GDP | Random Observations for Students of Economics

The Next Step on the Road to Serfdom

Economics Comments Off

Jun 052011

But nobody is proposing that the government deny you the right to have whatever medical care you want at your own expense. We’re only talking about what medical care will be paid for by the government.

I wish that Paul were correct, but I am not convinced that he is. Chills went down my spine a few days ago when I read the following proposal from the Center for American Progress, a think tank with strong ties to the Democratic party:

Thus we also include a failsafe mechanism that would ensure significant savings. Our failsafe would be triggered if, starting in 2020, total economywide health care expenditures grow at a rate faster than the economy. Should that happen, we would empower the IPAB [the panel of experts set up by President Obama's health care law] to extend successful reforms in Medicare and other public programs to insurance plans offered in the health care exchanges and then potentially to all health care plans, such that the target is met. This will ensure that costs are constrained across the health care sector, preventing cost-shifting and maintaining access for all.*

That is, under the likely scenario that healthcare spending keeps rising faster than GDP, the Center for American Progress would give government the power to prohibit people from buying expensive health plans with their own money. That is not my idea of progress.

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*Source: Page 43-44 of this document. I put the crucial phrase in bold.

Two Visions for Medicare

Economics Comments Off

Apr 132011

I must applaud the President for today’s speech in which he finally and at long last takes the long-term budget imbalance seriously. There was a surprising amount of finger pointing for a person who claims to be transcending partisanship. That is especially true in light of the fact that President Obama’s proposed policies, as put forth in his own annual budgets, have never shown how he would put the economy on a path with a declining debt-GDP ratio, even after the economy fully recovers from the recession.

But let’s put that inconvenient truth aside for the moment. I am delighted that these fiscal issues are now squarely on the national agenda. If only someone could lock President Obama and Congressman Ryan in a seedy hotel room, turn off their access to cable, give them an endless supply of coffee and cold sandwiches, and not let them leave until they come to agreement, the nation could take a large step forward.

What I found most interesting is the contrast between the President’s vision for Medicare and Congressman Ryan’s. There are two major issues:

How quickly should Medicare spending rise?
What happens if health care costs rise faster than the limit on spending?

As to the first question, the President proposes to set “a new target of Medicare growth per beneficiary growing with GDP per capita plus 0.5 percent.”* By contrast, Ryan proposes growth at the rate of inflation. The difference is probably about 2 percent per year.

As to the second question, the President gives authority to the “Independent Payment Advisory Board (IPAB).” By contrast, Ryan proposes that seniors use their “premium support” to shop among competing private insurers.

Here we see the fundamental differences between the parties: One believes in spending more and allocating that spending via central planning. The other believes in spending less and harnessing individual choice and competition to ensure that the money is spent wisely.

To be sure, there is room for compromise, especially on the first question, but the issues are not just numerical. The parties start with fundamentally different visions of markets and government.

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*The quotation is from an administration fact sheet I was emailed.

How much unemployment is structural?

Economics Comments Off

Jan 102011

Raghu Rajan cites the work of Erik Hurst:

As my colleague Erik Hurst and his co-authors have shown, states that had the largest rise in construction as a share of GDP in 2000-2006 tended to have had the greatest contraction in that industry in 2006-2009. These states also tended to have the largest rise in unemployment rates between 2006 and 2009.

The unemployed comprise not only construction workers, but also ancillary workers, such as real-estate brokers and bankers, as well as all those who work on houses, such as plumbers and electricians. So, the job losses extend far beyond those in the construction industry.

It is hard to believe that any increase in aggregate demand will boost the housing market – which, remember, was buoyed by visions of steady price appreciation that few seem likely to hold today – sufficiently to re-employ all these workers. Hurst estimates that this “structural” unemployment may account for up to three percentage points of total unemployment. In other words, were it not for construction, the US unemployment rate would be 6.5% – a far healthier situation than today.

Update: Erik sends me the following email.

Greg,

I saw that you linked to Raghu’s writings which described some of my work in progress assessing labor market mismatch and its potential effects on current unemployment rates (joint with Kerwin Charles and Laura Pilossoph). There was, however, an error in Raghu’s assessment of our work. I am emailing Raghu as well. Raghu reported that we are finding that upwards of 3 percentage points of total U.S. unemployment can be explained by structural forces. That is not what we have found. Preliminary back of the envelop calculations suggest that upwards of 3 percentage points of the unemployment rate in high unemployment rate states like Nevada or Arizona may be due to structural forces – not 3 percentage points of total U.S. unemployment. The amount of total U.S. unemployment explained by structural forces will almost certainly be much less. For many states, back of the envelop calculations suggest that structural forces are much less important. I have not yet computed a back of the envelope calculation of the total unemployment rate that potentially can be explained by structural forces. While we are definitely finding results that structural forces are at play, we are not finding that 3 percentage points of the current total U.S. unemployment rate is due to structural forces. As the research evolves, however , our conclusions may change.

I want to stress that the work is still in its early stages. We are in the process of formalizing everything now. We are still a month or so away from having a preliminary version of the paper. I will keep you posted when we have something that we feel comfortable sharing for public consumption.

If you can post this message to your readers, it would be much appreciated. Based on your post, I have received lots of emails about our preliminary (and not yet ready for prime time) work. Hopefully, the correction will help to focus people’s queries and questions accordingly.

Erik

A QE2 Ditty

Economics Comments Off

Nov 052010

Reader Dave Stehman sends in the following:

It’s Called Quantitative Easing

I heard it in the headlines
It’s news all over town
We might be double dippin’
Green shoots have all turned brown

It’s a balance sheet recession
With a housing overhang
But they’ve got a brand new program
And it will start you with a bang

And it’s called, quantitative easing
They say results are always pleasing.
When liquidity all starts freezing
Just warm things up with quantitative easing

I will say it straight and simple
It’s clear, just like a bell
There’s some long term bonds to buy
There’s some short term bonds to sell

Don’t talk about the good times
Don’t ask me where they went
Just move your inflation target
On up to three point five per cent

And it’s called, quantitative easing
This ain’t no joke, it ain’t no teasing
When the GDP starts wheezing
Treat with a shot of quantitative easing

Good and magic things will happen
It might take a week or three
Unemployment plunging downward
Recovery shaped just like a V

You’ll see Nobels at the Treasury
There’ll be rock stars at the Fed
It’ll take hair off of Krugman’s face
Put it on top of Ken Rogoff’s head

And it’s called, quantitative easin’
This ain’t no scam, so don’t call no policeman
When the engine of commerce starts seizin’
Just add a quart or quantitative easin’

Show no mercy to the critics
Don’t let no one stop your nerve
You can mock Ricardian Equivalence
You can laugh at the Laffer Curve

Tell that guy at the Minneapolis Fed
To shut up, or you’ll break his legs
And if the Bond Vigilantes don’t like it?
Well, they can go suck eggs

And it’s called quantitative easin’
You know I say this for a reason
When the economy just sits there squeezing
Loosen things up with quantitative easing

The Mid-Session Review

Economics Comments Off

Jul 232010

The Obama administration has just released the Mid-Session Review of the Budget. (As one of my friends snarkily puts it, “Release at 4 pm on Friday…who could have expected when we’re living in a new era of fiscal responsibility?”)

This budget document shows what would happen to the federal budget under the Administration’s economic forecast and assuming that all the President’s proposed policies are adopted. What does the document show? Based on a quick read, here is what I see:

The Administration believes we will have real growth about 4 percent over the next four years. Unemployment is projected to fall steadily, reaching to 5.5 percent at the end of 2015.
Deficits are projected to shrink but will not fall below 3.4 percent of GDP over the ten-year budget window.
The ratio of debt to GDP rises in each of the following ten years, with no end in sight.
The document once again holds out the hope that the fiscal commission will save the day by somehow finding a way to put the budget on a sustainable path.

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