People are unemployed for all sorts of reasons.  Some people like to use terms like ‘involuntary unemployment’ and ‘voluntary unemployment’ to describe those reasons.  In my view this is a big mistake.  These terms are not helpful ways to summarize very complex and subtle distinctions.  Indeed when I see people using these terms I generally tune them out, assuming they won’t have anything interesting to say about unemployment.

I know much less about health insurance than I do about unemployment, so the rest of the post is more of a “bleg” than a set of opinions. My first question is what is the goal of Obamacare?  Here’s a graph showing the share of Americans who lack health insurance from 2008 to 2014.

The share of the population that is uninsured has dropped sharply since last summer.  On the other hand the share of Americans lacking health insurance has risen in the 5 and 1/4 years since Obama was elected, from 15.4% to 15.6%.  On the other, other hand 3 or 4 million more Americans will have health insurance by 2014:3.  On the other, other, other hand that’s less than 2 percent of adults.  So the share lacking health insurance will still be almost as high as in the summer of 2008.  Or am I missing something?

Now let’s consider the goal of Obamacare.  If the goal is to eliminate uninsuredness, then it seems to have failed.  But perhaps the goal is to eliminate involuntary uninsuredness.  After all, all of the sad stories we were told before the law was passed tended to focus on people who were unable to get treated for illness, or perhaps were financially devastated by the cost of treatment.  If I’m not mistaken that will no longer occur, as no one can be turned down for having pre-existing conditions.  Or is that assumption false?  If there is no involuntary uninsuredness, can we consider the problem solved?

One objection might be that we need everyone covered, as otherwise the uninsured will tend to overuse emergency room services.  But unless I’m mistaken there are studies showing exactly the opposite, that when given health insurance people tend to use the ER more often.  Is that true?  If so, why do we need to have everyone covered?  Why isn’t it good enough to eliminate involuntary uninsuredness?  Is the fear a “death spiral” that drives the insurance companies out of business?”

I’m sure this post contains many mistakes, and hope my commenters can educate me.

PS.  In my view Obamacare did lots of bad things and two very good things.  The good things were eliminating involuntary uninsuredness and the Cadillac plan tax. I opposed the program, but have an open mind on how it will pan out.  We’ll know much more in 10 years. One key test is whether Congress will avoid “doc fixes” to the Cadillac plan tax.

PPS.  Haven’t read Piketty’s new book yet, but a question for people who have.  I’m told that he assumes the real rate of return on capital is about 5%, and that this is well above the real GDP growth rate.  That assumption seems OK.  But here’s what confuses me.  Some of the reviews seem to imply that Piketty argues that real rate of return on capital represents the rate at which the wealth of the upper classes grow.  Is that right?  If so, what is the basis of that argument?  I don’t think anyone seriously expects the grandchildren of a Bill Gates or a Warren Buffett to be 10 times as wealthy as they are.  I’m pretty sure I’m misinterpreting his argument, so I hope someone can set me straight.

Five years ago I did a post entitled Being There.  I compared Warren Buffett to the character played by Peter Sellers in the famous film.  I pointed out that people tend to be superstitious.  They don’t accept unusual coincidences.  Thus if someone outperforms the market for 20 years in a row, the general view is that it can’t be luck—after all the odds are a million to one against.  People forget that just as someone must win the lottery, in any group of a million investors it is a logical necessity that there has to be one who is luckier that all the others. Here’s a test I proposed back in 2009:

I suppose this should be testable.  If the EMH is correct then the top ten richest Americans should not see out-sized returns, once they have reached that pinnacle of success.  I have no idea whether the data exists to do this test, but is would be a good way of resolving the issue of whether Buffett just got lucky.  When similar tests are done with successful mutual fund managers, it turns out to be merely dumb luck.

At the time, many commenters claimed that hedge funds had greatly outperformed the market in recent years, disproving the EMH. It’s well known that hedge funds have since done relatively poorly.  But how about Mr. Buffet?  Here’s the NYT:

A new statistical analysis of Mr. Buffett’s long-term record at Berkshire Hathaway has just been done, and it’s come up with some fascinating insights about his abilities, past and present, and about the chances that the rest of us have for beating the market. Using a series of statistical measures, the study suggests that Mr. Buffett has indeed been blessed with an impressively big dose of alpha over a very long career.

But it also reveals something that isn’t impressive at all: For four of the last five years, Mr. Buffett has been doing worse than the typical, no-frills Standard & Poor’s 500-stock index fund “” so much worse that it’s unlikely to be a matter of a string of bad luck. Mr. Buffett has begun to behave like an investor with no alpha at all.

Why am I not surprised?  And don’t say, “it’s harder to do well when you are big.” It’s true that it’s harder to do extremely well when you are big, but it’s not hard to outperform the market when you are big, if you truly have “alpha.”  To see why, assume Buffett is only able to find $5 billion in good investments each year, but has $50 billion to manage.  Then put the $5 billion into the good investments, and index fund the other $45 billion.  If he truly had alpha he’d still be outperforming the market.

“It shows how amazingly difficult it is to keep beating the market, even for a master like Warren Buffett,” Mr. Mehta said in an interview. “And it suggests that just about everybody else should just use index funds and not even think about trying to beat the market.”

I certainly agree with the second point, but I disagree with the first point.  It should read: “It shows how difficult it is to keep winning the lottery, even for someone who has already won Megabucks.”

Sometimes people claim my anti-EMH pro-EMH arguments have no testable implications. That’s wrong.  I’ve been doing this for 5 years and again and again I’m being proved right and my critics are wrong:

1.  Back when Bitcoin was $30 I did a post skeptical of “bubble” claims.  The odds were probably at least 10 to one against me being right (as the potential upside was far more than downside, and hence far less likely) but I was right.  Even after the recent drop I’ll be glad to buy any Bitcoins you’d like to sell me at the “bubble” price of $30.

2.  I was skeptical of hedge funds.

3.  I was skeptical of the Oracle of Omaha.

4.  I was skeptical of Robert Shiller’s ability to give useful market timing advice.  He did not recommend buying stocks in March 2009.

5.  I was skeptical of the claim that the 2006 house price boom was a bubble.  We now know that Canada, Australia, New Zealand and Britain did not crash, after similar price run-ups.  This suggests the US crash was not pre-ordained, rather just “one of those things.”

Since I started blogging in early 2009, events have strongly supported my pro-EMH claims.  Anti-EMH models are completely useless.

PS.  Ok, I was wrong about one thing.  Last March I half jokingly said “stock prices have reached what looks like a permanently high plateau,” echoing Irving Fisher’s infamous 1929 prediction.  Yes, I was wrong—stocks have gone much higher over the past 13 months.

PPS.  Noah Smith has the best piece on high frequency trading that I have read so far.  (Tyler Cowen has also had some good stuff.)  Noah says we know almost nothing about whether it is good or bad, and I know far less that Noah.  Which suggests I have negative knowledge.

HT:  Clark Johnson.

Marcus Nunes sent me a post by the always excellent Joe Gagnon.  I’m not sure I fully agree with Gagnon’s view of the situation, but his post does a beautiful job of explaining the issues faced by the Fed in December 2008, and how they evaluated their various policy options:

The FOMC did not discuss the possibility of a negative interest rate on bank reserves, but it is widely agreed that a significantly negative interest is not feasible because banks would convert their reserve balances to paper currency. A lingering puzzle is why the Fed never lowered interest on reserves to zero in subsequent years, when financial strains had diminished and depositors and market participants had gotten used to the low rate environment, but standard macroeconomic models imply that the benefits of such a small decline would have been correspondingly small.

This paragraph shows that the Fed had two serious misconceptions.  Vault cash is a part of bank reserves, and hence there is no reason that the negative IOR could not also be applied to vault cash. (There may be legal barriers, but laws can be changed.) In earlier posts I’ve recommended that banks be exempt from negative IOR on a “normal” level of bank reserves, perhaps required reserves plus X%. The key is to make excess reserve holding costly at the margin, so that new injections of base money go out into circulation as cash. Because cash is very costly to store, this would depress market interest below zero, if the policy failed.  More likely it would succeed and dramatically boost AD, and therefore the mere threat of negative IOR would make the actual implementation of negative IOR unnecessary.

Update: Mark Sadowski clarifies the legal status of vault cash

The second misconception is the assumption that the benefits from a further small reduction in interest rates are minor.  That comes from flawed Keynesian models of monetary economics, which ignore the role of money as a medium of account.  If you set IOR at a rate slightly above the T-bill yield, then the demand for base money rises dramatically, which is highly deflationary.  To be sure, a lower rate might decrease T-bill yields by a roughly similar amount, in which case the spread is preserved, but that assumption raises all sorts of further questions, such as what impact does lower interest rates have on the expected future path of monetary policy.  There are numerous cases where over a trillion dollars in global stock market wealth has been created or destroyed within minutes by a decision over a 25 basis point change in the fed funds target. In other cases that sort of change has little impact. There is no basis for simply assuming that a small change in the fed funds target would be unimportant when the economy is poised on the knife edge of a depression.

There was some discussion, both within the meeting and in the background memos, about the possible benefits of committing to hold the policy rate low for so long that the economy would be likely to overshoot the long-run desired levels of employment and inflation temporarily. Some participants questioned the credibility of such a commitment, given the likelihood that the Fed would come to regret it later. More generally, FOMC participants seemed to have little appetite for tying their hands in such a dramatic fashion. Although they were all for getting back to their economic goals quickly, they had no desire to speed up the recovery at the expense of overshooting their goals.

Not willing “to speed up the recovery at the expense of overshooting?”  Sorry Fed officials, but that is against the law.  You have a dual mandate.  A decision that you are unwilling to overshoot 2% inflation by even a tiny bit, even when unemployment is 10%, is tantamount to admitting that only inflation matters.  A policy of never trying to overshoot 2% inflation is basically a single mandate policy, inflation targeting pure and simple.  That which has no practical implications, has no policy mandate implications.  If your policy is indistinguishable for a single mandate IT regime, then it is a single mandate IT regime.

There was widespread approval of the Fed’s generous provision of liquidity during the crisis, with some participants noting that measures of financial stress were beginning to ease a bit. Both the discussion and one of the background memos agreed that the liquidity facilities had a macroeconomically important effect to the extent that they were preventing cutbacks in consumption and investment that would otherwise have occurred. Some noted that these facilities were less effective at providing additional stimulus than they were at offsetting negative shocks because market participants could not be coerced into using these facilities.

God help us all if 80 years after the Great Depression Fed officials were still worried about pushing on strings and leading horses to water.

The FOMC discussion shows that there was little appetite for a dramatic push to increase inflation expectations, with some participants expressing doubt that the Fed could raise expectations substantially through statements about its intentions without any additional actions. But there was also an acknowledgment that the Fed had not been as clear as it could have been about what inflation rate it aimed to achieve. Speeches and other published materials seemed to show a comfort zone for inflation with a lower end around 1 to 1.5 percent and an upper end at 2 percent. One of the background memos assumed an inflation goal of 1.75 percent. Participants did not agree on a common inflation goal at this meeting.

The first sentence might be translated as: “There was little appetite for pushing inflation expectations up to a level where the policy was expected to succeed, and in any case in order to actually raise inflation expectations we might have to actually do something.”  Not quite sure what “little appetite” has to do with optimal monetary policy.  Perhaps it just means the FOMC members were not as hungry as the 15 million unemployed.

On the plus side, the actual adoption of a 2% inflation target in January 2012 might be viewed as a limited victory for Ben Bernanke, given that the implicit target was a bit lower.  Keep in mind that a 2% PCE inflation rate implies a 2.4% CPI inflation rate.  Very few people understand that the current 5 years TIPS spread of 2.16% means that markets expect the Fed to fall short of their PCE inflation target. And since unemployment is also elevated, there is an overwhelming case for easier money (if you accept the Fed’s announced policy goals–perhaps not if you favor a lower target.)

PS.  Just to be clear, I’m not recommending negative IOR in the current situation, the Fed has far better options.

PPS.  Note that the excerpts I quoted here aren’t necessarily Gagnon’s views.  He occasionally recommended a more aggressive Fed stance. They are his view of what the Fed was thinking.

PPPS.  My second link was to a recent Charles Evans speech which contained this gem:

Although all central banks face these strategy and communications issues, and they implement them somewhat differently, my view is that 90 percent of the communications challenge is met by expressing policy intentions clearly so that the public can understand the Federal Reserve’s goals and how the Fed is committed to achieving these goals in a timely fashion.A clear expression of policy intentions requires stating the Fed’s policy goals clearly and explicitly. These messages need to be repeated – over and over again. It is also necessary to clearly demonstrate our commitment to achieving these goals in a timely fashion with policy actions.

That’s what the Fed did not do in 2008-09.

Update:  Mark Sadowski also has some comments on Gagnon’s post.

The headline numbers were more of the same, but there are a couple of other data points that refute some recent hypotheses that have been floating around:

1.  Average hourly earnings fell from $24.31 to $24.30.  That’s probably not statistically significant, but it does slightly undercut a recent argument that people have been making.  Hourly wages have been trending up at about 2% per year since 2009. If we are reaching full employment, and/or the Fed’s 2% inflation target, you might expect a modest rise toward a more normal 3%, or a bit higher.  Some observers thought an upswing was starting last month, when the 12-month increase rose to 2.19%.  With this number the 12-month increase is back to 2.06%.  Because Janet Yellen focuses on wage growth, this is a slightly dovish signal for monetary policy. They need to do more to hit their 2% inflation target. BTW, nominal wages are the correct measure of “inflation” for monetary policy purposes.  We care about disequilibrium in the labor market, not the rental market or the oil market.  Good to see Yellen focused on that variable.

2.  Ed Lazear is a very fine economist, but recently wrote a long WSJ opinion piece that is almost entirely based on a simple misconception.

The job-equivalence number is computed simply by taking the total decline in hours and dividing by the average workweek. For example, if the average worker was employed for 34.4 hours and total hours worked declined by 344 hours, the 344 hours would be the equivalent of losing 10 workers’ worth of labor. Thus, although the U.S. economy added about 900,000 jobs since September, the shortened workweek is equivalent to losing about one million jobs during this same period. The difference between the loss of the equivalent of one million jobs and the gain of 900,000 new jobs yields a net effect of the equivalent of 100,000 lost jobs.

.  .  .

What accounts for the declining average workweek? In some instances””but not this one””a minor drop could be the result of a statistical fluke caused by rounding. Because the Bureau of Labor Statistics only reports hours to the nearest 1/10th, a small movement, say, to 34.449 hours from 34.450 hours, would be reported as a reduction in hours worked to 34.4 from 34.5, vastly overstating the loss in worked time. But the six-month decline in the workweek, to 34.2 from 34.5 hours, cannot be the consequence of a rounding error.

Was it the harsh winter in much of the United States? One problem with that explanation is that the numbers are already seasonally adjusted.

Seasonal adjustments reflect an average winter, not a harsh winter.  Thus a “harsh winter” is a quite reasonable explanation for the fall in average weekly hours. Because Lazear misinterpreted the nature of seasonal adjustments, he went on to search for other possible reasons for the decline in average weekly hours, such as the disincentive effects of Obamacare.

Now it looks like the harsh winter did explain the drop in hours—the March numbers bounced back to 34.5, essentially where they have been since 2006, except for a brief dip in 2008-09.  The WSJ needs a follow-up piece on average weekly hours. Consider this my one word submission:

Nevermind.

TravisV sent me the following:

A top Federal Reserve official who has expressed concerns about the possibility that the central bank’s policies could spark financial instability said Thursday he is resigning from his post on May 28.

Jeremy Stein, an economics professor at Harvard University, will be returning to Cambridge, Mass. to teach again, Mr. Stein said in his resignation letter to President Barack Obama.

Just last month, the 53-year old highlighted his argument that the Fed must be mindful of the possibility that its policies could contribute to asset bubbles. “Monetary policy should be less accommodative “” by which I mean that it should be willing to tolerate a larger forecast shortfall of the path of the unemployment rate from its full-employment level””when estimates of risk premiums in the bond market are abnormally low,” he said.

While his views weren’t shared by many of his colleagues, Mr. Stein’s role as an academic economist made him an influential figure within the central bank’s powerful Washington-based board.

.   .   .

In combating a deep recession and supporting a weak economic recovery, the Fed has kept official interest rates effectively at zero for over five years now. It has also purchased some $3 trillion in mortgage and Treasury bonds in an effort to keep long-term rates down and spur economic activity. But the program has not been without its skeptics. Mr. Stein, while supporting bond buys when they were launch, has been most vocally skeptically of them among board governors.

Given that Stein played a key role in the Fed’s premature taper, this is good news. Let’s hope the seat remains unfilled.

PS.  In 2009 I was encouraging Obama to fill Board seats as quickly as possible, until I figured out that he thinks monetary policy is credit policy, not AD management.

PPS.  Obama appointed Stein and Powell 2 years ago. Stein was the Democrat.  The slow recovery?  It’s all the Republican Party’s fault.