Month: June 2009

Do you believe in Stein’s Law?

Ezra Klein asks:

Do you believe in Stein's Law?

Stein's Law is the dictum named for the economist Herbert Stein.
If something cannot go on forever, he's reported to have said, it will
stop…It cannot be the case that we
will let health-care spending literally consume 100 percent of
America's gross domestic product before the end of the century.
Health-care spending cannot continue to increase at this rate. Thus, it
will stop.

I can imagine health care consuming thirty to forty percent of U.S. gdp at some point well short of the next century.  (When did people first realize that agriculture would fall to such a tiny share?)  In any case, Ezra frames a key issue:

Every year, we contain costs by quietly letting 2 million or so more
people fall into the ranks of the uninsured. And why not? It does not
require an act of Congress. It does not require a war with a powerful
interest group.

Recent polls notwithstanding, I still don't see the median U.S. voter as either a) willing to have his or her own health insurance taxed, b) accepting serious restrictions on Medicare reimbursements relative to the status quo, c) accepting the mix of HMOs and co-ops that could actually control costs, or d) taking lots of money away from "health care" and putting it into arguably-more-effective public health programs.

Polls are tricky.  The HMO revolution of the 1990s did not "poll" well ex post and that is why it is no longer with us.  Remember also that Harry Truman ran and won on a single-payer platform.  That was a long time ago.  That and other health care reform ideas have been popular in this country except when it comes to doing them.

So to answer Ezra's question, no I do not believe in Stein's Law.  The impossible will likely continue (until it stops).  If economic growth exceeds one percent and progress against disease continues, rising health care costs imply a semi-stable equilibrium for a long time to come, even if it's far from an optimum.  Cheaper, uninsured "retail" care, run on a walk-in, Wal-Mart sort of basis, may alleviate the burden on the uninsured to some extent.

Addendum: Read the comment by Garett Jones:

If the median voter hasn't changed her position much in the last
year or two, then by the MVT the policy outcome won't change much.
Whether the median voter is the "median member of Congress" or the
"median voter at the booth" is a minor question at that point.

The Dems have picked up a lot of culturally-conservative seats so
the median member of Congress probably hasn't changed her views all
that much. When you hear "The Dems won a seat that had been GOP for
decades" you should probably think Blue Dog.

And on Krugman's alleged evidence of unmet demand for health care
reform: As Larry Bartels's resarch shows, voters always say they want
more government services and lower taxes: They want more for less, no
surprise to economists. This is true even in Sweden. Voters leave it to
the legislators to figure out how to optimize their re-election chances
subject to those preferences and the government budget constraint. Is
there also a massive unmet need for tax cuts?

As the link..shows, support for massive health care reform
is lower now than in 1993: The median voter—whether in the booth or
on the floor on the House–is probably less supportive of massive
change than in 1993. Bad news for universal health care, if the MVT is
roughly true.

*Disrobing the Aboriginal Industry*

The authors are Frances Widdowson and Albert Howard and the subtitle is The Deception Behind Indigenous Cultural Preservation.  Here is one good two-sentence excerpt:

The "evidence" from "oral histories" is even more problematic when economic interests are involved.  Oral histories have been known to change when a claim is necessary to obtain access to valuable resources.

This book is too polemic for my tastes and it doesn't try hard enough to understand the other side of the issue.  But it makes many very good points backed up by many very real examples.  It is strongest when arguing against the lowering of intellectual standards for arguments made on behalf of indigenous groups.

What will drive future growth?

Simon Johnson asks:

…if finance doesn’t drive growth, what will…?

also read many commentators breaking national income into its components of C,
I, G, and X-M (consumption, investment, government spending, and net exports) and asking where the growth will "come from" to "drive"
the recovery.  Of course national income accounting is an identity, so this cannot be a nonsensical question.  Yet when the word "drive" is used, we are smuggling in a causal category.  There is no guarantee that any particular decomposition of the national income identities the relevant causal components for what will "drive" recovery.  How would it sound if you aggregated national income by zip code or county (or household) and asked where the boost to drive recovery would come from?  Such an approach might not be on the right conceptual track.

You'll also see discussions of how exports or real estate construction usually precede a more general recovery.  There is then a fear of when or how those trends will come about.  But again, are those the causal factors for thinking about economic recovery?  It was Chinese demand for exports which pulled Japan out of its lost decade but overall I am less convinced of the causal role of exports per se.  Healthy exports are often a symptom of good outcomes, not a cause.

Slipping back and forth between national income identities and causal relationships was one of the big problems in Keynes's General Theory.  I worry that we still see this tendency in macroeconomic thinking.

There are two key questions I ask in a downturn: what will boost aggregate demand? and what will cause a better matching of the particular components of C and I?

The answer to the first is usually "nominal money."  The answer to the second is trickier and harder to encapsulate in a few letters (C, I, G, X-M) or in the mention of an economic sector or two.

A third question might be: which factors are hindering confidence and thus recovery?  Sometimes the answer to this question works through the channel of monetary velocity and the relaxation of "wait and see" investment strategies.

None of these questions deny the relevance of aggregate demand macroeconomics.  But also none of these questions focus our attention on the C, I, G and X-M aggregates per se, except of course for nominal money.

These questions offer a framework for thinking about fiscal policy.  By mobilizing new M into a more rapid V, fiscal policy can boost aggregate demand.  And maybe you like how the money is being spent by the public sector (that's a separate debate).  But unless the new flow of spending is permanent, or can be turned off in a very smooth fashion, it creates temporary bubbly-like conditions in the recipient sectors and that is cause for concern.  You get a better matching of C and I in the short run, but maybe not a better matching for the longer run.

Carrying costs > liquidity premium, a continuing series

The white-haired parking meter repairman who, little by little, stole
more than $100,000 in coins from meters in Alexandria [VA], pleaded guilty
today to two counts of embezzling public funds, and faces a maximum of
40 years in prison.

Police caught William Jonas Fell, 61, in April, and when they searched
his house they discovered about $100,000 in paper money and $7,100 in
nickels, dimes and quarters stashed in rolls, a bucket and a silver

Fell's lawyer, Greg English, said that for more than a year, Fell
would ferry the coins home and exchange them for bills at a supermarket
near his home in Stafford county.

"What else do you do with it?" English said after the hearing in
Alexandria Circuit Court. "You can't put it in your checking account."

Here is more.

What I’ve been reading

1. Addiction: A Disorder of Choice, by Gene Heyman.  This book overstates its claims, but if you wish to see a non-economist defending a (broadly) Beckerian model of addiction, here you go.  I couldn't put it down!

2. Jodi Picoult, Handle with Care.  I felt I should try one by her to stay in touch.  It was better than I had expected though not really smarter than I had expected.  Here is an NYT article about her.

3. Les Miserables, by Victor Hugo.  This new translation by Julie Rose is more or less definitive.  But it is heavy.  If any book ought to be on Kindle…

4. Our Lot: How Real Estate Came to Own Us, by Alyssa Katz.  There is lots of good material about our social and policy infatuation with housing, but she commits a mistake that I have been "waiting for" — she blames part of the housing bubble on the decline of rent control

5. Javier Cercas, Anatomía de un instante.  A micro-study of one moment of time (Feb.23) when, post-Franco, Spain ended up sticking with the path to democracy rather than falling back to autocracy.  The focus is on conservative Prime Minister Adolfo Suárez and the book blends fictional and non-fictional narrative techniques very effectively.  Here is one review.  This is a very strong book also with relevance to current events in Iran.

6. Arnold Kling and Nick Schulz, From Poverty to Prosperity.  I've only been reading the Amazon blurb for it — the book isn't out yet — and here is Arnold on the book.

Ali Akbar Khan passes away at 87

A sarod player, he was one of my favorite musicians.  Here is one obituary, noting his father made him practice for 18 hours a day.  Here is another obituary; he once wrote: "If you practice for ten years, you may begin to please yourself, after
20 years you may become a performer and please the audience, after 30
years you may please even your guru, but you must practice for many
more years before you finally become a true artist — then you may
please even God."  Here is evidence that Khan understood the Romer model.  Here is my favorite Khan CD.

Should Japan abolish currency?

The idea is being discussed:

With recovery elusive, a population doddering into old age and perhaps a decade of deflation in prospect, Japan may start mulling the most radical monetary policy of all – the abolition of cash.

Unorthodox, untried and, said one Bank of Tokyo Mitsubishi strategist, “in the realms of economic science fiction”, the recommendation has nevertheless begun floating around Tokyo’s corridors of power and economists have described Japan as particularly suitable as a testing ground.

One policy goal is to open up the option of negative nominal interest rates, perhaps as low as negative four percent.  It's worth noting that although you can buy swine placenta drink there, simply by swiping your cell phone, currency in circulation still amounts to 16 percent of gdp.

For the pointer I thank Pin-Quan Ng, a loyal MR reader,

Blaming the Republicans

Ryan Avent has a good post and I agree with much of it (and read him as expressing a good deal of agreement with me).  I do, however, disagree with one part:

…if Waxman-Markey is a bad bill, then it is a bad bill largely because
the minority party has an energy plan that scarcely recognises the
threat of climate change as a problem. This guarantees that the vote
will be close, which guarantees that Democrats will have to wheel and
deal and wheel and deal to get the votes they need–the last Democrat to
be converted can name his price. It's a little silly to complain about
the imperfect bill Democrats have crafted, when the Republican minority
has basically forced them to build a law that every last Democrat can

I don't mean to pick on Ryan but I am seeing this idea growing in influence and I wish to push on it a bit.  (By the way, here is his follow-up post.)  A few points:

1. Negative claims about Republican politicians are, in fact, usually true.  I don't wish to defend them or make you dislike them less.

2. If a policy idea cannot survive the opposition being partisan and also lying about it, I submit the policy idea is not such a good one.  You can blame the opposition with all the justice in the world on your side, but still the idea has major, major problems.

3. The notion of a "minimum winning coalition" is commonplace in political science.  Maybe the idea isn't as universal as its early proponents claimed, but still it is an important force in shaping political equilibria.  If a policy idea cannot survive being turned into a "minimum winning coalition" version of itself…well…see #2.

4. Both the Republicans and the Democrats share some common problems and they are known as voters.  And special interest groups.  If your plan cannot survive the influence of voters, and special interest groups…well…see #2.

5. Many government programs can in fact survive all of these negative influences and still emerge as good ideas.

6. The Democrats do in fact rule by more than one seat in both houses of Congress.  So maybe the marginal Democratic legislators don't have so much bargaining power after all.  You can cite 60+ in the Senate but of course this is endogenous to what the Democrats themselves think public opinion will bear.  There is a reason why the Democratic establishment does not, as Matt Yglesias so often recommends, abolish the 60+ requirement.  Often they prefer inaction, combined with the ability to blame the Republicans for such.  See #4.  The often-sad truth is that the Democrats as a whole prefer to tailor policy to pander to their "worst" members.

7. If indeed "the revolution is over" it is a question of critical importance, for progressives, what lessons to take away from the experience.  I'm not yet sure what are the correct lessons, from a progressive point of view (Robin Hanson and I have been chatting about this and I hope to blog it more soon).  Deep in my bones, however, I feel that if the main takeaway were "the Republicans were at fault," that a significant learning opportunity will have been missed.