Archive for July 2014


Mea blog-o

Yesterday I felt horrible, and today I woke up with a fever for the first time in years.  So that’s my excuse.  I was already sick.

Seriously, I haven’t changed my views 180 degrees since yesterday, but I have changed them about 90 degrees.

1.  I still feel the ACA wording was ambiguous.  This probably reflects its size, the way it was rushed through after Scott Brown was elected, and the fact that early in the process most people assumed states would set up the exchanges.  (This article from 2012 discusses its ambiguity, as well as the intent of the drafters.)

2.  I still think the intent was to provide subsidies via the federal exchange.

So why have I somewhat changed my mind?  I don’t think I can continue to claim the courts were engaged in their typical overreach.  There are too many arguments on both sides.  It seems to me now that judges on both sides of the split decision had good arguments.

And commenters raised some issues that I found appealing:

1.  I hate ultra-long bills like Sarbanes-Oxley, Dodd-Frank and the ACA.  Complexity makes for bad governance.  So there is an argument that the Dems are paying the price for their belief in complexity.  The bill was so big they were not careful in drafting it.  Of course that’s not really reason enough to gut the bill.  But it’s an argument I find appealing.

2.  Another argument from commenters (and Tyler Cowen and Ross Douthat) is that it makes sense for courts to interpret laws literally, and then the Congress can change the language if there is a problem.  Now in this case the peculiarities of America politics makes that unlikely, at least in the near future.  But that merely shows the danger of trying to force through major changes in social policy with razor thin margins, and zero support from the other side.  (BTW, both parties have become much more extreme in recent years, so both are to “blame.”  The GOP probably fell further, but with the new Ryan proposal they show signs of having hit bottom and rebounding, whereas the Dems are still falling.  On the other hand if the GOP is serious about impeachment . . . )

3.  Look what happens when I try to help a liberal with whom I strongly disagree about everything. He undercuts me with a very weak response to the second set of revelations.  (He said “same answer.”)  That’s not the answer I would have given in that situation.  Do MIT profs ever do soul-searching?

4.  Perhaps the Dems are weaker on the time inconsistency front than I am.  If I had used subsidies as a club for the states to set up exchanges, I’d sure as hell carry through with the threat.  On the other hand this is the administration that drew a “red line” in the sand with Syria and chemical weapons, so who knows?  And I’m a bit on the stubborn side.

It’s now clear to me that this is not just another case of judicial overreach, but rather a very complex set of factors that are unlikely to ever again come together in exactly the same way.

I’d like to thanks Megan McArdle for providing me with some useful information.

David Glasner on me on IS-LM

Here is David Glasner:

Scott is totally right, of course, to point out that the fall in interest rates and the increase in the real quantity of money do not contradict the “money hypothesis.” However, he is also being selective and unfair in making that criticism, because, in two slides following almost immediately after the one to which Scott takes such offense, Foote actually explains that the simple IS-LM analysis presented in the previous slide requires modification to take into account expected deflation, because the demand for money depends on the nominal rate of interest while the amount of investment spending depends on the real rate of interest, and shows how to do the modification. Here are the slides:

.  .  .

Thus, expected deflation raises the real rate of interest thereby shifting the IS curve to the left while leaving the LM curve where it was. Expected deflation therefore explains a fall in both nominal and real income as well as in the nominal rate of interest; it also explains an increase in the real rate of interest. Scott seems to be emotionally committed to the notion that the IS-LM model must lead to a misunderstanding of the effects of monetary policy, holding Foote up as an example of this confusion on the basis of the first of the slides, but Foote actually shows that IS-LM can be tweaked to accommodate a correct understanding of the dominant role of monetary policy in the Great Depression.

Was I really so unfair?  Did I actually accuse Foote of not understanding that tight money can reduce nominal rates.  You be the judge:

Note the very last comment on the slide, about the significance of deflation.  The rest of the PP slides develop this idea further, and correctly show that while tight money might raise real interest rates, it could lower nominal rates through the Fisher effect. Thus it could shift the IS curve.  That helps, but it seems to suggest that the IS-LM model can be rescued by switching the argument from nominal to real interest rates. Alas, that won’t work.  The Fisher effect is only one of the ways that monetary shocks impact interest rates.  Tight money also reduces expected future real GDP, and this also shifts the IS curve.  So it isn’t just nominal interest rates that fall, real rates also fell during the 1930s, as expected future real GDP plunged.

It sure looks like I’m suggesting that Foote “correctly” understood the distinction between the impact of monetary policy on real rates and nominal rates.  I’m not sure where David got the idea I was being critical of Foote.  Then David simply ignored my observation that switching from nominal to real interest rates in no way rescues the IS-LM model.  Tight money can also reduce real interest rates.  Ex ante real rates did fall during the 1930s.  So IS-LM cannot be “tweaked to accommodate a correct understanding” of the role of money Depression.  It’s rotten to the core.

David continues:

The Great Depression was triggered by a deflationary scramble for gold associated with the uncoordinated restoration of the gold standard by the major European countries in the late 1920s, especially France and its insane central bank. On top of this, the Federal Reserve, succumbing to political pressure to stop “excessive” stock-market speculation, raised its discount rate to a near record 6.5% in early 1929, greatly amplifying the pressure on gold reserves, thereby driving up the value of gold, and causing expectations of the future price level to start dropping. It was thus a rise (both actual and expected) in the value of gold, not a reduction in the money supply, which was the source of the monetary shock that produced the Great Depression. The shock was administered without a reduction in the money supply, so there was no shift in the LM curve. IS-LM is not necessarily the best model with which to describe this monetary shock, but the basic story can be expressed in terms of the IS-LM model.

I agree that the best way to visualize the Great Contraction is through a large increase in the demand for monetary gold.  But I’m confused by David’s claim that this would not shift the LM curve.  Gold was the medium of account.  Unless I’m mistaken, an increase in the demand for gold would certainly be expected to shift the LM curve to the left, wouldn’t it?  (But then IS-LM is not my forte, so please tell me if I am wrong.)

PS.  In case you think I cherry-picked a quote, here’s the opening to my post, where I describe the quality of Foote’s PP slides:

Commenter Joseph sent me an excellent set of PP slides by a professor at Harvard named Chris Foote.  He has a very clear derivation of the AD curve from the IS-LM model.

If I’m going to be accused of being unfair to someone, at least give me the satisfaction of trashing their work!  My post had no criticism of Foote at all.  Just some criticism of ideas he listed on one slide as things other people have claimed might have caused the Depression.  I never assumed that was his view, and indeed he himself criticized some of those arguments in later slides.

PPS.  And how does David know I am “emotionally committed” to the view that IS-LM is worthless? Perhaps I have rational reasons for holding that view.  I’ve claimed that monetary policy can shift the IS curve, or else one has to assume the IS curve is upward sloping (Nick Rowe’s view.) I haven’t seen anyone rebut that view, emotionally or unemotionally.

Gun control and Haldig

There are two views on gun control.  Those who study original intent believe that the Second Amendment applies to individuals. That’s clearly what the founders intended.  (Read Joyce Malcolm for the historical background of the 2nd Amendment.)  Those who focus on the precise wording of the amendment are split, but some believe it only applies to citizens who are members of the National Guard.  (I don’t buy that interpretation, but my views are not relevant here.)

So we can assume that when and if Haldig is appealed to the Supreme Court, all the liberal justices who tend to uphold gun control laws will look at the precise wording of the ACA, and deny subsidies to people who purchased insurance through federal exchanges.  And all the conservative justices who often strike down gun control laws will look to Congressional intent, and uphold the subsidies.

I can hardly wait to see the Supreme Court implement the “judicial philosophy” of each member in the Haldig case!  Fortunately the members of the Supreme Court do not let personal political preferences interfere with their decisions.  Shame on you if you expect a split vote based on personal political preferences.

Jonathan Gruber on federal exchanges and subsidies

Several commenters pointed to a statement made by Jonathan Gruber in 2012.  (Gruber is a well know academic who helped advise Congress on the ACA, and who supports it.)

What’s important to remember politically about this is if you’re a state and you don’t set up an exchange, that means your citizens don’t get their tax credits “” but your citizens still pay the taxes that support this bill. So you’re essentially saying [to] your citizens you’re going to pay all the taxes to help all the other states in the country. I hope that that’s a blatant enough political reality that states will get their act together and realize there are billions of dollars at stake here in setting up these exchanges.

That seems to suggest he agrees with the recent court ruling.  But he actually disagrees with the ruling.  Indeed he seems to regard the ruling as ludicrous.  That doesn’t look good.  Until you realize that the quote was taken out of context, and that the comments immediately preceding the quote tells a very different story:

Yes, so these health insurance exchanges . . . will be these new shopping places and they’ll be the place that people go to get their subsidies for health insurance. In the law it says if the states don’t provide them the federal backstop will. The federal government has been sort of slow in putting up its backstop in part because I think they want to sort of squeeze the states to do it.

That seems to imply the federal backstops would provide health subsidies.  So how can we reconcile these two statements?  I believe Gruber was trying to say that the federal government was being slow in setting up the exchanges, because until they did so, those states without state exchanges would get no subsidy.  Once the federal exchanges were set up, they would all get the subsidy.

What I don’t understand is why commenters were providing me with the quote on top, but not the second quote, which provides important context.  

BTW, which of the following two statements represents the conservative view on the role of the courts?

A.  The courts should interpret the laws passed by the duly elected members of Congress, and should not be substituting their own views.  Original intent is what matters.  Unelected judges should not set policy.

B.  Yay!!  the courts have just gutted the ACA, which was an awful law passed by Congress.

I used to think it was A; now I wonder if it is B.

PS.  I totally disagree with Gruber on health care policy.

Update:  After I wrote this I came across Gruber’s explanation:

I honestly don’t remember why I said that. I was speaking off-the-cuff. It was just a mistake. People make mistakes. Congress made a mistake drafting the law and I made a mistake talking about it …

At this time, there was also substantial uncertainty about whether the federal backstop would be ready on time for 2014. I might have been thinking that if the federal backstop wasn’t ready by 2014, and states hadn’t set up their own exchange, there was a risk that citizens couldn’t get the tax credits right away.

But there was never any intention to literally withhold money, to withhold tax credits, from the states that didn’t take that step. That’s clear in the intent of the law and if you talk to anybody who worked on the law. My subsequent statement was just a speak-o””you know, like a typo.

I didn’t assume every state would set up its own exchanges but I assumed that subsidies would be available in every state.

The 2nd paragraph in Gruber’s comments is what I assumed he meant.  Just to be clear, there is no question that the top paragraph I quoted above (which is what the controversy is about) implies what the conservatives claim it implies.  He misspoke, no doubt about that.  But I’m interested in what Gruber thought, and the paragraph I emphasized makes more sense if you interpret it the way Gruber and I did.  Otherwise that paragraph is quite misleading relative to what comes after.

In sum, a nice debating point for conservatives, but if the Court had asked every single senator who voted for the ACA what he or she “intended” they probably would have all agreed with me.

The NYT and WaPo have liberal bias, which is why conservatives need to read them

Matt Yglesias has a very disturbing post.  I’d guess that most intellectuals who read the post will yawn, which makes it even more disturbing:

The deep nature of the division is illustrated by the suspicious way in which legal opinions and policy preferences are lining up on this issue. Essentially everyone who believes the Affordable Care Act was an important step toward securing social justice also agrees that it would be absurd to construe the statute in a manner that’s plainly inconsistent with congress’ goals. And essentially everyone who believes it’s crucially important to give the crucial sentence the most straightforward possible reading rather than defer to the IRS’ efforts to make sense of the law as a whole, also believes that the law is a scandalous boondoggle.

This is just incredibly sad. I don’t fit into Yglesias’s generalization (making me inessential?), but even if I am 100% wrong about the Halbig case, I would not change a single word of this post.  It’s an embarrassment that the two sides of the debate line up so predictably on a narrow technical issue.  It says that intellectuals cannot be trusted to argue in good faith.

Then it gets worse:

The judicial branch is supposed to operate separately from the contours of partisan politics. But judges are human beings, subject to the same cognitive failings as everyone else “” and the cognitive failings associated with polarized political disputes are large. And the judiciary is becoming more polarized along with everything else in America. David Paul Kuhn, for example, has shown that 5-4 decisions have become drastically more common over time.

The Supreme Court gets to choose which cases it hears, and this shows a Court that is increasingly inclined to hear cases that sharply divide the justices “” and therefore the legal community “” rather than to rule on questions where there is broad consensus. The justices also seem increasingly inclined to write maximalist rulings that can secure minimum winning coalitions, rather than to enter into compromises to secure broader agreement.

Another sign of polarization is in the selection of clerks. In recent years, Justices appointed by Democrats have come to almost exclusively select clerks who worked for Circuit Court judges appointed by Democrats and Republican justices behave the same way. Rather than seeking to surround themselves with intelligent young aides of varying views who will challenge their knee-jerk opinions, Justices seek assistants who share their outlook. Institutions like the Federalist Society and the American Constitution Society operate to ensure that politically-active lawyers operate in separate intellectual and professional networks from an early age.

So the Supreme Court is becoming increasing politicized, just like everyone else.  Is that bad?  Let’s just say it means we are becoming more like Venezuela.  I’ll leave it up to you to decide whether it is bad.

Then it gets even worse:

Vox’s Ezra Klein mounted an argument that it’s very unlikely the Supreme Court will affirm Halbig, citing the pragmatic reality that taking away health insurance from millions of people who already have it could be a political disaster. This makes a ton of sense to me. But as a forecast it would carry more credibility if we were seeing it on Fox News or The Wall Street Journal editorial page. Justice Scalia has gone so far as to say he doesn’t read the New York Times or the Washington Post because they’re too liberal, so it’s not obvious that ideas circulating in the non-conservative press tell us much about the thinking of conservative judges.

So it’s not just Paul Krugman who brags about reading only one side, the same is true of Scalia. What Scalia doesn’t understand is that the bias of the NYT (which is real) makes it even more essential that he read that paper.  Think about it.  If the NYT and WaPo have liberal bias, how likely is it that the WSJ and Fox News do not have conservative bias?  About one in a billion?

I find that when I read only one side of an issue like Halbig I get a biased perspective. Only after I read both sides do I have enough information to have an informed opinion.  I compare the facts presented, the logic of the arguments, etc.  You can usually tell who has the better argument.  In this case I thought the liberals did, but that’s immaterial.  I could easily be wrong. The point is to see both sides of the argument.

I once got into trouble for calling Krugman ignorant, by which I meant unaware of conservative viewpoints.  People thought I was calling him stupid.  Krugman and Scalia are obviously brilliant, but if they just read one side of the debate then there are not getting the maximum benefit from that brilliance.

Now go read a post by Brad DeLong or Mark Thoma to balance out my anti-Krugman bias!