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August 7, 2012

Latest Posts from Economist's View

Latest Posts from Economist's View

Posted: 29 Jun 2012 12:33 AM PDT
The Supreme Court's decision on health care reform does not mark the end of the battle to improve health care in the US:
The Real Winners, by Paul Krugman, Commentary, NY Times: So the Supreme Court — defying many expectations — upheld the Affordable Care Act, a k a Obamacare. There will, no doubt, be many headlines declaring this a big victory for President Obama, which it is. But the real winners are ordinary Americans...
How many people are we talking about? You might say 30 million... But ... add in every American who currently works for a company that offers good health insurance but is at risk of losing that job...; every American who would have found health insurance unaffordable but will now receive crucial financial help; every American with a pre-existing condition who would have been flatly denied coverage in many states.
In short,... the winners from that Supreme Court decision are your friends, your relatives, the people you work with — and, very likely, you. ...
But what about the cost? Put it this way: the budget office's estimate of the cost over the next decade ... is about only a third of the cost of the tax cuts, overwhelmingly favoring the wealthy, that Mitt Romney is proposing over the same period. ...
It's not perfect, by a long shot — it is, after all, originally a Republican plan... And there will be a long struggle to make it better... But it's still a big step toward a better — and by that I mean morally better — society.
Which brings us to the nature of the people who tried to kill health reform — and who will, of course, continue their efforts...
At one level, the most striking thing about the campaign against reform was its dishonesty. ... And, rest assured, all the old lies and probably a bunch of new ones will be rolled out again...
But what was and is really striking about the anti-reformers is their cruelty. It would be one thing if, at any point, they had offered any hint of an alternative proposal to help Americans with pre-existing conditions, Americans who simply can't afford expensive individual insurance, Americans who lose coverage along with their jobs. But it has long been obvious that the opposition's goal is simply to kill reform, never mind the human consequences. ...
The point is that this isn't over — not on health care, not on the broader shape of American society. The cruelty and ruthlessness that made this court decision such a nail-biter aren't going away.
But, for now, let's celebrate. This was a big day, a victory for due process, decency and the American people.
Posted: 29 Jun 2012 12:24 AM PDT
Arnold Kling is tired of being sneered at by "high-status academic economists":
The Curious Ethos of the Academic/Appointee, by Brian Caplan: High-status academic economists often look down on economists who engage in blogging and punditry. Their view: If you can't "definitively prove" your claims, you should remain silent. 

At the same time, though, high-status academic economists often receive top political appointments. Part of their job is to stand behind the administration's party line. They don't merely make claims they can't definitively prove; to keep their positions, appointees have to make claims they don't even believe! Yet high-status academic economists are proud to accept these jobs - and their colleagues admire them for doing so. ...
Noah Smith has something to say about "definitive proof":
"Science" without falsification is no science, by Noah Smith: Simon Wren-Lewis notes that although plenty of new macroeconomics has been added in response to the recent crisis/depression, nothing has been thrown out...
Four years after a huge deflationary shock with no apparent shock to technology, asset-pricing papers and labor search papers and international finance papers and even some business-cycle papers continue to use models in which business cycles are driven by technology shocks. No theory seems to have been thrown out. And these are young economists writing these papers, so it's not a generational effect. ...
If smart people don't agree, it may because they are waiting for new evidence or because they don't understand each other's math. But if enough time passes and people are still having the same arguments they had a hundred years ago - as is exactly the case in macro today - then we have to conclude that very little is being accomplished in the field. The creation of new theories does not represent scientific progress until it is matched by the rejection of failed alternative theories.

The root problem here is that macroeconomics seems to have no commonly agreed-upon criteria for falsification of hypotheses. Time-series data - in other words, watching history go by and trying to pick out recurring patterns - does not seem to be persuasive enough to kill any existing theory. Nobody seems to believe in cross-country regressions. And there are basically no macro experiments. ...

So as things stand, macro is mostly a "science" without falsification. In other words, it is barely a science at all. Microeconomists know this. The educated public knows this. And that is why the prestige of the macro field is falling. The solution is for macroeconomists to A) admit their ignorance more often (see this Mankiw article and this Cochrane article for good examples of how to do this), and B) search for better ways to falsify macro theories in a convincing way.
I have a slightly different take on this. From a column last summer:
What Caused the Financial Crisis? Don't Ask An Economist, by Mark Thoma: What caused the financial crisis that is still reverberating through the global economy? Last week's 4th Nobel Laureate Meeting in Lindau, Germany – a meeting that brings Nobel laureates in economics together with several hundred young economists from all over the world – illustrates how little agreement there is on the answer to this important question.
Surprisingly, the financial crisis did not receive much attention at the conference. Many of the sessions on macroeconomics and finance didn't mention it at all, and when it was finally discussed, the reasons cited for the financial meltdown were all over the map.
It was the banks, the Fed, too much regulation, too little regulation, Fannie and Freddie, moral hazard from too-big-to-fail banks, bad and intentionally misleading accounting, irrational exuberance, faulty models, and the ratings agencies. In addition, factors I view as important contributors to the crisis, such as the conditions that allowed troublesome runs on the shadow banking system after regulators let Lehman fail, were hardly mentioned.
Macroeconomic models have not fared well in recent years – the models didn't predict the financial crisis and gave little guidance to policymakers, and I was anxious to hear the laureates discuss what macroeconomists need to do to fix them. So I found the lack of consensus on what caused the crisis distressing. If the very best economists in the profession cannot come to anything close to agreement about why the crisis happened almost four years after the recession began, how can we possibly address the problems? ...
How can some of the best economists in the profession come to such different conclusions? A big part of the problem is that macroeconomists have not settled on a single model of the economy, and the various models often deliver very different, contradictory advice on how to solve economic problems. The basic problem is that economics is not an experimental science. We use historical data rather than experimental data, and it's possible to construct more than one model that explains the historical data equally well. Time and more data may allow us to settle on a particular model someday – as new data arrives it may favor one model over the other – but as long as this problem is present, macroeconomists will continue to hold opposing views and give conflicting advice.
This problem is not just of concern to macroeconomists; it has contributed to the dysfunction we are seeing in Washington as well. When Republicans need to find support for policies such as deregulation, they can enlist prominent economists – Nobel laureates perhaps – to back them up. Similarly, when Democrats need support for proposals to increase regulation, they can also count noted economists in their camp. If economists were largely unified, it would be harder for differences in Congress to persist, but unfortunately such unanimity is not generally present.
This divide in the profession also increases the possibility that the public will be sold false or misleading ideas intended to promote an ideological or political agenda.  If the experts disagree, how is the public supposed to know what to believe? They often don't have the expertise to analyze policy initiatives on their own, so they rely on experts to help them. But when the experts disagree at such a fundamental level, the public can no longer trust what it hears, and that leaves it vulnerable to people peddling all sorts of crazy ideas.
When the recession began, I had high hopes that it would help us to sort between competing macroeconomic models. As noted above, it's difficult to choose one model over another because the models do equally well at explaining the past. But this recession is so unlike any event for which there is existing data that it pushes the models into new territory that tests their explanatory power (macroeconomic data does not exist prior to 1947 in most cases, so it does not include the Great Depression). But, disappointingly, even though I believe the data point clearly toward models that emphasize the demand side rather than the supply side as the source of our problems, the crisis has not propelled us toward a particular class of models as would be expected in a data-driven, scientific discipline. Instead, the two sides have dug in their heels and the differences – many of which have been aired in public – have become larger and more contentious than ever.
Finally, on the usefulness of microeconomic models for macroeconomists -- what is known as microfoundations -- see here: The Macroeconomic Foundations of Microeconomics.
Posted: 29 Jun 2012 12:06 AM PDT
Posted: 28 Jun 2012 11:26 AM PDT
Joe Gagnon has a guest post at Econbrowser:
Guest Contribution: The Fed Shirks Its Duties, by Joseph E. Gagnon: On June 20, 2012, the Federal Reserve System's Federal Open Market Committee extinguished the last shred of doubt as to whether it intends to achieve its mandated objectives. Despite a substantial markdown of an already inadequate forecast, the Fed did not take any actions that would make it possible to achieve either of its objectives over the foreseeable future. The action that was announced--additional purchases of longer-term Treasuries worth $267 billion--is estimated to reduce the 10-year Treasury yield by no more than 5 to 10 basis points. That is an amount that is lost in the daily fluctuations of the Treasury market and not enough, even in the Fed's own models, to have an appreciable effect on the economy.
For more than two years, the Fed has dragged its feet and resisted the obvious need for more aggressive action. At this point it is not clear that the Fed has the tools it needs to get the best possible outcome without help from fiscal policy. Nevertheless, the Fed has considerable firepower remaining. It should aggressively push down mortgage interest rates and state clearly that it would welcome an inflation rate temporarily above its 2 percent target in order to make faster progress on its employment objective. These measures, discussed below, would substantially improve the economic outlook, even if there is disagreement about whether they are sufficient by themselves. ...
Posted: 28 Jun 2012 07:58 AM PDT
Here's my response to the Supreme Court's ruling on health care reform (at
Health care decision: Why the mandate, or its equivalent, was critical: The Supreme Court ruled today that the health care mandate is a tax, and hence constitutional. A majority of the Justices ruled that the penalty that must be paid if someone refuses to buy insurance is a form of tax that Congress can impose under its taxing power. That is, of course, good news for supporters of health care reform since a mandate, or something like it, is needed to stop health care markets from breaking down due to what economists call an "adverse selection" problem.
The intent of the mandate is to overcome this adverse selection problem. Adverse selection, a type of market failure, plagues insurance markets of all types, and health care is no exception. The problem is that providers of health insurance do not have as much information about the health of the people buying the insurance as they have about themselves. The health insurance companies try to overcome this informational disadvantage through check-ups prior to granting coverage, health histories, and other means, but even so individuals are better informed about their current health and their health histories than the insurance companies.
As I explained in more detail here, , this can cause health care markets to break down: Here's the core of the argument:
"If insurance is offered in this market at somewhere near the average cost of care for the group, people will use the superior information they have about their own health status to determine if this is a good deal for them. All of the people expecting to pay less for health care than the price the companies are asking for the insurance will drop out of the market (the young and healthy for the most part; all that is actually needed is that some people are willing to take a chance and go without insurance). With the relatively healthy people dropping out of the insurance pool, the price of insurance must go up, and when it does, more people drop out, the price goes up again, and this repeats until the market breaks down and nobody (or hardly anybody) can purchase insurance."
In order for these markets to work, health insurance must be distributed over a wide variety of people so that the average cost of care will be affordable, and to stop the markets from breaking down. One way to ensure that the pool is broad-based is to require that anyone who might need health care -- i.e. everyone -- purchase health insurance, i.e. through a mandate.
A mandate is not the only way to ensure that a broad swathe of the population purchases health insurance in a common pool. For example, subsidies can also encourage many people to enroll. If enough people enroll because of subsidies, it will function much like a mandate. But a mandate along with fines to enforce it is the most effective way to ensure that the pool is large enough, and includes enough people who do not expect significant health care expenditures, to keep the cost of insurance low.

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