Month: June 2014
A new argument for ACA, and how ACA interacts with disability insurance
This paper examines the effects of the Affordable Care Act (ACA) by considering a dynamic interaction between extending health insurance coverage and the demand for federal disability insurance. This paper extends the Bewley-Huggett-Aiyagari incomplete markets model by endogenizing health accumulation and disability decisions. The model suggests that the ACA will reduce the fraction of working-age people receiving disability benefits by 1 percentage point. In turn, the changes associated with disability decisions will help fund 47 percent of the ACA’s cost. Last, compared to the ACA, an alternative plan without Medicaid expansion will reduce tax burdens and improve welfare.
The pointer is from the excellent Kevin Lewis. I have not yet read the piece but thought it of sufficient interest to pass along right away.
How many catastrophes can we avert?
There is a new Martin and Pindyck paper on this topic, “Averting Catastrophes: The Strange Economics of Scylla and Charybdis”:
How should we evaluate public policies or projects to avert or reduce the likelihood of a catastrophic event? Examples might include a greenhouse gas abatement policy to avert a climate change catastrophe, investments in vaccine technologies that would help respond to a “mega-virus,” or the construction of levees to avert major flooding. A policy to avert a particular catastrophe considered in isolation might be evaluated in a cost-bene fit framework. But because society faces multiple potential catastrophes, simple cost-bene fit analysis breaks down: Even if the benefi t of averting each one exceeds the cost, we should not avert all of them. We explore the policy interdependence of catastrophic events, and show that considering these events in isolation can lead to policies that are far from optimal. We develop a rule for determining which events should be averted and which should not.
The ungated version is here, I do not at the moment see the link to the gated NBER version I printed out and read. The main point is simply that the shadow price of all these small anti-catastrophe investments goes up, the more of them we do, and thus we cannot do them all, even if every single investment appears to make sense on its own terms.
I think of this paper as providing a framework for assessing the debates between modern Progressives and pessimistic old school conservatives (not exactly the main debate we are seeing today by the way). The Progressive states “here is a potential or real catastrophe, let us fix it.” The pessimistic conservative says in response “there are far greater and less visible catastrophic dangers. We need to address those instead.” The pessimistic conservative usually is ignored, and so at the relevant margin it appears the Progressive is correct. Maybe in a sense the Progressive really is correct. But in another, more systemic sense the Progressive is walking a dangerous path. Society is losing the resources it may need to avert the more catastrophic catastrophes.
For the pessimistic conservative of course these often involve foreign policy threats, or they may involve “barbarism” more generally. I find also that pandemics are popular causes of concern with pessimistic conservatives.
Each time one of these Progressive remedies is adopted, the calculus looks even worse for the pessimistic conservative, as there are fewer resources left to address his causes for concern. Yet the danger of which the pessimistic conservative warns is greater each time, the longer we ignore it, and the more we devote our resources to other endeavors.
It is an interesting question whether optimistic libertarians or pessimistic conservatives have better (as opposed to more persuasive) arguments against Progressives. The optimistic libertarian can try “we have a better way of solving this problem!” The pessimistic conservative is still believing “we must neglect this issue so we can prepare for the even greater doom which may await us.” The Progressive prefers to argue from general grounds of benevolence, rather than debating which potential catastrophes to confront and neglect, and thus a quest for “free lunch” arguments ensues.
Some sophisticated Progressives may think they are in fact the best friends of the pessimistic conservatives. They may think the choice under consideration is not “which catastrophe to address?” but rather how we can build up our overall willingness to invest in preventing catastrophes. In this sense the Progressive may be presenting a valuable warm-up exercise, a bit like flexing the muscles for later combat. Imagine for instance if ACA were to also later help us monitor and confront a pandemic. Or if it gave us the political will to make other, later sacrifices. In that case Progressivism could well be right but only as the handmaiden of pessimistic conservatism and the Progressives would become the true Straussians, achieving one view under the guise of another.
The economic recovery in the United Kingdom
There is an excellent Chris Giles FT article on this topic, here is the bit of greatest interest to some recent debates:
The latest IMF fiscal monitor shows a cyclically-adjusted deficit of 5.9 per cent of national income in 2011, falling only to 5.7 per cent in 2012. This 0.2 percentage point drop in the cyclically-adjusted deficit appears tiny compared with the 2010 vintage of the same IMF document, which shows plans for a 1.4 percentage point decline over the same two years.
That’s not my favorite measure of fiscal stance, but it is the one most commonly cited. What we see is that “austerity didn’t get much worse,” to borrow the language of many of the Keynesians. It remains a mystery to me how this could account for the British recovery, as for instance expressed by Krugman:
Finally, Britain is growing much faster right now than I expected. Fundamental model flaw? I don’t think so. As Simon Wren-Lewis has pointed out repeatedly, the Cameron government essentially stopped tightening fiscal policy before the upturn, which means in effect that the “x” in my equation didn’t do what I thought it would. On top of that, there was a drop in private savings, which is one of those things that happens now and then.The point is that the deviation of British growth from what a standard Keynesian model would have predicted, while real, wasn’t out of line with the normal range of variation-due-to-stuff-happening; nothing there that warranted a major revision of framework.
I would say the fiscal stance of the British government stayed more or less the same, and a rapid recovery came, because the labor market was flexible and market economies have a natural (though in my view not universal) tendency to mean-revert and put unemployed resources back to work. Furthermore the UK had a relatively loose monetary policy, which sustained nominal values, even in light of a supposed liquidity trap. (The hypothesis that the relatively high inflation rate came from a VAT hike didn’t last long.)
I took the Keynesian position on Britain to be “they are in a liquidity trap, and possibly secular stagnation, so they will just sit there and not experience any natural tendency toward major recovery, at least not for a long time.” If the current Keynesian position (would it now be the New New Old Keynesian view?) is “in the absence of additional negative shocks, even in a liquidity trap market economies have a natural tendency to mean-revert and put unemployed resources back to work pretty quickly,”…well, I guess I am more of a Keynesian than I used to think.
Addendum: The article also offers this:
UK officials have no time for such comparisons, based on “spurious cyclical adjustment”. The Treasury said: “It’s interesting how the people who have started saying that we eased up on austerity are the very same people who just a few months earlier were accusing us of doggedly sticking to it. We have been consistent and stuck to the plans we set out.”
The independent Office for Budget Responsibility provides data with which to arbitrate this dispute. On the public spending side, there is no evidence of a secret stimulus. Public expenditure in 2012 and 2013 was a little lower than the level planned in 2010.
Its data also show there were no significant changes to the UK tax system in 2012-13, so no deliberate stimulus. Tax revenues, by contrast, were much weaker than expected as the economy stagnated, showing the strength of the automatic stabilisers in Britain.
Measures of the degree of fiscal tightening that do not rely on tax revenues, but changes in the tax system, such as those from the OBR or the independent Institute for Fiscal Studies, still show as much austerity in 2012 and 2013 as they did in 2010.
Sorry guys, but I have to call this one for some version of the classical hypothesis. And by the way, I still think the UK recovery is relatively fragile, but not for reasons which have much to do with traditional Keynesianism.
The “average is over” economic recovery proceeds
Average hourly earnings for private-sector American workers rose about 49 cents an hour over the last year, to $24.38 in May. But that wasn’t enough to cover inflation over the year, so in “real” or inflation adjusted terms, hourly worker pay fell 0.1 percent over the last 12 months. Weekly pay shows the same story, also falling 0.1 percent in the year ended in May.
Neil Irwin offers more here. Many people I know thought my earlier prediction of “falling or stagnant wages during the U.S. recovery” was an absurd prognostication, but so far it seems to be on the mark. Just wait for The Great Reset.
Is there a lot more insider trading than most people think?
I’ve long thought so, here are some new results supporting that view:
… a groundbreaking new study finally puts what we’ve instinctively thought into hard numbers — and the truth is worse than we imagined.
A quarter of all public company deals may involve some kind of insider trading, according to the study by two professors at the Stern School of Business at New York University and one professor from McGill University. The study, perhaps the most detailed and exhaustive of its kind, examined hundreds of transactions from 1996 through the end of 2012.
The professors examined stock option movements — when an investor buys an option to acquire a stock in the future at a set price — as a way of determining whether unusual activity took place in the 30 days before a deal’s announcement.
The results are persuasive and disturbing, suggesting that law enforcement is woefully behind — or perhaps is so overwhelmed that it simply looks for the most egregious examples of insider trading, or for prominent targets who can attract headlines.
The professors are so confident in their findings of pervasive insider trading that they determined statistically that the odds of the trading “arising out of chance” were “about three in a trillion.” (It’s easier, in other words, to hit the lottery.)
There is more here, via Ray Fisman.
Assorted links
2. Hong Kong groups get together to eat food they hate. And the exposure of Taiwanese banks to China.
3. More companies are offering IPOs to employees, customers, and fans.
4. The new French school with no teachers, no books, and no tuition. And the price of higher education will be falling.
5. Miyazaki images.
Can we trust published results in finance?
Maybe not. So says the new working paper by Campbell R. Harvey, Yan Lui, and Heqing Zhu, the abstract is here:
Hundreds of papers and hundreds of factors attempt to explain the cross-section of expected returns. Given this extensive data mining, it does not make any economic or statistical sense to use the usual significance criteria for a newly discovered factor, e.g., a t-ratio greater than 2.0. However, what hurdle should be used for current research? Our paper introduces a multiple testing framework and provides a time series of historical significance cutoffs from the first empirical tests in 1967 to today. We develop a new framework that allows for correlation among the tests as well as publication bias. We also project forward 20 years assuming the rate of factor production remains similar to the experience of the last few years. The estimation of our model suggests that today a newly discovered factor needs to clear a much higher hurdle, with a t-ratio greater than 3.0. Echoing a recent disturbing conclusion in the medical literature, we argue that most claimed research findings in financial economics are likely false.
If you click on the link above, you also will see a picture summarizing their main points.
For the pointer I thank Noah Smith.
What does the Argentina Supreme Court decision mean?
Joseph Cotterill writes:
Pari passu will now be enshrined as a powerful enforcement device in New York-law sovereign debt.
The Supreme Court declined to hear the case, meaning the current ruling will stand. The bottom line is that if Argentina tries to bypass a holdout debtor and make a payment somewhere else, the denied debtor has a potential legal claim to those funds. To expand on that a bit:
This law supports courts in deciding that ratable payment could be a remedy to use against sovereigns who refuse to pay their debts, and that third parties — settlement banks, clearing systems, other bondholders — may be sued if they are seen to handle funds in violation of such orders.
In more practical terms, that raises the cost to banks which are still dealing with Argentina or other defaulting nations. Most likely, this means creditors have a stronger incentive to be holdouts in the first place. I take that to be a negative and welfare-decreasing. If creditor rights were weaker up front, as I would prefer, it would be harder for nations to over-borrow in the first place, and ex post less of the cost of that over-borrowing will fall on the taxpayers and citizens of the poorer citizenry. Furthermore this could mean that associated financial institutions will be quicker to run for the exits once trouble materializes for a country, and that may worsen “sudden stop” and “runs” problems with lending to sovereigns.
In a separate but related judgment yesterday:
Ruling seven to one, the justices decided that the holdouts are allowed to “seek information about Argentina’s worldwide assets generally” to enforce judgment debt.
You can think of both judgments as telling Argentina they cannot default in the manner in which they had attempted to. And what might Argentina’s response be? They might once again…default. The country has two weeks to try to make it work under the current arrangements.
Here is yet another explanation. Here is Peter Coy on the same. Here is The Economist. This piece discusses the constraints on negotiating with the holdouts.
Are currency movements and capital outflows the relevant lever for China problems?
Maybe so:
There are some benefits to a weaker currency, such as more competitive exports. But with China’s current account surplus having shrunk from 10 per cent of gross domestic product in 2007 to just 2 per cent now, net outflows have a bigger impact on currency markets.
“[Policy makers] need the renminbi to go down, but that then unlocks Pandora’s box,” says Ms Choyleva. “If you exclude the exchange rate gains there’s nothing much left to invest in China.”
Kevin Lai, head of Asian economic research at Daiwa, believes the moves to guide the renminbi higher last week by the People’s Bank of China are a sign that authorities are “deeply concerned” the recent trickle of capital outflow could become a damaging flood – especially if the US Federal Reserve’s unwinding of asset purchases entices capital out of emerging markets including China.
The PBoC has for years expanded its balance sheet as foreign capital flowed in, he explains. Now, with capital beginning to flow out China’s central bank is being forced to add cash to the economy without the underpinning of US dollar inflows. That, in turn, is contributing to renminbi weakness.
His forecast is for a further 8 per cent fall in the Chinese currency against the dollar by the end of 2015, to Rmb6.83 from Rmb6.21 now, pushing back down through the 18-month lows plumbed in recent weeks.
“If the renminbi keeps going down, the market will demand a real answer and start pulling money out. That is the worst fear of the PBoC,” says Mr Lai.
That is Josh Noble from the FT, there is more here.
Assorted links
1. Is robot journalism going mainstream? And a Guardian survey piece on automation.
2. German investment is low and falling.
3. Which country has the best fans at the World Cup?
4. Joel Mokyr vs. Robert Gordon.
5. Has all politics become national?
6. The Piketty slides of Justin Wolfers, very useful.
The importance of tax evasion
Mr. Zucman’s tax evasion numbers are big enough to upend common assumptions, like the notion that China has become the world’s “owner” while Europe and America have become large debtors. The idea of the rich world’s indebtedness is “an illusion caused by tax havens,” Mr. Zucman wrote in a paper published last year. In fact, if offshore assets were properly measured, Europe would be a net creditor, and American indebtedness would fall from 18 percent of gross domestic product to 9 percent.
There is more here, interesting throughout. You will find some of the related research here.
What is the “sticker shock” for ACA reform?
There is a new NBER Working paper on that topic, by Mark Pauly, Scott Harrington, and Mark Leive, here is the abstract:
This paper provides estimates of the changes in premiums, average or expected out of pocket payments, and the sum of premiums and out of pocket payments (total expected price) for a sample of consumers who bought individual insurance in 2010 to 2012, comparing total expected prices before the Affordable Care Act with estimates of total expected prices if they were to purchase silver or bronze coverage after reform, before the effects of any premium subsidies. We provide comparisons for purchasers of self only coverage in California and in 23 states with minimal prior state premium regulation before the ACA now using federally managed exchanges. Using data from the Current Population Survey, we find that the average prices increased by 14 to 28 percent, with similar changes in California and the federal exchange states; we attribute the increase primarily to higher premiums in exchanges associated with insurer expectations of a higher risk population being enrolled. The increase in total expected price is similar for age-gender population subgroups except for a larger than average increases for older women. A welfare calculation of the change in risk premium associated with moving from coverage that prevailed before reform to bronze or silver coverage finds small changes.
You will find an ungated version here. The general point is that you hear enormous amounts of talk, including from economists, about what a success ACA has been. This talk does not in general consider trade-offs or welfare calculations, as could be illustrated by these results.
Sentences to ponder
Staff members at dozens of Department of Veterans Affairs hospitals across the country have objected for years to falsified patient appointment schedules and other improper practices, only to be rebuffed, disciplined or even fired after speaking up, according to interviews with current and former staff members and internal documents.
An intrinsic problem with government bureaucracy, or just the result of having the wrong people in charge? I say the former. The story is here.
From the comments, more on LBGT as deserving of respect
Mr. Econotarian wrote:
Actual science is that your brain can be gendered during development in a different fashion than your sex chromosomes. And that gender is not something that hormones alone can “fix”.
For example, the forceps minor (part of the corpus callosum, a mass of fibers that connect the brain’s two hemispheres) – among nontranssexuals, the forceps minor of males contains parallel nerve fibers of higher density than in females. But the density in female-to-male transsexuals is equivalent to that in typical males.
As another example, the hypothalamus, a hormone-producing part of the brain, is activated in nontranssexual men by the scent of estrogen, but in women—and male-to-female transsexuals—by the scent of androgens, male-associated hormones.
I would stress a social point. If it turns out you are born “different” in these ways (I’m not even sure what are the right words to use to cover all the relevant cases), what is the chance that your social structure will be supportive? Or will you feel tortured, mocked, and out of place? Might you even face forced institutionalization, as McCloskey was threatened with? Most likely things will not go so well for you, even in an America of 2014 which is far more tolerant overall than in times past, including on gay issues. Current attitudes toward transsexuals and other related groups remain a great shame. A simple question is how many teenagers have been miserable or even committed suicide or have had parts of their lives ruined because they were born different in these ways and did not find the right support structures early on or perhaps ever. And if you are mocking individuals for their differences in this regard, as some of you did in the comments thread, I will agree with Barkley Rosser’s response: “Some of you people really need to rethink who you are. Seriously.”
It’s not just the libertarian argument that you have — to put it bluntly — the “right to cut off your dick” (though you do). It’s that there are some very particular circles of humanity, revolving around transsexuality, cross-gender, and related notions, which deserve a culture of respect, above and beyond mere legal tolerance.
India is not the paradise for cross- and multiple-gender individuals that it is sometimes made out to be, but still we could learn a good deal from them on these issues. If nothing else, the argument from ignorance ought to weigh heavily here: there is plenty about these categories which we as a scientific community do not understand, and which you and I as individuals probably understand even less. So in the meantime should we not extend maximum tolerance for individuals whose lives are in some manner different?
No, I do not know what are the appropriate set of public policies for when children should receive treatment, if they consistently express a desire to change, and what are the relative limits of family and state in these matters. But if we start with tolerance and acceptance, and encourage a culture of respect for transsexualism, we are more likely to come up with the right policy answers, and also to minimize the damage if in the meantime we cannot quite figure out when to do what.
Starbucks will be funding on-line education
Starbucks will provide a free online college education to thousands of its workers, without requiring that they remain with the company, through an unusual arrangement with Arizona State University, the company and the university will announce on Monday.
The program is open to any of the company’s 135,000 United States employees, provided they work at least 20 hours a week and have the grades and test scores to gain admission to Arizona State. For a barista with at least two years of college credit, the company will pay full tuition; for those with fewer credits it will pay part of the cost, but even for many of them, courses will be free, with government and university aid.
“Starbucks is going where no other major corporation has gone,” said Jamie P. Merisotis, president and chief executive of the Lumina Foundation, a group focused on education. “For many of these Starbucks employees, an online university education is the only reasonable way they’re going to get a bachelor’s degree.”
There is further information here.