Quantitative Easin', ctd.

At Greg Mankiw's blog, a reader responds to the above with this ditty:

I heard it in the headlines
It's news all over town
We might be double dippin'
Green shoots have all turned brown

It's a balance sheet recession
With a housing overhang
But they've got a brand new program
And it will start you with a bang

And it's called, quantitative easing
They say results are always pleasing.
When liquidity all starts freezing
Just warm things up with quantitative easing

I will say it straight and simple
It's clear, just like a bell
There's some long term bonds to buy
There's some short term bonds to sell

Don't talk about the good times
Don't ask me where they went
Just move your inflation target
On up to three point five per cent

And it's called, quantitative easing
This ain't no joke, it ain't no teasing
When the GDP starts wheezing
Treat with a shot of quantitative easing

Good and magic things will happen
It might take a week or three
Unemployment plunging downward
Recovery shaped just like a V

You'll see Nobels at the Treasury
There'll be rock stars at the Fed
It'll take hair off of Krugman's face
Put it on top of Ken Rogoff's head

And it's called, quantitative easin'
This ain't no scam, so don't call no policeman
When the engine of commerce starts seizin'
Just add a quart or quantitative easin'

Show no mercy to the critics
Don't let no one stop your nerve
You can mock Ricardian Equivalence
You can laugh at the Laffer Curve

Tell that guy at the Minneapolis Fed
To shut up, or you'll break his legs
And if the Bond Vigilantes don't like it?
Well, they can go suck eggs

And it's called quantitative easin'
You know I say this for a reason
When the economy just sits there squeezing
Loosen things up with quantitative easing

Greg Mankiw can afford higher taxes

...but they'll make him work less.

The value of student evaluations

Via Mankiw, fascinating findings from Scott E. Carrell and James E. West:

Results show that there are statistically significant and sizable differences in student achievement across introductory course professors in both contemporaneous and follow‐on course achievement. However, our results indicate that professors who excel at promoting contemporaneous student achievement, on average, harm the subsequent performance of their students in more advanced classes. Academic rank, teaching experience, and terminal degree status of professors are negatively correlated with contemporaneous value‐added but positively correlated with follow on course value‐added. Hence, students of less experienced instructors who do not possess a doctorate perform significantly better in the contemporaneous course but perform worse in the follow‐on related curriculum.

Student evaluations are positively correlated with contemporaneous professor value‐added and negatively correlated with follow‐on student achievement. That is, students appear to reward higher grades in the introductory course but punish professors who increase deep learning (introductory course professor value‐added in follow‐on courses). Since many U.S. colleges and universities use student evaluations as a measurement of teaching quality for academic promotion and tenure decisions, this latter finding draws into question the value and accuracy of this practice.

Important sentences

"..a VAT is neither blessed nor evil. It is a tool. We can use it to advance a larger government, a more efficient tax system or some combination of the two."

—Greg Mankiw in the Times.

"...America's not very good at dealing with slow-moving crises, even with slow-moving solutions. We're much better at waiting until a crisis happens, acting quickly, and then putting together commissions to find out why nobody saw it coming."

—Derek Thompson, Atlantic Business.

Taxes per person

Greg Mankiw compares the U.S. to other countries.

Yglesias is not impressed.

How did the financial crisis happen?

Via Mankiw:

Yale economist Gary Gorton offers a very readable Q&A explaining his view of recent events. (.pdf)

It's sixteen pages and well worth the read--print it out in color if you can.

The sustainability of Obama's budget

Mankiw opines in the Times.

Financial regulation

A way forward (ht Mankiw)

The tradeoffs of health reform

Mankiw:

David Brooks gets it right today about the debate over healthcare reform. The fundamental question is, Should Americans embrace a more robust social safety net at the cost of much higher marginal tax rates, reduced work incentives, and a smaller economic pie?

From a strictly economic perspective, there is no right answer to this question. Arthur Okun said long ago that the big tradeoff in economic policy is between equality and efficiency. The pending healthcare reform bill moves us along that tradeoff. Let's just not pretend, as some healthcare reformers would have us do, that we can easily get more equality without paying the price in efficiency.

Put simply, the healthcare reform bill would make the United States more like western Europe. That may mean more security about healthcare, but it also means that future generations of Americans will likely spend more time enjoying leisure (.pdf)

I think Brooks and Mankiw are using the wrong terminology here. This is a tradeoff of subsidizing expanded health coverage, not a tradeoff of reforming the system.

I've discussed plenty of reforms that would increase the efficiency of health care in the US with no costs of higher marginal tax rates, reduced work incentives, or a smaller economic pie.

(The political problem, of course, is that most such reforms run afoul of entrenched interests like the AMA cartel, the AARP, large employers, etc).

Government motors update

Ugh.

Implicit marginal tax rates, again

Greg Mankiw writes in the Times and discusses:

A family of four with an income, say, of $54,000 would pay $9,900 for health care. That covers only about half the actual cost. Uncle Sam would pick up the rest.

Now suppose that the same family earns an additional $12,000 by, for example, having the primary earner work overtime or sending a secondary worker into the labor force. In that case, the federal subsidy shrinks, so the family’s cost of health care rises to $12,700.

In other words, $2,800 of the $12,000 of extra income, or 23 percent, would be effectively taxed away by the government’s new health care system.

That implicit marginal tax rate of 23 percent is a significant disincentive. And it comes on top of the explicit marginal tax rate the family already faces from income and payroll taxes. Altogether, many families would face marginal rates at or above the 50 percent level that animated the Reagan supply-side revolution.

[..] there is no simple fix. Higher marginal tax rates are an integral part of the Obama health plan.

Markets in everything: the value of primate capital

Mankiw:

A fun story from NPR about how monkeys value skills, as long as those skills are in scarce supply.

What a delicious confluence of naturalism and economics!

Learning to love insider trading

A GMU economist defends it in the WSJ...

It's Halloween season, and the scariest demons in the world of business are insider traders, lurking behind every stockbroker's desk and four-star restaurant banquette. They whisper dark corporate secrets into the ears of venal speculators, and inflict pain and agony upon ordinary investors.

Time to stop telling horror stories. Federal agents are wasting their time slapping handcuffs on hedge fund traders like Raj Rajaratnam, the financier charged last week with trading on nonpublic information involving IBM, Google and other big companies. The reassuring truth: Insider trading is impossible to police and helpful to markets and investors. Parsing the difference between legal and illegal insider trading is futile—and a disservice to all investors. Far from being so injurious to the economy that its practice must be criminalized, insiders buying and selling stocks based on their knowledge play a critical role in keeping asset prices honest—in keeping prices from lying to the public about corporate realities.

Prohibitions on insider trading prevent the market from adjusting as quickly as possible to changes in the demand for, and supply of, corporate assets. The result is prices that lie.

And when prices lie, market participants are misled into behaving in ways that harm not only themselves but also the economy writ large.

[continued]

(ht Mankiw)

Addendum: Prof. Bainbridge disagrees

"Pigovian question of the day"

Tyler Cowen cites this research finding: "Our estimates imply that every death of a helmetless motorcyclist prevents or delays as many as 0.33 deaths among individuals on organ transplant waiting lists."

And then asks: "So should we mandate or tax the use of such helmets?"

(via Mankiw)

Medicare's impingement on freedom

Paul Krugman writes:

the modern G.O.P. considers itself the party of Ronald Reagan — and Reagan was a fierce opponent of Medicare’s creation, warning that it would destroy American freedom. (Honest.)

Greg Mankiw responds:

Pretty silly of old Ronald, wasn't it? Well, also today, over at the Wall Street Journal, three past presidents of the American Medical Association write:

the right of patients to privately contract with physicians to ensure they have the medical care they want, without penalty—regardless of what the government pays—must be recognized and protected. Today, if a doctor wants to bill a patient for additional payment over the Medicare reimbursement, he has to withdraw from Medicare entirely for two years. A patient who agrees with this arrangement can't receive any Medicare money for that service, either.

So, if you include the right to sign mutually advantageous contracts and engage in the gains from trade as part of "freedom," then President Reagan was not so far off the mark.

The problem, it seems, is that Medicare sometimes tries to push the price of medical services below their equilibrium levels (a phenomenon that will likely get more severe with the Medicare cuts being envisioned in the pending healthcare reform bills). Such price controls naturally lead to private attempts to circumvent them, which in turn lead to regulations to prevent that behavior. These new regulations cannot help but impinge on economic freedoms.

Unemployment update

Mankiw's interpretation here.

The cost of magic pills

Another excellent column by Greg Mankiw.

A trillion here, a trillion there...

(meme) Obama administration's overly-rosy projections now less rosy.

Seems Greg Mankiw won the bet Paul Krugman wouldn't take.

Carbon taxes and market distortions

Greg Mankiw gets his wonk on.  It's worth your time if you want to grasp the essentials of why a new carbon tax combined with income and payroll tax cuts is the best environmental policy.

Question of trust

Krugman observes:

You could rely on a health maintenance organization to make the hard choices and do the cost management, and to some extent we do. But HMOs have been highly limited in their ability to achieve cost-effectiveness because people don’t trust them — they’re profit-making institutions, and your treatment is their cost. [Emphasis in the original.]

This gets Mankiw thinking:

Perhaps a lot of the disagreement over healthcare reform, and maybe other policy issues as well, stems from the fundamental question of what kind of institutions a person trusts. Some people are naturally skeptical of profit-seeking firms; others are naturally skeptical of government. (There is, of course, the issue that an HMO can be run as a nonprofit organization. The one I use through Harvard is an example. But let's put that issue aside for another day.)

I tend to distrust power unchecked by competition. This makes me particularly suspect of federal policies that take a strong role in directing private decisions. I am much more willing to have state and local governments exercise power in a variety of ways than for the federal government to undertake similar actions. I can more easily move to another state or town than to another nation. (I am not good with languages.)

Most private organizations have some competitors, and this fact makes me more comfortable interacting with them. If Harvard is a bad employer, I can move to Princeton or Yale, and this knowledge keeps Harvard in line. To be sure, we need a government-run court system to enforce contracts, prevent fraud, and preserve honest competition. But it is fundamentally competition among private organizations that I trust.

This philosophical inclination most likely influences my views of the healthcare debate. The more power a centralized government authority asserts, the more worried I am that the power will be misused either purposefully or, more likely, because of some well-intentioned but mistaken social theory. I prefer reforms that set up rules of the game but end up with power over key decisions as decentralized as possible.

What puzzles me is that Paul seems so ready to trust solutions that give a large role to the federal government. (In the past, for instance, he has advocated a single payer for healthcare.) I understand that trust of centralized authority is common among liberals. But here is the part of puzzles me: Over the past eight years, Paul has tried to convince his readers that Republicans are stupid and venal. History suggests that Republicans will run the government about half the time. Does he really want to turn control of healthcare half the time to a group of policymakers that he considers stupid and venal?

These thoughts, I appreciate, are broad generalizations. They don't immediately lead to a specific set of reform proposals. But I wanted to give Paul credit for a key insight: A central question in this and perhaps other debates is, Whom do you trust?

Naturally, I'm totally on Mankiw's side here.  And it seems to me that a large part of the distrust of private health-care in particular (as compared to non-health-care sectors) originates from a lack of choice.  Health insurance and management organizations may not be selling a commodity like bread, as Krugman argues, but they are selling something you could potentially have healthy market-based competition on.  The problem is right now we don't have good competition.

The market has been distorted by employers offering single or a limited selection of plans--a relic of World War II price controls that prohibited wage competition, leading employers to compete by offering more lavish benefits instead.  (This is a fine example of the unintended consequences of government regulation.)  To make matters worse, not only is there a limited selection, but those plans are tied to employment and not portable once you leave a job.  The status quo is perverse.

The lack of healthy competition causes problems.  If the insurance company you have refuses to cover a procedure that most health care consumers would expect to be covered (a situation that isn't specific to healthcare and can occur in other areas like insurance and finance) you don't have an effective recourse.  You probably can't switch to a provider that covers the procedure, because a) your employer may not offer that plan, and b) you might be denied based on the pre-existing condition.  You also couldn't start a backlash against the company that causes other customers to switch, the threat of which serves to keep companies honest (e.g., retention-attitudes like "the customer is always right").  Thus, health insurance and management organizations have a perverse incentive: denying coverage, particularly of more obscure and expensive procedures, offers them a much higher upside than the potential downside, because maintaining a good reputation with customers is less important to them than a healthy level of competition would dictate.

So how do we fix the market's competition?  Set up health insurance exchanges where anyone can choose any plan and not be denied on the basis of pre-existing conditions.  Require every employer that offers health benefits to contribute the same portion to these premiums if chosen.

For example, suppose that an employer offers to cover 70% of a $10,000/yr. BlueCross plan.  That's $7,000.  The employee should be able to take this very $7,000 and apply it toward any of the plans in the health insurance exchange.  Suppose there are several plans on offer there:

MoreBasicThanBlue -- $7,000/yr., with higher deductibles and such.
GoldPlated --- $15,000/yr., better coverage
MoreTrusted -- $10,000/yr., very similar to BlueCross but higher customer satisfaction

Presently, this employee would pay $3,000/yr. for their portion of the employer's BlueCross offer.  They might opt for the more basic plan, and pocket the difference as savings.  Or they might want want to shell out that extra $8,000/yr. for the Gold.   Or, maybe they heard from a friend or read at Consumer Reports that "MoreTrusted" offers better care then BlueCross (e.g. better customer service, fewer spuriously denied claims, etc).  They could select the most trusted provider.

This concludes my illustration of a functional, for-profit market-based system.  A government-run plan and greater bureaucracy does not seem helpful to me--and if you have a healthy distrust of government intervention and price controls, you should be concerned about direct public involvement making things worse.

Meanwhile, Tyler Cowen looks at examples of free market health care, which Krugman thinks there are no successful examples of.