assuming no default. With an open mortgage you have no idea when it will be paid off, even assuming no default. Plus, banks borrow short and lend long. A fall in interest rates is good for banks, because the value of their long assets rises more than the value of their short liabilities. But a fall in interest rates is just the time when people will pay off their open mortgages, so banks get lots of liquidity when they least need it. It's really stupid.
Stupid, and also I think dangerous. But this is the bit I don't understand too well. As I understand it, one of the main reasons behind the securitisation of mortgages in the US was because of the interest rate risk and liquidity risk I have talked about above. Banks didn't want to hold risky open mortgages on their books. So they securitised them and sold them off. Then the default risk turned out to be higher than the buyers of those securities thought it would be. And because the mortgages were sliced and bundled, it was impossible in practice for the lender to renegotiate terms with a borrower in difficulties. (Plus, there's the other weird and stupid feature of US mortgages [edit: in many states] that they are non-recourse, so the borrower can just hand in the keys and walk away, but that's a whole other subject). And then everything went pear-shaped when house prices fell.
Understandably, Americans don't like foreigners interfering in their internal affairs. But dammit, the US is big, rich, powerful and important, not some piddling little country that doesn't really matter to the rest of the world. When the US financial system catches a cold, other countries will at least sneeze. US 30-year fixed rate mortgages are not 30-year and not fixed rate. They are are weird, stupid, and dangerous. They need to know that.

Arnold Kling:

30-Year Fixed-Rate Mortgage Debate, by Arnold Kling: Richard Green likes them. Nick Rowe does not. I can understand Green's antipathy toward the most common forms of adjustable-rate mortgages in the United States. However, I think that a mortgage that amortizes over 30 years, with an interest-rate adjustment every five years, and no teaser rate would be better than any of the common mortgages here. The five-year fixed term would suit many people, since many people move in less than ten years.
In any case, regardless of what Green or Rowe or I believe is the right mortgage, I think that the market ought to decide. It is my hypothesis that, in the absence of government support (including loading the tail risk onto taxpayers), the thirty-year fixed-rate mortgage with no penalty for either prepayment or default would be priced too expensively to attract borrowers.

I'm trying to meet a deadline, so I'll have leave comments to you.

No comments: