In 2010, the Committee for Economic Development announced in a public statement that we believed that the right vote on the Patient Protection and Affordable Care Act was “no.”  We acknowledged that the creation of the health-insurance exchanges was a step toward employing market forces in health care, but we believed that it was being done in a far-from-optimal way.

While noting our opposition to the ACA, one must have a certain sympathy with the law’s defenders today with respect to one particular sore spot in the implementation of the law.

During the 2009-2010 debate, the law’s strongest advocates made two emphatic statements:

The current health-insurance system is horrendous.  It inhumanely denies coverage to millions of hardworking Americans.  And it is inefficient and unaffordable for households, employers and the federal government alike.  It wastes money in bad care, under-care, and even over-care that causes more pain and cost than it does healing.  It is more costly than care in any other developed country, and yet it yields inferior outcomes by every major indicator of health.  Our healthcare system is a disaster.




If you like it, you can keep it.

Clearly, the first manufactured “quote” is a caricature of the debate, but many on both sides of the key 2010 votes said nearly that.  And equally clearly, the second “quote” was not precisely paired with the first.  But the juxtaposition of the two does not do violence to the reality.  And so today, when numerous Americans find that the insurance plans with which they have been satisfied will be discontinued with the implementation of the ACA, there is considerable angst.  Some, perhaps much, of it is justified.  But there is an important lesson in this angst, and we should absorb it.

Some existing insurance plans should go away, and are doing so because of reforms in the ACA that have majority bipartisan support.  We know from experience, for example, that there was until recently a sub-industry of health insurance that combed the original application forms – sometimes years or even decades old – of now seriously ill customers to find discrepancies that could be used to deny coverage.  Sometimes they used grounds of pre-existing conditions, but sometimes they sought circumstances totally irrelevant to the ailment in question.  Such “rescissions,” as well as discrimination at the time of application on the basis of pre-existing conditions, are now banned by law.  Insurance policies created using business plans that relied on after-the-fact rescission to generate their profit are not viable in the new, and arguably better, marketplace.

But put such obvious issues aside.  Consider instead only the basic question of the efficiency of delivery of health care.  On a totally bipartisan basis, analysts pronounce as a truism that our system of delivering care must change if it is to remain affordable at acceptable levels of quality.  And assume for sake of argument that the ACA is wiped from the face of the industry, and the nation can start fresh.  What reform that fundamentally changes our mode of delivering health care can promise that every American can keep the insurance that he or she has today?

This is not an empty question, and not a mere acknowledgement that to make the soufflé, we must crack some eggs.  Millions of Americans know that they have medical conditions, and are today in a physician’s regular care.  Many of those have coverage in the old-fashioned fee-for-service system, where incentives reward providers who deliver more services – helpful or not.  Suppose that a fully justified reform creates strong incentives toward new modes of organization that integrate providers into cost-responsible systems.  How many thus-outdated insurance plans will go away?  How many providers already near the ends of their careers will contemplate the changing world and then decide to hang up their stethoscopes and retire?  So how many of their patients will find that they cannot “keep what they have,” and will blame the reform for disrupting their care and their lives?

Any new healthcare system, either the current ACA or any successor, will need to deal with such questions of transition.  The ACA included a “grandfather” clause for existing plans, but merely allowing a plan to continue legally does not mean that it will continue if reform-induced changes in the marketplace undermine its business model.  Thus, anyone who hopes to restructure the U.S. healthcare system, even if unambiguously to the entire society’s betterment, must be prepared to respond to the many individuals – often the elderly or the sick – who will not be able to “keep what they have.”

If all goes well – a frightening thought – Washington is about to kick the can down the road yet another time.  This would be a good outcome because Washington seems just as likely to miss a mighty swing at the can and fall on its bum in the mud.

There is no realistic alternative to another can kick, after all.  This is October.  The fiscal year has already begun.  The federal government has been shut down for two weeks.  The Treasury is just about out of borrowing ability, and on the brink of default (to use the stark term).  This is a drain-the-swamp-versus-fend-off-the-alligators moment.  The Congress is not going to reform the nation’s tax code, Medicare and Social Security before the end-of-the-year holidays, as anyone who has watched our legislators work even at their finest knows all too well.  Think of 1981-1982 on Social Security, and in 1981-1986 on the income tax – and note that these were separate, multi-year efforts.  It is time for damage avoidance; that is the best we can hope for.

So if we are going to kick the can, we might as well kick it strategically.  Let’s think about our situation – what we must accomplish, and when.

What do we need to accomplish?

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This is just a brief post-mortem on this morning’s monthly employment situation report, for those who did not have the opportunity to spend time with it.

As you probably know, the employment report is based on two separate surveys, one of employers and one of households.  The employer survey is generally thought to be the more reliable, with the footnote that it has a significant inevitable weak spot in the impossibility of adding newly created firms to, and dropping dying firms from, the sample in real time.  The household survey shows greater variability from month to month because of the difficulty some workaday citizens have with picking up the nuances of the concepts, not to mention the refusal of some to participate.

This month’s employer survey showed mediocre growth – 162,000 new jobs.  That is not enough to rebuild employment very much from the enormous job losses of the financial crisis, after taking into account the growth of the potential labor force (about 100,000 to 120,000 per month) because of the simple expansion of the adult population.  If you were hoping for a breakout number, this isn’t it.

The industry categorization of job growth was not terribly encouraging, either.  More than half of the new jobs came in food services and drinking places, and in retail trade.  I don’t want to overstate this complaint.  Job growth is better than the alternative, and jobs should not be downgraded reflexively on the basis of their industrial classification.  But having half of new job creation in these categories would be more satisfying if the overall new-job number had been robust.

One perspective on the labor market, and on the economy generally, is that the weakness in so many economies around the world (including ours) leads to reduced demand for goods and for highly technical services, which are the industry categories that tend to provide the best-paying jobs.  If we had robust overall economic and job growth, the retail and dining-and-drinking sectors would face more competition in the market for labor, and would have to pay more, benefitting everyone.  We don’t need a campaign against “services” and those firms that provide them, and we don’t need a campaign for gravity-defying higher wages without demand for labor.  We need economic growth.

In the household survey, the unemployment rate fell by 0.2 percentage points, from 7.6 percent to 7.4 percent.  Increasingly sophisticated public opinion puts much less stock (pardon the pun) in the unemployment rate than it did, say, two or three decades ago.  More people now understand that the unemployment ratio has a numerator and a denominator, that both matter, and that shifts in one or the other can yield a misleading overall change.  In this case, the household survey had employment rising, unemployment falling by a little more, but the size of the labor force declining a bit.  If the economy had been improving significantly, we would have expected some of the large number of discouraged job losers to re-enter the labor market.  Instead, following the pattern of recent months, we have at best tepid interest in the labor market.  Again, the need – easy to say, but more difficult to legislate than some would admit – is greater overall economic growth.

Wall Street often needs to decide whether good economic news is bad news (because it portends government macroeconomic restraint), or bad economic news is good news (because it will motivate government macroeconomic stimulus).  This time, Wall Street will have to interpret mediocre economic news.  May it choose wisely.

So the trend is that the trend continues.  Move along, folks, there’s nothing going on here.  (Sigh.)

Last week, the White House released its annual Mid-Session Review of the budget (which I will call the MSR out of habit).  It surprised most of the old budget hands in Washington – because it came without fanfare, it was actually early (the statutory due date is July 15), and for several years it has been delivered late (as was this year’s full budget).  One element of the rollout that wasn’t much of a surprise was that the news surrounding the document sounded good.  The story was that the deficit is down significantly from what had been expected, and that the outlook is for continued improvement.  In fact, in just a couple of years, the annual deficit would decline sufficiently for the debt to begin to shrink, and to continue shrinking, relative to the size of the economy.  At least, that was the spin on the document, that was what the press reported, and that was what most people heard.

As most of you would suspect, the superficial stories in the press put too much gloss on the true picture.  Though we have been over this general territory before, the MSR is an important part of the annual budget process, and the interpretation of this year’s release could have significant influence on the public mood on this issue.  So just to be sure, I’ll give you a rundown on some of the details.  To summarize, the headlines focus solely on the very near term to the exclusion of the future (which is what the budget is really all about), and miss the subtleties of what the MSR and the Administration’s budget document really are.  By the time we are done, you likely will take only the most limited comfort in the new information from the White House, and your concerns for the long run will be, if anything, a little greater.


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The brief holiday post last week reminded that the Federal Reserve faces a real challenge making monetary policy.  The unprecedented combination of a hesitant recovery from a near-Great-Depression downturn, plus the eventual need to reverse the pedal-to-the-metal interest rates and quantitative easing, leaves the Governors and the Bank Presidents with a truly sleep-depriving responsibility.

Last week’s view was from 30,000 feet.  This time, let’s focus more closely on one particular part of the Fed’s challenge – specifically, the enormous jolt that has been taken by the labor market, and most importantly the workers in it.

In the simplest terms, an appalling number of workers lost their jobs and had little or no prospect of finding new work.  This situation was aggravated by the concentration of the impact on housing, in two respects.  First, the housing industry itself was devastated – more so in specific localities, but by modern economic standards from sea to shining sea – meaning that if you were a construction worker, you had little hope of finding a job anywhere.  As a recent post pointed out in a different context, employment in residential construction dropped by about 50 percent from its mid-decade peak, and still hasn’t recovered much.  But second and more generally, the plunge in house values and housing demand has meant that any unemployed worker who found no local prospects and was willing to move to find work likely could not sell a home to do so.

The result was an enormous population of job losers with no hope and no options.  Many gave up searching for work.  The immediate human cost is obvious: lost incomes, lost homes, lost self-respect, lost marriages, lost skills, and children losing their optimism and vision.  It seems almost heartless to turn to the economic policy challenge that flows from this catastrophe, but after all, we need sound economic policy to limit the pain.

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And, indeed, as he listened to the cries of joy rising from the town, Rieux remembered that such joy is always imperiled.  He knew what those jubilant crowds did not know but could have learned from books: that the plague bacillus never dies or disappears for good; that it can lie dormant for years and years in furniture and linen-chests; that it bides its time in bedrooms, cellars, trunks, and bookshelves; and that perhaps the day would come when, for the bane and the enlightening of men, it would rouse up its rats again and send them forth to die in a happy city.

Albert Camus

The Plague

(Stuart Gilbert translation)

The public reaction to the revised baseline budget outlook of the Congressional Budget Office (CBO) has leaned overwhelmingly in one direction:  The deficit and debt problem is in indefinite remission, maybe even cured.  Action on the problem is on hold, if not off the table for good.

Jared Bernstein, former economic adviser to Vice President Joe Biden, was quoted in the first-day reaction story in the Washington Post as saying, “Certainly, if facts drove the day, this update would be a fire hose for the hair-on-fire austerity crowd [regarding] the near-term deficit… The patient is checking out of the hospital while [Republican leaders] are still preparing for major surgery.”

Jared, who is a good guy with deeply held principles (and a very quick wit), would surely say that my opening quotation for this post is way over the top.  But in all honesty, considering the potential consequences of a runaway public debt, I would say that the closing words of The Plague are pretty much in scale.  In fact, I would like to edit Jared’s metaphor:  The patient, a cardiac case with a known arterial blockage, has had his palpitations calmed by medication.  He is out of immediate danger, and has been reclassified from “critical” to “serious.”  His physicians now have the luxury of time.  They can choose a more deliberate approach than seemed essential a few hours ago.  They can even postpone the next step somewhat.  But the blockage is still there, and its consequences are still potentially terminal.  Sooner or later – but not too late – it must be addressed.

To get closer to my specific point, and moving my medical analogy back to The Plague, the plague bacillus is not the annual budget deficit, but rather the accumulated public debt.  It is still far too large; the CBO release has changed that fact hardly at all.  The debt has retreated into the cellars and the bookcases, hidden by today’s very low interest rates.  But interest rates will rise, and when they do, the debt will once again emerge into the streets.  And because we have used this complacent interlude of low interest rates to pile up debt hand over fist, when interest rates do rise, the debt will emerge more virulent than ever.

So that is the big picture, but back to the present:  What did CBO say, and why have people reacted so strongly (yet so blithely)?

CBO’s headline number was its estimate of the deficit for the current fiscal year (2013), which ends on September 30.  Back in February, CBO said that the 2013 deficit would be $845 billion.  Now, they estimate $642 billion – down by almost a quarter in three months.  Five years ago, a $642 billion deficit would have been terrifying.  But now, after four $1 trillion-plus deficits and another near miss, $642 billion feels like a mild early summer’s day at the beach.  People who are not budget specialists probably see that improvement and wonder how much better it will look in another three months.  This nation has climbed out of every jam unscathed; the deficit melted away in the 1990s; surely we will come out smelling like a rose again this time.

But here are the sobering details:  Of the $203 billion improvement in the 2013 deficit, $95 billion comes from a unexpected payment to the Treasury from Fannie Mae and Freddie Mac.  CBO reports that those payments will occur because of “accounting changes,” and assigns a probability of zero to any further payments at anything like that magnitude over the next 10 years.  Another $105 billion (that is, essentially the remainder) of the improvement comes from higher revenues.  Those revenues apparently arose because upper-income households shifted an unexpectedly large portion of their income from calendar year 2013 to calendar year 2012 to head off the increase in upper-bracket tax rates, and because corporate tax payments snapped back to normal from their depressed recession percentage of profits somewhat faster than CBO had anticipated in February.  Neither of those developments will repeat itself to any significant degree, either.

CBO does today see lower deficits in each of the following 10 years than they did in February.  But the margin is not large.  And in most years, the fallout of lower debt service because of the 2013 windfall accounts for as much as one-third of the total improvement.  The revenue surprise of this year trails down to essentially zero six years from now.  There are welcome assumed future savings in Medicare, Medicaid and Social Security.  But just as they had in February, CBO now expects the deficit to improve through only 2015, and then to begin to rise again.  And by 2019, the deficit is again large enough that the public debt grows faster than the economy – that is, the debt-to-GDP ratio begins to rise again.  From a local peak of 76.2 percent of GDP in 2014, it falls modestly to 70.8 percent of GDP in 2018, but then is back up to 73.6 percent of GDP in 2023.

Of course, all of these numbers are forecasts.  And as Nobel Prize-winning physicist Nils Bohr (not Yogi Berra) notably said, forecasting is very difficult, especially if it is about the future.  So we economists and budget-jockeys need to be appropriately humble about our projections.

Still, admitting uncertainty, it is hard to see a lot of upside in these numbers.  Might there be still more revenues?  Sure – but CBO already has raised its projection of revenues as a percent of GDP above their long-term average.  And that is after the income tax rate cuts for the vast majority of the population were made permanent at the beginning of this year, making further revenue improvement less likely.  And outlays could be lower, too; but CBO (as noted above) already has reduced its estimates for Medicare, Medicaid and Social Security.

There is a policy risk as well.  CBO notes that most of the temporary law that threatened lower revenues and higher spending over the past dozen years has been made permanent, and so now is baked into the baseline cake.  Most – but not all.  CBO reports that renewal of expiring tax cuts and postponement of pending triggered spending cuts (including the suspension of the “sequester”) would add $2.4 trillion to the cumulative 10-year deficits, and at the end of 2023 leave the debt at 83 percent of the GDP – the highest debt burden since 1948, just after the nation financed the enormous cost of fighting World War II.

So if we cannot lower the river, what about raising the bridge?  What if we had a larger GDP?  There is no question that if the GDP autonomously raised itself, it would reduce the debt-to-GDP ratio.  But many who seek a larger GDP to solve this problem want to achieve it by cutting taxes or raising spending – which would increase the debt directly.  Getting enough additional GDP growth to come out ahead on net would be a neat trick.  And that is especially true given that faster GDP growth would mean greater demand for credit, which would increase interest rates – increasing thereby the federal government’s debt-service cost, and blunting the benefit of the faster growth.  Sadly, the debt already is so large that growth is not so much of an unalloyed benefit as it used to be.

In short:  Our imprudence in piling up this debt, in failing to pay it down further when we had the opportunity, leaves us on the horns of a terrible dilemma.  We have too much debt; and we cannot choke our weak economy.  This is a monumental challenge for macroeconomic policy.  The CBO report is a break in the palpitations, not the disappearance of the arterial blockage.

A closing thought:  The Washington political environment has become so heated that it is difficult to build a productive dialog.  I myself find that when the one-liners start flying back and forth, I can lose the subtleties and the nuance and the conciliatory, problem-resolving language.  Areas of agreement are ignored because the conflict becomes an end in and of itself.  For example, if I asked Jared Bernstein if he believed that the federal government could go on indefinitely accumulating debt at a rate faster than its GDP grew, as is forecast at the end of the CBO 10-year budget window, I am quite sure that he would say no.  Likewise, if he asked me if I am secure in the current shaky economic recovery, I would say no.  We probably are in fundamental agreement about the nature of the current policy dilemma.  We have a lot of work to do to square this policy circle.  And we need to make our plans now – while the palpitations are gone – because we will have far fewer (if any) good options once the heart monitor starts blaring its warnings again.

We – and others on both sides – need to find areas of agreement so that Washington can get off the dime.  I should invite Jared out for a beer and see if we could get this started.  You there, Jared?