Thursday, July 30, 2009

Buiter on the Next Fed Chair

Income Tax Fact of the Day

From the Tax Foundation:

IRS data shows that in 2007—the most recent data available—the top 1 percent of taxpayers paid 40.4 percent of the total income taxes collected by the federal government. This is the highest percentage in modern history. By contrast, the top 1 percent paid 24.8 percent of the income tax burden in 1987, the year following the 1986 tax reform act. Remarkably, the share of the tax burden borne by the top 1 percent now exceeds the share paid by the bottom 95 percent of taxpayers combined.
N.B.: These percentages reflect both changing tax policy and the changing distribution of income.

"They priced it way too high"

Wednesday, July 29, 2009

Arrow on the Increasing Cost of Healthcare

The Nobel laureate Ken Arrow:
Oh, why health costs increase? The basic reason why health costs increased is that health care is a good thing! Because today there is a lot more you can do! Consider all these expenses that are diagnostic. Cat scans, X-rays, MRIs and now the proton-powered whatever-it-is. Something that is the size of a football field, cost $50 million, and has all sorts of diagnostic powers. A lot of these technologies clearly reveal things that would not be revealed otherwise. There's no question about it. Diagnostics have improved. Technology has improved. You know, sending things through your blood stream to help in operations, instead of cutting you open. It's incredible. But these things are costly. But for older people longevity is increasing by a month each year. Now, whether that creates other problems with retirement and social security is another question. But, nevertheless, preserving life is a good thing.

Tuesday, July 28, 2009

Why is supply and demand so confusing?

For those who teach principles of economics, this post by Scott Sumner is worth contemplating.

Scott does a good job explaining why the model of supply and demand is not always as straightforward as it seems. Why? I would put the answer as follows: Supply and demand curves are always drawn "holding other things constant." The key question when considering any possible shift in these curves is which other things are being held constant in the situation at hand.

Feldstein on Obamacare

IBM, Microsoft, ________

Monday, July 27, 2009

Back to the Drawing Board

A friend draws to my attention a new CBO report on the House healthcare reform effort. Noting that a reduction in the long-term fiscal imbalance was allegedly a prime motive for the bill, he thinks this paragraph from CBO will (and should) force the would-be reformers back to the drawing board:
Looking ahead to the decade beyond 2019, CBO tries to evaluate the rate at which the budgetary impact of each of those broad categories would be likely to change over time. The net cost of the coverage provisions would be growing at a rate of more than 8 percent per year in nominal terms between 2017 and 2019; we would anticipate a similar trend in the subsequent decade. The reductions in direct spending would also be larger in the second decade than in the first, and they would represent an increasing share of spending on Medicare over that period; however, they would be much smaller at the end of the10-year budget window than the cost of the coverage provisions, so they would not be likely to keep pace in dollar terms with the rising cost of the coverage expansion. Revenue from the surcharge on high-income individuals would be growing at about 5 percent per year in nominal terms between 2017 and 2019; that component would continue to grow at a slower rate than the cost of the coverage expansion in the following decade. In sum, relative to current law, the proposal would probably generate substantial increases in federal budget deficits during the decade beyond the current 10-year budget window.

A Reading for the Pigou Club

The Latest from Merle Hazard

By the way, Merle is also known as Jon Shayne, Harvard class of 1984 and a former Ec-10 student.

Should we envy European healthcare?

Gary Becker says the answer is no:

A recent excellent unpublished study by Samuel Preston and Jessica Ho of the University of Pennsylvania compare mortality rates for breast and prostate cancer. These are two of the most common and deadly forms of cancer--in the United States prostate cancer is the second leading cause of male cancer deaths, and breast cancer is the leading cause of female cancer deaths. These forms of cancer also appear to be less sensitive to known attributes of diet and other kinds of non-medical behavior than are lung cancer and many other cancers.

These authors show that the fraction of men receiving a PSA test, which is a test developed about 25 years ago to detect the presence of prostate cancer, is far higher in the US than in Sweden, France, and other countries that are usually said to have better health delivery systems. Similarly, the fraction of women receiving a mammogram, a test developed about 30 years ago to detect breast cancer, is also much higher in the US. The US also more aggressively treats both these (and other) cancers with surgery, radiation, and chemotherapy than do other countries.

Preston and Hu show that this more aggressive detection and treatment were apparently effective in producing a better bottom line since death rates from breast and prostate cancer declined during the past 20 [years] by much more in the US than in 15 comparison countries of Europe and Japan.

The Honeymoon is Over

From Rasmussen:
The Rasmussen Reports daily Presidential Tracking Poll for Sunday shows that 29% of the nation's voters now Strongly Approve of the way that Barack Obama is performing his role as President. Forty percent (40%) Strongly Disapprove giving Obama a Presidential Approval Index rating of -11. That’s the first time his ratings have reached double digits in negative territory....The President is now seen as politically liberal by 76%. That’s up six points from a month ago, 11 points since he was elected, and the highest total to date. Forty-eight percent (48%) now see him as Very Liberal, up 20 points since he was elected.
Maybe it is time to invite the Blue Dogs over to the White House for a beer.

Saturday, July 25, 2009

Unicorn Dust and Pixie Wings

Donald Marron points out that another one of those great cost-saving ideas in the healthcare debate (the Independent Medicare Advisory Council) has taken a hit:
CBO estimates that the proposed legislation would save a paltry $2 billion over the next ten years, less than 1/500 of the 10-year cost of health reform.
Damn that CBO! They keep killing all these great ideas with, like, analysis and numbers and all that stuff. Everything would work out just fine if only they would close their eyes, click their heels together three times, and say, "There is no policy like reform...there is no policy like reform...."


In a post on healthcare, Paul Krugman makes this observation:
You could rely on a health maintenance organization to make the hard choices and do the cost management, and to some extent we do. But HMOs have been highly limited in their ability to achieve cost-effectiveness because people don’t trust them — they’re profit-making institutions, and your treatment is their cost. [Emphasis in the original.]
Paul's comment got me thinking. Perhaps a lot of the disagreement over healthcare reform, and maybe other policy issues as well, stems from the fundamental question of what kind of institutions a person trusts. Some people are naturally skeptical of profit-seeking firms; others are naturally skeptical of government. (There is, of course, the issue that an HMO can be run as a nonprofit organization. The one I use through Harvard is an example. But let's put that issue aside for another day.)

I tend to distrust power unchecked by competition. This makes me particularly suspicious of federal policies that take a strong role in directing private decisions. I am much more willing to have state and local governments exercise power in a variety of ways than for the federal government to undertake similar actions. I can more easily move to another state or town than to another nation. (I am not good with languages.)

Most private organizations have some competitors, and this fact makes me more comfortable interacting with them. If Harvard is a bad employer, I can move to Princeton or Yale, and this knowledge keeps Harvard in line. To be sure, we need a government-run court system to enforce contracts, prevent fraud, and preserve honest competition. But it is fundamentally competition among private organizations that I trust.

This philosophical inclination most likely influences my views of the healthcare debate. The more power a centralized government authority asserts, the more worried I am that the power will be misused either purposefully or, more likely, because of some well-intentioned but mistaken social theory. I prefer reforms that set up rules of the game but end up with power over key decisions as decentralized as possible.

What puzzles me is that Paul seems so ready to trust solutions that give a large role to the federal government. (In the past, for instance, he has advocated a single payer for healthcare.) I understand that trust of centralized authority is common among liberals. But here is the part that puzzles me: Over the past eight years, Paul has tried to convince his readers that Republicans are stupid and venal. History suggests that Republicans will run the government about half the time. Does he really want to turn control of healthcare half the time over to a group that he considers stupid and venal?

These thoughts, I appreciate, are broad generalizations. They don't immediately lead to a specific set of reform proposals. But I wanted to give Paul credit for a key insight: A central question in this and perhaps other debates is, Whom do you trust?

Vote early and often

Friday, July 24, 2009

Dynan and Gayer to Brookings

I am delighted to note that Karen Dynan and Ted Gayer will become codirectors of the Brookings Economic Studies Program. Karen and Ted worked with me at the CEA in 2003-2004, and Karen is a former student of mine. They are both superb economists who will do an excellent job helping lead one of the premier public policy think tanks. (Gayer, by the way, is coauthor of an excellent textbook on public finance.)

Little League Arms Race

As my students learn in ec 10, the prisoners' dilemma is a good model for a lot of situations in life. Here is a new application: little league sports.

Thursday, July 23, 2009

How Harvard Lost $1 Billion

Answer: Betting on interest rates. (I don't know enough about Harvard's finances to judge whether the bet was sensible ex ante. But it sure isn't working out well ex post.)

Update: Someone more knowledgeable than I am about the financial situation at Harvard emails me the following response to the Felix Salmon piece I linked to above:
1) The instrument in question was highly liquid and could be sold fully within a few days; essentially all money was lost in 2008 two years after Larry Summers left.

2) Harvard has a system where the treasurer makes these decisions with approval of the corporation and involvement of a debt management committee on which president does not serve.

3) Given the plan to borrow large amounts of debt in the future, doing something to lock in low rates made sense. Iif Harvard was borrowing big, there would be offsetting saving now. The big error was the failure to adjust hedge when Allston was scaled back and to take account of the risks associated with the change in the university's credit rating.
Thanks to the reader who sent along this feedback.

Update 2: Felix Salmon is not persuaded.

The Press Conference in a Nutshell

An old friend emails me:

Here is what I learned from listening to Obama's press conference tonight about health care:

  • If Republicans have good ideas, then Obama certainly wants to use them, and he will decide if they are good ideas.
  • If Republicans don't vote for a healthcare plan put together by Democrats, they are just playing politics.
  • Ninety-seven percent of Americans will be covered, and there will be no increase in cost.
  • Nobody will be denied needed health care, and there will be a committee to decide who needs what, which was one of the Republican good ideas.
  • A government run alternative is needed to keep private insurance costs down because government is more efficient.
  • It takes about 10 minutes to answer each question about health care.

Tuesday, July 21, 2009

The Fed's Exit Strategy

A very clear explanation from Ben Bernanke.

Which reminds me: I should thank President Bush for taking one of the economics profession's best writers out the textbook market.


Ezra Klein dumps on me.

The Glittering Eye comes to my defense.

But my favorite line comes from a comment on Klein's site: "Your argument is basically, 'But he didn't even address the salient impact of unicorn dust and pixie wings'."

Monday, July 20, 2009

My Whereabouts

I learned long ago the three best reasons for being a professor: June, July, and August.

I will be spending much of the rest of summer away from my home and office (and my fast internet connection), which means the following:
  • If you are a blog reader, I will be posting less frequently.
  • If you are a journalist, I will not be able to respond to your queries.
  • If you are a Harvard student, I will not be able to meet you face to face in my office, but I will do my best to answer your questions via email.

Now, back to the beach.

Should the rich finance healthcare reform?

Bill Gale of Brookings:

Choosing to finance health care reform by taxing the rich is bad economic policy, bad health policy, bad budget policy and poor leadership.

It is bad economic policy because, coupled with the scheduled expiration of the Bush tax cuts, it would raise marginal tax rates by 10 percentage points for high-income households. While I object to the general hue and cry that occurs anytime anyone discusses any potential tax increase for the rich, it is nevertheless quite fair to say that a 10 percentage point increase in taxation on the return to labor and capital income is a lot and shouldn’t be the first choice. (But please spare me the small business arguments.)

It is bad health policy because we need to fix the structural problems in health care in order to cut costs and be able to expand coverage. One of the biggest structural problems is the non-taxation of employer-provided health care. Fixing that – converting it to a refundable fixed credit a la Furman and McCain – would not only raise a lot of money, it would improve incentives for health care. Taxing the rich does not address this issue at all – it may raise the same amount of revenue but it does not address the incentive problem that arises from nontaxation of employer provided health care.

It is bad budget policy because we are using up one of our options on the revenue side not to cut the deficit but to finance new spending. We need to save our powder for deficit reduction activities – use the change in tax treatment of employer sponsored health care to finance health care and use general revenue increases to finance general deficit reductions.

It is poor leadership because it furthers the myth that we can solve our fiscal problems by taxing “other” people or with gimmick taxes. It has been said many times already and will be said many times again: we are going to need broad based tax increases and spending cuts to bring the fiscal house into order and the more politicians continue to act as if we can just foist the financing on a small group (be it rich people or foreign corporations or obese people or people who drink soda, etc.) the worse are our prospects for solving the problems.

Jeff Frankel of Harvard's Kennedy School (and a veteran of the Clinton CEA) agrees:
a clearly more efficient way of getting the necessary revenue would be to eliminate employers' tax exemption for health care benefits, at least for upper income workers, as proposed by Furman, McCain and others. And another would be auctioning off most emission permits rather than giving most of them away, at least after the first five years or so. It is just another case of good economics getting steamrollered by politics.
I highlight these comments because they both come from well respected, slightly left-of-center, mainstream economists, which only goes to show how far leftward congressional healthcare reform efforts have drifted.

Is "deficit neutrality" too easy a test?

The President's economic team regularly reminds us of the following:
  1. The United States faces a large long-term fiscal gap between spending and tax revenue.
  2. That gap is driven in large measure by increasing healthcare costs.
  3. Healthcare reform should "bend the curve" and reduce future healthcare costs.

In light of these facts, shouldn't the healthcare reform bill be more than deficit neutral? Shouldn't it reduce the long-term structural deficit? As Donald Marron points out, current Congressional efforts do not even meet the standard of deficit neutrality. But even if they were deficit neutral, that would hardly be a success.

We were once told that healthcare reform would help fix our long-term fiscal problems. Now the standard is that healthcare reform won't make these problems worse.

By the way, for new readers of this blog, I wrote about my preferred solutions to the long-term fiscal gap here.

Update: A reader suggests an analogy: An obese friend is told that he should eat less and exercise more. Instead, he adds an extra serving of cake after dinner. But don't worry: His cake-eating plan is calorie-neutral, as he promises to exercise more as well.

Update 2: Beware of Budget Gimmicks in Health Care Reform

Sunday, July 19, 2009

Summers on Health Economics

In a speech last week, Larry Summers said:
Without comprehensive healthcare reform, there is little prospect of convincing markets that the long-term growth in Federal debt is under control or of convincing businesses that the United States is the most competitive place for them to invest.
This statement, while seemingly sensible to some laymen, is actually inconsistent with standard economic analysis, such as that offered by the Congressional Budget Office. The CBO tells us that the healthcare bills being considered in Congress will increase rather than decrease health spending and so will hardly assure markets the Federal debt is under control. The CBO also tells us that health spending does not raise problems of international competitiveness. My understanding is that the CBO analysis of these subjects is not at all controversial among professional economists.

Which raises the question: Does the President's chief economic adviser have views on health policy that flatly contradict what most economists believe? If so, I hope Larry gives a talk on that subject, explaining where the economics profession has gone wrong.

Anna Schwartz on the Bernanke Fed

From Newsweek:

Schwartz still believes that, as she told The Wall Street Journal last fall, Bernanke is fighting the last war. Yes, he's studiously taken the opposite course from what the Fed did in the early 1930s. But she maintains that the current crisis is less a liquidity problem and more a crisis of confidence because of the market's doubts about the toxic assets on banks' balance sheets.

"What disturbed me particularly about Bernanke's performance was the insistence on bailouts," said Schwartz in a flood of passion. "If he had been absolutely candid to the markets and explained on what basis he would choose to bail out firms, and which ones he would not consider as meriting bailout, I think if the market had understood that he had principles and they would be able to understand a decision in light of these principles, there would have been much less bewilderment about why did they rescue Bear Stearns and pass over Lehman Brothers. Even though he has made a lot of rhetorical statements about the importance of transparency, he has not been transparent. I think that's a real failure. I think the Fed or the government has no business bailing out a firm that is not solvent."

Saturday, July 18, 2009

Questions for the President

President Obama will hold a press conference this coming Wednesday. Here are two questions I would like to see the press ask him:

1. During your campaign, you said that under your tax plan, "no one will pay higher tax rates than they paid in the 1990s." The House healthcare reform bill, however, raises tax rates for top earners well above the 1990s levels. In many states, the top marginal tax rate would exceed 50 percent. Do you still stand by that campaign pledge, and would you veto any bill that violates it?

2. During your campaign, you said, "The danger in a cap-and-trade system is that the permits to emit greenhouse gases are given away for free as opposed to priced at auction. One of the mistakes the Europeans made in setting up a cap-and-trade system was to give too many of those permits away." The climate change bill now being considered in Congress does the same thing. Are you now willing to have the United States make the same mistake the Europeans made, or would you veto the bill?

Friday, July 17, 2009

Google Searches as an Economic Indicator

Politico reports:
Of all the statistics pouring into the White House every day, top economic adviser Larry Summers highlighted one Friday to make his case that the economic free-fall has ended. The number of people searching for the term “economic depression” on Google is down to normal levels, Summers said.
Above are the data from Google Trends that Larry was probably looking at.

Ali G meets an economist

With Sacha Cohen in the news with his latest movie Bruno, I thought it might be worth reprising an older character of his, Ali G, and his interview with the prominent economist Charles Schultze.

Thursday, July 16, 2009

Healthcare Thought of the Day

The AP reports:

From the beginning of the health care debate, Obama has insisted that any overhaul must "bend the curve" of rapidly rising costs that threaten to swamp the budgets of government, businesses and families.

Asked by Senate Budget Committee Chairman Kent Conrad, D-N.D., if the evolving legislation would bend the cost curve, the budget director responded that — as things stand now — "the curve is being raised."

Explained [CBO Director Doug] Elmendorf: "In the legislation that has been reported, we do not see the sort of fundamental changes that would be necessary to reduce the trajectory of federal health spending by a significant amount. And on the contrary, the legislation significantly expands the federal responsibility for health care costs."

I stand corrected

A couple days ago I noted that under the House healthcare reform bill, marginal tax rates on top earners would go up substantially. Indeed, they would reach levels not seen in many years. That bill would institute a tax surcharge of 5.4 percent on top of normal income taxes, which under current law are already scheduled to revert back to Clinton-era levels.

This is no cause for alarm. A reader points out that the President would surely veto such a bill. After all, during the campaign, he promised us the following through two of his top economic advisers:

Sen. Obama believes that responsible candidates must put forward specific ideas of how they would pay for their proposals. That is why he would repeal a portion of the tax cuts passed in the last eight years for families making over $250,000. But to be clear: He would leave their tax rates at or below where they were in the 1990s. The top two income-tax brackets would return to their 1990s levels of 36% and 39.6% (including the exemption and deduction phase-outs). All other brackets would remain as they are today.
Those are the words of Jason Furman (who is now at the NEC) and Austan Goolsbee (who is now at the CEA).

For further reassurance, see fact 3 at this Obama campaign factsheet.

Who are these guys?

From an article on the economic blogosphere in today's Wall Street Journal. (For those without a subscription, try clicking through here.)

Tuesday, July 14, 2009

Top tax rate may soon exceed 50 percent

The Wall Street Journal reports, House Health Bill Slaps 5.4% Tax on Top Earners. The Tax Foundation calculates that adding this surcharge to existing taxes would raise the top tax rate to over 50 percent in 39 states. Click on the link to find out where your state stands in their ranking.

I believe the relevant marginal tax rate is even higher than the Tax Foundation suggests. Their calculations seem to ignore sales taxes, which are significant in many states. Because income earned will eventually be spent and thus subject to sales taxes, sales tax rates need to be combined with income tax rates to find the true tax wedge that distorts the consumption-leisure decision. Once sales taxes are included, a top earner in a typical state would face a marginal tax rate of about 55 percent.

Zingales on NYC

Univiersity of Chicago economist Luigi Zingales:
The biggest threat of all to the Big Apple’s financial supremacy, however, comes from Washington. The Founding Fathers wisely decided that the nation’s political capital should be separate from its financial capital (in both senses of the word). Now this splendid segregation has ended. If the outcome of the Chrysler bankruptcy is any indication, Washington is willing to flex its muscle in financial decisions, altering the substance of contracts freely agreed to by private parties. In so doing, the national government has undermined the certainty of the rule of law, which was the American capital market’s strongest asset.

Keeping Animial Spirits Alive

This chart from Andrew Biggs "shows spending on veterinary care, which I pulled from the Consumer Expenditure Survey, and national health expenditures (for people) from the National Income and Product Accounts.... the rate of growth of spending from 1984 to 2006 wasn’t all that different—and in both cases, spending grew faster than the rate of economic growth. As new technologies are developed for humans, we adopt them for Bowser and Fifi—because we can afford to and we think it’s worth it."

These data are consistent with what I wrote a couple years ago: "The reason that we spend more [on healthcare] than our grandparents did is not waste, fraud and abuse, but advances in medical technology and growth in incomes. Science has consistently found new ways to extend and improve our lives. Wonderful as they are, they do not come cheap. Fortunately, our incomes are growing, and it makes sense to spend this growing prosperity on better health."

And that includes Tobin, the Mankiw family pet, pictured here.

Monday, July 13, 2009

Stocks for the Not-so-long Run

I am a fan of Jeremy Siegel's book Stocks for the Long Run. However, an article in the Wall Street Journal suggests that some of the data in the book may not be completely reliable:

There is just one problem with tracing stock performance all the way back to 1802: It isn't really valid.

Prof. Siegel based his early numbers on data first gathered decades ago by two economists, Walter Buckingham Smith and Arthur Harrison Cole. For the years 1802 through 1820, Profs. Smith and Cole collected prices on three dozen banking, insurance, transportation and other stocks -- but ended up including only seven, all banks, in their stock-market index. Through 1845, they tracked 19 insurance stocks, but rejected 95% of them, adding only one to their index. For 1834 onward, they added a maximum of 27 railroad stocks.

To be a good measure of stock returns, an index should be comprehensive (by including many stocks) and representative (by including the stocks commonly held by investors). The Smith and Cole indexes are neither, as the professors signaled in their 1935 book, "Fluctuations in American Business." They cherry-picked their indexes by throwing out any stock that didn't survive for the whole period, whose share prices were too hard to find or whose returns seemed "inflexible," "erratic," or "non-typical."

The database of early U.S. securities at has so far identified more than 1,000 stocks that were listed on 10 different exchanges -- including Charleston, S.C., New Orleans, and Norfolk, Va. -- between 1790 and 1860. Thus the indexes relied on by Prof. Siegel exclude 97% of all the stocks that existed in the earliest years of the U.S. market, and include only the bluest of the blue-chip survivors. Never mind all of the canals, wooden turnpikes, rubber-hat companies and the other doomed stocks that investors lost millions on -- and whose returns may never be reconstructed.

Glaeser on NYC

Sunday, July 12, 2009

Modern macro even Paul Krugman will love

Lately, Paul Krugman has been dissing modern macroeconomics, mainly because many macroeconomists do not agree with his conclusions about fiscal policy. This new paper by Marty Eichenbaum, Larry Christiano, and Sergio Rebelo should, however, make Paul happy. They report large fiscal policy multipliers in a new Keynesian DSGE model when the economy is at the zero interest lower bound.

An open question: How can the results in this paper be reconciled with results by John Cogan, Tobias Cwik, John Taylor, and Volker Wieland, who seem to perform a similar policy simulation in a similar model but reach a very different conclusion? Are there subtle differences in the models? Or subtle differences in the policy experiments? Or did one team simply make a mistake of some sort?

Figuring out why these two prominent teams of researchers come to opposite conclusions about fiscal policy multipliers, and which conclusion is more applicable to actual policy, would be a good paper topic for an ambitious grad student.

Does the citation count if they don't bother to mention your name?

From today's NY Times:
The advantages [of height] are so overwhelming that two economists once wrote a tongue-in-cheek paper proposing a special “tall tax” to level the playing field.

Excess Demand

What market has 80,000 potential consumers each demanding one unit, 300,000,000 potential producers each capable of supplying one unit, and a shortage nonetheless? Click here for the answer.

Saturday, July 11, 2009

More Fiscal Stimulus?

Pro and Con.

Friday, July 10, 2009

Healthcare Thought of the Day

From Michael Kinsley:
Six hundred billion doesn't sound like all that much to achieve, or come close to achieving, an important and long-standing goal such as universal health care. But keep in mind that health-care reform is supposed to save money. Its premise is that the current path is unaffordable. In that sense, a "mere" $600 billion extra is total defeat.

Miron on Bailouts

Makin on Homeownership

Thursday, July 09, 2009

The Problems at Harvard

The new issue of Vanity Fair has an article on Harvard's woes, stemming from a particularly bad year of investment returns on the endowment. Here is a tidbit from the magazine's website:

The longtime head of Harvard Management Company, Jack Meyer, quit to start his own hedge fund in 2005 after growing fed up with criticism over the eight-figure salaries some of his managers were pulling down and with persistent meddling from top Harvard officials. Two particular annoyances were [Larry] Summers, who had been questioning Meyer’s investment strategies, and Robert Rubin, a member of the Harvard Corporation, who frowned on Meyer’s aggressive strategies and wound up on the “warpath” with Meyer, as one person put it.

When Meyer left, he took much of Harvard Management Company with him — including 30 portfolio managers and traders, as well as the chief risk officer, chief operating officer, and chief technology officer. The place became “like a Ferrari without the engine,” according to a portfolio manager who arrived after Meyer left. This angered Rubin, according to someone who knows him well: “In Rubin’s opinion, Meyer crippled the institution.”

Lazear on Fiscal Stimulus

A New Business Plan

At another blog, Troublesome Frog comments:
I managed to get through a BS in economics at a non-Chicago university without Samuelson's text, but I believe I purchased three (!) Greg Mankiw textbooks in the process. While I have to say that he writes a good textbook, Mankiw is an economist's economist. He knows how to extract maximum producer surplus. I was half surprised that he didn't convince instructors to change editions halfway through the semester just to get another $140 from us.
FYI, for those instructors teaching intermediate macro this summer: The new edition will be out any day now. Feel free to switch editions mid-course.

Wednesday, July 08, 2009

Interview with Burt

As a freshman at Princeton, I took econ 101 (introductory macro) from Burt Malkiel, and I got from my first exposure to modern finance from reading his book A Random Walk Down Wall Street. To this day, as Burt has long advised, most of my equity investments are in low-cost index funds. It is alway great to keep up with what he is thinking. Click here to read a recent interview.

Tuesday, July 07, 2009

Costs versus Efficiency

Advocates of government-run health insurance like to point to Medicare's low administrative costs (which, as I noted yesterday, is a controversial claim). But even if that factual claim were true, the argument would hardly be dispositive as to the greater efficiency of a publicly run system. As I put it in my recent Times article, "True, Medicare’s administrative costs are low, but it is easy to keep those costs contained when a system merely writes checks without expending the resources to control wasteful medical spending."

A reader finds support for this position in some recent testimony by Malcolm K. Sparrow, Professor of the Practice of Public Management at Harvard's Kennedy School of Government. Professor Sparrow suggests that greater administrative costs aimed at uncovering medical fraud might be money well spent. Here is an excerpt:

The units of measure for losses due to health care fraud and abuse in this country are hundreds of billions of dollars per year. We just don't know the first digit. It might be as low as one hundred billion. More likely two or three. Possibly four or five. But whatever that first digit is, it has eleven zeroes after it. These are staggering sums of money to waste, and the task of controlling and reducing these losses warrants a great deal of serious attention....

By taking the fraud and abuse problem seriously this administration might be able to save 10% or even 20% from Medicare and Medicaid budgets. But to do that, one would have to spend 1% or maybe 2% (as opposed to the prevailing 0.1%) in order to check that the other 98% or 99% of the funds were well spent. But please realize what a massive departure that would be from the status quo. This would mean increasing the budgets for control operations by a factor of 10 or 20. Not by 10% or 20%, but by a factor of 10 or 20.

The bottom line: Low administrative costs are not to be confused with high administrative efficiency. In other words, administrators are not necessarily a deadweight loss to the system.

Monday, July 06, 2009

Gruber on Financing Health Reform

In the New England Journal of Medicine, MIT economist Jonathan Gruber says we should eliminate or limit the income-tax exclusion for expenditures on employer-sponsored health insurance. He makes a strong case.

N.B.: During the 2008 campaign, candidate McCain proposed something along these lines, and the idea was met by withering criticism from candidate Obama.

Medicare has lower administrative costs?

Maybe not:
only an extremely small portion of administrative costs are related to the dollar value of health care benefit claims. Expressing these costs as a percentage of benefit claims gives a misleading picture of the relative efficiency of government and private health plans.Medicare beneficiaries are by definition elderly, disabled, or patients with end-stage renal disease. Private insurance beneficiaries may include a small percentage of people in those categories, but they consist primarily of people are who under age 65 and not disabled. Naturally, Medicare beneficiaries need, on average, more health care services than those who are privately insured. Yet the bulk of administrative costs are incurred on a fixed program-level or a per-beneficiary basis. Expressing administrative costs as a percentage of total costs makes Medicare's administrative costs appear lower not because Medicare is necessarily more efficient but merely because its administrative costs are spread over a larger base of actual health care costs. When administrative costs are compared on a per-person basis, the picture changes. In 2005, Medicare's administrative costs were $509 per primary beneficiary, compared to private-sector administrative costs of $453.
Thanks to Craig Newmark for the pointer.

Update: A reader points me to this related study. Also, see the discussion here and here. Finally, Paul Krugman disses the study I quoted above, and then the author of the study pushes back.

Sunday, July 05, 2009

A Case to Watch

From the Washington Post:

A majority of the U.S. International Trade Commission recommended on Monday that President Barack Obama impose additional duties for three years on imports of low-cost Chinese tires the panel says are harming U.S. industry.

In a case seen as a test of how the Obama administration will cope with Chinese trade issues, four members of the six-member commission recommended that Obama impose additional duties of 55 percent in the first year, 45 percent in the second year, and 35 percent in the third year on imports of passenger vehicle and light truck tires from China.

"In our opinion, these tariff levels would remedy the market disruption that we have found to exist," the four said in a statement. The complaint was brought by the United Steelworkers union, which said a surge of Chinese tire imports have cost thousands of U.S. jobs.

Two other members of the commission disagreed, saying Obama should take no "trade-restricting" action because this would do more harm than good....

Trade experts are watching to see whether Obama, who criticized China for what he called unfair labor practices during his campaign and won strong labor support in his bid for the White House, will be tougher on China than predecessor George W. Bush. Bush routinely rejected petitions for restricting Chinese imports.

President Obama's views about international trade are still something of a mystery. As a senator and presidential candidate he seemed like a protectionist, but once elected he hired a bunch of free traders as economic advisers.

Larry Summers once said of Barack Obama, "When I’ve heard him talk about economic issues—with the exception of NAFTA, where I just hope he doesn’t believe what he says—he seems intelligent and serious. I wouldn’t say I’m bowled over by the brilliance of anything I’ve heard, but everything has a kind of thoughtfulness to it that’s sort of impressive." That is, even the president's chief economic adviser was discomfited by his campaign rhetoric concerning international trade.

This Chinese tire case may be one indication of the president's true feelings about trade. So let's wait and see what happens.

Saturday, July 04, 2009

Happy Independence Day!

Friday, July 03, 2009

High-speed Trains to Nowhere

CBO and I agree

In my recent Times article on the possibility of a public option, I wrote

An important question about any public provider of health insurance is whether it would have access to taxpayer funds. If not, the public plan would have to stand on its own financially, as private plans do, covering all expenses with premiums from those who signed up for it.

But if such a plan were desirable and feasible, nothing would stop someone from setting it up right now. In essence, a public plan without taxpayer support would be yet another nonprofit company offering health insurance. The fundamental viability of the enterprise does not depend on whether the employees are called “nonprofit administrators” or “civil servants.”

The CBO is thinking along similar lines. In its most recent letter on heath reform plans, it says
The new draft also includes provisions regarding a “public plan,” but those provisions did not have a substantial effect on the cost or enrollment projections, largely because the public plan would pay providers of health care at rates comparable to privately
negotiated rates—and thus was not projected to have premiums lower than those charged by private insurance plans in the exchanges.

Thursday, July 02, 2009

Unemployment Update

Old Speeches, New Policies

For academics, it always a delight when some old, obscure thing we've written suddenly gets noticed. So I was pleased when econoblogger Mark Thoma decided to draw attention yesterday to a speech I gave six years ago (pdf version) to the National Association of Business Economists. I had not looked at that speech in years, but looking back at it today, I think that it holds up pretty well. So, please, feel free to follow the link and read the whole thing.

The part of the speech that Mark highlights on his blog is the defense of running budget deficits during a recession. I am a bit puzzled about why Mark picked up that piece, however. Mark seems to be suggesting that my speech can somehow be construed as a defense of Obama fiscal policy. Yet I don't think that aspect of current economic policy is controversial. As I wrote in the NY Times in March of this year, "Few economists would blame either the Bush administration or the Obama administration for running budget deficits during an economic downturn."

The controversial parts of current fiscal policy are, first, the relative reliance on spending hikes versus tax cuts as short-run stimulus and, second, the long-term picture. On the short-run issue, I explained my preferences here. On the long-run issue, the apparent willingness of the congressional leadership to give away most of the allowances under a cap-and-trade system for carbon is the most recent symptom suggesting either a lack of concern about the long-term fiscal imbalance or a willingness to allow distortionary taxes to rise significantly in the future to close the fiscal gap.

Protectionism: A New Twist

Wednesday, July 01, 2009

More Competition, More Attentive Parents

Intriguing new research from UCSD economists Garey and Valerie Ramey (via Dan Hamermesh) shows that parents respond to the incentives:

After three decades of decline, the amount of time spent by parents on childcare in the U.S. began to rise dramatically in the mid-1990s. Moreover, the rise in childcare time was particularly pronounced among college-educated parents. Why would highly educated parents increase the amount of time they allocate to childcare at the same time that their own market returns have skyrocketed? After finding no empirical support for standard explanations, such as selection or income effects, we offer a new explanation. We argue that increased competition for college admissions may be an important source of these trends. The number of college-bound students has surged in recent years, coincident with the rise in time spent on childcare. The resulting "cohort crowding" has led parents to compete more aggressively for college slots by spending increasing amounts of time on college preparation.

Cooley on the Beleaguered Middle-class

The NYU economist looks at the data: Read both Part I and Part II.