On Obama's Pledge on Keeping One's Policy

There has been a lot of discussion about whether President Obama lied or not concerning his pledge that no one who liked their policy would lose it.  It not a lie, it certainly was disingenuous.  I have seen Robert Reich quoted as, "The Affordable Health Care Act allow insures to continue offering their old plans, but many insurers are choosing not to. I other words, the Act isn't the culprit; the insures are. Obama is being skewered for failing to warn Americans what they should already have known: that the market for private insurance is totally unreliable."

Washington Post "fact checker", Glenn Kessler, traces out the history of the claims.  See here.  He shows that the statement would not be true for anyone who obtained their policy after the Act passed, yet the pledge continued.  The rules of the Act were written so as to encourage insurance companies to drop the policies--any change, no matter how small--to a "substandard" (and cheap) policy would eliminate it status as grandfathered in.  Further, new policies like it would not be permissible so insurers have every reason to end the policies.  The writing of the Act was done in a way to strongly discourage any policies remaining for long that did not meet the standards of the Act.

It is a little like when I joined the Navy after completing college.  It was voluntary and my decision. Of course, there was also a draft and I would have been drafted into the Army. So, while technically true that the government did not force me into the Navy, it would be disingenuous to claim that the government didn't coerce me into entering military service.

Fed Policy Disagreements

The minutes of the most recent Fed meeting have been published. The Wall Street Journal is running an article today about the increasing differences in views about what the Fed should do.  A recent speech by Jeremy Stein, a new member of the board of the Fed, emphasizes some of the concerns that many have concerning some unwanted effects of the current policy.  As someone I saw on Squawk Box this morning put it--we may go from one financial crisis to another without having a boom time in between.  The persistently very low interest rates pusued by the Fed have to have some perverse effects.  The one talked about the most is that it encourages people to take on more risk to get a higher expected return.  In my view, the whole allocating process of financial markets is disrupted and perverted, and cannot be healthy in the long run and not doing much good in the short run.

Armen Alchian, RIP

The bulletin board outside the office of the Economics Department at UCLA had a picture of an old-style executioner, which the note underneath indicating it referred to the first graduate micro class students took. The class was taught by Armen Alchian in a manner similar to that seen in the old movie, "The Paper Chase."  While the class was intimidating, it also was stimulating.  There is an article in today's Wall Street Journal about Alchian as an obituary. He died at 98 years of age.

While getting my master's degree at Cal. State Haywarde and studying for the micro comprehensive exam, someone suggested I should read Alchian and Allen's Exchange and Production. It was their micro portion of their principles of economics text. Normally, one doesn't study for a graduate comprehensive exam by reading a principles textbook, but Exchange adn Production was no ordinary principles exam.  It was very rigorous and written at a college level, which meant it was too much for most college students.

Alchian's contributions to economic theory were mostly in the areas of analysis of property rights.  Several of his articles, are seminal in the field.  He also worked often in the law and economcis area, also teaching in the Economics for Lawyers (and another for judges) sponsored at the time by the George Mason University Law School.  I attended the law for economists course one summer, and Alchian was there teaching in the course for lawyers.  It was a good chance to visit with him.  He also played golf every day he was there.  Golf provided many examples in class as well.  My colleague at UCLA, Bob Newman, recounted one time that he was watching the eveining news and their was footage of a major traffic jam on an LA freeway. A helicopter was filming a portion, and one could see cars stopped. There was a man on the side of the road with a putter in his hand.  The camera focused on him as he walked down to pick up his golf ball and then turned around to face the camera. It was Alchian.  He was a great economist and teacher.  I am sorry to hear of his death.

Miscellaneous Items: British history, mental health care, and macroeconomic theory but not all together

Several links I found interesting:

1.  New York Times article on the declaration that bones discovered under a parking lot in England are the remains of King Richard III.

2.  Article from Seattle paper on poor care of the mentally ill in western Washington (sent to me by my daughter, Shelley, who works in mental health in Spokane.)

3. John Cochrane's blog on three views of consumption and the slow economy.  The post is somewhat technical in evaluating arguments in terms of New Keynesianism theory, permanent income hypothesis and old Keynesianis.  Cochrane's blog has become my favorite. He doesn't post often and when he does, they are long. But I find them helpful and informative.

Bullish or Bearish on the Economy, or Do We Just Muddle Along?

The stock market has returned to the levels that existed prior to the financial crisis.  Market experts are discussing whether the bull market can continue or whether the bottom will drop out again soon.  Opposing views can be found in many places, including this link

I am not as concerned about the equity markets as the economy as a whole.  Is there reason to be bullish on the economy or not?  On the plus side:  the American economy continues to be more innovative and resilient than most economies; immigration reform may actually come and immigrants tend to offer dynamism to the economy; households are getting their financial house in order--most corporations have already done so; inflation is still contained; productivity is high; among other things.

What about he negatives? These include: the recovery is very tepid and shows little sign of picking up soon; labor force participation rates, especially of men, are down; baby boomers are entering retirement age implying further reduction in labor force participation rates and increased transfer payments in the form of social security and medicare; there is too much of a concern over the short run--this includes the government, pundits and the Fed; dysfuntional government; a larger share of the population is dependent on the government for their income; Europe has problems; among other things.

I tend to be optimistic most of the time, but it is difficult to be optimistic right now.  I suspect we will continue to muddle along for awhile, but not see robust growth any time soon.

James Buchanan on Whether There is a "True Good Sociesty"

I am continuing to read works by James Buchanan. An article he published in Ethics in 1967 entitled, "Politics and Science: Reflections on Knight's Critique of Polanyi" is of relevance today. It deals with methodological issues about how science is done and whether the same approach can be made to the study of the political arena.  Polanyi's book was Science, Faith and Society and Polanyi argues for a somewhat realist approach to science--there is an underlying truth we are trying to discover.  In this, Polanyi was not a post-modern philosopher.  Polanyi evidently thought there could be a similar approch in the social sciences.  With this, Frank Knight, one of Buchanan's teachers I believe, was less confident.

Polanyi argued for a free and decentralized approach for science, and argued that the discoveries, challenges, and free discussion would ultimately lead to an idea of being closer to the truth. Hopefully, this is how science works.  But what about the political arena.  Buchanan writes, "If politics is not aimed at the discovery of 'truth' in any sense comparable to science, agreement among individuals cannot be expected to emerge as a result of free and open discussion. Enlightenment does not necessarily produce unanimity....Poltics becomes the proces through which divergent interests are compromised."

Buchanan then discusses whether there is one "good society." If there is, if there is a "truth" about the good society to discover, then there is no guarantee that free and open discussion will be the route there. If there is not a truth to discover but some believe there is and they have found it, it is likely they will seek to impose their view of truth and all others. Intolerance may be the result.  Buchanan then writes, "This attitude of intolerance seems especially to characterize the modern American left-liberal who dominates the academic setting and to whom there must always exist a set of prevailing 'truths,' politically determined, and from which open dissent becomes, somehow, 'immoral.'"

Does Paul Krugman come to mind?

Further Thoughts on James Buchanan

I wrote earlier about the death of James Buchanan and how I have read him more in recent years than I had earlier in my career.  I have read a lot of his work since his death, including two books--PUBLIC PRINCIPLE OF PUBLIC DEBT and DEMOCRACY IN DEFICIT: THE POLITICAL LEGACY OF LORD KEYNES (writen with Richard Wagner). While I was getting my Master's degree, I took a public finance class in which we used Buchanan's THE DEMAND AND SUPPLY OF PUBLIC GOODS as the text. Much of his writing was in the public finance area. However,  he is known more for helping create public choice.  I checked a couple of public finance textbooks as did my colleague, Sarah Estelle, who teaches public finance. It was interesting to see that Buchanan is hardly cited in them, and when he is, it is on a topics related to public choice rather than "pure" public finance.  The exception is a public finance book I have that was written in German and for the German market.  Buchanan is cited a lot, including his pure public finance work.

In a way, it is incorrect to separate public finance and public choice in Buchanan.  One of his first articles is, "The Pure Theory of Government Finance: A Suggested Approach," published in THE JOURNAL OF POLITICAL ECONOMY in 1949.  In the article, Buchanan says that the pure theory of government finance can be built upon one of two foundations--the "organismic" theory of the state or an "individualistic" theory of the state.  The organismic theory sees the state and all individuals in society as a single organic entity while the individualistic theory views the state as the sum of the individual members of society acting  in a collective capacity.  A theory of government finance that is built upon the first theory of the state may be totally inappropriate for the second theory of the state.

One place where Buchanan argued that this difference is important is in the treatment of public debt.  The modern approach is Keynesian, and says public debt is very different from private debt and public debt is not borne by future generations.  This may be appropriate if the state is "organismic," but inappropriate if the individualistic theory of the state is used.  A key reason is that those voting today, when confronted with choices that either increase government spending on popular programs or reducing taxes, and funding either by debt, will be more popular since the current generation will not bear the full costs of their decisions.  It is hard to refute his claim when examining public debt levels in the U.S. and Europe once Keynesianism became orthodox.

The arguments in this article suggest that Buchanan never saw a distinction between public finance and public choice.  Theories related to govenrment must pay some attention to institutions otherwise one would assume government actions are similar whether under Hitler or Stalin, or under representative democracy or Athenian democracy.  In some areas of economic analysis, pure theory can abstract from institutions, but surely not when trying to analyze actions of governments.

I think Buchanan is still worth reading and plan on continuing to do so.

New Disclosure Rules on Employer-Provided Health Care Insurance

An article in today's New York Times outlines a change on the W2 forms we get from our employers for taxable year 2012.  There is a listing of how much the employer paid on the employee's health care coverage for the year.  Many workers are stunned to find out that the health care insurance costs are $12,000 or more.  We know that as health care costs and insurance costs have risen over the last couple of decades that nominal wage increases have slowed down. The employer cares about the total cost of a worker and not just the dollar wages or salaries.  This is also one of the explanations for why middle-class wages have been relatively flat--we are only measuring the wages and not the total coompensation received by the employee.  According to the article, the disclosure is meant to make employees more cost conscious.  I find it hard to believe that that is the reason for the disclosure.  A worker sees that the employer spent $12000 on his medical insurance decides that he should go to the doctor less frequently?  I don't think so. 

Two Different but Related Op-Eds

Two good op-ed pieces in the Wall Street Journal.  The first discusses the myth of the stagnant middle class. It notes a number of important issues, including adjusting wages for inflation understates real wages since the CPI overestimates inflation, the nonwage portion of compensation has increased sharply--especially medical benefits, increased life expectancy, and the abundance of new products not available in the past that are purchased by middle class households.   The authors could have added another element--the puzzle over why consumption data show the middle and poorer classes consuming more than would seem to be indicated by reported income.

The second concerns climate change. Bjorn Borg criticizes the way in which President Obama referred to climate change in his inauguration address. Borg notes that the evidence cited by the president is wrong. Borg fears that the poor rationale used will ultimately lead to poor policy recommendations.  Borg does not dispute climate change but has long argued for a different approach to looking for solutions.

Both topics provide further evidence that the misinformation on some key issues propogated in the media and by politicians remains a problem.

James Buchanan Dies

James Buchanan died on January 9, a few days after the AEA meetings ended.  He won the Nobel Prize in econmics in 1986.  An obituary on him can be found here, and some comments on his importance by Tyler Cowen can be found on his blog. Buchanan was a very important economist and his Nobel was well-earned. In recent years, I have been reading him a lot more.  Since my major area in grad school was industrial organization and I never had a public finance course in grad school, I didn't read him much when I was younger.  But I have increasingly found him of more significance.  In one manner is that I no longer begin micro classes with the idea of scarcity but instead the idea that specialization of labor is productive. This is a point he made in his presidential address to the Southern Economic Association, "What Should Economists Do?",  and was published in the Soutern Economic Journal in January 1964. I am still struggling with his views on cost as found in his short book, Cost and Choice: An Inquiry in Economic Theory. The Liberty Fund has published the collected works of Buchanan, and it is 20 volumes. He had an extraordinary career.

On the Fiscal Cliff and the Progressive Program

The House passed the bill that averts the Fiscal Cliff. It looks like the market thinks it was a good thing, but I still am not sure. As David Brooks noted in the column I cited yesterday, no hard decisions have been made. We continue to put off any decisions about problems we know are there, namely, the unsustainability of our entitlement programs with current taxes and spending. President Obama has said that he will not negotiate when the debt limit ceiling is reached, so he has no plans for any serious reductions in spending.

President Obama considers himself a progressive. If we want to know what progressives want, there is no better place than the New York Times.  John Cochrane parses a recent New York Times editoria in his blog.  The editorial calls for tax reform but does not mean tax reform in a serious way. Instead, it is increasing taxes on higher incomes and redistributing it to others.  Cochrane's analysis is worth reading.

An op-ed in yesterday's Times by Russ Douthat illustrates further, although it is a little more realistic than the editorial Cochrane discusses. He states that for progressives, the government needs to increase revenues because cutting spending is not "progressive." But, he acknowledges that the entitlement programs are not sustainable. He sees the agreement on the fiscal cliff as negative in the sense that so many Democrats were willing to raise the lower bound on the increase in taxes to $400,000.  He argues that the Republicans approach to sustainability is to cut benefits but the programs are popular so  that won't happen. If Democrats are unwilling to broaden the tax base, then the Democratic approach is also not sustainable.

Based on these two examples--Douthat and the editorial--the progressive program offers nothing on how to expand the pie, i.e., nothing on growth.

Looks Like the Fiscal Cliff is Averted

The Senate passed a bill to avert the Fiscal Cliff. (See NY Times article here.)  Assuming the House also passes it, the Bush tax cuts are permanent except for those making over $400,000. The sequester is postponed with promises of finding cuts that are not across the board, unemployment insurance time period is extended again, some tax incentives for "green" energy remain, and a few other minor details. All in all, it looks more like a stimulus bill than a bill related to the deficit.  David Brooks' column today is good on how the politicians continue to refuse to make any tough decisions. He also says that the ultimate fault lies with we voters--we want things and are willing to pass the costs on to our children and grandchildren.  I think he is right.