Monthly Archives: November 2013

It’s Implementation, Stupid

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The Washington Post is troubled by President Obama’s “keep your plan” fix, but for the wrong reason.

Insurers who decided to act would try to hold onto their healthiest customers — those who don’t make many claims, if any. But the Obamacare marketplaces need those relatively healthy customers.

The threat of “adverse selection” in health insurance is over-rated and always has been.

The problems with implementation are under-rated and always have been. The Obama Administration has spent 3 years bulldozing the individual market in health insurance. Now, they expect the health insurance companies to rebuild it in 30 days.

The folks who have to implement the new Presidential edict are not pleased. From the state health insurance regulators:

The National Association of Insurance Commissioners (NAIC) suggested Thursday that the plan to allow insurance companies to offer non-compliant health plans into 2014 is not logistically feasible.

From the health insurance companies:

They have warned legislation in both chambers of Congress would provoke an administrative fiasco and could have serious implications for the new marketplace’s risk pool, premium prices and the cost of the law to the federal government.

From a WaPo blog story:

Here’s how Robert Laszewksi, an insurance consultant, put it in a note to clients earlier this morning:
“This means that the insurance companies have 32 days to reprogram their computer systems for policies, rates, and eligibility, send notices to the policyholders via US Mail, send a very complex letter that describes just what the differences are between specific policies and Obamacare compliant plans, ask the consumer for their decision — and give them a reasonable time to make that decision — and then enter those decisions back into their systems without creating massive billing, claim payment, and provider eligibility list mistakes.”

If I were the CEO of a health insurance company, I would engage in civil disobedience. I would design policies that are attractive to consumers, regardless of whether I offered those policies before and regardless of whether they satisfy regulatory mandates. I would then sell those policies to any customers who want them and defy the regulators to come in and take them away. I think in today’s environment, I could get away with that.

Thoughts on Secession

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Alberto Mingardi writes,

We are sometimes vote-intoxicated: we live in countries that consider voting the legitimate means for collecting [sic] decision making for everything but the extent and the boundaries of the very political community that is supposed to make decisions by voting. The bureaucratic apparatus is happy to have people decide democratically on other peoples’ money and lives, but not to the ultimate question of the survival of a nation state in its current geographical form. Too often secessionist movements are kicked out of the “respectable” public debate by quasi-religious appeal to the apparently immortal value of “national unity”.

I think you will find in general that the political class supports “reforms” that strengthen incumbents institutions and people in power, and that it opposes reforms that strengthen ordinary individuals. Making secession and “foot-voting” easier are examples of the latter.

Is Electricity Pricing FUBAR?

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Severin Borenstein writes,

You can, of course, eat the zucchini you grow, the manager might say, but once you start trading zucchinis with the store, you can’t expect to get the same price on sales to the store as you pay on purchases from the store. The margin the store makes between the wholesale and retail price is what pays for the building, heating and cooling, labor, and other costs that are mostly fixed with respect to the amount you buy.

The same economics applies in electricity, only more so.

But in promoting renewable energy, the government is saying that electricity companies have to make those sorts of trades. Pointer from Mark Thoma.

Three Axes the Minimum Wage, and Fair Trade

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A reader writes,

However, progressives cannot understand that business owners will reduce staffing when labor costs more. It’s incomprehensible to them. They keep talking about the emotions of those who are making low salaries.

From a three-axes perspective, the problem is pretty simple. A profitable firm pays low wages to workers, either at home or overseas. The firm is presumably able to “afford” to pay workers more, so should it not be pressured to do so? In this context, the firm looks an awful lot like an oppressor, and the workers look an awful lot like the oppressed.

The libertarian (or economist’s) counter is that the workers may end up worse off as a result of a “fair trade” boycott or a higher minimum wage. If these measures cause layoffs, then the workers who lose their jobs are certainly not better off.

I think that the hard part is getting progressives past the intuition that firms can “afford” to pay more. One of the reasons that I try to have my class go through the exercise of planning a simple start-up business is so that they can see that profit is not something that automatically accrues to any business. In general, I think that it is important to get people to think about issues from the standpoint of an entrepreneur, rather than simply treat business as “the other” and the enemy.

Is Health Insurance FUBAR?

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Consider two tasks:

1) Get the healthcare.gov web site to work by November 30.

2) Use legislation and regulations to enable people to keep their plans and keep their doctors.

I think that (1) is more likely to be achievable. Not that I am optimistic about (1), and today’s WaPo reports,

The insurance exchange is balking when more than 20,000 to 30,000 people attempt to use it at the same time — about half its intended capacity, said the official, who spoke on the condition of anonymity to disclose internal information. And CGI Federal, the main contractor that built the site, has succeeded in repairing only about six of every 10 of the defects it has addressed so far.

But there may be workarounds. A reader sent me this link to a story about web developers who created a site in two weeks that enables you to browse for plans to find the best one.

You can’t actually enroll on the HealthSherpa site, but they do provide contact information for companies offering the plans. Users who find a plan they like can go directly to the insurance companies without ever using HealthCare.gov.

On the other hand, “keep your plan, keep your doctor” seems to me a pretty hopeless case.

1. Even if Obamacare had never been enacted, it would have been difficult to back this promise. What is to stop an insurance company from deciding to tweak a plan or to get rid of it altogether? What is to stop a doctor from refusing to accept insurance from the given company, or from any company at all? These sorts of changes used to take place all the time, with or without Obamacare.

2. But now, the situation is FUBAR. The old plans no longer exist. In order to revive them, the insurance companies would have to have to put together brochures, mail them to customers, and give customers time to look them over and decide whether or not to renew. But before they can do that, the insurance companies have to go through the process of signing up health care providers, including negotiating agreements concerning compensation. But before they can do that, the insurance companies have to run their plans past regulators to make sure that they comply with whatever legislation/regulation the bureaucrats in Washington and the states come up with as they try to enforce “keep your doctor, keep your plan.” And before they can do that, regulations have to be written, go through a comment period, and published.

I would be surprised if this can be accomplished before health insurance cancellations take effect.

Larry Summers, 14.462, and Wealth Illusions

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Thanks to Mark Thoma, I came across a recent IMF Conference honoring Stanley Fischer, who I have called the Genghis Khan of macroeconomics.

If I were you, I would jump to the last video, on policy responses to the crisis. The panel features Ben Bernanke (who wrote his dissertation under Fischer), Fischer, Ken Rogoff (who wrote his dissertation under Dornbusch, but perhaps had Fischer on his committee), and Larry Summers, who went to grad school at Harvard but who spent a lot of time auditing courses at MIT, including Fischer’s monetary economics course, which Summers remembers as being called 14.462 in the MIT catalogue. The panel is chaired by Olivier Blanchard, long-time protege of Fischer, and the first question during the Q&A comes from Jeffrey Frankel, another Dornbusch student. I didn’t find Bernanke or Fischer so interesting, so I would recommend fast-forwarding to minute 33, when Rogoff is speaking.

Rogoff eventually says that one source of financial crisis is ordinary debt. One of the reasons that debt is over-utilized is that it often comes with a government guarantee, either explicit or implicit. One solution he proposes is to get rid of bank deposits. Instead, he would have the Fed run ATMs, and the only transaction accounts people would have would be deposits at the Fed, which I’m guessing would not earn interest. In order to earn interest, people would have to invest in risky securities.. (Rogoff was racing through his talk at this point, so I am doing some interpolation here that might not be exactly correct.)

36 years ago, these were my homies. Rogoff makes some amusing remarks about the macro wars of that time, and I think he correctly pinpoints Fischer and John Taylor as two economists who “bridged” the freshwater and saltwater schools. Later, Summers mocks Minnesota, just as in the old days.

Summers gives the most provocative talk, and it becomes the focus of much of the subsequent discussion. He asks why it was that for the decade prior to the financial crisis we needed the wealth illusions of bubbles in order to maintain an economy even close to full employment. He argues that the full-employment, non-bubble real interest rate must have been below zero for a long time, and that it may remain zero for a long time.

In response to Frankel’s question, Summers says that this situation can be attributed in part to Moore’s Law. Computers as a form of capital are characterized by decreasing prices, and this created a state of chronic excess supply in capital markets. The “savings glut” came not just from foreign sources but from the fact that the cost of obtaining capital in the form of computing equipment kept falling, making investment demand too low to absorb savings.

He is talking about a Great Stagnation not of supply but of demand. As he points out at the start of his talk, nobody has suggested anything like it since the 1940s, with the “secular stagnation” hypothesis. (I think that one of the proponents of that hypothesis was Summers’ uncle, Paul Samuelson, but I may be wrong about that.)

If you start by thinking in terms of classical economics, there are so many problems with Summers’ story that one does not even know where to begin. However, among Fischer’s horde, he is taken seriously. Bernanke does push back, invoking Bohm-Bawerk, as taught to us by Samuelson, to point out the extreme and implausible implications of a negative interest rate.

The panel tends to reinforce my complaints about the homogeneity of professional thinking, which is due, in my view, to Fischer’s over-breeding. These are macroeconomists who became prominent in the 1980s and 1990s. How is it that they constitute the panel here? The equivalent would be watching a panel in 1980 that consisted entirely of economists from the generation that thought wage-price controls were the best tool for fighting inflation.

New and Old Keynesianism

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John Cochrane writes,

The old-Keynesian model is driven completely by an income effect with no substitution effect. Consumers don’t think about today vs. the future at all. The new-Keynesian model based on the intertemporal substitution effect with no income effect at all.

Read the whole thing. He argues, I believe correctly, that advocates of Keynesian stimulus use the old Keynesian model to persuade laymen and policymakers and use the new Keynesian model to fend off other economists. You tell the simplistic “spending creates jobs, and jobs create spending” story to the public, and you tell a mathematically elegant but quite different intertemporal substitution story in academic work.

Gerald O’Driscoll vs. Scott Sumner

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O’Driscoll writes,

When the Kennedy and Johnson Administrations started engaging in fiscal activism under the sway of Keynesianism, the Federal Reserve under Chairman William McChesney Martin monetized the resulting deficits.

Sumner writes,

I do not believe the “Great Inflation” of 1965 – 81 was caused by the monetization of fiscal deficits. The deficits were relatively modest during that period, and the national debt was falling as a share of GDP. Deficits became a much bigger problem beginning in 1982, but that’s exactly when inflation fell to much lower levels. Instead the Great Inflation was probably caused by a mixture of honest policy errors and politics.

Let me throw a third hypothesis into the mix. There was a fair amount of money illusion in financial markets in the 1970s. That is, people looked at high nominal interest rates and thought that this would slow down inflation. In fact, interest rates were not high enough. Relative to financial markets, the Fed was following rather than leading. It was reflecting the views of Wall Street. Finally, in the early 1980s, the “bond market vigilantes” took over, and we had high real interest rates, high unemployment, and a slowdown in inflation. Just to be clear, I am giving the credit for high interest rates to the bond market vigilantes, not to Paul Volcker.

A Great Time to Raise the Minimum Wage

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The BLS reports,

Among the major worker groups, the unemployment rates for adult men
(7.0 percent), adult women (6.4 percent), teenagers (22.2 percent),
whites (6.3 percent), blacks (13.1 percent), and Hispanics (9.1 percent)
showed little or no change in October.

Emphasis added. The other day, I received a spambot email from Maryland Governor Martin O’Malley urging me to sign a petition in favor of raising the minimum wage. This is the Democrats’ big issue in a number of states, where the fantasy despots seem determined to drive teenagers out of the labor market.

Bill Dudley Hearts Big Banks

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The New York Fed Chief says,

I am not yet convinced that breaking up large, complex firms is the right approach. In particular, these firms presumably exist, in large part, because there are scale or network effects that allow these firms to offer certain types of services that have value to their global clients. These benefits might be lost or diminished if such firms were broken up. In addition, the costs incurred in breaking up such firms need to be considered. Finally, the breakup of such firms would not necessarily result in a significant reduction in overall systemic risk if the resulting component firms were still, collectively, systemic.

He cites no evidence about “scale or network effects,” and he knows enough economics to know that those firms need not exist “in large part” because of them. In financial markets where a few basis points can be a tremendous advantage, the too-big-to-fail subsidy can be much more important than any legitimate scale economies. As for considering the costs of breaking up such firms, how does that cost compare to the cost of another financial crisis?

The point that smaller firms could have systemic risk is true, but not decisive. Smaller firms, because they cannot expect bailouts, would act in a more disciplined manner. They and their creditors would have to make decisions knowing that under most circumstances they, not the taxpayers, will bear the consequences.