RSS FeedClearing the Brush, Trimming the Hedge
The Wall Street Journal provides this chart to show the projected effects of the two parties’ proposals regarding the renewal of the Bush tax cuts:
Via Yglesias.
If You Like Huge Deficits, More Tax Cuts Are for You
Via Ezra Klein:
As you see, extending unemployment insurance benefits causes a temporary blip in deficit spending. But the effect of tax cuts is lasting and deep. And as Bruce Bartlett points out, the “Starve the Beast” theory—according to which diminishing revenues will force the government to curtail spending—simply hasn’t held up:
Starve the beast theory has been the subject of much recent academic research, all of it showing that there is no truth to it whatsoever. Indeed, the literature shows that the effect is actually perverse; leading to higher spending because the tax-cost is reduced by tax cuts. I provide links to a number of recent academic studies on this point in my Fiscal Times post [Wednesday, July 14].
Five Unemployed for Every Job
From Scott Winship, via Matt Yglesias, here’s a graph comparing indexes of jobs advertised to unemployed job seekers. As you’d expect at a time of high unemployment, there are many more people looking for jobs than there are jobs looking for people.
The Deficit Problem, in One Graph
There are lots of ways we could get the federal government deficit under control in the short and medium term, if we really needed to. But there is really only one way to control the long-term deficit: to rein in the growth in health spending. Look at this:
The yellow line shooting up is the projected growth of the U.S. budget deficit (as a percentage of GDP) if current health spending trends continue. The light blue line drifting slowly downwards is what our budget outlook would look like if health cost trends in the U.S. were scaled down to match trends in other high-income OECD countries.
The Center for Economic and Policy Research declares, “The U.S. health care system is possibly the most inefficient in the world: We spend twice as much per person on health care as other advanced countries, but we have worse health outcomes, including a lower life expectancy.” If we want to fix the long-term deficit problem, we have to address the problem of exploding health spending. In the long term, there is no other deficit problem.
Via Austin Frakt.
The Mark of W.
Arjun Jayadev at New Deal 2.0 finds the mark of George W. Bush’s presidency etched into the picture of our national finances over the past decade. Literally. And I don’t mean Joe-Biden literally. But literally literally. That is, the literal letter “W” literally appears on the graph of total revenues over the last 10+ years (supplemented by projections of presumptive recovery).
This observation prompts Mike Konczal, writing at Ezra Klein’s place, to declare the past decade the “W years.” And so they were.
Neither Intelligible, Nor a Principle
The Fed’s “dual mandate” to promote maximum employment and curb inflation is problematic. It’s sort of like telling someone to work as much as possible and sleep as much as possible. The two goals counteract one another, and there’s a whole lot of middle ground between them. Matt Yglesias dreams of a better way:
This is pie-in-the-sky, but I think that if Congress wants to get serious about supervising the Fed better what they ought to do is scrap the “dual mandate” in favor of something clearer. The nature of the dual mandate is that it’s impossible to say if the Fed is meeting its mandate, and thus impossible to hold anyone accountable. As an alternative, Congress could set a statutory nominal GDP trend target or a price level trend target and hold the leadership of the Fed accountable based on how good a job they do of hitting the target.
One thing the current system shows you is that it doesn’t take much for a statutory mandate to satisfy the Supreme Court’s “intelligible principle” standard (though I don’t believe the Supreme Court has specifically addressed the Fed’s mandate—no one has standing to challenge it). The Court has held that Congress may delegate power to an administrative agency—e.g., to conduct the nation’s monetary policy—only when Congress specifies an intelligible principle to guide the agency’s discretion in exercising the delegated power.
One perfectly intelligible principle for the Fed would be: Go forth and do open-market mumbo jumbo to achieve maximum employment. Another perfectly intelligible principle would be: Go forth and do open-market mumbo jumbo to stabilize prices. But to demand both at once is scarcely intelligible, and hardly a principle. Basically we’re leaving it to the Fed to decide how to balance inflation and unemployment. And I guess that’s what the Fed will always say it’s doing—no matter what policy direction it takes.
Because of the Fed’s cherished “independence,” and because the Federal Open Market Committee (the Fed’s rate-setting arm) is stacked with regional Fed bankers, the Fed’s obscure, relativistic mandate is tantamount to untouchable regulatory capture. It’s not clear that auditing the Fed can change this underlying dynamic.
The Sickness unto Debt (with Pie Chart)
This pie chart from the IMF, via Ezra Klein, shows the various sources of new debt taken on by G-20 governments since the recession began. Stimulus spending and financial-sector bailouts account for a comparatively small portion. (Not sure though if U.S. figures would be in lockstep proportion with G-20 numbers here.) The bulk is just a consequence of the fall in tax revenues, which, of course, is a consequence of a drop in incomes. Klein writes:
A lot of people, understandably enough, assume that [the run-up in debt] is the product of government spending. The stimulus was expensive, and the bank rescues seemed expensive, and we just passed a health-care reform plan, and that must be why the deficit blew up.
The IMF, in a new report (pdf), explains that that’s not the case. “Of the almost 39 percentage points of GDP increase in the debt ratio, about two-thirds is explained by revenue weakness and the fall in GDP during 2008-09,” they write.
[...] This isn’t just an interesting explanatory point, though. It’s a reminder that the most important thing we can do to reduce the deficit in the long run is to do whatever it takes to get economic growth back up to speed. The more willing we are to accept permanently higher unemployment and permanently lower growth, the harder it’s going to be to get our debt under control.
The Fed’s Dual Mandate
In her statement upon being nominated to be vice chair of the Federal Reserve Board of Governors, Janet Yellen mentioned the dual goals imposed by Congress on the Fed’s conduct of U.S. monetary policy. It is common to hear the Fed’s mandate described in terms of its “dual goals.” Here’s the actual statutory language:
The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.
I guess that language is just enough of a jumble that it doesn’t really matter that there are actually three goals: maximum employment, stable prices, and moderate long-term interest rates. Maybe the third gets lopped off because we think of the Fed’s control of interest rates more as a means than as an end. And because employment and inflation are the two recognized poles of monetary policy.
In more ways than one, though, it seems that the statutory language takes a back seat in directing Fed policy priorities. The word maximum in “maximum employment” is understood to be implicitly limited by the need to stave off inflation, though the need to escape high unemployment doesn’t seem to imply complementary limits to the pursuit of stable prices. Also, the statute’s more direct mandate has to do with long-run growth tied to increased production; the other two (or three) goals are almost afterthoughts.
I’m not especially knowledgeable about any of this, but I’d just note that this is a statutory provision which, however it was intended, seems tailor-made to supply obfuscatory justification of whatever direction Fed policy happens to take. There’s a little bit of everything in there, and the Fed Board and Federal Open Market Committee have immense discretion in their control of what is probably the government’s most consequential role in the economy. And that’s why these nominations matter so much.
Fed Nominations
A month and a half ago, the White House announced the names of three people the President would be nominating to fill the vacancies at the Federal Reserve Board of Governors. And finally today those same three people were actually nominated.
My first thought is: By the time the sun starts burning out, we will totally have this nut cracked! And my second thought is: I hope these three nominees are committed to raising the employment level.
Well, Janet Yellen, president of the San Francisco Fed and the nominee for vice chair of the Board of Governors, made some promising noises right out of the box today:
I am strongly committed to pursuing the dual goals that Congress has assigned us: maximum employment and price stability and, if confirmed, I will work to ensure that policy promotes job creation and keeps inflation in check.
Sounds good, maybe, I think. You know, in that deeply ambiguous monetary policy kind of way. Via Matt Yglesias.
Slip and Fall
Via Kevin Drum, Simon Johnson and James Kwak describe how global finance fell prey to the oldest metaphor in the book:
It was as if the government first repealed the laws against littering, eliminated all public sanitation services, and subsidized the consumption of bananas . . . and then the global economy slipped on a banana peel.
Should Obama Make Recess Appointments to the Fed?
Brad DeLong thinks President Obama should fill the vacancies at the Federal Reserve by making recess appointments. Matt Yglesias is “not so sure about that”:
The Fed is one of the relatively few elements of the government that our national elite establishment takes seriously. When there was a need to reconfirm Ben Bernanke it got done, and quickly. I think that if Obama put some well-qualified names out there and made a point of emphasizing that he thinks quick action is needed, that he could get the job done.
I may be missing something here, but if the President thinks two new votes on the Fed Board might improve the odds that Fed policy would turn in a modestly more inflationary direction and help bring down unemployment, he should fill those seats as soon as his constitutional authority allows. I don’t really understand the argument against recess appointments here. He might ruffle some feathers. But so what? He could apologize and say it had to be done. The Senate is free to reject the appointees at the end of the session. And who really cares anyway?
The Fed chair is important and must be taken seriously in a way that the other seats on the board are not. (Chairs more important than seats. Hmmm….) The fact that multiple extended vacancies doesn’t make much difference in the functioning of the board—even if it makes a big difference in policy—seems to me evidence enough that nominations for these seats can be safely subjected to the usual treatment: maximal perversion of procedure for even the most minimal political gain.
More on Fed Vacancies
With soon-to-be three vacancies at the Fed and one already filled, President Obama could potentially fill a majority of seats (four of seven) on the Fed’s Board of Governors with his own appointees relatively early in his administration. (Five of seven if you count Bernanke. See previous post.) Members of the Fed Board serve staggered, 14-year terms, with one seat becoming available every two years. By design of the Federal Reserve Act, in a single term the President will make only two “scheduled” appointments to the Board, and a two-term President will have barely appointed a majority of Board members by the time he leaves office. These are some of the characteristic ways of making an “independent” agency independent—ways of limiting presidential control and influence over the board members. So it might seem that the opportunity the administration now has to revamp monetary policy through Fed appointments would be historic, possibly unprecedented. It might seem that way, but it isn’t.
Marriner S. Eccles Federal Reserve Board Building
In a review of appointments made to 12 independent regulatory commissions by presidents from Warren G. Harding through the George W. Bush, Neal Devins and David Lewis found that presidents have nearly always been able to appoint a majority (pdf) to each commission—ninety percent of the time. On average, they have appointed majorities to each commission within the first 26 months of their term. And they have achieved majorities for their party—adding to the ranks of commissioners appointed by previous presidents of the new president’s party—in just ten months.
The Devins and Lewis study did not include the Federal Reserve, but the authors note that only twice did presidents fail to achieve a majority on the Fed Board (Kennedy and Nixon).
The circumstances under which Obama took office have combined to accelerate vacancies. When a new president succeeds a president of the other party, as Obama has, there is typically a spike in vacancies, mostly due to resignations of partisans of the new president. Also vacancies typically increase in times of unified government, where one party controls both the White House and the Senate, as Democrats do now. The magnitude of both factors—party change in the White House and unified government—is proportional to the degree of polarization between the parties. And yep, we’ve got that, too.
So, if President Obama were to push through three Fed nominees this year—unlikely given election-year politics and the clogged drain that is the Senate confirmation process—he might be slightly ahead of the average presidential timeline, but the occasion is not at all unprecedented.
Still, unprecedented or not, it would be a shame to waste the opportunity. Those three seats at the Fed should be the first three items on the President’s jobs agenda.
Help Wanted at the Fed?
Marriner S. Eccles Federal Reserve Board Building
Throughout Barack Obama’s presidency there have been two vacant seats on the Federal Reserve Board of Governors—save for his first week in office, when there were three. One Obama appointee took his seat on January 28, 2009. This week the Fed’s vice chair announced he will be stepping down in June, opening up the possibility that within his first two years of office, Obama could make four appointments to the Fed—five, if you count Bernanke’s reappointment. (Bernanke was reappointed to the chairmanship, a four-year term. But his membership on the Board, a 14-year term, extends to 2020.) There are only seven seats on the Fed Board. Which means that Obama has a chance to reshape the country’s monetary policy by appointing a new majority of the Board (plus reappointing its chairman), potentially even before congressional mid-term elections. So far, the President has not nominated anyone for these vacancies.
Is this the historic, far-reaching opportunity that it seems to be? And if so, is the administration blowing it?
Well, not really. But it is probably way more important than anything else the administration can try to do to decrease unemployment. Because of its influence over interest rates and credit, the Fed has far greater and more direct sway over the level of employment than any other part of the government. The Fed is a big deal.
But the most significant powers of the Fed—the ability to set interest rates through “open-market operations” like buying and selling treasury bonds—are wielded not by the Board of Governors per se, but by the Federal Open Market Committee (FOMC). The FOMC consists of the seven (7) members of the Board, plus five (5) private members appointed by regional Federal Reserve Banks on a rotation.1 That’s twelve (12) seats altogether.
So the four potential seats on the Fed Board that Obama could fill would not actually constitute a decisive majority on the FOMC. And according to this NYT story, the 5 FOMC representatives from the regional Fed banks tend to be even more hawkish on inflation than the Washington Fed Board members. So, because of their apparent aversion to any inflation at all, they are presumably unlikely to support the kind of credit-easing measures that could get businesses hiring again.
But hey, Mr. President, it wouldn’t hurt to try! It’s always possible that there are a couple of closet “unemployment hawks” on the FOMC. After all, the Federal Reserve Act mandates that the FOMC pursue a policy of “maximum employment” and price stability—not just the latter.
- This arrangement, whereby 5 of 12 seats on the FOMC are held by people not appointed by the President or by a department head, is pretty clearly unconstitutional. It clearly violates the Appointments Clause, but I’ll write about that another time. [↩]
Is the Excise Tax Good Policy?
Now that the Democrats have lost control of the 60th vote in the Senate, the only option for immediate legislative action on healthcare is for the House to adopt the bill already passed by the Senate. I join the chorus of those who have called for the House to buck up and pass the bill now and revise it later through reconciliation. But House Speaker Nancy Pelosi has now announced that she does not “see the votes” for adopting the Senate bill without modifications.
Most of the discussion of whether the House should pass the Senate bill has been about political strategy. But the House’s number one complaint about the Senate bill has been the excise tax on high-cost health insurance plans, largely because of labor unions’ opposition to the policy. The recent deal struck between the White House and labor leaders softened that opposition and introduced some sensible refinements to the tax, but that deal is moot if no further action is possible in the Senate.
So, leaving the politics aside, is the excise tax good policy?
The balance of opinion in my blogroll seems to be for it, more or less. But there are a few reasons I just haven’t been able to close the deal. (Though again, just to be clear, I very much believe the House should pass the Senate bill and work to improve the details later.)
First, I have a hard time believing it will be a real game-changer on cost control. And if it doesn’t come through on cost control, then it doesn’t amount to much more than a convoluted device for raising revenue.
Second, I think there’s a legitimate concern that, to the extent the excise does rein in spending, it will do so by shunting people into plans with high deductibles and co-pays, which might result in patients avoiding needed visits to the doctor—instead of doctors avoiding unneeded tests and procedures.
Cost Control
The theory behind the excise tax, says Jonathan Gruber, is this:
It would reduce the incentives for employers to provide excessively generous insurance, leading to more cost-conscious use of health care and, ultimately, lower spending. In other words, it “bends the curve.”
This biggest question mark for me is the mechanism by which the tax is supposed to slow the growth of health spending. Health policy analysts broadly agree that the root cause of our healthcare cost crisis lies in structural defects in the way care is delivered and paid for. Fee-for-service medicine incentivizes inefficiency and waste, as Atul Gawande famously illustrated. This suggests that reform must reach the payer-provider relationship if it is to have any hope of slowing the growth of spending.
But the excise tax targets the other side of the system: the payer-consumer (or insurer-insured) relationship. So how is this supposed to translate into reform on the payment side? Austin Frakt:
[I]n theory anything that is taxed should experience a lower demand. Therefore, one would expect that individuals and employers will seek lower premium plans to avoid the tax. In doing so they have to give up something and it can only be benefits or show up in the form of increased cost sharing. That could induce lower utilization and therefore lower costs overall. Perhaps insurers will try harder to create plans with lower premiums (to woo employers). One way they could do so is by negotiating lower rates with providers if they can. Economic theory would suggest they already get the lowest possible rates given market power. So I don’t know that there is much to gain there.
Tim Jost drives the point home:
The excise tax would not give insurers more bargaining power in dealing with hospitals, doctors and drug companies. It would not create new innovations in delivery systems. It would not generate credible evidence to “manage” care. It would not do anything but force insurers to offer cheaper plans to whoever had unhealthy enough employees to qualify for the tax.
My takeaway from all this is that the tax may trim some excess in the form of luxury benefits (more on that below), which could indeed reduce costs. But, because it doesn’t reach the underlying problem of provider incentives, it is highly doubtful that it will succeed in reducing the rate of growth of costs. It targets the wrong side of the equation. Which brings me to my second area of concern about the policy: its fairness.
Fairness
At least three separate fairness concerns have been raised repeatedly by critics.
First, the excise tax has been said to unfairly burden people on plans in high-cost regions of the country and plans that are expensive as a result of the age or gender profile of the risk pool. These concerns were to be addressed (in bill-merger negotiations) through special adjustments to the threshold at which the tax kicks in.1 But without the ability to pass a modified bill in the Senate, this issue remains a serious one.
Second, a common concern, recently articulated by Maggie Mahar, is that employers will pocket the savings that result from switching to cheaper plans, rather than passing the savings on to their employees as increased wages. Economists tend to answer this concern by pointing to the tradeoff between benefits and wages. Basically, it is axiomatic among experts that every dollar of compensation you receive in benefits is a dollar you give up in wages. As Austin Frakt has put it, “Workers pay the premiums even if employers appear to.”
I’m not sure the economists’ answer will satisfy critics of the excise tax, though. I think the critics’ point is really that employers will try to game the transition, exploiting the opportunity to lower employees’ overall compensation. But even if some employers do engage in mischief, the labor market will eventually force the numbers into line. It’s possible I’m too trusting of the experts here. But my intuition is that, if employers are able to get away with undercompensating their employees, they’re probably already doing it. And if they are, that’s a problem, but it’s not a problem created by the excise tax.
The third fairness concern is the one that troubles me most. There are only two ways to get people onto lower-priced plans without lowering the actual costs of care: (A) to cut plan benefits, or (B) to offer plans with higher out-of-pocket costs (deductibles and co-pays).
(A) would be smart policy if benefits were extravagant. And maybe they are sometimes. But a recent study in Health Affairs found only 3.7% of cost variation between high-cost and low-cost plans can be ascribed to benefit design. That suggests that there is not a lot of fat to trim from Cadillac plans without cutting into core benefits.
The trouble with (B), and arguably with the excise tax in general, is that it puts the burden of reining in spending on the consumer and seems as likely to prevent sick people from getting care as anything else. The excise tax cuts spending by squeezing utilization on the consumer side.2 But it is the providers who are making all the important utilization decisions. We just do what we’re told. Doctor’s orders!
Maggie Mahar argues:
75 percent of our health care dollars are spent on patients suffering from serious chronic diseases such as cancer, heart disease, stroke, and chronic obstructive pulmonary disease.
* * *
[C]hronically ill patients don’t make the decisions on big ticket items such as surgery, hospitalization, a battery of expensive tests, or a drug that costs $50,000 a year. Doctors and hospitals tell them what they must have to survive. Co-pays and deductibles will not make these patients more “cost-conscious.” Cost-sharing will only give a distraught stroke victim another reason to worry.Patients do make small decisions. Should I visit the doctor? Should I have my blood pressure checked? Should I try a smoking cessation clinic? And here, research shows, that if they face a co-pay, there is a 50/50 chance that they will make the wrong decision, foregoing needed care.
However, Mahar does acknowledge that the Senate bill (§ 2713(a)) prohibits co-pays on preventive care recommended by the US Preventive Services Task Force. That presumably reduces the scope of this concern. But it still seems a legitimate one.
Conclusion
Supporters of the excise tax are apt to say reasonable things like this, from Krugman:
[W]e really don’t know what it will take to rein in health costs, but that’s a reason to try every plausible idea that experts have proposed. Limiting tax deductibility is definitely one of those ideas.
I think that is the right attitude to have. I also think it’s important to remember that there will be lots of time and opportunity to tinker with the details later, and for now the most urgent need is to pass a bill so that there will be details to tinker with. Austin Frakt puts the excise tax in perspective (and shows that I could have saved myself the trouble of writing this post by quoting him extensively):
On the whole, the tax is quite a ways removed from the real problems, which are over-utilization of low efficacy care and high unit prices. Were I to design a tax I’d want to target those things.
The Cadillac tax is blunt but it raises revenue while avoiding the politically difficult fight with providers. …. I’m willing to accept putting off the real tussle over health care costs for now just so we can achieve some important insurance market reforms and set up some structures (do some pilots and demos) to prepare for that fight later, which is what current legislation would do. But someday, and quite soon–but not this year–we’ll have to return to the cost issue in earnest.
The Cadillac tax is a stop gap measure, but nobody should fool themselves into thinking it will solve the real cost problem.
- The Senate bill does provide adjustments for plans in 17 high-cost states. [↩]
- A classic study by RAND known as the Health Insurance Experiment (HIE), summarized here, showed that cost sharing requirements can reduce utilization without affecting the quality of care. But doubts about the applicability of the HIE, articulated here by Tim Jost and Joseph White, also seem reasonable. [↩]
Analogy of the Day: Leverage and O-Rings
Kevin Drum, on the history of finance lobbyists seeking relaxation of regulations in the wake of financial crises:
We live in a world where leverage—as well as Wall Street’s nearly endless stream of new contrivances for exploiting it—is largely controlled not by regulators or congressional committees, but by the finance lobby. And the last thing the finance lobby wants is constraints of any kind. So Wall Street promised solemnly to take the lessons of LTCM to heart and then got right down to the business of ignoring them. In fact it spent the next decade not merely blocking reform, but making things worse by lobbying relentlessly to expand leverage, complexity, regulatory forbearance, and risk.
Now if the aerospace lobby had told us after the 1986 Challenger disaster that the key to better performance was to turbocharge the engines and quit performing preflight inspections, everyone would have agreed that they were crazy. Yet that’s essentially what the finance lobby has done over the past decade, and in some weird way we were too mesmerized to recognize it. Within months of a near catastrophe caused by one of the industry’s brightest stars, the lobbyists were busily making certain that it would happen again—and that when it did happen, it would be bigger and more disastrous than ever.