Every now and then someone inadvertently says something that is truer than intended. Such is the case with a quote that appears in Robert Samuelson's column today.
The piece is devoted to bemoaning the reduction in entrepreneurship which Samuelson somehow thinks is tied to slower job creation. (This relationship is pretty damn weak, but no reason to waste time here.) At one point Samuelson list five possible reasons for the decline in entrepreneurship. Number one is:
"Schools — K-12 plus colleges and universities — aren’t turning out enough skilled workers. 'I have jobs,' said one Texas entrepreneur. 'I just don’t have the talent to fill them.'"
This entrepreneur is likely closer to the mark than he or she realized. The way you find skilled workers is by offering higher wages than your competitors. There are undoubtedly people in the country who have the skills that this entrepreneur needs. If he can't get them to work for him then obviously he is not offering a high enough wage, or as he said, "I just don't have the talent to fill them."
Of course it is possible that this entrepreneur could not afford to offer a high enough wage to attract the skilled workers, but then he really doesn't have the jobs. This would be like someone complaining that they couldn't get a doctor to treat them, without noting the fact that they were only willing to pay $30 an hour. The problem in that case is that the person is unwilling to pay the going wage for doctors.
This story is about as simple as economics gets. If there were a shortage of skilled workers then their wages would be rising. As it is, there is no major group of workers who are seeing rapidly rising wages, therefore it is not plausible that there are shortages of skilled workers.
The problem is likely just what Samuelson quotes the entrepreneur as saying, he lacks the talent to properly run a business.
(Btw, if Samuelson is really looking for causes for the decline of entrepreneurship, the collapse of anti-trust enforcement should probably be on his list.)
NPR harshly criticized a change in Germany's social security system which allows workers to collect benefits at age 63, rather than the previous age of 65, if they had contributed to the retirement system for 45 years. The piece repeated claims that this expansion of the retirement system was hypocritical, since Germany is demanding austerity from other members of the euro zone. It also implied that it would be a large expense, telling listeners that 50,000 workers are taking advantage of the reduction in the retirement age.
It would have been worth noting that increased spending by Germany helps it neighbors. Since the euro zone is suffering from inadequate demand, when Germany spends more money it helps Italy and Spain since it will create more demand for their goods and services.
These countries may resent that Germany has the money to spend, just as poor people may resent that rich people have the money to spend, but in the context where the rich do have the money, the poor are better off if they spend it than if they don't. While people in the rest of the euro zone have plenty of grounds for resenting the austerity demanded by Germany, which is causing mass unemployment and costing the region trillions of dollars in lost output, if they really don't want Germany to spend more on its retirees, then they must want higher unemployment and less growth in their own countries.
It would also have been useful to put the numbers here in some context. Germany has a labor force of a bit under 43 million, or roughly 28 percent of the size of the U.S. labor force. This means that this flood of new beneficiaries would be equivalent to an addition of 200,000 retirees to the U.S. Social Security system. That would be an increase of approximately 0.6 percent.
The piece also claimed that Germany is facing a labor shortage as more workers retire. It is difficult to know what this is supposed to mean. In a market economy if there are fewer workers, people switch from less productive jobs to more productive jobs. This means that there might be fewer people working in convenience stores, or as housekeepers, and kitchen workers. What's the problem?
Note: Typos corrected.
The NYT ran an AP article on the contraction in Japan's economy in the 2nd quarter of 2014. The article noted the 6.8 percent annual rate of contraction and told readers that this posed a real problem for Abenomics.
While this rate of decline is undoubtedly a cause of concern, it would have been worth mentioning that its economy grew at a 6.7 percent annual rate in the first quarter. The big factor in this seesaw was a sharp rise in the consumption tax that went into effect in April. This tax increase led many people to pull major purchases forward. As a result, they bought cars, appliances, and other expensive items in the first quarter that they would have otherwise bought in the second quarter.
The modest net contraction over the two quarters taken together should still be cause for concern, but it is a very different world than one in which an economy is sinking at close to a 7.0 percent annual rate.
The Washington Post had an article dedicated to uncovering the reason that the housing market in Washington has been slow in recent months. While it runs through several possible explanations it leaves off the most obvious one: prices are too high.
Inflation adjusted house prices are more than 50 percent above their pre-bubble levels. Back in good old econ 101 we always taught that if supply exceeded demand then the price should fall. The fact that prices in DC are so far above their pre-bubble level would be good evidence that this is the problem.
News apparently travels slowly in the nation's capital. The New York Times reported on a speech by Stanley Fischer, the vice chair of the Fed, in which he expressed confusion over the causes of the weak recovery.
It would have been helpful to express the views of economists who could have expressed surprise over Fischer's confusion. When the housing bubble collapsed, there was a massive loss of demand. Spending on residential construction fell back by more than 4.0 percentage points of GDP. With the loss of $8 trillion in housing wealth, consumption fell back by close to 3.0 percentage points of GDP. This created a total gap of 7 percentage points of GDP, which is close to $1.2 trillion in today's economy.
Residential construction has recovered to some extent, but it is still well below its bubble peaks. Unless we see another bubble, there is no reason to expect construction to get back anywhere near its 2005-2006 share of GDP. Consumption has also recovered to some extent, but without the bubble wealth that drove it, there is no reason to expect it to reach the same share of output as in the bubble years.
Unless Fischer has some very novel theory of the economy, there would have been no reason to expect a more rapid bounce back of the economy than what we saw, especially after the federal government turned to austerity in 2011. It would have been helpful if the NYT had focused on the seeming confusion in Fischer's thinking.
Having read Fischer's speech, I think the confusion is more in the reporting than in the speech, which seems largely on the mark on the current state of the economy. The spelling of "Fischer" has also been corrected.
The NYT reported that the Postal Service lost $2.0 billion in the third quarter of its 2014 fiscal year. While the piece did note that much of this loss was attributable to a requirement imposed by Congress that the system prefund its retiree health benefits, it would have been useful to also point out that a change in the accounting of liabilities in its workers' compensation fund added $0.6 billion to its losses this quarter. By contrast, in the third quarter of last year the accounting for this fund increased profits by $0.8 billion. Without the charges for workers' compensation and the prefunding of retiree health benefits, the system would not have shown a loss for the third quarter. Excluding these charges it would have shown a profit of $1.0 billion for the first three quarters of the year.
It is also worth noting that the prefunding requirement has little or no precedence in the private sector. It targets an extraordinarily high level of prefunding (many companies pay benefits as current expenses), to be reached in a short period of time. It also uses assumptions on health care cost growth that are far above recent growth rates.
Regular readers of the Washington Post have grown fond of Robert Samuelson's repeated calls for cuts to Social Security (e.g. here, here, here, here, here, here, here, here, here , and here). At the core of Samuelson's complaints are long-term projections from the Congressional Budget Office (CBO), and other sources, that the country will have large deficits 15 years, 25 years, or further in the future.
He likes to say that these deficits are due to Social Security and Medicare, although the main driver is the fact that U.S. health care costs are vastly out of line with costs in the rest of the world. If our doctors, drug companies, and other health care providers got paid the same as their counterparts in other wealthy countries, the projections would show huge surpluses, not deficits. But Samuelson prefers to go after poor and middle class seniors rather than highly paid people in the health care sector.
But this is secondary to the big issue with today's column. Samuelson's repeated hyperventilations about Social Security and Medicare are based on budget projections made for the distant and very distant future. For this purpose Samuelson apparently is willing to accept that economics can be a very precise science even though the past track record of budget forecasters has been atrocious. (For cheap thrills check out these projections for large deficits in the year 2000, big surpluses in 2003, or modest deficits in 2010. In each case the overwhelming source of error was in the economic projection, not policy changes.)
But for today's column arguing that the Fed should be looking to raise interest rates sooner rather than later Samuelson has serious reservations about the quality of economic predictions:
"Although economists are arguing furiously over this [whether the Fed should be raising interest rates], there’s no scientific way to measure slack. Economic policymaking is often an exercise in educated guesswork, built on imperfect statistics, shaky assumptions, incomplete theories and political preferences. This is an instructive case in point."
He concludes the piece:
"The Fed is expected to begin raising rates in 2015, but the time and pace are unknown. The danger of waiting too long or going too slow is that inflation, now controlled in the market and in Americans’ thinking, will escape these convenient bounds. Once that happens — as the double-digit inflation of the 1970s and early 1980s showed — inflation takes on a life of its own and becomes self-fulfilling. It can be suppressed only through tight credit, recession and high unemployment. We don’t want to go there."
That's pretty much what David Treadwell, the spokesperson for the state's Department of Economic and Community Development told an AP reporter. The article reports on a subsidized loan from the state to a German company to finance a training center for its workers. The piece then cites the views of several economists that there is no evidence that Connecticut has a shortage of trained workers. Among other things, a shortage would generally be associated with rapidly rising wages, which the state is not seeing.
It then concludes with a quote from Mr. Treadwell:
"She's hearing from the businesses and they're saying it is a problem, ... It doesn't necessarily matter what the economists are saying."
There you have it.
The Washington Post treated us to another hand wringing piece on Sovaldi. The deal is that we could virtually eliminate a major disease in 10-20 years if only we were prepared to bite the bullet and pay Gilead Sciences $84k a head for Sovaldi.
Those are not the only options. Gilead Sciences charges $84,000 for Sovaldi but it doesn't actually cost $84,000 to produce the drug. Generic manufacturers make the drug available in Egypt for less than $1,000 per person and Indian generic manufacturers believe they could produce it for even less. If we allowed people in the United States to go these countries to get treatment, covering the cost of travel for themselves and immediate family, it would be possible to provide treatment for a small fraction of this cost.
If this were done on a large scale it would undermine the model of financing research through granting patent monopolies, however it is long past time that this 16th century mode of financing be re-examined. There is a vast literature in economics on the waste and corruption that results from policies like tariffs that raise the price of products above the cost of production.
In the case of Sovaldi, the patent monopoly has a distortionary effect that is similar to a 10,000 percent tariff. Predictably it leads to a huge amount of corruption, with companies routinely misrepresenting the safety and effectiveness of their drugs. The secrecy that companies rely upon to ensure themselves the ability to capitalize on the value of their research also slows the pace of drug development. Unfortunately the industry is so powerful (it is a major source of advertising revenue for the Post), that it can prevent alternatives to patents from even being raised in public debate.
It's great that the folks at the Washington Post are capable of mind reading. If we just looked at the substance of the Johnson-Crapo bill for replacing Fannie Mae and Freddie Mac by a system in which private companies would be able to issue mortgage backed securities that carried a government guarantee, we might think that the motive was to increase the profits of the financial industry. After all, the industry would be able to earn tens of billions in additional profits each year by getting this business.
However the Post told readers:
"To avoid a repeat of the bailout, the Obama administration is pushing to dismantle Fannie and Freddie and shift the risks of mortgage lending away from taxpayers to the private sector."
Since the bill doesn't actually avoid a repeat of the bailout, most readers would probably not realize that this is the motive of the Obama administration in privatizing Fannie and Freddie. Under the Johnson-Crapo bill, the government would be on the hook for 90 percent of the face value of mortgage backed securities (MBS). As was the case in the housing bubble years, private issuers would have incentive to issue MBS of dubious quality, since they make money on the issuance. The big difference between the Johnson-Crapo system and the one in place during the bubble years is that the issuers would be able to tell buyers that the government is covering 90 percent of their investment. In the bubble years, investors understood that if the MBS went bad they could in principle lose their whole investment.
Catherine Rampell used her column to give readers a short quiz on government spending. There are a couple of questions that could use a bit further examination.
The first question asks readers:
"An elderly person receives about how much in federal spending for every $1 received by a child?"
The correct answer is $7 according to Rampell. There are two problems with this question. First, the most important government program for the young is education, which is prmarily a state and local expense. So it is wrong to simply focus on federal spending as a measure of public priorities.
More importantly, the main reason for this ratio is that we have a retirement program (Social Security) and a senior health insurance program (Medicare) that are run through the government. These are benefits that people have paid for during their working lifetime.
In the logic of the Rampell quiz we could say that something like $100 in federal spending goes to the very rich (the top 0.1 percent) for every $1 received by a child. This would be based on the assumption that 10 percent of their $6.4 million annual income comes from interest on government bonds. Of course the rich paid to buy these bonds, but the elderly also paid for their Social Security and Medicare. If we're ignoring that fact in talking about benefits from Social Security and Medicare, then we should also ignore it when talking about interest on government bonds. (According to the Urban Institute, the discounted value of Social Security benefits received by current and future retirees is slightly less than the taxes they paid into the program.)
The possibility of a privatized Social Security system demonstrates the illogic of Rampell's quiz. Suppose we required that workers pay an amount equal to their current Social Security taxes into a private account which would then pay them a benefit comparable to their currently scheduled benefit. The situation of the elderly will not have been changed (ignoring the problems of a privatized system), but now we would not have the same inequality between federal payments to the elderly and the young.
There is also a serious problem with question 5 in which readers are supposed to answer there is a $127,000 difference, "between what you paid in Medicare taxes and what you can expect to receive in Medicare benefits." The problem with this description is that the gap is due to the fact that we pay health care providers about twice as much as they receive in other wealthy countries. In other words, people get back more in Medicare benefits than what they pay in Medicare taxes because are doctors are very rich (average earnings @ $250,000, net of malpractice insurance), drug companies are very rich, and medical supply companies are very rich. If we paid our providers the same as providers in Canada or West Europe then the value of benefits would be close to what people pay into Medicare in taxes. By the logic of question 5, every time we up what we pay doctors and drug companies, the elderly are better off.
The NYT had an interesting piece on the progress of high-speed rail under President Obama. As the headline tells it, we've spent $11 billion without all that much to show.
Just in case readers didn't know offhand, the federal government has spent roughly $550 billion on transportation over the last six years, so spending on high speed rail would be roughly 2.0 percent of total transportation spending. If you think this spending has been driving up your tax bill, this comes to roughly 0.05 percent of total federal spending over the last six years.While it would require a careful analysis to make a full assessment of whether the money devoted to high-speed rail has produced good results compared to alternative uses it would have been helpful to express this spending in a way that would be meaningful to most readers.
Involuntary part-time employment has fallen by 670,000 over the last year, however it's still up by almost 3 million from its pre-recession level. While there would seem to be a very simple and obvious explanation for this one -- weak demand in the economy -- you can't employ many people saying the obvious. Hence we see a lot of nonsense in the media on the topic.
The latest installment comes to us from McClatchy News Service. The story is that the problem is skills and employer sanctions in Obamacare.
"One reason is a gap in the kinds of skills needed to find work in an increasingly technological workplace. Many employers also remain uncertain about the economy and hesitant about deeper financial commitments.
"And hiring part-time instead full-time employees is one way that some businesses are getting around the costs of a mandate in the health care law that requires employers with 50 or more full-time workers to provide insurance coverage beginning in January."
Let's see, the problem is a gap in skills. So employers have those full-time jobs out there, the problem is that workers just don't have the skills needed to fill them.
Let's assume this is true. Imagine you're one of those frustrated employers. You have all this demand for your service or product, but the dolts coming through your door just don't have the skills needed for your increasingly technological workplace. What might you do to solve this problem?
That's right, you could raise wages. This way you would pull away the workers who have these skills from your slow moving competitors.
There is a problem here. We don't have any major sector of the economy with rapidly rising wages. (Yes, North Dakota has rapidly rising wages and it employs about 0.3 percent of the workforce.) This indicates that we either don't have a skills gap or if we do it exists primarily among employers who don't understand how labor markets work.
A piece of data that doesn't fit well with the skills gap story is that the sector with the most rapid growth since the downturn has been the leisure and hospitality sector, which has added 1,120,000 jobs (total employment in all other sectors together is still below the pre-recession level). This sector is not generally considered to be at the center of the technological revolution. It also has an averagework week of 25.1 hours.
The Obamacare part of the story also doesn't fit the data. Employers would have thought that the employer sanctions applied for the first half of 2013 until the Obama administration announced a waiver in July of that year. During this period there was a modest increase in the share of the workforce working 25-29 hours, just under the 30 hour cutoff for the sanction. However this increase was totally at the expense of the share working less than 25 hours. The portion of the workforce putting in more than 30 hours a week actually increased.
In short, there is zero reason to believe that the increase in involuntary part-time employment has anything to do with either a skills gap or Obamacare. There is a simple explanation based on inadequate demand since we haven't filled the gap created by the collapse of the housing bubble. Unlike the more complicated explanations, this one fits the data.
There is a widely believed, but largely silly, view that rising inequality is the result of technology and globalization. NPR gave us an illustration of how silly this view is in a segment on plans in California to reduce the duration of medical school from four years to three years.
The ostensible motivation was to help address a shortage of primary care physicians. The reason why the piece is relevant to the larger issue of inequality is that it never once mentioned the possibility of bringing in more doctors from other countries. Doctors in the United States earn on average twice what their counterparts do in other wealthy countries. Since we have no notable differences in health outcomes, the implication would be that our doctors are of no better quality on average than those in Europe and Canada.
This would suggest that there is a vast pool of doctors who could benefit from coming to the United States and working for more money than they would receive in their home country. The pool of potential doctors is even larger if we include doctors from developing countries who could be required to train to U.S. standards. To ensure that developing countries benefit as well, we could repatriate tax revenue from expatriate doctors so they can train two or three doctors for everyone that comes here. (If you plan to complain that this policy hurts developing countries read the last sentence as many times as necessary to understand it.)
What is striking is that the issue of bringing in more doctors from other countries never got mentioned in this piece or in other new stories that raise the question of doctor shortages. Bringing in immigrant workers is raised all the time in other contexts such as alleged shortages of nurses, STEM workers, and farm workers.
The fact that immigration is not discussed in the context of a doctor shortage has nothing to do with inevitable processes of globalization or technology. It has to do with the power of doctors relative to other workers. Doctors are able to prevent their wages from being driven down by foreign competition; other workers have less power. It really is that simple.
Addendum: The above comment is not entirely fair to NPR. Planet Money once had a segment in which I discussed the possibility of bringing in more foreign doctors as a way of saving money on health care.
I see from comments that folks have noted the number of residency slots as the source of the limit on the supply of doctors. There are two points to be made on this. First, this rule is a textbook protectionist restriction. The requirement that people have to do a residency in the United States did not come down from the heavens, it was imposed as a way to restrict the number of doctors.
This gets us to the second point. The number of slots was cut back in 1997 at the insistence of the A.M.A. and other doctors' organizations because they said there were too many doctors and it was driving down their pay. So the pieces of the puzzle all fit together easily.
Students learn in introductory economic that Y = C+I+G +(X-m), which means that GDP is equal to the sum of consumption, investment, government spending and net exports. Those who remember their intro econ are not surprised to see that Italy has slid back into recession for the third time since the 2008 crisis.
Unfortunately simple economic logic does not find its way into the NYT article on the weakness of Italy's economy and much of the rest of the euro zone. The basic story is straightforward. Since 2010 the European Union has been demanding that countries in the euro zone reduce their budget deficits. This means cutting government spending and/or raising taxes. Lower government spending directly reduces demand in the economy. Raising taxes indirectly reduces demand by reducing disposable income, and thereby reducing consumption. (There is a supply-side effect from the change in incentives, but this is in almost all cases much smaller.)
In short, the European Union has been requiring that many of the countries in the Euro zone reduce demand in their economy. There is no obvious mechanism to replace this lost demand. If Italy, Spain, and other countries flirting with recessions had freely floating exchange rates it would be possible that the decline in the value of their currencies would lead to an increase in net exports (a lower valued currency would make their exports cheaper and imports more expensive), but since they are in the euro zone this route is not possible, except insofar as the euro falls against other currencies.
The high unemployment caused by the European Union's polices can have a modest stimulatory effect insofar as they push down wages in these countries. This can improve their competitive position relative to Germany and other countries with stronger economies, but this process is likely to be very slow, especially with inflation running at a very low rate in Germany.
In short, there is no plausible story whereby the countries of southern Europe can expect to replace the demand lost from the deficit reduction demanded by the European Union. The article should have at some point mentioned that the recession in Italy is pretty much exactly what most economists would expect from the European Union's austerity policies, just as physicists expect that when we drop a hammer it falls.
Yes, that is what he said according to the Washington Post. The context was a business summit involving U.S. and African business people and African heads of state. Immelt was complaining that the reauthorization of the Export-Import Bank is being seriously debated Washington.
The Bank makes or guarantees around $35 billion in loans, with the vast majority of the money going to large companies like GE, which Immelt heads. The Bank effectively is allowing these companies to get loans at below market interest rates, adding billions of dollars to their profits each year.
According to the piece Immelt complained:
"There’s a lot of things to be critical about big businesses, and there’s a lot of things that don’t work in government, but exporting is not one of them and the Ex-Im Bank is not one of them, ... And the fact that we have to sit here and argue for it I think is just wrong.”
It is also worth noting that article misled readers by saying:
"some Republicans and conservative groups say the bank should be allowed to die, claiming that it doles out corporate welfare and engages in crony capitalism."
There are also many people who are neither Republicans nor conservatives who do not think it is an important role of government to make people like Jeffrey Immelt even richer.
That one should be obvious, but for some reason almost no one ever says it. This is why it is very nice to see Eduardo Porter's piece making the point in the NYT today.
The basic point is probably too simple for economists to understand, but if we have 20 percent fewer people in 2050 than in a baseline scenario, then they all can emit 20 percent more greenhouse gas (GHG) emissions in that year and have the same amount of total emissions. Alternatively, if we have the same amount of per capita emissions, we will have 20 percent less total emissions.Restraining population growth is not going to solve the problem. We have to sharply reduce the amount of GHG emissions per person, but reaching whatever targets we set will be much easier with a smaller population.
It is remarkable how frequently news stories decry evidence of slowing population growth or shrinking populations as implying some sort of catastrophe. This is nonsense. It simply implies a tighter labor market with a rising ratio of capital to labor. In this scenario, workers switch from low productivity jobs (e.g. restaurant work, house cleaning, and retail clerks) to higher productivity jobs. This is a problem for the people who want to hire cheap labor, but will likely be seen as good news by almost everyone else.
In an article on corporate inversions (relocating their official headquarters to another country) the Washington Post told readers:
"the potential costs to the U.S. treasury are enormous. One measure, by the congressional Joint Committee on Taxation (JCT), suggests that the nation stands to lose nearly $20 billion in tax revenue over the next decade. Former JCT director Edward Kleinbard said he thinks the potential loss is much higher."
For those wondering how big a deal $20 billion over the next decade is, the Congressional Budget Office (CBO) projects total revenue over this period of $40.6 trillion, which means that the JCT estimate would imply a lose of revenue of 0.05 percent. To make another comparison, Medicare spending has been coming in far lower than projected in recent years. The most recent projections for net spending in 2015 is $524 billion. By comparison, in 2008 CBO projected that we would spend $609 billion in 2015, implying a saving of $85 billion in 2015 alone. Carrying through the differences in projected growth rates in the most recent projections with the growth rate projected in 2008, the savings from lower Medicare spending would exceed $1 trillion, making them more than 50 times "enormous."
This does not mean that the Congress and the president should not try to stop a practice that serves no economic purpose and will needlessly cost the government a substantial amount of revenue. It is also important to note that this gaming of the tax code imposes real costs on the economy. There are financial firms that will earn lots of money from this sort of financial engineering. The resources used by these firms (e.g. the labor of the accountants and lawyers engineering the switch) could instead be used productively. In effect. some people are getting very rich being paid to dig holes and fill them up again, in other words, doing work of no economic value.
This is a problem with all economic transactions that become profitable wholly or partly because of quirks in the tax code. For example, much of the wealth of private equity fund managers can be attributed to their exploitation of the deduction for interest payments. This deduction effectively subsidizes heavy corporate leverage, which is undesirable from an economic standpoint since it increases the risk of bankruptcy.
The economic waste associated with tax loopholes, which almost always makes the rich richer, is at least as important a reason to be concerned about corporate tax loopholes as the lost revenue to the government.
The Post's Wonkblog has a piece telling us that we should thank the recession for the slowdown in health care cost growth. I was one of those in the camp who thought the recession was responsible for the slowdown in health care growth in 2008-2010, however I think the explanation weakens as time goes on and costs continue to grow slowly.
The point is simple. Suppose that you have $10k slashed from your income in 2008 compared to its 2007 level. We might expect that you would spend less on health care and everything else in 2008. Suppose that your income in 2009 is again $10k below where you expected it would have been back in 2007. This happens again in 2010, 2011, 2012, 2013, and 2014. In other words, your income grows at more or less the same pace that you would have expected in each of these years, but the level in each year is 10k below what you had expected it would be in back in 2007.
In this story, which more or less captures the recovery, we might expect that the level of health care spending in these later years would be lower than had been projected in 2007, but the growth rate would be pretty much the same. The Post piece tells us that ain't so.
It cites two studies. Since one is behind a paywall, I will focus on the Brookings study which is freely available to the unwashed masses. This study finds a reasonably strong link between health care spending and GDP growth, however there is a long lag. The regressions for the growth of per capita health care spending use as independent variables current GDP growth and 5 lagged GDP terms using annual data. What is striking is that the strongest effect shows up on the fourth lagged term.
This is noteworthy in the current context because in 2013, the fourth lagged term gave us 2009 GDP growth, which was -2.8 percent. The fourth lagged term this year would give us 2010 GDP growth, which was 2.5 percent. The difference between these two implies a predicted rate of health care cost growth that is 1.6 percentage points higher in 2014 than in 2013. (This calculation uses the coefficients from column 1 of Table 1, the uptick in predicted cost growth would apply for all the regressions whose results are shown in the table, although the size would vary.)
The point is that if this study is the basis for expecting a sharp slowing of health care costs due to the weak economy, the period during which that would be true is over. Based on the study's findings we should be seeing substantially more rapid increases in health care costs in 2014 than we did last year. Thus far this doesn't appear to be the case, which may cause us to question the usefulness of this model for explaining recent patterns in health care cost growth.
Medgeek was good enough to send me the other study, a paper by David Dranove, Craig Garthwaite, and Christopher Ody, which I quickly read through. Looks to me like it provides good evidence that the recession was the major factor in reducing cost growth in 2008-2010. Their model shows that the recession would not lead to any further decline in cost growth in 2011 or later years (see Exhibit 3). In fact, the modest uptick in the employment to population ratio in subsequent years means that we should have been seeing somewhat above trend increases in health care costs in 2012-2014. So yes, there is good reason to believe that the recession was the major factor behind slower health care costs in the years 2008-2010. The continued slow growth over the last three and a half years requires another explanation.
Knowingly issuing a fraudulent mortgage (e.g. a mortgage based on false information) is fraud. It is the sort of thing that you can go to jail for, especially when it is done on a mass scale, as was the case in the financial crisis. Knowingly passing along fraudulent mortgages in mortgage backed securities is also fraud.
No important figure at any major bank was prosecuted for these activities by the Justice Department. As a result, virtually all of them benefited from their actions in the housing bubble years. They were better off as a result of having committed fraud than if they had obeyed the law. Economic theory tells us that we should expect that this would lead other executives in similar positions to act the same way. In other words, they will break the law, since the consequences of getting caught are essentially zero.
In spite of this reality, in an article on a Justice Department investigation of loan practice in the subprime auto loan market the NYT told readers:
"For the Justice Department, buffeted by criticism for not indicting a Wall Street executive, the mortgage investigations have helped polish the agency’s image as a tough enforcer as they have yielded a string of multibillion dollar penalties."
The article doesn't tell readers in whose mind the Justice Department's image has been polished. The recent settlements against banks can be seen as taking actions against a mob run company after the mob has sold it off, while all the mobsters continue to go free and live off the proceeds of their illegal dealings. That may seem tough to some people, but probably not anyone who has given the issue much attention.
Note: Typo corrected.
In the NYT Upshot section Neil Irwin had an interesting piece assessing which sectors are most responsible for the weakness of the economy. His culprits (in order) were residential invesment (housing), state and local government, durable goods consumption, business equipment investment, and federal spending. Irwin's methodology was to take the Congressional Budget Office's estimate of potential GDP (roughly 5 percent higher than the current level) and then assume that each component has the same share of this potential as its average of GDP over the two decades from 1993 to 2013. The difference between this hypothetical level of demand from a component and the actual level of demand from that component in the second quarter of 2014 is the basis for determining the shortfall.
I decided to do a similar exercise with a couple of minor differences. The table below shows the difference between each component's average share of GDP in the period from 1990-2013 (this was an accident -- misread Irwin's start point) and the average for the first two quarters of 2014. The two quarters are taken together because for many components a strong second quarter offset a weak first quarter. I have also lumped components together (e.g. the categories of consumption are all together). The categories in bold are the major components that together add to GDP.
|Percentage Point Change|
|Intellectual property products||-0.4|
|Change in inventories||-0.1|
|State and local||0.5|
Source: Bureau of Economic Analysis, National Income and Product Accounts, Table 1.1.5.
There are a few points that can be made from this table. First, the items that have fallen substantially as a share of GDP are government spending, which had roughly equal dropoffs at the federal and state and local levels, and residential construction. Net exports are also down as the import share had grown more than the export share. Non-residential investment is at its average level for the 1990-2013 period. The big gainer in shares is consumption, which had a 2.3 percentage points larger share of GDP in 2014 than its average in the prior period.