Matthew Yglesias's Blog, page 2360

Appropriations Deal Kills Ron Wyden's "Free Choice" Health Care Vouchers For No Good Reason

As details of the specific content of the appropriations agreement continue to filter out, some of it looks pretty weird. It seems, for example, that an amendment Senator Ron Wyden (D-OR) got into the Affordable Care Act aimed at making it easier for people with employer-provided health insurance to opt out of the plan their boss' HR director chose for them and buy coverage in the exchanges instead was killed off.

We don't really know who killed it, but it doesn't have any meaningful budgetary impact so it's not like this was a concession made in order to reach some target cut figure.

I know some people on the progressive side had concerns about Wyden's idea, but I think it was a basically sound effort to speed up the health care bill's transformation of insurance for the majority of Americans who are currently ensured. Various other provisions of the Affordable Care Act mean that we'll be evolving in a Wydenish direction over time anyway, but I think the very delayed phase-in of the ACA structure is much more bug than feature, so I'm sad to see it further delayed.

Talking About Debt At a Time of Low Interest Rates, Low Inflation, And High Unemployment Is Crazy

The news that the President is planning to release a plan for long-term debt reduction this week will attract a lot of commentary on the political wisdom of the approach and the policy merits of his ideas, but it's worth pointing out yet again how crazy it is for this topic to be taking center stage on the Washington agenda. The main problem with high levels of government debt is that in order to generate demand for bonds it might be necessary to offer investors very high interest rates. And if investors can obtain high interest rates by lending to the government, they'll demand even higher interest rates to lend to the private sector. This "crowding out" effect means that private sector investment will be lower than optimal, and enterprise that could be profitable in a lower-debt scenario are now unprofitable.

That's bad, but it's not happening today.

Another potential problem with high levels of government debt is that it's possible that central bank operations to keep interest rates low could be leading to dangerous levels of inflation. But that's not what's happening now. Expectations of future inflation are anchored slightly below the Fed's target level. The price level is well below the long-term trend and shows no sign of catching up. There's no crowding out problem and there's no inflation problem.

There is, however, a serious problem of idleness.

In human terms, that's first and foremost a problem of people actively looking for work who aren't doing any work. Secondarily, it's people who'd ideally be working longer hours who are working part-time instead. And third it's people who once upon a time were in the labor force but have now given up and aren't doing market labor. But the idleness has other manifestations. It's vacant storefronts in cities and malls across America. It's vacant office space in almost all of our metropolitan areas. It's factories who've canceled shifts, and trucks plying the highways only half full. These people and these machines could be doing something. The people haven't fallen ill. The offices haven't been destroyed by an earthquake.

But instead of focusing on the problem of idleness, we're focused on the problem of debt even though nobody can say what problem in the lives of Americans in April of 2011 is caused by too much debt. And the agenda cycle here is depressing. Once upon a time Ronald Reagan was president, and the agenda was focused on gigantic debt-increases tax cuts and boosts in defense spending. Once upon a time the administration of Bill Clinton succeeded in achieving massive deficit reduction. At that time, George W Bush argued that the absence of giant deficits was an indication of policy failure requiring massive tax cuts to address it. The leading economic lights of the time including Maestro Alan Greenspan argued passionately that insufficient debt was a huge problem and one that only tax cuts could save. Then with Barack Obama in office, even as all the objective indicators point to the need to focus on unemployment the Beltway is seized with a passionate need to address the problem of too much debt.

It makes me a bit sick.

Unfree Labor

It's twenty years old, but somehow Amazon's recommending software told me I would enjoy Peter Kolchin's Unfree Labor: American Slavery and Russian Serfdom and the software was correct.

The comparative perspective serves to put the subject in an interesting light. The creation of the serf economy and the plantation slave economy happened at roughly the same time, and under what were in some ways broadly similar circumstances—the expansion of European peoples into a vast new periphery. Under normal circumstances, large scale landownership was sufficient to make a local elite rich. But under conditions of territorial expansion, the value of land relative to labor was too low for a conventional rent-based strategy to work. You needed to own the workforce to prevent them from setting out for more vacant pastures. But while the basic economic logic was similar in both cases, the social realities were quite different. Russian serfs were Russian orthodox peasants in a country primarily inhabited by Russian orthodox peasants, and landlord absenteeism meant that in a day-to-day sense peasant communities were substantially self-governing. American slaves were, by contrast, a closely supervised and highly visible minority suffering from intense disruption of pre-existing social and cultural networks. Conversely, material living standards on American plantations were higher than on Russian estates including for the unfree work forces. These two factors seem to have combined to make the Dixie slave economy considerably more robust. Russian serfdom sort of goes out with whimper in the 1850s and 60s with public opinion strongly believing that it's holding the rural economy back. American slavery, by contrast, obviously goes out with a bang with white southerners quite committed to its continued social and economic benefits.

My one qualm is that I wanted to hear more about the underlying economics. How is the surplus created by unfree labor divided between his current owner, his current owner's customers, and the original enslaver of the unfree worker's ancestors?

The book's footnotes also led me to the fact that the Works Progress Administration compiled oral histories of surviving slaves in the 1930s and Amazon has them available for free download. There are various problems with them as historical sources, but they're very interesting reading.

Addressing Prenatal Opiate Use

The story in Sunday's NYT by Abby Goodman and Katie Zezima on newborn babies in Maine suffering from opiate withdrawal since their mothers were addicted to OxyContin makes for excellent reading. But nothing in the piece particularly suggested an appropriate policy rememdy. Fortunately, Harold Pollack has some experience with this issue and some good ideas:

I've done a fair amount of research on substance use among pregnant and parenting women. Eleven years ago, at Mark Kleiman's behest, I wrote a piece for the Drug Policy Analysis Bulletin, was called "when pregnant women use crack." I argued then that the "crack baby" problem was often a pediatric problem masquerading as an obstetric one. I'd stand by this basic perspective.

People are often most disturbed by the direct biological impacts of a specific substance, especially because these impacts are often poorly-understood at the period when prenatal substance use first attracts public attention. Most of the time, the chief threats to maternal and infant well-being do not arise from the immediate teratogenic properties of a drug on the developing fetus. With the ironic and crucial exception of alcohol, the direct biological impacts of intoxicating substances are readily overstated.

Most pregnant women who use illicit drugs will have basically healthy babies. When they don't, the underlying biological mechanism is often something other than the illicit drug, but something that becomes much more difficult to properly address when illicit drug use is in the mix. They may have infections that affect birth outcomes. They are likely to be smoking and drinking. They may have depression or other mental health concerns. They may have poor nutrition and poor general health. Some of these women will be exposed to domestic violence or various challenges that come with being pregnant and not having much money. They may delay prenatal care because they are ambivalent about the pregnancy. They may be afraid or ashamed to access medical resources when they have a drug problem.

The upshot of all of this is that while obviously being addicted to opiates while pregnant is far from an ideal situation, it's one where the range of possible outcomes is actually quite wide. The essential thing is to avoid adopting an approach that's so punitive toward the women in question that it leads them to avoid seeking the substantial public health resources that are available to manage the situation. Effective engagement with people living at the margins of society is difficult, but possible, and it makes a big difference: "the real challenge is to develop and field good interventions to help pregnant women with drug problems both before and after their children are born."

The Overton Window

Given the objective constellation of forces, I don't think it was necessarily a mistake of the White House to sign off on the appropriations deal. The deal will hurt the macroeconomy, but a shutdown would have hurt it more. But the administration's rhetoric about the deal is a good deal harder to accept. When people with badly wrongheaded ideas about economic policy gain control of congress, bad deals become inevitable. Signing them is forgivable. Turning around and calling the bad deal a good one is much less forgivable.

Now we have Barack Obama hailing large spending cuts at a time of high unemployment and low interest rates and Mike Pence saying the deal's not good enough to vote for. John Boehner now holds the center ground, and "everyone agrees" that it makes sense to reduce aggregate demand in the middle of a recession.

Blame Institutions, Not People

Bob Kuttner :

[Larry] Summers was terrific, acknowledging that the stimulus of February 2009 was too small, that the idea of deflating our way to recovery is insane, that de-regulation had been excessive, and that much of the economics profession missed the developing crisis because its infatuation with self-correcting markets.

If only this man had been Obama's chief economic adviser!

It reminded me a bit of Eisenhower's farewell address, warning of a military-industrial complex, or Citizen Jimmy Carter's sublime post-presidency. Why do these people find their consciences and souls after they give up power?

I think that's a very smart observation, but all too often people fail to draw the correct implications. The takeaway here ought to be that we all need to try harder to resist the fundamental attribution error and to avoid overrating the importance of specific people. If it often seems that ex-officials are wiser and more moral than they were when in office, maybe the problem is not with the officials but the offices.

Negative Interest Rates And The Carry Trade

Tyler Cowen asked yesterday if the stimulative impact of hypothetical negative nominal interest rates wouldn't just be undermined by people shifting into a different currency. My first response was that such a move would reduce the value of the currency in question, thus expanding demand through the net exports channel. But my second and better response is that whatever problems may or may not exist in this domain have nothing in particular to do with negative nominal interest rates.

Even in a zero lower bound world, interest rate differentials exist and therefore the carry trade happens. To what extent this is a problem for monetary policy is an interesting issue. My understanding of the evidence is that capital controls help a country maintain monetary policy autonomy which to me is a pretty strong argument for capital controls. But either way, there's no special issue of negative nominal rates here, and it still seems to me to be the case that moving to an all-digital currency adds an important stabilization tool.

The Lump of Buildings Fallacy

Ryan Avent on the economics of new buildings in a growing metropolitan area:

But you can see the problem. If you limit building supply, then you limit the number of firms that can locate in an area. But firms don't work in isolation. They create demand for other businesses (accountants, consultants, lawyers, ad firms, or design firms, for instance). Additional supply, by making it affordable for more businesses to operate in an area, attracts additional ancillary uses, which will occupy still more space.

Now, if there is falling demand for an area in the first place — if some structural trend, like suburbanization associated with rapid increases in car ownership, or like the collapse of Midwestern industry, is undermining the very purpose behind an economic node — then adding a lot of new supply might accelerate decline. When rents are falling and vacancy rates are rising, local leaders often think that a bold new project may turn an area around. But this is mistaken; it will add to supply and accelerate price declines, potentially pushing rents below building maintenance costs and generating pressure to tear down existing structures.

But this is precisely the opposite of what we observe in the economically dynamic, skill-driven cities in which supply limits are so enormously costly.

Exactly. If you make it cheaper for a company to get the office space it needs to expand, you increase demand for secondary business services. And the increased employment in those secondary business service fields also increases demand for lower skilled support staff (janitors, security guards) as well as for general retail and entertainment services. There's a huge multiplier associated with an increase in business activity that's mostly limited by the high cost of space and the hassles of congestion (not just traffic jams, but general crowding and unpleasantness). If you manage congestion better and reduce restrictions on the availability of space, you can reap big benefits.

My Debt Ceiling Advice

With the political world gearing up for a debt ceiling fight, my hope and advice to the administration and its allies in congress would be for them to be doing everything in their power to push back against this idea. The view I would be pushing, formally and informally through all channels, is that there is not going to be a debt ceiling fight. There will be no fight because there's nothing to fight over because there's no negotiation to conduct.

Barack Obama's position on the debt ceiling is that raising the debt ceiling would be better than not raising the debt ceiling. Conveniently, John Boehner's position on the debt ceiling is that raising the debt ceiling would be better than not raising the debt ceiling. Under the circumstances, the following legislative bargain suggests itself: Raise the debt ceiling. Nothing cataclysmic happens the day the US goes past the debt ceiling, but it's inconvenient. The way to resolve that inconvenience is to raise the debt ceiling. The next day it gets a bit worse and the solution is to raise the debt ceiling. A week later, it gets even worse and the solution is to raise the debt ceiling. A month later it gets even worse and the solution is to raise the debt ceiling.

If there's some large block of members of congress who genuinely believe that failing to raise the debt ceiling is superior to raising the debt ceiling, then obviously it would make sense to negotiate with those people. But I don't believe that there are any such people. I'm happy to believe that there are lots of members of congress whose preference is to vote no on a debt ceiling increase (as I believe Barack Obama did at one point) but that's something else. This is quite different from the shutdown battle, where I'm happy to believe that lots of members of congress really do think a week or two of government shutdown isn't such a bad thing.

The Quasi-War

Not a lot of people know about the so-called "Quasi-War" fought between the United States and France during the John Adams administration, but I think it's an important episode to recall for the purposes of ongoing debates about the Obama administration's protestations that the ongoing war in Libya somehow really isn't a war.

The point isn't that Obama is right—he's wrong—but that this is how the game's always been played. From the administration of the second president ever, we were fighting an undeclared war on presidential authority. And of course Adams' congressional opponents complained about it. And when they took over the White House, they certainly changed the basic orientation of American foreign policy. But they didn't really change the practice around this declaration of war business. Instead the new undeclared war was one against Barbary Pirates. Which isn't to say that congress wasn't involved in the fight against the pirates. The key point was that congress appropriated funds to send the obtain and dispatch the ships. And from thence onward, despite the fact that we sometimes did get formal declarations of war (World War One and World War Two) and sometimes had a special congressional vote (Gulf War One and Gulf War Two) and sometimes had wars purely on executive recognizance (Civil War, Korea) that congress has always played an important role in the process as the institution that runs the appropriations process.

Which is to say that congressional authorization for the Lincoln administration's prosecution of a war against the CSA took the form of appropriations and other measures to create the Union Army. And in the case of something like Libya, congressional authorization takes the form of the fact that we just this week had a giant political fight about appropriations in which nobody in the opposition leadership made the slightest gesture in the direction of a "rider" that would prevent the president from prosecuting that war or limiting his discretion in initiating new wars. This is what happens almost every year—congress appropriates funds for a military, and does little to tie the president's hands in terms of how he uses it. When congress wants to tie the president's hands—as it did in the seventies when it stopped the Ford administration from continuing involvement in the defense of South Vietnam—congress gets its way. But most of the time congress doesn't want to tie the president's hands.