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March 31, 2012

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Latest Posts from Economist's View


Posted: 31 Mar 2012 12:33 AM PDT
30economist-reinhardt2-blog480[1]
More here.
Posted: 31 Mar 2012 12:24 AM PDT
Dean Baker:
Discrepancies Between National Income and GDP, by Dean Baker: Binyamin Appelbaum has a NYT blogpost suggesting that the economy may be growing more rapidly than the GDP imply based on the fact that national income has grown more rapidly in recent quarters. ...
Appelbaum's ... points to a new paper that suggests that we should be taking an average of GDP growth and income growth as our actual measure of economic growth. If we go this route, then it implies that the recovery has been somewhat stronger (and the recession steeper) than the standard measure of GDP growth.
There is an alternative story. David Rosnick and I analyzed the movement of the statistical discrepancy and found a strong inverse correlation between the size of the statistical discrepancy and capital gains in the stock market and housing. This meant, for example there was a large negative statistical discrepancy in 1999 and 2000 at the peak of the stock bubble (i.e. income exceeded output) which disappeared after the bubble burst.
The same thing happened in the peak years of the housing bubble, 2004-2007. In that case also, the large gap between the income side measure and the output side measure disappeared after the bubble burst.
The logic is simple. Some amount of capital gains will get misclassified in the national accounts as ordinary income. (Capital gains should not count as income for GDP purposes.) While this may always be true, when we have more capital gains, the amount of capital gains misclassified in this way will be greater.
This story fits the data pretty well. If our analysis is correct, then we are better off sticking with our old friend GDP as the best measure of economic growth.
Posted: 31 Mar 2012 12:06 AM PDT
Posted: 30 Mar 2012 02:11 PM PDT
I've been trying to get the Federal Reserve banks to engage more with the public through blogs, with economics bloggers in particular. We'll see how that goes, but it's encouraging to see that they are starting to converse and debate among themselves:
Are unemployed construction workers really doing better?, Pedro Silos and Lei Feng, macroblog: Two New York Fed economists, Richard Crump and Ayşegül Şahin, writing in Liberty Street Economics, have shared some interesting findings regarding developments in the labor market during the ongoing recovery. Their conclusion is that unemployed construction workers, according to several indicators, seem to be doing better than workers who lost jobs in other sectors. ...
These facts, according to the authors, provide support to the hypothesis that problems in the labor market cannot be blamed on the degree of mismatch between displaced construction workers and job vacancies in other sectors.
In this post, we present an alternative view of the fate of unemployed construction workers...
Hope to see more of this.
Posted: 30 Mar 2012 10:42 AM PDT
Tim Duy:
Slow and Steady, by Tim Duy: Looking at the spending component of this morning's Personal Income and Outlays report for February, it still pays to focus on the path of spending rather than to become terribly hopeful or despondent about the twists and turns along that path:
Pcefeb12D
The 0.5% gain in February compensated for some earlier weakness in the numbers, while the overall trend holds - spending is rising about 0.18 percent per month compared to 0.24 percent prior to the recession. Spending was supported by a drop in the saving rate, down to 3.7% from 4.3% the previous month. This likely reflects borrowing for new auto purchases - note the stronger trend in durable goods spending:
Pcefeb12F
The acceleration in auto sales is clearly supporting this trend since the middle of last year. Apparently, what's good for Detroit is still good for America. The importance of autos in sustaining spending begs the question of what will occur when pent up demand is satisfied? Obviously, auto sales will stop contributing positively to growth as sales level off at some point in what I would expect to be the not to distant future. This is especially the case considering the anemic pace of personal income growth:
Pcefeb12G
Hopefully, income growth will accelerate as the labor market improves. Otherwise, households will need to take on additional debt or running down saving rates to hold the current trend in place.
Bottom Line: Consumer spending continues to rise, although the sustainability is still called into question because of the reliance of pent-up demand and falling saving rates to support underlying trends. That said, for all the ups and downs in the monthly data, the trend has generally been upward at a pace that is disappointing compared to pre-recession trends. Slow and steady has been the best bet.
Posted: 30 Mar 2012 07:29 AM PDT
Tim Duy:
Inflation: Still Nothing to See Here, By Tim Duy: The Februrary Personal Income and Outlays report came out this morning, and with it a fresh read on the Federal Reserve's preferred inflation measure, the PCE price index. On a year-over-year basis, headline inflation is trending down to the 2% target, while core is settling in just below that target.  
Pcefeb12A
As a reminder, the Fed targets headline over the longer run, but watches core as a signal to where headline is headed.  Headline is trending down to core, as expected. The Fed was right to dismiss last year's energy-induced headline increase as a temporary phenomenon. Is there any near term trends to be concerned about? The three-month core trend edged down a notch to just above 2%:
Pcefeb12B
Still less than the rise experienced in the first part of 2011.  What about the path of prices? Still tracking along a trend below that of prior to the recession:
Pcefeb12C
Opportunistic disinflation at work.
Bottom Line:  Inflation remains contained - by itself, price trends provide no reason for the Fed to turn hawkish. Moreover, there is nothing here to stop Federal Reserve Chairman Ben Bernanke from easing policy should the US recovery falter.

March 30, 2012

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Latest Posts from Economist's View


Posted: 30 Mar 2012 12:42 AM PDT
Friday, March 30, the Kauffman Foundation is hosting the fourth annual Economics Bloggers Forum in Kansas City, MO. Check back here at growthology.org for a live stream of the event starting around 8:30 AM. There will be presentations from some of your favorite bloggers. An agenda follows below. [agenda]
Posted: 30 Mar 2012 12:33 AM PDT
The Supreme Court is undermining the public's confidence in its ability to stand above politics:
Broccoli and Bad Faith, by Paul Krugman, Commentary, NY Times: Nobody knows what the Supreme Court will decide with regard to the Affordable Care Act. But ... it seems quite possible that the court will strike down the "mandate" — the requirement that individuals purchase health insurance — and maybe the whole law. Removing the mandate would make the law much less workable, while striking down the whole thing would mean denying health coverage to 30 million or more Americans.
Given the stakes, one might have expected all the court's members to be very careful... In reality, however,... antireform justices appeared to embrace any argument, no matter how flimsy, that they could use to kill reform.
Let's start with the already famous exchange in which Justice Antonin Scalia compared the purchase of health insurance to the purchase of broccoli... That comparison horrified health care experts ... because health insurance is nothing like broccoli.
Why? When people choose not to buy broccoli, they don't make broccoli unavailable to those who want it. But when people don't buy health insurance until they get sick — which is what happens in the absence of a mandate — the resulting worsening of the risk pool makes insurance more expensive, and often unaffordable, for those who remain. As a result, unregulated health insurance basically doesn't work, and never has.
There are at least two ways to address this reality... One is to tax everyone ... and use the money raised to provide health coverage. That's what Medicare and Medicaid do. The other is to require that everyone buy insurance, while aiding those for whom this is a financial hardship.
Are these fundamentally different approaches? ... Here's what Charles Fried — who was Ronald Reagan's solicitor general — said..: "I've never understood why regulating by making people go buy something is somehow more intrusive than regulating by making them pay taxes and then giving it to them." ... (By the way, another pet conservative project — private accounts to replace Social Security — relies on, yes, mandatory contributions from individuals.)
So has there been a real change in legal thinking here? Mr. Fried thinks that it's just politics — and other discussions in the hearings strongly support that perception. ...
As I said, we don't know how this will go. But it's hard not to feel a sense of foreboding — and to worry that the nation's already badly damaged faith in the Supreme Court's ability to stand above politics is about to take another severe hit.
Posted: 30 Mar 2012 12:30 AM PDT
Via the NY Fed's Liberty Street Economics blog:
Skills Mismatch, Construction Workers, and the Labor Market, by Richard Crump and Ayşegül Şahin: Recessions and recoveries typically have been times of substantial reallocation in the economy and the labor market, and the current cycle does not appear to be an exception. The speed and smoothness of reallocation depend in part on the structure of the labor market, particularly the degree of mismatch between the characteristics of available workers and newly available jobs. Such mismatches could occur because of differences in skills between workers and jobs (skills mismatch) or because of differences in the location of the available jobs and available workers (geographic mismatch). In this post, we focus on skills mismatch to assess the extent to which the slow pace of the labor market recovery from the Great Recession can be attributed to such problems. If skills mismatch is much more severe than usual, we would expect the unemployment rate to remain higher for longer and the workers subject to such mismatch to have worse labor market outcomes.

We concentrate particularly on construction workers, who many have thought are prone to a high degree of skills mismatch because of the housing boom and bust. Contrary to this view, we find that (1) general measures of mismatch, after rising sharply in the recession, are now near their pre-recession level as they continue to display a pronounced cyclical pattern; and (2) construction workers are not experiencing relatively worse labor market outcomes. ...[continue reading]...
These two points support the argument I've been making that many of the structural factors that people are seeing are likely to be temporary and hence should not constrain monetary policy (i.e. to the extent that natural rates have changed, much of the change is temporary).
Posted: 30 Mar 2012 12:24 AM PDT
My daughter Amy runs the communications for Nathan Fletcher, a candidate for mayor of San Diego (formally, she's the Deputy Campaign Manager, Communications -- she played a similar role in Carly Fiorina's senate campaign). Today, Fletcher announced that he is leaving the GOP.
David Brooks wrote about it here.
Here's the video of the announcement:
We need two rational, competitive political parties. If this, and similar action from other moderates can help to bring Republicans back to sanity, that would be good for all of us.
[Let me add something: One of the reasons I started blogging just over seven years ago -- just after Bush was reelected --

was that, in my view, the Democratic party's voice had been taken over by the far left and that was hurting the party with the more moderate voters it needed to win elections. Whenever I'd hear the people representing Democrats in the media talk about economic issues, I often wanted to cringe. They weren't helping. Worse, the people representing the party in the media were very poor at countering the market fundamentalism that the other side used so effectively. So I wanted to try to add one voice, however small -- and it was as small as they get at that point -- to the debate. Free markets are an easy story to tell. Whatever the issue, the answer is the same:

get government out of the way and all will be well with the world. Market failure -- the main reason I advocated government intervention (I even had a series of posts on "Market Failure in Everything") -- is a harder sell and I wanted to help. I figured if everyone waited for someone else to do these things they wouldn't get done so one day, on a bit of a whim, I started a blog.
It turns out that maybe I'm not as moderate as I thought, and some of the people I thought were nuts might have had a few things to say worth listening to. But that's another story. What I'm wondering is if the Republicans lose the presidential election, will the more reality based voices within the Republican party begin to exert themselves far more than they have to date? I certainly hope so.]

Posted: 30 Mar 2012 12:06 AM PDT
Posted: 29 Mar 2012 11:43 AM PDT
Flight delay, so one more -- Brad DeLong:
The Shadow of Depression, by Brad DeLong, Commentary, Project Syndicate: Four times in the past century, a large chunk of the industrial world has fallen into deep and long depressions characterized by persistent high unemployment: the United States in the 1930's, industrialized Western Europe in the 1930's, Western Europe again in the 1980's, and Japan in the 1990's. Two of these downturns – Western Europe in the 1980's and Japan in the 1990's – cast a long and dark shadow on future economic performance.
In both cases, if either Europe or Japan returned – or, indeed, ever returns – to something like the pre-downturn trend of economic growth, it took (or will take) decades. In a third case, Europe at the end of the 1930's, we do not know what would have happened had Europe not become a battlefield following Nazi Germany's invasion of Poland.
In only one instance was the long-run growth trend left undisturbed: US production and employment after World War II were not significantly affected by the macroeconomic impact of the Great Depression. Of course, in the absence of mobilization for WWII, it is possible and even likely that the Great Depression would have cast a shadow on post-1940 US economic growth. That is certainly how things looked, with high levels of structural unemployment and a below-trend capital stock, at the end of the 1930's, before mobilization and the European and Pacific wars began in earnest. ...[continue reading]...

March 29, 2012

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Latest Posts from Economist's View


Posted: 29 Mar 2012 01:08 AM PDT
Travel day coming up, so a series of quick hits. Let's start with this. Long-term unemployment has permanent effects:
The Enduring Consequences of Unemployment, by Binyamin Appelbaum, Commentary, NY Times: Our economic malaise has spurred a wave of research about the impact of unemployment on individuals and the broader economy. The findings are disheartening. The consequences are both devastating and enduring.
People who lose jobs, even if they eventually find new ones, suffer lasting damage to their earnings potential, their health, and the prospects of their children. And the longer it takes to find a new job, the deeper the damage appears to be. ...
Maybe we should do something.
Posted: 29 Mar 2012 12:42 AM PDT
Not gonna happen:
Healthcare Jujitsu, by Robert Reich: Not surprisingly,... Supreme Court argument over the so-called "individual mandate" requiring everyone to buy health insurance revolved around epistemological niceties...
Behind this judicial foreplay is the brute political fact that if the Court decides the individual mandate is an unconstitutional extension of federal authority, the entire law starts unraveling.
But with a bit of political jujitsu, the President could turn any such defeat into a victory for a single-payer healthcare system – Medicare for all. Here's how.
The dilemma at the heart of the new law is that it continues to depend on private health insurers, who have to make a profit... Yet the only way private insurers can afford to cover everyone with pre-existing health problems, as the new law requires, is to have every American buy health insurance – including young and healthier people who are unlikely to rack up large healthcare costs.
This dilemma is the product of political compromise. You'll remember the Administration couldn't get the votes for a single-payer system such as Medicare for all. It hardly tried. Not a single Republican would even agree to a bill giving Americans the option of buying into it. ...
Republicans have mastered the art of political jujitsu. Their strategy has been to demonize government and seek to privatize everything that might otherwise be a public program financed by tax dollars (see Paul Ryan's plan for turning Medicare into vouchers). Then they go to court and argue that any mandatory purchase is unconstitutional because it exceeds the government's authority.
Obama and the Democrats should do the reverse. If the Supreme Court strikes down the individual mandate in the new health law, private insurers will swarm Capitol Hill demanding that the law be amended to remove the requirement that they cover people with pre-existing conditions.
When this happens, Obama and the Democrats should say they're willing to remove that requirement – but only if Medicare is available to all, financed by payroll taxes. If they did this the public will be behind them — as will the Supreme Court.
There other ways to forge a "policital compromise" besides this. I support a single payer solution, but I can't see how we get there from here without big changes in the political environment.
Posted: 29 Mar 2012 12:33 AM PDT
According to this, for now and into the foreseeable future, "jobless recoveries will be the norm":
Disentangling the channels of the 2007-2009 recession, by Jim Hamilton: Harvard Professor James Stock and Princeton Professor Mark Watson presented a very interesting paper last week at the Spring 2012 Conference for the Brookings Papers on Economic Activity. Their paper studied similarities and differences between the 2007-2009 recession and other U.S. business cycles.
Stock and Watson characterized the comovements over 1959:Q1-2007:Q3 of 198 different U.S. macroeconomic variables...
Their first question was whether the observed U.S. macroeconomic data continued to track those factors in the same way during the most recent recession and recovery as they had historically. Stock and Watson's answer was, for the most part, yes. ...
But if the Great Recession can be interpreted as normal responses to abnormally large shocks, what about the anemic recovery? Stock and Watson attribute this to a slowdown in trend growth rates... Again quoting from Stock and Watson's paper:
The explanation for this declining trend growth rate which we find the most compelling rests on changes in underlying demographic factors, primarily the plateau over the past decade in the female labor force participation rate (after rising sharply during the 1970s through 1990s) and the aging of the U.S. workforce. Because the net change in mean productivity growth over this period is small, this slower trend growth in employment corresponds directly to slowdown in trend GDP growth. These demographic changes imply continued low or even declining trend growth rates in employment, which in turn imply that future recessions will be deeper, and will have slower recoveries, than historically has been the case. In other words, jobless recoveries will be the norm.
So why are we talking about reducing rather than enhancing social support for the jobless?
Posted: 29 Mar 2012 12:24 AM PDT
This is a bit on the wonkish side, but since I've talked a lot about the difficulties that heterogeneous agents pose in macroeconomics, particularly for aggregation, I thought I should note this review of models with heterogeneous agents:
Macroeconomics with Heterogeneity: A Practical Guide, by Fatih Guvenen, Economic Quarterly, FRB Richmond: This article reviews macroeconomic models with heterogeneous households. A key question for the relevance of these models concerns the degree to which markets are complete. This is because the existence of complete markets imposes restrictions on (i) how much heterogeneity matters for aggregate phenomena and (ii) the types of cross-sectional distributions that can be obtained. The degree of market incompleteness, in turn, depends on two factors: (i) the richness of insurance opportunities provided by the economic environment and (ii) the nature and magnitude of idiosyncratic risks to be insured. First, I review a broad collection of empirical evidence—from econometric tests of "full insurance," to quantitative and empirical analyses of the permanent income ("self-insurance") model that examine how it fits the facts about life-cycle allocations, to studies that try to directly measure where economies place between these two benchmarks ("partial insurance"). The empirical evidence I survey reveals significant uncertainty in the profession regarding the magnitudes of idiosyncratic risks, as well as whether or not these risks have increased since the 1970s. An important difficulty stems from the fact that inequality often arises from a mixture of idiosyncratic risk and fixed (or predictable) heterogeneity, making the two challenging to disentangle. Second, I discuss applications of incomplete markets models to trends in wealth, consumption, and earnings inequality both over the life cycle and over time, where this challenge is evident. Third, I discuss "approximate" aggregation—the finding that some incomplete markets models generate aggregate implications very similar to representative-agent models. What approximate aggregation does and does not imply is illustrated through several examples. Finally, I discuss some computational issues relevant for solving and calibrating such models and I provide a simple yet fully parallelizable global optimization algorithm that can be used to calibrate heterogeneous agent models. View Full Article.
Posted: 29 Mar 2012 12:06 AM PDT
Posted: 28 Mar 2012 10:02 AM PDT
I want to return to the argument about the need for an individual mandate. A post earlier today talks about adverse selection problems in the health insurance market. These problems are driven by the fact that individuals know more about their health status than insurance companies. But there is another reason for insurance mandate as well, moral hazard (and avoiding externalities).
We are, I hope, a compassionate society, one that would not let an individual suffer severe health problems, perhaps even death, if treatment is available. In an emergency, we generally give the care that is needed and ask questions later.
This allows relatively healthy people to go without health insurance secure in the knowledge that if they get hit with a truly catastrophic and expensive to treat illness, society will take care of them. If we could make people pay the full cost of this wager that they won't need insurance, i.e. if society could turn it's back and say you made your choice, now live (or die) with it, a mandate wouldn't be needed. ut we can't (and I wouldn't want to live in a societ that could).
When it comes to Social Security we recognize that people can game the system in this way -- contribute nothing during their lives and rely on the fact that society will provide for them when they are old -- and we force them to contribute. That way, they build up their own retirement funds with a long series of small contributions and, at least in part, pay their own way. They have no choice but to do so. If this didn't happen, other members of society would have to pay this portion of the bill.
I don't see anything wrong with asking people to pay the expected value of their health care -- a mandate to get insurance to cover the catastrophic things that society would cover in any case -- to avoid this type of gaming of the system. Yes, it's true that many healthy people will pay, remain healthy, and seem to get nothing. But that's the wrong way to look at it. They have insurance whether they pay for it or not. Society will not let them die of a standard, treatable illness so insurance services are present. In fact, it's the knowledge that society is providing these services that motivates many people to take a chance and go without. So people are getting something, insurance services, in any case and those services are present whether or not you get sick. Just like fire insurance, the presence of insurance coverage has value to households even if they never use it. All society is doing with a mandate is asking people to pay for the health insurance services they receive rather than relying on others to pay the bill for them.
Posted: 28 Mar 2012 09:20 AM PDT
From the Dallas Fed:
All in the Family: The Close Connection Between Nominal-GDP Targeting and the Taylor Rule, by Evan F. Koenig: Abstract: The classic Taylor rule for adjusting the stance of monetary policy is formally a special case of nominal- gross-domestic-product (GDP) targeting. Suitably implemented, moreover, nominal-GDP targeting satisfies the definition of a "flexible inflation targeting" policy rule. However, nominal-GDP targeting would require more discipline from policymakers than some analysts think is realistic.
I've been asking this for some time now, but I viewed nominal GDP targeting as a special case of the Taylor rule (when the coefficients are set just right), but it's the other way around -- the Taylor rule is the special case:
Note that the Taylor rule is a special case of nominal-GDP targeting... The chief difference between the two policy approaches is that under nominal-GDP targeting, policymakers look at a longer history of price changes than they do under the Taylor rule when deciding on the appropriate policy setting. Secondarily, the estimate of potential output that enters the nominal-GDP-targeting rule is less sensitive to short-term supply shocks than is the estimate that enters the Taylor rule.
The last point about temporary supply shocks is important as I tried to emphasize here (the post talks about why policymakers should not respond to temporary supply shocks under a Taylor rule, I didn't mention nominal GDP targeting as a solution).
Finally:
One might think that nominal-GDP targeting's ability to work around the zero-bound constraint would appeal to monetary policy doves and that its tighter control of inflation expectations would appeal to monetary policy hawks. Why hasn't nominal-GDP targeting received more widespread support? The main issue is credibility.[14] Some analysts are concerned that future FOMCs may fail to follow through on promises of accommodation, while others fear that future FOMCs may back away from nominal-GDP targeting should it call for tighter policy than the current approach. To the extent that the public shares the former concern, an announced shift to nominal-GDP targeting would do little to accelerate the economy's recovery. To the extent that the public shares the latter concern, an announced shift to nominal-GDP targeting might be seen as a relaxation of the Federal Reserve's commitment to price stability rather than an enhancement to that commitment.
NomGDP
Posted: 28 Mar 2012 08:44 AM PDT
This is a post I did awhile back for CBS (Nov. 2009):
COMMENTARY There's a similarity between used cars and health care. And once you understand the economics of used cars, you may look at health care in a new light.
Let's start with used cars. "The Market for Lemons" by George Akerlof is a famous paper in economics demonstrating how markets can break down when buyers and sellers are differentially informed. For example, suppose that there are 1,001 used cars worth from $0 to $1,000, i.e. one car is worth $0, one is worth $1, the next is worth $2, and so on up to a car valued at $1,000. Assume that the car owners can assess the value of the cars they are selling accurately, but buyers can't discern any difference in quality from examining the cars. That is, sellers are better informed than buyers about the car's quality.
In such a market, a buyer would expect to receive a car of average quality, and the price would settle at $500 (the exact price doesn't matter, all that's required is that the market sets some price below $1,000). But at a price of $500, all the sellers with cars valued from $501 to $1,000 would withdraw their cars from the market since the price of $500 is less than their cars are worth.

At this point, the only cars left on the market are valued between $0 and $500, and with buyers once again expecting to receive a car of average quality, the price would fall to $250. At this price, all the people with cars valued from $251 to $500 would take their cars off the market, and the cars left on the market would now be valued between $0 and $250.

The process repeats itself, the price drops to $125, more cars drop out, and this continues until there is just one car on the market selling for $0. That is, the market for used cars breaks down.

The technical term for this is an "adverse selection" problem, and there are many ways to solve it. The buyer can hire a mechanic to determine the value of a car before the purchase; the sellers can offer insurance against the car breaking down; the sellers might have a desire to maintain a reputation for quality (dealers selling cars that fall apart shortly after purchase will lose their reputations and go out of business), and so forth.

What does this have to do with health care? The adverse selection problem is one of the reasons we need an individual mandate for health care insurance (i.e. a requirement that everyone must purchase insurance that is part of the proposed health care reform package).

To explain how the adverse selection problem arises in these markets, note that people purchasing health insurance generally have better information about their health status than the people selling the insurance. 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 the result is just like in the used car example above: The market breaks down and nobody (or hardly anybody) can purchase insurance.

But since we do not want people financially ruined or unable to get care when they are struck with a costly health problem, we need health insurance, and that insurance must be distributed over a wide variety of people so that the average cost of care will be affordable. 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. (For a further discussion of these issues, see here.) In the past, the broad-based pools needed to make insurance work were obtained through a large tax break to induce firms to provide insurance to their employees, combined with a requirement that if the insurance is offered, it must be available to all employees. But the steady erosion in the employer-based system is one of the motivations for reforming the health care system.

Without an individual mandate, the health insurance market is likely to break down due to the adverse selection problem, but such a mandate can place a considerable burden on some households. Thus, while the individual mandate is necessary to make these markets work, it is also necessary to provide subsides to lower and middle class households who wouldn't be able to purchase the insurance without such help.
Posted: 28 Mar 2012 08:27 AM PDT
One of the editors asked for comments on a new survey of business executives about what is holding back the economy:
 Demand, not Supply is Holding Back the Recovery
No surprise that, as with other surverys like this, the most common factor cited is lack of demand.

March 28, 2012

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Posted: 28 Mar 2012 12:06 AM PDT
Posted: 27 Mar 2012 11:03 AM PDT
Standing up to market power can work if you have significant market power of your own:
JK Rowling blows up the eBookstore business, by Joshua Gans: ...Today, JK Rowling finally joined the eBook party on her own Pottermore website. ... I want to concentrate on what all this means for eBook publishing.
First, some facts. (i) You can only purchase Harry Potter books from Pottermore. Go to Amazon ... and you are directed to the Pottermore site. You then go through a process of linking your Amazon account but then can download the book straight on to your device.
(ii) You purchase once and you can get the book on any device. And I mean any. Kindle, iPad (through iBooks), Google Play (whatever that is) and Sony who appear to have provided the technical grunt to get this working. There is no other major book that is available this way. Actually, probably no other paid book available this way.
(iii) What about DRM? That is hard to parse. Here is what I know. I ... downloaded ... direct to my computer (in ePub format) and it appears that with that version I can put it on as many readers as I like. The site says I am limited to 8 downloads but once I have that ePub version there does not seem to be any limits.
So what does this mean? The whole concern over eBooks was potential device lock-in. We are worried about being tied to Amazon or Apple or what have you forever. This same thing is preventing entry or inroads by others such as Sony. The Rowling initiative breaks through all of that. It is device independent for the first time in this industry. One can only imagine the negotiations that occurred that allowed that to be possible — particularly with Amazon. Also, I can't imagine that Amazon or Apple are getting their 30% cuts in this deal but let's wait and see on that.
The point is that once one author ... can prove all this possible, there is the potential for floodgates to be opened. It will be interesting to see where this leads.

March 27, 2012

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Posted: 27 Mar 2012 12:33 AM PDT
DeLong and Summers, the debate over potential output, and whether Bernanke has the courage, foresight, and persuasiveness to follow Greenspan's lead:
The Economy's Great Fall: Are the Losses Permanent?
I wrote this before Bernanke's speech on the labor market on Monday. He says, echoing the topic of the column:
Is the current high level of long-term unemployment primarily the result of cyclical factors, such as insufficient aggregate demand, or of structural changes, such as a worsening mismatch between workers' skills and employers' requirements? ... I will argue today that ... the continued weakness in aggregate demand is likely the predominant factor.
So maybe the structural impediment, inflation hawk types at the Fed will be vanquished after all. We shall see. [See Tim Duy's comments on as well.]
Posted: 27 Mar 2012 12:24 AM PDT
Tim Duy:
Bernanke, Bullard, and QE3, by Tim Duy: This morning Federal Reserve Chairman Ben Bernanke gave a speech that apparently was identified as proof that QE3 is still in the cards. He argues that while labor markets have shown improvement in recent months, conditions are far from normal. Moreover, he sees the problem of long-term unemployment as largely structural, and delivers what many believed to be the money quote:
I will argue today that, while both cyclical and structural forces have doubtless contributed to the increase in long-term unemployment, the continued weakness in aggregate demand is likely the predominant factor. Consequently, the Federal Reserve's accommodative monetary policies, by providing support for demand and for the recovery, should help, over time, to reduce long-term unemployment as well.
In my opinion, to interpret this as a call for additional quantitative easing is a bit of a stretch. It sounds like simply a confirmation that Bernanke believes the current policy stance is appropriate and that the existence of long-term unemployment should not be viewed as a reason to believe that we are closing in on a resource constraint that would necessitate a tightening of the policy stance. I was drawn to a much more nuanced section:
However, to the extent that the decline in the unemployment rate since last summer has brought unemployment back more into line with the level of aggregate demand, then further significant improvements in unemployment will likely require faster economic growth than we experienced during the past year. It will be especially important to evaluate incoming information to assess whether the recovery is picking up as improvements in the labor market feed through to consumer and business confidence; or, conversely, whether the headwinds that have impeded the recovery to date continue to restrain the pace at which the labor market and economic activity normalize.
In essence, Bernanke suggests that the recent rapid improvements in unemployment reflect largely a reversal of out-sized deterioration experienced during the recession. As such, we should not expect a slower pace of improvement given current growth forecasts. Under such conditions, I believe, Bernanke would push for another round of QE - although it stills begs the question of why he doesn't push for more now given the existing forecasts. But he hasn't, so we can only infer that he thinks the costs of additional easing outweigh the benefits.
He leaves open the possibility, however, that labor markets will continue to improve at the recent pace, in which I think QE3 is off the table. And that is where Federal Reserve President James Bullard steps in to the picture. He said pretty much the same thing in a CNBC interview:
"I think QE3 would require the economy to deteriorate somewhat from where it is right now," Bullard said. "The basic story on the U.S. economy is that we've had good news over the last six months or so, especially compared to the recession scenario that was being painted in the August-September time period of last year."
That said, this is somewhat softer language than he used in a speech last week:
But now, with the Committee on pause, it may be a good time to take stock of whether we may be at a turning point. Many of the further policy actions the Committee might consider at this juncture would have effects extending out for several years. As the U.S. economy continues to rebound and repair, those policy actions may create an overcommitment to ultra-easy monetary policy. The ultra-easy policy has been appropriate until now, but it will not always be appropriate.
The FOMC has often been criticized historically for overstaying policy stances that might have made sense at one juncture but are no longer appropriate as macroeconomic conditions change. This occurs in part because of the lags in the effects of policy, the difficulty in interpreting real-time data, much of which is subsequently revised, and the sheer uncertainty of macroeconomic developments. With numerous monetary policy actions still on the table, and others still affecting the economy with a lag, it may be especially difficult to remove policy accommodation at the appropriate pace and at the appropriate time. One may want to approach such a situation with caution.
This seems to suggest he is in fact entertaining the possibility that the turning point for policy will occur sooner than expected. My view is that the crux of any disagreement between Bullard and Bernanke is the timing of any tightening. Both would push for additional easing should conditions deteriorate. But Bernanke is willing to leave existing policy in place for well into the future, whereas Bullard is looking forward to pulling the trigger on tighter policy sooner than later.
This, by the way, is a debate Bernanke would win in the absence of clear indications that tightening is necessary.
Incredibly, in his CNBC interview, Bullard strays into the world of Japanese monetary policy:
"I think one of the biggest mistakes is continue to throw us much more in the way of monetary injections into the economy and with that, you get a much higher increase in commodity prices and potentially produce less global consumption across the world, which slows economic activity down," Bullard said. "I'm afraid that's the real danger just now - that we've maintained too loose of a policy right across the global economy and what results is inflation and reduction in real spending power."
I get this, I really do. But I have come to the conclusion that the Federal Reserve should not consider the reaction functions of other central banks when setting policy. Simply put, this is not the Fed's problem. To the extent that other nations import the Fed's monetary policy, they do so by choice. Bullard continues:
Bullard says he would like to see the Federal Reserve resume a "more normal monetary policy as soon as possible" because it has detrimental effects on the economy.
"It (the policy) punishes savers, for instance, in the economy, it does send a pessimistic signal about the economy and I think that can hurt investment prospects in the U.S.," Bullard said. "But we need to provide the right amount of support for the recovery as we do that, and we need to keep an eye on inflation."
Concerns that like the commodity price issue seem to mimic those of Bank of Japan Governor Masaaki Shirakawa. And we all know what about the wisdom of BoJ monetary policy.
Bottom Line: I do not think Bernanke's speech is a signal that QE3 is guaranteed. But it is a signal that QE3 is definitely not off the table. It is entirely data dependent. The current flow of data does not support additional action. I don't think it would take much of a deterioration to prompt additional action, so if you have a bearish view of the US economy, expect QE3. But if you have a bullish view, don't expect a rapid policy reversal. Bernanke isn't ready to go there.
Posted: 27 Mar 2012 12:06 AM PDT
Posted: 26 Mar 2012 12:50 PM PDT
The skeptics have decided that evidence isn't really evidence -- it's a grand conspiracy of thousands to fool the public -- so no amount of evidence will matter. Nevertheless, this is worth noting:
Global Warming Close to Becoming Irreversible, by Nina Chestney, Scientific American: The world is close to reaching tipping points that will make it irreversibly hotter ... scientists warned on Monday. ... As emissions grow,... the world is close to reaching thresholds beyond which the effects on the global climate will be irreversible ...
For ice sheets - huge refrigerators that slow down the warming of the planet - the tipping point has probably already been passed...
Most climate estimates agree the Amazon rainforest will get drier as the planet warms. Mass tree deaths caused by drought have raised fears it is on the verge of a tipping point, when it will stop absorbing emissions and add to them instead. Around 1.6 billion tons of carbon were lost in 2005 from the rainforest and 2.2 billion tons in 2010, which has undone about 10 years of carbon sink activity...
One of the most worrying and unknown thresholds is the Siberian permafrost, which stores frozen carbon in the soil away from the atmosphere. ... In a worst case scenario, 30 to 63 billion tons of carbon a year could be released by 2040, rising to 232 to 380 billion tons by 2100. This compares to around 10 billion tons of CO2 released by fossil fuel use each year.
Increased CO2 in the atmosphere has also turned oceans more acidic as they absorb it. In the past 200 years, ocean acidification has happened at a speed not seen for around 60 million years...
Posted: 26 Mar 2012 11:28 AM PDT
Where do crony capitalists get their training?:
Markets or shareholders?, by Niraj Dawar, INSEAD: There is a fine line between professing free-market capitalism and teaching the subversion of those markets that is crossed in business-school classrooms every day. ...
We like to believe in the ideal of free markets because competition, we are convinced, is good for the economy. Competition forces sellers to keep the interests of the buyers at the heart of what they do; competition marginalizes and eliminates inefficient players; and competition for customers and resources spurs innovation... In short, these ideal markets lead to an efficient allocation of the economy's resources, making us all better off in the long term.
If there is one principle that informs business school curricula, it is the belief in the efficiency and inherent goodness of free markets.
But there is another principle that contends for the title, and that is the belief that the goal of a business organization is the maximization of shareholder value. ... This is a worthy goal... Businesses that aim to maximize shareholder value in competitive markets will use the economy's resources efficiently.
In a real economy – one that is not your textbook picture-perfect market – the maximization of shareholder value is most efficiently achieved by exploiting market imperfections..., companies get into the business of creating and maintaining regulatory wrinkles so that they can continue to exploit them... Firms that push for government protection in the form of trade barriers, longer patent life, or more global application of patents are attempting to keep competitors out. This type of lobbying for protection and favorable regulation undermines markets in many industries in many countries, including telecoms, banking, airlines, energy, infrastructure, pharmaceuticals, etc. ...
And business schools often end up supporting the erection of regulatory barriers to entry. In other words, at the same time as we profess a reverence for the markets, we're teaching the subversion of freer markets. ...
Restoring society's eroding faith in capitalism is not something that will happen overnight. Alleviating popular skepticism of business schools and their graduates may take even longer. But a good place for business schools to start is with some soul searching about where their allegiance resides: with efficient markets in the service of society, or with the creation of market inefficiencies in the service of oligopolies?
(Amusing as it may be to watch, the theater of having MBAs take oaths and participate in ring ceremonies is not going to restore society's faith in business schools).
This problem won't be solved from within, i.e. by hoping that businesses will suddenly drop behaviors that lead to increased profits. It's the institutions surrounding markets that must adjust.
Posted: 26 Mar 2012 08:50 AM PDT
I did my best to defend New Keynesianism against the New Monetarist assault, but it's lonely being a New Keynesian in St. Louis (as Randy Wright let me know at every opportunity). But it was a fun visit -- thanks David!:
Bloggers in St. Louis, by David Andolfatto: Another eventful week at work (last week). Two coauthors in town (Fabrizio Mattesini and Randy Wright) and three seminars (Nicolas Trachter, Mario Crucini, and Fatih Guvenen). Well, four seminars, I guess. Narayana Kocherlokota was in town to deliver the Hyman P. Minsky lecture at Washington University. Oh, and Mark Thoma also gave an interesting seminar on how bloggers have helped (and harmed) the nature of economic discussions/debates. Fascinating stuff all around.
Mark was visiting the St. Louis Fed all last week (at my invitation). Of course, I knew that keeping him away from Steve Williamson was going to be a problem. And I was right. Here they are at the Kocherlakota event, with me trying to break up their fight:
My two favorite bloggers coming to blows
Things calmed down after I agreed to buy them both a beer; see here:
Best Buds
Ah, good times. But now...back to work!