J. Bradford DeLong's Blog, page 2112

Sensible Economists' Letter on the Affordable Care Act

David Cutler, Harold Pollack, and Karen Davenport put this together and assembled the signatures in 48 hours...

This week, Congress is holding hearings on the economic impact of health care reform.  We write to convey our strong conclusion that leaving in place the Patient Protection and Affordable Care Act of 2010 (ACA) will significantly strengthen the economy and promote economic recovery.  Repealing the Affordable Care Act would cause needless economic harm, and would set back efforts to create a more disciplined and more effective health care system.

Our conclusion is based on two economic principles.  First, high medical spending harms employment and economic growth.  Many studies demonstrate that employers respond to rising health insurance costs by reducing wages, hiring fewer workers, or some combination of the two.  Lack of universal coverage impairs job mobility as well; workers pass up opportunities for self-employment or for positions working for small firms because they fear losing their health insurance or facing higher premiums.  Second, the ACA contains essentially every cost-containment provision policy analysts have considered effective in reducing the rate of medical spending.  These provisions include:

Payment innovations including greater reimbursement for patient-centered primary care; bundled payments for hospital, physician, and other services provided for a single episode of care; shared savings approaches or capitation payments that reward accountable provider groups that assume responsibility for the continuum of a patient’s care; and pay-for-performance incentives for Medicare providers.
An Independent Payment Advisory Board with authority to make recommendations to reduce cost growth and improve quality within both Medicare and the health system as a whole
A new Innovation Center within the Centers for Medicare and Medicaid Services, or CMS, charged with streamlining the testing of demonstration and pilot projects in Medicare and rapidly expanding successful models across the program
Measures to inform patients and payers about the quality of medical care providers, which provide relatively low-quality, high-cost providers financial incentives to improve their care
Increased funding for comparative effectiveness research
Increased emphasis on wellness and prevention

Taken together, these provisions are likely to reduce employer spending on health insurance.  Estimates suggest spending reductions ranging from tens of billions of dollars to hundreds of billions of dollars.  Because repealing reform would eliminate the above provisions, it would increase business spending on health insurance, and hence reduce employment.  One study concludes that repealing ACA would produce job reductions of 250,000 to 400,000 annually over the next decade.  Worker mobility would be impaired as well, as people remain locked into less productive jobs just to get health insurance.

The budgetary impact of repeal would also be severe.  The Congressional Budget Office concludes that repealing ACA would increase the cumulative federal deficit by $230 billion over the next decade, and would further increase the deficit in later years. Other studies suggest that budgetary impact of repeal is even greater.  State and local governments would face even more serious fiscal challenges if the ACA were repealed, as they would lose substantial resources provided under the new law while facing the burdens of caring for 32 million more uninsured people. Repealing the ACA would thus make a difficult budget situation even worse.

Rather than undermining health reform, Congress needs to make ACA as successful as it can be. This would be as good for our economy as it would be for the health of our citizens.

We Are Live at The Week: RomneyWorld vs. ObamaWorld

President Romney vs. President Obama: Somewhere out there in the multiverse, beyond space and time -- perhaps in the place on the TV show "The Fringe” where the characters Olivia and Walter's counterparts Fauxlivia and Walternate live -- is a place in which President Mitt Romney won the 2008 presidential election. The specific reasons for Romney’s victory are not terribly important. Perhaps the fundamentalist preachers of the Republican Party endorsed rather than scorned Romney for his Mormonism. Perhaps traditional Republican power brokers were less willing to forgive John McCain for his previous forays into "bipartisanship." Probably Mitt Romney would have been better informed and appeared more of a leader in responding to the financial crisis than McCain. Add in a few missteps by the Democrats, and it might well have been Mitt Romney before whom John Roberts bobbled the oath of office in January 2009. It could have happened here, therefore it did happen somewhere out in the multiverse.

What do the American economy and economic policy look like right now along that President Romney branch of the multiverse?

Well, they look a lot like they look right here on earth.

President Romney would have provided support to troubled banks--capital injections and stress tests--but he would have avoided even a few targeted nationalizations of the banking system: he is, after all, a Republican.

He would not have pushed the Treasury to engage in large-scale quantitative easing through the Public-Private Investment Program or large-scale mortgage restructuring through the HAMP home mortgage modification program.

On monetary policy, Romney would most likely have reappointed Ben Bernanke and let the Federal Reserve proceed as it wished. On fiscal policy, Romney's Chairman of the Council of Economic Advisers, Mark Zandi, and his National Economic Council Director Douglas Holtz-Eakin would have proposed a fiscal stimulus package that was 60 percent tax cuts and 40 percent spending increases. The Democratic Congress would then have bargained with the administration to produce a stimulus that was 40 percent tax cuts and 60 percent spending.

But, of course, all these policies are exactly what Obama and the Democratic Congress actually enacted.

On global warming, Romney would have abandoned economists' preferred Pigovian carbon tax for the complicated, corporatist and business-friendlier approach of a cap-and-trade system; but he would have been no more successful than Obama in assembling a Senate coalition to achieve anything.

On healthcare, Romney would have taken his signature Massachusetts health care reform and expanded it nationwide: we would have RomneyCare. But that is precisely what we do have.

I see only two key policy differences between RomneyWorld and ObamaWorld. Had Romney been elected President in 2008 we would not have repealed the military policy of "Don't Ask, Don't Tell." And had Romney been elected President in 2008, Elizabeth Warren would not now be Assistant to the President for Consumer Financial Protection.

Otherwise? As far as policy is concerned, we would be smack on the mark that we are on now.

But the politics would be very, very different.

Think, first, of the Republicans -- their legislators and office holders, their spinmasters, stenographers, and intellectuals. All Republicans except a small grumbling fringe would be crowing about how ObamaCare -- oops! I mean RomneyCare -- is the golden mean between continued tolerance of a dysfunctional system and rash experimentation with overregulation. All would be saying that Republicans were able to get things done because they were not overambitious or free-market-phobic. Republicans would talk about how Romney had bargained the Dodd-Frank financial regulation into a form where it was not intrusive overregulation but merely a sober attempt to fence in a free-range system that had been out of control. But the Dodd-Frank bill that Romney would have signed would be, save for the consumer protection agency, the same as the Dodd-Frank bill that Obama signed.

Republicans would talk about how Romney's expansionary fiscal policy had been effective in fighting the recession. They would say that, if anything, an even larger fiscal stimulus package back in the start of 2009 would have further boosted the shaky economy.

In that alternate RomneyWorld, professional bipartisans would be praising Romney for minimizing partisanship and working for sensible policies. They would praise him for aggressively expanding the deficit so that the government boosted aggregate demand in the depths of the downturn when the private sector sat down. And they would praise him for having taken major steps to control entitlement spending through the long-term cost-cutting and revenue-raising provisions of RomneyCare. But these professional bipartisans who would be praising President Romney for tackling the entitlement problem through Romneycare, by taxing Cadillac health plans and by giving teeth to the Payment Authorization Board, would be the very same people who in our world give Barack Obama no credit for either.

So while the policy outcomes in RomneyWorld would be remarkably similar to those achieved in ObamaWorld, the rhetoric that accompanied and publicly defined those outcomes would have been markedly different. Democrats would have lamented Romney’s various half –measures (which they largely perceive as three-quarters measures in our world) to deal with the crises. But no cries of socialism, or vitriol about government takeovers, would have greeted RomneyCare. There would have been no winks and nods to assertions among a fevered base that the president is a usurper. There would be no claims from Senators like Charles Grassley--who until Election Day 2008 supported health reform based on requiring all individuals to pay a tax if they did not have health insurance --that the Affordable Care Act's requirement that all individuals obtain health insurance on pain of paying an extra tax is unconstitutional.

There would be no Republican senatorial candidates telling people that when their party loses an election, "Second Amendment remedies" may be necessary.

And, though it’s considered very impolite to say this out loud: quite possibly in alternate RomneyWorld our members of Congress would be less likely to get shot.

Economics as a Regressive Science: Negative Intellectual Progress Since the Days of Jean-Baptiste Say Watch

Mark Thoma sends us to Paul Krugman:

Great Leaps Backward: I’ve been watching with sympathy as David Beckworth and Scott Sumner discover that their updated monetarism actually puts them on my side of the great ideological divide — cast into the outer darkness along with John Maynard Keynes and Milton Friedman.

But what does the other side believe?... [Robert Murphy] says that what we call an economic boom is actually something like China’s disastrous Great Leap Forward, which led to a temporary surge in consumption but only at the expense of degradation of the country’s underlying productive capacity. And the unemployment that follows is a result of that degradation: there’s simply nothing useful for the unemployed workers to do.... [W]hat reason do we have to think that it has anything to do with the business cycles we actually see in market economies?...

[T]here are many... problems with the notion of a recession as a supply shock. A short sample: If inflation is a case of too much money chasing too few goods, why aren’t slumps associated with accelerating rather than decelerating inflation, as the supply of goods falls? Why is there such a strong correlation between nominal and real GDP? Why is there overwhelming evidence that when central banks decide to slow the economy, the economy does indeed slow? And on and on.

Oh, and what evidence is there that the economy’s capacity is damaged during booms? Investment rises, not falls, during booms; yes, I know that Austrians take refuge in cosmic talk about the complexity of production and how measured investment may not show what’s really happening, etc., but where’s the positive evidence of what they’re claiming?

The point is that the real world looks a lot like the one Keynes and Friedman envisioned, in which the demand side drives the business cycle. Why should anyone be determined to throw away 75 years of economic thought, to believe that these appearances are deceiving? Why the insistence on taking an intellectual Great Leap Backward?

Well, at that point we’re into talking about the essentially political nature of this thing...

I Thought It Was Polite to Listen to the Speech Before You Released a Statement on It?

Clearly I do not understand modern manners...

Pete Peterson, via Atrios:

No, Pete Peterson, You Cannot Demand An Embargo Without A Bag Of Cash Attached: EMBARGOED UNTIL 9:00 PM January 25, 2011

STATEMENT BY PETER G. PETERSON, CHAIRMAN OF THE PETER G. PETERSON FOUNDATION, ON PRESIDENT OBAMA’S STATE OF THE UNION ADDRESS

In his speech this evening, President Obama rightly addressed the need to achieve economic stability and promote growth. While it is certainly important for the President to focus on economic recovery and job creation in the short term, reducing our projected federal debt is essential to the nation’s economic health and prosperity in the long term.

A spending freeze is a step in the right direction, but it is only one element of the long-term fiscal plan we need.

As we work to strengthen our economy today, we cannot afford to turn our backs on the future. We must couple current efforts to stimulate the economy with a long-term plan that reduces the ballooning interest costs which buy us nothing and crowd out deeply needed investments. We cannot become more of an investment economy if we don’t have future resources to invest.

A variety of organizations, including the President’s Commission on Fiscal Responsibility and Reform, are coming forward with pragmatic solutions to our long-term fiscal challenges. The magnitude of the problem is so great that spending cuts or revenue increases alone will not be enough. This year, the President and Congress must work together to agree upon a comprehensive, bipartisan plan to be implemented when the economy recovers, in order put our nation on a sustainable long-term path to recovery, competitiveness and prosperity.

I Thought It Was Poiite to Listen to the Speech Before You Released a Statement on It?

Clearly I do not understand modern manners...

Pete Peterson, via Atrios:

No, Pete Peterson, You Cannot Demand An Embargo Without A Bag Of Cash Attached: EMBARGOED UNTIL 9:00 PM January 25, 2011

STATEMENT BY PETER G. PETERSON, CHAIRMAN OF THE PETER G. PETERSON FOUNDATION, ON PRESIDENT OBAMA’S STATE OF THE UNION ADDRESS

In his speech this evening, President Obama rightly addressed the need to achieve economic stability and promote growth. While it is certainly important for the President to focus on economic recovery and job creation in the short term, reducing our projected federal debt is essential to the nation’s economic health and prosperity in the long term.

A spending freeze is a step in the right direction, but it is only one element of the long-term fiscal plan we need.

As we work to strengthen our economy today, we cannot afford to turn our backs on the future. We must couple current efforts to stimulate the economy with a long-term plan that reduces the ballooning interest costs which buy us nothing and crowd out deeply needed investments. We cannot become more of an investment economy if we don’t have future resources to invest.

A variety of organizations, including the President’s Commission on Fiscal Responsibility and Reform, are coming forward with pragmatic solutions to our long-term fiscal challenges. The magnitude of the problem is so great that spending cuts or revenue increases alone will not be enough. This year, the President and Congress must work together to agree upon a comprehensive, bipartisan plan to be implemented when the economy recovers, in order put our nation on a sustainable long-term path to recovery, competitiveness and prosperity.

Austerity Double-Dip Watch: The United Kingdom

Jennifer Ryan:

Economy Shrinks More-Than-Expected as December Freeze Precedes Budget Cuts: Britain’s economy unexpectedly shrank the most in more than a year in the fourth quarter as construction slumped and the coldest December in a century hampered services and retailing. Gross domestic product fell 0.5 percent after increasing 0.7 percent in the previous quarter, the Office for National Statistics said in London today. Growth would have been “flattish” without the impact of the weather.... The pound dropped after the report, which shows the U.K. recovery faded even before Prime Minister David Cameron’s government increased sales tax to 20 percent this month, which may damp consumer demand this year. The data may reinforce calls for the Bank of England to hold off increasing its key interest rate to curb inflation. Governor Mervyn King, who leads the bank’s divided policy committee, delivers his first public speech of the year later today.

“The economy is underheating, not overheating,” Neil Mackinnon, an economist at VTB Capital Inc. in London and a former Treasury official, said in a phone interview. “An interest-rate increase would easily push the economy back into recession and would be a major policy error.”... The GDP drop is the biggest since the second quarter of 2009, when it fell 0.8 percent.... While these are “obviously disappointing numbers, there is “no question of changing” the fiscal plan, U.K. Chancellor of the Exchequer George Osborne said. “We will not be blown off course by bad weather.”

His opposition counterpart Ed Balls said in a statement that the figures were a “matter of great concern.” “George Osborne and the Treasury must urgently re-think their reckless plan to cut the deficit too far and too fast and start putting growth and jobs first,” Balls said....

King is due to deliver his speech in Newcastle, England at 7:40 p.m. local time. The Bank of England left its key rate on hold this month, and the outlook for growth and inflation has divided U.K. policy makers. Consumer-price increases accelerated to an annual 3.7 percent in December, the 13th month it’s been above the central bank’s 2 percent target. While policy maker Adam Posen has described recent price gains as temporary, his colleague Andrew Sentance said late yesterday it’s a “mistake” to label “global factors affecting inflation as one-off short-term disturbances.” “Emerging market and developing economies which appear to have shaped global price developments over the past decade, and this pattern looks set to continue into the future,” he said....

“Any notion that interest rates were going to be put up earlier than the fourth quarter this year, this is the final nail in the coffin for that sort of talk,” said Hetal Mehta, an economist at Daiwa Capital Markets Europe Ltd. in London. “The government will have to rely on the Bank of England to keep interest rates very low for a very long time in order to allow them to continue with their fiscal tightening.”

Snow last month kept Britons away from shops, creating the biggest-ever drop in retail sales for a December. Surveys by the Chartered Institute of Purchasing and Supply and Markit Economics Inc. showed services and construction also shrank....

The recovery faces further headwinds from government cuts to tackle a deficit that widened to 15.3 billion pounds ($24.4 billion) in December from 14.3 billion pounds a year earlier. The shortfall is projected to hit 10 percent of GDP this year.

Why Obama's Poll Ratings Are Rising

Our politics has been badly broken by the Republican Party. I think that Greg Sargent nails it:

Why Americans think Obama is too liberal: What McConnell was really saying here is that if any Republicans signed on to Obama's proposals, it risked suggesting to the American people that Obama's governing approach was moderate or even somewhat centrist -- something that could command some agreement. By contrast, when no Republicans signed on to Obama's proposals it made it far easier for them to paint Obama's agenda as ideologically off the rails to the left, which is exactly what they did.

If no Republicans were willing to sign on to Obama's proposals, that had to indicate that something was seriously amiss and that there was cause for real alarm about the overreaching nature of his agenda, right? And judging by the outcome of the midterms, this strategy worked....

[I]t's no accident that in the wake of Obama's successful passage of legislation with bipartisan support -- the tax deal, the New START treaty, the repeal of don't ask don't tell -- the new NBC/WSJ poll finds that the number who think Obama is "moderate" has suddenly jumped to the highest ever of his presidency. As McConnell recognized, denying Obama bipartisan support during his first two years made it far easier to paint him as an out-of-control old-style big government liberal....

What McConnell shrewdly recognized is that the public would read the absence of bipartisan cooperation with Obama as a sign of liberal extremism, and would perceive any bipartisan support for his agenda as a sign of moderation, regardless of the policy details. This is exactly what happened....

[Obama's] fundamental approach -- combine center-left and Republican solutions -- has been more or less the same throughout. He offered deals on health reform, just like on taxes. But they were rejected. The main difference is that Republicans signed on to the post-election initiatives, making them look "moderate" in comparison to the previous ones.

Hoisted from Comments: Are You Still Rich If You Spend Your Money Living in a Nice Place?

Bloix:

Are You Still Rich If You Spend Your Money Living in a Nice Place?: Re: "A family with two $75k earners is middle-class in the Bay Area, but is living high on the hog in Austin, Texas."

A family with two earners who can make $75k each in the Bay Area can't possibly make $75k each in Austin, Texas.

"more people would rather live in San Francisco than in Austin: that is why living in San Francisco is so expensive."

I strongly suspect that if you went down to the Embarcadero and made an announcement to all the legal assistants and IT personnel and secretaries and office managers and all the other support positions for the law firms and banks and brokers, "You can all move to Austin and get an equivalent job at your current salary," the support infrastructure of those office buildings would empty out in half an hour.

The reason the people who make $75k are in the Bay Area is that the people who make ten times that want to be in the Bay Area, and the $75k-ers need to be where the $750k-ers want to be.

Well, if they want to be $75Kers, they do.

And why do the $750Kers want to be in San Francisco? They clearly think the tradeoff is worth it, and the stuff rich people usually buy--very large homes with large grounds--is the stuff for which the price gradient is the steepest of all.

What More Is There to Be Said?

The kicker is that Jean-Baptiste Say did not believe in "Say's Law" as a short-run phenomenon. Even in 1803 he acknowledged the possibility of an excess demand for money--although he did dismiss it as a very transitory something that would be easily remedied:

Jean-Baptiste Say (1803), A Treatise on Political Economy Book I, Chapter XV: Sales cannot be said to be dull because money is scarce, but because other products are so. There is always money enough to conduct the circulation and mutual interchange of other values, when those values really exist. Should the increase of traffic require more money to facilitate it, the want is easily supplied, and is a strong indication of prosperity—a proof that a great abundance of values has been created, which it is wished to exchange for other values. In such cases, merchants know well enough how to find substitutes for the product serving as the medium of exchange or money...

By 1829, however, Say's analysis of an excess demand for money in a financial panic and its consequences for production and employment is--well, it sounds Keynesian:

Jean-Baptiste Say (1829), Cours Complet d'Economie Politique Pratique: The Bank [of England]... to limit its losses... forced the return of its banknotes and ceased to put new notes into circulation. It was then obliged to cease to discount commercial bills. Provincial banks were in consequence obliged to follow the same course, and commerce found itself deprived at a stroke of the advances on which it had counted, be it to create new businesses, or to give a lease of life to the old.

As the bills that businessmen had discounted came to maturity, they were obliged to meet them, and finding no more advances from the bankers, each was forced to use up all the resources at his disposal. They sold goods for half what they had cost. Business assets could not be sold at any price. As every type of merchandise had sunk below its costs of production, a multitude of workers were without work. Many bankruptcies were declared among merchants and among bankers, who having placed more bills in circulation than their personal wealth could cover, could no longer find guarantees to cover their issues beyond the undertakings of individuals, many of whom had themselves become bankrupt...

It has, after all, been known since at least 1829 that planned expenditure can fall short of planned production if people in aggregate plan to hold more liquid cash money, more savings vehicles, or more safe assets than financial markets have to supply--and that the consequence of planned spending falling short of planned production is depression and unemployment.

If Jean-Baptiste Say himself expressly argued that a financial crisis can produce a shortage o demand and a depression, what more is there to be said?

Paul Krugman:

The War on Demand: Something really strange has happened to the debate over economic policy in the face of the Great Recession and its aftermath — or maybe the real point is that events have revealed the true nature of the debate, stripping away some of the illusions. It’s a bigger story than any one point of dispute — say, over the size of the multiplier, or the effects of quantitative easing — might suggest. Basically, in the face of what I would have said is obviously a massive shortfall of aggregate demand, we’re seeing on all-out attack on the very notion that the demand side matters.

This isn’t entirely new, of course. Real business cycle theory has been a powerful force within academic economics for three decades. But... RBC guys had very little impact on public or policy discussion....

Now, however... it’s becoming clear that many people don’t so much disagree with the idea that demand matters as find it abhorrent, incomprehensible, or both. I fairly often get comments to the effect that I can’t possibly believe what I’m saying about monetary or fiscal policy, that no sensible person could believe that printing money or engaging in deficit spending will increase output and employment — never mind that all I’m saying is what Econ 101 textbooks have been saying for the last 62 years.

So what’s going on here?

First, Keynes was right: Say’s Law — the notion that income must be spent, and hence that supply creates its own demand — really is at the heart of the issue. Many, many people just can’t see how it’s possible for there to be an overall shortfall of demand. The reason I’ve always loved the baby-sitting coop story is that it’s a human-scale example of how demand shortfalls are possible. But my experience is that if you try telling that story to someone convinced that demand can’t ever be a problem, it just bounces off: the minute you finish, they’re back to saying that income must be spent on something, so a shortage of demand can never happen, and any rise in one person’s spending must lead to an equal fall in someone else’s spending.

Second... many people find the notion of inadequate demand abhorrent... [from] notions of morality.... [A] substantial number of writers on economics find the whole idea that the economy can suffer because people are too thrifty, insufficiently willing to spend, deeply repugnant.... The world shouldn’t be like that — and therefore it isn’t.

Third, monetarists — old-style Friedman-type monetarists who focus on monetary aggregates, or the new style which says that the Fed can and should target nominal GDP — are... part of the axis of monetary evil as far as the demand-deniers are concerned.... [F]rom the point of view of those who can’t see how demand can possibly matter they’re... Keynesians....

It’s kind of shocking if you think about it. Here we have a huge, hard-won intellectual achievement, one that accounts very well for the world we actually see, and yet it’s being thrown away because it doesn’t go along with ideological preconceptions. Once that sort of thing starts, where does it stop? The next thing you know, the theory of evolution will get the same treatment. Oh, wait.

Seriously, though, this is truly sad — and dangerous. Demand-side understanding, in my view, played a big role in helping us avoid a full replay of the Great Depression; if enough people had shared that understanding, we might have avoided even the minor-league Depression we’re going through. But willful ignorance is on the march — and the odds are that we’ll handle the next crisis very badly.

Liveblogging World War II: January 24, 1941

Harold Hinton:

LINDBERGH URGES NEGOTIATED PEACE: URGES NEUTRALITY; Aviator Testifies He Wants Neither Side to Win Conflict 'MISTAKE' TO AID BRITAIN This Prolongs War, He Says: Any negotiated peace to end the European war as soon as possible, whether or not such a peace would be considered just by the American people, would be preferable, in the interest of the United States, to prolonging the present conflict, Colonel Charles A. Lindbergh told the House Foreign Affairs Committee at its public hearing today.