Friday, February 17, 2012

Are We Seeing a Healthcare Cost Bubble?

Jeffrey Sachs' "Entitlements Hysteria" discusses the rising healthcare cost obsession common among politicians as well as the "punditariat". Their beliefs remind me of the folks who thought housing prices would always rise. Haven't we had enough reason to learn it's folly to bet on prices always rising? It makes no difference whether it's housing or healthcare, just because it rose over some past years doesn't mean it necessarily will over all the years to come.

Past price increases beyond inflation don't guarantee future price increases beyond inflation any more than past performance guarantees future earnings. In fact, if we do implement a public option or a single payer system with price negotiation, we could very well see a drop in prices! So why do so many people seem to be so convinced healthcare prices couldn't possibly stop skyrocketing? After all, everything else that goes up out of step with the rest of the economy eventually stops rising faster and usually falls back down.

Thursday, February 16, 2012

Why Demand For Treasuries Will Remain High

Back in December, the Financial Time's Alphaville showed us a chart from the Credit Suisse 2012 Global Outlook that should probably have generated more attention than it seem to have received. It explains a lot about the situation for US debt issuance.


There, in a nutshell, we have the single biggest reason why we can offer Treasuries at a negative real yield. Pair that drop in safe assets with the knowledge that many banks are required to maintain a certain amount of safe collateral. Their need for such safe assets hasn't dropped, but the supply of such assets has imploded far below what they need. This is a recipe for voracious demand for US Treasuries.

The supply of alternative safe assets isn't likely to expand much anytime soon, since trust in MBS issues evaporated. At worst, we can reasonably expect to be able to sell as many Treasuries as we might want at very low rates for a long time to come. Most likely, we can reasonably expect to continue selling Treasuries with a negative real yield for a good while longer. That means that for the foreseeable near to mid term, investors and banks will continue paying us (after accounting for inflation) to hold their "safe" money for them.

There is no debt crisis looming for the United States. None whatsoever.

See also Cardiff Garcia's "The decline of “safe” assets".

Wednesday, February 15, 2012

Deregulation, Bubbles, And The Myth That Our Two Major Parties Are The Same

Many people point the blame for our recent financial crisis towards deregulation. While there's something to that, deregulation did not cause the housing bubble to exist. All deregulation did was let it get more out of hand and have bigger consequences. While that's plenty of reason to push for strong financial regulations, we shouldn't let ourselves believe that regulations could have prevented there from being any more bubbles. Bubbles can happen without any govt interference. And they can happen despite the wisest govt efforts to prevent them. Psychology, markets, information failures, and irrational exuberance build bubbles. And those are also the factors that usually burst them.

Bubbles can form simply from too few people remembering the last time something happened ... such as a major drop in real estate prices. Then people may -- as they did -- start to think it can only go up and they need to get in now and if they get in now they can easily sell higher later. As long as people start to believe that about anything -- and I knew many people who believed that about housing -- then we will get a bubble.

That said, deregulation did arguably make the housing bubble bigger and played a part in how it popped, the impact, and the aftermath. It would have happened anyway, but it wouldn't necessarily have happened the same. It probably wouldn't have been as bad if we'd had better regulation of sub-prime mortgages, securitization, and derivatives as well as better established procedures for the orderly liquidation of large failed banks in a way that protects their customers but not the banks themselves.

Many have rightly pointed out that the Republicans championed deregulation. In response, some try to claim, "but the Democrats did some too," as if all were equal and as if it were a bipartisan failure.

Did the Democrats occasionally go along with some of those policies? Sure, at least many of their blue dogs did. But the Democrats didn't make those policies central to their platform. They didn't push that recent Republican recipe as the right answer for every situation. By contrast, the Republicans did fully, enthusiastically, thoroughly embrace and push all those bad ideas (see below). Some of the Democrats occasionally went along with the insanity and maybe some even bought parts of it -- which was bad -- but it shouldn't earn their party as much blame as the folks who were seriously pushing all those bad ideas as a central and widespread basis of their party policy.

And worst of all, the Republicans are still pushing deregulation as if it hadn't seriously messed us up in recent memory. The party used to be able to claim a proud history with folks like Ike and Lincoln. Now? They would benefit greatly from an effort to transform themselves away from all they've become. It could be back towards the Grand Old Party they used to be. Or it could be something entirely new. Just please, Republicans, get your party to stop pushing every insane position that's been demonstrated to be wrong and bad for us by recent history.

For more of the "bad ideas" referenced above, see "Republicans undiscover fire" by Mark Sumner.


Full disclosure: I'm an independent, a member of no political party. (And I'm well aware both major parties have their own flaws. ...but that doesn't make their flaws equal.)

Monday, February 13, 2012

Education Spending, the Prequel (pre-2005)

Gravity and Education Spending spoke to the federal education funding situation from 2005 and thereafter. Here's one that addresses the years before that by borrowing a chart from ed.gov. Note how little that gray federal segment is compared to the rest of the bars. And they wonder why fluctuations in federal education spending don't correlate with student performance. Maybe it could be the fact that federal education spending has generally been a small portion of the total.

from http://www2.ed.gov/about/overview/fed/10facts/edlite-chart.html#2

Gravity and Education Spending

There's a CATO Institute graph going around that paints a very distorted picture as if we had some sort of continuously skyrocketing federal spending on education. In truth, that's not the case at all. We saw a very large -- but very brief -- spike on account of the Great Recession. The CATO graph neglects to include the estimates for 2011 and 2012 spending that show it going back down.
Data from http://www.gpoaccess.gov/usbudget/fy11/pdf/hist.pdf
Sometimes what went up comes back down. And that's without even adjusting for inflation.

The 2010 through 2012 figures are estimates. But CATO included the 2010 estimate, so why not the rest of the picture so that we could see it comes back down?

What happens if we adjust for inflation and population?

Not only does the brief boost go away, but it looks like its going to go below 2005 levels.

Update: for a little pre-2005 context, see Education Spending, the Prequel (pre-2005).

Friday, February 10, 2012

Debunking the Notion that Inequality Wouldn't Impact the Economy

It's been claimed -- incorrectly -- that overall activity would neither be increased nor diminished by how evenly or unevenly money is distributed within our national economy. According to that line, we'd get the same amount of commerce regardless of whether we have a larger share of the pie held by the wealthy or by the lower and middle classes. "Money is money," or so they say.

Except that in reality, lower average propensity to consume (APC) results from significantly increased real income.1 Who has how much matters because people tend to spend different portions of their income at different levels of wealth. Wealth and income distributions make a significant difference to effective demand. We're not concerned with what people would like to have if they had enough money; we're concerned with what people will spend with the money they're getting. If Warren is a wealthy person and John is a poor person and over time Warren attains a higher share of the available money, total spending -- effective demand -- generated by those two consumers will drop.

If there's $1,000,000 of total income between the two at time T1 and Warren gets $950,000 while John gets $50,000 and Warren spends 33.33%2 of income to John's 100% of income, then total spending by these two individuals at time T1 will be:

T1: $316,635 + $50,000 = $366,635.00

When income ratios shift and there's an inflation-adjusted $1,000,000 of total income at time T2 and Warren gets $975,000 while John gets $25,000, Warren's spending ratio (APC) will likely have fallen slightly from the previous propensity, but we'll stick with 33.33% for simplicity and understatement. Meanwhile, John can't spend as much as before because John's available funds have dropped. Even if Warren still spends at the same rate -- which is unlikely -- then total spending would be:

T2: $325,967.50 + $25,000 = $349,967.50

That would be a drop from time T1 to time T2 of $16,667.50 in inflation-adjusted spending. I've picked an arbitrary APC for Warren, but herein we're just showing the rough effect. The dollar values are merely for illustration of the concept. Even if the exact average amount might vary slightly from the $16,667.50 of our illustration, the point remains that there would be a shortfall. With more of the money shifted to those with a lower APC, you get lower consumption which is to say lower effective demand.

Even if total income increases, with enough shift from those who will spend higher percentages of their income to those who will spend lower percentages of their income, total spending can fall. More total wealth does not necessarily translate to more total spending. More total wealth will only increase total spending when distribution among varying APCs (and thus the overall APC) remains sufficiently stable. Having wealthy people is useful; but we need enough money in the hands of average consumers to support that wealth. Concentrate too much of the available wealth into too few hands and you get less ability to consume which means less effective demand.

Confronted with that reality, the "money is money" crowd rely on APC's flip-side, average propensity to save (APS). They're two sides of the same coin. As APC drops, APS rises. Our hypothetical Warren has a lower propensity to consume but a higher propensity to save. Some try to claim that the reduction in APC would be balanced out in terms of economic activity by the corresponding increase in APS. Unfortunately, that would only hold true in a closed economy with no outlets for investment other than productive investments (such as business start-ups and expansions). We're not a closed economy, so even when increasing APS does translate the savings into productive investment, those investments need not necessarily be domestic. For the United States, given that foreign returns are out-pacing domestic returns from such investments, much of the savings naturally translates into foreign investment which does absolutely nothing to balance out the reduction of consumption in our domestic economy.

Even if we were a closed economy, we have a variety of investment options beyond just productive business investments alone. For instance, Warren might buy gold ETF shares from Glenn who might then use the proceeds to speculate on the British Pound or perhaps to buy Treasuries.3 A dollar of savings lacks any certainty whatsoever that it would spur even a penny of business investment. Particularly when many businesses are avoiding expansion because they already have more than enough capacity to meet projected demand for their goods and services for the next several years, we find ourselves in a situation where there is both a shortage of effective demand from consumption and a shortage of available productive investment options due to insufficient need to expand caused by that same shortage of effective demand.

This all matters because we need a certain level of effective demand in order to sustain full employment. Without sufficient consumption, businesses need fewer workers. With less demand for labor, wages fall. Dropping wages and employment both further depress the nation's ability to consume, leading to yet more unemployment and dropping wages. With too much of our wealth concentrated at the top, we can't support as much wealth. That's bad for rich and poor alike. As Franklin D. Roosevelt said, "we all go up, or else we all go down, as one people." We as Americans believe in promoting wealth and affluence. But to do so effectively, we must have enough of a strong base underneath the top to support a growing top. To have steadily growing affluence, we must mitigate the divergence of our most wealthy from our lower and middle classes.

 Notes:

1. When the shift is initially happening, we refer to the marginal propensity to consume (MPC), essentially the rate of change in APC. Herein, we're not concerned with the rate of change but rather just the implications of such a change from one state of APC at one point in time to another state of APC at a second point in time.

2. The 33.33% and 100% value are arbitrary representations of the fact that higher income consumers spend less of their total income than lower income consumers. The actual observed multiplier for various income levels may vary. What's important here is not the specific percentages but rather the impact of the difference in percentages.

3. Treasuries arguably could indirectly contribute to productive domestic investment when the government spends within the economy. Likewise, the gold seller could use the proceeds to invest domestically. However, neither of these have the direct impact on domestic economic activity seen from domestic consumption or direct domestic business investment. They're not a clear proxy for domestic activity. They're a case where savings may or may not translate to investment.

Thursday, February 9, 2012

Oh, So You Noticed That Too, Ezra?

Back in January and February of 2011, I wrote a couple posts about the lack of evidence for the right-wing assertion that cutting top marginal tax rates would somehow help our job growth. (See "Tax Rates and GDP Growth" and "Chained to Real: Tax Rates, Inflation-adjusted GDP Measures, and the Difference")

I know it's a bit trivial to revel in my little soap-box covering something before one of the Big Names, but c'est la vie. Where's the fun in never letting loose with frivolity? I just noticed that in June of 2011, Ezra Klein covered the ground that I'd staked out earlier in that year with his post "Tax rates and job creation in one graph". I don't begrudge him that ground at all, of course. I have to admit the graph he posted shows a more compelling visual representation than mine did of why we shouldn't listen to that old excuse for cutting the top rates. Mine merely showed that the right-wing has no grounds for the claim, whereas the one Mr. Klein posted goes further and makes a somewhat persuasive argument in the other direction from the right-wing claims.

Mr. Klein got the chart he'd posted by way of the folks over at American Progress. As they point out about Speaker Boehner, candidate Romney, and their ilk regarding jobs and taxes,
"In fact, they are just as wrong about this as they are about the relationship between marginal tax rates and overall economic growth. In the past 60 years, job growth has actually been greater in years when the top income tax rate was much higher than it is now."
In this case, I'll follow in Mr. Klein's footsteps and post American Progress's chart as a follow up to my own.

from http://www.americanprogress.org/issues/2011/06/marginal_tax_employment_charticle.html 
They also have an article that -- like mine from earlier in that year -- focuses on GDP growth rather than job growth. And as they say there about top marginal tax rates and GDP growth,
"These numbers do not mean that higher rates necessarily lead to higher growth. But the central tenet of modern conservative economics is that a lower top marginal tax rate will result in more growth, and these numbers do show conclusively that history has not been kind to that theory."
It's good to see others using their larger platforms for refuting those conservative claims with the facts.

Wednesday, February 8, 2012

Waiting for Inflation? Might as Well be Waiting for Godot.

Interesting observation of statistics in a recent Bloomberg article by Caroline Salas Gage:
"During Bernanke’s tenure, the U.S. consumer price index has risen an average of 2.4 percent, lower than the 3.1 percent average for Alan Greenspan and 6.3 percent for Paul Volcker. Greenspan was chairman from 1987 to 2006; Volcker was Fed chief from 1979 to 1987."
Although the best turn of phrase in that article may have been when she quoted Mark Gertler's euphemism of "not fact-based".
"The criticism about the Fed being inflationary is not fact-based"

Tuesday, February 7, 2012

Big Government? Or Big Drop In Government?

January 2007 - December 2011; from BLS and Census data
Proportionally, our American government has been shrinking since April 2009 on a steady slop of decline in relative size compared to the population. Even without population growth, total govt payrolls dropped by 702,000 between April 2009 and January 2012. Those layoffs slashed over 3% of the govt workforce from the start of that period.

Monday, February 6, 2012

Debunking the Notion that Inequality Wouldn't Impact the Economy

Update: A newer revision of this piece is available than the one below. While this version is still OK, the newer version is recommended as both more complete and I think a better read. The newer version is available at  http://thoughtstate.blogspot.com/2012/02/debunking-inequality-economy.html and http://www.addictinginfo.org/2012/02/10/debunking-the-notion-that-inequality-wouldnt-impact-the-economy/.

It's been claimed that, "Money is money: demand is made by those who have it to spend. If it is unequally spread, the amount of consumption remains the same if saving remains the same."

Except that in reality, lower average propensity to consume (APC) results from significantly increased real income. Who has how much matters because people spend different portions of their income at different levels of wealth. Wealth and income distributions make a significant difference to effective demand. We're not concerned with what people would like to have if they had enough money; we're concerned with what people will spend with the money they're getting. If X is a wealthy person and Y is a poor person and over time X attains a higher share of the available money, total spending -- effective demand -- will drop.

If there's $1,000,000 of total income at time T1 and X gets $950,000 while Y gets $50,000 and X spends 33.33% of income to Y's 100% of income, then total spending at time T1 will be $316,635 + $50,000 = $366,635.00.

If there's an inflation-adjusted $1,000,000 of total income at time T2 and X gets $975,000 while Y gets $25,000, X's spending will likely have fallen from the previous propensity but we'll go with 33.33% for understatement. Meanwhile, Y can't spend as much as before because Y's available funds have dropped. Even if X still spends at the same rate -- which is unlikely -- then total spending would be $325,967.50 + $25,000 = $349,967.50. Admittedly, I've picked an arbitrary APC for X, but the point is to show the effect. Even if the exact average amount might vary slightly from a drop of $16,667.50 in spending between T1 and T2, the point remains that there would be a shortfall. With more of the money shifted to those with a lower APC, you get lower consumption which is to say lower effective demand.

Even if total income increases, with enough shift from those who will spend higher percentages of their income to those who will spend lower percentages of their income, total spending can fall. More total wealth does not necessarily translate to more total spending. More total wealth will only increase total spending when distribution among varying APCs remains sufficiently stable. Having wealthy people is useful; but we need enough money in the hands of average consumers to support that wealth. Concentrate too much of the available wealth into too few hands and you get less ability to consume which means less effective demand.


Note on totals versus individuals: the figures above are not intended as a complete representation of our entire economy. They're just looking at two selected hypothetical consumers within that economy and the total between those two. In order to represent the total economy, we'd need to involve such factors as the ratio of upper incomes to lower incomes with many Y-type consumers existing for each X-type consumer. However, representing the entire economy is thoroughly unnecessary for illustrating the main point. We're not looking to calculate out the exact total dollar amount shifted out of the domestic economy by shifting income shares from lower-income individuals to higher-income individuals. The point is simply to explain the fact that there is some amount being shifted out of the domestic economy.


Note on the impact of increasing APS: It's been argued that this reduction in APC would be balanced out in terms of economic activity by the corresponding increase in APS. Unfortunately, that would only hold true in a closed economy with no outlets for investment other than productive investments (such as business start-ups and expansions). We are not a closed economy, so even when increasing APS does translate the savings into productive investment, those investments need not necessarily be domestic. For the United States, given that foreign returns are out-pacing domestic returns from such investments, much of the savings naturally translates into foreign investment which does absolutely nothing to balance out the reduction of consumption in our domestic economy. Further, even if we were a closed economy, we have a variety of investment options beyond just productive investments alone. There is absolutely no certainty whatsoever that a dollar of savings will necessarily even spur a penny of business expansion. Particularly when many businesses are avoiding expansion because they already have more than enough capacity to meet projected demand for their goods and services for  the next several years, we find ourselves in a situation where there is both a shortage of effective demand from consumption and a shortage of available productive investment options due to insufficient need to expand caused by that same shortage of effective demand.

Sunday, February 5, 2012

Private Payrolls Versus Govt Payrolls

Over the course of the Great Recession, we naturally dipped a bit in our percentage of all payrolls from private employment. At first, over the course of 2008 and very early 2009, private payrolls were dropping significantly faster than government payrolls. That has since reversed.
The dotted red line indicates the level of the first full month of President Obama's tenure.

As 2009 wore on, the bleeding in private payrolls slowed (from -0.73% in April to -0.29% in May and eventually dwindling to -0.04% in November). The change in private payrolls turned positive in March 2010 and the tally's been growing every since. Meanwhile, except for a spike in May 2010 from Census hiring, govt payrolls fluctuated in the same narrow band from late 2008 until plummeting after the Census work. By January 2012, govt payrolls dropped to a five year low at a level not seen since July 2006.
Private payrolls on the larger scale at left; govt payrolls on the smaller scale at right.

Growing population casts the drop in government payrolls with an even larger impact. By 2010, we reached a 20 year low as far as the number of government workers per capita.

Year
Govt workers per million Americans
Annual change
2008
73.94
0.36%
2009
73.47
-0.64%
2010
72.70
-1.05%
2011
70.94
-2.42%

As Daniel Gross put it, describing the increasing private share of all payrolls, "Socialism? Hardly."

Friday, February 3, 2012

Socialist Presidents? Who Comes Closer: FDR, Obama, or Reagan?

We seem to have a resurgence of folks worrying about socialism. Those claiming rampant socialism have particularly fretted about certain Presidents, but more on that later. First, let's get an overview of private industry's percentage of all payrolls since 1939 via the BLS data to put it into broad perspective. If there's one clear, defining trait of socialism, it'd be that folks work for the government rather than private industry. After all, to qualify as socialism requires social ownership of the means of production. Private employers aren't socially owned. So the private % of payrolls tells us just how much we're still a [mostly] capitalist society.


What do we see here? Rather little change in the broad perspective. Clearly we'll need to get a close up in order to see any differentiation from President to President. Let's get right to looking at how they stack up. Sadly, using the BLS data only gets us back as far as 1939, so that'll have to do.


Up there we've got a picture of the average % private industry occupied of total nonfarm payrolls during each President's active years. With a high of 86.64% and a low of 80.95%, it's a rather tight range. It takes a close up to see a difference. But while it's neck and neck, Truman gets the high mark. Honorable mention should obviously go to that bastion of small government, Franklin D. Roosevelt, with an average of 86.08% private payrolls during the latter part of his term (1939 onward). Ironically, the low mark goes to a man who bore the same surname as an auto industry magnate, President Ford.

Many have focused on the current President lately. In particular, there's a virtual cottage industry for discussing President Obama in the light of things said by President Reagan. So let's focus on how those two compare.

The private share of payrolls under President Obama rises a bit above the private share under President Reagan. So if President Obama were a socialist as alleged, that'd make President Reagan a socialist ... and an even more effective one at that. Not that President Reagan really was, of course. But this should make it quite clear to anyone who isn't arguing from an unreasoning bias that President Obama has maintained the largely capitalist nature of America. In his first three years, President Obama has presided over a mostly growing private share of payrolls that has averaged higher than that under half of the preceding Presidents since JFK.