Debt, Medicare, Politics, Etc.
As per my post earlier today, there is at least one reader of this blog, along with his/her gang of macroeconomics-minded teens, interested in the U.S. debt. I’m guessing many other readers are interested in this topic too. To all such readers, please don’t expect me to be your sole source of information on it. That would be a big mistake.
But, reading Krugman on the topic would not be an obvious mistake. It just so happens that he put up a marvelous post moments ago that explains why he’s not worried about the U.S.’s current debt level. At the end it nicely ties into all the political footballs of the day, tightly spun in standard Krugman style.
What this means is that if you’re worried about the US fiscal position, you should not be focused on this year’s deficit, let alone the 0.07% of GDP in unemployment benefits Bunning tried to stop. You should, instead, worry about when investors will lose confidence in a country where one party insists both that raising taxes is anathema and that trying to rein in Medicare spending means creating death panels.
The title of Krugman’s post is “Debt is a political issue.” No kidding! It is worth a full read.
An Opening at the Fed?
There’s some talk that Bernanke won’t be reconfirmed as Fed chair and speculation about an alternative. Brian Johnson suggested Paul Krugman which surprised me given my view of his interest in political nuance. Krugman himself called Johnson’s idea crazy and James Kwak countered that it isn’t as crazy as Krugman thinks, but concludes that Krugman is probably serious that he doesn’t want the job anyway.
My thoughts on Krugman are closer to those of Tyler Cowen who writes,
[H]e is too dedicated to reading and writing and speaking his mind. The Fed Chair has to be an expert on building consensus and at maintaining more credibility than Congress; even when the Fed screws up you can’t just dump this equilibrium in favor of Fed-bashing. What lies on the other side of that curtain isn’t pretty. Would Krugman gladly suffer the fools in Congress? Johnson and Kwak are overrating the technocratic aspects of the job (which largely fall upon the Fed staff anyway) and underrating the public relations and balance of power aspects. It’s unusual that an academic will be the best person for the job.
Meanwhile, James Hamilton argues that Bernanke should be reconfirmed and concludes his post with links to the opinions of many others (just in case you’re interested). Since many macro-economists I trust (DeLong, Thoma, and Hamilton himself) who follow the Fed more closely than I are in favor of keeping Bernanke at the helm I’m inclined to go along. That’s especially so because the turn against him seems to be a form of political cover against populist backlash, which is far from the best reason to change Fed leadership at a time of economic fragility.
What “I” Really Think of the Cadillac Tax
It would be easy if I just agreed with Paul Krugman about everything. But I don’t always.
Yet, sometimes I do. And he writes well. So instead of writing my own post about what I really think about the Cadillac tax I’ll just state (now for “the record”) that I think what he wrote makes a lot of sense. In brief, the tax’s general aim is good, but the specific way it is currently proposed is bad and should be fixed. (In truth this isn’t too different from what I’ve already strongly implied. Maybe Krugman is agreeing with me. He doesn’t always.)
The other thing I agree with Krugman about today is in his other post. Click through to find out. That’s the point.
Krugman Too
In today’s NY Times Krugman, in passing, obliquely referenced the results I described yesterday, that Medicare beneficiaries are more satisfied with Medicare than are the non-elderly with private insurance.
Today, Medicare — which is, by the way, one of those “single payer” systems conservatives love to demonize — covers everyone 65 and older. And surveys show that Medicare recipients are much more satisfied with their coverage than Americans with private insurance. [Emphasis mine.]
Despite what Krugman and others say, these results do not show and cannot be interpreted as showing that public insurance causes greater satisfaction than private insurance. Such results, biased by sample selection, are handy rhetorical tools, but they don’t actually tell you anything.
(Actually, little secret, those survey results also show that Medicare beneficiaries enrolled in Medicare Advantage (private plans operating under Medicare) are a bit more satisfied than Medicare beneficiaries enrolled in traditional fee for service Medicare. There are selection problems with this comparison too so I won’t conclude that it means that people like private plans more than government ones. Would Krugman?)
Eye on Inflation
This post originally appeared on The Finance Buff.
Yes, another inflation post. If the economists keep blogging it, I’ll keep linking to their stuff. We’ll see in a few years who got it right. I’ll have the records!
- Andy Harless in A Long Way to Inflation is much more worried about deflation.
- Casey Mulligan in What Monetary Policy Cannot Do recalls Milton Friedman’s claim that monetary policy cannot have a sustained effect on interest rates or inflation and finds the claim credible in light of recent data.
- Henry Blodget in Why Krugman’s Not Worried About Inflation describes the “pissing match” among economists over inflation. He links to Arthur Laffer (Here Comes Hyperinflation), Paul Kasriel (worried about inflation), and of course Krugman (no inflation worries). Krugman himself cites Mark Thoma’s and David Altig’s reaction to Laffer. So this is a dense source of economic prognostication.
I predict more debate, followed by some “I told you so” gloating, and then we’ll all forget about it until the next blast of fiscal and monetary stimulus in ??? years.
Reading Krugman
This post originally appeared on The Finance Buff.
I think Paul Krugman has a blind spot. Yes, the Nobel Prize winning, Princeton University economist, and NY Times columnist Paul Krugman. I saw evidence of it in last week’s debate among economists over Treasury Secretary Geithner’s bank rescue plan, the so-called Public-Private Investment Program (PPIP).
In brief, under PPIP private investors would receive non-recourse federal loans to buy toxic assets from banks. The goal is to increase lending so as to reduce unemployment. (Was that too brief? If so, the dots are connected in Brad DeLong’s clever FAQ, and well-crafted numerical examples can be found here and here.)
The cynical won’t be surprised that the plan is similar to one pitched to the Treasury Department by institutional investors, or that some banks may be gaming the system. The plan is also similar to one proposed by Harvard Law Professor Lucian Bebchuk.
While the White House press corps was not terribly interested in PPIP, it lit up the economics blogosphere. MIT’s Ricardo Caballero thinks the plan “is well-conceived and deserves to be supported.” Johns Hopkins economics professor Christopher Carroll finds savvy the way it induces private investors to price assets. NYU’s Nouriel Roubini is cautiously optimistic. Many other sharp economists view the approach favorably, including Mark Thoma (Univ. of Oregon) and Brad DeLong (Berkeley).
There is a list of equally impressive opponents. Jeffrey Sachs of Columbia University thinks PPIP provides a one-way bet: heads investors win, tails the government loses. Financial Times columnist Martin Wolf calls PPIP a “vulture fund relief scheme.” MIT Sloan School’s Simon Johnson worries in a well thought out LA Times opinion piece that without nationalization banks will not sell enough of their toxic assets.
Finally, Paul Krugman is filled with despair over PPIP, calling it a “waste of taxpayer money.” He believes Obama is “squandering [the] credibility” he needs to win support for bank nationalization. (Krugman once worried that nationalization might be too expensive: Times change and opinions with them.)
As the liberal economist of record, Krugman’s critique of PPIP received a lot of press much of it uncritical. I think a little more critical reading is warranted, that his cry for nationalization now misses something crucial. Namely, he has a blind spot for the political and implementation risks and challenges. As John Heilemann wrote in New York Magazine, “Getting the economics right may be devilishly difficult—but the politics are even trickier, and just as crucial.”
One cannot be president and apolitical. Incentives and risks of governance compel Obama to think beyond economics even when considering economic issues. He is, no doubt, sensitive to his political capital, the issues over which to allocate it, and Congress’ appetite for alternatives to PPIP (like nationalization), among others. Brad DeLong points out that Obama does not easily achieve the 60 votes in the Senate he would need to take bolder action. (PPIP requires no additional congressional approval.) “Do we want to revive our economy, or do we want to punish the bankers?” DeLong asks, “I don’t agree that we can do both.” Matthew Yglesias elaborates,
“Doing something…without an additional vote makes it more likely that they can ask Congress to cast those tough votes on the budget and on health care rather than on bank bailouts.”
According to Obama aides, “Krugman’s suggestion that the government could take over the banking system is deeply impractical.” (Newsweek) Impractical politically but also because nationalization would require expertise and staff the Treasury Department does not yet possess. Therefore, like it or not, Geithner needs the banking industry’s cooperation to increase lending. He nearly lost it during the uproar over the AIG bonuses. He’d lose it for sure with a nationalization plan.
If nationalizing banks is a political non-starter then attempting to do so would destroy the credibility Krugman feels Obama is squandering with PPIP. Therefore, right now PPIP may be the only step forward. After all, a bank balance sheet has only two sides: assets and liabilities. Nationalization works the latter, PPIP the former.
My critique of Krugman is brash. He has a Nobel Prize while I have a Certificate of Appreciation from my employer. Yet it is hardly ever wise to consider an expert’s opinion thoughtlessly. Even experts can be poor sources of expertise. Even Nobel laureates make mistakes (like this or this). Whether you’re reading Krugman or TIE, it is not wise to reflexively trust what you read. You can take that to the bank.
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