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Archive for January, 2011

Mini is apparently the new thing in popular economics. Tyler Cowen’s new mini-book is getting lots of attention from the blogosphere. And econ-crooner Merle Hazard has released a set of mini-songs about the European debt crisis.

Best so far is Ode to Germany:

For more, click on over to Paul Solman’s page at the PBS Newshour, where you can also find info about their lyric-writing contest.

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As expected, Treasury has announced that it will allow the $200 billion Supplemental Financing Program to run down to only $5 billion; that will save $195 billion of borrowing authority under the current debt ceiling:

Treasury Issues Debt Management Guidance on the Supplementary Financing Program
1/27/2011
WASHINGTON – The U.S. Department of the Treasury’s Assistant Secretary for Financial Markets, Mary Miller, today issued the following statement on the Supplementary Financing Program:
“Beginning on February 3, 2011, the balance in the Treasury’s Supplementary Financing Account will gradually decrease to $5 billion, as outstanding Supplementary Financing Program bills mature and are not rolled over. This action is being taken to preserve flexibility in the conduct of debt management policy.”​

Treasury created the SFP in order to help the Fed expand its balance sheet without “printing money” (or, more accurately, “printing reserves”). Under the program, Treasury issues bonds, as usual, but it deposits the proceeds in an account at the Federal Reserve, rather than using them to pay the nation’s bills. The Fed then uses those deposits to purchase assets. Since the money ultimately comes from investors who own the new Treasury bonds, the SFP allows the Fed to expand its balance sheet without creating reserves out of thin air.

With the program winding down — at least until the debt ceiling gets raised — the Fed will have to ask its electronic printing press for another $195 billion if it wants to maintain its targeted portfolio.

 

 

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The latest must-read New Yorker piece by Atul Gawande describes recent efforts to cut costs and improve quality by coordinating patient care – in particular that of the most expensive patients. In “The Hot Spotter” (gated), he follows several innovators, including Rushika Fernandopulle, who directs a clinic-based program in Atlantic City, New Jersey. Fernandopulle and his team face many challenges in managing costs and improving the care of his patients. But:

Their most difficult obstacle, however, has been the waywardness not of patients but of doctors-the doctors whom the patients see outside the clinic. … The Atlantic City casino workers and hospital staff … had the best-paying insurance in town. Some doctors weren’t about to let that business slip away.

Fernandopulle told me about a woman who had seen a cardiologist for chest pain two decades ago, when she was in her twenties. It was the result of a temporary, inflammatory condition, but he continued to have her see him for an examination and an electrocardiogram every three months, and a cardiac ultrasound every year. The results were always normal. After the clinic doctors advised her to stop, the cardiologist called her at home to say that her health was at risk if she didn’t keep seeing him. She went back.

The clinic encountered similar troubles with some of the doctors who saw its hospitalized patients. One group of hospital-based internists was excellent, and coordinated its care plans with the clinic. But the others refused, resulting in longer stays and higher costs.

Any guesses which internists were on salary and which were fee-for-service?

Commentators often worry that third-party payment leads to moral hazard and overconsumption by patients. That’s true, but we should also keep an eye on the providers. Payment reform is one of the key challenges in future health care reform.

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What is Health Care Reform?

Health care reform increases the federal deficit over the next ten years. The health care reform legislation, however, reduces the deficit.

Greg Mankiw set off a vigorous discussion in the blogosphere (see, e.g., Ezra Klein, Clive Crook, and the Austin Frakt) with a provocative analogy about health care reform:

I have a plan to reduce the budget deficit.  The essence of the plan is the federal government writing me a check for $1 billion.  The plan will be financed by $3 billion of tax increases.  According to my back-of-the envelope calculations, giving me that $1 billion will reduce the budget deficit by $2 billion.

Now, you may be tempted to say that giving me that $1 billion will not really reduce the budget deficit.  Rather, you might say, it is the tax increases, which have nothing to do with my handout, that are reducing the budget deficit.  But if you are tempted by that kind of sloppy thinking, you have not been following the debate over healthcare reform.

I read Greg as raising an important rhetorical / pedagogic question which, judging by some responses, may have been overshadowed by his satire.

That simple question is “what is health care reform?”

The policy community and commentariat often equate health care reform with the legislation (actually two pieces of legislation) that President Obama signed into law last year. As everyone knows, the Congressional Budget Office estimated that those two laws would, if fully implemented, reduce the federal budget deficit by $143 billion from 2010-2019. That’s the basis for the claim that “health care reform would reduce the deficit over the next ten years.” (CBO also discussed what would happen in later years, where the law, if allowed to execute fully, would have a bigger effect, but let’s leave that to the side right now.)

The complication, which Greg’s post partly addresses, is that the health care reform legislation included many provisions. Greg notes, for example, that some expanded health insurance, while others raised taxes. In his view, only the first part constitutes health care reform — an effort that by itself would widen the deficit — while the tax increases are what made the legislation deficit-reducing.

In fact, it’s more complicated than that. By my count, the two pieces of health care reform legislation combined seven different sets of provisions:

1. Expanding health insurance coverage (e.g., by creating exchanges and subsidies and expanding Medicaid)

2. Expanding federal payments for and provision of health care services (e.g., reducing the “doughnut hole” in the Medicare drug benefit)

3. Cuts to federal payments for and provision of health care services (e.g., cuts to Medicare Advantage and some Medicare payment rates)

4. Tax increases related to insurance coverage (e.g., the excise tax on “Cadillac” health plans)

5. Tax increases not related to insurance coverage (e.g., the new tax on investment income)

6. The CLASS Act, which created an insurance program for long-term care

7. Reform of federal subsidies for student loans

(The House Republicans’ effort to repeal health care reform would overturn 1-6, but leave the student loan changes in place.)

To capture these complexities, I occasionally refer to the legislation as the health care / tax / student loan / long-term care legislation. But whenever I write that for publication, my editors take it out. Although my lengthy description is accurate, it doesn’t work for friendly conversation. So the law (which again, was really two laws) gets called the health care reform law.

Greg’s point, I think, is that this rhetorical convention creates confusion when talking about the law’s budget impacts. To say “the health care reform law reduces the deficit over the next ten years according to CBO” is absolutely true. But it often gets elided to “health care reform reduces the deficit over the next ten years” which isn’t true if, like Greg, you think the revenue raisers, student loan changes, and CLASS Act aren’t really health care reform.

I think Greg is right to worry about this distinction. Because of the information loss as the details of CBO scores get transmitted through various layers of speakers and media (including this blog), some people are indeed under the mistaken impression that health care reform, by itself, reduces the budget deficit over the next ten years. It doesn’t.

However, Greg’s analogy has a flaw: it presumes that none of the tax increases count as health reform. I disagree.

Our current tax system provides enormous ($200 billion per year) subsidies for employer-provided health insurance. They should be viewed as part of the government’s existing intervention in the health marketplace. And rolling back those subsidies strikes me as essential to future health care reform. I would count any revenues raised from doing so as part of health care reform.

That didn’t happen, but the legislation did include a tax on “Cadillac” health plans as a partial substitute. That will clearly affect health insurance markets, and it offset a portion of existing tax subsidies. For both those reasons, it should be viewed as part of health care reform.

The key thing is not the difference between spending and revenues, but between provisions that fundamentally change the health care system and those that do not.

Happily, I am not alone in this view. Indeed, it has been endorsed by none other than the Congressional Budget Office. CBO grappled with this issue during the health care debate. And after much thought, it came up with a useful measure of the health care reform part of the legislation: the “Federal Government’s Budgetary Commitment to Health Care“. This measure combines the spending and tax subsidies that the government provides for health care.

Taking all the health care provisions into account, CBO concluded that the health care reform legislation would increase the federal government’s budgetary commitment to health care. But not as much as many critics suggest. Adding together items (1) through (4) on my list, CBO concluded that the health care reform parts of the legislation would increase the deficit by about $400 billion over ten years. That would then be more than offset by the other provisions — primarily taxes but also the student loan provisions and the CLASS Act. (In later years, by the way, CBO projects that the legislation would actually reduce the federal commitment to health care.)

Bottom line: Health care reform increases the federal deficit over the next ten years, but the health care reform legislation reduces the deficit. What could be simpler?

P.S. I hope it goes without saying–but will say it anyway–that one should not evaluate the health care reform legislation on its fiscal impacts alone … or even predominantly. The legislation has a wide range of benefits (e.g., 32 million more people with health insurance) and costs. The key question is how they net out.

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Panda Prices Plummet

In another sign of deflationary pressures, the Washington Post’s Michael Ruane reports that panda prices have plummeted:

The National Zoo has reached an agreement with China to extend for five years the stay of Washington’s beloved black and white bears at a dramatically reduced cost. …

The old $1 million-a year, 10-year lease expired Dec. 6.

Update: Sarah Brumfield (AP via Washington Times) reports the new price is $500,000 per year, half the previous level.

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In a guest column at CNN Money, I argue that Treasury Secretary Timothy Geithner won’t allow us to default on the public debt even if Congress fails to increase the debt ceiling:

America reached two dubious milestones in recent weeks.

Our national debt, including Social Security obligations, has run up to nearly $14 trillion. That’s a lot of money, even in Washington.

And our Treasury Secretary started using the d-word. Writing to congressional leaders, Timothy Geithner warned that failing to increase America’s debt ceiling, currently $14.3 trillion, “would precipitate a default by the United States.”

“Default” is not a word that Treasury secretaries use lightly. For more than two centuries, the United States has paid its debts on time. That’s why U.S. Treasuries have historically been considered the safest investment in the world.

When Geithner was sworn into office, he took responsibility for defending the full faith and credit of the United States.

So why is he openly discussing the possibility of default? Because of the peculiar political theater of the debt limit.

Alone among developed nations, our country separates the legislative decisions that govern spending and taxes from those that govern debt.

As a result, America must periodically watch its elected leaders try to avoid voting for higher debt, even though most of them happily voted for higher spending, lower taxes or both.

During these spells of political brinkmanship, the Treasury secretary’s job is to prod Congress into action.

Given today’s political divisiveness, Geithner understandably decided — as did his predecessors in similar circumstances — that the best way to defend America’s credit worthiness is, paradoxically, to warn of potential default if Congress fails to act.

Geithner is correct that the debt limit must increase. With monthly deficits running more than $100 billion, it’s simply unthinkable that Congress could cut spending or increase revenue enough to avoid borrowing more. America’s daunting fiscal challenges require bold action, but it must be thoughtful and deliberate, not arbitrary and sudden.

Still, I am troubled by any suggestion that the United States might willingly default on its public debt. Doing so would have absolutely no upside. That’s why I’m confident that Geithner won’t let it happen.

If Congress somehow fails to increase the ceiling in time, Geithner would do everything in his power to avoid going down in history as the first Treasury secretary to miss a debt payment.

To do so, he would use the same tactics as any stressed debtor.

Squirrel it away: First, Geithner would hold on to his cash and what little credit he has left. Among other things, he would eliminate unneeded borrowing associated with certain obscure programs such as the Exchange Stabilization Fund and a state and local debt program.

Turn to family for help: He would call in money from his relatives, in this case the Federal Reserve. During the financial crisis, Treasury created a special program to borrow money on the Fed’s behalf; that borrowing now totals $200 billion. Treasury temporarily wound this program down the last time we got close to the debt ceiling. Expect the same this time.

Promise to pay later:He would issue IOUs (which don’t officially count as debt) to friendly creditors who have no choice but to accept them. Geithner’s predecessors did this with two retirement funds for government employees, both of which were later made whole. In his recent letter to Congress, Geithner said he’d do the same.

Sell stuff: Lastly, Geithner would look for assets that are easy to sell. Thanks to the financial crisis, Treasury now owns a sizeable investment portfolio, including stakes in auto companies, banks and other financial institutions. Don’t be surprised if Treasury cashes in some of these positions to raise cash in coming months.

Those tactics would give Congress time to work through its differences and raise the debt limit.

If lawmakers fail to act on time, however, Geithner would face starker choices: Our monthly bills average about $300 billion, while revenues are about $180 billion. If we hit the debt limit, the federal government would be able to pay only 60 cents of every dollar it should be paying.

But even that does not mean that we will default on the public debt. Geithner would then choose which creditors to pay promptly and which to defer.

As the heir to Alexander Hamilton, Geithner would undoubtedly keep making payments on the public debt, rolling over the outstanding principal and paying interest. Interest payments are relatively small, averaging about $20 billion per month, and paying them on time is essential to America’s enviable position in world capital markets. To miss even one is and should be unthinkable.

Other creditors would have to wait in line. Treasury would defer payments to some groups of creditors, perhaps including Social Security beneficiaries, Medicare providers, military personnel, weapons vendors or taxpayers expecting refunds.

Missing such payments would be another dubious milestone in America’s fiscal journey — so dubious, in fact, that the resulting constituent outrage would likely force Congress to increase the debt ceiling immediately.

Here’s to hoping that Congress doesn’t let things go that far and get that bad.

P.S. Stan Collender, Greg Ip, and Felix Salmon have also made the point that hitting the debt limit might cause the the government to delay some payments to some creditors (technically a type of default), but will not and should not default on the public debt.

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Over the New York Times Magazine, Paul Krugman has today’s must-read economics article on the fate of Europe. (Today’s in the physical world; it’s been up electronically for several days.)

Krugman walks through various ways that struggling Eurozone members might adjust to their ongoing financial crisis.

Along the way, he emphasizes a key point: American housing and mortgage markets were not the only cause of the global crisis:

You still hear people talking about the global economic crisis of 2008 as if it were something made in America. But Europe deserves equal billing. This was, if you like, a North Atlantic crisis, with not much to choose between the messes of the Old World and the New. We had our subprime borrowers, who either chose to take on or were misled into taking on mortgages too big for their incomes; they had their peripheral economies, which similarly borrowed much more than they could really afford to pay back. In both cases, real estate bubbles temporarily masked the underlying unsustainability of the borrowing: as long as housing prices kept rising, borrowers could always pay back previous loans with more money borrowed against their properties. Sooner or later, however, the music would stop. Both sides of the Atlantic were accidents waiting to happen.

 

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Sometime this spring, Congress will vote to increase the debt ceiling. That vote won’t come easy. Newly ascendant House Republicans will threaten to withhold needed votes unless significant spending cuts or budget process reforms are attached to the measure. Democrats will denounce Republicans for threatening the government’s ability to pay its bills. And Treasury Secretary Tim Geithner will be forced into creative financing moves to buy Congressional leaders enough time to strike a deal.

But strike a deal they will. With monthly deficits running around $100 billion, the United States can’t cut spending or increase tax revenues enough to avoid further borrowing this year. It is equally inconceivable (I hope) that our elected leaders will decide to withhold payments from Social Security beneficiaries, our military, and our creditors.

So the debt ceiling will go up. And that means that at least 50 senators and more than 200 House members will cast a politically toxic yea vote.

Which lucky members will they be? The answer may well depend on what other budget provisions accompany the debt limit measure. That’s impossible to handicap today. In the meantime, though, we can look at past votes. They tell a clear story: debt limit votes are about politics, not principle.

Consider, for example, Senate votes on stand-alone debt limit measures over the past decade:

When Republicans held both the Senate and the White House (2003, 2004, 2006), they provided virtually all the yea votes, while almost all Democrats voted no. When the Democrats were in power (2009, 2010), the roles reversed: the Democrats provided all but one of the yea votes, while Republicans voted no. Only when government was divided – with a Democratic Senate and a Republican president (2002, 2007) – has the vote to lift the debt limit been bipartisan.

The House has taken fewer stand-alone votes than the Senate (because of the so-called Gephardt rule, which the Republicans abolished last week), but they show the same pattern: the party in power votes to increase the debt limit:

History thus suggests that Democrats will bear the burden of lifting the debt limit in the Senate; expect at least 50 yea votes. The only interesting question is whether individual Republicans filibuster the increase; if so, a 60-vote cloture measure would require at least 7 Republican votes as well.

Handicapping the House is more difficult since we’ve had no recent experience with divided government. If the Senate provides any guide, roughly equal numbers of Republicans and Democrats will ultimately vote for an increase. That would allow many Tea Party-backed Republicans to vote no without affecting the outcome. And other members might simply skip the vote. That’s what 21 members did in 2004, when it took just 208 votes to raise the debt ceiling.

Note: Congress increased the debt limit three other times during the past decade as part of larger bills: the 2008 housing act, the 2008 TARP act, and the 2009 stimulus. For simplicity, I have included all votes by Independents with the Democrats, since that’s how those members caucused during this period.

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I love Twitter (you can find me at @dmarron). Indeed, I spend much more time perusing my Twitter feed than I do on Facebook. But it’s not because I care about Kanye West’s latest weirdness (I followed him for about eight hours) or what Katy Perry had for lunch. No, the reason I love Twitter is that I can follow people who curate the web for me. News organizations, journalists, fellow bloggers, and others provide an endless stream of links to interesting stories, facts, and research. For me, Twitter is a modern day clipping service that I can customize to my idiosyncratic tastes.

Several of my Facebook friends are also remarkable curators, as are many of the blogs that I follow (e.g., Marginal Revolution and Infectious Greed, to name just two).  So curation turns out to be perhaps the most important service I consume on the web. In the wilderness of information, skilled guides are essential.

Of course, I also use Google dozens of times each day. Curation is great, but sometimes what you need is a good search engine. But as Paul Kedrosky over at Infectious Greed notes, search sometimes doesn’t work. That’s one reason that Paul sees curation gaining on search, at least for now:

Instead, the re-rise of curation is partly about crowd curation — not one people, but lots of people, whether consciously (lists, etc.) or unconsciously (tweets, etc) — and partly about hand curation (JetSetter, etc.). We are going to increasingly see nichey services that sell curation as a primary feature, with the primary advantage of being mostly unsullied by content farms, SEO spam, and nonsensical Q&A sites intended to create low-rent versions of Borges’ Library of Babylon. The result will be a subset of curated sites that will re-seed a new generation of algorithmic search sites, and the cycle will continue, over and over.

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The Federal Reserve system is doing its part to cut the budget deficit. The central bank earned $81 billion in fiscal 2010, of which a bit more than $78 billion will be remitted to the Treasury. That’s $31 billion more than last year.

According to the Fed’s news release yesterday, the following items drove profits:

$76.2 billion in income on securities acquired through open market operations (federal agency and government-sponsored enterprise (GSE) mortgage-backed securities, U.S. Treasury securities, and GSE debt securities) [In short, the Fed is making money on its "quantitative easing" / "credit easing" activities. At least for now.];

$7.1 billion in net income from consolidated limited liability companies (LLCs), which were created in response to the financial crisis [Profits on the Maiden Lane partnerships, etc.];

$2.1 billion in interest income from credit extended to American International Group, Inc.;

$1.3 billion of dividends on preferred interests in AIA Aurora LLC and ALICO Holdings LLC [also related to AIG]; and

$0.8 billion in interest income on loans extended under the Term Asset-Backed Securities Loan Facility (TALF) and loans to depository institutions.

Additional earnings were derived primarily from revenue of $0.6 billion from the provision of priced services to depository institutions.

Those $88 billion in gross earnings were slightly offset by the following expenses:

$2.7 billion [of interest expense] on depository institutions’ reserve balances and term deposits;

[$4.3 billion] of operating expenses of the Reserve Banks, including $1.0 billion for Board expenditures and the cost of new currency.

The resulting $81 billion in net profits were then distributed as follows: $78.4 billion to the Treasury, $1.6 billion as dividends to member banks, and $0.6 billion retained to “equate surplus with paid-in capital.”

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