Creeping Socialism in Health Insurance

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Jeffrey H. Anderson writes,

According to the Centers for Disease Control and Prevention (see table 1.2b), 66.8 percent of those living in the United States had private health insurance in 2007. Now, as of 2015 (the most recent year for which figures are available), only 65.6 percent of those living in the United States have private health insurance.

…Meanwhile, the CDC figures show that the percentage of people living in the United States who have public health coverage has risen dramatically, from 18.1 percent in 2007 to 25.3 percent in 2015 (see table 1.2a).

I was wondering how much of this reflects people aging into Medicare, but then I clicked on the link to the report and the tables are for Americans under 65. My guess is that future health care reforms (“fixing Obamacare”) will move us further in that direction.

How Fractal is High-skilled Immigration?

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Sari Pekkala Kerr, William Kerr, Çaǧlar Özden, and Christopher Parsons write,

The number of migrants with a tertiary degree rose nearly 130 percent from 1990 to 2010, while low skilled (primary educated) migrants increased by only 40 percent during that time. A pattern is emerging in which these high-skilled migrants are departing from a broader range of countries and heading to a narrower range of countries—in particular, the United States, the United Kingdom, Canada, and Australia.

Pointer from Tyler Cowen.

I wonder if this pattern is fractal. That is, within the United States, do we see a net influx of high-skilled individuals to only a few metro areas? Within metro areas, do we see a net influx to only a few hot spots?

Sebastian Mallaby Interview

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with Greg Ip of the WSJ.

The way that Greenspan protected and established the independence, authority and prestige of the central bank was by being more political than the politicians who criticized him. If they wanted to leak bad stories about him, he would leak three bad stories about them. If they wanted to try and entrap him in politics, you know what? He had contacts in the Senate. He would go over there and so and so, who was his enemy, suddenly would not get confirmed to a big administration position. So he knew the dark arts of politics better even than the politicians did.

…This model of the empowered expert, the political guru, is now in retreat in the era of Donald Trump, but it isn’t totally gone. I would say that’s the central legacy that Alan Greenspan has left to the United States.

Read the whole interview.

The Case for Manners

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Henry Hazlitt wrote,

Too often moral codes, especially those still largely attached to religious roots, are ascetic and grim. Codes of manners, on the other hand, usually require us to be at least outwardly cheerful, agreeable, gracious, convivial—in short, a contagious source of cheer to others.

Pointer from Don Boudreaux.

I think that codes of manners also can be used to convey respect for others. You are telling people, including strangers, that you conduct yourself with them in mind.

I believe that restraint in the use of four-letter words used to serve this purpose, and it could once again serve this purpose. This puts me at odds with my fellow Baby Boomers and those who came after.

Greenspan and Financial Regulation

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In his new biography of Alan Greenspan, Sebastian Mallaby says some things I agree with, but he also rides a number of hobby horses that I take issue with.

Where I agree:

1. I agree that it is hard to achieve financial soundness through regulation. Financial markets are too flexible and adaptive to prevent institutions from gaming the system. If you want to see that point made at greater length, read my essay The Chess Game of Financial Regulation.

2. From 1970 to 1990, we got rid of interest rate ceilings on deposits, restrictions on bank branches, and futile attempts to distinguish commercial banking from investment banking. The process was long and grueling, with lobbyists engaged in furious rent-seeking battles all along the way. What Mallaby points out, and that I hadn’t considered, is that when the dust settled, we had a more rational, integrated competitive financial sector, but we had the same archaic, fragmented regulatory structure. So we had a separate regulator for thrifts, even though institutions with thrift charters were doing things that the thrift regulator had never seen before. The same with commercial banks, insurance companies, and investment banks. It was a regulatory structure that was set up to fail.

Where I disagree:

1. Mallaby buys into the theory that Brooksley Born should have gotten her way and had all derivatives trading moved to exchanges. I disagree. It is possible to trade derivative contracts in Treasury bonds and bills on exchanges, because the underlying securities are generic and liquid. Traders can benchmark prices and cheaply engage in arbitrage transactions. What AIG and others were doing involved creating a separate credit default swap for each security. In effect, Born would have been asking the exchanges to set up hundreds of different markets, most of which would have been illiquid in terms of the underlying securities.

If Greenspan was reluctant to wade in with financial regulatory proposals, that may have been because he thought that the issues were over his head. In fact, that may be what I most respect about Greenspan. Regulators generally do not see their own limitations. Brooksley Born would be a prime example of a regulator willing to take on a task while lacking sufficient knowledge.

2. Although I agree with Mallaby on the challenges of reining in financial excesses using regulation, he takes the view that monetary policy can and should be used to prick bubbles. He writes as if a major lesson, perhaps even the main lesson, of the financial crisis is that central banks should raise interest rates to pop bubbles. He writes as if this is obvious, when in fact very few economists see it that way, even now. In fact, Timothy Taylor recently pointed to an IMF study saying that global debt is at an all-time high, and only on the extreme right are there economists suggesting that monetary policy needs to be tightened. The other day, I got to attend a talk by Mallaby and I posed this issue. He agreed that his views were not widely shared by the mainstream (the people who complain about low interest rates as a threat to financial stability tend to be on the far right), but he said that one of the perks of writing the book was putting his opinions out there. Fair enough.

3. Mallaby blames the crisis in part on inflation targeting. He sees this policy as the mindless result of Fed officials’ not-entirely-rational preference for low, stable inflation. He could have pointed out that it was the overwhelming consensus of academic economists of the 1980s and 1990s that low, stable inflation was exactly the right objective for monetary policy. They believed that demand-driven recessions were the result of the public’s errors in expectations about inflation. Get rid of those errors by stabilizing inflation, so the thinking went, and you would eliminate recessions. This was known as the so-called Divine Coincidence, because it meant that the Fed could just focus on keeping the rate of inflation steady and let full employment take care of itself.

4. Mallaby takes a cheap shot at the Basel II approach to risk-based capital requirements, in which regulators were to use a bank’s model of its risks to gauge the amount of capital it should have. He compares this to giving a teenager the keys to the Mercedes. (a) I think that Greenspan had retired before Basel II was widely implemented. Most banks, perhaps even all banks, were still on Basel I, which used risk buckets. (b) Rather than being silly, using models was a good idea. The Basel I approach treated a bank that hedged its risks and a bank that went unhedged as identical. Basel I had no coherent way of dealing with derivatives or securities with embedded options, such as mortgage-backed securities. You need to use a model to solve both of those problems. And because every bank codes its portfolio differently, it is impractical to try to input the data into any model other than the one that the bank itself uses. Since you cannot try other models on the data, the best you can do is audit the way the bank goes about its modeling process.

It’s not a perfect way to regulate, but there is no obviously better way. At his talk, Mallaby emphasized that he did not think that any regulatory policy could truly rein in risk-taking. This gets back to point 1 under “Where I agree.”

Janet Yellen raises some good questions

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She said,

Prior to the financial crisis, these so-called representative-agent models were the dominant paradigm for analyzing many macroeconomic questions. However, a disaggregated approach seems needed to understand some key aspects of the Great Recession.. . .

More generally, studying the effects of household and firm heterogeneity might help us better account for the severity of the recession and the slow recovery.

Pointer from Mark Thoma.

You might have to go much farther than Yellen has in mind in thinking in terms of heterogeneity of firms, workers, and households. At some point, it ceases to be macro.

And there is this:

the influence of labor market conditions on inflation in recent years seems to be weaker than had been commonly thought prior to the financial crisis. Although inflation fell during the recession, the decline was quite modest given how high unemployment rose; likewise, wages and prices rose comparatively little as the labor market gradually recovered.

I disagree with the standard models of inflation, including the monetarist model. Specialization and Trade offers my answers to all of Ms. Yellen’s questions.

The Man Who Networked

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I just finished Sebastian Mallaby’s The Man Who Knew, his new biography of Alan Greenspan. A few thoughts:

1. It is masterfully written. I have already recommended it to friends who are not economists. I cannot praise highly enough the book’s organization, prose, and editing. Mallaby is a gifted storyteller.

2. One central theme is Greenspan as a brilliant thinker who overcame shyness to ascend to the apex of the Washington social and political ladder. However, I finished the book wondering if the story could be told the other way around: Greenspan as a savvy social networker who exploited his connections to create the illusion that he was a brilliant thinker. As you read the book, keep my interpretation in mind and see how it does or does not fit.

Note that Greenspan’s primary occupation was that of a Wall Street economic soothsayer, a game not known for being rich in intellectual competition. Moreover, as of 1987 Greenspan was not even in the top tier of those (above him would have been Ed Yardeni, Henry Kaufman, and Steve Roach, just off the top of my head).

3. Another central theme concerns the issue of whether Greenspan was a libertarian or a compromiser. Again, I think this may be the wrong framing. I get the sense that he navigated issues piecemeal rather than by following an intellectual framework. If Greenspan often strayed from Ayn Rand’s philosophy, that may have been because his mind was just not given to systematic thinking of any sort.

The Top-Down Reformer’s Calculation Problem

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Two recent examples.

1. I was invited to attend the Progressive Policy Institute on Wednesday, but not as a speaker. The topic is introduced by saying

Now that Congress has passed the Every Student Succeeds Act (ESSA), states are revamping their federally required systems to measure school quality and hold schools accountable for performance. But most are doing so using outdated assumptions, holdovers from the Industrial Era, when cookie-cutter public schools followed orders from central headquarters and students were assigned to the closest school.

In today’s world, that is no longer the norm. We are migrating toward systems made up of diverse, fairly autonomous schools of choice, some of them operated by independent organizations, as charter, contract, or innovation schools. Before revising their measurement and accountability systems, states need to rethink their assumptions.

2. And David Cutler must be happy to read this story.

Medicare on Friday unveiled a far-reaching overhaul of how it pays doctors and other clinicians. Compensation for medical professionals will start taking into account the quality of service – not just quantity.

A Nobel Prize in economics was just awarded in part for the insight that it is a bad idea to compensate workers on factors that are heavily influenced by luck. In my view, having someone in Washington evaluate a school or a teacher or a doctor does exactly that.

People who are close to the schooling process, including parents, peers, and principals, can use judgment to evaluate teachers. That’s the way it used to work 50 years ago, before the advent of consolidated, unionized school districts.

For doctors, the prevalence of third-party payments means that their compensation is being determined by remote bureaucrats regardless.

Factor-price Non-equalization?

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A commenter wrote,

Given this definition of ‘discipline’, under what condition do you stop believing your intuition? What would you observe that would cause you to drop your belief in price-factor equalization, or, assortative mating?

Coincidentally, Josh Zumbrun writes,

Why would a company pay someone $80,000 if most people with an identical background—clones, in the paper’s parlance—earn $40,000? Conversely, why would someone with that background stay in the job earning $40,000 if another company will pay $80,000 for the same work?

The puzzle is that worker pay increases are highly correlated with the rate at which profit increases at the firms that they work.

My thoughts:

1. I tend to distrust the ability of economists to know more than a firm what the firm’s workers ought to be paid. Imagine an economist trying to tell Google that, based on your regression equation, it is paying its programmers more than the market wage. Google might reply that its programmers earn more because Google has selected better programmers.

2. The article offers the theory that firms with monopoly power will pay workers more. Perhaps, but a monopolist still has an incentive to avoid paying an above-market wage to its workers. In any case, if Google pays more because it has monopoly power, how pervasive is this? Do they pay above-market wages to janitorial staff? Above-market prices for office supplies? When Google employees travel, does Google pay more than the asking prices for hotel rooms and airline tickets?

3. Suppose that we grant that two workers who appear to be identical to someone running a regression equation are in fact identical in practice. It could be that each worker made a long-term commitment to a firm, and one chose a firm that happened to succeed and the other chose a firm that happened to fail. That might lead to factor-price non-equalization.

As you can see, I am very reluctant to let go of factor-price equalization. But if more evidence against it accumulates, I will be willing to change my mind.

However, in Specialization and Trade, I make the point at length that economic propositions are not falsifiable. If you want to stay committed to a proposition, you can. I say that economics deals with very few falsifiable hypotheses and many non-falsifiable frameworks of interpretation.

I can tell from the comments on previous posts that my position bothers some people enormously. They strongly oppose the situation as I describe it. Perhaps it will help to say that I have nothing against rigorous falsifiability in science, I just do not think it can be carried out in economics.

I hope you can appreciate that this is the situation with history. I doubt that we will ever be able to prove that wars are caused by X or that revolutions are caused by Y. Still, there are useful interpretive frameworks that tell us something about these issues.

I believe that all of the disciplines that deal with human society are going to have to live with this. If someone is really attached to their interpretive framework, it will be difficult or impossible to dissuade them. The best that one can hope is that people will not be so unreasonable as to assign 100 percent credibility to any information that supports their view and 0 percent credibility to any information that opposes it.

I think that we naturally try to fight back when one of our views is threatened, as mine are by the research cited above. The ideal would be for us to fight back when a study supports our views and be more accepting of studies that threaten our view, but it is difficult to live up to that ideal.

I’m Now in Cass Sunstein’s Corner

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He writes,

If you think that Barack Obama has been a terrific president (as I do) and that Hillary Clinton would be an excellent successor (as I also do), then you might want to consider the following books, to help you to understand why so many of your fellow citizens disagree with you

I could pick a nit and say that these books only explain why a few fellow citizens disagree with the left. But they are a good selection of conservative intellectual thought. I give Sunstein a lot of credit for reading them and recommending them.

One of my biggest worries is intellectual and moral arrogance among policy makers. I think that this contributed to such disasters as Vietnam, Syria, and the housing and regulatory policies that contributed to the financial crisis.

I think that left-leaning lawyers can be particularly arrogant, and I worry about who Mrs. Clinton will appoint to the Supreme Court. If she were to appoint Sunstein, I would now be less worried. I was not such a big fan of Sunstein’s before, but the linked essay fulfills the motto of this blog.

So, let me attempt a similar exercise. What are some books that I would recommend to people who tend to agree with me about things in order to open your minds to other reasonable points of view?

1. In the area of education, I am a proponent of the Null Hypothesis (interventions do not make reliable, replicable, long-term differences). Two books that make a good case otherwise are Goldin and Katz, The Race Between Education and Technology and Elizabeth Green, Building a Better Teacher.

2. People who tend to agree with me on things often like the model of humans as rationally pursuing their interests. Daniel Kahneman’s Thinking Fast and Slow is a must-read for understanding the contrary point of view. You are bound to object to parts of it, but there is much valuable insight in this book.

3. People who tend to agree with me on things often like to emphasize what incentives can explain. However, Joseph Henrich’s The Secret of Our Success is a good reminder that there are other social norms in the background that are important. Another book on the importance of culture is Peter Turchin’s War, Peace, and War.

4. As you know, I am no fan of Keynesian economics or of macroeconomics in general. But I can recommend L. Randall Wray’s Why Minsky Matters and George Akerlof and Robert Shiller, Animal Spirits (although I detested their subsequent book). Scott Sumner’s history of the Great Depression, The Midas Paradox [link fixed], is a tour de force.

5. In Our Kids, Robert Putnam coined the phrase “bifurcated family patterns.” Isabel Sawhill’s Generation Unbound looks at the same phenomenon. Both authors are left of center, so many of you will not find their books congenial, but you can still appreciate the data and the observations.