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.
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.
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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.
Addendum:
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.
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.
Addendum:
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.
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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.
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.
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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.
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.
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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.
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.
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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.
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.
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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.
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.
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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.
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.
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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.
Second Addendum:
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.
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.
Second Addendum:
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.
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