Donald

Latest Data on Transfers and Income

In a series of posts (most recent here), I’ve documented that Americans are getting an increasing portion of their income from the government.

BEA released new data on incomes a couple weeks ago, including revisions back to 1995. These data reinforce the story I’ve described in my previous posts:

Transfers accounted for 17.3% of personal income in June. That’s the second highest in history, topped only by the 18.2% recorded in May, when transfers were boosted by one-time payments from this year’s stimulus act:

The increasing importance of transfers reflects both short-run developments and long-run trends. In the past year, the importance of transfers has grown because of (a) weakness in other forms of income, (b) the natural expansion of transfers due to economic weakness (e.g., increases in unemployment insurance payments), and (c) policies to expand benefits (e.g., as an attempt at stimulus). Over the longer run, however, the growth of transfers has been driven by the expansion of entitlement programs.

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Inflation, Bank Reserves, and Lending

The Business News Network in Canada interviewed me last week about the gigantic amount of excess reserves being held by U.S. banks.

Here’s a link to the video of the interview. (We had a small technical glitch at the start, but then got rolling.)

Going into the interview, I was focused on the following talking points:

Total bank reserves have skyrocketed over the past year, from roughly $50 billion to roughly $850 billion.
When we studied economics in school, we were usually taught that a big increase in reserves would eventually translate into big inflation.
However, that’s not true today, for two reasons: (1) short-term interest rates are effectively zero, and (2) the Fed can now pay interest on reserves. Those facts weaken / break the traditional link between reserves and inflationary pressures.
Some have wondered whether the excess reserves mean that banks are hoarding, rather than lending.
That’s not true either. Instead, the high level of reserves simply reflects the fact that the Fed has been a busy beaver, expanding its balance sheet by making loans and buying securities (i.e., credit easing). Banks might be hoarding or they might not; excess reserves don’t shed any light on the question.
Viewers who are interested in these issues should check out a recent paper from the New York Federal Reserve, which does a great job of explaining each of these issues.

I didn’t manage to get all of that into the interview, of course, but I tried to hit some of the high points.

Prevention, Health Costs, and Value

Cost has played a leading role in the policy debate over health care / health insurance. That’s appropriate since private health costs put such a burden on workers and families, and public health costs place such a burden on state and federal budgets.

I worry, however, that the focus on costs and spending sometimes overshadows what ought to be the real goal: getting as much value as possible from our health care system.

A case in point is the debate over preventative care.

Policymakers are desperate for painless ways to pay for expanded health care coverage. Many of them have therefore become enamored of the idea that increased spending on preventative care could reduce overall health spending. As I noted yesterday, however, there’s a problem with that idea: it generally isn’t true.

If your only goal is paying for expanded health care, that finding is both unwelcome and fatal – the search for painless pay-fors will have to look elsewhere.

If your goal is increasing the value we get from our health system, however, your inquiry isn’t done. Instead, you should say “That’s too bad; I was hoping it would save money. But while we’re talking about it, do the benefits of preventative care justify the higher spending?”

Good question.

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Does Prevention Reduce Costs?

One of the common memes in the health debate is the claim that increased spending on preventative medical care (e.g., cancer screening) can reduce overall health spending.

That idea is very attractive, since it seems to offer a free lunch: greater health at lower cost. It has just one small problem, though: it isn’t true.

As the Congressional Budget Office describes in an analysis released on Friday:

Although different types of preventive care have different effects on spending, the evidence suggests that for most preventive services, expanded utilization leads to higher, not lower, medical spending overall.

That result may seem counterintuitive. For example, many observers point to cases in which a simple medical test, if given early enough, can reveal a condition that is treatable at a fraction of the cost of treating that same illness after it has progressed. In such cases, an ounce of prevention improves health and reduces spending—for that individual. But when analyzing the effects of preventive care on total spending for health care, it is important to recognize that doctors do not know beforehand which patients are going to develop costly illnesses. To avert one case of acute illness, it is usually necessary to provide preventive care to many patients, most of whom would not have suffered that illness anyway. Even when the unit cost of a particular preventive service is low, costs can accumulate quickly when a large number of patients are treated preventively. Judging the overall effect on medical spending requires analysts to calculate not just the savings from the relatively few individuals who would avoid more expensive treatment later, but also the costs for the many who would make greater use of preventive care.

In short, an ounce of prevention may save a pound of cure for the patients it helps. But those ounces of prevention can add up to tons of costs when spread over millions of patients.

And that’s not all.

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Budget Deficit Likely Lower Than Forecast

As I’ve noted in a series of posts, the budget deficit this year will be gigantic. Indeed, it’s already reached almost $1.3 trillion. That’s big money, even in Washington.

As Stan Collender points out over at Capital Gains and Games, however, the absolute amount of the deficit is not the only thing that matters politically. Also important is how the deficit stacks up relative to expectations. And, as Stan says, there’s good reason to believe that the deficit will come in less than original forecasts.

Back in May, the Obama administration projected that this year’s deficit would come in at $1.84 trillion, assuming enactment of the President’s policies. In June, the Congressional Budget Office came up with a very similar estimate.

Now it’s looking as though the deficit could come in several hundred billion dollars lower than that.

The evidence for this is two-fold:

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Turning Guantanamo into Hong Kong

At the TED conference in Oxford last month, Paul Romer put forward a big idea: charter cities. His basic vision is that the best way to promote growth in developing countries may be to start over. Of course, you can’t just sweep away the existing system of economic and political institutions; they may be killing growth, but they are well-entrenched. So do the next best thing: clear some ground and build new charter cities.

Those cities will have rules — indeed, economic history teaches that they must have rules — but they will be focused on providing an environment that promotes economic growth. In short, property rights and the rule of law are in, corruption and political patronage are out.

His provocative example: If the U.S. gives up on Guantanamo, Raul Castro should invite the Canadians to help manage the area as a charter city. Over time, perhaps Guantanamo could become the Hong Kong of the Caribbean.

To illustrate how prosperity varies around the globe, Romer uses the increasingly popular approach of showing night time satellite photos. North Korea is a sea of darkness next to South Korea, illustrating the perils of too much government control. The darkness of Haiti, as compared to its neighbor the Dominican Republic, similarly illustrates the perils of too little government or, at least, too little governance.

As Romer frames it, development is a classic Goldilocks problem of finding the right set of rules — not too hot, not too cold — and then allowing people to make the choices that eventually lead to prosperity.

Federal Deficit Up to $1.3 trillion

On Thursday, the Congressional Budget Office released its latest snapshot on the federal budget. The headlines:

The budget deficit was almost $1.3 trillion during the first ten months of the fiscal year (through July). That’s up from $389 billion at this point last year.

Spending has risen 21% over last year, while tax revenues have fallen by 17%.

CBO estimates that $125 billion of the increased spending and decreased revenues are the result of this year’s stimulus act.

The chart shows the main drivers of the exploding deficit:

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A Less-Bad Jobs Report

The headlines in today’s jobs report were better than expected:

Payrolls fell by “only” 247,000 in July, somewhat smaller than the 325,000 that analysts had anticipated.
The unemployment rate ticked down to 9.4%.

If you dig into the numbers a bit further, you find some other encouraging nuggets:

Job losses in May and June were 43,000 smaller than BLS had previously estimated.
The average work week ticked up from 33.0 hours in June to 33.1 hours in July. That may seem like a small change, but it’s a good sign that hours have bounced off the record low recorded in June.
Average hourly earnings increased 0.2%. Again not a huge change, but clearly pointing in the right direction.
The U-6 measure of unemployment, which includes workers who are discouraged or working part-time for economic reasons, declined from 16.5% to 16.3%:

Losing 247,000 jobs is not a good month in the job market. But it is the best month since last August, before the fall of Lehman.

Big Salaries at Netflix

The slide deck describing the culture at Netflix has some real gems (ht kottke.org).

For example, here are three elements of the company’s compensation practices:

Unlike many companies, we practice “adequate performance gets a generous severance package.” (slide 26)

Netflix vacation policy and tracking: “there is no policy or tracking” (“There is also no clothing policy at Netflix, but no one has come to work naked lately.”) (slide 68)

Big salary is the most efficient form of compensation. (No bonuses, no free stock options, etc.) (slide 106)

Well worth a read.

Sub-Debt = Senior Debt?

I was flipping through a report from the Bank for International Settlements (BIS) recently (ht Torsten Slok) and came across this fascinating six-pack of charts:

The charts show how much banks have had to pay in interest on their senior, subordinated, and guaranteed debt, relative to the interest rates of comparable government bonds. For example, the chart shows that banks in the United Kingdom have recently had to pay about 250 basis points (i.e., 2.5 percentage points) more on their senior debt than the UK government pays on its debt.

There are many interesting stories spread across these charts. For example, the red lines suggest that the first wave of investors in guaranteed bank debt in the United States and France did well for themselves (since the decline in yields implies an increase in bond prices).

But the thing that really caught my eye was the behavior of the senior debt (green) and sub-debt (blue) lines. In the five European countries, you see what you might expect: the sub-debt trades at a higher spread than the senior debt. That makes sense, since the sub-debt faces greater risk of losses. Investors demand compensation — a higher yield — for bearing that risk.

And then there’s the United States.

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