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Casey Mulligan Argues Insurance Deductibles Should Rise by 40 Percent in 2015 (corrected version) Print
Wednesday, 09 April 2014 07:48

Casey Mulligan has once again left me baffled by the economic analysis in his Economix blogpost. If I'm understanding him correctly he is saying that the deductibles for insurance provided through the exchanges in 2015 should be allowed to rise by 40 percent, based on a rise of this amount in the average premium of non-employer provided insurance policies in 2014 compared with 2013. This is based on the provision of the law that deductibles and other adjustable payments should rise in step with medical inflation.

However as Mulligan points out at length, the 40 percent rise in the cost of the average premium in 2014 was not due to medical inflation but rather due to the fact that policies being issued in 2014 under the provisions of the ACA were more comprehensive than the policies being issued in 2013. Since the insurers priced these benefits into the premiums they charged in 2014, and this was also priced into the original schedule of deductibles and subsidies, why would we expect these costs to rise by 40 percent in 2015 relative to 2014.

Based on this logic, the Department of Health and Human Services has set the target increase for a variety of indexed measures in the ACA at 4.2 percent, its calculation of the overall rate of increase in per capita health care costs. It's not clear where Mulligan sees a problem here. Perhaps he is a better lawyer than me and believes the law requires that these targted payments in future years should rise based on the one time increase in 2014, but it is certainly hard to see any economic logic behind this view. In other words, if there is a scandal in having the targeted payments in the ACA rise in step with health care costs, it's hard to see what it is.


Addendum: An earlier version wrongly said that Mullligan was referring to insurance prices.

Third Way Proposes to Tax Workers to Subsidize Wall Street Print
Tuesday, 08 April 2014 05:50

For those who have been worried about the plight of the poor boys and girls who work in the financial sector, Jonathan Cowan and Jim Kessler, respectively the president and vice-president of Third Way, have a plan to help. In a NYT column yesterday, headlined "Capitalize Workers!," Cowan and Kessler proposed a supplemental retirement system which would require employers to put 50 cents an hour into a retirement fund for all of their workers. Cowan and Kessler tell us that this should lead to an accumulation of $160,000 for a worker who works full-time from ages 22 to 67, leading to an annuity of $790 a month. What's not to like?

First, we should give Cowan and Kessler credit for effective recycling. Mandated savings plans like this are not exactly new, so getting this plan published in the NYT as a remarkable new idea to address inequality is a pretty good feat.

Getting to the substance, the requirement that employers pay 50 cents an hour for their workers' retirement is a nice little trick for the kiddies, but all the adults in the room know that this money will come out of workers' wages.(The assumption that employer side payments on wages are in the long-run deducted from wages is almost universally accepted among economists.) This deduction would actually be a substantial hit to low wage workers. Cowan and Kessler's proposal would effectively amount to a 5 percent tax on the wages of someone earning $10 an hour. That is not exactly trivial -- the Social Security trustees project that we could fully fund the program for the next 75 years with a tax increase that is a bit more than half this size. 

The next issue is the $160k accumulation that Cowan and Kessler project. They qualify this comment by saying:

"if stocks and bonds enjoy the same average rates of return as they did over the last 45 years."

That is a huge "if." Given current price to earnings ratios in the stock market and growth projections for the economy, it is almost inconceivable that stocks and bonds will enjoy the same average returns in the future as they did over the last 45 years. With the ratio of stock prices to trend earnings now approaching 20 to 1, we should anticipate real returns in the stock market going forward to average roughly 5 percent. If we assume real returns on bonds of 3.0 percent (this is probably a bit high), then a portfolio that is invested half in stock and half in bonds should produce a real return on 4.0 percent, before deducting fees.



Michael Gerson Is Confused About Health Care Costs Print
Tuesday, 08 April 2014 04:03

In his Washington Post column Michael Gerson told readers that health care costs increased at the fastest rate in 10 years in the last quarter of 2013. His source lists the growth rate of expenditures (not costs) at 5.6 percent in the quarter. This follows very slow growth in the prior three quarters. By comparison, health care spending grew by 6.7 percent over the whole year in 2007. There may well have been quarters more recently in which the growth rate exceeded 5.7 percent (the quarterly data are erratic), but clearly the claim that the fourth quarter growth rate was a ten-year high is obviously not true.

Obamacare Increased Voluntary Part-Time Employment, Involuntary Is Down Print
Monday, 07 April 2014 19:59

Paul Solman seems determined to make me an optimist on the state of the economy, at least by comparison. Following the comments of Kristin Butcher, chair of Wellesley's economic department, his blogpost on the March jobs report dismisses the 192,000 job growth reported for March:

"That’s because, according to the survey of 60,000 households, roughly 170,000 more Americans of working age were added to the population in March, consistent with the number we add just about every month, and also consistent with the Census Bureau’s report that the U.S. population is growing at slightly more than 2 million people a year.But that would mean that the number of jobs added — 192,000 — just kept pace with the number of new people who needed them."

This comment misses the fact that not everyone works. The employment to population ratio (EPOP) is just below 60 percent. This means that for the EPOP to stay constant we need roughly 100,000 new jobs a month. In this context, the March numbers implied that we reduced the number of unemployed by roughly 90,000.

The other item on which I am more optimistic than Solman is part-time employment. He emphasized the rise in involuntary part-time as bad news. I looked to the rise in voluntary part-time as good news. While the number of people working part-time involuntarily did rise in March, it is still 240,000 (@ 3.0 percent) below the year ago level, and is fact well below the level for any month in 2013. These numbers are erratic and the March rise partly reverses a drop of 580,000 reported between December and February. In other words, there is no evidence in this series that the Affordable Care Act (ACA) is increasing the number of people involuntarily working part-time as the post suggests.

On the other hand, the number of people who are voluntarily working part-time increased by 230,000 in March and is 515,000 above its year ago level. One possible effect of the ACA would be to give workers the option to work part-time who previously may have had to work full-time to get health care insurance. Since workers can now get insurance through their exchanges rather than their jobs, many may choose to work fewer hours to spend more time with their families or doing other things. This is especially likely for parents of young children.

In short, the data to date would support the view that Obamacare is having a positive effect on the labor market by giving workers more choices. But we will need many more months of data before we can say this with any confidence.

Are Investors Less Confused About Real and Nominal Interest Rates Than They Were 40 Years Ago? Print
Monday, 07 April 2014 12:38

Brad DeLong picks up on Paul Krugman's column and questions whether the top one percent of the income distribution (or top 0.01 percent) really have much to fear from higher inflation. Brad concludes that they don't, but that they think they do.  He says:

"The top 0.01% were impoverished by the 1970s as a whole. But they have not been enriched by the post 2008 era. What they have gained via a higher capitalization via low safe interest rates has been offset by what they have lost as a result of depressed profits, depressed by a low level of economic activity, a depression which has not been completely offset by downward pressure on wages. The top 0.01% would not be poorer absolutely (although they would be poorer relatively) in a high-pressure higher-inflation economy."

"But they think they would be…"

I'm not sure about Brad's story here. While weak GDP growth has undoubtedly depressed profits, this has been largely offset by a large increase in profit shares. If I were a 0.01 percenter, I would certainly not be confident that a return to something resembling full employment would not depress profits. In other words, a loss in profit share due to higher wage pressures could certainly offset the gains due to increased output. Also, from the standpoint of the rich, why risk it?

The other factor that could carry much weight in the minds of the super-rich is the impact of inflation on the stock market. Brad notes the plunge in stock valuations in the 1970s as one of the items that reduced the wealth of the rich:

"a steep fall in stock market equities even though the value of corporate debt owed falls, as investors become much more pessimistic and value earnings at a much lower multiple–in part because of the productivity growth slowdown, in part because of confusion between nominal and real discount rates, and for other reasons."

It is remarkable that more than three decades later we don't have a widely accepted explanation for the extraordinarily low price to earnings ratios of the 1970s. The view that investors were confused and wrongly discounted earnings using nominal interest rates rather than real interest rates is one common explanation.

However, if this was true in the 1970s do we have good reason to believe that it would not be true today? After all, these are the same folks that could not see an $8 trillion housing bubble in the last decade and a $10 trillion stock bubble in the prior decade. When do we think the big investors stopped being wrong on fundamental economic issues?


There is Evidence That Cities Can Combat Inequality Print
Monday, 07 April 2014 04:53

The NYT had a piece on efforts to address inequality at the local level which might have left readers with the impression that there is little that cities can do. The only economist quoted in the piece was Edward Glaeser, who was very dismissive of the idea that cities could do anything that would have much impact.

It would have been useful to include the views of University of Massachusetts economist Arin Dube or Berkeley economist Michael Reich, both of whom have done extensive work on state and local minimum wages. Reich recently co-authored a book on the impact of local measures in helping low-income workers.

The Generation War Goes on Parade Print
Monday, 07 April 2014 03:52

Paul Taylor, a vice president at Pew and the author of a new book on generational conflict, took his generation war story to Parade Magazine this weekend. This magazine, which is distributed to millions of people with their Sunday paper, included a piece by Taylor that warned:

"By the time every boomer is collecting Social Security and Medicare, those two programs are projected to eat up about half our entire federal budget—and both the Social Security trust fund and one of Medicare’s two trust funds will be broke. That’s because the ratio of taxpayers to retirees will have fallen to its lowest level ever, about 2 to 1. (When Social Security first went into effect, the ratio was more than 20 to 1.) But renegotiating the social contract between the generations will be a tall order, because these days, young and old in America don’t look alike, act alike, or vote alike."

This comment is fundamentally misleading. First, the ratio of taxpayers to retirees at the time Social Security started has nothing to do with the time of day. Amazon had only a few thousand customers in the first months it was operating. So what?

When Social Security was first created its actuaries knew full well that life expectancies would increase and that the ratio of workers to retirees would decline, and they adjusted the program accordingly. This was done primarily through a series of tax increases that were scheduled decades in advance. In addition, the commission chaired by Alan Greenspan in 1983 increased the age at which workers qualify for full benefits from 65 to 67. This increase is phased in over the period from 2002 to 2022. It is remarkable that Taylor seems unaware of these facts.

While the program is still projected to face a shortfall over its 75-year planning horizon, close to half of this shortfall is attributable to the upward redistribution of income over the last three decades. This upward redistribution has worsened the finances of the program in two ways.

First, it increased the portion of wage income that went to workers who earned more than the wage cap. In 1983, when the Greenspan commission set the cap at its current level (which is indexed to average wages), only 10 percent of wage income was above the cap and escaped taxation. Now it is close the 18 percent of wage income.



Can You Say "Patent Monopolies?" Print
Sunday, 06 April 2014 07:37

It's hard to believe that patent protection was not mentioned in this useful NYT piece on the high cost of treating chronic diseases like diabetes. The prices of new drugs and devices are high because the government grants companies patent monopolies. It will arrest and imprison potential competitors.

As every intro econ textbook shows, the monopoly profits also provide enormous incentives for corruption. As a result companies routinely misrepresent the safety and effectiveness of their products and lobby politicians to get the government to pay for their products. We would be debating alternative mechanisms for financing drug research if the industry were not so powerful and the economic profession so corrupt.



Sorry folks, I should have been clearer. I meant that the issue of patent-supported research was never raised. There are some folks, like Joe Stiglitz, who is a Nobel prize winning economist, who have suggested alternatives to patent protection as a way to finance research into prescription drugs or medical equipment. So the idea that alternatives exist should not be viewed as crazy-talk. And, if you don't bring up alternative to patent-supported research in an article like this one -- which is a careful and thoughtful piece -- where is the issue going to be raised? 

If Technology Has Increased Unemployment Among the Less Educated, Someone Forgot to Tell the Data Print
Saturday, 05 April 2014 21:52

Tyler Cowen warns us that technology may be making it much harder for less educated workers to get jobs. He highlights a series of changes in the economy then tells readers:

"All of these developments mean a disadvantage for people who don’t like formal education, even if they are otherwise very talented. It’s no surprise that current unemployment has been concentrated among those with lower education levels."

Actually, the data show unemployment has been less concentrated among the less educated in this recovery than was the case twenty years ago. Over the first three months of 2014 the unemployment rate for people over age 25 with at least a college degree averaged 3.3 percent. This is slightly higher than the 3.1 percent average in the first quarter of 1992.

While the unemployment rate for college grads was higher in the most recent period than in 1992, it was lower for both people with just high school degrees and for people who did not graduate high school. For high school grads the unemployment rate averaged 6.4 percent in the most recent quarter, half a percentage point below the 6.9 percent average in the first quarter of 1992. For those without high school degrees the unemployment rate was 9.7 percent in the first quarter of 2014 more than a percentage point lower than the 11.0 percent average in the first quarter of 1992.

There are other measures that may support Cowen's case, but a simple comparison of unemployment rates by education levels shows the opposite.


Note: Typos corrected.


Glenn Hubbard Says We Have a Shortage of Workers Print
Saturday, 05 April 2014 06:40

Glenn Hubbard, the dean of Columbia Business School and former chief economist to President George W. Bush, argued that we have a shortage of workers in a Wall Street Journal column. Hubbard noted the sharp fall in labor force participation since the downturn. He attributed it to a lack of incentive for people to work. This is in striking contrast to the more obvious logic, that when people have been trying unsuccessfully to find jobs for 6 months or a year, they eventually give up. (This explanation seems especially plausible since we know that employers generally will not even consider hiring a person who has been unemployed for a long period of time.)

The problem with Hubbard's story is that he doesn't have a good explanation for why people suddenly decided that they didn't want to work. He points to an increase in the length of unemployment benefits, but this happens in every downturn. Furthermore, the maximum duration of benefits has been cut back sharply from its peak of 99 weeks in the first years of the recession with no corresponding surge in employment.

The Affordable Care Act will make it possible for many people to get health care insurance without working or without working full time, but that should only have begun affecting the data in the last few months as the health care exchanges came into existence. It would not explain the drop in labor force participation that was already quite evident by the summer of last year.

If the problem is really on the supply side then we should be seeing a surge in vacancies. In fact, the vacancy rate is still more than 10 percent below the pre-recession level and more than 20 percent below the 2000 level. We should also see an increase in the length of the average workweek. While this is more or less back to its pre-recession level (slightly above in manufacturing), it certainly is not unusually high. And we should be seeing rapid wage growth as firms compete for workers. Wages are now just moderately outpacing inflation.

In short, we have no reason to believe that the problem with the labor force is on the supply side. There remains an incredibly simple story that the housing bubble that was driving demand collapsed. With no source of demand to replace the housing and consumption driven by the bubble we are destined to slog through a prolonged period of slow growth and high unemployment. That one seems straightforward but it is apparently too simple for economists to understand.



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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.