And the most salient feature of the current episode is that there has been unusually little creation. From the 1990’s to the 2000’s, the quarterly job creation rate fell from about 8% to about 7%. Since 2006, it has fallen to about 6%.Read his entire blog posting here.
Your October 7, 1987 letter asks whether the full faith and credit of the United States Government stands behind the Federal Deposit Insurance Corporation and its deposit insurance fund.... I stated that a joint resolution of Congress (H.R. Con. Res. 290) adopted in March 1982...because of its status as a non-binding resolution, did not serve to create any legal liability on the part of the United States Government to support the funds. You now ask whether Congress has passed a statute that makes the United States Government legally liable for any and all obligations of the FDIC.Congress PROBABLY will back the FDIC, but legally it is not required to do so, nor are the courts legally required to support any depositor's claim against the FDIC for funds, if insurance funds are not available.
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[I]t is our opinion that Title IX of CEBA merely represents an expression of the intent of Congress to support the FDIC's deposit insurance fund should the need arise.
But can Congress require every American to buy health insurance?Read the complete Washington Post article by Rivkin and Casey here.
In short, no. The Constitution assigns only limited, enumerated powers to Congress and none, including the power to regulate interstate commerce or to impose taxes, would support a federal mandate requiring anyone who is otherwise without health insurance to buy it.
Judge Rakoff wants the explanation behind why a Bank of America proxy statement last November misled investors about bonuses for employees at Merrill Lynch, which was about to be acquired by the bank. On Tuesday, he stated another desire: to get the SEC to better explain why had agreed to a settlement without pressing the bank’s executives harder.Read the entire blog post here. It also has excellent links to articles about the history of this SEC case.
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...starting to suggest an apparent willingness on the part of the Commission to let a big player off the hook....
France’s costly national health insurance is mostly financed by taxes on labor. A Frenchman making a monthly salary of 3,000 euros will pay approximately 350 of them (deducted by his employer) for health insurance. Then the employer will add approximately 1,200 euros, making the total monthly cost to the employer of this individual’s services not 3,000 euros but 4,200. High labor costs in France affect not only consumer prices but also unemployment rates, since employers are reluctant to pay so much for low-skill workers. Economists agree that unemployment rates and the cost of national health insurance are directly related everywhere, which partly explains why even in periods of economic growth, the average French unemployment rate hovers around 10 percent.The French system negatively affects employment in France and increases the cost of drugs in the US for Americans.
High as they are, taxes on wages are not enough to cover the constant deficits that national health insurance runs. France imposes an additional levy to try to close the insurance deficit—the CSG (contribution sociale généralisée)—which applies to all income, including dividends, and which Parliament increases every year.
From 1980 to 2006, the percentage of US households earning $100,000 or more (in constant 2006 dollars) grew from 8.6% to 19.1%. The percentage between $75k and $100K grew from 10.3 to 11.3 percent. At the other end, the percentage under $15K fell from 16.6% to 13.4% and the percentage between $15K and $34K fell from 26.2% to 23.3%. Thus all three categories below $35K fell a total of 6.1 percentage points.Read the entire blog post here.
Bank regulators are set to discuss accounting standards next week, with an aim toward determining the potential affects that off-balance-sheet rules may have on some financial institutions. During the past year, bankers have fretted about new accounting rules that would force them to bring back on their balance sheets billions of dollars worth of assets — a move bankers have argued will throw regulatory capital ratios into chaos.Read the complete CFO.com article here.
Betting on political outcomes, economic outcomes, even box office success for movies: there's a burgeoning industry based on prediction markets.He is also an author on Core Economics blog.
Andrew Leigh, our regular Wryside Economics commentator, argues that betting markets are more accurate than polling when it comes to political predictions, in particular.
For decades, insurance companies have been pricing policies based on the belief that adverse selection comes into play among their customers. But [Michael] Keane, a professor of economics at the W. P. Carey School of Business, says it does not. There are no empirical data proving adverse selection, he says. Other factors are operating and, in fact, insurance companies often benefit from "advantageous selection," in which the best risks also are their best customers.Read the complete article, "Adverse to whom? Insurance company fears of 'adverse selection' may be unfounded" here.
There is no objective evidence to indicate that a government-run health care system in the United States will reduce personal bankruptcies. The U.S.-Canada comparative analysis strongly suggests that bankruptcy statistics are being exaggerated and distorted for political reasons.Read The Medical Bankruptcy Myth, by Brett J. Skinner, published Wednesday, August 19, 2009, online in the Journal of the American Enterprise Institute.
Due to a misdiagnosis of the 1929 stock market crash, the US creates a huge regulatory and enforcement structure, the SEC, to prevent investor and securities fraud and stock market crashes. In the subsequent 75 years, investor and securities fraud continues, including Enron, Madoff and many other similarly notorious cases over the period. Many of the SEC protections, such as insider trading, are common law rights recognized prior to the creation of the 1933 and 1934 Acts and the SEC.
Contractual legal rights are a powerful mechanism for protecting the rights of parties to commercial transactions. In fact, most transactions are based on contractual protections as opposed to regulatory protections. Shareholders and other interested private parties, and not the SEC, often sue to enforce their legal rights in securities transactions, when courts have recognized their right to sue to protect themselves.
While the counterfactual of life without 75 years of an SEC is difficult to envision, the existence of the SEC did not prevent major securities and investor fraud. Additionally, the SEC is always requesting more funding and staffing to investigate and litigate fraud. It is unclear that the 33 and 34 Acts have decreased fraudulent activities.
Unlike banking, where FDIC insurance creates moral hazard, distorts the risk reward relationship of bank investments and makes the government (and the FDIC) an interested and potentially aggrieved party, the SEC is not in a similar relationship to the parties and transactions it supervises.
Maybe in a market economy as enormous and as complicated as the US capital markets and economy, it is impossible to have an adequate regulatory supervisory structure. It might be better to allow private participants to negotiate and protect themselves on a transaction level. The SEC is always chasing the fraud after it has happened. Is that worth the expense and false expectation of investor and securities protection?
Since federal taxes are based on nominal incomes, workers with the same real income pay higher taxes in high-cost areas than in low-cost areas, without receiving additional benefits.... For federal taxes to not distort the location choices of workers, the correct principle is that taxes should be independent of where workers live....For example, in the New York metropolitan area, wage levels are 21 percent above the national average, which, interacted with an effective marginal tax rate of 33 percent, creates a 7 percent federal surtax on labor income for locating there.... Because federal taxes are not indexed to local wage levels, workers are induced to leave cities with high wages and move to cities with low wages. As a result, unindexed federal taxes lower employment levels and property values in high-wage cities while having the opposite effect on low-wage cities. In equilibrium, these price changes compensate workers for federal tax differences across cities, but the resulting geographic distribution of employment is inefficient, reducing overall welfare.Update: Ungated earlier version of paper available for download here.
But as his [Obama's] approval ratings slip—only half of Americans support his policies, the “lowest level since Inauguration Day,” according to a Quinnipiac University poll released August 6—some people wonder if Obama is trying to do too much, too fast. It’s a situation that any number of chief executive officers have faced, say faculty at Emory University and its Goizueta Business School.Read "Managing at the Speed of Change" published August 12, 2009, in Knowledge@Emory for a strategic review of the President's attempts to enact financial regulatory and health care change. The authors mention several possible policy mistakes and propose a few helpful suggestions.
“An outsider should not act like a preacher and assume he or she knows everything about the business,” Sheth says. “It’s a good way to quickly develop adversaries, as we’re seeing with President Obama’s efforts at rapid change. It's like antibodies fighting the new intruder.”The entire article is available online here.
High-frequency trading from Marketplace on Vimeo.
High-frequency trading is creating a ruckus on Wall Street. Marketplace Senior Editor Paddy Hirsch explains high-frequency trading and why some people are upset about it.
Paddy Hirsch has 26 other excellent videos about finance and economics available here.What is motivating President Obama to persist in seeking universal health care? If his main constituent groups did not benefit in some way, he would not propose universal care. Unions gain because it removes health care coverage from the bargaining table and allows unions to negotiate for other items. Minorities make up a majority of the group without health insurance and a rationed, restricted coverage is probably better than no coverage, especially when Obama's plan is to have the wealthy, as opposed to the users, bear the costs for the coverage. In addition, minorities make up a large share of the Medicaid government health program for the poor and universal health care would probably increase the health coverage benefits to this group.In rereading it, I notice I did not mention any benefit for the broad swath of Americans who have health insurance, mostly paid for by their employers. The failure of Obama to articulate a benefit for most of America who do not see the cost of their medical care and who are overwhelmingly satisfied with their medical care and medical insurance is probably the single biggest reason for the President's failure, at this point, to have broader support for his health care plan.
It would push senior Medicare coverage into universal coverage and stealthily allow for a future decrease in senior benefits by limiting all beneficiaries' health costs and not just seniors. The savings from the reduced expenditures on seniors will subsidize the other groups' costs.
Congress and the President will most likely continue to have their existing separate health coverage with exceptional benefits fully paid by the taxpayers.
Therefore, while many would see over time a noticeable decrease in the quality of their health care through delays, rationing, denials and spending caps, Obama's main constituency groups will see an improvement and President Obama and Congress will continue to have their existing health coverage.
Within the economic arena, as opposed to general welfare, does an incomplete and possibly inaccurate measurement of GDP lead to misstatements about the economy and misleading research? For example, at beginnings of unemployment increases are there greater proportions of workers who take on non-measured home based jobs like caring full-time for an invalid parent, doing major home repairs, etc. A reconstructed unemployment might be lower than measured, GDP might be higher at early stages of recessions, and it might explain some of the inability of the market to reduce measured unemployment.Read the entire blog post including comments here.
If there are problems measuring GDP, then do we know how GDP responds? For example, in Cash for Clunkers, the new car purchases are added to GDP, but the destruction of the older vehicles is not subtracted. If instead we had a trade in program for new energy efficient homes that required destroying the older, less energy efficient home, we would reach a different result about GDP effects. The new home purchase would add to GDP as for cars, but the destruction of the old home would result in a reduction of GDP because imputed rent on homes is included in GDP unlike cars.
We would get different economic multiplier effects, etc. about two very similar programs and draw misleading conclusions unless we recognized the data inconsistency. Given what we know about the problems with GDP and recognizing that there are also hidden problems, do we know how economic research and measurements are biased by the GDP inaccuracies? Have we adopted mistaken policies due to inaccurate data?
So why are there big banks? The primary reason for any firm to grow is to avoid some of the transaction costs of using the markets. The transactions costs avoided by centralizing costs in one firm include the difficulty of discovery the relevant prices, as well as the costs of brokering deals and raising capital from outsiders.Read the entire article here.
But this avoidance of the market is also a disadvantage, as avoiding market prices subtracts from a bankers knowledge and makes efficient economic calculation difficult.
This is actually the central economic dynamics of a capitalist economy. Prices are important to economic calculation but they involve transaction costs. Eliminating transaction costs from dealing with external price markets is the leading explanation for why firms exist at all, and why they grow. But this also has a cost of making prices less transparent, and economic calculation more difficult. The size of any firm is probably dependent on how these things balance out: transactions costs and calculational chaos costs.
The US Securities and Exchange Commission should fund itself directly from industry fees, a system that would allow it to tackle more complex investigations and invest more in technology and skilled people, Mary Schapiro, its chairman, told the Financial Times.The complete article is available here.
"The disappointment with economists is not because there were none of us who forecast the possibility of the crisis we are in, but rather that economists like Robert Lucas and myself [Brad DeLong] did not listen with sufficient care and attention to hte Michael Mussa posse."
You inadvertently are the best defense of Robert Lucas, his article and the efficient market hypothesis. If a respected economist at a top ten economics school, such as yourself, did not find the analysis and predictions of Dean Baker, Richard Thaler, Robert Shiller, and Michael Mussa compelling so that you would take action, make investment decisions based on their advice, and argue for policy changes, what can be expected of other economists, policy makers, and home buyers?
Additionally, you admit you were in the midst of writing a paper, presumably with economically cogent, logical and correct arguments against the conclusions of the economic doomsayers.
It is not that Shiller saw the heightened potential of the decline in home prices that is important. What is important is that there was no reason to believe that his predictions and analysis were any more or less accurate than any other prediction in the noisy environment of future home price predictions. Economic research on bubbles shows that they can also last a long time and revert to fundamental levels gradually as opposed to crashing.
Is timeliness an important factor for your respect of the predictions that home price levels were unsustainable or can a bubble crash prediction be made a few years too early and still be respected? Is predicting the extent of the downturn important? Was Shiller's prediction any more than what goes up must come down?
I assume that the economists you mentioned have made other predictions over the years. How accurate are their other predictions as to results, timing, duration and severity? Were these four and others who made the same predictions just lucky this time?
Your behavior is a defense of the efficient market hypothesis. Given the information that you knew and that was available to you, you could not credibly see the coming decline in home prices and you did not act or invest as if a decline was coming. That is all the efficient market hypothesis says. Available information is not actionable to the extent that it will allow someone to make profits beyond that expected by chance and risk.
Thank you for showing through action that Robert Lucas, Eugene Fama and many other EMH proponents are right.
Read the entire article here.
The CBO is actually being kind to the would-be reformers. Its analysis likely understates—by at least $1 trillion—the true costs of expanding health coverage as current Democratic legislation contemplates. Over the last few months, my colleagues and I at the consulting firm Health Systems Innovations have provided cost estimates of health-care reform to both Republican and Democratic members of Congress, and we’ve posted these estimates on our website as well. We believe that the Democratic bills currently under consideration in the House and Senate would cost $2.1 trillion and $2.4 trillion, respectively—much higher than CBO’s figures.
The compensation theory requires bankers to have known the they were making risky investments when they bought triple-A rated securities but acted imprudently because the personal rewards were great and the personal losses were small. That's just not what happened in the years leading up to our crisis.Read the complete article here.
What really led to our crisis was that so many bankers were wrong. Take Ralph Cioffi, the Bear Stearns money manager who ran the two hedge funds that blew up in the early months of this crisis. He was just about the most knowledgeable banker in the world when it came to mortgage backed securities, especially one built from subprime mortgages. Bear Stearns originated the very first subprime, CRA securitization. If anyone was in a position to know that he was taking undue risks it would have been Cioffi.
But the evidence indicates the Cioffi didn't know. He wasn't engaged in risky investments in pursuit of bonuses. He actually believed that the hedge funds, which were 90% invested in AAA or AA securities, were safe. Even after the subprime meltdown began, his faith didn't waiver.
Medical care in the United States is derided as miserable compared to health care systems in the rest of the developed world. Economists, government officials, insurers, and academics beat the drum for a far larger government role in health care. Much of the public assumes that their arguments are sound because the calls for change are so ubiquitous and the topic so complex. Before we turn to government as the solution, however, we should consider some unheralded facts about America’s health care system.Read the complete Stanford University Hoover Digest article here. [Article title changed to "Here’s a Second Opinion."]
America’s unique employer-based healthcare system may have made sense 50 years ago, when healthcare was cheap and business faced little global competition. But today’s circumstances are radically different. Soaring health costs strangle business and absorb cash that could otherwise go to wages. The link between healthcare and employment explains why millions of Americans have lost coverage during this recession. Budding entrepreneurs with ill spouses or children stay in jobs they loathe for fear of losing the insurance they need. Keeping employers at the core of the welfare state is bad for business, bad for the economy and bad for families.From The Financial Times article, July 30, 2009, "America’s healthcare should no longer be tied to jobs" by Matt Miller.
With flaws like these you would think a prime goal of health reform would be to give everyone access to group health coverage outside the employer setting. But you would be wrong. Amazingly, this goal was taken off the table at the start. President Barack Obama and Democrats in Congress feared that moving beyond the employer-based system would leave them assailed as “socialists”. Business feared being slammed by unions for “shirking responsibilities”. Unions feared that if health benefits were no longer shaped through collective bargaining, their standing would fall further. Everyone in Washington feared too much “change”.
So the authors controlled for the differing non-health care related deaths to develop a life expectancy table that could more accurately reflect the relationship between health care quality and life expectancy: [Table omitted]Read the complete blog post here.
The US jumps from 15th on the list with a life expectancy of 75.3 to 1st with a life expectancy of 76.9.
GDP Non-defense federal government spending provided a 0.15 percentage point boost to GDP, while state and local government spending contributed 0.30 percentage points, according to the Commerce Department. Federal spending jumped nearly 11%, though much of it was in the defense arena, while state and local government outlays increased 2.4%.CNNMoney.com, Stimulus has yet to really boost GDP.
