Monday, February 13, 2017

Economies in reverse

How can economies forget? How is it that once we have learned to do something better, that knowledge can be lost and economies move backward? How can productivity decline? Viewing productivity as knowledge, it would seem almost impossible for it to do so -- and real business cycle theory was often derided on that point. Yet middle ages eurpoeans lost the recipe for concrete, and time after time we have seen economies get worse. How can our own productivity be growing so slowly overall when so much we see around us is progressing so fast?

Scott Alexander at Slate Star Codex has an intriguing blog post that illuminates these questions (HT marginal revolution). I'll offer my thoughts on the answers at the end.

Scott starts with education:

Inputs triple, output unchanged. Productivity dropped to a third of its previous level.

Friday, February 10, 2017

Healthcare repair on "The Hill"

On repeal and replace, a healthcare oped on "The Hill", here.  

Republicans replacing Obamacare, beware. It has a certain logic. Much of it patches up unintended consequences of previous regulations. If we just roll back and patch once again, we will end up right back where we started.

It’s wiser to start with a vision of the destination. In an ideal America, health insurance is individual, portable, and guaranteed renewable — it includes the right to continue coverage, with no increase in cost. It even includes the right to transfer to a comparable plan at any other insurer. Insurance companies pay each other for these transfers, and then compete for sick as well as healthy patients. The right to continue coverage is separate from the coverage itself. You can get the right to buy gold coverage with a silver plan.

Most Americans sign up as they graduate from high school, get a drivers’ license, register to vote, or start a first job. Young healthy people might choose bare-bones catastrophic coverage, but the right to step up to a more generous plan later. Nobody’s premiums subsidize others, so such insurance is cheap.


People keep their individual plans as they go to school, get and change jobs or move around.  Employers may contribute to these individual plans. If employers offer group coverage, people keep the right to individual plans later.

Health insurance then follows people  from job to job, state to state, in and out of marriage, just like car, home and life insurance, and 401(k) savings.

But health insurance is not a payment plan for small expenses, as home insurance does not “pay for” lightbulbs. Insurance protects your wallet against large, unexpected expenses. People pay for most regular care the same way they pay for cars, homes, and TVs — though likewise helped to do so with health savings and health credit accounts to smooth large expenses over time. Doctors don’t spend half their time filling out forms, and there are no longer two and a half claims processors for every doctor.

Big cost control comes from the only reliable source — rigorous supply competition. The minute someone tries to charge too much, new doctors, clinics, hospitals, and models of care spring up competing for the customer’s dollar. “Access” to health care comes like anything else, from your checkbook and intensely competitive businesses jockeying for it.

What about those who can’t afford even this much?  Nobody dies in the street. There is also a robust system of government and charity care for the poor, indigent, those who have fallen between the cracks, and victims of rare expensive diseases. For most, this simply means a voucher or tax credit to buy private insurance.

But — a central principle — the government no longer massively screws up the health insurance and health care arrangements of the majority of Americans, who can afford houses, cars, and smartphones, and therefore health care, in order to help the unfortunate. We help people forthrightly, with taxes and on-budget spending.

Why do we not have this world? Because it was regulated out of existence, and now is simply illegal.

The original sin of American health insurance is the tax deduction for employer-provided group plans — but not, to this day, for employer contributions to portable individual insurance.  “Insurance” then became a payment plan, to maximize the tax deduction, and then horrendously inefficient as people were no longer spending their own money.

Worse, nobody who hopes to get a job with benefits then buys long-term individual insurance. This provision alone pretty much created the preexisting conditions problem.

Patch, patch. To address preexisting conditions, the government mandated that insurers must sell insurance to everyone at the same price. Insurance companies will then try to avoid sick people, so coverage must be highly regulated.  Healthy people won’t buy it, so it must be nearly impossible for people to just pay out of pocket. Obamacare added the individual mandate.

Cross-subsidies are a second original sin. Our government doesn’t like taxing and spending on budget where we can see it. So it forces others to pay: It forces employers to provide health insurance. It forces hospitals to provide free care. It low-balls Medicare and Medicaid reimbursement.

The big problem: These patches and cross-subsidies cannot stand competition. Yet without supply competition, costs increase, the number of people needing subsidized care rises, and around we go.

The Republican plans now circulating make progress. Rep. Tom Price’s plan ties protection from preexisting conditions to continuous coverage. His and Speaker Paul Ryan’s “Better Way” plan move toward premium support for private insurance, and greater portability.

So far, though, the announced plans do not really overturn the original sins. But those plans were crafted in a different political landscape. We can now  go big, and really fix the government-induced health care mess in a durable way.

I visited my dermatologist last month. I spent 20 minutes with a resident, and 5 minutes with the dermatologist. The bill was $1335. An “insurance adjustment”  knocked off  $779. Insurance paid $438. I paid $118.  The game goes on. We start with a fake sticker price to negotiate with the uninsured and to declare uncompensated care. But you cannot just walk in and pay as you can for anything else. Even $438 includes a huge cross-subsidy.

We’ll know we’ve fixed health care when we don’t get bills like this.

Mr. Cochrane is a Senior Fellow of the Hoover Institution at Stanford University and an Adjunct Scholar of the Cato Institute.

Wednesday, February 8, 2017

Carbon compromise?

In a remarkable and clear oped "A Conservative Answer to Climate Change" James Baker and George Shultz lay out the case for a carbon tax in place of the complex, cronyist and ineffective regulatory approach to controlling carbon emissions.

A plea to commenters. Don't fall in to the trap of arguing whether climate change is real or whether carbon (and methane) contribute to it. That's 5% of the debate. The real debate is how much economic damage does climate change actually do. Science might tell us that the temperature will warm 2 degrees in a century, with a band of uncertainty. But the band of uncertainty of the economic, social and political consequences of 2 degrees is much bigger. Moreover, the band of relative uncertainty is bigger still. Does "science," as the IPCC claims, really tell us that climate change is the greatest danger facing us -- above nuclear war, pandemic, state failure, and so on?

And most of all, given that our governments are going to do something about climate change, how can we do something much more efficient, and (plea to environmentalists) much more effective? That's the question worth debating.

Both sides have fallen in to the trap of arguing about climate change itself, as if it follows inexorably that our governments must respond to "yes" with the current system of controls and interventions. The range of economic and environmental effects from the "how" question are much, much larger than the range of the effects of the "is climate change real" question.

So, Baker and Shultz lay out in gorgeous clarity the kind of compromise we all hope our governments can still occasionally achieve: Given that we're going to do something, trade a carbon tax for the removal of intrusive regulation. You get more economy and less carbon.

The oped refers to a report from the Climate Leadership Council, which is here and worth reading. The Niskanen Center has also been championing the case, and reaching out to environmental groups.

There is a natural bargain, if our political system can get around its current habit of take-no-prisoners maximalism.

Tuesday, February 7, 2017

Summers on Trade

Larry Summers has an excellent FT column, "Revoking trade deals will not help American middle classes." (If you can't access FT, these usually show up eventually on Larry's blog)

The key point: whatever you think of the impact of trade and globalization, trade deals are not responsible for stagnating "middle class" wages.
...the idea that past trade agreements have damaged the American middle class and that the prospective Trans-Pacific Partnership would do further damage is now widely accepted in both major US political parties. 
... the idea that the US trade agreements of the past generation have impoverished to any significant extent is absurd. 
There is a debate to be had about the impact of globalisation on middle class wages and inequality. Increased imports have displaced jobs...
My judgment is that these effects are considerably smaller than the impacts of technological progress... 
But an assessment of the impact of trade on wages is very different than an assessment of trade agreements. It is inconceivable that multilateral trade agreements, such as the North American Free Trade Agreement, have had a meaningful impact on US wages and jobs for the simple reason that the US market was almost completely open 40 years ago before entering into any of the controversial agreements. 
...The irrelevance of trade agreements to import competition becomes obvious when one listens to the main arguments against trade agreements. They rarely, if ever, take the form of saying we are inappropriately taking down US trade barriers. 
Rather the naysayers argue that different demands should be made on other countries during negotiations - on issues including intellectual property, labour standards, dispute resolution or exchange rate manipulation....
In other words, the US was open already in the postwar period. Trade deals ask other countries to take down trade barriers in specific markets, and also to make internal changes, for the US to remain open.
The reason for the rise in US imports is not reduced trade barriers. Rather it is that emerging markets are indeed emerging. They are growing in their economic potential because of successful economic reforms and greater global integration. 
These developments would have occurred with or without US trade pacts, though the agreements have usually been an impetus to reform. Indeed, since the US does very little to reduce trade barriers in our agreements, the impetus to reform is most of what foreign policymakers value in them along with political connection to the US. 
Trade deals are very useful for many countries, including the U.S. When politicians get demands for subsidies, protection, stifling regulation, or lack of needed regulation, they can point to the trade agreement. That's a good argument for multilateral agreements as well -- look at the broad range of countries that has agreed to behave, not just look at our special deal with one country.
The truth too often denied by both sides in this debate is that incremental agreements like TPP have been largely irrelevant to the fate of middle class workers. The real strategic choice Americans face is whether the objective of their policies is to see the economies of the rest of the world grow and prosper. Or, does the US want to keep the rest of the world from threatening it by slowing global growth and walling off products and people?
Framed this way the solution appears obvious. A strategy of returning to the protectionism of the past and seeking to thwart the growth of other nations is untenable and would likely lead to a downward spiral in the global economy. The right approach is to maintain openness while finding ways to help workers at home who are displaced by technical progress, trade or other challenges.
If it works, protection only enriches some Americans at the expense of foreigners and other Americans.  It is a negative-sum game. If you do not think America's role in the world is to try to send a billion Chinese and Indians back to grinding poverty, to benefit a bit selected American workers and businesses, then you ought not to be a fan.

Larry focuses on the TPP, but the trade agenda is now much larger -- a substantial increase in US trade restrictions, including a return to tariffs, industry - by - industry quantative restrictions, even in violation of trade agreements, and so on.

Larry mentions protectionism in the past, but don't get all nostalgic. That was in the far past, last seen in the universally reviled Smoot-Hawley tariff of the Great Depression. Nobody looks back to that nostalgically as part of "Great" America.

Do read the whole essay.

Monday, February 6, 2017

Dodd-Frank Reform

Dodd-Frank reform seems to be back on the front burner, according to the latest Presidential executive order. At last.

But let us hope it can be done right. Simply pulling down regulations in ways demanded by big banks will lead, I am afraid, to lower capital standards, more debt implicitly guaranteed by the government, and just enough regulation to keep the big end of the banking industry protected from competition and disruptive innovation.

As with much reform, there is a rather detailed and clearheaded effort coming out of Congress, which gets much less attention than it should relative to the Administration's preliminary thoughts. Watch Rep Jeb Heainsarling's Choice Act for Dodd Frank reform. (Speaker Paul Ryan's "Better Way" plan is the one to watch on everything else. Though corporate taxes are getting a lot of news, the personal tax plan is more important.)

The core of the Choice act offers a clever carrot: Much less regulation in return for much more capital.

A reader asked me a while ago how I would deal with the extraordinary complexity of the Dodd-Frank act. I answered that fixing it was easy  -- a trained parrot could do it. Just teach the parrot to say "More capital. More Capital. More capital."  

Which is all to introduce a little essay I wrote that was serendipitously published last week in the Chicago Booth Review, "A way to fight bank runs—and regulatory complexity" It's a much edited version of an earlier blog post, and offers some suggestions on how even the Choice act might be improved. I'd copy it here, but the Booth Review team did such a nice job of formatting it that I'll hope to get you to click the link instead.

(I've been doing this for a while with the Chicago Booth Review, and they now have a page with all my essays.)

Wednesday, February 1, 2017

Corporate tax (or is it?) reading list

On the house and administration plans to reform the corporate tax, and my struggles to figure it out.

Larry Kotlikoff, "With Some Tweaks, The Democrats Can Love The House Tax Plan."
..the corporate tax reform, which is the most significant part of the House plan and represents a major and long overdue shift toward consumption taxation.  ...  there are two ways to tax consumption, C. You can either tax it directly (e.g., via a retail sales tax or a personal consumption tax) or indirectly by taxing everything available for consumption, namely output plus imports, less investment plus exports.
Greg Mankiw, "A Three-Point Tax Reform"
Consider the following tax reform:
1. Impose a retail sales tax on consumer goods and services, both domestic and imported.
2. Use some of the proceeds from the tax to repeal the corporate income tax.
3. Use the rest of the proceeds from the tax to significantly cut the payroll tax.
...
As I understand it, this plan is, in effect, what the Republicans in Congress are proposing.
William G. Gale, "Understanding the Republicans’ corporate tax reform"
The DBCFT is essentially a value-added tax (VAT), but with a deduction for wages.  ...The deduction for wages makes the DBCFT progressive, relative to a VAT. It only taxes consumption financed out of holdings of capital, whereas a VAT burdens all consumption. 
..A final concern is that the corporate reform proposals described above, ... would reduce federal tax revenue..Rough estimates suggest that setting the DBCFT rate at around 30 percent for all businesses would eliminate the revenue shortfall.