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August 7, 2012

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Posted: 22 Jul 2012 12:06 AM PDT
Posted: 21 Jul 2012 09:36 PM PDT
Charles Plosser, President of the Philadelphia Fed, explains the limitations of DSGE models, particularly models of the New Keynesian variety used for policy analysis. (He doesn't reject the DSGE methodology, and that will disappoint some, but he does raise good questions about this class of models. I believe the macroeconomics literature is going to fully explore these micro-founded, forward looking, optimizing models whether critics like it or not, so we may as well get on with it. The questions raised below help to clarify the direction the research should take, and in the end the models will either prove worthy, or be cast aside. In the meantime, I hope the macroeconomics profession will become more open to alternative ideas/models than it has been in the recent past, but I doubt the humility needed for that to happen has taken hold despite all the problems with these models that were exposed by the housing and financial crises.):
Macro Models and Monetary Policy Analysis, by Charles I. Plosser, President and Chief Executive Officer, Federal Reserve Bank of Philadelphia, Bundesbank — Federal Reserve Bank of Philadelphia Spring 2012 Research Conference, Eltville, Germany, May 25, 2012: Introduction ...After spending over 30 years in academia, I have served the last six years as a policymaker trying to apply what economics has taught me. Needless to say, I picked a challenging time to undertake such an endeavor. But I have learned that, despite the advances in our understanding of economics, a number of issues remain unresolved in the context of modern macro models and their use for policy analysis. In my remarks today, I will touch on some issues facing policymakers that I believe state-of-the-art macro models would do well to confront. Before continuing, I should note that I speak for myself and not the Federal Reserve System or my colleagues on the Federal Open Market Committee.
More than 40 years ago, the rational expectations revolution in macroeconomics helped to shape a consensus among economists that only unanticipated shifts in monetary policy can have real effects. According to this consensus, only monetary surprises affect the real economy in the short to medium run because consumers, workers, employers, and investors cannot respond quickly enough to offset the effect of these policy actions on consumption, the labor market, and investment.1
But over the years this consensus view on the transmission mechanism of monetary policy to the real economy has evolved. The current generation of macro models, referred to as New Keynesian DSGE models,2 rely on real and nominal frictions to transmit not only unanticipated but also systematic changes in monetary policy to the economy. Unexpected monetary shocks drive movements in output, consumption, investment, hours worked, and employment in DSGE models. However, in contrast to the earlier literature, it is the relevance of systematic movements in monetary policy that makes these models of so much interest for policy analysis. Systematic policy changes are represented in these models by Taylor-type rules, in which the policy interest rate responds to changes in inflation and a measure of real activity, such as output growth. Armed with forecasts of inflation and output growth, a central bank can assess the impact that different policy rate paths may have on the economy. The ability to do this type of policy analysis helps explain the widespread use of New Keynesian DSGE models at central banks around the world.
These modern macro models stress the importance of credibility and systematic policy, as well as forward-looking rational agents, in the determination of economic outcomes. In doing so, they offer guidance to policymakers about how to structure policies that will improve the policy framework and, therefore, economic performance. Nonetheless, I think there is room for improving the models and the advice they deliver on policy options. Before discussing several of these improvements, it is important to appreciate the "rules of the game" of the New Keynesian DSGE framework.
The New Keynesian Framework
New Keynesian DSGE models are the latest update to real business cycle, or RBC, theory. Given my own research in this area, it probably does not surprise many of you that I find the RBC paradigm a useful and valuable platform on which to build our macroeconomic models.3 One goal of real business cycle theory is to study the predictions of dynamic general equilibrium models, in which optimizing and forward-looking consumers, workers, employers, and investors are endowed with rational expectations. A shortcoming many see in the simple real business cycle model is its difficulty in internally generating persistent changes in output and employment from a transitory or temporary external shock to, say, productivity.4 The recognition of this problem has inspired variations on the simple model, of which the New Keynesian revival is an example.
The approach taken in these models is to incorporate a structure of real and nominal frictions into the real business cycle framework. These frictions are placed in DSGE models, in part, to make real economic activity respond to anticipated and unanticipated changes in monetary policy, at least, in the short to medium run. The real frictions that drive internal propagation of monetary policy often include habit formation in consumption, that is, how past consumption influences current consumption; the costs of capital used in production; and the resources expended by adding new investment to the existing stock of capital. New Keynesian DSGE models also include the costs faced by monopolistic firms and households when setting their prices and nominal wages. A nominal friction often assumed in Keynesian DSGE models is that firms and households have to wait a fixed interval of time before they can reset their prices and wages in a forward-looking, optimal manner. A rule of the game in these models is that the interactions of these nominal frictions with real frictions give rise to persistent monetary nonneutralities over the business cycle.5 It is this monetary transmission mechanism that makes the New Keynesian DSGE models attractive to central banks.
An assumption of these models is that the structure of these real and nominal frictions, which transmit changes in monetary policy to the real economy, well-approximate the true underlying rigidities of the actual economy and are not affected by changes in monetary policy. This assumption implies that the frictions faced by consumers, workers, employers, and investors cannot be eliminated at any price they might be willing to pay. Although the actors in actual economies probably recognize the incentives they have to innovate — think of the strategy to use continuous pricing on line for many goods and services — or to seek insurance to minimize the costs of the frictions, these actions and markets are ruled out by the "rules of the game" of New Keynesian DSGE modeling.
Another important rule of the game prescribes that monetary policy is represented by an interest rate or Taylor-type reaction function that policymakers are committed to follow and that everyone believes will, in fact, be followed. This ingredient of New Keynesian DSGE models most often commits a central bank to increase its policy rate when inflation or output rises above the target set by the central bank. And this commitment is assumed to be fully credible according to the rules of the game of New Keynesian DSGE models. Policy changes are then evaluated as deviations from the invariant policy rule to which policymakers are credibly committed.
The Lucas Critique Revisited with Respect to New Keynesian DSGE Models
In my view, the current rules of the game of New Keynesian DSGE models run afoul of the Lucas critique — a seminal work for my generation of macroeconomists and for each generation since.6 The Lucas critique teaches us that to do policy analysis correctly, we must understand the relationship between economic outcomes and the beliefs of economic agents about the policy regime. Equally important is the Lucas critique's warning against using models whose structure changes with the alternative government policies under consideration.7 Policy changes are almost never once and for all. So, many economists would argue that an economic model that maps states of the world to outcomes but that does not model how policy shifts across alternative regimes would fail the Lucas critique because it would not be policy invariant.8 Instead, economists could better judge the effects of competing policy options by building models that account for the way in which policymakers switch between alternative policy regimes as economic circumstances change.9
For example, I have always been uncomfortable with the New Keynesian model's assumption that wage and price setters have market power but, at the same time, are unable or unwilling to change prices in response to anticipated and systematic shifts in monetary policy. This suggests that the deep structure of nominal frictions in New Keynesian DSGE models should do more than measure the length of time that firms and households wait for a chance to reset their prices and wages.10 Moreover, it raises questions about the mechanism by which monetary policy shocks are transmitted to the real economy in these models.
I might also note here that the evidence from micro data on price behavior is not particularly consistent with the implications of the usual staggered price-setting assumptions in these models.11 When the real and nominal frictions of New Keynesian models do not reflect the incentives faced by economic actors in actual economies, these models violate the Lucas critique's policy invariance dictum, and thus, the policy advice these models offer must be interpreted with caution.
From a policy perspective, the assumption that a central bank can always and everywhere credibly commit to its policy rule is, I believe, also questionable. While it is desirable for policymakers to do so — and in practice, I seek ways to make policy more systematic and more credible — commitment is a luxury few central bankers ever actually have, and fewer still faithfully follow.
During the 1980s and 1990s, it was quite common to hear in workshops and seminars the criticism that a model didn't satisfy the Lucas critique. I thought this was often a cheap shot because almost no model satisfactorily dealt with the issue. And during a period when the policy regime was apparently fairly stable — which many argued it mostly was during those years — the failure to satisfy the Lucas critique seemed somewhat less troublesome. However, in my view, throughout the crisis of the last few years and its aftermath, the Lucas critique has become decidedly more relevant. Policy actions have become increasingly discretionary. Moreover, the financial crisis and associated policy responses have left many central banks operating with their policy rate near the zero lower bound; this means that they are no longer following a systematic rule, if they ever were. Given that central bankers are, in fact, acting in a discretionary manner, whether it is because they are at the zero bound or because they cannot or will not commit, how are we to interpret policy advice coming from models that assume full commitment to a systematic rule? I think this point is driven home by noting that a number of central banks have been openly discussing different regimes, from price-level targeting to nominal GDP targeting. In such an environment where policymakers actively debate alternative regimes, how confident can we be about the policy advice that follows from models in which that is never contemplated?
Some Directions for Furthering the Research Agenda
While I have been pointing out some limitations of DSGE models, I would like to end my remarks with six suggestions I believe would be fruitful for the research agenda.
First, I believe we should work to give the real and nominal frictions that underpin the monetary propagation mechanism of New Keynesian DSGE models deeper and more empirically supported structural foundations. There is already much work being done on this in the areas of search models applied to labor markets and studies of the behavior of prices at the firm level. Many of you at this conference have made significant contributions to this literature.
Second, on the policy dimension, the impact of the zero lower bound on central bank policy rates remains, as a central banker once said, a conundrum. The zero lower bound introduces nonlinearity into the analysis of monetary policy that macroeconomists and policymakers still do not fully understand. New Keynesian models have made some progress in solving this problem,12 but a complete understanding of the zero bound conundrum involves recasting a New Keynesian DSGE model to show how it can provide an economically meaningful story of the set of shocks, financial markets, and frictions that explain the financial crisis, the resulting recession, and the weak recovery that has followed. This might be asking a lot, but a good challenge usually produces extraordinary research.
Third, we must make progress in our analysis of credibility and commitment. The New Keynesian framework mostly assumes that policymakers are fully credible in their commitment to a specified policy rule. If that is not the case in practice, how do policymakers assess the policy advice these models deliver? Policy at the zero lower bound is a leading example of this issue. According to the New Keynesian model, zero lower bound policies rely on policymakers guiding the public's expectations of when an initial interest rate increase will occur in the future. If the credibility of this forward guidance is questioned, evaluation of the zero lower bound policy has to account for the public's beliefs that commitment to this policy is incomplete. I have found that policymakers like to presume that their policy actions are completely credible and then engage in decisions accordingly. Yet if that presumption is wrong, those policies will not have the desired or predicted outcomes. Is there a way to design and estimate policy responses in such a world? Can reputational models be adapted for this purpose?
Fourth, and related, macroeconomists need to consider how to integrate the institutional design of central banks into our macroeconomic models. Different designs permit different degrees of discretion for a central bank. For example, responsibility for setting monetary policy is often delegated by an elected legislature to an independent central bank. However, the mandates given to central banks differ across countries. The Fed is often said to have a dual mandate; some banks have a hierarchal mandate; and others have a single mandate. Yet economists endow their New Keynesian DSGE models with strikingly uniform Taylor-type rules, always assuming complete credibility. Policy analysis might be improved by considering the institutional design of central banks and how it relates to the ability to commit and the specification of the Taylor-type rules that go into New Keynesian models. Central banks with different levels of discretion will respond differently to the same set of shocks.
Let me offer a slightly different take on this issue. Policymakers are not Ramsey social planners. They are individuals who respond to incentives like every other actor in the economy. Those incentives are often shaped by the nature of the institutions in which they operate. Yet the models we use often ignore both the institutional environment and the rational behavior of policymakers. The models often ask policymakers to undertake actions that run counter to the incentives they face. How should economists then think about the policy advice their models offer and the outcomes they should expect? How should we think about the design of our institutions? This is not an unexplored arena, but if we are to take the policy guidance from our models seriously, we must think harder about such issues in the context of our models.
This leads to my fifth suggestion. Monetary theory has given a great deal of thought to rules and credibility in the design of monetary policy, but the recent crisis suggests that we need to think more about the design of lender-of-last-resort policy and the institutional mechanism for its execution. Whether to act as the lender of last resort is discretionary, but does it have to be so? Are there ways to make it more systematic ex ante? If so, how?
My sixth and final thought concerns moral hazard, which is addressed in only a handful of models. Moral hazard looms large when one thinks about lender-of-last-resort activities. But it is also a factor when monetary policy uses discretion to deviate from its policy rule. If the central bank has credibility that it will return to the rule once it has deviated, this may not be much of a problem. On the other hand, a central bank with less credibility, or no credibility, may run the risk of inducing excessive risk-taking. An example of this might be the so-called "Greenspan put," in which the markets perceived that when asset prices fell, the Fed would respond by reducing interest rates. Do monetary policy actions that appear to react to the stock market induce moral hazard and excessive risk-taking? Does having lender-of-last-resort powers influence the central bank's monetary policy decisions, especially at moments when it is not clear whether the economy is in the midst of a financial crisis? Does the combination of lender-of-last-resort responsibilities with discretionary monetary policy create moral hazard perils for a central bank, encouraging it to take riskier actions? I do not know the answer to these questions, but addressing them and the other challenges I have mentioned with New Keynesian DSGE models should prove useful for evaluating the merits of different institutional designs for central banks.
The financial crisis and recession have raised new challenges for policymakers and researchers. The degree to which policy actions, for better or worse, have become increasingly discretionary should give us pause as we try to evaluate policy choices in the context of the workhorse New Keynesian framework, especially given its assumption of credibly committed policymakers. Indeed, the Lucas critique would seem to take on new relevance in this post-crisis world. Central banks need to ask if discretionary policies can create incentives that fundamentally change the actions and expectations of consumers, workers, firms, and investors. Characterizing policy in this way also raises issues of whether the institutional design of central banks matters for evaluating monetary policy. I hope my comments today encourage you, as well as the wider community of macroeconomists, to pursue these research questions that are relevant to our efforts to improve our policy choices.
References and Footnotes
An, Sungbae, and Frank Schorfheide. "Bayesian Analysis of DSGE Models," Econometric Reviews, 26 (2007), pp. 113-172.
Alvarez, Luis J., and Pablo Burriel. "Is a Calvo Price Setting Model Consistent with Individual Price Data?" B.E. Journal of Macroeconomics, 10:1, 13 (2010).
Braun, R. Anton, Lena M. Körber, and Yuichiro Waki. "Some Unpleasant Properties of Log-linearized Solutions When the Nominal Rate Is Zero," Federal Reserve Bank of Atlanta Working Paper 12-5 (2012).
Carlstrom, Charles T., Timothy S. Fuerst, and Matthias Paustian. "How Inflationary Is an Extended Period of Low Interest Rates?," Federal Reserve Bank of Cleveland Working Paper 12-2 (2012).
Christiano, Lawrence J., Martin Eichenbaum, and Charles I. Evans. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, 113(February 2005), pp. 1-45.
Cogley, Timothy, and James M. Nason. "Impulse Dynamics and Propagation Mechanisms in a Real Business Cycle Model," Economics Letters, 43(December 1993), pp. 77-81.
Cogley, Timothy, and James M. Nason. "Output Dynamics in Real-Business-Cycle Models," American Economic Review, 85(June 1995), pp. 492-511.
Cogley, Timothy, and Thomas J. Sargent. "Drifts and Volatilities: Monetary Policies and Outcomes in the Post-WWII US," Review of Economic Dynamics, 8(2005), pp. 262-302.
Cooley, Thomas F., Stephen F. LeRoy, and Neil Raymon. "Econometric Policy Evaluation: Note," American Economic Review, 74 (June 1984), pp. 467-70.
Fernández-Villaverde, Jesus, Pablo A. Guerrón-Quintana, and Juan F. Rubio-Ramírez. "The New Macroeconometrics: A Bayesian Approach," in A. O'Hagan and A.M. West eds., The Oxford Handbook of Applied Bayesian Analysis. Oxford: Oxford University Press, 2011.
Fernández-Villaverde, Jesus, Grey Gordon, Pablo A. Guerrón-Quintana, and Juan F. Rubio-Ramírez. "Non-linear Adventures at the Zero Lower Bound," Federal Reserve Bank of Philadelphia Working Paper 12-10 (2012).
King, Robert G., and Charles I. Plosser. "Real Business Cycles and the Test of the Adelmans," Journal of Monetary Economics, 33(April 1994), pp. 405-38.
King, Robert G., Charles I. Plosser, and Sergio T. Rebelo. "Production, Growth, and Business Cycles: I. The Basic Neoclassical Model," Journal of Monetary Economics, 33(May 1988a), pp. 195-232.
King, Robert G., Charles I. Plosser, and Sergio T. Rebelo. "Production, Growth, and Business Cycles: II. The Basic Neoclassical Model," Journal of Monetary Economics, 33 (May 1988b), pp. 309-42.
Leeper, Eric M., and Troy Davig. "Generalizing the Taylor Principle," American Economic Review, 97(June 2006), pp. 607-35.
Leeper, Eric M., and Tao Zha. "Modest Policy Interventions," Journal of Monetary Economics, 50 (2003), pp. 1673-1700.
Long, John B., and Charles I. Plosser. "Real Business Cycles," Journal of Political Economy, 91(February 1983), pp. 39-69.
Lucas, Robert E., Jr. "Econometric Policy Evaluation: A Critique," in K. Brunner and A. Meltzer, eds. Carnegie-Rochester Conference Series on Public Policy 1, 1976, pp. 19-46.
Maćkowiak, Bartosz, and Frank Smets. "Implications of Microeconomic Price Data for Macroeconomic Models," in J. Fuhrer, Y. Kodrzycki, J. Little, and G. Olivei, eds., Understanding Inflation and the Implications for Monetary Policy: A Phillips Curve Perspective. Boston: MIT Press, October 2009, pp. 291-333.
Rotemberg, Julio, J., and Michael Woodford. "Real-Business-Cycle Models and Forecastable Movements in Output, Hours, and Consumption," American Economic Review, 86 (June 1995), pp. 71-89.
Sargent, Thomas J. "The Ends of Four Big Inflations," in Hall, R.E., ed., Inflation: Causes and Effects. Chicago: University of Chicago Press, 1983.
Sargent, Thomas J. "Vector Autoregressions, Expectations, and Advice," American Economic Review, 74 (May 1984), pp. 408-15.
Sargent, Thomas J. "Expectations and the Non-neutrality of Lucas," Journal of Monetary Economics, 37 (1996), pp. 535-48.
Sargent, Thomas J. The Conquest of American Inflation). Princeton, NJ: Princeton University Press, 1999.
Sims, Christopher A. "Policy Analysis with Econometric Models," Brookings Papers on Economic Activity, 1 (1982), pp. 107-52.
Sims, Christopher A. "A Rational Expectations Framework for Short Run Policy Analysis," in W.A. Barnett and K.J. Singleton, eds., New Approaches to Monetary Economics: Proceedings of the Second International Symposium in Economic Theory and Econometrics, Cambridge: Cambridge University Press, 1987.
Sims, Christopher A., and Tao Zha. "Were There Regime Switches in U.S. Monetary Policy?," American Economic Review, 96 (2006), pp. 54-81.
Smets, Frank, and Rafael Wouters. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, 97 (June 2007), pp. 586-606.
1 See Sargent (1996).
2 DSGE stands for dynamic stochastic general equilibrium.
3 See Long and Plosser (1983) and King, Plosser, and Rebelo (1988a, b).
4 See King and Plosser (1994), Rotemberg and Woodford (1995), and Cogley and Nason (1993, 1995).
5 See Christiano, Eichenbaum, and Evans (2005) and Smets and Wouters (2007).
6 See Lucas (1976).
7 The Lucas critique does not apply to the forecasting problem. An aim of forecasters is to develop models immune from systematic forecast errors instead of models whose structure is immutable in the face of shifting policy regimes.
8 See Cooley, LeRoy, and Raymon (1984), Sargent (1984), Sims (1982, 1987), and Leeper and Zha (2003).
9 See Leeper and Zha (2003), Cogley and Sargent (2005), Sims and Zha (2006), and Leeper and Davig (2006).
10Economic history is replete with examples of systematic monetary policy interventions creating incentives for consumers, workers, employers, and investors to alter their decision rules and actions, including the German hyperinflation of the early 1920s, the Great Inflation of the 1970s, and the Volcker disinflation; see Sargent (1983, 1999).
11 See Maćkowiak and Smets (2009) and Alvarez and Burriel (2010).
12 See Braun, Körber, and Waki (2012), Carlstrom, Fuerst, and Paustian (2012), and Fernández-Villaverde, Gordon, Guerrón-Quintana, and Rubio-Ramírez (2012).
Posted: 21 Jul 2012 04:23 PM PDT
Another quick one while I wait for a connection at the SF airport --- Robert Stavins explains the independence property for cap-and-trade systems. This property "allows equity and efficiency concerns to be separated. In particular, a government can set an overall cap of pollutant emissions (a pollution reduction goal) and leave it up to a legislature to construct a constituency in support of the program by allocating shares of the allowances to various interests, such as sectors and geographic regions, without affecting either the environmental performance of the system or its aggregate social costs":
Two Notable Events Prompt Examination of an Important Property of Cap-and-Trade, by Robert Stavins: ...In our just-published article, "The Effect of Allowance Allocations on Cap-and-Trade System Performance," [Robert] Hahn and I ... focused on an idea that is closely related to the Coase theorem, namely, that the market equilibrium in a cap-and-trade system will be cost-effective and independent of the initial allocation of tradable rights (typically referred to as permits or allowances). That is, the overall cost of achieving a given emission reduction will be minimized, and the final allocation of permits will be independent of the initial allocation, under certain conditions (conditional upon the permits being allocated freely, i.e., not auctioned). We call this the independence property. It is closely related to a core principle of general equilibrium theory (Arrow and Debreu 1954), namely, that when markets are complete, outcomes remain efficient even after lump-sum transfers among agents.
The Practical Political Importance of the Independence Property
We were interested in the independence property because of its great political importance.  The reason why this property is of such great relevance to the practical development of public policy is that it allows equity and efficiency concerns to be separated. In particular, a government can set an overall cap of pollutant emissions (a pollution reduction goal) and leave it up to a legislature to construct a constituency in support of the program by allocating shares of the allowances to various interests, such as sectors and geographic regions, without affecting either the environmental performance of the system or its aggregate social costs.  Indeed, this property is a key reason why cap-and-trade systems have been employed and have evolved as the preferred instrument in a variety of environmental policy settings.
In Theory, Does the Property Always Hold?
Because of the importance of this property, we examined the conditions under which it is more or less likely to hold — both in theory and in practice.  In short, we found that in theory, a number of factors can lead to the independence property being violated. These are particular types of transaction costs in cap-and-trade markets; significant market power in the allowance market; uncertainty regarding the future price of allowances; conditional allowance allocations, such as output-based updating-allocation mechanisms; non-cost-minimizing behavior by firms; and specific kinds of regulatory treatment of participants in a cap-and-trade market.
In Reality, Has the Property Held?
Of course, the fact that these factors can lead to the violation of the independence property does not mean that in practice they do so in quantitatively significant ways.  Therefore, Hahn and I also carried out an empirical assessment of the independence property in past and current cap-and-trade systems: lead trading; chlorofluorocarbons (CFCs) under the Montreal Protocol; the sulfur dioxide (SO2) allowance trading program; the Regional Clean Air Incentives Market (RECLAIM) in Southern California; eastern nitrogen oxides (NOX) markets; the European Union Emission Trading Scheme (EU ETS); and Article 17 of the Kyoto Protocol.
I encourage you to read our article, but, a quick summary of our assessment is that we found modest support for the independence property in the seven cases we examined (but also recognized that it would surely be useful to have more empirical research in this realm).
Politicians Have Had it Right
That the independence property appears to be broadly validated provides support for the efficacy of past political judgments regarding constituency building through legislatures' allowance allocations in cap-and-trade systems. Governments have repeatedly set the overall emissions cap and then left it up to the political process to allocate the available number of allowances among sources to build support for an initiative without reducing the system's environmental performance or driving up its cost.
This success with environmental cap-and-trade systems should be contrasted with many other public policy proposals for which the normal course of events is that the political bargaining that is necessary to develop support reduces the effectiveness of the policy or drives up its overall cost.  So, the independence property of well-designed and implemented cap-and-trade systems is hardly something to be taken for granted.  It is of real political importance and remarkable social value.
Posted: 21 Jul 2012 04:05 PM PDT
Christina Romer says, in reference to health care costs, that "serious debate over further cost-savings measures may be a long way off" because "Republicans seem more interested in just limiting the government's share of health care expenditures than in slowing overall spending":
Only the First Step in Containing Health Costs, by Christina Romer, Commentary, NY Times: Here's a frightening thought: Despite the recent Supreme Court decision upholding the Affordable Care Act, serious work on more health care legislation is still needed.
Don't get me wrong: the new law is a great step forward. It is expected to expand health insurance coverage to more than 30 million uninsured Americans without increasing the deficit, and it makes an important start on reining in the rapid growth of health care costs. ...
Just how much the law will slow spending growth is highly uncertain. The Congressional Budget Office, whose views on this issue fall squarely between the optimists' and the pessimists', estimates that it's likely to reduce the budget deficit by about $1 trillion in its second decade — when the cost-containment measures have had time to pay dividends.
Big as those savings are, they will still leave a huge share of national output dedicated to health care and the federal budget far in the red. ...
Sadly, serious debate over further cost-savings measures may be a long way off. Some Republicans seem more interested in just limiting the government's share of health care expenditures than in slowing overall spending. And some Democrats seem more interested in just preserving existing government programs than in making the entire health care system more efficient.
For the sake of the nation's fiscal health, and the health and economic security of American families, it's time to embrace cost containment in health care as the next great legislative challenge.
[The article details the cost-saving measures in the health care legislation, and discusses further steps that could be taken, but shies away from any suggestion that we adopt the types of universal care health care systems that have worked to contain costs in other countries.]
Posted: 21 Jul 2012 06:03 AM PDT
About to travel home and only have time for quick posts (I've been gone for over four weeks, except for four days in between trips, and am anxious to get there):
Dicing With The Climate, by Paul Krugman: Via Michael Roberts, a new paper (pdf) by James Hansen and associates that helps clear up a couple of points about climate change.
The first is the relationship between extreme weather events and climate change. The normal, cautious thing is to say that there's no way to attribute any particular event, like a heat wave in the Ukraine, to global warming — and news media have basically been bullied by this argument into rarely mentioning climate change even when reporting on extreme weather. But Hansen et al make an important point: this argument is much weaker when we're talking about really extreme events, like temperatures more than 3 standard deviations above historical norms. Such events would almost never happen if there weren't a rising trend in global temperatures; so when they become quite common, as they have, it's fair to call them evidence of warming.
The second point is how we know that climate change is a bad thing — a question I sometimes get asked. The questioners wonder why the fact that, say, more of Canada becomes agriculturally viable doesn't offset the damage in places that get too hot.
My first-pass answer is that we have a global economy that is adapted to historically normal climate — not just in terms of what is grown where, but in terms of where we locate our cities. In the long run, after a couple of centuries' worth of urban development and infrastructure has been drowned by rising sea levels and/or made useless because previously habitable regions need to be abandoned, we might be able to reconstruct an equally productive economy; but in the long run …
But Hansen et al make a stronger point: life as we know it evolved to fit the historical range of planetary temperatures. In the long run it might be able to adapt to a changed world — but now we're talking millions of years.
In the long run, we are all extinct.
See also: The Climate Change Tipping Point.
Posted: 21 Jul 2012 05:49 AM PDT
I thought some of these agencies performed much better in the past, e.g. during the Clinton administration. In any case, what seems to be missing from this account is the role of the Republican attack on government (beyond the push for privatization discussed below):
Regulatory thrombosis, by Daniel Little: Charles Perrow is a leading researcher on the sociology of organizations, and he is a singular expert on accidents and system failures. Several of his books are classics in their field... So it is very striking to find that Perrow is highly skeptical about the ability of governmental organizations in the United States to protect the public from large failures and disasters of various kinds -- hurricanes, floods, chemical plant fires, software failures, terrorism. His assessment of organizations such as the Federal Emergency Management Agency, the Department of Homeland Security, or the Nuclear Regulatory Commission is dismal. ...

The level of organizational ineptitude that he documents in the performance of these agencies is staggering... And the disarray that he documents in these organizations is genuinely frightening. ...

What this all suggests is that the U.S. government and our political culture do a particularly bad job of creating organizational intelligence in response to crucial national challenges. By this I mean an effective group of bureaus with a clear mission, committed executive leadership, and consistent communication and collaboration among agencies and a demonstrated ability to formulate and carry out rational plans in addressing identified risks. ... And the US government's ability to provide this kind of intelligent risk abatement seems particularly weak.

Perrow doesn't endorse the general view that organizations can never succeed in accomplishing the functions we assign to them -- hospitals, police departments, even labor unions. Instead, there seem to be particular reasons why large regulatory agencies in the United States have proven particularly inept, in his assessment. The most faulty organizations are those that are designed to regulate risky activities and those that are charged to create prudent long-term plans for the future that seem particularly suspect, in his account. So what are those reasons for failure in these kinds of organizations?

One major part of his assessment focuses on the role that economic and political power plays in deforming the operations of major organizations to serve the interests of the powerful. Regulatory agencies are "captured" by the powerful industries they are supposed to oversee, whether through influence on the executive branch or through merciless lobbying of the legislative branch. Energy companies pressure the Congress and the NRC to privatize security at nuclear power plants -- with what would otherwise be comical results when it comes to testing the resulting level of security at numerous plants. Private security forces are given advance notice of the time and nature of the simulated attack -- and even so half the attacks are successful.

Another major source of dysfunction that Perrow identifies in the case of the Department of Homeland Security is the workings of Congressional politics..., the funds available through Homeland Security become a major prize for lobbyists, corporations, and other interested parties -- with resulting congressional pressure on DHS strategies and priorities.

Another culprit in this story of failure is the conservative penchant for leaving everything to private enterprise. As Michael Brown put the point during his tenure as director of FEMA, "The general idea—that the business of government is not to provide services, but to make sure that they are provided—seems self-evident to me" (kl 1867). ... Activities like nuclear power generation, chemical plants, air travel, drug safety, and residential development in hurricane or forest fire zones are all too risky to be left to private initiative and self-regulation. We need strong, well-resourced, well-staffed, and independent regulatory systems for these activities, and increasingly our scorecard on each of these dimensions is in the failing range.

Overall it appears that Perrow believes that agencies like DHS and FEMA would function better if they were under clear authority of the executive branch rather than Congressional oversight and direction. Presidential authority would not guarantee success -- witness George W. Bush's hapless management of the first iteration of Homeland Security within the White House -- but the odds are better. With a President with a clearly stated and implemented priority for effective management of the risk of terrorism, the planning and coordination needed would have a greater likelihood of success.

It often sounds as though Perrow is faulting these organizations for defects that are inherent in all large organizations. But it seems more fair to say that his analysis does not identify a general feature of organizations that leads to failure in these cases, but rather a situational fact having to do with the power of business to resist regulation and the susceptibility of Congress and the President to political pressures that hamstring effective regulatory organizations. Perrow does refer to specific organizational hazards -- bad executive leadership, faltering morale, inability to collaborate across agencies, excessively hierarchical architecture -- but the heart of his argument lies elsewhere. The key set of problems spiral back to the inordinate power that corporations have in the United States, and the distortions they create in Congress and the executive branch. ... It is specifics of the US political system rather than general defects of large organizations per se that lead to the bad outcomes that Perrow identifies. There are strong democracies that do a much better job of regulating risky industries and planning for disasters than we do -- for example, France and Germany. ...
There isn't much public concern about these risks, and legislators are therefore free to ignore them as well. ... So where will the political demand for strong regulation come from? Will we need to wait for the bad news we've managed by good fortune to have avoided up to this point?

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