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February 26, 2007
Has The NAIRU Gone Away?
For decades, a simple rule has governed how the Federal Reserve views the nation's economy: When unemployment falls too low, inflation goes up, and vice versa.
... From 1979 to 2003, Fed Chairman Paul Volcker and his successor, Alan Greenspan, exploited this idea, periodically using interest rates to push unemployment higher to achieve lasting reductions in inflation.
But even as they were doing so, the short-run impact of unemployment on inflation began to diminish. Though the trend has been under way for 25 years, only recently has intensive research by Fed economists and others incorporated it into mainstream thinking.
Well, I'm not sure how recent recently is, but my colleagues Terry Fitzgerald, Peter Rupert, and I wrote this in 1997:
A key aspect of [the conventional] perspective is the implicit, but critical, role of the potential-output and full-employment concepts in determining whether a particular growth rate or unemployment rate is inherently "inflationary." The meanings and implications of these concepts are the subject of considerable debate among economists. We are ourselves skeptical that there exists a definitive notion of labor market tightness associated with above-trend (or above-potential) real GDP growth that is reliably related to price pressures.
I don't present this to suggest that we were particularly prescient. As Dean notes, the conventional perspective is wrapped around the idea of the so-called NAIRU...
According to articles in both the Wall Street Journal and the Financial Times, the Fed may no longer view the non-accelerating inflation rate of unemployment (NAIRU) as a useful tool for guiding monetary policy. The problem seems to be that they don't know where it is and what it means.
... and, at the time we wrote those words above, many, many others shared skepticism about the usefulness of NAIRU-related concepts -- not least several members of the Federal Open Market Committee. From the transcript of the May 21, 1996 meeting of the FOMC:
CHAIRMAN GREENSPAN... The key to this outlook, as I see it, is not an evaluation of the physical side of the economy that appears in the Greenbook because I suspect that starting at midyear economic growth may well be on the low side of recent experience. The crucial question is the linkage to inflation. At this stage it is very difficult to take the existing structure of the NAIRUs, capacity limits, and the usual potential analysis that we do and square it in any measurable way with what we sense from anecdotal reports.
MR. JORDAN [Cleveland Fed]... Is your confidence in the 5-3/4 percent NAIRU instead of, say, 5-1/2 or 5-1/4 percent? Is it in the or 2-3/4 percent real fed funds rate versus 2-1/2 or 2-1/4 percent? Or is it in a particular measure of inflation or inflation expectations.
Mr. KOHN. I would have to say that I am not very confident about any of those measures. There is a band of uncertainty around them all. I do think that, as Mike Prell has commented--and I think Governor Meyer said this yesterday as well--there used to be more confidence about the NAIRU calculation.
CHAIRMAN GREENSPAN... The evidence that there is a significant shortfall in measured wages from the predictions of our wage-NAIRU econometric relationships is pretty clear.
VICE CHAIRMAN MCDONOUGH [New York Fed]... One of the things we have become rather convinced of is that the NAIRU is a very interesting analytical tool, but it is a very poor forecasting tool...
MR BOEHNE [Philadelphia Fed]... The NAIRU concept, while it means a lot to economists, is a very unfortunate way of communicating because 99.99 percent of the people do not understand it and it comes across as meaning that we are against growth and against more jobs.
MR. MCTEER [Dallas Fed]... There’s a sentence on page 6 of the Bluebook that says: “In the staff model, the sacrifice ratio over five years is about 2; that is, a 1 percentage point reduction in inflation can be achieved only by pushing the unemployment rate above the NAIRU by the equivalent of about 2 percentage points for one year.” At the end of 1996, in December, the CPI inflation rate was 3.3 percent, and I think the latest reading is 2.2 percent. It has come down then on that trailing basis more than a full percentage point at a time when the unemployment rate has come down by half a dozen notches...
MR. STERN [Minneapolis Fed]... if there is a NAIRU, it bounces around a lot.
MR. KOHN... In fact, we are very uncertain about the level of the NAIRU, and some of these supply shocks could be affecting it in a more permanent way.
You get the idea. I've cherry-picked the comments, but they accurately reflect my recollection of what was in the air at the time. In fact, to greater and lesser degrees, the reputation of the NAIRU way of thinking has been under attack for as long as I have been employed by the Federal Reserve System (starting in 1989). On the other hand, if you push most Fed folk about their view of how the world works, chances are very good that you will receive back a story about the NAIRU (or its close relations, the output gap and the natural rate of interest).
Remember the "New Economy"? File this story with that one.
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» Forget the NAIRU? from Economic Investigations
You thought I was crazy when I criticized the NAIRU concept as being the relic of an obsolete way of doing macroeconomics: I must be having a bad acid trip The Natural Rate is Obsolete Hodrick-Prescott and the Output Gap (old and stupid, ... [Read More]
Tracked on Feb 27, 2007 3:49:49 PM
February 24, 2007
The Euro Vs. The Dollar
Although I've not written much about the topic lately, I have been monitoring the debate of the last several months about the rise of the euro, and the related question of whether it will eventually emerge as the world's dominant international money. The discussion has been prompted in part by the fact that euro appreciated by about 11 percent from December 2005 to December 2006, but also by some really splashy news: The observation that the value of euro notes in circulation has surpassed the value of dollar notes, the reported desire of oil-producing countries to diversify their foreign-exchange reserves, and the fact that euro-denominated debt has become a larger share of the global cross-border total than dollar-denominated debt. Yesterday Brad Setser published some ruminations about whether the Japanese yen can ever be the "un-dollar", but the reality is that the euro remains the only real contender for the foreseeable future.
A couple of pictures (constructed by my colleague Owen Humpage) helps to put things in perspective. To begin with, international currency reserves are still dollar dominated:
There are definitely some problems with those statistics -- see, for example, the picture provided by Brad Setser, provided by Menzie Chinn -- but here is another relevant fact: The overwhelming share of foreign exchange transactions involve dollars:
It seems pretty clear that most of the euro activity is still taking place on the European stage. That could change -- there is an interesting discussion about the expanding importance of the export sector being conducted at Eurointelligence and at Eurozone Watch -- but my guess is that the "tipping point" for the euro depends critically on whether the eurozone ultimately expands.
As I have noted in the past, the research of Menzie Chinn and Jeffrey Frankel suggests that the wildcard involves the UK's designs on the euro. But the incorporation of the so-called "accession countries" is at issue as well. For that reason, this, from the Financial Times, got my attention:
On Monday Standard & Poor’s lowered the outlook for Latvia’s long-term sovereign debt from stable to negative. The country has a huge current account deficit, accelerating inflation and loose monetary policy, just like Thailand in 1997. And, as in Asia a decade ago, the symptoms are not limited to one country. As growth has accelerated in the European Union’s 10 newest central and eastern members, it has become unbalanced, propelled by consumers rather than exports. The results are predictable – worsening trade imbalances, mounting inflation and wage pressures. Only Poland and the Czech Republic currently meet the inflation requirement for euro membership, while current account deficits in six of the EU-10 hover near or beyond 10 per cent of gross domestic product. Meanwhile, credit is expanding dramatically – at more than 50 per cent year-on-year in Latvia, Lithuania and Romania, according to Danske Bank.
If the EU were to fracture, the natural fault-line would be the edge of the euro zone, as Toomas Hendrik Ilves, Estonia ’s thoughtful president, has observed...
The common currency includes most of old Europe, but excludes most of the new democracies (including his). What would happen to the outsiders? It would be nice to think, as a worst-case scenario, that the single market would hang together, and that the baker's dozen of countries outside the euro zone would at least remain part of this thriving free-trade area...
Probably, however, the unraveling would go further. The EU already finds it a huge effort to make the Poles, for example, abide by European competition law. Without a seat at the top table in Brussels, no Polish government would allow foreigners to claim full national treatment, especially when it came to buying the country’s big companies. With that, the single market would unravel too.
That all may be a bit alarmist -- the worst-case scenario is important to think about, but it rarely happens. The point is that, despite the challenges that undeniably confront policy makers in the United States, there are equal, if not more daunting, challenges elsewhere. I have my doubts that the "exorbitant privilege" of being the world's dominant currency is likely to pass from the dollar any time soon.
UPDATE: Export activity in Germany (and Japan) is also on the mind of Edward Hugh, at Bonobo Land.
UPDATE II: Claus Vistesen uncovers an article from the Financial Times suggesting that central bankers are chasing yield by by taking on more risk, as well as by diversifying the currencies in their reserve portfolios. My sense is that this sort of motivation drives "investment" decisions at the margin, but that core portfolio choices are still driven by "fundamentals" related to trade flows, financial market activity, and internal exchange rate policies. But as the FT article notes, central bankers are "a secretive bunch," so there is a lot we -- or at least I -- don't know.
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February 22, 2007
Hedge Funds Get A Regulatory Stay
After months of reflection, the overseers of the U.S. financial system have concluded that current regulations, administered carefully, are sufficient to prevent hedge funds, private-equity investors and other "private pools of capital" from threatening the stability of the broader financial system.
The report by the President's Working Group on Financial Markets -- the heads of the Treasury, Federal Reserve, Securities and Exchange Commission and Commodity Futures Trading Commission -- is their first comprehensive statement on hedge-fund risks since a study that followed the near-collapse in 1999 of giant hedge fund Long Term Capital Management.
The "principles and guidelines" released Thursday said that while hedge funds "present challenges for market participants and policymakers," the risks can be maintained through a combination of "market discipline" and limiting the private pools of capital to wealthy investors. It urged policy makers to scrutinize hedge fund counter-parties, such as banks and mutual funds, and rely on investors and their financial advisors to help mitigate risks.
...Mr. Paulson said. "What we've emphasized is market discipline."
Of course, it ain't over until it's over...
Rep. Barney Frank (D., Mass.), chairman of the House Financial Services Committee, said his panel will hold hearings on hedge funds this spring. He called the working group's report "a first step in addressing questions presented by the significant growth of hedge funds," but added "further study and monitoring" of systemic risk and investor protection were needed.
... but for now, the view is that the players are big boys and girls and that the exposure of banks, for example, are being contained through the prudent exercise of current oversight. Or, in the workds of the headline writers at Forbes.com: Caveat Emptor.
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» San Diego County pension fund from Econbrowser
I have been developing concerns about the possibility that hedge fund investment flows have become a destabilizing force in world financial markets. Following the maxim "think globally, act locally," I decided to take a look at how the behavior of o... [Read More]
Tracked on Feb 23, 2007 8:54:40 AM
February 21, 2007
A Dent In The Yen Carry Trade... Oh, Wait
A few weeks back, my friend Edward Hugh was monitoring the then latest thinking from the Bank of Japan:
Bank of Japan policy board member Hidehiko Haru has underlined what most Bonobo readers should already know, that internal consumption in Japan is week and that there's no threat that rising prices will cripple economic growth. Conclusion: there's no hurry to raise rates:
"Given that there's no evidence of any inflationary risk, there's no need to rush,'' Haru, 69, said today in a speech to business executives in Shizuoka city, Japan. "Gradual adjustments will be needed and will be made based on improvements in the economy and prices.''
Apparently, the "gradual adjustments" phase has arrived. From the Financial Times:
The Bank of Japan’s policy board on Wednesday voted eight to one to raise interest rates a notch to 0.5 per cent, pointing to strong economic growth data as it made the first increase since July...
The BoJ’s decision to raise rates came as the result of strong growth in the fourth quarter, when gross domestic product expanded by 4.8 per cent on an annualised basis. That was the only significant positive piece of data released since last month when the board voted six to three against a rate increase.
Why? Good question, I guess:
Masaaki Kanno, chief economist at JP Morgan in Tokyo, said: “It is a little puzzling to explain why five board members changed their mind.” He said the GDP data on its own, by definition backward looking, was not enough to explain a rise in terms of the bank’s stated forward-looking framework...
However, leaving aside what he said was the bank’s failure properly to explain its rationale, Mr Kanno said the board was justified in raising rates. He said it had stressed the second pillar of its policy framework, which concentrates on risks. These included the possibility of an asset price bubble and, particularly, risks associated with the weak yen, he said.
Yuka Hayashi, reporting for The Wall Street Journal, expands on that idea:
"As world financial markets become integrated, the time has come for us central bankers to conduct monetary policy while keeping firmly in mind its external consequences," BOJ Governor Toshihiko Fukui told a news conference.
Specifically, the governor said the BOJ wanted to quench expectations that Japanese rates would stay very low for very long, which might cause them to take "extreme positions." He said the BOJ had in mind, among other aspects of global markets, the so-called "carry trade," where investors borrow money at Japan's low rates and invest it elsewhere where returns are higher. Mr. Fukui said such borrowing could present a risk to the global economy if unwound suddenly.
But, my oh my, how events have a way interfering with the message. From Bloomberg:
The dollar approached a four-year high against the yen and rose versus the euro after a government report showed U.S. consumer prices in January increased more than economists forecast.
Investors bought the U.S. currency as signs of inflation may cut speculation that the Federal Reserve's next move is to reduce borrowing costs. The dollar's advance started after the Bank of Japan said further interest-rate increases would be gradual. The yen declined to near an all-time low versus the euro.
"The report works in favor of the dollar,'' said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. "Inflation is creeping up. The Fed is going to keep rates on hold. There isn't a rate decrease anytime soon.''
The more things change...
UPDATE: Brad Setser, insightful as ever, has some thoughts on the size of the carry trade, and adds that "the market consensus certainly seems to be that Japanese rates aren't going to rise far or fast enough to put a real dent in the carry trade."
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February 16, 2007
Is A Tight Labor Market Consistent With No Job Growth?
Chicago Exec-MBA Germana Paterlini noticed his passage from Ben Bernanke's Congressional testimony this week (emphasis added):
The rate of resource utilization is high, as can be seen in rates of capacity utilization above their long-term average and, most evidently, in the tightness of the labor market. Indeed, anecdotal reports suggest that businesses are having difficulty recruiting well-qualified workers in certain occupations.
Germana's company, Certusoft, is apparently one of these businesses. Certusoft is a software company, and you might think that this sort of high-skill enterprise is not exactly representative. But the data from the Bureau of Labor Statistics' Job Openings and Turnover Survey (JOLTS) suggests the phenomenon is fairly widespread. Job openings -- or unfilled positions -- have been rising steadily for about three years and, after flattening out in the first half of 2006, the growth of job vacancies accelerated in the latter part of the year:
This pattern even emerges in manufacturing, a sector in which net job creation continues on in negative territory:
To be sure, a combination of rising job openings and no job growth does not prove that there is a skill-match problem restraining employment growth (resulting in labor-market "tightness" even though the pace of job expansion appears modest). But it does make you think.
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February 15, 2007
Where The Troubles Are
Although extensive fourth-quarter information on the financial state of US homeowners has yet to fully arrive, it has been clear for awhile that the most serious problems are concentrated in the market for adjustable rate mortgages (ARMs), and sub-prime ARMs specifically:
From a macro policy point of view, the largest concern is that problems in the housing market might spill over into consumer spending or, what in my opinion would be more troubling, financial markets, which provide the necessary support for both consumption and investment activity going forward.
Despite lower-than-expected retail sales in January, I think it hard to argue with Federal Reserve Chairman Ben Bernanke's assessment:
The principal source of the ongoing moderation has been a substantial cooling in the housing market, which has led to a marked slowdown in the pace of residential construction. However, the weakness in housing market activity and the slower appreciation of house prices do not seem to have spilled over to any significant extent to other sectors of the economy. Consumer spending has continued to expand at a solid rate, and the demand for labor has remained strong.
And of spillovers into the health of the financial sector? So far, so good, but this, from today's Wall Street Journal (page A4 in the print edition) is worth watching:
Efforts by major banks and Wall Street firms to unload bad U.S. housing loans are speeding up a shakeout in the subprime mortgage industry.
As more Americans fall behind on mortgage payments, Merrill Lynch & Co., J.P. Morgan Chase & Co., HSBC Holdings PLC and others are trying to force mortgage originators to buy back the same high-risk, high-return loans that the big banks eagerly bought in 2005 and 2006...
As more subprime lenders face losses or bankruptcy, big banks also face another problem: Many lent money to small firms like ResMae so that those firms could make more mortgage loans to borrowers. It isn't clear how much of these loans will be paid back to the banks. Wall Street firms also are increasing their own internal generation of subprime loans by acquiring smaller mortgage loan originators or processing companies.
In 2005 and 2006, banks such as HSBC and brokerage firms like Merrill Lynch went on a buying spree, snapping up subprime loans from typically small mortgage banks that had lent money to homebuyers. At the same time, many lenders were loosening their credit standards and making riskier loans.
That risk is getting its due attention now:
As I said, worth watching.
UPDATE: XP77 econ master Ken Sutton reminds me of this from Caroline Baum, appearing at Bloomberg earlier this week:
The issue isn't whether loans defined as risky carry risk; they do. The real question is whether the risk was priced correctly; whether rising delinquency rates on subprime loans, sometimes made without proper documentation, will spill over into the rest of the home-loan market; whether borrowers will default when teaser rates on adjustable-rate mortgages reset higher at a time when home prices are falling; and -- the big kahuna, the one that matters to the Federal Reserve -- whether any of the bad- loan problems will affect financial institutions' ability to lend.
In its January survey on bank lending practices, the Fed said that a net 15 percent of domestic banks reported tightening credit standards on residential mortgage loans over the past three months, the biggest net increase since the early 1990s. That was the last time banks were saddled with -- guess what? -- bad real-estate loans.
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February 14, 2007
The Twins Part Ways
From the AP (via abcNews.com):
The deficit for the first four months of the current budget year is down sharply from the same period a year ago as the government continues to benefit from record levels of tax collections.
The Treasury Department reported Monday that the deficit for the budget year that began Oct. 1 totals $42.2 billion, down 57.2 percent from the same period a year ago.
The United States ran a record trade deficit in 2006 for the fifth consecutive year, the Census Bureau reported Tuesday in an announcement that quickly reignited the dispute between the Bush administration and Democrats over the value of past and future deals lowering trade barriers.
The bureau said that the trade deficit, or gap between what the United States sells abroad and what it imports, reached a new high of $763.3 billion last year, a 6.5 percent increase over the year before. The deficit was fueled by the continuing American need for foreign oil and imports of consumer goods from China and other countries.
The fact that the two deficits are moving in opposite directions is not really anything new:
Twin deficits? Not so much.
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February 13, 2007
Poverty In The Suburbs
Once prized as a leafy haven from the social ills of urban life, the suburbs are now grappling with a new outbreak of an old problem: poverty. Currently, 38 million Americans live below the poverty line, which the federal government defines as an annual income of $20,000 or less for a family of four. But for the first time in history, more of America's poor are living in the suburbs than the cities—1.2 million more, according to a 2005 survey. "The suburbs have reached a tipping point," says Brookings Institution analyst Alan Berube, who compiled the data.
Cleveland, as it turns out, is chosen as the poster city for suburban poverty:
Six years ago, Brian Lavelle moved out of the city of Cleveland to the nearby suburb of Lakewood for what he thought would be a better life... Then, three years ago, the steel mill closed and Lavelle found that the life he dreamed of was just that, a dream. The suburbs, he quickly learned, are a tough place to live if you're poor.
... five years ago, a Hunger Network food pantry in Bedford Heights, a struggling suburb of Cleveland, served 50 families a month. Now more than 700 families depend on it for food.
Howard and Jane Pettry, of Middleburg Heights, Ohio [another Cleveland suburb], see themselves as working-class—just facing hard times. In December, Jane was laid off from her job at a local supermarket, and a week later Howard had a heart attack and missed a month of work from his job at a grain mill. Now Jane's collecting unemployment and they're staring at the poverty line as they struggle to pay the mortgage and the bills.
Is it really the case that the suburbs are increasingly poverty-ridden? I'm suspicious. Not too long ago, my colleagues Mark Schweitzer and Brian Rudick examined the case of Cleveland specifically:
Cleveland is the poorest big city in the United States, according to the Census Bureau, with nearly a third of the city’s residents living in poverty. The city’s poverty rate also rose since it was last measured. These numbers have received a lot of attention since they were released, but unfortunately, they are easily misinterpreted.
The numbers tell us that Cleveland has many poor people. But the numbers don’t tell us that Clevelanders have become worse off, that the region’s economy has deteriorated, or even that there are more poor people in the city than before.
A closer look at the American Community Survey results suggests that Cleveland’s poverty rate reflects the fact that the region’s poor are concentrated in the central city, while the wealthier live in the suburbs. The rate may have risen because people are moving out of the city, and those that leave are disproportionately better-off than those that stay behind. Neither of these facts on its own says anything about the economic health of the region, but they do say something about the relative desirability of living in the city versus its outskirts.
The definition of the Cleveland MSA has recently changed to exclude Ashtabula County, but under either the old or new definition, poverty is far lower outside the city than inside it.
... Looking at the poverty rate of the MSA [metropolitan statistical area] reveals that Cleveland (officially the Cleveland-Lorain-Elyria MSA) is not too different from other U.S. cities. The poverty rate of the Cleveland MSA is just a little above the average for all metropolitan areas in the United States. And like other cities in the country, Cleveland’s suburbs have far lower poverty than the city itself.
...the 2005 rise in metro area poverty figures seen in this figure is almost entirely accounted for by the increase in the number of poor people in the city of Cleveland, rather than in the suburbs. In the 2004-2005 shift that boosted the poverty rate for the MSA, for example, the number of poor people in the MSA grew by 43,540, but 36,991 of that increase occurred in the city.
It is true that the number of poor people in the suburbs is larger than the number of poor people in the city -- according to Schweitzer and Rudick "about two-thirds of the metro area’s poor live outside the city of Cleveland" -- but this is simply a function of the fact that the population of the MSA is heavily concentrated outside of the city. In terms of poverty trends, there just isn't that much happening in the suburbs:
If one wants to use Cleveland to tell a story about poverty -- especially concentrated poverty -- the action is still in the central city.
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February 12, 2007
Another Thought On The Edwards Health Care Plan
The U.S. government will help states and groups of states create regional Health Markets, non-profit purchasing pools that offer a choice of competing insurance plans. At least one plan would be a public program based upon Medicare. All plans will include comprehensive benefits, including full mental health benefits. Families and businesses could choose to supplement their coverage with additional benefits. The markets will be available to everyone who does not get comparable insurance from their jobs or a public program and to employers that choose to join rather than offer their own insurance plans.
The one thing that worries me is the possibility that the endgame is domination by the public Medicare-like program, not because it is the best or most efficient means of providing insurance, but because state-run enterprises can stifle the competition by exploiting their access to taxpayer capital.
Fortunately, there is something of a model for markets in which government and private firms compete. That model comes in the form of the Monetary Control Act of 1980, which governs the behavior of the Federal Reserve when it participates in businesses for which there are actual or potential private-sector alternatives. (An example of such a business would be the collection and clearing of checks.) In essence, the rules of the Act require that the Federal Reserve cover its economic costs, which include the return to capital that would be required by the owners of for-profit businesses.
Why is is it necessary to have the government producing services that private firms are able and willing to provide? Whether you are talking about medical insurance or check-processing, it's a good question. But arguably the provisions of the Monetary Control Act resulted in an efficiency-focused government supplier with some devotion to serving markets (community banks in particular) that might have been less desirable to private providers of those services. And that doesn't sound like a bad outcome for a health care system.
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February 11, 2007
John Edwards Leaves The Gate On Health Care
John Edwards jumped ahead of the other designated major candidates in proposing a detailed plan to get to universal coverage.
Hooray for Senator Edwards, who deserves nothing but credit for jump-starting the debate. His proposal envisions a future with mandatory universal insurance coverage, provided through a combination of public and private sources, and "regional Health markets" designed to resolve the problem of constructing adequate risk pools.
The risk-pool problem has presumably helped (along with tax subsidies, of course) to entangle the provision of insurance with employment, but Senator Edwards is apparently uninterested in moving away from employer-based health care plans:
Businesses have a responsibility to support their employees’ health. They will be required to either provide a comprehensive health plan to their employees or to contribute to the cost of covering them through Health Markets.
This doesn't seem like such a good idea to me. As Gary Becker wrote not too long ago:
The tying together of health insurance with employment is partly a legacy of World War II, when employers began to offer health insurance as a fringe benefit to help them compete better for workers whose wages were regulated by the wartime government. Employer-provided health insurance expanded over time even after wage controls were abolished because income tax rates rose greatly over time. This artificial incentive to combine health insurance with employment would be eliminated under [President Bush's] proposal.
...there does seem to be movement toward universal care, and all sides generally agree that employers should get out of the health insurance business.
An argument for employer-based system might start with arguing that it is the only way to combat the isolate and kill strategy of insurance companies described by Brad DeLong:
Insurance companies work like dogs to avoid selling insurance to people who are expensively sick or likely to get expensively sick. As a result, a huge amount of people's work-time and information technology processing power are wasted on the negative-sum game of trying to pass the hot potato of paying for the care of the sick to somebody else. The more people separate themselves or are separated into smaller and smaller pools with calculably different exposures to risk, the worse this problem gets. The way to solve it is to shove people into pools as big as possible.
Tyler Cowen has a response to this, but in any event it would seem that the Edwards regional Health markets gets to that issue independently -- why the insistence that businesses "provide a comprehensive health plan to their employees"?
The best -- or at least the cleverest --argument I've seen for employer-provided insurance comes from Steve Landsburg in his book The Armchair Economist:
Employers typically have less than perfect information about what their employees are up to. This makes it hard to get incentives right. You can't reward productivity that you can't observe...
Many employers provide their employees with more health care coverage than is required by law, essentially giving an extra $500 worth of medical insurance instead of an extra $500 in wages. At first this seems mysterious: Why not give employee the cash and let them spend it as they want? A partial answer -- and perhaps the entire answer -- is that employees prefer nontaxable benefits to taxable wages. But another possible answer is that good health care enhances productivity. If productivity were easily observed and rewarded, there would be no issue here, because employees would have ample incentives on their own to acquire adequate health care. But in a word of imperfect information, employee benefit packages can be the best way to enforce good behavior.
Interesting argument, but it is, of course, a reason employers would continue to provide health care benefits of their volition -- no mandate, or tax subsidy, required.
So, I'm not quite sold on the whole Edwards package, but do say kudos again for laying the ideas out in plain view. Now, I think, the onus is on everyone else to explain what they have in mind, and why it is better than what is now on the table.
UPDATE: Arnold Kling lays out his own vision, at TCS Daily. (Here I offer a wildly unnecessary, but nonetheless obligatory, hat tip to Instapundit.) As far as I know, Arnold is not running for anything, but some smart candidate might think about adding him to the team.
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» Blog Round Up: Karl Rove, Health Care, and More from John Edwards 08 Blog
piIs anyone talking about their agenda for America? [Karl]Rove asked, noting the possible exception of former Sen. John Edwards, D-N.C., who has been out of office since 2005./i/p pSo says Rove in a hre... [Read More]
Tracked on Feb 14, 2007 11:55:01 PM
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