Donald

Tracking the Stimulus: Update

Good news: The Recovery.gov website now includes information about the tax components of the stimulus, not just the spending components:

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According to the chart, an estimated $62.5 billion made its way out the door in tax reductions through the end of August. The corresponding spending data indicate that $88.8 billion in federal spending made its way out the door by August 28.

Putting these together, you get an estimated $151.3 billion in combined tax reductions and spending increases through the end of August.

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Bending the Curve: Redefining Health Insurance

Over the past few months, a politically-diverse group of health policy experts has been pondering a key question: what are the “specific, feasible steps” that policymakers could use to reduce the growth of health spending? In short, how can we bend the curve?

The fruits of their labor were published by the Brookings Institution on Tuesday as Bending the Curve: Effective Steps to Reduce Long-Term Health Care Spending Growth.

I encourage everyone interested in health policy to give it a close look.

The report’s recommendations for fixing health insurance particularly caught my eye:

Governments should ensure proper incentives for non-group and small-group health insurance markets to focus on competition based on cost and quality rather than selection. Achieving this requires near-universal coverage and insurance exchanges to pool risk outside of employment, augment choice, and align premium differences with differences in plan costs.

…

[Therefore, these insurance markets should be restructured to] focus insurer competition on cost and quality through requirements for guaranteed issue without — or with very limited — pre-existing condition exclusions; limited health rating, such as those related to age and behaviors only; and full risk-adjustment of premiums across insurers based on enrollees’ risk. For market stability, these reforms must be undertaken in the context of an enforced mandate that individuals maintain continuous, creditable basic coverage.

In short, the report recommends a combination of an individual mandate and reforms that eliminate both the ability of and the incentive for insurance companies to try to enroll only the healthy and low-cost.

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Another Look at Oil and Natural Gas Prices

A couple weeks ago, I discussed the remarkable divergence between the prices of oil and natural gas. At the time, the spot price of West Texas Intermediate was above $73 per barrel, while the spot price of natural gas at the Henry Hub was about $3 per MMBtu. The ratio of the two prices was at record levels, with the oil price 24.5 times the natural gas price.

Oil prices have declined since then, closing at $68.24 per barrel yesterday. But natural gas prices have also declined, closing at $2.82. As a result, the price ratio remains above 24, much higher than the 6 to 12 that’s been normal in recent decades.

To provide some more insight into what’s going on, I made a new graph to show the path of oil and natural gas prices since the start of 2001:

The chart (squiggle, if you prefer) tracks the path of monthly average oil prices along the horizontal axis and monthly average natural gas prices along the vertical, plus yesterday’s closing data. Several features of the graph leap out:

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Dodging the Resource Curse

Over the weekend, the Financial Times had a fascinating piece about Farouk al-Kasim, an Iraqi who is credited with saving Norway from the resource curse:

Poor countries dream of finding oil like poor people fantasise about winning the lottery. But the dream often turns into a nightmare as new oil exporters realise that their treasure brings more trouble than help. Juan Pablo Pérez Alfonso, one time Venezuelan oil minister, likened oil to “the devil’s excrement”. Sheikh Ahmed Yamani, his Saudi Arabian counterpart, reportedly said: “I wish we had found water.”

Such resignation reflects bitter experience of the way that dependency on natural resources can poison a country’s economic and political system. Inflows of hard currency push up prices, squeezing the competitiveness of non-oil businesses and starving them of capital. As a result, productivity growth withers (a phenomenon known as “Dutch disease” after the negative effects of North Sea gas production on the Netherlands). Meanwhile, the state institutions in charge of oil often become corrupt and evade democratic control. And oil-rich states almost invariably waste the income it brings, many ending their oil booms deeper in debt than when they started.

al-Kasim is credited with designing a system that struck a balance among a state-owned oil company, private oil companies, and an independent regulator:

The real achievement, in other words, was not finding oil but coping with its discovery. Norway faced the same dilemma as every other new oil producer with no experience of the industry: if you rely too much on private foreign companies, too little of the oil wealth benefits the country in the form of government revenue or economic development; if you go too far in the other direction, you risk a bloated, politicised oil sector that evades both accountability to the people and competitive pressures to be efficient.

The economic question is fascinating — how can you avoid the resource curse? — but you should also read the article for his unique personal journey (involving a child with cerebral palsy and one of the easiest job hunts in history).

P.S. Other coverage at Curious Capitalist and Kottke.

The Fannie and Freddie Anomaly

Can anyone explain the stock prices of Fannie Mae and Freddie Mac, the two government-sponsored enterprises that are supporting our mortgage market?

On Friday, Fannie’s common stock closed at $2.04 per share, up 250% since the start of August. That values the company–to be precise, the privately-owned common shares in the company–at more than $2 billion.

Freddie Mac’s common shares closed at $2.40 per share, up almost 300% since the start of August. That values Freddie’s privately-owned common shares at more than $1.5 billion.

Collectively, then, the common stock of these two wards of the state totals almost $4 billion.

This seems a trifle high, however, since most observers think their common stock is worthless (see, for example, this AP story).

I think those observers are right.

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Positive, Normative, and … ?

Am I the only one who feels unfulfilled by the standard distinction between positive and normative economics?

I am gearing up to return to the classroom next week, to teach microeconomics to incoming masters students at the Georgetown Public Policy Institute. Anyone who’s experienced the first day of micro class knows what’s coming. After introducing myself and talking about the wonders of economics (which is, indeed, fun, useful, and enlightening), I will launch into the great positive vs. normative distinction.

In brief:

Positive is the science side of economics: understanding and predicting the behavior of individuals, firms, markets, economies, etc. In short, the part of economics in which we try to be physicists (or, sometimes, biologists).

Normative is the side of economics where we make value judgments, identifying policies as good or bad. In short, the part of economics in which we try to be philosopher-kings.

Both styles of economics are important, particularly in a public policy program. And drawing a careful distinction is vital, not least because of the many people in Washington (both economists and non-economists) who try to dress up their value judgments as science.

I have one problem with this distinction, however: it overlooks a great deal of what economists actually do.

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The Rubber Room

Over in the New Yorker, Steven Brill discusses “the battle over New York City’s worst teachers“:

These fifteen teachers, along with about six hundred others in six larger Rubber Rooms in the city’s five boroughs, have been accused of misconduct, such as hitting or molesting a student, or, in some cases, of incompetence, in a system that rarely calls anyone incompetent.

The teachers have been in the Rubber Room for an average of about three years, doing the same thing every day—which is pretty much nothing at all. Watched over by two private security guards and two city Department of Education supervisors, they punch a time clock for the same hours that they would have kept at school—typically, eight-fifteen to three-fifteen. Like all teachers, they have the summer off. The city’s contract with their union, the United Federation of Teachers, requires that charges against them be heard by an arbitrator, and until the charges are resolved—the process is often endless—they will continue to draw their salaries and accrue pensions and other benefits.

“You can never appreciate how irrational the system is until you’ve lived with it,” says Joel Klein, the city’s schools chancellor, who was appointed by Mayor Michael Bloomberg seven years ago.

Neither the Mayor nor the chancellor is popular in the Rubber Room. “Before Bloomberg and Klein took over, there was no such thing as incompetence,” Brandi Scheiner, standing just under the Manhattan Rubber Room’s “Handle with Care” poster, said recently. Scheiner, who is fifty-six, talks with a raspy Queens accent. Suspended with pay from her job as an elementary-school teacher, she earns more than a hundred thousand dollars a year, and she is, she said, “entitled to every penny of it.” She has been in the Rubber Room for two years.

Brill paints a picture of a stunningly costly and, frankly, stupid system for handling teachers who are accused of misconduct or incompetence.

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Craigslist’s Business Model

The magazine Wired regularly publishes some of the most interesting articles about economics and the modern world. Last month, for example, they had a great article about the antitrust threats looming over Google. The month before, it covered the economics of Somali pirates, which I never found time to write about. And the month before that, it discussed how Google, not eBay, is really the master of auctions.

This month, Wired provides an in-depth look at craigslist.

For those who don’t already know, craigslist is the place to post classified ads on the web. According to Wired, it is the world’s “most popular dating site,” “the most popular job-search site,” and “the nation’s largest apartment-hunting site.” Not to mention the myriad other things you can buy, sell, trade, give, receive, etc. on the site.

How did craigslist achieve this dominance? The article doesn’t provide a crisp answer, but it does offer some gems about how the company operates. You should read the article for the full effect, but here is a sample:

On innovation:

Think of any Web feature that has become popular in the past 10 years: Chances are craigslist has considered it and rejected it. If you try to build a third-party application designed to make craigslist work better, the management will almost certainly throw up technical roadblocks to shut you down.

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OMB’s 2009 Deficit Estimate Is Likely Too High

As expected, the new budget projections from the Office of Management and Budget show an estimated deficit of $1.58 trillion in the current year (which ends on September 30).

In their coverage of the dueling budget releases, many members of the media are noting that this estimate is almost identical to the $1.59 trillion estimate released by the Congressional Budget Office. Thus, it may appear that OMB and CBO reached similar conclusions about this year’s deficit.

That is not correct.

OMB and CBO use different accounting for a growing part of the budget — the federal take-over of Fannie Mae and Freddie Mac. If you adjust for those accounting differences, an apples-to-apples comparison shows that OMB’s projection of a $1.58 trillion deficit should be compared to a CBO estimate of $1.41 trillion. (For details, see the table on p. 2 and the box on pp. 8-9 of CBO’s report.)

In other words, using identical accounting, CBO is projecting a deficit that is almost $200 billion less than projected by OMB.

Here’s how it works:

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More Stimulus Spending Than Originally Projected

Lots of budget news this morning, with the release of the newest projections from the Office of Management and Budget and the Congressional Budget Office.

One headline is that spending on the stimulus will be higher than expected. As reported by Lori Montgomery at the Washington Post (ht EconomistMom):

The $787 billion economic stimulus package President Obama signed earlier this year is likely to cost “tens of billions of dollars” more than expected, helping to drive projections for next year’s budget deficit to $1.5 trillion, White House budget director Peter Orszag told reporters.

With unemployment climbing, costs for a variety of stimulus programs are running higher than anticipated, Orszag said, including expanded unemployment benefits, food stamps and energy grants. In an interview embargoed for release Tuesday morning, Orszag said he could not estimate the overall cost of the package, but he called Republican estimates of $900 billion “slightly high.”

The $900 billion estimate that Peter mentions is reported in this letter from former CBO Director Doug Holtz-Eakin to Republican House Leader John Boehner.

The CBO also addresses this issue in its report (box on pp. 10-11). The box discusses lots of pesky nuances about budget accounting and the timing of payments. Perhaps the most interesting observation, consistent with the OMB quote above, is that:

The higher-than-expected unemployment rate has led CBO to raise its estimates of spending in 2009 for ARRA [i.e., stimulus] provisions that affect unemployment compensation (by $7 billion) and Medicaid (by $1 billion).

In other words, the weaker economy has added $8 billion to stimulus spending in fiscal 2009 alone with, presumably, more to come in fiscal 2010.

These developments further complicate the challenging task of tracking the stimulus.