Sunday, February 17, 2019

The Best News of Your Lifetime

I mentioned this in class about 10 days ago, but here’s a chart from the World Bank (an anti-poverty NGO):

It is reasonable to point out that this only goes back to 1980, and that there had to be improvements before then.The $1.90/day value is the World Bank’s estimate of subsistence level consumption. This was essentially 100% in 1680. So, the improvement from 100% to 42.2% took 300 years.

It is also worthwhile to think in terms of absolute numbers (populations are in millions):

Year

Population at Subsistence

Population Above Subsistence

1680

  590

   10

1980

1,850

2,590

2015

  736

6,622

Do note that I made up the number in the cell at the top right. The truth is the data doesn’t go back that far. But our best estimate for 1820 is 6% of the world’s population living above subsistence level, so the choice of 10 out of 600 in 1680 seems plausible.

These numbers demonstrate a phenomenon that economists understand well, but that the general public experiences as something they feel is wrong. It’s called a Kuznets Curve, and it shows up in a number of areas where environmental issues are a concern. Theoretically, it’s a very basic result that emerges in theoretical models without making unusual assumptions.

Roughly, it’s an explanation of why things sometimes get worse before they get better. In this case, it didn’t take much of an improvement in well-being for population to start rising: people lived longer, children became more likely to survive until adulthood, and so on. What doesn’t immediately change is the desire of adults to have children (who grow up to care for the adults in their senior years — that’s how human societies “did social security” on their own for millennia). Anyway, it takes a couple of generations for people to realize that isn’t necessary and to reduce the number of children they have, and invest more in each one (do note that while this is happening in many places after the advent of widely available birth control, it was observed in most of the now developed world for decades before “the pill” became available or surgical abortion was common).

In other cases, it explains why developed countries tend to be cleaner and less polluted than developing ones. The first thing people do is pollute and make money. Later on, that money is used to reduce pollution.

N.B. With science, there’s always a conflict between data and anecdotes. Scientists are able to say serious things because of their focus on data. But humans evolved in a world of anecdotes, and we still tend to prefer them. Journalists love anecdotes: they’re the basis of their stories. A problem then arises with Kuznets Curve behavior: for a while at least, the number of anecdotes increases for a while even though the overall situation is changing. So, the table above suggests that the maximum number of anecdotes about subsistence living occurs fairly recently (and actually peaked somewhere around 1970), even though the proportion of people whose lives are advancing out of subsistence has been increasing for centuries. In fact, while the number living at a subsistence level is dropping for the world as a whole, it’s still increasing in sub-Saharan Africa (even though the rate is improving there too).

Tuesday, February 5, 2019

In What Sense Is Last Year’s Tax Reform Paying for Itself?

The op-ed piece entitled “Tax Reform Is Covering Its Costs” by Edward Conrad is careful about its use of stock and flow variables, and comes to the conclusion that it is.

Last week the Congressional Budget Office released a 10-year forecast—the first to assess the effects of tax reform after one year of hard results. Compared with its prereform projection, the CBO now expects annual GDP growth to be almost $750 billion higher by 2027, the last year of its prior forecast. A strong case can be made that tax reform played a predominant role in accelerating GDP growth.

Do note that the CBO is supposed to be non-partisan, although most people think it leans a little towards the Democrats.

On the other side of the ledger, the CBO predicts the tax cuts will add $1.9 trillion of additional debt in the coming decade …

The first is a flow (since its GDP), while the second is a stock (since its debt). So they should not be directly compared.

However, the interest on the new debt will be a flow, and can be compared to GDP:

… and that the government will pay about $60 billion more in interest each year as a result.

How does this compare to tax revenue?

… The government is on pace to collect more than $120 billion each year from that additional $750 billion of GDP—much more than enough to cover the additional interest payments. Even if a significant portion of the projected GDP gains since 2017 are not the result of tax reform, the tax cut still pays for itself.

Do note that this is not a Laffer curve type of result (that would be that a lower tax rate brings in more tax revenue merely because the rate had been set too high). As argued in many posts on this blog last year, corporate tax rate reduction leads to increased investment because capital can be moved to where it earns the highest return, which in turn makes workers more productive.

What Has Obamacare Actually Done?

**** I have some links to add to this, but they are on my PC in the office. I’ll add those on Wednesday morning.

Ummm … I hope you get that — informed or uninformed — most people’s opinions about healthcare and healthcare finance are not very sharp.

After several years of Obamacare, there’s now serious research about its effects. The hot new one that economists are talking about is entitled “The Impact of the Affordable Care Act: Evidence from California’s Hospital Sector”.

Obamacare was sold as a lot of different things to different people (it’s a little like the musical “The Music Man”). One important aspect of this that got little attention (or understanding) on the part of the general public is that it required buy-in from the hospital industry. While healthcare is a large part of U.S. GDP, there is always a constant strain of thought that providers are not getting doing well financially, right? So they wouldn’t have signed on without some assurances that the policy was designed to ease their bottom lines.

This is related to the healthcare finance system we had before and after Obamacare. While Obamacare made many modifications, the core principle of the U.S. system remained intact: people seek to attain overpriced private insurance with very broad and deep coverage (often as a job benefit), providers overcharge those customers, and the excess is used to pay for the healthcare of people without coverage. If that excess is not enough, providers have an existential problem. That sort of care is provided for by two types of institutions: 1) county hospitals that must “take everyone”, and 2) hospitals that run on charitable donations.

Discussions of the high cost of the U.S. system tend to miss 3 salient features. First, Americans are not living a comparable lifestyle to most of the comparison countries. This is important because the income elasticity of healthcare is higher than 1 (technically, peoples’ purchases indicate it is a luxury good), so people with more money will buy proportionally more healthcare. Second, healthcare outcomes are better in the U.S. than in other countries: diseases are spotted earlier, and life expectancy after treatment is better (Americans tend to screw up their life expectancy before they get to the doctor). Third, the strong net inflows of “medical tourists” suggest many people are well aware of the second point.

Please note that none of this should indicate that I am an apologist for the U.S. system. I’m just pointing out that the evidence that we get what we pay for, and that we choose to pay for more healthcare because we can, is quite strong and needs to be acknowledged more widely.

So, what did they find?

  • Medicaid enrollments are up nationwide. (Medicaid and Medicare are often confused: the former is for the poor, the latter is for the old).
  • No increase (in California) in private coverage. In short, the healthcare exchanges were a waste.
  • Less people are paying for healthcare out-of-pocket. Combined with the last two, this indicates that all of this change is coming through Medicaid.
  • Increases in payments through Medicaid are also heavily substituting for payments that used to be made by county hospitals. Since Medicaid is funded through federal revenues, this amounts to a transfer from counties nationwide that had lower indigent costs to those that had higher indigent costs. In combination with other research, this suggests we are providing more healthcare funding to people who don’t value healthcare very highly.
  • The CBO indicates that Obamacare increased federal spending by $120B/yr. That’s a 3% increase in federal outlays (that’s “the budget” that Congress passes), or a 9% increase in federal government expenditures on consumption and investment (the G in Y=C+I+G+X).
  • Obamacare has increases access to hospital care, and ER utilization. And people are choosing to go to better quality facilities. However, this effect is not large: utility estimates suggest it is comparable to living 4 miles closer to the hospital.
  • No net improvement on healthcare outcomes. Do note that the estimates are positive, but that the variability of healthcare outcomes swamps that and makes it statistically insignificant.
  • Hospitals are bringing in more revenue.
  • The gains in hospital revenue have gone mostly to those serving more indigent patients (primarily those county hospitals).
  • Hospitals do not seem to be spending the increased revenue on improved quality or capital investments. This suggests it is filling holes associated with previous shortfalls.

How can all that best be summarized? How about this: we’re transferring more money from richer to poorer counties, through Medicaid, to provide better coverage to people who didn’t think it was worth the price, but they’re using it, and the hospitals are benefiting, but for the patients it’s a wash.

Trump was notably surprised when he said “Nobody knew hat healthcare could be so complicated.” It seems it may have been more complicated than the Democrats thought when they passed Obamacare too.

Monday, February 4, 2019

Economizing Is Hard (and That May be a Big Problem)

Economists are often criticized for making unrealistic assumptions about the behavior of “people” in our models: it seems implausible that real people would behave as intelligently as the “people” in the models are assumed to do.

In defense of economists, I will say that at higher levels (where you start to do a lot of theory) a lot of that implausibly smart behavior is assumed because you can’t even start to solve the problems we think about without presuming a lot of smarts: it just makes the math easier. And, then as the theory advances, we figure out ways to incorporate less smart behavior into our models.

Anyway, there’s new empirical research out about this. In “IQ, Expectations, and Choice”, researchers look at the accuracy of inflation expectations, and financial choices based on that, through the filter of IQ (their sample is men only). And what they find is not pretty.

Here’s the macro issue they’re worried about:

After the financial crisis, several governments around the world implemented unconventional policy measures to decrease household leverage and increase household spending so as to avoid a liquidity trap. Policies such as mortgage refinancing programs and unconventional monetary policy aimed to affect choice through managing households’ beliefs about future macroeconomic conditions and hence stimulating consumption over savings. Unfortunately, these policies turned out to be much less effective than expected. A candidate explanation for such ineffectiveness is that many households’ expectations might not react to policy announcement merely because households make mistakes in forming their expectations and have no understanding of economic mechanisms. [emphasis is mine, not theirs]

So, they got a long-term data set from Finland, where all men have to take an IQ test for military service at age 20. Then they match that up with consumer surveys done later in life, typically around age 33. It’s somewhat technical, so let me translate:

  • Higher IQ men made smaller errors in their expectations of inflation.
  • Lower IQ men did not adjust their current expectations at all when their past expectations were inaccurate.
  • Lower IQ men rounded their expectations more drastically.
  • Lower IQ men were more likely to report implausible or unrealistic numbers for inflationary expectations.

In one sense, none of that is very surprising, so … who cares, right?

Except that theory tells us that people behaving optimally should adjust their consumption when their expectations of inflation change.

…We find low-IQ men do not respond to changing inflation expectations … These results suggest that men with low cognitive abilities might not fully understand economic incentives, irrespective of the extent to which they are informed about current and future macroeconomic variables.

This is a doozy:

… Non-responsiveness of low-cognitive-ability individuals … might result in an implicit redistribution from low- to high-cognitive abilities men when central banks or government implement policies to stimulate demand via policies that aim to raise inflation expectations. The lack of forward-looking attitudes in low-cognitive-ability individuals might also determine a lower sensitivity to policy shocks aiming to favor
forward-looking saving and borrowing choices. Hence, cognitive abilities might contribute to changes in wealth inequality over time. Limited reaction to policy interventions by many households would also be detrimental for governments that aim to change aggregate consumption and saving patterns throughout the business cycle.

That is not pretty: expansionary monetary policy might have a reverse Robin Hood effect, and policies to discourage poor saving/borrowing decisions might not help those who have the most to lose. That’s a big problem, because 1) monetary policy is a common and basic tool of countries around the globe who are presuming that it can’t be subverted by the poor choices individuals sometimes make, and 2) it’s coverage in principles is at least somewhat indicative that this is as easy as understanding macroeconomic policy can be (and it may not be easy enough).

Friday, February 1, 2019

Further Reflection On the Quodlibet Question of Whether or Not the Housing Crisis Caused the Last Recession

For this one, the content of this post is required. The links are optional, but would make great reading for the intensely interested student.

****************************************************

I forgot a sixth point in my reply to GS’s question. This is, that financial crises and recessions are two different things, and that they do not have to occur together. For example, the 1987 stock market crash was a financial crisis, but there was no recession from 1982 to 1990. Part of what made the last recession so bad was that the financial crisis overlapped it. We saw the first signs of declining home prices in southwestern Florida in early 2006, followed by the first signs of financial trouble in April 2007 with the bankruptcy filing by New Century. The recession itself began 8 months later with a December 2007 peak. The first 9 months of the recession were relatively mild, before the bankruptcy filing of the large financial firm Lehman Brothers in September 2008 sent the economy into steep decline. Arguably, the next 4 months’ decline was steep enough to be comparable to part of the Great Depression, although not nearly as sustained. In the Spring 2009 version of your class, we kept an eye on the data and started seeing brighter signs in late January. The economy troughed in July. The financial crisis went on for some time after that, but as early as March 2009, stronger banks were already trying to pay back their “bailout” because it wasn’t (and in some cases hadn’t been) needed.†

****************************************************

I put the above into a post because the new issue of the Journal of Economic Perspectives  just came out. This is freely accessible. In this issue they have a symposium of 3 articles on the post-crisis financial regulation.

Former Fed Governor Tarullo writes that improved regulations have made the biggest banks stronger, but that “… the current regulatory framework does not deal effectively with threats to financial stability outside the perimeter of regulated banking organizations, notably from forms of shadow banking.” Shadow banks are financial institutions with some bank-like operations, but which are not banks at all. Examples include … hmmm … New Century (which was a REIT), and Lehman Brothers (which was an investment bank). Shadow banks get into banking-like operations in the first place because they can offer services which banking regulation prevents. There’s clearly a demand for these services, and they can clearly create crises, but we’ve done little about them.

Duffie (a big name in finance) partially uses the language I used in class the other day. He calls the housing crisis a shock rather than an impulse (shock might be more common terminology than impulse, and I use both). But he specifically argues that the financial system “became a key channel of propagation”. In parallel to Tarullo, Duffie argues that we still have a “too big to fail” mentality towards certain firms in the financial industry, but our new regulations don’t cover whole industries which are viewed this way.

Aikman, Bridge, Kashyap, and Siegert argue that better financial regulation could have prevented the financial crisis from making the recession worse (this is called macroprudential regulation). These include better monitoring of risk in real time, forcing financial firms to reduce leverage, providing liquidity for institutions to get out of funding mismatches — like borrowing short and lending long, and helping households reduce their stock of debt. They then contrast the U.S. and the U.K., and argue that the U.K.’s new institutions are well-equipped to address these problems. However, the U.S. institution, Dodd-Frank’s Financial Stability Oversight Council lacks authority to address these problems directly, and can be circumvented through regulatory capture. Ugh.

† I heard about the financial crisis vicariously, two separate times, but didn’t know what to make of it at the time.

In one case, a professor you all know brought me a consulting project to potentially work on (we were a candidate, and ultimately didn’t get the job). It was from a huge international bank. They were having problems because mortgage loans were going delinquent (by 30 days). That’s the normal part. Some of those get back on track, and some go delinquent by 60 days, and here was the new thing: the rate of ones that were getting worse was going up, and they didn’t know why. I still have that project’s files on my computer, and they’re dated December 2, 2006.

In the second case, SUU hired a new professor. I happened to run into this guy at a restaurant over the summer, and got to talking. He had left Florida Gulf Coast University, a new-ish school, south of Fort Myers, in the then booming southwestern corner of the peninsula. He got out because the housing market there had crashed, and and he didn’t want to lose a bundle on the home he owned. That was in August 2007 … 4 months before the recession started, 7 months before Bear Stearns was merged to avoid a crisis, and 13 months before Lehman Brothers went bankrupt. That’s pretty close to the top of this extensive timeline of the financial crisis.

Thursday, January 31, 2019

Public Economists You Might Try Reading (Optional)

This is from Alex Tabarrok. The quotes are from an article entitled “How Are Economists Portrayed by the Media? Let’s Ask Them.”

Some journalists (of all political stripes) who write with great economic understanding are

… The quality of the coverage of economics in the media is often excellent and has never been better. Greg Ip, David Leonhardt, Catherine Rampell, Adam Davidson, Stacey Vanek Smith, Cardiff Garcia, Megan McArdle all do superb economic commentary and reporting not just about the economy but about economics. And those are only the people off the top of my head, I could name many more.

Some of these people write regular columns, that appear on the same day(s) every week. Others write occasional columns, that appear irregularly, but still once a week or so.

Ip writes quite a bit for the Wall Street Journal. He writes for two occasional columns called Capital Account and The Outlook. He also writes a lot of the news articles in their Economy section.

David Leonhardt writes a few op-ed pieces a week for The New York Times.

Catherine Rampell writes for The Washington Post, and has a piece appearing every few days. Megan McArdle writes for them as well.

Adam Davidson writes for The New Yorker, mostly about politics, but his understanding of the economics of that politics is very good.

If you like to listen, Stacey Vanek Smith and Cardiff Garcia are on NPR’s Planet Money show. You can also subscribe to her podcast The Indicator.

And then there’s professional economists you might read, like:

The public also has access to top economists through the blogs and social media. I would count Paul Krugman, Tyler Cowen, John Cochrane, and Jeniffer Doleac [sic] in this category.

Krugman’s columns are from The New York Times, where he’s been a regular columnist for over a decade. He’s been a professor at Princeton for about 40 years, and won a Nobel Prize for his work on one aspect of trade (for my money, he could win a second for a different aspect, if they awarded them that way).

I am not yet familiar with Jeniffer Doleac. She’s young/new. I’m on the lookout for her stuff now (she is on Medium and/or Twitter) .

Of course, all of these people also write for other outlets and in other formats.

Thursday, January 24, 2019

What Are They Fighting Over? Walls and Border Walls Edition

In this class, we cover current events as they relate to macroeconomic policy. It’s hard to believe, but the current debate over “the wall” is an issue for class this semester, since the government is partially shut down over this, and that has (modest) macroeconomic consequences.

So, what does Trump want, and what is Pelosi refusing to cooperate with? (Keep in mind, that she has constituents she’s trying to satisfy, and controls a very blunt instrument).

  • Trump wants $5B for “a wall” on our southern border. To make the math clear, I’m going to rewrite that as $5,000M.
  • That is a one-time expense. Yes, there would be other expenses for other sections in the future. And yes there would be a flow of expenses to maintain what is built with the $5,000M.
  • Foxnews.com reports that DHS plans to add 215 miles of new and/or improved wall with the money. That works out to about $25M per mile.
  • We already have a lot of wall on that border. Check out this fantastic interactive graphics from The New York Times. The border is roughly 2,000 miles long, the western third mostly sits on federal government land (mostly BLM), and almost all of that is completely walled already (some of the money is intended to make those parts harder to pass through).
  • Yes, Republicans are kind of correct that Democrats supported building those barriers. However, do note what was funded before was what Trump now regards as inadequate, and that part of the current proposal is to fix that up.
  • Newer and better estimates show that the “official” numbers from the Census Bureau to scope the size of our illegal immigrant population appear to be grossly understated (if you’re on the low side by half, I wonder how the Census Bureau has any voice in this debate at all).
  • We also employ 16K Border Patrol agents along the southern border. Let’s ballpark that: 16K agents, getting compensated at $100K/yr on average, works out to $1,600M/yr. In most organizations, labor is 2/3 of the cost, so figure $2,500M/yr: so an annual expense flow that quickly swamps what Trump is asking for.
  • Ummm … don’t forget that we have (sound barrier) walls all over our interstates. In fact, we have more of those than we do border walls on the southern border (about 4 times as much). These are cheaper though, costing about 10% of what border walls do. Ballparking it out, they would cost about $10,000M to build all at once. But we build them incrementally; for example they spent roughly $500M on them between 2008 and 2010.
  • Mexico does not have a border wall on its southern border (with Guatemala): this is an internet hoax. However, the border is very rugged, so most people follow the roads, and Mexico has had longstanding issues with its own illegal immigration. Yes, there has been serious (but guarded) talk in Mexico, for a long time, that maybe they need to build a wall too. The new Mexican administration is against this.

The upshot of all this is that … whether you like the idea or not … walls are not very expensive. I’m not sure if they are cost-effective, but a lot of governments seem to think they are: they are building them all over the world (many longer than ours), it’s been a big trend of the last 20 years, and check out this map from the Wikipedia page on border barriers to get a sense of the scope:

 Border Barriers in the World

I do not know how to measure the cost-effectiveness of our current border barriers. But, it’s very interesting that both the poor and the improved estimates of the illegal immigrant population both level off after the bipartisan passage of the funding that built the barriers we now have. To me, that suggests they did their job.

BTW: Denmark wants to build a fence on its border with Germany!!! It will be 44 miles long, and is intended to keep wild boar from migrating north. At least that’s what they say: Denmark (with the happiest citizens in the world, has taken a hard turn against immigrants, so it’s useful to ask if the boar wall will serve a double purpose, given that Denmark is already fairly successful at shutting down illegal immigration at this border).

N.B. The whole discussion above about one-time expenses vs paying the Border Patrol is an example of the whole stock-flow distinction covered in Chapter III of the class Handbook, and is related to Bastiat’s arguments about both the broken window fallacy, and what is seen and not seen.

Personal and Professional Opinion: honestly, I really wish I didn’t have to talk about this issue. I don’t care that much: on net I think there are solid estimates that immigration is beneficial on net. But macroeconomically, we should be clear about two things: 1) it’s the gradient of well-being difference between countries that leads to immigration, and 2) around the world the swelling numbers of illegal immigrants reflect higher incomes in poorer countries that make travel possible at all. So, from # 1, we’re never going to get rid of this problem unless we make the U.S. poorer and Latin America richer. And, last time I checked poor people getting richer was a good thing, so # 2 suggests this issue is never going to get smaller (wall or not).