Hey Peeps: On the Economy, Podcast #4 is Live!

March 7th, 2017 at 3:16 pm

In this episode, Ben and I talk about the increasing importance of the Labor Dept with one of our favorite advocates in this space, Judy Conti from the National Employment Law Project (an advocacy organization whose board I chair). If you’re thinking, “why do I need to learn about what the Labor Dept does?” then you’re our target audience, so hit play and check it out.

Plus, there’s a musical interlude featuring one of my all-time favorite Motzartean melodies from his Serenade in D Major, aka the “Posthorn Serenade.” (What’s a posthorn? it’s this, but we’re losing the thread here; www.youtube.com/watch?v=MS5YCVdPxCk).

Plus, another economics dad joke. I’ll bet you don’t know the three laws of economics…

As always, Ben and I welcome your feedback, suggestions, and questions for us to tackle in the mailbag section.


The House ACA replacement plan will unwind the coverage gains of the ACA, part 1

March 7th, 2017 at 9:57 am

Much as I worried about in an extended piece from yesterday on the problems with Republicans’ replacement ideas, their new bill to replace the Affordable Care Act will lead to less coverage and more cost shifting from government to moderate and low-income families.

I’m crunched for time this AM, so I’ll be adding to this post throughout the day, but here are a few initial impressions:

–The bill will lead to millions losing coverage, due to the repeal of the Medicaid expansion and to lowering the subsidies available to moderate- and low-income households.

–The key disconnect here is that their tax credits are no longer tied to the cost of coverage, so paying for health coverage will mean more out-of-pocket costs than under Obamacare. Once the CBO scores this aspect of the plan, along with the Medicaid part I note next, I suspect we’ll see large coverage losses, possibly unwinding up to 20 million in coverage gains from the ACA.

–As I wrote yesterday, Republicans turn Medicaid financing into a “per capita cap,” a type of block grant. Instead of receiving the federal financing they need to pay for anyone eligible for Medicaid, the per person cap is a fixed allotment that grows at the rate of inflation plus 1 percent. To their credit, House Republicans index the per-capita cap to medical inflation (plus 1), which grows faster than overall inflation. But the key question is: how much less will states get relative to their current allotments? Since Republicans are clearly counting on savings from this switch, the answer can’t be zero (otherwise, why make the switch?). According to a new analysis by Edwin Park, the amount of federal Medicaid support that states will lose under the proposed plan is $370 billion. Under the assumption that states will be very unlikely to replace losses of that magnitude, the result will be diminished coverage for low-income families.

–The bill ends employer and individual mandates and, in their place–because health insurance doesn’t work if people can just seek coverage when they’re sick–allows insurers to impose a 30 percent surcharge on those with gaps in coverage. As I noted in my piece yesterday, low-income persons and those with pre-existing conditions are the most likely to face coverage gaps.

–The plan targets Planned Parenthood by disallowing Medicaid reimbursements. To state the obvious, that has nothing to do with health care reform and is a pure sap to the anti-choice right.

–It’s not all about cutting coverage – the bill is also about cutting taxes for the rich. It repeals two very progressive taxes implemented under the ACA, a Medicare payroll tax on high earners and a tax on the investment income of high-income people. My colleagues previously estimated that the average millionaire household would receive a tax cut of around $50,000 from getting rid of these provisions, and that the 400 richest households would receive an average tax cut of $7 million.

Like I said, I’ll be getting deeper into the weeds on this later in the day–running out now to talk about it on CNBC ~ 11am EST–but this looks very much like what I wrote about yesterday. By significantly ramping up cost sharing, the incentives in the House R’s plan will lead healthy people to leave the risk pool, setting off the adverse selection problem that the ACA was built to avoid. Combine that with the whacking of the Medicaid expansion (turning the problem into a block-grant variant) and you get the predicted result: health care that’s a lot less affordable, thus triggering the loss of the ACA coverage gains, all served up with a huge,wasteful tax cut for the wealthy.

UPDATE: I’ve nothing to add to the above for now but a word on the politics. I don’t understand what R House leader Paul Ryan is up to here. Key groups in the House are ranting that this plan is nothing like the repeal they seek. They want to kill Obamacare and their leadership just delivered unto them “Obamacare lite.” As Ryan Grim pointed out “…so far the Heritage Foundation, Americans for Prosperity, the Koch brothers, the Republican Study Committee and Club for Growth have all come out and slammed Paul Ryan’s version of Obamacare repeal. In other words, everybody.” Meanwhile, from the moderate side, four R senators from states that took the Medicaid expansion object to the bill’s repeal of this part of Obamacare, as they understandably don’t want to see “a reduction in access to life-saving health care services.”

Under the safe assumption that no Senate D’s will help the R’s, if those four hold their position, this can’t pass the Senate. It probably can’t pass the House either. Other than that, it’s in great shape.

So what’s Ryan’s play here (the Congressman, not the HuffPo dude)? I’ve got too much to do to sit around and speculate, but typically, you don’t put out a bill on something this important until you’ve taken the temperature on it from within your party. Perhaps he can say he tried to go with something reasonable (not how I’d characterize this bill, of course), turn things over to the hard right, pass something Draconian over to the Senate where it surely dies, and then blame it on them.

Sadly, that sounds more like the Washington I’ve come to know. Gladly, otoh, the ACA seems a lot more intact for now than you might have thought late at night on Nov. 8th.

Clashing with the Fed: Should they stay or should they go?

March 3rd, 2017 at 9:21 am

Should the Fed raise their benchmark interest rate at their meeting later this month?

As of this morning, financial markets put the likelihood of a March rate hike of another 25 basis points at 77.5 percent. That’s about twice what it was a few weeks ago, but since then, many Fed heads have suggested such a hike is on the table for their meeting later this month.

So, in the words of The Clash, should they stay or should they go?

Reasons not to raise:

–The job market is closing in on full employment, but it’s not there yet; both the underemployment rate and the prime-age employment rate remain elevated (btw, if you thought today was jobs day, you’re off by a week; this happens sometimes in March, as Feb is a short month). While a small brake tap won’t derail existing momentum, raising the cost of borrowing certainly could slow the pace of job growth.

–While the recovery is about eight years old, which isn’t young for an expansion, middle- and low-wage workers have only recently started seeing real paycheck gains. By early 2015, the real blue-collar and non-managerial wage was back to its 2010 level and it has generally kept rising. The tighter the job market, the more these workers will gain.

–Moreover, there’s little evidence that wage growth is bleeding into price growth, so given how important these recent gains are to middle- and low-income working households, why chance slowing them down?

–The strong dollar, which pushes against inflation (by making imports cheaper) is doing the Fed’s work for them!


Source: Fred database

–Which raises the most salient reason for the Fed to keep their feet off the brakes: their core inflation gauge remains below their 2 percent target. Core PCE prices have accelerated, as have inflationary expectations, but it has been holding steady at around 1.7 percent, year-over-over. Given that their inflation target is symmetrical–meaning years of being below target should be followed by some time above target–a pre-emptive strike on price growth is unwarranted.

Source: BEA

Reasons to raise:

–The Fed has to see around corners, and thus often moves before utilization constraints are fully bindng.

–The economic headwinds typically cited in favor of holding have somewhat dissapted. As Fed governor Brainard put it in a speech this week: “With full employment within reach, signs of progress on our inflation mandate, and a favorable shift in the balance of risks at home and abroad, it will likely be appropriate for the Committee to continue gradually removing monetary accommodation.” She sees positive movements in the recoveries of Europe, Japan, and China, and stresses rising measures of both actual and expected inflation here at home.

–The Fed may view the stock market rally as a bit overdone and want to take action against too much speculation. At the same time, as noted above, the market now expects a rate hike, so to not raise would signal that the Fed is less optimistic about the economy than many of its members have been saying lately in speeches. That could tank the rally, though I doubt the governors give a very heavy weight to that possibility.

–The job market, or more precisely, labor demand, is in a solid groove and won’t be slowed by a small hike.

–“Normalization” of the Fed funds rate is necessary to avoid the zero-lower-bound problem when the economy weakens.

Basically, the case for raising is that the funds rate is still very low, they’re close to meeting the full employment side of their mandate, and the US and global economies are in strong enough shape to handily absorb a small hike. The case against raising is why tap the brakes when risks are still asymmetric, meaning that the risk of weakening demand is greater than the risk of inflationary overheating?

I see both sides and think it’s a close call, but I’m still more moved by the risk asymmetry case for holding than the “it won’t hurt, so let’s take out a bit of insurance against missing our inflation mandate” case for raising.

So I would stay rather than go, though just to be clear, I don’t think that if they stay there will be trouble and if they go it will be double.

Please don’t say “overhaul” when you mean “cut.”

March 2nd, 2017 at 8:34 am

I love my morning Budget Tracker update from Congressional Quarterly almost as much as I love my morning coffee. It provides that quick, efficient dive into the daily budget weeds that wonks like me crave (sorry, it’s behind a paywall).

So I was disheartened to see them fall into this trap that I’ve been pretty keyed up about of late (my bold):

Republican lawmakers made clear Wednesday that any efforts to overhaul entitlement programs like Social Security and Medicare are now on the legislative back burner.

Readers are somehow required to know that “overhaul” means “cut.” This being the Budget Tracker, most readers probably know the translation, but this is not the time for squishy, ambiguous language.

I’m not sure when that time will come, but until then, people writing about these issues need to call it like it is.


Inflation?! We ain’t got no stinkin’ inflation!

February 28th, 2017 at 11:12 am

This morning’s update to the GDP report from last quarter showed that the Fed’s preferred inflation gauge, the core PCE deflator, rose at an annual rate of only 1.2 percent in 2016Q4. Seasoned economists know that the technical term for such an increase is bupkis.

Now, OTE’ers know that I’m always going on about boosting the signal to noise ratio by looking at year-over-year changes instead of annualized quarterly ones. That holds here as well, as seen in the figure below: the yr/yr change cuts a smooth average through the noisier annualized quarterly change.

Source: BEA

Still, the deceleration in the noisier series could signal a slight slowing in an already low-pressure inflation environment. FWIW, a pure ARIMA forecast has the yr/yr change slowing from 1.7 percent to 1.5 percent over the next four quarters.

Anyway, GDP’s on trend at about 2 percent, the job market is closing in, but not yet at, full employment (the underemployment rate is still about a percentage point too high), and wage growth has picked up a bit but it’s not bleeding into price growth in anything like an obvious or threatening way. And inflation remains below the Fed’s 2 percent target and could even be slowing.

I’m pretty guilty when it comes to the usual economist’s hedge of “on the one hand this, on the other hand, that” but let me say unequivocally that the evidence in favor of a Fed rate hike in March looks really very, very weak.