Category Archives: Mark Thoma is Indispensable

Wealth, Saving, and Inequality

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Noah Smith writes,

If you do the math, you discover that in the long run, income levels and initial wealth (factors 1 and 2 from above) are not the main determinants of wealth. They are dwarfed by factors 3 and 4 — savings rates and rates of return. The most potent way to get more wealth to the poor and middle-class is to get these people to save more of their income, and to invest in assets with higher average rates of return.

Is this true? If so, it strikes me as a very conservative proposition. It suggests that the civilization-barbarism axis is what drives inequality of wealth, because deferred gratification is one of the civilized values in the conservative pantheon. In effect, Smith is saying that wealth comes from civilized behavior and lack of wealth comes from barbaric behavior.

Utterly oblivious to irony, Smith proceeds to recommend that government teach people to save.

Pointer from Mark Thoma.

Health Care Spending and Demographics

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Joshua Gordon writes,

Nearly three-quarters of the spending increases in Medicare over the next two decades can be attributed to aging alone. And, as I will explain, the remaining increase in costs due to health care inflation will be very difficult to avoid because even that amount of projected growth is lower than anyone realistically believes we can sustainably achieve. Thus, the major problem in Medicare really is one of an aging population. In this case, the Medicare problem is no different than the Social Security problem.

Kudos to Mark Thoma for providing the pointer. The essay contradicts the world view of many of those with whom Thoma usually sides.

Hospital Charges

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Steven Brill has gotten the health-technocrats very excited. For example, Uwe Reinhardt writes,

hospitals are free to squeeze uninsured middle- and upper-middle-class patients for every penny of savings or assets they and their families may have. That’s despite the fact that the economic turf of these hospitals – for the most part so-called nonprofit hospitals

Pointer from Mark Thoma.

Solve the puzzle:

1. Itemized charges on hospital bills are very high. This is most obvious for items that you can buy yourself in a drugstore or supermarket.

2. Relative to these outrageous markups, profits at for-profit hospitals (and at “so-called nonprofit hospitals”) are not very high.

The explanation is that hospital costs are mostly overhead, meaning that they are not tied to billable services or events. The janitors who clean the halls and rooms once a day (or more)? Overhead. Record-keeping, billing, computer systems, communications? Overhead. Fancy medical equipment? Overhead. Nurses and other staff? For the most part, overhead.

Because most of the cost in hospitals is overhead (or fixed cost, in economic parlance), its allocation across billable items is arbitrary. That is why “tough negotiation” by Medicare does not really reduce overall health spending. Instead, it means that overhead costs have to be shifted somewhere else, including onto those who happen to be affluent but uninsured.

What would happen if we followed the prescription of Reinhardt and others, to force hospitals to bill everyone else at Medicare rates? Hospitals would either stop taking Medicare, drastically cut back on services (reduce janitorial service to once a week), or close altogether.

I am not saying that the business practices of doctors and hospitals are beyond reproach. But claiming that there is a free lunch in medical care from just paying providers a lot less money is unhealthy demagoguery.

John Cochrane on Banking, Expert Forecasting

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1. He liked Admati and Hellwig more than I did.

Ms. Admati and Mr. Hellwig do not offer a detailed regulatory plan. They don’t even advocate a precise number for bank capital, beyond a parenthetical suggestion that banks could get to 20% or 30% quickly by cutting dividend payments. (I would go further: Their ideas justify 50% or even 100%: When you swipe your ATM card, you could just sell $50 of bank stock.)

I think he is being careless. My own essay tries to consider why households would prefer to hold bank debt rather than bank equity. Keep in mind, however, that all of us agree that the relationship between government and banks is problematic, and that the problems are not solved by regulation.

2. He cites a nice essay by Alex Pollock listing statements by regulators prior to the housing crisis that showed their mindset before the crisis. They thought they had everything under control. In 2009, they changed their minds. Now, with Dodd-Frank, they tell us they have everything under control again. Note that Pollock could have included many more pre-crisis quotes, such as the “before” quote from Ben Bernanke.

Of course, Bernanke still believes that we live in mediocristan. On the outlook for long-term interest rates, the other day He said,

While these forecasts embody a wide range of underlying models and assumptions, the basic message is clear–long-term interest rates are expected to rise gradually over the next few years, rising (at least according to these forecasts) to around 3 percent at the end of 2014. The forecasts in chart 4 imply a total increase of between 200 and 300 basis points in long-term yields between now and 2017.

Of course, the forecasts in chart 4 are just forecasts, and reality might well turn out to be different. Chart 5 provides three complementary approaches to summarizing the uncertainty surrounding forecasts of long-term rates. The dark gray bars in the chart are based on the range of forecasts reported in the Blue Chip Financial Forecasts, the blue bars are based on the historical uncertainty regarding long-term interest rates as reflected in the Board staff’s FRB/US model of the U.S. economy, and the orange bars give a market-based measure of uncertainty derived from swaptions. These three different measures give a broadly similar picture about the upside and downside risks to the forecasts of long-term rates. Rates 100 basis points higher than the expected paths in chart 4 by 2014 are certainly plausible outcomes as judged by each of the three measures, and this uncertainty grows to as much as 175 basis points by 2017.

Pointer from Mark Thoma.

Where Wages Are Stickiest

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From the National Employment Law Project:

Industry dynamics are playing an important role in shaping the unbalanced recovery. We find that three lowwage industries (food services, retail, and employment services) added 1.7 million jobs over the past two years, fully 43 percent of net employment growth. At the same time, better-paying industries (like construction; manufacturing; finance, insurance and real estate; and information) did not grow, or did not grow enough to make up for recession losses. Other better-paying industries (like professional and technical services) saw solid growth, but not in their mid-wage occupations. And steep cuts in state and local government have hit mid- and higher-wage occupations the hardest.

Pointer from Tyler Cowen (also Mark Thoma).

Focus on the last sentence. What if pay for all government workers–federal, state and local–had been reduced by 5 percent at the start of the recession? How many jobs would have been saved?

In general, I think that we mis-frame the government budget issue when we talk about taxes vs. program cuts. Instead, we should be talking about taxes vs. reductions in compensation for government workers. It is not at all clear to me that we need to reduce incomes in the private sector in order to maintain incomes in the public sector.

It All Sounds So Simple

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Richard Thaler writes,

To me, the ideal health care delivery system would include…A fee for health rather than fee for service model. Doctors and hospitals should be paid for keeping their patients well. Paying them for doing more tests and surgeries creates bad incentives.

Pointer from Tyler Cowen and Mark Thoma.

When Thaler plays chess, does he think even one move ahead? I am sure that my readers do not need me to tell them how doctors would respond to a “fee for health” incentive system, do I?

To be fair, Thaler has some reasonable ideas in the column. But this particular gambit was so weak that he was “dead out of the opening” as far as I was concerned.

Ends and Means

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Cass Sunstein writes,

In recent decades, some of the most important research in social science, coming from psychologists and behavioral economists, has been trying to answer it. That research is having a significant influence on public officials throughout the world. Many believe that behavioral findings are cutting away at some of the foundations of Mill’s harm principle, because they show that people make a lot of mistakes, and that those mistakes can prove extremely damaging.

Pointer from Mark Thoma.

Sunstein later writes,

Until now, we have lacked a serious philosophical discussion of whether and how recent behavioral findings undermine Mill’s harm principle and thus open the way toward paternalism. Sarah Conly’s illuminating book Against Autonomy provides such a discussion. Her starting point is that in light of the recent findings, we should be able to agree that Mill was quite wrong about the competence of human beings as choosers. “We are too fat, we are too much in debt, and we save too little for the future.”

Then there is this:

Because hers is a paternalism of means rather than ends, she would not authorize government to stamp out sin (as, for example, by forbidding certain forms of sexual behavior) or otherwise direct people to follow official views about what a good life entails. She wants government to act to overcome cognitive errors while respecting people’s judgments about their own needs, goals, and values.

Try to imagine a dialog between Conly and Michael Huemer (or another libertarian).

Libertarian: if a random stranger came to you and forcibly stopped you from drinking a large soda “for your own good,” would you find that acceptable? I would accept advice from a stranger. I might accept forcible restraint from a friend or someone to whom I had given permission to restrain my impulses (like Odysseus with the Sirens). However, why should I want government officials to interfere with my decisions because of my supposed incompetence?

Conly: Government officials are not random strangers. They are experts. That is why the should be allowed to interfere with your decision.

Libertarian: I listen to experts all the time. But what makes government officials so wonderfully expert that I should be forced to listen to them? When it comes to “staying out of debt” and “saving for the future,” are government officials the experts to whom you would have me defer? Seriously?

Maybe someone can help me be more charitable here.

The New Fraud Paper

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It is by Tomasz Piskorski, Amit Seru, and James Witkin.

We find that mortgages with misrepresented owner occupancy status are charged interest rates that are higher when compared with loans with similar characteristics and where the property was truthfully reported as being the primary residence of the borrower. Similarly, interest rates on loans with misrepresented second liens are generally higher when compared with loans with similar characteristics and no second lien. Given the increased defaults of these misrepresented loans, this suggests that lenders were partly aware of the higher risk of these loans. Strikingly, however, we find that the interest rate markups on the misrepresented loans are much smaller relative to loans where the property was truthfully disclosed as not being primary residence of the borrower and as having a higher lien. This suggests that relative to prevailing interest pricing of that time, interest rates on misrepresented mortgages did not fully reflect their higher default risk.

Pointer from Mark Thoma.

My thinking goes like this. There are some loan brokers who have a reputation for participating in fraud, so they have a smaller choice of lenders that will do business with them. Customers of those brokers end up paying higher rates as a result. The lenders who do not blacklist those brokers wind up being adversely selected. They think they are getting a higher profit margin on these loans than other loans, but in fact the reason that they can get away with (slightly) higher interest rates is that other lenders (rightly) will not touch loans from the same source.

As I said when I first heard about this paper from Luigi Zingales but did not know where to find it,

Zingales says that the bankers should be prosecuted. He makes it sound as if the lenders would record a loan internally as backed by an investment property and report it to investors as an owner-occupied home. That would require a much more complex conspiratorial action on the part of the lender, and until I learn otherwise, I will doubt that it happened.

Indeed, the authors of the paper looked at one infamous now-bankrupt subprime lender, New Century.

Of all loans in this sample that we identified as having misreported nonowner-occupied status, none was reported as being for non-owner-occupied properties in the New Century database. This evidence suggests that the misrepresentation concerning owner-occupancy status was made early in the origination process, possibly by the borrower or broker originating the loan on behalf of New Century.

The authors go on to write,

In contrast, of all mortgages identified as having misreported second lien status to investors, 93.3% had a second lien reported in the New Century database. This confirms that the lenders were often aware of the presence of second liens, and hence their underreporting occurs later in the process of intermediation.

Consider these possibilities:

1. New Century sold loans in the “TBA market,” meaning that investors committed to buy the loans before they were closed. New Century sold these loans as not having seconds, because it had no idea about them. Lo and behold, when the borrowers went to closing, they needed a second loan in order to make the down payment. New Century then recorded in its database the existence of the seconds, but there was no further communication with the investors.

2. New Century new darn well all along about the seconds, but they have two records in their database–a record that they made for internal purposes and a record that they gave to investors.

#1 is still fraud, but it is not as blatantly intentional as #2. I suspect it was #1.

When my online housing course starts (by the end of this month, I am now told), I want to share my knowledge of these institutional issues.

Economists Don’t Believe in Liquidity Traps

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The latest IGM forum poll of economic experts asks, in effect, whether Japan was in a liquidity trap. The statement given is

The persistent deflation in Japan since 1997 could have been avoided had the Bank of Japan followed different monetary policies.

The page does not load properly for me, due to a JavaScript error. But only Bob Hall disagrees, offering a liquidity trap argument. Apparently, none of the other economists polled is willing to argue for the liquidity trap.

Of course, I do not believe in the liquidity trap. Just watch. In the case of Japan, the central bank could have printed yen to buy dollars and other foreign currency, and I am confident that by doing so they could have produced inflation.

Thanks to Mark Thoma for the pointer.

What is a Charitable Contribution?

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Robert Shiller writes,

We trust one another, and not just the government, to make important decisions and to take action. Self-reliant does not mean selfish: while it is important that we manage our personal finances responsibly, we also have a deep tradition of giving to others. Many of us believe that we have obligations to others that only we can interpret, through our own consciences.

Pointer from Mark Thoma.

My question concerns how we define a charitable contribution. For example, only non-profits qualify to receive charitable contributions. I see no reason for this to be the case. I do not think that non-profit is inherently more ethical than for-profit.

Another way to define a charitable contribution would be as money donated for which you receive nothing in return. But donors get psychic benefits in return for contributions. So you could say that you are being charitable if you get nothing tangible in return. Does that mean that if I take a yoga class or go to a psychotherapist that I am making a charitable contribution?

I think that it is possible to come up with a definition of charitable contribution that works. It has something to do with the intent to provide tangible benefits to others. My contribution to a school for at-risk kids differs from my taking a yoga class in that regard.

Consider four things you can do with your income: spend it on personal consumption; invest it for the future; donate it in order to provide benefits to others; or pay it in taxes.

If we had a pure consumption tax with no charitable deduction, then the privileged activities would be investing for the future and donating to charity in the present. In that case, I would not be too inclined to give people an incentive to donate to charity in the present.

I am still trying to think through this issue.