Micro vs Macro

...the fallacy of composition separates micro from macro...

As I struggle with teaching senior majors a bit of macroeconomics, I am trying to think of ways in which I can distinguish the mindset of micro (the majority of our curriculm) from macro.

(Aside: for the present, I'm posting primarily on the course site on the publicly-accessible W&L WordPress server, at http://econ398.academic.wlu.edu (and similar sites for Japan at econ272.academic.wlu.edu and Industrial Organization at econ243.academic.wlu.edu)

One issue is data: if you take a skeptical view, that structural change in the US since 1980 is substantial -- look at changes in "openness" (trade shares, international financial flows), financial sector reforms (the nature of "money", the rise of multistate banks, and "shadow" banks), labor markets (education levels, mobility, less weight in unionized sectors, more in services) and demographics (more and older retirees hence greater transfers) -- then you may be reluctant to think that there is much to be garnered, indeed you may believe that much will be muddied, from using data older than 20 years. Since key macro measures are only available on a quarterly basis, you're thus stuck with 80 observations, which doesn't provide for much statistical power, particularly given the infrequency of shocks and major policy changes. Using multi-country panel data requires even stronger assumptions than (say) using data from 1962 on for the US. Those doing micro work tend to use datasets with hundreds, if not many thousands, of observations.

Then there are aggregation issues. The more disaggregated the model, the more convincing are microfoundations (though ironically those who use that term are often using models so aggregate that they are reduced to assuming representative agents with identical and unchanging preferences for labor vs leisure and today vs the future). These are present as well in micro markets, but are either more obvious or less severe, and typically both.

Most central, in my mind, is that the fallacy of composition separates micro from macro. A nice post on the Vox EU blog, "Micro success does not guarantee macro success," provides an illustration. They look at job search assistance programs, for which in the Danish case there are not only good data, but a randomized base that helps control for extraneous factors. Such programs do indeed improve the speed at which workers find new jobs, by about 10% over 3 months. Since such individuals then stop collecting unemployment and start paying taxes, it is extremely cost-effective.

However...such experiments are hard to replicate, because unless the demand for workers is adequate, the primary effect is to speed up who gets jobs -- those fortunate enough to be enrolled in the program -- but not to create extra jobs.

Basically, the normal statistical design takes those in a city who were chosen (randomly) for the program with those who were not. Most (though not all) of the effects disappear when those not chosen for the program are compared with those newly unemployed elsewhere. At first glance that's less clean because it's harder to control for various in geography and attendant local industry effects. However, it misses the point that the difference in the more typical control case doesn't preclude that it takes those (randomly) not chosen for the program longer to find a job. Furthermore, when extended to a wider share of those unemployed, employers are flooded with applications, while the ability of the employment office to taylor their help goes down. Indeed, past the point of including about 30% of those unemployed, the spillovers dominate, and the program ceases to be cost-effective.

Macroeconomics if full of similar examples. One household can increase their saving to provide for retirement; that won't shift asset prices, it won't shift the amount of consumption. So they can effectively transfer resources across time. We have that built in (fallaciously) into our economy, in the form of the Social Security Trust Fund. Unfortunately, we can't put doctors in deep freeze: medical services have to come out of contemporaneous production. So in order for retirees to consume medical services (and in the aggregate, other consumption goods), we who are working have to consume less. All retirement is fundamentally pay-as-you-go. The Trust Fund is meaningless; when the future comes, the idea is that it sells off assets. But it's not small in the economy. To do so requires us to save more (to buy those bonds) or to be taxed more (so the government can buy them on our behalf) or (but only in the short term) rolled over into general government debt.

I won't pretend this is simple to understand. But I don't pretend that macroeconomics is easy, either. It requires us to deal with aggregation and spillovers, which is not what we do in our day-to-day decision making. That requires abstraction and building models to check that we've aggregated consistently; it turns out to be very easy to play with ideas only to discover that they don't add up, that they are internally inconsistent (and not in a small way).

And then there remains the challenge of testing these abstractions against our scanty set of real-world data.

...signature...

No fiscal cliff?

The New York Times 29 August 2012 Economix blog, "Is the Fiscal Cliff a Big Deal?" by Casey Mulligan is faulty, because it misses an Economics 101 opportunity cost issue.

...cutting unemployment insurance won't increase employment; in an environment where jobs are scarce, at most it will shift who has jobs...

Now it's easy to find non-economists making this mistake, or comparable ones. The Republican platform worries that trimming the Department of Defense's budget will cut jobs and hurt the economy, but turns around and claims that the roughly half of the 2009 stimulus package that added jobs somehow didn't help the economy. However, absent very large changes -- in an economy with a labor force of 155 million, a million jobs one way or the other is not a large change, however much it matters to those million people -- if such effects exist, they are symmetric.

What Mulligan assumes is that such issues never exist. The issue of unemployment is that people aren't looking for work. So cutting unemployment benefits will actually lead to more people working. First, unemployment benefits are not that generous -- if you're on a tight budget, you really need more income. But in today's context that's beside the point, because the underlying rate of unemployment is high. Corrected for changes in the working age population, the gap from where we were before the recession started is 14.5 million jobs.

Let me give an anecdote. My son has hunted for a regular job for a year, with no "bites" -- other than to become a low-level fast-food supervisor. He does better doing landscaping for neighbors. But a few years back he had opportunities, but wanted to finish his college degree. Most of his friends are in the same position, job-hunting, though they may have part-time jobs that provide some income.

Now an anecdote is not data; it only helps you think about what might be going on. But it does suggest that we look at overall unemployment. After all, if you want to argue that collecting unemployment checks is what is holding the economy back, you have to explain the source of a sudden shift in ethics in early 2007 that led 10-plus million Americans to decide that sitting home was a nice option. Instead, we can look at job losses and mass layoffs, both tracked by the Bureau of Labor Statistics. Their data also show a rise in those "working part-time for economic reasons", that is, people who have had their hours cut but want to work more. If the mass laziness story is true, then we shouldn't see this happening, either -- we'd expect to see the number of people happily accepting part-time work also rising. The data show they're unhappily accepting such work because the alternative, unemployment, is worse.

Mulligan's analysis of why in fact the "fiscal cliff" won't actually hurt growth isn't worth a "mulligan" -- this analysis is too sloppy to be anything more than ideology wrapped in professional credentials; the Times shouldn't grant him another shot.

Incentives do matter -- my paid employment lies in trying to teach students that -- but they aren't the only things that matters. In this case jobs simply aren't there. So if someone enjoying life on the dole gets a job, that means someone else won't have a job. Unless employment opportunities increase, it's a game of musical chairs. That reflects the second main thing that I am tasked with conveying to students, that they calculate opportunity costs appropriately, without double-counting or missing something. Mulligan totally fails to ask whether opportunities have shifted; he would earn a 50% grade in Economics 101.

...mike smitka...

Paul Ryan: In all honesty, there's nothing there to critique

... [to] gut medicare...is economically irrelevant...because it represents an unfunded mandate...

As an economist I place little credence in words, and so in all honesty I can do little to critique Paul Ryan. That's because his track record in Congress is minimal – in 13 years only 2 bills with his name have actually passed, and neither was substantive. True, he's put his name on many bills, but they've gone nowhere. So while he claims to be for sound budgets, as an economist I see no evidence of that in what he has accomplished during his 6-plus terms in the House. If anything, his voting record points the other way: he's cast an "Aye" for numerous budget-busting laws, including the Bush-era tax cuts and the Medicare prescription drug bill that expanded benefits but not revenues. Furthermore, he did support the Bush bail-out measures, a mark in his favor as putting things practical over things ideological. His track record is too thin to tell whether he is primarily pragmatic. Of course his telegenic persona conveys a different message, but it is a message without substance.

As to ideas, well, Ryan is allowing himself to be portrayed as a neo-fisc, the new breed of Republican fiscal conservatives who promise to balance budgets while cutting taxes.* To date the neo-fiscs have shown no ability to deliver. Yes, they've cut taxes. But no, they've not closed loopholes – Ryan's proclaimed preference – and no, they've not controlled expenditures. Ryan is true to neo-fisc form, in that he has not spelled out details on either front, except that he won't cut defense, hardly an example of controlling expenditures. Oh, he's promised to gut medicare, but that's neither politically credible nor economically meaningful. Why is it economically irrelevant? That's because it represents an unfunded mandate: we as a society don't tolerate emergency rooms refusing to admit car accident victims or nursing homes trundling elderly patients to curbside because they can't pay for their next day. Those costs will have to be loaded onto the charges for people with insurance. In short, the neo-fisc position consists of slogans and not fleshed-out policies; you can't label proponents ideologues, because you have to have ideas to be an ideologue.**

...you can't label [neo-fiscs] ideologues because you have to have ideas to be an ideologue...

For Romney – surely he is in charge of his campaign – Ryan is a convenient mouthpiece, his value enhanced by his skimpy track record, because unlike the beach, it hides rather than reveals. Ryan is already energizing the disaffected on the right, who might otherwise sit the election out. Meanwhile that frees Romney to move toward the center, where the swing voters reside. He doesn't have much time left to do that, but there's also little evidence that people vote their pocketbooks; style seems to trump substance.

I've blogged on Japan and Economics about debt and deficits, choosing that forum because Japan's debt is far higher and thus less sustainable than ours. But Japan has also started to do something about it, passing an increase in their national sales tax (the final deal was hammered out on August 10th) when further budget cuts proved illusive.

* I will blog on Japan and Economics about debt and deficits, choosing that forum because Japan's debt is far higher and thus less sustainable than ours. But even in Japan it's not a crisis, and in addition Japan has started to do something about it, passing an increase in their national sales tax (the final deal was hammered out on August 10th) when further budget cuts proved illusive.

** My computer's dictionary would thus label such "demagogues:" politicians who "appeal to popular desires and prejudices rather than use rational argument." My sense is that campaigning via sound bites forces all candidates to rely on that game. Hence polls matter, policy analysis does not. My training as an economist however suits me only for the latter, and so that's what I blog.

Mike Smitka

What Romney Thinks Matters

...our problem is strong growth!?...

Mitt Romney's choice of a vice presidential is puzzling. As I see it, Paul Ryan's primary strength is that he shares a name with Rand Paul. Ryan has never worked outside the Beltway; he's a pure Beltway insider. Obama at least worked before running for office, as a professor, as a lawyer and as a community activist. (Anyway who thinks Obama is a liberal needs to check where he taught, too -- not too many years ago the Republican Party might have thought he was a little too conservative for them!)

Back to Ryan. I looked at junior's budget proposal months back, and it didn't make dollars and cents -- the arithmetic simply didn't add up. He wanted to reduce the Federal government to 3.75% or less of the economy. But he also promised not to touch the military -- and the Department of Defense and related expenditures are a full 4.0% of our economy. And that's just for starters. I didn't see any point in spending more time on his proposal, but suppose I'll now be forced to read through it carefully. Not today.

In any case, Romney's choice does deliver a clear message, that he views our primary problem as economic growth so strong that it is driving wages up -- because if interest rates are zero, government debt costs our society nothing. As a Wall Street insider, Romney can't claim not to know that. Now wages are our economy's biggest cost. If they aren't rising, we can't have inflation. Food prices go up and down; so do energy costs. But both are modest slices. Ours is a service economy; what matters are not things solid and liquid, but how much it costs to pay someone to cook us a meal, or change a bandage, or set up an IT system.

So Romney must believe that unemployment is not a problem. Too much employment is the problem -- despite the 8.3% headline.

He's out of touch with the world in which I live, with a recent college grad at home, still unemployed. And hasn't Romney read the latest inflation reports from the Bureau of Labor Statistics? -- April, 0.0%; May, -0.3%; June, 0.0%. The average is deflation. For those of you who believe in conspiracies behind every door (and the doors at the BLS are kept locked VERY tight prior to announcements, listen to the August 3rd 2012 Planet Money podcast Keeping the Biggest Secret in the US Economy), well, the Billion Price Project that relies solely on private sector data tells a similar story: there are simply no signs of inflation.

Will Ryan help Romney pull in votes? I'm not a political scientist, and know neither whether Wisconsin is a close race nor whether Ryan is respected there. All I know is that his state is not on the "swing" lists I've seen. Otherwise, unless a VEEP embarrasses the main candidate -- I used to live in Ferraro's home district, and so know up close that some picks are underwhelming -- the apparent reaction of voters is "who cares?" Still, a junior House member doesn't seem an impressive pick.

Does Ryan appeal to swing voters -- well, I think not. I used to dance from party to party, but for a couple decades have lived in a Congressional district where elections haven't been contested, so I don't know whether I can still swing. (My blue suede shoes are Galabrier "Royal Robbins" rock climbing boots from the 1970s, so no, I can't dance.) Still, my gut feeling is that Ryan has no appeal even among moderate Republicans.

I'd like an alternative to Obama. But It doesn't look like the Republicans are providing one this time around.

Mike Smitka

CORRECTION: I do not follow who is whom among politicians, current and would-be. In the process I confused Paul Ryan with Ron Paul Jr (and hence Ron Paul Sr). In the first version of this page I mistakenly wrote that Ryan's strength was his father's name recognition. That is wrong; Paul Ryan's father died while he was a teenager.

It's not just kids and retirees

...early retirement and education aren't "safety valves"...

At 8.3%, "headline" unemployment represents 1 in 8 would-be workers without jobs. Furthermore, we know that we're seeing not just high unemployment but also a big drop in the size of the labor force. That is, we've observed a big drop in the unemployment-population ratio.

OK, but isn't this just youth staying in school longer? And baby boomers who are retiring, or retiring early? After all, the unemployment rate for "prime" workers is 7.2%, rather lower than the July 2012 average of 8.3%. And if we're thinking of the impact on families -- kids -- high "primer earner" unemployment is more worrisome than that at the young and old ends of the age spectrum.

Now for the population as a whole employment has fallen more than unemployment has risen. Rephrased, the non-participation [in the labor force] rate rose, from 33.9% in January 2004-December 2006 to 36.2% over the 6 months ending in July 2012, a 2.3% rise. Relative to the base (66.1%) that's equivalent to a 3.5% rise in unemployment. If we add that to the headline rate we get 11.8%.

This sort of shift doesn't typify previous recessions. But perhaps this time around it's not the recession but long-term trends that happen to be showing up now. [See the graph below on the long-term trend.] In particular, we've far more youth in higher education, and baby boomers are in their early 60s. So it could be that large numbers of younger individuals are staying in school -- or, having grim job prospects, are enrolling in community colleges en masse. Meanwhile, for the boomers, while retiring before age 65 may be painful, it's feasible. And government workers and others can qualify for pensions before age 65, and don't have to wait on social security.

Unfortunately, the data show it's not just boomers and students: the shift for the prime age workers (age 25-54) is in fact is larger than that for the population as a whole. We're not in fact seeing a boom in schooling and early retirements.

In particular, during the bubble era 2004-7 prime age labor force participation rose by 1.4 percentage points, from a peak of 78.7% to 80.3%, and averaged 79.4% over January 2004-December 2006; over the last 6 months, through July 2012, it's averaged 75.7%. That's a drop of 3.7% (and an equivalent rise in the non-participation rate). Doing the same arithmetic leads to an adjusted unemployment rate of 11.9%. At one level it's not surprising; prime age workers (25-54) are a large proportion of the standard labor force (age 16-64), so the averages can't diverge all that much. Still, I'd hoped otherwise. But early retirement and education aren't "safety valves" that mute the impact of the Great Recession. That's not the case

...Mike Smitka...

Was Tobin Right? – "the" Tobin Tax, that is?

...foreshortening the bubble by 6 months would have helped...

I'd headed from Wall Street to grad school in the fall of 1980 because of the eurodollar bubble I saw poised to implode around my bank and others. Lots of liquidity, regulation carried out with a wink and a nod – where I worked, the Bank of Tokyo, continued lending quietly despite a formal prohibition, a "quiet period", imposed by the Ministry of Finance on Japanese banks. How did BOT get around it? – well, they had two subsidiaries, one in California, one in New York, that were (legally) US banks. So regulations from Tokyo didn't apply. We didn't tell regulators what we were doing, and it seems they didn't ask.

In college I'd done math, history, languages but not a single course in economics. It was thus Jim Tobin – the late Nobel laureate who spent most of his career at Yale – who introduced me to macroeconomics. At that point the rational expectations revolution was just beginning, while many of today's standard econometric techniques were just being developed, so I had a foot in both schools. Tobin saw that we were exposed to as much as he could cram into a year, including finance and other areas that are now separate fields. It was a good grounding, full of wisdom, and an attempt to get us to think through stories, to learn the weaknesses of narrative and the weaknesses of formal models. He was suspicious of what he called "new classical" macroeconomics. Formal general equilibrium models were not robust – John Taylor showed that one simple tweak undid the initial "policy neutrality" models of last year's Nobel laureate Thomas Sargent (who, by the way, Tobin tried unsuccessfully to recruit to Yale). Of course "Jumpin" Joe Stiglitz was showing the same thing held true for a variety of simple equilibrium models, but that's for a footnote.*

But all of this is an aside, and ultimately I didn't stay on the macro side, partly because that seemed less central to understanding Japan, and partly because a whole group of students were doing the money-macro thing. In addition, I'd done some grad work in math, and deliberately gave it up. So I wondered whether I'd be any happier doing it a second time around. Too bad, perhaps, because I think my sense of the dynamics of bubbles turned out to be pretty sound – the bubble I saw clearly as an insider didn't actually "break" until the Latin American debt crisis erupted in 1984. In any case, I was iconoclastic enough to avoid the crowd, ultimately doing a dissertation with another future nobel laureate as chair, but those stories are for later.

Back to Tobin and macro. Over time the gist of macro gradually sank in, in all its variety; I only remember one thing as puzzling me, the "Tobin tax" on financial transactions. He foresaw financial markets as able to move money into individuals niches (say, an Iceland) in such volume as to sway the structure of the real economy, and able to move more quickly than real economies could respond. Except that it wasn't just tiny economies that were at risk, but subsets such as US real estate or (within the still inchoate EU) Spain. Putting a tax on transactions could shift traders away from short-term arbitrage (in today's markets, of potentially under a second's duration) and into assets that offered higher real returns over a longer time horizon. (Of course Tobin was a developer of CAPM, and so preached on the risk-return tradeoff and balanced portfolios, more poignant at Yale because in the go-go years of the 1970s endowment managers lost so much money as to put the institution at risk.)

Anyway, at the time I saw no benefit from a "Tobin tax"; I thought he was wrong, overstating the dangers, understating the costs of his tax. But he really did see the direction the world was moving – perhaps because, unlike economists of the past 30 years, as a grad student he had had to study economic history, including the era of global markets that started unravelling in 1914. Would a "Tobin tax" have prevented our current meltdown? Perhaps not. Leaning on central bankers to provide easy money wasn't even necessary, Greenspan and counterparts elsewhere needed little urging. But it would have slowed the rise, would have forced managers in financial institutions to step back and ask whether speculation should be allowed to develop into a core source of profits. And it would have generated much more information.

That lack of information should not be treated lightly. People really didn't know what was going on.

Let me illustrate that with a story from my banking days. Sometime in 1980 it fell to me to sound out peer institutions on their Brazil exposure. To do that I needed to offer information from my end, and so asked for and was given (in considerable detail) our own exposure: local lending, short-term trade finance ("letters of credit"), foreign exchange positions, cross-border "eurodollar" loans in various currencies. At that point BOT's position was on the order of $1 billion, not quite enough to bring down the bank, but enough to make a serious dent in its capitalization. We were reaching the point where we were reluctant to hold more Brazil paper directly, and if others were in a similar position … well, that would be it for Brazil.

So I called around to the then-reigning banks, Citi and Morgan and a few others most active in Latin America, where Brazil was perceived as the most successful and the best managed economy. Some banks gave me more info, some less, but to me the bottom line was clear: Brazil could still borrow, but at its then-current rate of burning through foreign exchange reserves, it wouldn't be able to do so for long. That was bad news: their economy was running on debt, fueled by a plethora of "big push" investment projects financed with international loans that weren't (yet) generating exports and hence the dollar revenue needed to "service" dollar-denominated debt. Needless to say, that big push also generated lots of jobs, and so was popular with the military dictatorship of the day, who (with hindsight justly) feared the impact on their hold on power should the economy slow. [Homework: trace analogs with German banks and Spanish resort property developers.]

The bottom line, however, is that banks were flying blind, unable to aggregate information in much detail. No one talked about private loans or foreign exchange business, which was quite profitable (we "scored" with VW in Brazil and used that to gain business with VW in Germany, all hush-hush). And even if we (and the Brazilian government) kept pretty good track of eurodollar originations, we (and we assumed others) tried to sell on paper to smaller, correspondent banks and get it off our own books so that we could keep lending. Foisting Brazil paper took time, and those in the making the loans to Brazil weren't necessarily kept in the loop by our own correspondent banking people. We had no idea about others; the borrower – Brazil – only knew who originally lent the money, not who currently held the "paper", the loan. Well, it turned out that other banks too were finding it harder to unload their eurodollar assets to smaller banks. By the time everyone knew that, however, it was too late: by the fall of 1980 the overwhelming majority of the loans that underlay the crisis of 1984 had been "booked".

Again, this time around many market participants were surely starting to have their suspicions. A Tobin tax would have forced greater clarity. Oh, not much. With real estate prices rising at 20+% per annum in places such as Arizona (to use US as an example), however, even foreshortening the bubble by 6 months would have helped.

...Mike Smitka...

* Note: to the best of my knowledge – I have not scanned the literature for a number of years – the uncomfortable truth is that this lack of robustness in small models is true for large models, too. There is simply no "law of large numbers" for general equilibria, where a simple model of an economy that is fragile to minor changes in assumptions gets things "almost right" when hundreds more markets are added.
In addition, the "dynamic" (forward-looking) general equilibrium models in current use rely upon convergence to a steady state as a solution technique. That assumption distinctly limits the ability to use such models to "test" whether fiscal policy works since it makes it hard to force the model to deviate from the equilibrium path.

Mea culpa: my apologies for weaving too many threads in one short post. I intend to gradually expand this into multiple posts. But not tonight.

… what do I do when data demonstrate I've been wrong? I hope I change my mind …

Romneycare -- so-called Obamacare -- ruled constitutional

...Romney opposing Romneycare...I find odious...

Healthcare costs are a millstone around the neck of the US economy: we spend twice as much as countries such as Japan, yet have over 50 million -- 1/6^th -- of our population without coverage, have public health metrics surpassed by some developing countries, and have regions of the country with little local access to healthcare even for those with insurance. In the subcomponents of the CPI (Consumer Price Index), medical care is often the item rising the fastest.

Health care provision in the US is enormously complicated, a crazy-quilt combination of medical professionals, insurance systems -- which don't always treat preventive care -- hospitals that are non-profit and for-profit, medical practices that may be solo, a partnership with or without a nurse practitioner (rules for which vary by state), incorporated in a larger group, or employed by a hospital or health maintenance organization (HMO). Labs can be owned by doctors and hospitals -- despite the conflict of interest -- as well as by independent entities. Record keeping is not uniform, and health histories spotty; a doctor may not be able to get information from other doctors who have treated the patient in a timely manner, or be able to check what medications someone is currently taking.

Some of this comes from our history. Blue Cross began as an attempt to improve the financial system of Baylor University Hospital in Texas; it thus focused on surgery and other in-patient care. Universal coverage was initially delayed in the 1910s over whether it should be done at the state or the Federal level. In the late 1940s the issue was whether it would be handled through government, employers, or unions. Early insurance such as Blue Cross (and Blue Shield surgical coverage) varied from state to state, and by that time life insurers were also entering the field. (General Motors, for example, initially used MetLife, not the Blues.) Employers lobbied hard and successfully to be the ones in control of cash flow, but today they are running away as fast as possible.[Note]

All of this means that we can't have a one-size-fits-all policy unless we also force (for example) uniformity in one or more areas of our hodgepodge. At least some incumbents will see their business disappear, and the political path chosen by Romney in Massachusetts was to leave the actual provision of healthcare -- whatever piece it might be -- as is.

So back to the issues. One is lack of coverage; the other is expense. Private insurance systems face the challenges of adverse selection, that purchasers of insurance will be dominated by those who are older or in ill health and believe they'll need insurance. Those who are healthy are tempted to opt out. But doctors are socialized under the Hippocratic Oath. Our society as a whole is sympathetic. Hospitals can't throw a patient out on the streets to die if they run out of money. We have Good Samaritan laws; malpractice leaves providers exposed to legal liability. So that means that, covered or not, those who are seriously ill get treated. The cost then falls upon those who are insured. And then more people either cannot afford coverage (if you're on minimum wage!) or choose not to purchase it. Universal coverage avoids the downward spiral in coverage from moral hazard. Romneycare, enacted now at the national level, faced that issue directly.

Then there is moral hazard, the temptation of those, once insured, to be less cautious (e.g., auto collision insurance may make people less careful of how they park) or kin the case of medical insurance, to overuse it. Since fee-for-service coverage is the standard in the US, that really comes down to doctors providing too much care. It of course makes their practice (and hospital) more profitable, because patients aren't provided with a menu and asked to choose. (Just the opposite: we are bombarded with advertising urging us to pressure our doctors to provide more.)

This is particularly important at the end of life, when it is not unusual for a terminally ill patient to receive hundreds of thousands of dollars of care in their last week of life. We do have hospice -- my father chose that route, not wanting to die in a hospital, not wanting his suffering multiplied during his last day or two, and feeling it was just wrong to use all those medical resources simply because he had insurance. My mother, brothers and I concurred. Unfortunately many individuals refuse to face this issue, and in that case all it takes is one family member demanding "do everything you can." See for example a recent front-page article from the St. Louis Post-Dispatch End of Life Care, run while visiting St. Louis for a niece's graduation from her medical residency.

Then there is technology, were we clearly are facing diminishing returns. Cancer treatment has benefited above all from early diagnosis (which unfortunately is not easy with lung cancer, but is with the other most prevalent types of breast, cervix, prostate and colon cancers. Others -- blood cancers -- can often be cured, and then followed by bone marrow transplants. At least three family members have benefited from that, all at ages young enough to enjoy decades more of life. We can go on and on. But now we are at the point where new drugs as often as not merely improve on existing ones, and where better surgical diagnostic and surgical techniques allow us to address harder-to-treat heart conditions (which affect smaller and smaller slices of our population). It's hard to see how to handle this from the standpoint of ethics -- that Hippocratic Oath and its derivatives. Other countries do however try to see that new technologies are used only where there are very strong medical arguments in their favor, including likely years of remaining life.

The current Federal incarnation of Romneycare does little to address either moral hazard or the dilemma arising from costly new technologies. It will save us money, through better and earlier treatment, most relevant for younger patients. It thus leaves a lot to desire. However, it is a step in the right direction, and far superior to the alternative of doing nothing, and watch the insurance system continue to unravel as fewer and fewer employers provide coverage.

I have no answer to the puzzle of why the package is known by the sitting president's name, and not by that of his challenger, who in fact was the one to put it together with the help of a variety of Republican think-tanks (back when think-tanks actually did spend time thinking rather than generating purely partisan twitter "bites"). I can understand, sort of, the partisan logic that has Romney opposing Romney care in the context of the Republican primaries, though I think it odious. I can't fathom why the media is passive in the face of the effort to carry that into the general election.

...Mike Smitka...

Note: I wrote a paper on the history of healthcare at General Motors, presented at the Business History Conference in Milan Italy, the Society of Automotive Historians in Tugelo, Mississippi and published in Automotive History Review (2012).

Remember (not that many are old enough!) that until the 1940s there were no antibiotics and few other effective medications. Doctors could set bones, deliver babies and perform [by today's standards] simple surgery. Staying in a hospital cost less than staying in a hotel. The main focus of healthcare was thus the provision of sick time, because the main out-of-pocket cost of illness was lost income, not medical expenses.

Demographic First-Strike Capability

...economic's strength lies in testing perceptions against data...

In recent travels I encountered the claim that Muslims are aiming to overrun the rest of the world by ordering their women to open their wombs. The result, I was told, was that Muslim women average 8 children each, dooming the non-Muslim world to subjugation.

I was skeptical, because it goes against all the evidence from countries I study -- primarily the US, Japan and China -- about the behavior of women. Variation across the Islamic world is vast; strife in Iraq ought remind us these are not surface variations. So with several hundred million adherents someone, somewhere surely is advocating higher fertility as an Islamic duty.

But that doesn't mean that women are listening. China tries to restrict fertility to one child; despite draconian, indeed horrific measures to enforce it, fertility rates there remain above those of Japan and Korea. My hunch was that in their fertility countries that are heavily Muslim look little different from the rest of the world -- low and falling, particularly in prosperous countries.

Countries do collect this sort of data. Of course businesses want a good census to help in product planning, capacity planning and marketing. Fertility data are also valuable, necessary for governments to structure healthcare policy -- clinic construction, midwife training -- and budget for school construction. While data collection is a challenge in very poor countries, only a minuscule fraction of the world's population remain nomads.

So what do the data show? Egypt's fertility is below that of the Philippines; India's is above that of Bangladesh. The fertility rate of Indonesia, the world's most populous Islamic state, is at replacement level, as 2.1 children per mother are necessary to guarantee that on average at least one daughter will live to reproductive age. Radical Iran is below that level -- perhaps Americans don't realize that it is a literate and (relative to its neighbors) prosperous society.

Economists watch what people do, they don't rely on what they say. Men may talk the talk, if they're part of the increasingly unpopular ruling party. But words alone are impotent.

...words alone are impotent...

The real lesson is that fertility is falling across the world, no matter the religion, and that as incomes rise, fertility falls. Sub-saharan Africa remains anomalous, but if you want to look at the data – the World Bank has a nice web site for that -- you'll find that even there change is evident.

Mike Smitka

Affordable Housing as Source of Bubble

...policies to push home ownership weren't responsible...

Working papers are the place to go for recent research; journals are passe, too far behind the times to be my first resort.

A recent paper by Rubén Hernández-Murillo, Andra C. Ghent and Michael T. Owyang is a good example. Furthermore, as with most working papers, it's freely downloadable, though you'll need to have a subscription when it comes out as a standard journal article some years hence. Here I provide the title, abstract and a link. Of course (well, not all papers are that way) it's written with economists in mind and so even the abstract is heavy on jargon -- though their one-word summary is clear and says it all. Anyway, I'll translate...

Title:

Did affordable housing legislation contribute to the subprime securities boom?

Abstract:

No. In this paper we use a regression discontinuity approach to investigate whether affordable housing policies influenced origination or affected prices of subprime mortgages. We use merged loan-level data on non-prime securitized mortgages with individual- and neighborhood-level data for California and Florida. We find no evidence that lenders increased subprime originations or altered pricing around the discrete eligibility cutoffs for the Government Sponsored Enterprises (GSEs) affordable housing goals or the Community Reinvestment Act. Our results indicate that the extensive purchases of risky private-label mortgage-backed securities by the GSEs were not due to affordable housing mandates.

Translation:

Let's crunch the data before and after policy changes to see whether the number of sub-prime mortgages changes, or the terms and conditions changed. We put in variables known to affect the mortgage market, which otherwise might obscure (or exaggerate) the effects of policy. Furthermore, we'll use really detailed local data to make sure we're comparing apples to apples, and don't by accident compare a region with lots of subprime mortgages to one with few. Finally, looking at those who all along would have qualified for subprime mortgages doesn't tell us much, or rather may obscure what is going on. For example, the number of such people may have increased reflecting changes in demographics and job markets. So we'll look at people around the margin, and not in the middle. The result: before and after are the same. Policy didn't do it.

Now that's what those who have "eyeballed" the data have long maintained. But we worked really hard to see if any of the reasons given that "eyeballing" was wrong held water. They didn't. No smoking gun. No evidence, period.

OK, maybe the authors wouldn't go quite so far ... but that's how I as an economist read the subtext of the abstract.

...Mike Smitka...

Link to pdf: (don't click if you don't want the actual paper!)
http://d.repec.org/n?u=RePEc:fip:fedlwp:2012-005&r=ure