Supreme court and health insurance

It was interesting watching and reading about the Supreme Court arguments on the constitutionality of the health-care law.

This is an interesting moment for constitutional law. Are there limits to the commerce clause? What is the balance of Federal vs. State power? But this is an awful conversation for thinking about reasonable health-insurance and health-care regulation.

The central constitutional weakness of the law is the "individual mandate." We're all supposed to buy insurance, and if we don't we pay a penalty. So everyone is hot and bothered discussing the mandate. But the mandate is far from the central economic problem with the law. So, as a country, we're like a squabbling couple, fighting over who should do the dishes, when the real problem is "why did you buy that stupid boat?" 

Japan

I'm in Japan, one great data point on the ineffectiveness of fiscal stimulus, and the reason for blog silence for the last week or so. I will be giving a talk about asset pricing, based on the "Discount Rates" paper, at a Chicago Booth  event on Friday evening March 23 at the American Club in Tokyo, details here. Blog readers and ex-students most welcome. It's a public event, but you have to register.  

Austerity, Stimulus, or Growth Now?

(This is also a Bloomberg "Business class" column, with minor improvements.)

Austerity isn't working in Europe. Greece is collapsing, Italy and Spain’s output is declining, and even Germany and the U.K. are slowing down. In addition to its direct economic costs, these “austerity” programs aren't even swiftly closing budget gaps. As incomes decline, tax revenue drops, and it is harder to cut spending. A downward spiral looms.

These events have important lessons for the U.S. Our government cannot forever borrow and spend 10 percent of gross domestic product each year, with an impending entitlements fiasco to boot. Sooner or later, we will have to fix our finances, too.  Europe's experience is a warning that austerity -- a program of sharp budget cuts and (even) higher tax rates, but largely putting off “structural reforms” for a sunnier day -- is a dangerous path.

Why is austerity causing such economic difficulty? What else should we do?

To London

I'll be at the Booth campus in London next Monday March 12 as part of a panel discussion with Francesco Garzzarelli and Charles Goodhart on "Financial Stability and the Macroeconomy," sponsored by the Becker-Friedman Institute. More information on the event here. Presuming, of course, that the fact that Greece has finally defaulted doesn't mean the end of the world, as so many predicted. Ex-students, colleagues, and blog readers, if you come to the event, stop and say hi. 

Too big not to fail

The Economist has a great article, "Too big not to fail" about the Dodd-Frank regulation. Readers of this blog will know I'm no big fan of Dodd-Frank, for example an article in Regulation, collected opeds, and collected blog posts on reform. I've made most of these points before. But to hear it from the liberal-leaning Economist, with very detailed documentation, is good news.

A few delicious quotes:

Manna from Heaven: the Harvard Stimulus Debate

Last week there was a fiscal stimulus debate between titans John Taylor and Larry Summers, at Harvard. Taylor wrote his opening remarks on his blog, which I recommend without further comment.  Summers was quoted in the Harvard Crimson:

Summers also said that in studies comparing states that received varying amounts of stimulus money, those that received more money experienced higher levels of job growth.

This makes no sense as an argument for overall fiscal stimulus. 

A story from Davos, and how Grumpy got his name

I was reading Nick Paumgarten's New Yorker article about Davos in the bathtub this morning, and ran into this gem:

The Belvedere [hotel], ... is the annual meeting’s hub after dark. Often, there are a half-dozen parties going on at once. To get into it,...you must pass through airport-like security ... The line, on this night, was long enough that a Nobel laureate in economics, who, moments earlier at the Hotel National, had been holding forth on unfairness, deemed it worth cutting. 

It would be easy enough to figure out who it was, but I like the story better as it is, a reflection on the Davos attitude, not a snarky comment on one individual. (If you know, please don't run it by outing him in the comments.) 
 
A while back, on a lovely spring night, I was walking home with my family after dinner out. We observed one of Hyde Park's Great Liberal Minds, walking his ill-trained dog. He watched his dog deliver a a large steaming poop, and walked off, leaving the poop behind.

I opined, "well, there goes the Great Liberal; I suppose he thinks there is a Federal Department of Picking up your Dog Poop."

The kids laughed and dubbed me "Grumpy Economist" on the spot.

Update: I removed a few comments. I really do not want this to be personal.  

Benn Steil and I debate house prices

Last week Benn Steil wrote a very interesting oped on housing. (Originally at Financial News) He unearthed the amazingly large number of young people who bought houses in the boom, and then lost a lot when house prices fell. One quote:

What effect did the housing bust have on them? Household balance sheets among the Facebook generation were the hardest hit: between 2007 and 2009, half of those under the age of 35 lost over 25% of their wealth. A quarter of those under 35 lost over 86% of their wealth. Not surprisingly, they have been badly hit by the foreclosure tsunami; the median head of household in foreclosure being eight years younger than the median not in foreclosure. Younger households typically started off with less wealth than older ones and, following the bust, ended up with much less.

This bodes badly for their future, and the country’s

I wrote back, and the following exchange might be useful for blog readers here.  We don’t come to hard and fast answers, but I think we clarified a lot of channels that do and don't work.

John:
Your oped was very interesting, but I have to disagree with a basic point.  Lower house prices are great news for the majority of young households.

Weird stuff in high frequency markets

On the left is a graph from a really neat paper, "Low-Latency Trading" by Joel Hasbrouck and Gideon Saar (2011). You're looking at the flow of "messages"--limit orders placed or canceled--on the NASDAQ.  The x axis is time, modulo 10 seconds. So, you're looking at the typical flow of messages over any 10 second time interval.

As you can see, there is a big crush of messages on the top of the second, which rapidly tails off in the milliseconds following the even second. There is a second surge between 500 and 600 milliseconds.

Evidently, lots of computer programs reach out and look at the markets once per second, or once per half second. The programs clocks are tightly synchronized to the exchange's clock, so if you program a computer "go look once per second," it's likely to go look exactly on the second (or half second). The result is a flurry of activity on the even second.

Hope for Europe

A provocative Wall Street Journal OpEd by Donald Luskin and Lorcan Kelly gives me hope for Europe.

No, I'm not talking about Greece, and the latest bailout deal. That's more of the usual charade. But in the end Greece is small. Europe can bail Greece out if they feel like it; or let it default.Or let it rot, which seems where they are headed. 

Italy and Spain are where the real issue lies. Italy and Spain are too big to bail.

Taylor on Lehman and TARP

John Taylor took the trouble to respond to Paul Krugman's latest outrage on the sources of the financial crisis.  Taylor's post -- along with the deeper analysis he points to -- is well worth reading.

Fed Independence 2025

Headline: The Fed just  forced mortgage servicers  that got caught submitting "documents that were not properly notarized," among other sins, to cough up money towards principal reduction, for people unaffected by the notarization scandal, as well as to fund "nonprofit housing counseling organizations" and other policy objectives. 

Deeper question: What will the Fed look like in 2025? How long can it stay independent as it takes on more and more power, and uses that power for these kinds of political policy actions?

Act 1:  Three recent news items add up to a scary picture.

Where your money goes

Two nice graphs from the New York Times 

Comment: Now, could we please stop talking about how we need more taxes to pay for roads and bridges or to help the poor? The main function of our government is to write checks to middle-class and wealthy voters. And that's the reason its finances are in the toilet.

This means Elizabeth Warren, for example, who said a factory owner needs to pay more taxes because "you moved your goods to market on the roads the rest of us paid for; you hired workers the rest of us paid to educate; you were safe in your factory because of police forces and fire forces that the rest of us paid for." Answer: you paid for that long ago. That's not where the money is going.

Wallison on financial regulation

Peter Wallison has an important Op-Ed in the Wall Street Journal last week (AEI link) titled "Dodd-Frank and the Myth of Interconnectedness"

The chain of bankruptcies is one of the central myths of the financial crisis. A owes money to B,  B owes money to C, C owes money to D. If A fails, it wil result in a chain of bankruptcies where B, C,  and D fail too.

As Peter points out, it simply did not happen. We had a run, not a chain of bankruptcies.

The Real Trouble With the Birth-Control Mandate

(This is a Wall Street Journal Op-Ed. If you don't subscribe, there is a pdf on my webpage.)

When the administration affirmed last month that church-affiliated employers must buy health insurance that covers birth control, the outcry was instant. Critics complained that certain institutions should be exempt as a matter of religious freedom. Although the ruling was meant to be final, presidential advisers said this week that the administration might look for a compromise.

Critics are missing the larger point. Why should the Department of Health and Human Services (HHS) decree that any of us must pay for "insurance" that covers contraceptives?

Taylor's graphs

John Taylor wrote a very nice blog post, "Reassessing the recovery". He made two graphs, reproduced here. On the top you see the current recession and recovery. On the bottom you see the typical pattern, exemplified by the biggest previous postwar recession in 1982.

We usually bounce back to the trend line. Now, we're not.

The difference betwen "levels" and "growth rates" accounts for a lot of confusion in popular discussions. "Recessions" are pretty much defined as times in which GDP is declining -- negative growth rates, the level is going down. GDP stopped going down in early 2009.

Yet, as many commentators point out, if the recession is over, why does it feel so glum out there? Answer: because prosperity is measured in levels. Employment responsds to levels. 

The big macroeconoimc question for our time is this: Just why are we stuck at a much lower level? What do we need to do to get back to the trend line? Or is that trend line illusory?

There are two stories -- and I use that word advisedly.

Sargent on debt and defaults

Tom Sargent's Wall Street Journal oped is well worth reading closely. It's a very short summary of his Nobel prize speech

As readers of this blog will probably know, I think Europe should stop bailing out bondholders of Greek and other debt. (See the Euro collection and Euro tags to the right.)

"What about Alexander Hamilton?" has always been a nagging doubt.

Negative stimulus, 1946

I ran across a fascinating article, "A Post-Mortem on Transition Predictions of National Product,"  in the 1946 Journal of Political Economy, by Lawrence Klein. Klein, who would go on to create the main macroeconomic forecasting models and a Nobel Prize, was  confronting one of the first great failures of Keynesian economics:

Consumer financial protection, 1984

The Financial Times reports an amazing interview with Martin Wheatley, the "head of the UK's new consumer protection watchdog."

Investors cannot be counted on to make rational choices so regulators need to “step into their footprints” and limit or ban the sale of potentially harmful products,

Consumer financial protection, 1840

I recently read again a very nice paper by Toby Moskowitz and Effi Benmelech, "The Political Economy of Financial Regulation" which studies 19th century usury laws. Usury laws limit interest rates that can be charged for loans, supposedly to protect borrowers.

It doesn't always work out that way.