Archive for May 2014


Krugman on Levitt on healthcare

Paul Krugman has a post criticizing some rather silly and superficial comments about healthcare made by Steve Levitt.  In a discussion with David Cameron, Levitt compared free healthcare to a market where cars were free.  Of course the healthcare market differs from the car market in some very important ways not captured by that analogy.  It’s not that the analogy is useless (it does help to explain why America spends so much on healthcare), rather the problem is that it is just the starting point of a discussion, not a useful way of summing up the problem.

So Krugman’s right about that, but this comment made me want to scream at the computer:

That’s us in the upper right-hand corner: our uniquely privatized system is uniquely expensive, while overall indicators of the quality of care don’t point to any US superiority. So on the face of it, the evidence strongly suggests that the proposition that health is an area where private markets work badly is borne out by experience.

Our “uniquely privatized system?”  A system where nearly half of healthcare expenditures are made by the government?  And much of the other half is made by insurance companies that are private in name only?  Recall that nearly 40% of the cost of “private” health insurance is covered by government subsidies.  And that government regulators determine what procedures must be covered.  And the government controls entry into the healthcare industry. This is called a “uniquely private system”?  Both America and Europe have socialized medicine, the Europeans are just better than us at avoiding massive waste in the system.  Both our so-called “private” insurance and our so-called “public” insurance systems are far more expensive than in Europe.

Krugman doesn’t mention that Levitt also opposes the US healthcare system (a pretty important oversight), as does any sensible person.  It’s a disaster.  The car analogy is useful in one respect.  If you make something “free” for the consumer, and don’t regulate spending effectively, you have huge excess spending.  So how come the European systems have “free” healthcare as well, without as much overspending?  It’s simple; they ration care.  We are going to have to do the same.

The real choice is not between the US system and the European systems, but between systems where people pay out of pocket (like Singapore) and systems where they don’t (the US and Europe.)  Of course Krugman won’t show you that sort of graph, as it would demonstrate exactly the opposite of what he claims.  Singapore spends much less on healthcare.  Indeed he didn’t even include Singapore in his graph—I wonder why?  (Yes, Singapore regulates health care costs, as do all countries.  But that’s not what Krugman’s chart was addressing.)

Krugman is pretty unreliable when talking about free market reforms.  Recall that (in 2007) he claimed that Argentina and Mexico had adopted Chile’s neoliberal reforms, without the good results.   I suspect he gets his information from reading Naomi Klein.

This also caught my attention:

There’s also the resurgence of faith-based free-market fundamentalism. I’ll write more on this soon, but I’m seeing on multiple fronts signs of an attempt to wave away everything that happened to the world these past seven years and go back to the notion that the market always knows best.

Attempts to wave away everything that has happened over the past seven years?  What does that remind me of?  Maybe this:

Here we go again. I laughed, I cried and I felt like it was 2006 all over again while reading the financial press this week cheerlead administration steps designed to “ease mortgage credit.”  What’s really happening is, in an incredible gift to banks and investors, Fannie Mae and Freddie Mac have now officially completed their horror-movie-like rise from the dead. Expect to see Housing Bubble 2 in neighborhood theaters near you very soon, with investors laughing all the way to the bank.

Mel Watt, the new director of the Federal Housing Finance Agency, gave his first public speech on Monday, and made clear that the notion of winding down Freddie and Fannie was dead. In fact, he called for increasing their role in greasing housing sales. Headline after headline expressed relief that it’ll be easier to get mortgages, and what a great thing that is for the economy.  The same lack of curiosity by financial journalists that helped create the housing mess “” if banking regulators say it, it must be true! “” has reared its ugly head again.

.  .  .

Lowered lending standards. Abandoning down payment requirements. Forgiveness for banks that originate underperforming loans. And most of all, pressure to prime a sluggish market and a sluggish economy using any means possible “” and a green light from Washington, D.C. – these are all the elements that were place back in 2001 that led to the housing bubble.

Oddly I’m not seeing much outrage in the liberal blogosphere.  Perhaps because it’s the Democrats in Congress and the White House that are leading the charge for bringing back the “deregulated” housing regime that (in 2008) progressives assured us caused the financial crisis.

Krugman on the need for a higher inflation target

Paul Krugman has a paper that suggests we need a higher inflation target.  It’s hard to disagree with these arguments:

First, recent research and discussion of the possibilities of “secular stagnation” (Krugman 2013, Summers 2013) and/or secular downward trends in the natural real rate of interest (IMF 2014) suggests not just that the probability of zero-lower-bound episodes is higher than previously realized, but that it is growing; an inflation target that may have been defensible two decades ago is arguably much less defensible now.

Second, there are actually two zeroes that should be taken into account in setting an inflation target: downward nominal wage rigidity isn’t as hard a constraint as the interest rate ZLB, but there is now abundant evidence that cuts in nominal wages only take place under severe pressure, which means that real or relative wage adjustment becomes much harder at low inflation. Furthermore, we now have reason to believe that the need for large changes in relative wages occurs much more frequently than previously imagined, especially in an imperfectly integrated currency union like the euro area, and that such adjustments are much easier in a moderate-inflation environment than under deflation or low inflation.

Finally “” and this is the main new element in this paper “” there is growing evidence that economies entering a severe slump with low inflation can all too easily get stuck in an economic and political trap, in which there is a self-perpetuating feedback loop between economic weakness and low inflation. Escaping from this feedback loop appears to require more radical economic policies than are likely to be forthcoming. As a result, a relatively high inflation target in normal times can be regarded as a crucial form of insurance, a way of foreclosing the possibility of very bad outcomes. 

This is also very good:

Much of the modern literature on both the zero lower bound and the risks of deflation has its origins in Japanese experience in the 1990s, which led a number of economists (notably Ben Bernanke, Lars Svensson, Michael Woodford, and myself) to worry that something similar could happen to advanced Western economies – which has in fact happened. One characteristic of that early literature was that it involved quite a lot of hectoring, in the sense of Western economists lambasting the Bank of Japan for its inadequate response to low growth and deflation. Bernanke memorably declared that the BoJ needed to start showing “Rooseveltian resolve.” 

However, a funny thing happened a decade later: Western central banks also proved diffident in their response to poor economic performance. It seems that entering a slump with low inflation doesn’t simply leave economies vulnerable to an economic trap; it also seems to set central banks up for several kinds of political economy traps, in which officials who promised to act to maintain 2 percent inflation lose their resolve to act when inflation actually drops toward zero.  

At the risk of possibly being too cute, let me characterize the various ways in which resolve fails as the complacency trap, the credibility trap, and the timidity trap. 

So let’s think about what Krugman has done here.  He’s presented an impeccable argument for a higher inflation target.  Then he’s explained why the major central banks are unwilling to take his advice.  They are complacent and timid.  It’s not easy for central banks to abandon a commitment to 2% inflation, and suddenly opt for a 4% inflation target.

But suppose there was another way to address all of the problems associated with the 2% inflation target.  A policy that avoided the zero bound problem for interest rates.  A policy that avoided the zero bound problem for nominal wage gains.  And suppose that policy did not require the central bank to suddenly become bolder when conditions changed.  A policy for all seasons, that would be optimal in economies with both high and low growth rates in real GDP.  A policy for economies with savings gluts and investment shortfalls.

Fortunately there is—NGDPLT along a 5% trend line.  This is roughly (not exactly) the policy the US followed between 1990 and 2007.  And if the Fed had announced in 2007 that we would continue to follow this policy in the years to come, no one would have panicked.  Both liberals and conservatives would have let out a big yawn—more of the same.  And yet in retrospect a policy of 5% NGDP targeting, level targeting, would have prevented (or at least greatly moderated) the Great Recession.  To be sure, the policy would probably have been viewed as a failure, especially by those economists representing the party out of office.  The poor performance of productivity, labor force growth, etc., was not something that could have been completely avoided (although obviously without a deep recession the labor force would have done somewhat better.)  We would have had some stagflation in 2008-2010—low growth and above 2% inflation, which would have been blamed on the change in monetary policy.

Given what we now know I suspect that even Ben Bernanke wishes the Fed had had a 5% NGDPLT policy in 2007.  This policy can overcome the wage stickiness problem no matter how much productivity declines.   There is no need for the Fed to change policy when conditions change. The rate of inflation automatically adjusts when the trend rate of real growth changes, which is what Krugman is recommending.

Paul Krugman just presented one of the best arguments that I have ever seen for NGDPLT.

PS.  The weekly unemployment claims number came in at 297,000.  That’s the second lowest figure in 45 years, as a percent of the US population (0.093%).  The only lower figure was in April 15, 2000, when it was .092%.  Very few workers are losing their jobs, and yet wage growth remains quite low (about 2%.)



The alternative to monetary stimulus

Just when you think Washington DC cannot get any more clueless, President Obama appoints Mel Watt to oversee the GSEs.  From the Wall Street Journal:

WASHINGTON””The Obama administration and federal regulators are reversing course on some of the biggest postcrisis efforts to tighten mortgage-lending standards amid concern they could snuff out the fledgling housing rebound and dent the economic recovery.

On Tuesday, Mel Watt, the newly installed overseer of Fannie MaeFNMA +3.94% and Freddie Mac, FMCC +5.35% said the mortgage giants should direct their focus toward making more credit available to homeowners, a U-turn from previous directives to pull back from the mortgage market.

In coming weeks, six agencies, including Mr. Watt’s, are expected to finalize new rules for mortgages that are packaged into securities by private investors. Those rules largely abandon earlier proposals requiring larger down payments on mortgages in certain types of mortgage-backed securities.

The steps mark a sharp shift from just a few years ago, when Washington, scarred by the 2008 crisis, pushed to restrict the flow of easy money that fueled the housing bubble and its subsequent bust. Critics of the move to loosen the reins now, including some economists and lenders, worry that regulators could be opening the way for another boom and bust.

“Some?”  Are there any economists who support this garbage?

For the past year, top policy makers at the White House and at the Federal Reserve have expressed worries that the housing sector, traditionally a key engine of an economic recovery, is struggling to shift into higher gear as mortgage-dependent borrowers remain on the sidelines.

Both Treasury Secretary Jacob Lew and Federal Reserve Chairwoman Janet Yellen last week noted the housing market as a factor holding back the economic recovery.

So let’s see, we have to taper QE because otherwise the economy will “overheat.” After all, unemployment has fallen to 6.3% and many of the remaining unemployed are supposedly unemployable.  And yet we need to go back to the subprime mortgage economy to juice the economy.  Is that the view of the Fed? Forget about “getting in all the cracks,” can we stop opening up new cracks as wide as the Grand Canyon?

Mr. Watt, the former North Carolina congressman who took over as the director of the Federal Housing Finance Agency in January, used his first public speech on Tuesday to lay out the shift in course for Fannie and Freddie, and pegged executive compensation at the companies to meeting the new goals.

The more corrupt you are, the more Uncle Sam will reward you with top 0.001% salaries.  Where does one even begin?

Fannie and Freddie, which remain under U.S. conservatorship, and federal agencies continue to backstop the vast majority of new mortgages being issued.

Wait, didn’t all the liberals tell us back in 2008 that the crisis was caused by evil Republicans who believed in “deregulation,” and that we needed to get progressives in there to prevent these sorts of abuses?  Just as we needed to stop the evil Republicans from letting the NSA trample our civil rights?

The FHFA has recently attempted to lure private investors back into the housing-finance market””and reduce the Fannie and Freddie footprint””by raising the cost of government-backed lending.

With few signs that private investors are returning on a large scale, Mr. Watt signaled a clear break with his predecessor, Edward DeMarco, who left the FHFA last month after nearly five years as its acting director.

“I don’t think it’s FHFA’s role to contract the footprint of Fannie and Freddie,” Mr. Watt said during a discussion at the Brookings Institution in Washington. Winding down the companies without clear proof that private investors are willing to step back in “would be irresponsible.”

His comments signal a move away from treating Fannie and Freddie as “institutions in intentional decline” towards “institutions that should be better prepared to form the core of our system for years to come,” said Jim Parrott, a former housing adviser in the Obama White House.

Mr. Watt’s remarks are significant, given legislation to overhaul the mortgage-finance giants and replace them with a new system that reduces the government’s role in housing appears headed for a dead end in the current session of Congress.

Mr. DeMarco in a separate speech at a banking conference in Charlotte, N.C., on Tuesday, urged restraint: “Do not confuse weakening underwriting standards and underpricing risk with helping people or promoting market efficiency.”

The new steps are the fruit of three years of strenuous pushback by those opposed to tighter lending standards.

In the wake of the 2010 Dodd-Frank law, regulators proposed a spate of new rules intended to eliminate questionable mortgage products and remove any incentive banks had to make loans unlikely to be repaid.

Among the biggest changes that were proposed: Borrowers would either have to put 20% down, or the bank would have to retain 5% of the loan’s risk once it was sliced, packaged and sold to investors.

The March 2011 proposal triggered a huge outcry from lawmakers, affordable-housing groups and the real-estate industry, all of whom said it would put the brakes on homeownership for millions of credit-worthy borrowers, particularly first-time buyers and minorities.

I sort of knew this was going to happen, just as I knew Obama would continue with the Bush “war on terror.”  But it’s still something of a shock when you see it in black and white.  Here’s my prediction.  All of those who moaned about “deregulation” back in 2008 will go silent, just as the Dems in Congress who criticized Dick Cheney either ignored Edward Snowdon’s revelations, or said he should go to jail.

Why does Geithner think money was tight during the 1930s?

Matt Yglesias has moved, which creates a dilemma.  Do I keep reading the old link at Slate, and then end up reading all the other fascinating/appalling non-Moneybox articles written by the kids over there, or do I follow him to his new link?  I don’t have time for both.  Here Yglesias quotes from Tim Geithner’s book Stress Test:

Loose monetary policy can have limited power in a crisis, because low interest rates don’t help that much when borrowers don’t want to borrow and lenders don’t want to lend, but as the central bankers of the 1930s demonstrated, tight monetary policy can be disastrous.

That last claim caught my attention.  I wondered why Geithner thought money was tight during the 1930s. I presume he’s mostly referring to the Great Contraction, from roughly August 1929 to March 1933. Here are some things the Fed did during the Great Contraction:

1.  Short term interest rates were cut quickly and sharply, from about 6.5% to just above zero.

2.  When rates got low the Fed did more and more QE, raising the monetary base through open market purchases of securities.

3.  There was also the Reconstruction Finance Corporation, aimed at helping to support the banking system.

I know what you are thinking; “Sumner, haven’t you claimed those indicators are misleading, and that money has been tight since 2008 despite all the QE and rate cuts?”  Yes, that’s what I’ve been saying.  And yes, I believe Geithner is right in claiming that money was tight during the 1930s.

But here’s what I can’t understand, why does Geithner think money was tight during the 1930s? I’m pretty sure he’s not a market monetarist, based on his other expressed opinions.  I suppose he might cite the Friedman and Schwartz data on M2, but does anyone seriously think he uses M2 as an indicator of the stance of monetary policy?  Didn’t the Fed stop publishing M3 (its modern equivalent) because almost no one even cared?

So once again, what are these “lessons” that the Fed learned from the Great Depression?  Why does Geithner think monetary policy was tight in the 1930s but easy since 2008?  How does he determine the stance of monetary policy?

I also noticed some other good Yglesias posts.  This one on taxes is excellent.  There’s also a very good post on capital, but I’m going to quibble a bit with his conclusion:

But there are some things mainstream economics doesn’t seem to explain very well.

For example, on the neoclassical theory poor countries that successfully get rich should do so by liberalizing their financial systems, running trade deficits, and importing foreign money until over time they build up enough capital for the marginal productivity of labor to increase. In practice, successful catchup stories (first in Japan, then in Singapore and Taiwan and Korea, now in China) work the other way around “” countries use financial repression and run trade surpluses to develop increasingly sophisticated local businesses.

During Korea’s high growth phase they ran fairly consistent current account deficits.  Between 1960 and 1985 I am pretty sure they ran deficits every single year, averaging close to 8% of GDP. That was because domestic investment was far higher than domestic saving.  Then they moved into surplus in the late 1980s, before moving back into deficits in the 1990-97 period.  I think people have a tendency to assume that because Korea has recently run surpluses, it has always done so.  It did things the correct way, borrowing when it was poor to build up its capital stock.

Why quibble over a single country?  Because some people (not Matt) make sweeping conclusions based on a single characteristic of a successful country.  I suppose I’ve been guilty at times.  One thing Korea did do, for instance, is infant-industry policies.  But Hong Kong was just as successful without those policies, and AFAIK, they have not played a particularly important role in a few of the other cases (these things are actually hard to measure, for instance import tariffs and export subsidies offset each other.  If the two policies are done across the board they net out to nothing.)

I don’t know what explains all of the East Asian growth miracles, but I’m skeptical of factors that show up in only some of the countries.  Those factors might have helped, but I doubt they were decisive, especially if others did just as well without those policies.  Perhaps the closest thing to a generalization one can make is “export-oriented.”  But how did they do that?

PS.  In a recent post I quoted Paul Krugman claiming that he couldn’t think of important intellectuals on the other side changing their mind after the worries of high inflation didn’t pan out. Later a bunch of people sent me one quote after another of Krugman praising policy hawks like Kocherlakota and Arthur Laffer for having the guts to admit they were wrong and change their mind.  One commenter prefaced his comment with, “In Krugman’s defense.”  That made me smile. Please, I beg of you, don’t ever “defend” me that way.

On the other hand, Krugman has very good posts bashing the ECB here and here.

Yglesias on inequality

Matt Yglesias has a good post on one flaw in inequality data:

Here’s some cool census data on trends in the foreign-born population of the United States. Two things pop out””one is that we’re not at the sustained peak levels we had between the Civil War and World War I. The second is that the 1950s and 1960s that American liberals often cite as halcyon days for the economy were near the immigration nadir.

Your mileage may vary on that latter fact, but my interpretation of it is that it gives reason for less hoary nostalgia about those days. For one thing it’s just a sign that the postwar United States was not a “land of opportunity” in the way it is now and was earlier for people born in foreign countries. The American mythos of upward mobility has always had a lot to do with the immigrant experience. The first generation gains some new opportunities by moving to a richer and freer country but is naturally held back by a lack of language skills and relevant local connections. The second and third generations are less held back by those factors and are able to obtain a much higher level of prosperity than they would have if their parents and grandparents had stayed in Poland or Mexico.

But the other thing is to remember that the presence of foreign-born people skews a lot of statistics. The foreign-born population in the United States is poorer than the native-born population. If all those people evaporated tomorrow, the average income of the remaining people would fall but per capita income would rise due to compositional effects. We would also have “more equality” since a disproportionate share of the poorest people would have vanished, and the incomes of capital owners would fall more than the incomes of wage earners. But again, very few actual people would be made better off this way.

I’ve criticized income inequality data on similar grounds, although I think the major flaws lie elsewhere (lifecycle effects, mixing wages and capital gains, etc.)

Here’s a brain teaser:  Would the American people circa 2050 be better off if today we adopted a tight immigration policy, or a liberal immigration policy?

The answer may well be “yes.”  The explanation is over at my newest post at Econlog.