July 21, 2017

Economix Blog: Support for College Students and Banks: Not So Different

Phillip Swagel is a professor at the School of Public Policy at the University of Maryland and was assistant secretary for economic policy at the Treasury Department from 2006 to 2009.

Today’s Economist

Perspectives from expert contributors.

A bipartisan deal reached in the Senate clears the way for legislation on federal student loans to undo the July 1 increase in interest rates on new loans to 6.8 percent from 3.4 percent. The House of Representatives previously approved a bill that embraced the key feature of President Obama’s proposal, which was to link interest rates on student loans to borrowing costs for the government. The Senate approach includes this link, pegged to yields on 10-year Treasury notes.  The rate on new loans would adjust each year up to a cap, but an individual borrower’s interest rate would be fixed over the life of the loan. This is expected to lead to relatively low interest rates on student loans in the near term and higher rates in the future as yields on Treasury bonds rebound with the economy over the next several years.

Mr. Obama in particular deserves recognition for putting forward a reasonable proposal that was in the ballpark of what Republicans would accept, and for rejecting partisan pleas to stick with his previous advocacy, electorally motivated, of setting low loan rates a year or two at a time. We can only hope to see similar leadership rather than partisan rhetoric from the president on other economic issues in his series of economic speeches beginning this week.

Left aside in the bonhomie was a proposal from Senator Elizabeth Warren, a Democrat from Massachusetts, that would have used the Federal Reserve’s discount window lending as the benchmark for student loans while Congress worked on a “fair, long term solution.” Under what was titled the Bank on Students Loan Fairness Act, college students would get their loans from the federal government for one year at the same 0.75 percent interest rate the Fed charges banks. The proposal garnered nine co-sponsors, all Democrats, along with a long list of endorsements from the likes of university professors and administrators and organizations representing students.

Others were not as welcoming. President Obama reportedly tried to steer Senator Warren toward the bipartisan compromise, while education experts from the Democratic-leaning Brookings Institution wrote that Senator Warren’s proposal “should be quickly dismissed as a cheap political gimmick.” The Washington Post’s fact checker challenged Senator Warren’s assertion that the government was racking up large profits from higher interest rates on student loans, assigning a “two Pinocchio” rating of “significant omissions and/or exaggerations” to the budgetary arithmetic behind the proposal. The idea that the federal government was balancing the budget on the backs of college students was among the motivating factors for setting a lower interest rate.

I am glad to see the prospect of a bipartisan agreement on student loans (and not just because I am a professor — the process by which the House and President Obama reached substantive agreement and then brought along the Senate suggests the possibility of similar progress on other economic issues). But I believe that Senator Warren has a valid point in making an analogy between federal support for banks and support for college students. This is worth developing more fully, in part because it sheds light on the government’s role in the financial sector.

The Federal Reserve lends money to banks at the discount window; the interest rate has been 0.75 percent since Feb. 19, 2010, but reached as low as 0.50 percent starting on Dec. 16, 2008.  These loans are made in the Fed’s capacity as the lender of last resort, under which it provides temporary liquidity (typically overnight) to solvent banks on a fully secured basis at a penalty rate. (Four lectures by the Federal Reserve chairman, Ben S. Bernanke, in March 2012 provide an accessible introduction to monetary policy.) Incredible as it might sound, the 0.75 percent interest rate charged by the Fed is indeed a penalty. Banks eligible to borrow at the discount window would normally borrow from other institutions in the federal funds market, where the interest rate has recently hovered around 0.1 percent, roughly in the middle of the Fed’s target range of zero to 0.25 percent.

For students looking to finance their educations, seeing the federal government as a lender of last resort might be appropriate, since many college students would turn first to their parents if family resources permit. Even Senator Warren’s proposed 0.75 percent interest rate on federal student loans might well be more than what Mom and Dad charge.

Banks provide collateral for their loans in the form of securities such as Treasury bonds, and the owners of banks must finance their activities in part with their own capital at risk.  It is natural to view college students as solvent-but-illiquid to the extent that their education unleashes the higher future earnings with which to repay their loans. Students thus put up as collateral their own human capital: it is quite difficult to walk away from federal student loans, meaning that a college-age borrower’s future earnings effectively serve as the surety for repayment. Indeed, a further motivation for the low interest rate proposed by Senator Warren is the concern that the burden of college debt is having a negative impact on graduates’ spending and thus on the overall economy.  On the other hand, others have raised concerns that easier financing spurs higher college tuitions and thus does not improve college affordability.

The analogy between banks and students is not perfect.  A challenge for making the connection between the interest rates charged to banks and to students is that the Fed generally provides overnight lending at the discount window, whereas students have 10 to 25 years to repay their loans.  President Obama’s proposal, adopted by Congress, to tie student loan interest rates to the 10-year Treasury note thus makes eminent sense.  At the same time, students signing loan contracts for the 2013-14 academic year will benefit from the Fed’s activities even without Senator Warren’s bill, just not directly.  Through its third quantitative easing program, QE3, the Fed is intervening in the Treasury bond market and likely holding down borrowing costs for the federal government, including the interest rate on 10-year Treasury notes.

The other potential difficulty for students in connecting their loans to federal support for banks is that to get access to the discount window, banks are subject to a wide-ranging regulatory and supervisory regime. For college students, the analogy would be to have a federal examiner watch to make sure they do their homework and get through the required readings ahead of a lecture. As a professor, I can see the attraction of fleshing out this aspect of Senator Warren’s proposal to give college students the same federal support as banks. I am not sure that my students would agree.

Article source: http://economix.blogs.nytimes.com/2013/07/23/support-for-college-students-and-banks-not-so-different/?partner=rss&emc=rss

Economix Blog: Inequality, Mobility and the Policy Agenda They Imply

Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities in Washington and a former chief economist to Vice President Joseph R. Biden Jr.

In making the critical connection between high inequality and diminished mobility, I’ve often cited the work of economist Miles Corak, who had a fine commentary on the topic in The New York Times on Sunday.  I wanted to highlight a few key points but then spend a moment on his policy solutions, which struck me as inadequate.

Today’s Economist

Perspectives from expert contributors.

Professor Corak wrote about the increasingly robust opportunities available to the children of the wealthiest 1 percent of households relative to children from less privileged backgrounds, partly because of nepotism and networks.  No news there, of course, but Professor Corak emphasizes that while this phenomenon is common across countries, the outcomes for children in other rich countries are less tied to their birth than they are for children here.

Part of that difference stems from the fact that policies to offset inequalities at the starting gate face far less aggressive opposition in other advanced economies.  For example:

“Ontario, the most populous Canadian province, is introducing full-day kindergarten, accessible to all 4- and 5-year-olds, without fanfare or a hint of the kind of rhetorical rancor and calamitous opposition that the Obama administration has faced for its proposal to do the same.”

That’s a highly resonant observation.  For years, economists of all political stripes have argued for quality preschool to counteract the extreme and lasting disadvantages faced by children who start life in poverty in this country, poverty that is far deeper in terms of material deprivation than in most other advanced economies.  The lifelong impact of starting out under these difficult circumstances means that quality interventions have a high benefit/cost ratio to society.  Yet to see how quickly and effectively the anti-government, anti-tax and anti-spending forces snapped into action the day after President Obama announced an idea like this in his last State of the Union address gives you a tangible and fearsome sense of the full spate of the barriers facing those disadvantaged children.

That’s where I thought Professor Corak didn’t go nearly far enough:

“The recipes for breaking this intergenerational trap are clear: a nurturing environment in the early years combined with accessible and high-quality health care and education promote the capacities of young children, heighten the development of their skills as they grow older, and ultimately raise their chances of upward mobility.”

Definitely necessary, and I appreciate the health care reference, but far from sufficient.  It’s a common default for economists and policy makers to present a trenchant analysis of a problem with many deep roots and then conclude, “That’s why we need better education and skill development.”

The problem is that a central thesis of the inequality/mobility nexus is that skills alone won’t crack it.  Again, no question that overcoming the barriers that block lower-income children from achieving their intellectual (and economically productive) potential is an essential part of this, but if you don’t deal with the politics — really, the power — you’ll end up with a bunch more children who fortunately have gone a lot further in their personal development, but remain stuck in or near the income decile of their birth.

As Professor Corak puts it, “Less inequality makes opportunity-enhancing policies that are of relatively larger benefit to lower-income families easier to introduce and sustain.”  The inverse of this has been shown by political scientists like Larry Bartels and Martin Gilens to be a determinant factor in blocking policies that would push back against wealth concentration and supporting policies (trickle-down tax cuts, deregulation, spending cuts, reducing social insurance) that protect the highly unequal status quo.  With its Citizens United decision, even the Supreme Court is in on the deal.

In my writing, I’ve identified this as the uniquely American, highly toxic combination of wealth concentration interacting with money in politics to create a vicious cycle that promotes higher inequality, less mobility, and — clearly evident in the current context — dysfunctional politics that can’t begin to do anything about either the macroeconomy or the inequality problem except make them worse.

In this regard, solutions must be both political, structural (for example, campaign finance reform) and much more demand side than strictly supply side (education being the latter — and to be clear, I agree that’s a critical part of the solution).  This is where the full employment policies I’m always going on about fit in, along with greater union power, higher minimum wages, financial market regulation, progressive taxation, and taking aim at the persistent trade deficit that has been sapping demand from our manufacturers for decades.

That’s a huge, ambitious agenda, one that goes so far beyond the realm of the possible that it may seem curious to even raise it.  But the fact is that anything useful goes beyond what’s possible right now, and I just don’t see the point of bringing a squirt gun to a forest fire.  At the very least, I’d like my fellow travelers to envision the full scope of what we’re up against.

Article source: http://economix.blogs.nytimes.com/2013/07/22/inequality-mobility-and-the-policy-agenda-they-imply/?partner=rss&emc=rss

Today’s Economist: The 300 Billionth Burger

Nancy Folbre, economist at the University of Massachusetts, Amherst.

Nancy Folbre is an economics professor at the University of Massachusetts, Amherst.

In his autobiography, “Grinding It Out: The Making of McDonald’s,” Ray Kroc described the company he built as “my personal monument to capitalism.”

Today’s Economist

Perspectives from expert contributors.

The monument is a towering one. Only ballpark estimates are available, because McDonald’s stopped posting estimates of its cumulative burger sales when they reached 99 billion in 1994. But the company is on track to hit the 300 billion mark in the near future, if it hasn’t already.

With total revenue that exceeds the gross domestic product of Ecuador, McDonald’s is virtually a culinary country of its own. Not surprisingly, it has become a recurrent focus of political contention.

This year’s protests against the low pay of its employees reflect larger concerns about the decline of good jobs in the United States, and the company’s recently published personal budgeting advice reflects remarkably widespread disregard for people trying to get by on poverty-level wages.

A company that can sell 300 billion burgers clearly knows how to respond to consumer concerns. As Eric Schlosser explains in “Fast Food Nation,” McDonald’s moved relatively quickly to improve standards of humane treatment for the (nonhuman) animals in its supply chain. In the wake of bad publicity from Morgan Spurlock’s film “Supersize Me,” the company made significant efforts to improve the nutritional value of its menu. Last year, the company took the lead in a commitment to post calorie counts for every item.

Of course, the company’s nutritional impact is influenced by policies over which it has little direct control. In the United States, Big Macs cost less than a salad largely because our agricultural policies subsidize the price of meat far more generously than the prices of fresh vegetables and fruits.

The low wages the company pays its workers also reflect the economic environment. In this country they average less than $8 an hour, reflecting a federal minimum wage that has been stuck at $7.25 an hour for four years. If the minimum wage were adjusted to correct for inflation, its 1968 peak would amount to about $9.42 today.

More than 88 percent of those who would benefit from a higher minimum are over the age of 20.

Global comparisons demonstrate that macroeconomic conditions and government regulation — not individual skill or effort — determine the level of company wages relative to prices.  In 2005, the now-defunct Asian Labour News estimated that it took American workers at McDonald’s about 30 minutes to earn enough to buy a Big Mac. In China, it took workers behind the counter about 3 hours 58 minutes; in India, 8 hours 34 minutes.

The relative bargaining power of low-wage workers has a far greater impact on burger prices than differences in efficiency. Underlying differences in labor markets — as well as factors influencing international exchange rates — help explain why Big Macs are relatively expensive in dollar terms in high-wage countries such as Norway and Switzerland and relatively cheap in low-wage ones like India and China.

Americans whose top priority is minimizing burger costs should perhaps shop overseas. Low-price fast food offers some quick visible benefits. But consumers who are also workers need to consider its long-run implications for their own wages and living standards. Happy Meals don’t necessarily lead to happy families.

Wage trends in fast food are not simply a result of impersonal market forces. Corporate policy matters. According to Bloomberg News, the disparity between the pay of McDonald’s fast-food workers and its chief executive officer has doubled in the last 10 years, while the company lobbied against minimum wage increases and discouraged unionization.

The budgeting advice that the company management recently offered employees — effectively lampooned in a video posted by the group Low Pay Is Not Okay — reveals a management that is out of touch with the experience of its workers.  It includes estimates for rent and utilities, but it does not mention food, clothing, gas, or child care. It presumes that they will hold a second job and find health insurance costing only $20 a month.

The sample budget assumes hourly gross pay of about $15 an hour (assuming a 40-hour workweek), far more than most McDonald’s employees will ever earn. In other words, the company’s own calculations suggest that it fails to offer a living wage.

It is hard to imagine Ray Kroc, a self-made businessman who started out selling milkshake machines, ever patronizing his employees in such a careless way.

According to a recent Gallup Poll, more than two-thirds of Americans support an increase in the minimum wage, and some restaurant owners are also on board.

McDonald’s could put a living wage on its menu. You could ask for it the next time you hit the takeout window.

Or you could just drive past the golden arches in search of a better monument to your ideals.

Article source: http://economix.blogs.nytimes.com/2013/07/22/the-300-billionth-burger/?partner=rss&emc=rss

Economix Blog: Further Progress on Housing Finance

Phillip Swagel is a professor at the School of Public Policy at the University of Maryland and was assistant secretary for economic policy at the Treasury Department from 2006 to 2009.

The House Financial on Services Committee will hold a hearing on Thursday to consider draft legislation for housing finance reform put forward by its chairman, Jeb Hensarling, Republican of Texas, that would end the taxpayer backstop on mortgages now provided through Fannie Mae and Freddie Mac and wind down the two companies over five years. Under the proposal, private investors rather than taxpayers would fund mortgages and take on the risks and rewards of housing investments.  

Today’s Economist

Perspectives from expert contributors.

New rules would foster increased use of covered bonds, under which a pool of private assets rather than a government guarantee protects investors against losses. The legislation further seeks to ensure that smaller banks continue to play a role in housing finance. The Hensarling approach thus has the desirable features of moving to a housing finance system driven by private incentives while protecting taxpayers and ensuring the participation of banks of all sizes.

The government role in the new system would be sharply defined, with regulators focused on oversight and setting standards rather than providing insurance. The Federal Housing Administration would continue to guarantee mortgages under the Hensarling proposal but would focus on first-time home buyers with moderate incomes.

Currently, the Federal Housing Administration is involved with loans of up to $729,750, which is difficult to square with the agency’s mission to expand sustainable homeownership. As documented by Joseph Gyourko, a professor of at the Wharton School of the University of Pennsylvania, the agency has financial troubles of its own. (I testified about the need for its reform at a hearing in February of the Senate Banking committee). The Hensarling bill includes changes that would address this situation.

Mortgage interest rates will rise with any overhaul that brings in private capital, but this reflects that the system is now undercapitalized with taxpayers at risk. Before the financial crisis, private-label mortgages bundled into securities without a then-implicit guarantee provided by Fannie and Freddie had interest rates from 0.5 to 1 percentage point higher than loans backed by the two government-sponsored enterprises.

It is hard to know quite how much rates would rise without a government backstop, but the housing market is in an upswing and affordability remains high, so it seems likely that the housing sector would continue to recover even with higher rates from both changes in housing finance and the Federal Reserve’s eventual normalization of monetary policy. [Read more…]

Article source: http://economix.blogs.nytimes.com/2013/07/17/further-progress-on-housing-finance/?partner=rss&emc=rss

Economix Blog: Inflationphobia, Part II

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Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of the forthcoming book “The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”

Last week, I discussed the phenomenon of inflationphobia – an irrational fear of inflation that is constraining the Federal Reserve and holding back the economy. The roots of inflationphobia go back at least to the Great Depression, when inflationphobes made the same arguments year after year despite continuing deflation – a falling price level.

Today’s Economist

Perspectives from expert contributors.

The defining characteristic of the Great Depression was deflation, which began in 1927, two years before the stock market crash. The following data from the Bureau of Labor Statistics show the average change in the Consumer Price Index.

Bureau of Labor Statistics

Between 1926 and 1933, the price level fell about 25 percent. This meant that any obligation fixed in dollars increased 25 percent in real terms. This was particularly important in two areas – wages and debts. If a worker managed to keep the same monetary wage between 1926 and 1933, she actually got an increase in pay of 25 percent in terms of what she could buy because the prices of things she consumed fell 25 percent.

Similarly, if one had a debt in 1926, the real burden of that debt and the debt service increased 25 percent between 1926 and 1933. This was especially important for farmers because the prices of agricultural produce fell very rapidly and the burden of their debts increased just as rapidly.

The great economist Irving Fisher thought that the increasing real burden of debt resulting from deflation was the core cause of the Great Depression.

Despite the falling price level year after year, there were inflationphobes even then, who saw signs of inflation, inevitably leading to German-style hyperinflation, everywhere. The leading inflationphobe was a writer named Henry Hazlitt. Although not trained as an economist, he had a strong interest in the subject and the rare skill to write about it clearly.

H.L. Mencken once said of Mr. Hazlitt that he was “one of the few economists in human history who could really write.” From 1934 to 1946, he was an editorial writer for The New York Times, writing a vast number of editorials and signed articles, mainly on economic issues.

In 1932, Mr. Hazlitt was still writing for The Nation magazine, where he was a strenuous supporter of the gold standard and a fierce critic of John Maynard Keynes, whom he viewed as nothing but a crude inflationist. Mr. Hazlitt thought the cure for deflation was for all workers to slash their wages, which would lower business costs and restore growth. Debtors would simply repudiate their debts and renegotiate them.

No doubt if workers had been willing to slash their wages 25 percent, and banks and bondholders had been willing to slash their interest and principal 25 percent, this would have gone a long way toward alleviating the negative economic effects of deflation. But absent a law requiring it – which the libertarian Mr. Hazlitt would have opposed – this process could only take place slowly, painfully and unevenly.

By contrast, simply reflating the price level back to its 1926 level was relatively easy. The Federal Reserve just had to increase the money supply sufficiently. By the 1960s, even the arch-conservative Milton Friedman said this was what the Fed should have done.

But in the early 1930s, the idea of reflation was controversial, mainly because bondholders enjoyed getting back 25 percent more than they had lent in real terms. Why should they give that up? That is why one of the strongest supporters of the gold standard and opponents of reflation was Benjamin M. Anderson Jr., chief economist of the Chase National Bank.

Irving Fisher and other economists argued in favor of reflation, even being joined by Winston Churchill, who had lately been chancellor of the Exchequer in England. But the most outspoken advocate of reflation was Mr. Keynes, who was quoted in The Wall Street Journal on March 2, 1932, as saying, “It is unthinkable that we can step straight from the financial crisis to relief of the industrial crisis without the cheap money phase intervening.”

In 1933, Franklin D. Roosevelt became president and tried to stanch the deflation by suspending the gold standard and proposing legislation that would fix prices and prevent them from falling further. But these policies were ineffective because they did not get at the root of the problem, which was a fall in the money supply.

This resulted because there was no deposit insurance, so bank deposits literally disappeared when banks failed, and because the Fed refused to offset the resulting fall in the money supply through open-market monetary operations.

Mr. Fisher and some members of Congress kept pointing to the Fed, but to no avail. Responding to Republican attacks on reflation, Mr. Fisher said, there is “absolutely no escape from our present imminent danger except through reflation.”

They were opposed by Mr. Anderson and the New York banker James P. Warburg, who demanded restoration of the gold standard. In 1934, Mr. Warburg published a book detailing his criticism of reflation that was favorably reviewed in The Times by Mr. Hazlitt.

In a June 10, 1934, article for The Times, Keynes explained that monetary stimulus by itself was insufficient to stop deflation and that the
price-fixing instituted by the National Industrial Recovery Act was counterproductive, if well intentioned. He said government spending was essential to get money moving throughout the economy and recommended an increase of $400 million per month – close to $100 billion per month in today’s economy.

In an editorial probably written by Mr. Hazlitt, The Times rejected any resort to inflation no matter how much prices fell. “The one thing your inflationist cannot have too much of is inflation,” the editorial said. “Give him one dose and he becomes much more emphatic in his demands for another.”

In other words, it’s always a slippery slope – a little inflation today invariably leads to hyperinflation tomorrow. If economic stagnation and high unemployment result, it’s a small price to pay to avoid something worse, the inflationphobes always assert.

Next week I will have more to say about inflationphobia.

Article source: http://economix.blogs.nytimes.com/2013/07/16/inflationphobia-part-ii/?partner=rss&emc=rss

Today’s Economist: Inflationphobia, Part II

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Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of the forthcoming book “The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”

Last week, I discussed the phenomenon of inflationphobia – an irrational fear of inflation that is constraining the Federal Reserve and holding back the economy. The roots of inflationphobia go back at least to the Great Depression, when inflationphobes made the same arguments year after year despite continuing deflation – a falling price level.

Today’s Economist

Perspectives from expert contributors.

The defining characteristic of the Great Depression was deflation, which began in 1927, two years before the stock market crash. The following data from the Bureau of Labor Statistics show the average change in the Consumer Price Index.

Bureau of Labor Statistics

Between 1926 and 1933, the price level fell about 25 percent. This meant that any obligation fixed in dollars increased 25 percent in real terms. This was particularly important in two areas – wages and debts. If a worker managed to keep the same monetary wage between 1926 and 1933, she actually got an increase in pay of 25 percent in terms of what she could buy because the prices of things she consumed fell 25 percent.

Similarly, if one had a debt in 1926, the real burden of that debt and the debt service increased 25 percent between 1926 and 1933. This was especially important for farmers because the prices of agricultural produce fell very rapidly and the burden of their debts increased just as rapidly.

The great economist Irving Fisher thought that the increasing real burden of debt resulting from deflation was the core cause of the Great Depression.

Despite the falling price level year after year, there were inflationphobes even then, who saw signs of inflation, inevitably leading to German-style hyperinflation, everywhere. The leading inflationphobe was a writer named Henry Hazlitt. Although not trained as an economist, he had a strong interest in the subject and the rare skill to write about it clearly.

H.L. Mencken once said of Mr. Hazlitt that he was “one of the few economists in human history who could really write.” From 1934 to 1946, he was an editorial writer for The New York Times, writing a vast number of editorials and signed articles, mainly on economic issues.

In 1932, Mr. Hazlitt was still writing for The Nation magazine, where he was a strenuous supporter of the gold standard and a fierce critic of John Maynard Keynes, whom he viewed as nothing but a crude inflationist. Mr. Hazlitt thought the cure for deflation was for all workers to slash their wages, which would lower business costs and restore growth. Debtors would simply repudiate their debts and renegotiate them.

No doubt if workers had been willing to slash their wages 25 percent, and banks and bondholders had been willing to slash their interest and principal 25 percent, this would have gone a long way toward alleviating the negative economic effects of deflation. But absent a law requiring it – which the libertarian Mr. Hazlitt would have opposed – this process could only take place slowly, painfully and unevenly.

By contrast, simply reflating the price level back to its 1926 level was relatively easy. The Federal Reserve just had to increase the money supply sufficiently. By the 1960s, even the arch-conservative Milton Friedman said this was what the Fed should have done.

But in the early 1930s, the idea of reflation was controversial, mainly because bondholders enjoyed getting back 25 percent more than they had lent in real terms. Why should they give that up? That is why one of the strongest supporters of the gold standard and opponents of reflation was Benjamin M. Anderson Jr., chief economist of the Chase National Bank.

Irving Fisher and other economists argued in favor of reflation, even being joined by Winston Churchill, who had lately been chancellor of the Exchequer in England. But the most outspoken advocate of reflation was Mr. Keynes, who was quoted in The Wall Street Journal on March 2, 1932, as saying, “It is unthinkable that we can step straight from the financial crisis to relief of the industrial crisis without the cheap money phase intervening.”

In 1933, Franklin D. Roosevelt became president and tried to stanch the deflation by suspending the gold standard and proposing legislation that would fix prices and prevent them from falling further. But these policies were ineffective because they did not get at the root of the problem, which was a fall in the money supply.

This resulted because there was no deposit insurance, so bank deposits literally disappeared when banks failed, and because the Fed refused to offset the resulting fall in the money supply through open-market monetary operations.

Mr. Fisher and some members of Congress kept pointing to the Fed, but to no avail. Responding to Republican attacks on reflation, Mr. Fisher said, there is “absolutely no escape from our present imminent danger except through reflation.”

They were opposed by Mr. Anderson and the New York banker James P. Warburg, who demanded restoration of the gold standard. In 1934, Mr. Warburg published a book detailing his criticism of reflation that was favorably reviewed in The Times by Mr. Hazlitt.

In a June 10, 1934, article for The Times, Keynes explained that monetary stimulus by itself was insufficient to stop deflation and that the
price-fixing instituted by the National Industrial Recovery Act was counterproductive, if well intentioned. He said government spending was essential to get money moving throughout the economy and recommended an increase of $400 million per month – close to $100 billion per month in today’s economy.

In an editorial probably written by Mr. Hazlitt, The Times rejected any resort to inflation no matter how much prices fell. “The one thing your inflationist cannot have too much of is inflation,” the editorial said. “Give him one dose and he becomes much more emphatic in his demands for another.”

In other words, it’s always a slippery slope – a little inflation today invariably leads to hyperinflation tomorrow. If economic stagnation and high unemployment result, it’s a small price to pay to avoid something worse, the inflationphobes always assert.

Next week I will have more to say about inflationphobia.

Article source: http://economix.blogs.nytimes.com/2013/07/16/inflationphobia-part-ii/?partner=rss&emc=rss

Economix Blog: Taxing Employers and Employees

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Casey B. Mulligan is an economics professor at the University of Chicago. He is the author of “The Redistribution Recession: How Labor Market Distortions Contracted the Economy.”

The delay of the Affordable Care Act’s employer mandate is a favorable development for the labor market, but the employer mandate is only the tip of the iceberg in terms of the labor-market distortions that the law has scheduled to come on line next year.

Today’s Economist

Perspectives from expert contributors.

The Affordable Care Act’s employer mandate will eventually levy a penalty on large employers that do not offer affordable health insurance to their full-time employees. The penalty is based on the number of full-time employees and adds about $3,000 to the annual cost of employing each person.

Employers have been complaining about the penalty, saying it will reduce the number of people they hire and cause them to reduce employee hours. Even economists and commentators supporting the law acknowledge that per-employee penalties reduce hiring by raising the cost of employment.

Economists have traditionally recognized that it hardly matters whether a tax is levied on employers or on employees, especially in the long run. In the employee-tax case, the employee pays the tax directly. In the employer-tax case, the employee pays the tax indirectly through reduced pay, because employer penalties reduce the willingness of employers to compete for people (Jonathan Gruber of the Massachusetts Institute of Technology has provided some good evidence in support of this widely accepted economic proposition).

Among other things, employment, employer costs and employee take-home pay would be essentially the same if the government levied a $3,000 fine on workers for having a full-time job with a large employer that does not offer health benefits, rather than levying the fine on employers on the basis of their full-time personnel, as the Affordable Care Act does.

But the political optics of the two policies are dramatically different. Large businesses can supposedly afford $3,000 per employee, while many employees could not afford another $3,000 bite out of their paychecks. Like it or not, economics’ equivalence results tells us employees will have to afford what amounts to a tax on them beginning in 2015, pursuant to the Treasury Department’s decision to begin collecting the employer penalty in that year.

For the purposes of understanding the state of the labor market, it doesn’t really matter whether individuals would be paying a tax for having a full-time job or receiving a subsidy for not having a full-time job. Either policy would reduce the gap between the income of full-time employees and everybody else. The ultimate result will be less full-time employment, in an amount commensurate with the size of the tax or subsidy.

The Affordable Care Act offers subsidies for people without work or in part-time positions that far exceed $3,000 per employee per year, which makes the employer mandate only a small piece of the law’s employment effects.

The law’s other new work-disincentive provisions, still on schedule for next year, include (i) a sliding income scale that sets premiums for people who buy health insurance on the new marketplaces, (ii) a plan for premium assistance that essentially resurrects the Recovery Act’s subsidy for what are known as Cobra benefits, allowing employees who have left a job to continue to participate, for a limited time, in their former employer’s health plan, in a more comprehensive form and (iii) hardship relief from the individual mandate.

As an example of these provisions, I explained last week how, even without the employer penalties, the premium assistance plan sharply penalizes full-time employment in favor of part-time employment. In combination, the provisions going into effect next year are two or three times larger than the employer mandate by itself, depending on the type of worker and the industry of employment.

Proponents of the Affordable Care Act, including a number of economists, have yet to acknowledge that so many provisions of the act have, from a labor economics perspective, so much in common with the employer mandate. But labor-market distortions are a common feature of several significant parts of the act and are an important part of what has happened in our labor market.

Whatever labor market benefits accrue from delaying the employer mandate could be had many times over by delaying the entire Affordable Care Act.

Article source: http://economix.blogs.nytimes.com/2013/07/10/taxing-employers-and-employees/?partner=rss&emc=rss

Today’s Economist: Dispatch From Europe: Learning, or Not, From Policy Mistakes

Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities in Washington and a former chief economist to Vice President Joseph R. Biden Jr.

In contemplating American political gridlock, I’ve often written that one of the most disconcerting aspects of our current economic policy is an inability, or at least an unwillingness, to diagnose what’s wrong and prescribe solutions. Still, our economy is resilient and flexible, our central bank has been aggressively applying monetary stimulus (while fruitlessly importuning Congress to help), and our currency is our own and the one other countries hold in reserve.

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As a result, we do not face recessionary risks, as in Europe, where I’m enjoying a working vacation (a concept that gets you lots of eye-rolls in France). Yet we slog along at growth rates that are too slow to move the jobless rate down from its still elevated level of 7.6 percent, officially, and above 14 percent if you count the underemployed.

It’s worse in Europe. In France, growth is flat-lining if not slightly negative, and unemployment is creeping up on 11 percent. But at least among economic elites, many continue to defend the fiscal consolidation, or austerity measures, that have reduced the French budget deficit, e.g., from 7.5 percent of gross domestic product in 2009 to 4.8 percent last year (according to Eurostat).

These numbers came up in a discussion with one French economist who insisted the nation’s main economic problem was politicians’ refusal to lower the deficit. When these declining deficit values were pointed out, her response was, “It should be 3 percent.”

Another prominent economist argued that my criticisms of austerity measures must be wrong because the American budget cuts prescribed by sequestration don’t appear to be hurting our economy. Except for the fact that (a) they are, and (b) “not hurting” is not equal to “helping.” (Thanks in part to sequestration and other fiscal headwinds, the United States gross domestic product was only 1.8 percent in the first quarter, as government subtracted 0.9 percentage points from growth. See also Catherine Rampell’s review of sequestration’s significant employment impacts.)

In fact, the essential problem with the debate in Europe is the same as in the United States: reducing deficits and debt is seen as a solution in and of itself, not as the outcome of actual solutions. Let me explain.

While your spending must broadly align with your revenues over business cycles, it is a mistake to think that when you’re facing large output gaps, if you only make the “hard choices” to reduce your budget deficit, your fiscal rectitude will be rewarded with growth and jobs. Closing the budget deficit won’t close the jobs deficit.

This relates to the Reinhart-Rogoff mistake that gave policy makers a paper to wave around allegedly arguing that high debt levels slow growth. Again, the causality is reversed. Stronger growth right now would solve problems that debt reduction can only create.

In other words, they’re aiming at the wrong variables and yet adamantly defending results that quite plainly show their mistakes. And I’m not just talking about rising unemployment. Note that even as the French budget deficit has gone down since 2009, the debt-to-G.D.P. ratio has gone up, from 79 percent to 90 percent.

To be fair, American Keynesians too often suggest that if only European Union countries would increase government spending and backstop the banks, everything would fall into place. But as I’ve heard from even the occasional sympathetic policy makers and advisers over here, life is a lot more complicated than that in the currency union.

As one German asked me, “How do you think New Yorkers would feel about bailing out Texans or vice versa?” — an excellent question that we never have to think about. Another high-ranking German official told me, “Look, we know what we have to do … we just can’t let anyone see us doing it.” Good luck with that.

Yet when I say European policy makers aren’t learning from their mistakes, I mean that quite literally. Two economists for the International Monetary Fund recently published an important and rigorous analysis of austerity in action. Their work asks the following question: so far, have the results of fiscal consolidation come out the way what we expected? It’s a statistical exercise that asks how far off the mark the conventional European wisdom turned out to be by looking at what forecasters thought would happen to G.D.P. growth given fiscal consolidation plans versus what actually happened.

And the answer is off the mark by a factor of three. That is, they found the fiscal multiplier to be around three times as large as the consensus, meaning deficit reduction was that much more hurtful to growth than they expected.

But when you’re focused so intensely on the problem of public debt, the idea that reducing it is more damaging than you thought apparently creates too much cognitive dissonance. And it’s easy to dismiss a study that goes against your strongly held assumptions. Another economist said the I.M.F. analysis just proves that economists are poor forecasters, as if we didn’t already know that (in fact, their study shows systematic mistakes in the same direction — all underestimating the cost of premature consolidation).

So, if my short sojourn is any indication, Europe will continue to slog even more slowly than we will. It may well be a while until policy makers begin to learn from their mistakes. I’m sorry I can’t share happier news from abroad, but perhaps the smart thing to do at this point is to turn off the laptop, start the vacation part of the vacation, and be very thankful that I’m privileged enough to do so in such beautiful, historic places.

Article source: http://economix.blogs.nytimes.com/2013/07/08/dispatch-from-europe-learning-or-not-from-policy-mistakes/?partner=rss&emc=rss

Economix Blog: Confusing the Public on the Affordable Care Act

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Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.

In my previous post I explained that general statements on the probable impact of the Affordable Care Act on the pocketbooks of Americans often do not make sense and can be quite misleading.

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My point can be illustrated with a recent news release from the Ohio Department of Insurance, “Health Insurance Costs to Increase Significantly Under Affordable Care Act.” The department states that it “released the information today to help health insurance consumers continue to prepare for the expected price increases.” It offers a one-sided perspective.

In its announcement, the department reports:

The department’s preliminary analysis of the proposed plans for the individual market reveal that insurers expect the cost to cover health care expenses for consumers will significantly increase. Based on a report released by the Society of Actuaries earlier this year, the department estimates this increase is an average of 88 percent. … A total of 14 companies filed proposed rates for 214 different plans to the department. Projected costs from the companies for providing coverage for the required essential health benefits ranged from $282.51 to $577.40 for individual health insurance plans.

Presumably these numbers refer to claims cost and not premiums.

The release is silent on whether the reported average of $420 of this wide range of claims costs are those for a given benefit package or an average over quite different benefit packages. If the former, how could the range of cost claims be so wide? If the latter, the reported average of these numbers would be meaningless. After all, how informative would it be to say that the average cost for a group of cars is $110,422, when that includes Chevrolets, Jeeps, BMWs and Ferraris?

If properly informing consumers had been truly the department’s intention, it should have added at least two additional pieces of information.

First, the news release should have reminded readers explicitly that income-related federal subsidies toward health insurance premiums will be available for individuals with household incomes up to 400 percent of the federal poverty level, along with “cost-sharing subsidies” toward out-of-pocket costs for families with incomes between 100 and 250 percent of the federal poverty level. For lower-income people, these subsidies will significantly offset premiums driven up by the reported 88 percent increase in costs.

Second, the news release might have included some explanation of why the “cost to cover health care expenses for consumers” in Ohio is expected to rise as a result of the Affordable Care Act.

A clue to the answer can be gained from the study by the Society of Actuaries cited by the department.

That study reports average claims costs per member per month for what it calls the “pre-A.C.A.” and the “post-A.C.A.” state of affairs. The pre-A.C.A. figure represents estimated claims cost per insured person per month in 2014 if the Affordable Care Act did not exist. The post-A.C.A. estimate reflects the counterfactual assumption that the entire act has been fully carried out in 2014, something that actually will occur only by the latter half of the decade.

Using a highly complex simulation model, the actuaries estimate that if the Affordable Care Act were fully carried out by 2014, the average claims cost per member per month in Ohio’s nongroup risk pools would rise from an estimated pre-A.C.A. level of $223 (Figure S-2, Page 8) to the post-A.C.A. level of $406, an 82 percent increase, assuming no expansion of Medicaid in Ohio. The increase in systemwide total health spending in Ohio brought on by the Affordable Care Act, however, is estimated to be only 3.2 percent.

Aside from the fact that the minimally accepted package of essential benefits under the Affordable Care Act will be more generous and costly than many of the much leaner policies traditionally sold in the nongroup market, that can leave people exposed to high financial risk, a major driver of the projected cost increase — one explicitly flagged by the actuaries — is a projected change in the risk profile of the insured in Ohio’s nongroup market.

The Society of Actuaries projects that the number of individuals insured in that market will increase from the pre-A.C.A. level of 415,000 to the post-A.C.A. level of one million. Many of these newly insured are projected to be relatively sicker individuals who had been excluded from Ohio’s nongroup market, either because they could not afford the high premiums they were quoted, based as these were on the individual’s health status; or because insurers had refused them coverage outright; or because they were in the state’s high-risk pool.

Just last week Julie Appleby of the Kaiser News Network reported on the tribulations that individuals had routinely experienced in the current, pre-A.C.A. nongroup market.

The proponents of the Affordable Care Act should not deny that with this simulated change in the risk profile of Ohio’s nongroup insurance market — which may or may not come about — a switch from medically underwritten premiums to community-rated premiums, coupled with a richer benefit package, could significantly raise premiums for healthy individuals with higher incomes who are not entitled to substantial federal subsidies or any at all. The Ohio Insurance Department’s news release certainly drives home that point.

On the other hand, for projected new entrants into Ohio’s nongroup market who are relatively less healthy, the community-rated premiums even before federal subsidies are most likely to be significantly lower than their medically underwritten pre-A.C.A. premiums — if they had been offered coverage at all. A forthright news release would have mentioned that positive outcome as well.

From the “fact sheet” that the Department of Insurance appended to its news release, one gathers that Ohio’s lieutenant governor, Mary Taylor, who also acts as director of the Department of Insurance, opposes the Affordable Care Act and supports its repeal. In the fact sheet, her department notes:

Health insurance today is priced based on individual characteristics. Those with healthier lifestyles are rewarded with more affordable options. Under the A.C.A., all Ohioans will be lumped together for the purposes of pricing thereby eliminating the benefits of healthier choices. This method of rating is commonly known as “community rating. … Because Ohio is being forced into this type of pricing, health insurance costs are increasing in 2014.

I can understand how community rating violates the theory of justice espoused by libertarians. In fact, I have proposed a way to accommodate their preferred social ethic. The department’s rationale for opposing what it calls “one-size-fits-all pricing,” however, astonishes me.

One can agree that an individual’s choice of an unhealthy lifestyle can reduce her or his health status and increase that person’s use of health care. Community rating gives such people a financial break we would rather not give them.

But many serious and often devastating illnesses afflicting individuals are a result of accidents, or genetic or environmental factors that have little to do with lifestyle choices. The many victims of such illnesses, in Ohio as elsewhere, might interpret the Ohio Insurance Department’s rather crudely put theory of the causation of illness as an insult added to injury.

Article source: http://economix.blogs.nytimes.com/2013/07/02/confusing-the-public-on-the-affordable-care-act/?partner=rss&emc=rss

Economix Blog: The Declining Demand for Husbands

Nancy Folbre, economist at the University of Massachusetts, Amherst.

Nancy Folbre is an economics professor at the University of Massachusetts, Amherst.

Once upon a time women seemed more eager than men to marry. Today such generalizations no longer apply.

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Is it women’s preferences (the demand for husbands) or men’s preferences (the supply of husbands) that are driving the trend toward less marriage? It’s hard to tell, but some gender asymmetries are apparent. For instance, a recent poll of unmarried blacks of prime marrying age found that only 25 percent of women were seeking a long-term relationship compared with 43 percent of men.

Some people may dislike application of concepts like supply and demand to the search for potential lifetime partners. After all, we like to think of ourselves — and our partners — as unique individuals, not as substitutes or next-best choices.

But the concept of a marriage market offers some useful insights into the evolution of marriage as an institution. It also helps explain why markets don’t always generate efficient adjustments to new circumstances.

As a contractual commitment, marriage has a price. It offers both costs and benefits to potential partners. The contract involves commitments for financial support and family care on terms that can be completely egalitarian.

But the terms can also be more advantageous to men or to women. For example, Anglo-American law traditionally gave men greater rights than women in marriage, and some religious traditions today encourage wives, but not husbands, to promise obedience.

Economic prospects matter: not just the relative earnings of men and women but also their relative contributions of time and energy to domestic work and family care.

Women are willing to pay a higher price for marriage than men if they have few alternatives, as when their opportunities for economic independence are restricted. An increase in the supply of women who want to marry drives the price of marriage down for men.

In these circumstances, as the economist Shoshana Grossbard puts it, husbands can pay a low “quasi-wage” for domestic services.

If the supply of women who want to marry decreases, the terms of marriage move in favor of women. They are likely to receive a larger share of joint income and leisure time. Husbands become more likely to relinquish some decision-making power and do more housework and child care.

Marriage market dynamics mean that a bride’s bargaining power is partly determined by the number of other choices her groom has (and vice versa). The changing terms of marriage complicate the effects of women’s improved economic position. On the one hand, men should like the prospect of sharing income with a high-earning woman. On the other hand, they may find it difficult to adjust to a new social role.

Considerable research suggests that gender roles are, in fact, pretty sticky. In a recent article, Marianne Bertrand, Jessica Pan and Emir Kamenica offer evidence that wives often try to enact traditional gender roles in an apparent effort to reassure their husbands that they are not a threat. (The New York Times took note of their findings in an article and a commentary.)

These economists also contend that couples in which the wife earns more than the husband are less satisfied with their marriage and are more likely to divorce. But as the sociologist Philip Cohen points out, this assertion is based on data more than 20 years old and disregards a large body of sociological research.

Some attitudes have recently changed in the United States. According to a recent survey by the Pew Research Center, only about 28 percent of respondents this year agreed that “it was generally better for a marriage if a husband earns more than his wife,” compared with 40 percent in 1997.

Economic factors may shape the pace of attitudinal change. In a fascinating study of nonmarriage among women college graduates in Japan, Jisoo Hwang observes that men whose mothers were employed have less traditional attitudes than other men and were also more likely to marry. She hypothesizes that the relatively recent and abrupt increase in female employment in that country made it more difficult for men there to adjust.

Some evidence from the United States suggests that class and education also influence role flexibility. Affluent couples are more likely to marry than other Americans, perhaps because they don’t need to renegotiate gender roles; they can purchase substitutes for wives’ traditional domestic work in the form of restaurant meals, child care and cleaning services.

Higher education may give students more familiarity with normative change and more experience negotiating differences. In the Pew survey referred to above, adults with a college degree were only half as likely as those with only a high school diploma to say it is generally better for a marriage if a husband out-earns a wife.

The demand for long-term commitments seems to be steadily declining among both women and men. Philip Cohen persuasively asserts that we should stop bemoaning this change and adapt to a world in which fewer adults marry.

But it is also worth noting that inflexible rules and sticky gender roles impede adjustments that could help increase both the demand for and supply of potential spouses. The sociologist Kathleen Gerson develops this position in some detail in her book “The Unfinished Revolution.”

As same-sex couples have profoundly demonstrated, the demand for marriage is not based on some natural sexual division of labor, but on the desire to give personal commitments public recognition.

Men and women who get this point probably enjoy a distinct advantage in finding a partner, whether or not they are lucky enough to achieve long-run equilibrium with someone they love.

Article source: http://economix.blogs.nytimes.com/2013/06/17/the-declining-demand-for-husbands/?partner=rss&emc=rss