Ezra Klein highlights the most important feature of Obamacare. People who have insurance now will be assured that they can still buy it if they lose it for some reason. This will make a huge difference to the bulk of the population who do already have insurance. They can now change jobs or even quit and still be assured of being able to get insurance at a reasonable price.
Ezra Klein highlights the most important feature of Obamacare. People who have insurance now will be assured that they can still buy it if they lose it for some reason. This will make a huge difference to the bulk of the population who do already have insurance. They can now change jobs or even quit and still be assured of being able to get insurance at a reasonable price.
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Neil Irwin seems to miss the major issues on too big to fail in his discussion of Treasury Secretary Jack Lew’s remarks proclaiming too big to fail (TBTF) to be sort of over. The most obvious issue is simply whether the markets believe TBTF is over.
This is a question of whether they think Jack Lew or his successors will simply wave good bye if J.P. Morgan, Goldman Sachs, or one of the other megabanks goes under. If they don’t believe that the government will just let one of these banks sink then they will still be willing to lend money to them at a below market rate since they are counting on the government to back up their loans.
This below market interest rate amounts to a massive subsidy to the top executives and shareholders of these banks. Bloomberg news estimated the size of this subsidy at $83 billion a year, more than the cost of the food stamp program. Insofar as Lew’s efforts to create doubts about a government rescue are successful, the size of this subsidy would shrink toward zero. However as long as the markets do not take him seriously (my bet is they don’t), the big banks will still be getting a massive subsidy.
This is one of the reasons why President Obama’s recent comments on inequality were seriously misplaced. He said the government cannot stand on the sidelines as the distribution of income becomes much more unequal. Of course government is not standing on the sidelines; it is actively working to increase inequality through measures like the TBTF subsidy.
The other point that Irwin gets wrong is implying that the economic crisis in some way hinged on getting the TBTF issue right. The economy’s current weakness is attributable to a lack of a source of demand to replace the demand generated by the housing bubble. Investment and consumption are both at normal levels relative to the size of the economy; there is no evidence that the residue of the financial crisis is holding them back.
The issue going forward will be whether we have people at the Fed and other regulatory agencies who take bubbles seriously. We clearly did not in the past and since no one faced any career consequences as a result of this gargantuan failure, there is not much reason to believe that lessons have been learned.
Neil Irwin seems to miss the major issues on too big to fail in his discussion of Treasury Secretary Jack Lew’s remarks proclaiming too big to fail (TBTF) to be sort of over. The most obvious issue is simply whether the markets believe TBTF is over.
This is a question of whether they think Jack Lew or his successors will simply wave good bye if J.P. Morgan, Goldman Sachs, or one of the other megabanks goes under. If they don’t believe that the government will just let one of these banks sink then they will still be willing to lend money to them at a below market rate since they are counting on the government to back up their loans.
This below market interest rate amounts to a massive subsidy to the top executives and shareholders of these banks. Bloomberg news estimated the size of this subsidy at $83 billion a year, more than the cost of the food stamp program. Insofar as Lew’s efforts to create doubts about a government rescue are successful, the size of this subsidy would shrink toward zero. However as long as the markets do not take him seriously (my bet is they don’t), the big banks will still be getting a massive subsidy.
This is one of the reasons why President Obama’s recent comments on inequality were seriously misplaced. He said the government cannot stand on the sidelines as the distribution of income becomes much more unequal. Of course government is not standing on the sidelines; it is actively working to increase inequality through measures like the TBTF subsidy.
The other point that Irwin gets wrong is implying that the economic crisis in some way hinged on getting the TBTF issue right. The economy’s current weakness is attributable to a lack of a source of demand to replace the demand generated by the housing bubble. Investment and consumption are both at normal levels relative to the size of the economy; there is no evidence that the residue of the financial crisis is holding them back.
The issue going forward will be whether we have people at the Fed and other regulatory agencies who take bubbles seriously. We clearly did not in the past and since no one faced any career consequences as a result of this gargantuan failure, there is not much reason to believe that lessons have been learned.
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I’m not kidding. That was in a front page “news” story on the November jobs report. The piece told readers:
“Some economists are forecasting growth as high as 3 percent next year. New data released Friday showing robust hiring in November suggested that the private sector already is gaining momentum.
“The only thing that has to happen is that lawmakers have to do nothing,’ said Mark Zandi, chief economist at Moody’s Analytics. ‘It’s a pretty low bar.'”
According to the Congressional Budget Office the economy is currently operating at a level of output that is approximately 6 percent below its potential. The rate of growth of potential GDP is in the range of 2.2-2.4 percent annually. This means that if the economy sustains the 3.0 percent growth rate that has the Post so excited, it will close this gap at the rate of 0.6-0.8 percentage points a year. That means it will take between 7.5-10.0 years to close the gap, if the Congress follows Zandi’s prescription.
It probably would have been worth including the views of an economist who would have pointed out that this path would imply the loss of between $4.0 trillion and $5.5 trillion in potential output, an amount that is between 100 and 140 times the size of the proposed cuts to SNAP that has been filling public debates. The overwhelming majority of this lost potential output is coming out of the pockets of low and moderate income workers.
I’m not kidding. That was in a front page “news” story on the November jobs report. The piece told readers:
“Some economists are forecasting growth as high as 3 percent next year. New data released Friday showing robust hiring in November suggested that the private sector already is gaining momentum.
“The only thing that has to happen is that lawmakers have to do nothing,’ said Mark Zandi, chief economist at Moody’s Analytics. ‘It’s a pretty low bar.'”
According to the Congressional Budget Office the economy is currently operating at a level of output that is approximately 6 percent below its potential. The rate of growth of potential GDP is in the range of 2.2-2.4 percent annually. This means that if the economy sustains the 3.0 percent growth rate that has the Post so excited, it will close this gap at the rate of 0.6-0.8 percentage points a year. That means it will take between 7.5-10.0 years to close the gap, if the Congress follows Zandi’s prescription.
It probably would have been worth including the views of an economist who would have pointed out that this path would imply the loss of between $4.0 trillion and $5.5 trillion in potential output, an amount that is between 100 and 140 times the size of the proposed cuts to SNAP that has been filling public debates. The overwhelming majority of this lost potential output is coming out of the pockets of low and moderate income workers.
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Couldn’t resist this one. No the WaPo columnist isn’t complaining about too much money going to big banks. He is once again complaining about money going to seniors, or more specifically the idea pushed by Senators Tom Harkin and Elizabeth Warren that we might want to increase the money going to seniors.
Harkin proposed a bill, which Warren has now endorsed, which will base the annual cost of living adjustment on a price index that more closely tracks the consumption patterns of seniors than the current index. It would also raise benefits by an average of about $70 a month.
This makes Lane unhappy since he thinks seniors are doing just fine. Ironically he cites a study showing that the share of 70-year olds who won’t be able to replace 75 percent of the income will rise from 25 percent for those born between 1940-1944 to 30 percent from 1970-1974.
This actually is a low bar for two reasons. First weak wage growth over this period means that 75 percent of working income is much less relative to the economy’s average productivity for this later age cohort. The other reason is that at age 70 the later born cohort will have on average have about 2.5 more years of life expectancy (12.6 year versus 10.2 years). This means that they will likely have more wealth and will more likely still be working.
The real value of Social Security benefits do increase through time and therefore are projected to be a considerably larger share of retirees’ income in future decades. This shows the importance of Social Security, but hardly describes a scenario of a thriving population of wealthy seniors.
But getting back to the issue of the size of this transfer that Lane terms “vast.” The increase in benefits of $70 a month would cost around $50 billion a year. We don’t know exactly how much the elderly CPI will differ from the currently used index, but if we lift the numbers in the other direction that the Congressional Budget Office estimates for the chained CPI, the additional expense will be around $10 billion a year over the next decade, bringing the total cost to $60 billion, a bit less than 0.4 percent of GDP.
By comparison, Bloomberg News estimated the size of the implicit taxpayer subsidy to the big banks at $83 billion a year, a bit more than 0.5 percent of GDP. For some reason the vast subsidy to the big banks, and implicitly their top executives and shareholders, doesn’t draw the same attention in the Washington Post’s pages (news and opinion) as money going to seniors.
Couldn’t resist this one. No the WaPo columnist isn’t complaining about too much money going to big banks. He is once again complaining about money going to seniors, or more specifically the idea pushed by Senators Tom Harkin and Elizabeth Warren that we might want to increase the money going to seniors.
Harkin proposed a bill, which Warren has now endorsed, which will base the annual cost of living adjustment on a price index that more closely tracks the consumption patterns of seniors than the current index. It would also raise benefits by an average of about $70 a month.
This makes Lane unhappy since he thinks seniors are doing just fine. Ironically he cites a study showing that the share of 70-year olds who won’t be able to replace 75 percent of the income will rise from 25 percent for those born between 1940-1944 to 30 percent from 1970-1974.
This actually is a low bar for two reasons. First weak wage growth over this period means that 75 percent of working income is much less relative to the economy’s average productivity for this later age cohort. The other reason is that at age 70 the later born cohort will have on average have about 2.5 more years of life expectancy (12.6 year versus 10.2 years). This means that they will likely have more wealth and will more likely still be working.
The real value of Social Security benefits do increase through time and therefore are projected to be a considerably larger share of retirees’ income in future decades. This shows the importance of Social Security, but hardly describes a scenario of a thriving population of wealthy seniors.
But getting back to the issue of the size of this transfer that Lane terms “vast.” The increase in benefits of $70 a month would cost around $50 billion a year. We don’t know exactly how much the elderly CPI will differ from the currently used index, but if we lift the numbers in the other direction that the Congressional Budget Office estimates for the chained CPI, the additional expense will be around $10 billion a year over the next decade, bringing the total cost to $60 billion, a bit less than 0.4 percent of GDP.
By comparison, Bloomberg News estimated the size of the implicit taxpayer subsidy to the big banks at $83 billion a year, a bit more than 0.5 percent of GDP. For some reason the vast subsidy to the big banks, and implicitly their top executives and shareholders, doesn’t draw the same attention in the Washington Post’s pages (news and opinion) as money going to seniors.
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Interesting piece on the prospects of a doctor shortage by Scott Gottlieb and Ezekiel Emanual in the NYT. Interestingly they never discuss the possibility of bringing in more qualified doctors from other countries. It’s much cheaper to train doctors (to U.S. standards) in other countries than in the United States. If the political system were not so completely dominated by protectionist Neanderthals, opening up our system to foreign trained doctors would be a central item on the trade agenda. The potential gains to the economy from reducing doctors’ wages to the level paid in other wealthy countries would be close to $100 billion a year (@ $800 a year for a family of four).
Interesting piece on the prospects of a doctor shortage by Scott Gottlieb and Ezekiel Emanual in the NYT. Interestingly they never discuss the possibility of bringing in more qualified doctors from other countries. It’s much cheaper to train doctors (to U.S. standards) in other countries than in the United States. If the political system were not so completely dominated by protectionist Neanderthals, opening up our system to foreign trained doctors would be a central item on the trade agenda. The potential gains to the economy from reducing doctors’ wages to the level paid in other wealthy countries would be close to $100 billion a year (@ $800 a year for a family of four).
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The NYT had a piece discussing the situation with Chicago’s underfunded pensions. It could have used some additional context.
First it would have been useful to point out how the pensions became badly underfunded. The problem goes back to the late 1990s when Chicago, like many other state and local governments, largely stopped contributing to their pensions because they thought the run-up in the stock market made it unnecessary. They made projections, with the blessing of bond-rating agencies like Moody’s and Standard and Poor’s, that essentially assumed that the stock bubble would grow ever larger for decades in the future.
After the bubble burst, Chicago continued to make contributions at the same levels. This was a conscious decision by the city’s political leaders, most importantly its mayor Richard M. Daley. Any city that goes a decade without making required contributions to its pensions will have a seriously underfunded pension system. This is the legacy of Mayor Daley, who remarkably is still a respected figure in public life.
While the shortfall is substantial it would be helpful to put in the context of the size of the city and its projected revenue. Its pension shortfalls are in the neighborhood of $28 billion. This is equal to approximately 0.5 percent of its projected income over the next three decades and 15 percent of projected revenue. This is far from trivial, but also not a crushing burden for a city with an otherwise healthy economy.
The article also highlights the decision of a federal judge to allow Detroit to declare bankruptcy. Given its much healthier finances it is unlikely that Chicago’s current mayor, Rahm Emanuel, would opt to go the bankruptcy route.
The NYT had a piece discussing the situation with Chicago’s underfunded pensions. It could have used some additional context.
First it would have been useful to point out how the pensions became badly underfunded. The problem goes back to the late 1990s when Chicago, like many other state and local governments, largely stopped contributing to their pensions because they thought the run-up in the stock market made it unnecessary. They made projections, with the blessing of bond-rating agencies like Moody’s and Standard and Poor’s, that essentially assumed that the stock bubble would grow ever larger for decades in the future.
After the bubble burst, Chicago continued to make contributions at the same levels. This was a conscious decision by the city’s political leaders, most importantly its mayor Richard M. Daley. Any city that goes a decade without making required contributions to its pensions will have a seriously underfunded pension system. This is the legacy of Mayor Daley, who remarkably is still a respected figure in public life.
While the shortfall is substantial it would be helpful to put in the context of the size of the city and its projected revenue. Its pension shortfalls are in the neighborhood of $28 billion. This is equal to approximately 0.5 percent of its projected income over the next three decades and 15 percent of projected revenue. This is far from trivial, but also not a crushing burden for a city with an otherwise healthy economy.
The article also highlights the decision of a federal judge to allow Detroit to declare bankruptcy. Given its much healthier finances it is unlikely that Chicago’s current mayor, Rahm Emanuel, would opt to go the bankruptcy route.
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The Washington Post should have found someone who would have pointed out President Obama’s misrepresentation when it quoted him saying:
“Government can’t stand on the sidelines in our efforts [to reduce inequality and increase mobility], because government is us. It can and should reflect our deepest values and commitments.”
Of course government has not been on sidelines, it has pursued policies that increase inequality. There are a long list that fall into this category including the bank bailouts of 2008-2010, too big to fail insurance for large banks, stronger and longer patent and copyright protection, and a trade policy that puts less educated workers in direct competition with low paid workers in the developing world, while largely protecting the most highly paid professionals, like doctors, from the same sort of competition.
However the biggest way in which the government has promoted inequality is by running budgets that lead to large scale unemployment and underemployment. Just as the decision to deliberately use fiscal policy to stimulate the economy and create jobs is a policy choice so is the decision to run smaller budget deficits, thereby reducing growth and employment. The government is currently following the latter policy denying work to millions of people. Also, since the bargaining power of workers in the bottom third of the labor market depends hugely on the level of unemployment, the high unemployment policy is also reducing their wages.
The Washington Post should have found someone who would have pointed out President Obama’s misrepresentation when it quoted him saying:
“Government can’t stand on the sidelines in our efforts [to reduce inequality and increase mobility], because government is us. It can and should reflect our deepest values and commitments.”
Of course government has not been on sidelines, it has pursued policies that increase inequality. There are a long list that fall into this category including the bank bailouts of 2008-2010, too big to fail insurance for large banks, stronger and longer patent and copyright protection, and a trade policy that puts less educated workers in direct competition with low paid workers in the developing world, while largely protecting the most highly paid professionals, like doctors, from the same sort of competition.
However the biggest way in which the government has promoted inequality is by running budgets that lead to large scale unemployment and underemployment. Just as the decision to deliberately use fiscal policy to stimulate the economy and create jobs is a policy choice so is the decision to run smaller budget deficits, thereby reducing growth and employment. The government is currently following the latter policy denying work to millions of people. Also, since the bargaining power of workers in the bottom third of the labor market depends hugely on the level of unemployment, the high unemployment policy is also reducing their wages.
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Binyamin Appelbaum had an interesting post about how many economists would like to see a higher rate of inflation to help recover from the downturn. The piece emphasizes the role of inflation in lowering real wages, with the argument that lower real wages are necessary to increase employment.
While there may be some truth to this point, it is worth fleshing out the argument more fully. At any point in time, there are sectors in which demand is increasing and we would expect to see rising real wages and also sectors where demand is falling and we would expect to see real wages do the same (e.g. Wall Street traders — okay, that was a dream).
Anyhow, when inflation is very low, the only way to bring about declines in real wages in these sectors is by having lower nominal wages. Since workers resist nominal pay cuts, we end up not having this adjustment and therefore we end up with fewer jobs than would otherwise be the case. However it is an important qualification in this story that it is not about reducing real wages for all workers, only for some subset.
The other important point is that higher inflation promotes growth in other ways. First and foremost it makes investment more profitable by reducing real interest rates. Firms are considering spending money today to sell more output (e.g. software, computers, Twitter derivatives etc.) in the future. If they expect to sell this output for higher prices because of inflation, then they will find it more profitable to invest today. If we can keep interest rates more or less constant and raise the expected rate of inflation, then firms will have much more incentive to invest. This process seems to be working successfully in Japan at the moment.
Finally, inflation reduces debt burdens. Everyone who has debt in nominal dollars, such as homeowners, students, state and local governments, and the national government, will see the real value of its debt fall in response to inflation. This reduces their debt burden and makes it easier to spend. This would likely also be an important source of demand growth from higher inflation.
While many economists do emphasize the wage story, to my mind the other parts are likely more important. And, if higher inflation leads to more employment, this will increase workers’ bargaining power and allow them to achieve wage gains that are likely to quickly offset any losses due to inflation — although the Wall Street traders may not make up the lost ground.
Addendum:
Let me make a quick comment to clear up unnecessary confusion (can’t do much about the deliberate confusion). The notion of inflation being a way to lower wages in the U.S. refers to the wages of some workers, not all workers. There are always industries seeing increased demand and some seeing reduced demand. The response to the latter would be lower wages. That is difficult to bring about in a situation of near zero inflation and nominal wage rigidity. By having higher inflation so that real wages can fall in these industries, we can increase employment, output, and real wages more generally. That is the argument. Folks can say why that may not work, but it’s really not worth anyone’s time to deliberately misrepresent it so you can say it’s stupid.
Binyamin Appelbaum had an interesting post about how many economists would like to see a higher rate of inflation to help recover from the downturn. The piece emphasizes the role of inflation in lowering real wages, with the argument that lower real wages are necessary to increase employment.
While there may be some truth to this point, it is worth fleshing out the argument more fully. At any point in time, there are sectors in which demand is increasing and we would expect to see rising real wages and also sectors where demand is falling and we would expect to see real wages do the same (e.g. Wall Street traders — okay, that was a dream).
Anyhow, when inflation is very low, the only way to bring about declines in real wages in these sectors is by having lower nominal wages. Since workers resist nominal pay cuts, we end up not having this adjustment and therefore we end up with fewer jobs than would otherwise be the case. However it is an important qualification in this story that it is not about reducing real wages for all workers, only for some subset.
The other important point is that higher inflation promotes growth in other ways. First and foremost it makes investment more profitable by reducing real interest rates. Firms are considering spending money today to sell more output (e.g. software, computers, Twitter derivatives etc.) in the future. If they expect to sell this output for higher prices because of inflation, then they will find it more profitable to invest today. If we can keep interest rates more or less constant and raise the expected rate of inflation, then firms will have much more incentive to invest. This process seems to be working successfully in Japan at the moment.
Finally, inflation reduces debt burdens. Everyone who has debt in nominal dollars, such as homeowners, students, state and local governments, and the national government, will see the real value of its debt fall in response to inflation. This reduces their debt burden and makes it easier to spend. This would likely also be an important source of demand growth from higher inflation.
While many economists do emphasize the wage story, to my mind the other parts are likely more important. And, if higher inflation leads to more employment, this will increase workers’ bargaining power and allow them to achieve wage gains that are likely to quickly offset any losses due to inflation — although the Wall Street traders may not make up the lost ground.
Addendum:
Let me make a quick comment to clear up unnecessary confusion (can’t do much about the deliberate confusion). The notion of inflation being a way to lower wages in the U.S. refers to the wages of some workers, not all workers. There are always industries seeing increased demand and some seeing reduced demand. The response to the latter would be lower wages. That is difficult to bring about in a situation of near zero inflation and nominal wage rigidity. By having higher inflation so that real wages can fall in these industries, we can increase employment, output, and real wages more generally. That is the argument. Folks can say why that may not work, but it’s really not worth anyone’s time to deliberately misrepresent it so you can say it’s stupid.
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Eduardo Porter has a good piece on efforts to use the economic crisis to make Europe’s labor market more like the U.S. market. One result is likely to be much higher levels of inequality.
Eduardo Porter has a good piece on efforts to use the economic crisis to make Europe’s labor market more like the U.S. market. One result is likely to be much higher levels of inequality.
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My friend and co-author Jared Bernstein has a good post on the minimum wage this morning. It would benefit from one additional point.
While Jared acknowledges that the minimum wage may lead to some job loss it is important to note that jobs in the low wage labor market tend to be high turnover jobs, although turnover is likely to be slower in response to a higher wage. The reason why this matters is that when we talk about job loss in response to a minimum wage hike, we rarely are talking about people literally losing their jobs. Essentially this means somewhat less employment.
That would play out in the form of workers taking longer to find jobs. This could mean, for example, that workers may expect to work an average of 1 percent fewer hours in response to a hike of 10 percent in the minimum wage because it takes them longer to find a job. However, they could expect to get 10 percent more money for each hour they work. That is the sort of trade-off we would be talking about based on the extensive research on the topic.
My friend and co-author Jared Bernstein has a good post on the minimum wage this morning. It would benefit from one additional point.
While Jared acknowledges that the minimum wage may lead to some job loss it is important to note that jobs in the low wage labor market tend to be high turnover jobs, although turnover is likely to be slower in response to a higher wage. The reason why this matters is that when we talk about job loss in response to a minimum wage hike, we rarely are talking about people literally losing their jobs. Essentially this means somewhat less employment.
That would play out in the form of workers taking longer to find jobs. This could mean, for example, that workers may expect to work an average of 1 percent fewer hours in response to a hike of 10 percent in the minimum wage because it takes them longer to find a job. However, they could expect to get 10 percent more money for each hour they work. That is the sort of trade-off we would be talking about based on the extensive research on the topic.
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