Libertarian's Nightmare Gets Even Worse

The House is talking about mandating the purchase of health insurance for employers with aggregate payrolls as small as $250,001 per year.

Larry Summers wrote once a nice paper explaining how mandated benefits are not the same as a tax, because the worker gets at least some benefit when his employer purchases employee benefits, whereas all of the benefits from employer tax payments go to the government.

Nevertheless, mandating health coverage is in large part a tax, especially for small businesses for whom a large fraction (I would guess about 1/3) of the costs of providing health insurance are insurance administrative (as opposed to obtaining health care, or at least health care administration).

If and when such a law goes into effect, a number of employers may want to shrink their payroll to get it small enough to avoid the mandate: perhaps by moving full time workers to part time, or firing some employees.

Obviously, big brother will have red tape that is designed to penalize such opportunistic payroll policies. In case the red tape doesn't work, the threat of law suits from affected employees may.

So the savvy employer will make these payroll adjustments well before the law is passed and goes into effect. For example, if he thought the law would go into effect in Fall 2009, he might start firing people and moving others to part time in the Fall of 2008.

Of course, the above is purely hypothetical. It wouldn't actually happen! Neither would these:

• minimum wage hike
• means-tested mortgage modification
• mean-tested student loan modification
• unemployment insurance extensions
• state income tax hikes,
• IRS means-tested enforcement of prior tax debts
• marginal federal tax rate hikes on the "rich"!

Mortgage Modification News

Reuters reports that U.S. officials are thinking about further ways to forgive debts for the unemployed. That's bad news, but at least one of those official partly recognizes that such a policy "could create perverse incentives."

Data was also release showing that 185,000 mortgages were modified in 2009 Q1. That's a lot (too many, IMO), although less than the pace the Obama Administration would like see.

[update: Now Reuters reports consideration of a plan to allow unemployed people to become renters of their home. Note that, for a homeowner whose mortgage is underwater, this at least amounts to forgiving the entire amount that the mortgage that exceeds the value of the house. To the extent that there are a surplus of houses supplied to the rental market, this "rent your house" plan might be even more generous than that.]

Retail Sales Rise, but Still Low

Seasonally adjsuted retail sales rose in June, but are still lower than they were in February. We'll know more tomorrow (with the CPI report) how much of the retail sales increase was inflation versus higher sales volume.

I suspect that it is mostly inflation.

PPI shows significant inflation

This morning the BLS released it's Producer Price index for June, which was 1.8 percent higher than in May. That's the largest monthly increase in quite a while.

The PPI for residential construction also increased modestly May-June, although it is still lower than it was in most of 2008 and early 2009. Higher residential construction prices (even if they are lower relative to the overall CPI or the overall PPI) likely mean that housing prices are higher. Maybe the biggest problem in our economy is that housing prices are low relative to the mortgage debt they collateralize.

Inflation is a good thing right now!

Dr. Dolittle

Are Animals Telling Us About the Economics of Health Care?

Health care spending has increased faster than overall spending in the economy, and has done so for decades. A variety of causes have been cited:

1. Technical progress has made healthcare better (e.g., treating heart disease without surgery) at an especially rapid rate, and this has increased health care demand relative to other goods in the economy.
2. The U.S. has been getting richer (with a hopefully brief and comparatively minor interruption in 2008-9), and health care is a luxury good.
3. Americans are increasingly busy, so they have been substituting health care and related activities from the home to the market. Eg., in the old days maybe mom would have counseled a depressed child, now that child sees a mental health care giver.
4. Medicare and/or private insurance and/or malpractice litigation cause patients and doctors to demand too much health care, because the patients and doctors do have to pay for the health care they receive and give. Of course, Medicare and private insurance have been around for a long time, so this theory is usually tweaked to explain why it has gotten worse.
5. Medicare and/or private insurance have skewed technical progress. Again, because patients and doctors do not pay, they have greater demand for costly new technologies than they do for new technologies that could give the same health care at cheaper cost. Elsewhere in the economy, more of the technical progress goes toward obtaining the same results at lower cost (rather than spending more to get better results).
6. The American Medical Association and other physician groups have blocked the supply of physicians by limiting medical school admissions, preventing nurses from doing some doctors tasks, etc.
7. The federal government has stiffled the supply of physicians by creating the expectation that they will have to pay for part of the next health care reform. Potential medical school enrollees have long recognized this and chose other professions.

It is important to know the relative importance of these factors. To the extent that it is (1)-(3), health care spending growth is NOT A PROBLEM, but something to celebrate -- it reflects improvements in our situation. If the government were to reduce health care spending, that would be bad!

To the extent that (3)-(6) are to blame, some kind of reform might make things better. Although explanation (5) does imply that the health care industry needs some fixing, it still agrees with (1) that health care has not gotten more expensive -- it has just gotten better. (5) is just saying that, considering the cost, health care has gotten too good.

I think (1)-(3), (5) and the main factors.

Today Professor Mankiw shows how veterinary spending has increased just like spending on human health care, but Professor Mankiw only hints and the fascinating economics behind that comparison.



I do not own a pet, but I am pretty sure that pets are not covered by private insurance or medicare. So you cannot blame (4) for the vet services spending growth! Numbers (6) and (7) would seem to make vet services CHEAPER, by pushing some people from being physicians to being vets.

(1)-(3) are consistent with the common trend for vet and human health spending. E.g., both pet and human health care may be luxury goods. Busy mom may be at least as willing to shift her pet's care to the market as to shift child's care.

I bet a lot of the technical progress seen in vet care has been adopted from the human health industry. This fits with (1), but it also fits with (5). To see this, note that vet spending is 200 times less than human spending. Thus, I bet very few things are invented with the intention that they would ultimately be used on pets (who have no insurance), and then only later is the human applicability of these inventions appreciated. Rather, a health care innovator who is working on something potentially applicable to both humans and pets must realize that 99+% of his profits would come from the human application, and that humans have health insurance.

In short, the spillover of human technology to pets fits explanation (5) with the growth of pet spending: HUMAN insurance has distorted innovation away from cost reducing technical progress, even in the pet sector.

[Added: a number of people claim that the vet spending series is inconsistent with the view the third-party payers are the problem -- but my discussion agrument (5) shows why that's wrong.]

Government Makes it Worse: Add Minimum Wage Hike to the List

Later this month, the federal government will add to its lists of employment-destroying public policies that have appeared or enlarged since mid-2008:

• minimum wage hike
• means-tested mortgage modification
• mean-tested student loan modification
• unemployment insurance extensions
• state income tax hikes,
• IRS means-tested enforcement of prior tax debts
• marginal federal tax rate hikes on the "rich"!

How long will this list get before more economists recognize that government has done more harm than good during this recession?

The Fastest and Most Efficient Sailboat in Orient NY

Yesterday my 18' Hobie SX traversed a 21 nautical mile course in less than three hours. Like me, dozens of sailboat captains hail from Orient, NY, but none of them was able to cross the annual "Spindrift" race's finish line before I did.

An out of town boat (a J105 -- about twice as long as mine) crossed 20 seconds before I did, and a 40' boat (a J122 from New Suffolk) beat me by 22 minutes.

Although efficiency was not part of the race, I did well in that category: I sailed myself (as compared to five sailing each of the others) and with boat and equipment (no engine or electricity!) that is at an order-of-magnitude cheaper!

Larry Summers Interview: A Cynic's Interpretation

Larry Summers seems to be saying:

• Obama is a central planner: his teams is trying to guide the U.S. economy to grow the "right" industries, and shrink the "wrong" ones.
• The economy is going to get worse. How does he know? Maybe he knows of plans to unveil yet more policies that further destroy work incentives, in addition to those unveiled already: like means-tested mortgage modification, mean-tested student loan modification, unemployment insurance extensions, state income tax hikes, and marginal federal tax rate hikes on the "rich"!

There has been so much talk of "fiscal stimulus" and ways the government can help, but I think the ultimately the debate about public policy and the 2008-9 economy will be whether the government made things worse, or was just impotent.

There are few economists now saying that government caused the housing bubble (quite an exaggeration, I think), but I seem to be the only one saying that, even with a housing crash, the depth of this recession would have been significantly less if the government had not done its damage too.

An Ill-Timed and Ill-Targeted Stimulus

Copyright, The New York Times Company

Last week’s disappointing employment report has raised the question of whether the stimulus package is working. Construction data over the last couple of years supports the view that federal spending would never provide much “stimulus,” in part because it was doomed to be ill-timed and ill-targeted.

The chart below graphs monthly construction spending, from 2003-2009, for three sectors: private residential, private nonresidential and public (of which residential is negligible). In order to adjust for the inflation and economic trends of the period, each spending series is expressed as a percentage of personal income less transfers.



Hindsight shows that housing construction sharply reversed trend in early 2006. Hindsight also shows that the housing boom used up significant numbers of workers and equipment, and the housing crash freed up those resources. That created opportunities for non-residential construction projects in the private and public sectors.

Although private construction did not significantly respond to these opportunities during 2006, private non-residential construction ramped up throughout 2007. That private non-residential activity remained high, and perhaps increased further, throughout 2008.

Meanwhile, the public sector still kept its construction activity at the low level that prevailed throughout the housing boom. Unlike the private sector, it did essentially nothing to put unemployed workers and equipment to work.

In January 2009, Congress passed a stimulus bill that was supposed to put some of the unemployed back to work. But January 2009 was almost three years after the spending opportunity presented itself, and two years after many projects were under way by those in the private sector who saw these opportunities.

Moreover, typing and signing a bill is not the same as doing construction work. The public construction series shown in the chart goes through May 2009 — four months after the bill became law — and shows only a tiny increase by that time. We are told that we will actually notice stimulus bill spending sometime in 2010.

One might argue that the housing crash presented the public sector with little opportunity because residential construction workers and equipment are not useful for the kinds of transportation construction that dominate public construction spending. That is at most partly true, because some housing workers have responded to the housing crash by re-qualifying for highway work.

More importantly, that argument (if correct) only provides another reason public spending cannot both put unemployed housing resources back to work and provide value to the public: The housing resources are ill-suited for public sector work.

The public sector — especially at the federal level — is not known for its agile and effective responses to market conditions. In authoring the stimulus bill, Congress and the president relied too much on federal spending and too little on the private sector.

C-S/OFHEO comparison from Professor Nunes

Professor Nunes sent me this chart comparing the Case-Shiller national housing price index with the OFHEO index for the Pacific region only. The close correlation between the two is consistent with the hypothesis of Rebecca Wilder that the "national" Case-Shiller index does not represent well the nation as a whole.