J. Bradford DeLong's Blog, page 2152

Department of "Huh"? (Why Oh Why Can't We Have a Better Press Corps? New York Times Edition)

What the Simpson-Bowles tax provisions do:

Eric Toder and Daniel Baneman: TPC Tax Topics | Distributional Estimates for Bowles-Simpson "Chairmen's Mark":

What Greg Mankiw writes:

Deficit Reduction Plan Is Realistic: Erskine B. Bowles and Alan K. Simpson, the chairmen of President Obama’s deficit reduction commission, have taken at hard look at these tax expenditures — and they don’t like what they see. In their draft proposal, released earlier this month, they proposed doing away with tax expenditures, which together cost the Treasury over $1 trillion a year.

Such a drastic step would allow Mr. Bowles and Mr. Simpson to move the budget toward fiscal sustainability, while simultaneously reducing all income tax rates. Under their plan, the top tax rate would fall to 23 percent from the 35 percent in today’s law (and the 39.6 percent currently advocated by Democratic leadership).

This approach has long been the basic recipe for tax reform. By broadening the tax base and lowering tax rates, we can increase government revenue and distort incentives less. That should command widespread applause across the ideological spectrum. Unfortunately, the reaction has been less enthusiastic.

Pundits on the left are suspicious of any plan that reduces marginal tax rates on the rich. But, as Mr. Bowles and Mr. Simpson point out, tax expenditures disproportionately benefit those at the top of the economic ladder. According to their figures, tax expenditures increase the after-tax income of those in the bottom quintile by about 6 percent. Those in the top 1 percent of the income distribution enjoy about twice that gain. Progressives who are concerned about the gap between rich and poor should be eager to scale back tax expenditures.

Isn't it worth saying that it looks as though Simpson-Bowles is an average $7000/year tax cut for the top 1% and an average $600/year tax increase for the working and middle classes? "Progressives who are concerned about the gap between rich and poor should be eager to scale back tax expenditures" just does not cut it, does it?

Hoisted from the Archives: Partha Dasgupta Makes a Mistake in His Critique of the Stern Review

Partha Dasgupta Makes a Mistake in His Critique of the Stern Review (November 30, 2006):

Partha Dasgupta makes a mistake. This is a rare, rare, rare event. Dasgupta writes, criticizing the Stern Review:

http://www.econ.cam.ac.uk/faculty/dasgupta/Stern.pdf: To give you an example of what I mean, suppose, following the Review, we set delta equal to 0.1% per year and eta equal to 1 in a deterministic economy where the social rate of return on investment is, say, 4% a year. It is an easy calculation to show that the current generation in that model economy ought to save a full 97.5% of its GDP for the future! You should know that the aggregate savings ratio in the UK is currently about 15% of GDP. A 97.5% saving rate is so patently absurd that we must reject it out of hand. To accept it would be to claim that the current generation in the model economy ought literally to starve itself so that future generations are able to enjoy ever increasing consumption levels...

In the "deterministic economy where the social rate of return on investment is, say, 4% a year" model that Dasgupta is using, the concept of "output" Y is Haig-Simons output--what you could consume and still leave the economy next year with the same productive capacity as it has this year. With that definition of output Y, with consumption level C, and with social rate of return on investment r, it is indeed the case that the growth rate g(Y) of a zero-population-growth economy is:

g(Y) = r(1 - C/Y)

Take the expression for the rate of growth of consumption g(C) as a function of the parameters δ and η:

g(C) = (r - δ)/η

And see that the assumed values for r, δ, and η give us a 3.9% per year growth rate of consumption. If you impose the steady-state requirement that the growth rates of consumption and output be the same, you do indeed get a 97.5% savings rate--that consumption is 2.5% of Haig-Simons output:

C/Y = .025

because with r=4% per year that is the only way to get g(Y)=3.9%

But suppose that you use a different concept of output--GDP--and say that productive capacity increases not just because you save some of GDP but also because of improvements in knowledge and technology g(A), so that:

g(Y) = r(1 - C/Y) + g(A)

with worldwide g(A) equal, say, to 3% per year. Then our g(C) equation still gives us a 3.9% per year total economic growth rate, but our g(Y) equation is then:

3.9% = g(Y) = r(1 - C/Y) + g(A) = 4%(1 - C/Y) + 3%

which gives us a savings rate not of 97.5% of Haig-Simons output but rather of 22.5% of GDP, leaving 77.5% of GDP for consumption.

A consumption-to-output ratio of 77.5% is far from absurd, and so Dasgupta's critique of Stern fails. His mistake is in failing to remember that in his model Haig-Simons output is very, very different indeed from standard reported GDP.

That being said, I agree with most of Dasgupta's other major point: the action here is in the choice of the parameter η. I think it's appropriate to consider different ηs in the range from 1 to 5, and think the Stern Review should have done so.

(I'm also enough of a utilitarian fundamentalist to believe that the right value for δ is zero, and that Nordhaus's δ of 3% per year is unconscionable--it means that somebody born in 1960 "counts" for twice as much as somebody born in 1995, who in turn "counts" for twice as much as somebody born in 2020; somebody born in 1960 "counts" for 256 times as much as somebody born in 2160. That's not utilitarianism.)

A Depressing Thought for the Morning...

Sometime in the past two years I have passed a milestone: I will never again wake up free of pain...

Four Weeks Caffeine Free!!

Well, except when recovering from red-eye or other transcontinental or transoceanic airplane plights. Or for diet cokes before lectures (4 mg./oz.). Or for cups of decaf (0.5 mg./oz.)...

Econ 1: Fall 2010: U.C. Berkeley: Student Oral Presentation Articles for the Weeks of November 22 and November 29:

Presentation Articles for Weeks of November 22 and November 29:

Timothy Jost: "Implementing Health Reform: Emerging Guidance on Insurance Exchanges" http://healthaffairs.org/blog/2010/11/19/implementing-health-reform-emerging-guidance-on-insurance-exchanges/

Report of the Commission on the Measurement of Economic Performance and Social Progress, pp. 7-18 http://www.stiglitz-sen-fitoussi.fr/documents/rapport_anglais.pdf

Partha Dasgupta: Comments on the Stern Review http://www.econ.cam.ac.uk/faculty/dasgupta/STERN.pdf

Conor Friedersdorf Sends Us to Kevin Starr on When California Flirted With Fascism

Conor:

When California Flirted With Fascism | Politics | The American Scene: On several occasions, I’ve recommended Kevin Starr’s multi-volume history of California. Here’s a passage that is particularly striking, from page 176 of Endangered Dreams:

In early 1935 the City of Los Angeles established a Committee on Indigent Alien Transients, which reflected the bias of the city. Astonishingly, the committee openly defined an indigent alien transient ‘as being a transient entering the state of California without visible means of support and whose legal residence is foreign to the state of California.’ Thus the Committee, for all practical purposes, took California out of the Union. The City of Los Angeles would soon attempt to seize control of the state.

Long skilled in the techniques of rousting transients out of town after jailing them on vagrancy charges, the Los Angeles Police Department played an important role on the committee, on which the deputy chief of police sat as chairman. On 4 November 1935 the Committee on Indigent Alien Transients issued a report calling for the establishment of checkpoints manned by police and health officials at every major point of entry into the state. Transients who could not prove California residence, the report recommended, should be put into camps, preferably operated by the State Relief Administration, where they would be fingerprinted and their backgrounds checked for a criminal record. The report also called for “Vagrancy Penal Camps” for transients arrested on vagrancy charges. These penal camps would serve as labor pools for work upon roads, parks, and other public projects. Police should monitor all common carriers, railroads especially, and all main arterial highways in an effort to apprehend indigent alien transients seeking to enter the state. State and local officials, meanwhile, should form a statewide committee to supervise these activities: an extra-parliamentary task force responsible for sealing off the borders of California from transient migration.

Not surprisingly, these recommendations, offered with a straight face—with their suggestion of checkpoints, of preemptive arrests of those whose only crime was being poor in the Great Depression, of fingerprinting in forced labor camps, and, worse, of Vagrancy Penal Camps where thousands might be concentrated—did not meet with universal acceptance throughout the state. As paranoid as mainstream California might have become, it was not yet ready for such an unconstitutional, police state program.

Encouraged by local oligarchs, together with the City Council and the County Board of Supervisors, Los Angeles Police Chief James Davis, a spit-and-polish officer, resplendent in shiny black riding boots and a Sam Browne belt, brushed aside any constitutional scruples, of which the chief had few, and decided to go it alone. On 3 February 1936 Chief Davis dispatched 126 LAPD officers to sixteen crucial highway and railroad entry points throughout the state with orders to turn back any and all indigent transients who could not prove California residence. Within days, the Foreign Legion of Los Angeles, as it was soon called, had established checkpoints along the Oregon border in Del Norte, Siskiyou, and Modoc counties; in the central Sierra Nevada counties of Plumas, Lassen, Nevada, and Mono; in the city of Independence in Inyo County, and across the southern desert in the counties of San Bernardino, riverside, and Imperial. To maintain a semblance of legality, Chief Davis requested that his officers be locally deputized, which the sheriff of Del Norte County refused to do.

Among other things, this passage is a reminder that the current recession isn’t actually very much like The Great Depression, and that as astonishingly bad as today’s state and local officials are they’re not nearly so stark raving mad as the LAPD of old.

Karen Dynan and Don Kohn Support the Federal Reserve

KD and DK:

Fed keeps its focus amid the criticism: The US is navigating tough economic times... the economy... is not growing fast enough to reduce very high levels of unemployment... considerable excess capacity in labour and product markets for some time to come... likely to keep inflation well below the 1¾ to 2 per cent level that Ben Bernanke, the chairman of the Federal Reserve, has identified as desirable.

In an action designed to improve the prospects for the economy, the Fed has announced a programme to expand its holdings of intermediate and long-term Treasury securities. This is intended to promote an easing in financial conditions, thereby boosting spending and promoting a return of inflation to a more desirable level....

Will these purchases lead to much higher inflation?... [I]ntense competition in labour and product markets has driven underlying inflation to its lowest level in decades. With these conditions unlikely to disappear soon, inflation expectations and inflation itself could fall further....

Will the purchases lead to adverse consequences for other countries that will overwhelm any benefits, even for the US? Lower interest rates on US Treasury securities... put downward pressure on the dollar’s foreign exchange value. Some decline in the currency’s foreign exchange value is a way that easier monetary policy has traditionally bolstered activity and prevented undesirable declines in inflation. A lower dollar along with lower interest rates and higher asset prices in the US are not ends in and of themselves but rather channels through which the US can achieve a more vigorous and sustainable recovery in the context of long-run price stability. This outcome is in everyone’s interest....

A good discussion of the Fed’s difficult policy decision certainly is in the public interest. But a discussion of this broader agenda would hold more promise than the finger-pointing at the Fed that has been so prominent in recent commentary...

Will the PPACA Exchanges Offer Anything Other than Catastrophic Plans?

I don't know. I do know that if I were an insurance executive it would take a lot of Dutch Courage to make me be the first to offer a first-dollar comprehensive plan through the exchanges.

Yet another reason it would be very good for every state to start up a public option--and tell the federal government it needs to help finance it or the state will wash its hands of the exchanges completely.

Aaron Carroll:

What will insurance in the exchanges look like?:  I was talking with some very nice insurance company executives and managers yesterday, and asked them about what they might offer in the exchanges.  It’s worth sharing some thoughts. The media, and thus the country, are fixated on the politics at a national level.  I’ve argued before that’s missing the point, as much of this will happen at a state level.  But I think we have spent far too much time discussing repealing or defunding the bill, and not nearly enough on what still needs to be done. For instance, we just told millions of people that they can go to the exchanges in 2014 and buy insurance.  There won’t be any lifetime or annual limits.  There won’t be denials for pre-existing conditions.  There won’t be any surcharges for having such conditions.  And it’s going to be “reasonably” priced.

I asked what insurance companies might offer under those conditions.  After all, if it were really that easy to offer comprehensive insurance at a real discount, someone would already do it. Such insurance is going to have to come with restrictions.  There might be network restrictions (such as seeing only certain providers).  There might be gateways people don’t like.  And there might be other rules in place that people don’t anticipate.

My conversations lead me to believe that many people are expecting that the plans offered in the exchanges will be Medicare-like in many ways.  I feel like many people think they will have choice of doctor, choice of hospital, and the ability to dictate care.  I’m not seeing how insurance companies will be able to offer such products at prices people can afford.  As I talk to more and more people in the insurance industry, my thoughts seem confirmed.

I may be wrong, but I think it’s worth addressing.  Mistaken expectations have been, and continue to be, a real problem in health care reform.

Hoisted from Comments: On the Republicans Opposed to Quantitative Easing

Hoisted from Comments: Crying "Fire! Fire!!" in Noah's Flood Watch - Grasping Reality with Both Hands: Davis X. Machina said...

Not salt water economics, nor even fresh water economics, but holy water economics.

Bad News for Health Care Cost Containment

I disagree with Austin. I think that this is surprising and disappointing.

Austin Frakt:

News flash: Government meddles with Medicare plan payments: This, from Julie Appleby of Kaiser Heath News, really is not surprising, but it is disappointing:

In a surprising move, the Obama administration will extend special bonus payments meant to reward top-performing Medicare Advantage insurers to those that score only average ratings. The three-year plan goes beyond what the health law called for in creating the bonuses. The law says bonuses, which start in 2012, would go to insurers that scored at least four out of five “stars” on a set of quality measurements. Instead, a “demonstration project” authorized by Medicare officials will extend bonus payments to plans that score at least three stars. Based on this year’s star ratings, the change means 62 percent of all Medicare Advantage insurers — representing 84 percent of enrollees — will qualify for the quality bonuses, compared with only 14 percent of plans under the health law provisions. [...]

The total cost over the three years is $1.3 billion. Wall Street likes it: Barclays Capital analyst Joshua Raskin, in a report, called the decision a “clear and unexpected positive” for managed care stocks. But some consumer advocates expressed skepticism, wryly noting that lowering the bar for bonuses reminded them of the fictional Lake Wobegon, where all the children are above average. [...]

“It’s only been eight days since the election,” Raskin wrote in his report, “but the rollback of Medicare Advantage cuts got its first step forward.”

There are several things not to like about this. First, high quality won’t be achieved by paying for mediocrity. Second, the cuts to MA were part of the funding for expansion of health insurance. That they’re unraveling is both a cost issue and a political one. Opponents of the ACA said that the assumed savings from Medicare is not believable. Congress or CMS always gives it away.... Even if this only gives back a tiny fraction of the savings expected from Medicare, it just looks bad and gives critics of the health reform law ammunition. Third, it’s just another piece of evidence that administrative pricing doesn’t work. Give administrators the authority to fiddle with payments and they’re too heavily influenced by those getting paid. This has been a problem in Medicare for decades....

When will we get serious about this stuff? It really matters and we’re blowing it!