Pethokoukis

James Pethokoukis: Covering the nexus of Washington and Wall Street

Economics, Health Care, Pethokoukis

Is the weak US economy fixing America’s health care cost problem?

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Image Credit: Shutterstock

Image Credit: Shutterstock

US health care reform expands insurance coverage, but more reform is needed to control spending. Yet even as politicians and policy wonks continue to cook up cost-control schemes, the anemic economy may be doing the heavy lifting for them. But not in the way you might guess.

A new study from Harvard economists David Cutler and Nikhil Sahni finds national health spending between 2003 and 2012 was nearly 16%, or $514 billion, below US government forecasts. The researchers attribute 37% of the unexpected spending slowdown to the Great Recession, with a decline in private insurance coverage and lower Medicare payment rates accounting for another 8%. As for the rest, Cutler and Sahni attribute 55% to a combination of structural changes, “including less rapid development of imaging technology and new pharmaceuticals, increased patient cost sharing, and greater provider efficiency.”

You could sum up many of these structural changes as different sorts of innovation. The paper outlines a number of widespread efficiency savings over the past decade from improvements such as reduced bloodstream infections and lower Medicare readmission rates. Health insurance plans became more diverse, giving consumers more choice such as health savings accounts. Cutler and Sahni point to changes in cost sharing — higher deductibles and copayments — as likely additional factors slowing spending.

And while the economists think technological stagnation played a role, too, they’re not so sure. They also speculate that perhaps improvements in digital technology and image sharing have decreased the need for re-imaging. Other economists have cited the IT and networking revolution as improving disease management.

Perhaps a decade of subpar growth has helped control costs less by limiting what consumers and business have to spend but than forcing industry to get smarter. The Great Depression 1930s, for instance, saw huge increases in innovation and productivity.  As economist Alexander Field has put it, “There is evidence that for some organizations and industries, just as for some individuals, adversity summons reservoirs of initiative and creativity that have long-term positive consequences.”

If trends continues, public-sector health care spending would be as much as $770 billion less than predicted. Already, government budget scorekeepers have been plugging lower health inflation into their forecasts. But would another economic surprise, in this an acceleration in GDO growth — make hash of these news predictions? History suggests higher spending growth will return, though much depends on the impact of the Affordable Care Act. We better hope the innovation continues.

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Pethokoukis, Economics, U.S. Economy

Isn’t most of the supposed fiscal deficit from undocumented immigrants already baked into the cake?

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Here’s the basic math from the Heritage Foundation study on the fiscal impact of legalizing undocumented workers: In 2010, the average undocumented immigrant household received around $25,000 in government benefits and services while paying roughly $10,000 in taxes. From the study: “This generated an average annual fiscal deficit (benefits received minus taxes paid) of around $14,387 per household.”

After what Heritage calls “amnesty,” that fiscal deficit would rise:

At the end of the interim period, unlawful immigrants would become eligible for means-tested welfare and medical subsidies under Obamacare. Average benefits would rise to $43,900 per household; tax payments would remain around $16,000; the average fiscal deficit (benefits minus taxes) would be about $28,000 per household.

Those numbers form the statistical nugget behind the claim that over a lifetime, “the former unlawful immigrants together would … generate a lifetime fiscal deficit (total benefits minus total taxes) of $6.3 trillion” in constant 2010 dollars.

OK, here’s what vexes me:

1. According to the Pew Hispanic Center, 80% of the children of undocumented parents were born here — some 4.5 million kids — and are thus US citizens. Americans.

2. Of that nearly $25,000 ($24,721 to specific) in government benefits and services going to undocumented households, education spending averaged $13,627 in 2010, while means-tested aid (going mainly to the US-born children in the family) averaged $4,497. So we are talking roughly $18,000.

3. In other words, around 40% of the spending under “amnesty” would be going toward US citizens. And that accounts for nearly two-thirds of the fiscal deficit. In other words, two-thirds of the fiscal deficit is already baked into the cake unless you are going to deport all those undocumented immigrant parents, and they take their children with them. I mean, is that the counterfactual here? Really?

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Pethokoukis, Economics, U.S. Economy

Cloning Silicon Valley: Do governments know how to create entrepreneur and innovation clusters?

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Silicon Valley is an amazing American asset. It sure would be great if government could sprinkle some pixie dust and have technology clusters sprout up here, there, and everywhere. Not that public officials don’t try to make that happen via a panoply of subsidies.

Just look at what Washington has been doing lately. As documented in the new study Clusters of Entrepreneurship and Innovation by Aaron Chatterji, Edward Glaeser, and William Kerr, though April 2012, the Obama administration spent over $225 million on regional cluster projects. One example: A $129 million investment over five years in the Energy Regional Innovation Cluster in Philadelphia.

OK, time for an uncomfortable question: Any evidence of success? Do we know what works and what doesn’t? Not so much:

Even though entrepreneurship is a powerful force that engenders local and economic growth, it is not obvious that government policy can create entrepreneurship.  … At this point, we are still just beginning to acquire enough wisdom to create sound policies that internalize the externalities that can come from innovation and new start-ups. While we believe that there are conclusions that can be drawn at this stage—research universities powerfully impact local development; focusing on large-scale employers can crowd out small scale start-ups—we need much more information before entrepreneurship policy can attain the relatively mature status enjoyed by, for example, policies towards international trade and monopoly.

Some policies do seem to have many upsides and few downsides, such as allowing more skilled immigrants, strengthening education systems, and eliminating unwise regulations. But when we move beyond such simple broad policies towards specific entrepreneurship strategies like clustering, our ignorance becomes obvious. The best path forward involves experimentation and evaluation. Without advances in these dimensions, we cannot be confident that policies to promote entrepreneurship will have their intended impact.

I love that phrase, “experimentation and evaluation.” Maybe instead of helicopter drops of taxpayer cash as part of some ersatz government venture capital program, government could instead take the lead in coming up with research guidelines to figure out what policies work and what don’t. CGK:

While the obstacles to creating better research designs to study these programs are formidable, they are not impossible to overcome. Many agencies, including the SBA, already submit evaluations of certain programs to Congress along with their budget requests. It should be possible to provide broad outlines of what a good evaluation should look like, and Congress could provide guidance informed by academics in this regard. Moreover, given the U.S. government’s newly prominent role in promoting high-growth entrepreneurship and regional clusters specifically, the federal grant competitions could be designed to reward rigorous evaluations and specific milestones achieved.

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Pethokoukis, Economics, U.S. Economy

Would legalizing undocumented workers really cost $6.3 trillion?

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Even if US budgets were deep in the black, it would be perfectly legitimate to examine the fiscal costs of legalizing millions of currently undocumented workers. But such analysis should provide as full an economic picture as possible for policymakers. A new Heritage foundation study, while providing some useful data points, is frustratingly incomplete.

Certainly pundits and activists with axes to grind will run hard with Heritage’s claim that “former unlawful immigrants together …  would generate a lifetime fiscal deficit (total benefits minus total taxes) of $6.3 trillion.” Quite a talking point — one researchers arrive at via a fairly straightforward calculation. They simply determine the difference between their forecast of futures taxes paid and benefits received. Fair enough and good to know.

The study, however, fails to capture indirect but important economic impacts of immigration such as increasing economic activity or positively affecting American employment. Both of those would lead to higher tax revenues and reduced transfer payments. Surely every effort should be given to factoring in such dynamic impacts of immigration reform. The Heritage study says, for instance, that “taxes and benefits must be viewed holistically.” So, too, immigration overall. Big policy changes don’t exist in a vacuum, isolated from the rest of the economy. (And, of course, the study only focuses on a single part of comprehensive immigration reform.)

Not making these added calculations raises red flags as to the study’s completeness. What about studies of US states that find economic contributions of low-skill immigrants “dwarf their fiscal costs.” Another example: Heritage claims “that unlawful immigration appears to depress the wages of low-skill US-born and lawful immigrant workers by 10 percent, or $2,300, per year.” Yet other highly regarded research finds wage gains at all education levels for US-born workers.

Is immigration reform that potentially expands the population of less-skilled individuals a smart economic policy or not? It’s impossible to draw a reasonable conclusion based only on the Heritage study.

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Economics, Financial Services, Pethokoukis

A study in crony capitalism: Subprime lenders offered better deals to borrowers in districts of congressional big shots

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Credit: Stuart Gabriel, Matthew Kahn, Ryan Vaughn

Credit: Stuart Gabriel, Matthew Kahn, Ryan Vaughn

UCLA researchers have found that leading up to the Financial Crisis, subprime lenders employed a novel method of influencing the political process. In addition to campaign contributions to key politicians, they gave special treatment to borrowers represented by key congressional leaders. The full details can be found in “Congressional influence as a determinant of subprime lending.”

Take the case of New Century, which became  the second-biggest subprime mortgage lender in the US:

Our findings highlight that New Century was especially active in offering differential treatment to borrowers represented by the Democratic and Republican leadership of Congress. In the case of borrowers residing in the districts of the Speaker of the House and the Majority and Minority Leaders and whips, subprime lenders were less likely to reject loans; further, New Century offered lower mortgage-interest rates and larger loan amounts, all things equal, to residents of those areas. This fact is especially true for African American borrowers in these districts. Also, borrowers received rate discounts in districts where New Century donated to the local Congressional Representative’s election campaign.

The study goes on to speculate that New Century viewed campaign contributions and the “enhancement of subprime-credit access” to those important congressional districts as ”consistent with profit maximisation, to the extent it helped to buy Congressional support for widespread proliferation of this controversial lending instrument among less qualified borrowers.”

In other words, a case study in crony capitalism. Congress regulates business, and then business contributes money or some other benefit to the political overseers. “Profit maximization” by creating influence rather than value.

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Economics, Financial Services, Pethokoukis

Washington finally waking up to Dodd-Frank’s failure

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A stunning note this morning from ace banking analyst Jaret Seiberg of Guggenheim Washington Research Group. Some of the key points (bold is mine):

We believe it is now close to inevitable that regulators will adopt measures that go beyond Basel 3 to ensure that the biggest banks have loss absorbing capital and debt that would make it possible to resolve even the biggest financial firm. … Our view is that many regulators worry that the biggest banks still lack enough capital. We suspect that some even believe the Federal Reserve should have used the CCAR stress test to further limit distributions so banks had to grow capital even more. In our view, part of this is because regulators worry that banks are manipulating risk weighted assets to lower their capital requirements. But it also likely stems from a broader concern that banks would be safer if they had even more capital than what Basel 3 requires. We would not view this as the perspective of the regulatory fringe. We suspect that many senior officials worry that some banks are so complicated that the only way to ensure a mistake does not spark a crisis is to force them to keep high levels of capital.

As I wrote last week, Federal Reserve Governor Daniel Tarullo has suggested banks with large amounts of short-term wholesale funding should have to hold more capital — the most likely option, according to Seiberg. Other ideas include requiring a higher leverage ratio (4% to 5% versus the 3% Basel 3 level), and the Fed forcing megabanks to retain more earnings as way of raising equity capital levels.

Regulators seems prepared to push hard the issue, but not to the extent resulting in a megabank breakup. That would be the job of Congress. The Brown-Vitter bill represents another step on that path. But it seems clear that Dodd-Frank will not be — and should not be — Washington’s definitive word on post-Financial Crisis financial reform.

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Pethokoukis, Economics, U.S. Economy

Is US productivity really slowing? An optimistic counterargument

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Productivity growth of US workers has been disappointingly low since 2004, ending a decade-long upturn. It’s been averaging about 1.5% annually, well below the long-run average rate of 2.25% that prevailed since 1889. And so far, 2013 isn’t looking much better. Productivity in the nonfarm business sector advanced at only a 0.7% annual rate in Q1, and over the past year has increased a mere 0.9%.

Does this downturn represent a permanent downshift, which would mean a lower-growth US economy growing forward? And since innovation drives productivity growth, does the slowdown prove a “Great Stagnation?” About this, technology optimist Andrew McAfee, co-author of Race Against the Machines, makes two points in a new blog post. First, the slowdown is likely just a pause:

It’s impossible for me to imagine that Web 2.0; smartphones, tablets, and the app explosion they generated; warehouse and factory robots; self-driving cars and drone planes; AI sophisticated enough to crush the best human Jeopardy! players; and the rest of the continually unfolding and expanding portfolio of modern digital technologies are going to be economically insignificant.

Lots of new technologies that we’re still in the early stages of figuring out how to use most efficiently and productively. But McAfee also thinks productivity and GDP measures aren’t really catching all of what’s going on. As his co-author Erik Brynjolfsson recently said in a New York Times interview.

“G.D.P. is not a measure of how much value is produced for consumers,” said Erik Brynjolfsson of the Massachusetts Institute of Technology. “Everybody should recognize that G.D.P. is not a welfare metric.”

G.D.P. misses what Americans gain from sharing information on Facebook or finding information on Google or Wikipedia. It misses how dating sites reduce the cost and increase the odds of finding a mate. It misses the time saved by drivers who use Google Maps and the time gained by consumers from shopping online. Measured in money — what it contributes to G.D.P. — the recording industry is shrinking. Yet never before have Americans had access to so much music. … So how to measure the Internet’s contribution to our lives? A few years ago, Austan Goolsbee of the University of Chicago and Peter J. Klenow of Stanford gave it a shot. They estimated that the value consumers gained from the Internet amounted to about 2 percent of their income — an order of magnitude larger than what they spent to go online. Their trick was to measure not only how much money users spent on access but also how much of their leisure time they spent online.

Last year, Mr. Brynjolfsson and an M.I.T. postgraduate, JooHee Oh, used a similar accounting technique to that of Mr. Goolsbee and Mr. Klenow and concluded that the consumer surplus from free online services — the value derived by consumers from the experience above what they paid for it — has been growing by $34 billion a year, on average, since 2002. If it were tacked on as “economic output,” it would add about 0.26 of a percentage point to annual G.D.P. growth.

Of course, if McAfee and Brynjolfsson are correct, it makes the US jobs machine look even worse, and the productivity-employment gap even larger:

Credit: Erik Brynjolfsson

Credit: Erik Brynjolfsson

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Economics, Financial Services, Pethokoukis

Fed governor outlines ‘another alternative for the break-up-the-megabank crowd’

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Federal Reserve Governor Daniel Tarullo is the central bank’s regulation guy and has been giving some provocative speeches exploring how to end Too Big To Fail and reduce systemic risk. In a speech today, he suggests linking the amount of extra capital a big bank must have with how the bank funds itself:

While there is decidedly a need for solid minimum requirements for both capital and liquidity, the relationship between the two also matters. Where a firm has little need of short-term funding to maintain its ongoing business, it is less susceptible to runs. Where, on the other hand, a firm is significantly dependent on such funding, it may need considerable common equity capital to convince market actors that it is indeed solvent. Similarly, the greater or lesser use of short-term funding helps define a firm’s relative contribution to the systemic risk latent in these markets.

The theory: More liquid banks wouldn’t need as thick an equity capital cushion as those with larger wholesale funding exposures. Jaret Seibeg of Guggenheim Washington Research Group, the go-to bank analyst on all things regulatory, sees the proposal as having legs:

We believe this is a way to target the mega banks with large broker-dealer operations as they tend to rely much more on wholesale funding than traditional banks. For instance, it would appear JP Morgan is more exposed to this risk than Wells Fargo.

We are a long ways from this idea becoming the law of the land. But we believe this could quickly gain traction and we expect many more headlines on this plan in the coming weeks and months.

As I have mentioned before, cranking up capital requirements might well result in banks breaking themselves up.

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Pethokoukis, Economics, U.S. Economy

The 2 austerity-economic growth charts that Paul Krugman and Steven Rattner will never show you

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Alex Tabarrok has put together his own version of an austerity vs. economic growth chart, using Paul Krugman’s preferred austerity measure, total government expenditure divided by potential GDP (see above chart): Krugman sees “very bad policy” from the decline in government spending, while Tabarrok reads the chart this way:

In the 1990s growth was strong even while “austerity” was increasing (falling red line). More recently, we have seen a big increase in austerity according to Krugman and his measure but although there has been no boom, growth has remained modest.

I see it like Tabarrok. I have done a few charts like these and have found the economy holding up pretty well. Here is a twist: I took the Krugman austerity data (red line) and compared it against private-sector GDP (blue line). Even as spending collapses, private-sector GDP bends a bit but does not break.

050313krugchart2

 

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Pethokoukis, Economics, U.S. Economy

America’s missing 12 million private-sector jobs

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Credit: MKM Partners

Credit: MKM Partners

The budget deficit isn’t the only gap that should worry US policymakers.

Consider: The U.S. lost 8.8 million private sector jobs during the Great Recession. Since the beginning of the jobs recovery, we have gained back 6.8 million, leaving a gap of about 2 million. As economist Michael Darda calculates, if average monthly job gains remain close to the 12-month average of 180,000 for the private sector, the level of private sector jobs will rise to an all-time high in just under one year.

But even then, private-sector jobs will still be way below the 1990-2007 trend. Currently the shortfall is nearly 12 million missing jobs. The “jobs gap” remains a frightening maw gobbling up the hopes and dreams of American workers.

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