Economics, Pethokoukis, Taxes and Spending

Reaganomics 2.0: Yes, the supply-side agenda really does need an update

Official_Portrait_of_President_Reagan_1981

Just catching up now to a Forbes piece by Brian Domitrovic, another broadside against the expansion of the child tax credit outlined in the conservative reform policy book “Room to Grow.” This bit is unfortunately representative of the piece:

The “Room to Grow: suggestion is Keynesianism by another name: non-marginal rate cuts so that people closer to the bottom can have more to spend. It is odd to hear that supply-side economics should be updated because it succeeded in the 1980s. The proposed update suggests a return to demand-side economics, whose record includes having failed spectacularly in the stagflation of the 1970s.

To be honest, I feel like this ground has been pretty well covered for now. (Such as here and here.) But Domitrovic mentions this blog, so I offer the briefest of responses: this severe, visceral revulsion at the idea of letting middle-class families keep more of what they earn during a time of economic stagnation is befuddling, really. (Perhaps it demands sociological rather than economic analysis.) That, especially when conservative reformers also back sweeping corporate tax reform is especially odd.

All in all, these critiques suggest a rather narrow, cramped, and retrograde vision of what a pro-growth supply-side economic agenda might look like in the 21st century. Is the top personal income tax rate really everywhere and always the biggest problem with the US economy? These attacks also ignore a variety of modern economic phenomenon — including job polarization, wage stagnation, and automation — that could mean boosting GDP growth is a necessary but insufficient condition for a broadly shared prosperity in 21st century America.

A pro-work, pro-innovation agenda will require tax reform, yes, but also healthcare, education, and regulatory reform along with modernization of the safety net. Summarily and reflexively dismissing all updates and expansions to the now 33-year-old Reagan agenda (note that distance between now and then is the same as the distance between Reagan and the Dewey GOP of the late 1940s) as “Keynesianism” — now a catch-all slander devoid of much meaning — is unhelpful.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

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What we’re reading today: September 12, 2014

Check out the top pieces we’re reading today on the economy, technology, education, and more.

1.) Martin R. West, in his post for Education Next, discusses the first hard evidence on virtual education.

2.) At WSJ, Mark Sklar writes on doctoring in the age of Obamacare.

3.) The Boston Fed looks at Bitcoin as money here.

4.) From The Upshot comes a piece on making top colleges less aristocratic and more meritocratic.

5.) Public pensions are still marching to their death, comments Jeffrey Dorfman at Forbes.

6.) The jobless rate may be a flawed indicator for Fed policy, notes this NYTimes article.

7.) From MIT Technology Review: Intel says laptops and tablets with 3-D vision are coming soon.

8.) At e21, Jared Meyer measures regulation, asking: “How many regulations are there? Which industries have to jump through the most regulatory hoops? Which government agencies are most likely to pass new rules?”

9.) This Brookings piece makes the case for combining teacher evaluation and the Common Core.

10.) The internet is getting too big for just one kind of Wi-Fi, says Quartz.

Follow AEIdeas on Twitter at @AEIdeas, and Natalie Scholl at @Natalie_Scholl.

Pethokoukis

‘The Scottish referendum is not occurring at a good time for Europe’

Wise and worrisome words from Desmond Lachman:

The fallout from a Scottish yes vote is unlikely to be confined to the British Isles. Separatist movements across Europe would gain encouragement from Scotland’s bold move, which could inject further uncertainty into Europe’s already fragmenting political landscape. The most serious and immediate threat in this respect is that of Catalonia where the Spanish government is already in a tense standoff with Barcelona over its intention to hold a non-binding referendum in November 2014 on the question of Catalonia’s independence.

The Scottish referendum is not occurring at a good time for Europe. The European economic recovery has again run out of steam, geopolitical risks from the Russian-Ukraine crisis are continuing to impact European investor confidence, and Europe’s politics continues its process of gradually fragmenting. The last thing that a fragile Europe needs right now is new shock waves from a Scottish economic crisis. For that reason alone, one has to hope that the Scottish electorate does the right thing and votes no to dissolving its 300-year old union with the rest of the United Kingdom.

The betting public and latest polls suggest a “no” vote on independence.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

Pethokoukis

What really happened when Google’s driverless car took a self-driving test

Image Credit: Steve Jurvetson (Flickr) (CC-by-2.0)

Image Credit: Steve Jurvetson (Flickr) (CC-by-2.0)

A couple weeks ago, I wrote on the many obstacles still facing driverless cars. Here, courtesy of IEEE Spectrum, is a look at how Google’s autonomous car passed the first US state self-driving test. While “regulations governing Google’s experimental self-driving cars will come into effect on California’s roads starting September 16th,” and the cars have driven over 1 million kilometers since the company started developing them in 2009, “they have been tested only once by a government body on open roads”—Nevada DMV officials in May 2012.

Here’s what happened:

  • Google’s autonomous Toyota Prius passed the test almost immediately
  • However, Google chose the test route and set limits on the road and weather conditions that the vehicle could encounter
  • Engineers had to take control of the car twice during the drive
  • In smooth, everyday traffic, the Prius worked perfectly: the car detected and stopped for pedestrians and merged smoothly onto a freeway up to the local speed limit
  • The car was not tested on roundabouts
  • Also, Google’s policy was to prohibit autonomous operation at railroad crossings that lack signals and for human drivers to take over
  • Construction proved a little tricky: when faced with a partially blocked-off road, the car switched between autonomous and manual modes and then braked to a halt, requiring the safety driver to take control
  • It was recorded that the car needed driver assistance with some turns

This is a portion of the notes on the car’s performance by Bruce Breslow, then head of the DMV–”the measured pace of Google’s autonomous Prius may have started to annoy” him:

Bruce Breslow's notes on Google Prius

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Economics, Health Care, Pethokoukis

The $700 billion savings myth: New economic study undercuts a key Obamacare selling point

New research suggests that one of the key economic claims used to sell Obamacare to Congress might not be true. Here is Obama White House budget boss and healthcare guru Peter Orszag in 2009:

As I have written and talked about before, one of the biggest signals of inefficiency in American health care is the massive regional variation in cost and health outcomes. As the Dartmouth Health Atlas has made clear, medicine is practiced differently in different regions across the country, different cities, and even among different hospitals in the same city. And yet the higher cost areas and hospitals don’t generate better outcomes than the lower-cost ones. The result is an estimated $700 billion a year spent on health care that does nothing to improve patient health, but subjects you and me to tests and procedures that aren’t necessary and are potentially harmful – not to mention wasteful.

And a summary of the new Brookings paper, “Why the Geographic Variation in Health Care Spending Can’t Tell Us Much About the Efficiency or Quality of Our Health Care System,” by Louise Sheiner:

Underlying socioeconomic and demographic characteristics have important implications for the geographic patterns in Medicare spending. The findings contradict prior research claiming that most of the variation in Medicare spending can be attributed to geographic differences in medical ‘practice styles’ (the extent and intensity of medical interventions in a given area), thus calling into question the claim that the U.S. could save up to $700 billion in health care waste and inefficiency if all providers were to emulate the practices of low-costs states.

In “Why Geographic Variation in Health Care Spending Can’t Tell Us Much about the Efficiency or Quality of our Health Care System,” Brookings Senior Fellow and Hutchins Center on Fiscal and Monetary Policy Director Louise Sheiner contends that the geographic variation in health care spending does not provide a useful measure of inefficiency and waste in the system, in contrast to the widely accepted views from theDartmouth Atlas of Health Care. Her paper finds that the ‘practice style’ that Dartmouth researchers point to is in fact reflective of underlying systemic differences across states. By employing a state-level approach, as opposed to Dartmouth’s individual-level approach, Sheiner shows that “states with similar demographic characteristics have similar levels of real beneficiary Medicare spending. Thus, what the Dartmouth researchers have deemed as differences in ‘practice styles’ are not randomly distributed, but are instead closely linked to population characteristics.”

In fact, states that appear to be high-cost, like Florida and Connecticut, are no longer big health care spenders once demographic and health variables are controlled for, just as states that appear to be low health care spender like Utah and Vermont are actually relatively high spenders once those adjustments are made. These results suggest that the cross-state variation in Medicare spending is tightly associated with the characteristics of state populations, and that once these characteristic are controlled for, the variation in spending is fairly small.

 

For example, it is no surprise that states like Mississippi and Louisiana spend far more on Medicare given their population’s characteristics. These states perform poorly on a wide range of indicators, including diabetes rates, obesity rates and lack of physical activity, suggesting that the higher Medicare expenditures may simply reflect the fact that the population is unhealthy. Furthermore, physicians practicing in states with sicker populations may practice a more intensive form of medicine for all their patients, making comparisons across states based on individual patients potentially misleading. Finally, states with higher Medicare expenditures tend to have more uninsured and lower reimbursements from private insurance and Medicaid. Because all of these factors are so hard to disentangle, Sheiner concludes that looking at variation in Medicare spending across geographic areas particularly informative. “A comparison of health spending in Mississippi with health spending in Minnesota is not likely to provide a useful metric of the ‘inefficiencies’ of the health system, nor is it likely to provide a useful guide to improve the quality of care in places where it is lacking,” she writes.

The author also finds a negative correlation between each state’s level and growth of Medicare spending – low-spending states tend to have higher growth rates than high-spending states. Thus, examining the practice patterns in low-cost states isn’t likely to provide the key to “bending the cost curve” in health spending, she concludes.

Recall that back in 2010, the geographic savings claim also came under fire from the New York Times.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

Pethokoukis

Here are the food words that each US state obsesses about on Twitter

091114food

Fascinating. From “Analyzing the Language of Food on Social Media” by  Daniel Fried, Mihai Surdeanu, Stephen Kobourov, Melanie Hingle, and Dane Bell (h/t to io9):

We investigate the predictive power behind the language of food on social media. We collect a corpus of over three million food-related posts from Twitter and demonstrate that many latent population characteristics can be directly predicted from this data: overweight rate, diabetes rate, political leaning, and home geographical location of authors. For all tasks, our language-based models significantly outperform the majority- class baselines. Performance is further improved with more complex natural language processing, such as topic modeling. We analyze which textual features have most predictive power for these datasets, providing insight into the connections between the language of food, geographic locale, and community characteristics. Lastly, we design and implement an online system for real-time query and visualization of the dataset. Visualization tools, such as geo-referenced heatmaps, semantics-preserving wordclouds and temporal histograms, allow us to discover more complex, global patterns mirrored in the language of food.

Actually, this is super interesting. As the above summary notes, the study also found some interesting political linkages:

For the political affiliation task, we observe that features correlated with Republican states include those centered around work (the Airport topic) and home (the After Work topic, including words such as home, after, work). The most predictive feature for Democratic states is #vegan, and we also see topics associated with urban life and eating out, such as Deli, #brunch, promotions such as Restaurant Advertising, and Eating Out.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

Pethokoukis

Here’s a plan to immediately turn around the eurozone economy

Image Credit: shutterstock

Image Credit: shutterstock

Strong words plus strong action. Economist Lars Christensen lays out a plan:

The ECB’s major failure started in April 2011 –  so let that be our starting point. And now lets assume that we want a 4% NGDP path starting at that time. With 2% potential real GDP growth in the euro zone this should over the cycle give us 2% euro zone inflation. The difference between the 4% path and the actual NGDP level is presently around 7.5%. The only way to close this gap is by doing aggressive and open-ended quantitative easing.

My suggestion would be that the ECB tomorrow should announce the it will close ‘the gap’ as fast as possible by doing open-ended QE until the gap has been closed. Lets pick a number – lets say the ECB did EUR 200bn QE per month starting tomorrow and that the ECB at the same time would announce that it every month would monitor whether the gap was closing or not. This of course would necessitate more than 4% NGDP growth to close the gap – so if for example expected NGDP growth dropped below for example 6-8% then the ECB would further step up QE in steps of EUR 50bn per month. In this regard it is important to remember that it would take as much as 8% yearly NGDP growth to close the gap in two years.

Such policy would course be a very powerful signal to the markets and we would likely get the reaction very fast. First of all the euro would weaken sharply and euro equity prices would shoot up. Furthermore, inflation expectations – particularly near-term inflation expectations would shoot up. This in itself would have a dramatic impact on nominal demand in the European economy and it would in my opinion be possible to close the NGDP gap in two years. When the gap is closed the ECB would just continue to target 4% NGDP growth and start “tapering” and then gradual rate hikes in the exact same way the Fed has done. But first we need to see some action from the ECB.

MKM Partners

MKM Partners

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

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You want a Fed laser-focused on inflation? That’s what we had in 2008. Didn’t turn out so well …

Stephen Golub, Ayse Kaya, Michael Reay

Stephen Golub, Ayse Kaya, Michael Reay

What was the Fed thinking back in 2008? What was going through the minds of US central bankers when they (a) left the short-term interest rates alone between April  and October as the economy deteriorated and income expectations fell, and (b) effectively tightened monetary policy in June by nudging up the expected path of the fed funds rate through hawkish FOMC member statements?

Well, the Fed was thinking about inflation. Economist Timothy Taylor points to a paper by Stephen Golub, Ayse Kaya, Michael Reay that tracks how many times certain words popped up during FOMC meetings. Referring to the above chart, Talyor notes the following:

For example, here’s a figure showing how often the terms “inflation” and “growth” came up at various FOMC meetings. Notice that in summer 2007, inflation is coming up quite a lot; indeed, there is some talk at several of the meetings that the Fed might need to raise interest rates soon to head off a surge of inflation–which of course turned out to be a gross misreading of where the economy was headed.  …

I think the discussion at the Fed was influenced by the experience of the dot-com boom and crash that preceded the previous recession. There had been calls for years through the mid and late 1990s for the Fed to raise interest rates to limit the “irrational exuberance” of the dot-com boom, but the Fed (mostly) just let the boom continue, until it brought on the recession in 2001. That recession had been only six months long and not too deep. Thus, the thinking in summer 2008 was to expect a shallow recession, and to avoid bringing on a deeper recession. Of course, this thinking neglected what later seemed an obvious point: the 2001 dot-com collapse was about stock market values, and while that pinched the economy, the 2007-2009 recession was about losses the value of debt owed to banks and other financial institutions, which posed a much more fundamental economic risk.

If it wasn’t so tragic I would laugh. The much reviled money-printing, big-government enabling Fed was obsessed with inflation as the economy entered the maw of the Great Recession. Even in the second half of 2008 when the economy fell by 1.9% in the third quarter and 8.2% in the fourth quarter, inflation was talked about way more than growth. And that obsession turned a mild downturn into a severe recession. Thankfully, we have a possible fix for that

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

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What we’re reading today: September 11, 2014

Check out the top pieces we’re reading today on the economy, technology, education, and more.

1.) Charts from Mercatus, using data from the CBO’s recent update to its Budget and Economic Outlook, “show that growing entitlement obligations and net interest payments are projected to push outlays (spending) to grow faster than revenues over much of the next decade.”

2.) From Education Next: the challenges of AP history: Are you sure you want college credit?

3.) IEEE looks at how Google’s autonomous car passed the first US state self-driving test.

4.) Did you know: the US fishing industry contributes nearly $90 billion to the US economy, according to Brookings.

5.) Are high housing costs restraining California’s growth? Carson Bruno asks in Real Clear Markets.

6.) The National Association of Manufacturers has recently released a report on the cost of federal regulation.

7.) Kay Hymowitz discusses gender gap journalism in her latest for Family Studies.

8.) At NYTimes, Edward Castronova and Joshua A.T. Fairfield write on the digital wallet revolution.

9.) The cost of employer health coverage shows muted growth, says Anna Wilde Matthew in WSJ. An “increase of 3% pushed average annual family-plan premium to $16,834.”

WSJ: Employer health premiums

Follow AEIdeas on Twitter at @AEIdeas, and Natalie Scholl at @Natalie_Scholl.