Bernanke Speaks!

Fed Chairman Ben Bernanke in a rare television interview:



In part 2, we learn he was born in a small town, and the Fed has money-carrying robots:



He also slips in a plug for his savings glut hypothesis.

Health Care: Doing Less With More

This graph, from Jacob Funk Kirkegaard of the Peterson Institute illustrates, that the US spends far more than any other country on health care, without achieving better outcomes: He writes:

It was therefore encouraging that the recently passed $787 billion stimulus package included $1.1 billion for funding comparative research into the relative efficiency of different drugs, medical devices, or surgical procedures for treating the same specific condition. The aim is to steer healthcare expenditures toward the most cost-effective treatment methods. This type of comparative analysis is often revealing.

However, given the scale of the cost challenges facing the healthcare system, the scope of the comparative cost analysis program in the stimulus package was strikingly timid. A far more informative comparative analysis would focus on contrasting the costs of different healthcare systems rather than just treatment options; in other words between the levels of total healthcare spending versus outcomes in different countries.

Not only is the US system seemingly inefficient in a static sense, the problems are expected to get worse over time. The CBO projects massive growth in federal spending for medicare and medicaid: Note that this is largely due to "excess cost growth" - that is, health care costs continuing to increase faster than inflation; the aging of the population makes a relatively minor contribution. While the CBO's projection is for the federal programs, rising costs will only make things worse for the employer-based private system as well.

Therefore, its good that the administration is taking the issue on, once more.... Matthew Yglesias says a political compromise might resemble the Swiss model.

Earmarks

The fight over "earmarks" in appropriations bills is largely symbolic. Earmarks account for a small portion of the overall federal budget, and, as Stan Collender points out, their presence does not affect the total amount of spending:

Lost in all of the debate (and the reporting about the debate) on the earmarks in the omnibus 2009 appropriations bill the Senate is still working to adopt is the basic fact that cutting earmarks doesn't save any money.

This is not open for discussion. An earmark simply a congressional decision to allocate a part of appropriation for a particular purpose. Eliminating the allocation doesn't reduce the appropriation, it simply leaves the allocation decision to a federal department or agency rather than to Congress.

Schumpeter on Math

One somewhat surprising thing we learn from Prophet of Innovation, Thomas McCraw's delightful biography of Joseph Schumpeter, was that he was an advocate of the use of mathematical tools in economics, even though his own work was not mathematical.

On his own, he performed daily exercises in calculus and tried to master advanced techniques such as matrix algebra. He even raised the question of a new type of math that would capture the dynamic changes he saw as the heart of capitalism. One diary entry of 1948 mentions, with a question mark "Evolutionary math?" - a tool that could do for his own system what conventional math had done for Walras's static equilibrium. But there was no evolutionary math at that time in sense that Schumpeter meant, and there is still not enough today to "operationalize" his system thoroughly. Schumpeter knew that he had little talent in mathmenatics, but he continued to challenge himself and enjoy the chase. "Whatever other advantages math may have," he wrote in his diary, "it is certainly the purest of human pleasures."

Some encouragement for those of us who come to study economics in spite of our natural level of mathematical ability.

On the "Output Gap" Gap

The Obama administration's budget proposal forecasts real GDP growth as follows:

2009: -1.2%
2010: 3.2%
2011: 4.0%
2012: 4.6%
2013: 4.2%

and 2.9% thereafter (table S-8). In his elliptical fashion, Greg Mankiw hints these projections might be criticized as unduly optimistic. The "blue chip" average of private sector forecasts are indeed somewhat lower (in a display of Obama-era "refreshing honesty" these are included in the same table of the budget). For reference, over the period 1948-2008, the average annual growth of real GDP is 3.36% (2.88%, 1974-2008).

While Yogi Berra was right that "its tough to make predictions, especially about the future," there is good reason to expect above-average growth coming out of the recession. The Solow model gets things basically right about long-run growth in the US: our economic capacity increases fairly steadily over time due to technological progress and population growth. During a recession, resources go under-utilized (e.g., unemployment occurs) and the actual amount of output falls below capacity (a.k.a. "potential output"). But capacity continues to grow, creating a growing "output gap" between what we are producing and what we can produce. This picture from the CBO's January forecast is a good illustration: Notice that the recovery - closing the output gap and catching back up to the long-term trend - necessarily involves faster than average growth.

Some object to comparisons with the 1981-82 recession (the causes were very different), but it was the last downturn of similar magnitude to the current one. While 1982 was a very, very bad year - unemployment peaked at 10.8% in November and December - the recovery saw several years of rapid growth:

1982: -1.9%
1983: 4.5%
1984: 7.2% (!!!)
1985: 4.1%

At Econbrowser, Menzie Chinn has more discussion, with illustrations, of the issue. On his new blog, OMB Director Peter Orszag explains the gap between the administration and CBO forecasts.

Update (3/3): The CEA makes the same point, with evidence. Mankiw is skeptical.
Update #2 (3/3): Brad DeLong weighs in, responding to Mankiw.

Rotten AIG

The government is shoveling more money into the maw of AIG. The Times' Joe Nocera explains that this is really a bailout of the banks that purchased insurance in the form of credit default swaps from AIG. Its all about the "systemic risk." On his blog, he writes:

[T]he reason A.I.G. is being propped up is that the government fears that if the company defaulted the counterparties would suddenly be faced with tens of billions of dollars worth of unacknowledged losses — and they would go bust. It would make the Lehman fiasco look like a garden party.

He explains further in this column. The Baseline Scenario has a chronology of AIG's bailouts, so far. See also Felix Salmon, Justin Fox.

Reagan Fact of the Day

Bruce Bartlett, one of the architects of Reaganomics, reminds us:

According to a recent Treasury Department study, Ronald Reagan proposed the largest peacetime tax increase in American history as part of a budget deal to get the federal deficit under control. The Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982 was signed into law on Sept. 3, and most of its provisions took effect on Jan. 1, 1983.

During debate on TEFRA, many conservatives predicted economic disaster. They argued that raising taxes in the midst of a severe recession was exactly the wrong thing to do. "Every school child knows you don't raise taxes in a recession unless you want to make it worse," The Wall Street Journal's editorial page warned. Said Rep. Newt Gingrich, "I think it will make the economy sicker." The Chamber of Commerce of the U.S. said it had "no doubt that it will curb the economic recovery everyone wants."

Looking at the data, however, it is very hard to see any evidence that TEFRA had a negative effect on growth. Indeed, one could easily make a case that its enactment stimulated growth. As one can see, the economy's growth rates after TEFRA took effect were among the fastest in history....

Reagan signed into law major tax increases every year of his presidency after the first. By the end of his presidency, he took back half of the 1981 tax cut in the form of higher taxes. And it should also be noted that when confronted with a crisis in Social Security in 1983, Reagan endorsed a rescue plan drafted by Alan Greenspan that consisted almost entirely of higher taxes.

Morning in America

Under the headline the Times' David Leonhardt writes:

The budget that President Obama proposed on Thursday is nothing less than an attempt to end a three-decade era of economic policy dominated by the ideas of Ronald Reagan and his supporters.

The Obama budget — a bold, even radical departure from recent history, wrapped in bureaucratic formality and statistical tables — would sharply raise taxes on the rich, beyond where Bill Clinton had raised them. It would reduce taxes for everyone else, to a lower point than they were under either Mr. Clinton or George W. Bush. And it would lay the groundwork for sweeping changes in health care and education, among other areas.

More than anything else, the proposals seek to reverse the rapid increase in economic inequality over the last 30 years. They do so first by rewriting the tax code and, over the longer term, by trying to solve some big causes of the middle-class income slowdown, like high medical costs and slowing educational gains.

That's My Congressman

The Cincinnati Enquirer reports:

Boehner praised President Barack Obama's address before the joint session of Congress, which dealt mainly with the non-controversial topics of better health care and education while cutting earmarks and wasteful spending. "With few exceptions, it was a speech I could have given," Boehner said, joking that he probably couldn't have delivered it quite as well. "It was a very conservative speech. Very few parts that I disagreed with."

Ahh, yes.. if you can't beat 'em, pretend like they've joined you.

Turning Japanese?

Paul Krugman, among others, really thinks so. But the Curious Capitalist points us to Foreign Affairs, where Richard Katz argues that we are not repeating Japan's mistakes:

The consequences of the 2008 U.S. financial crisis will be different from Japan's slump in the 1990s for three reasons: the cause of the current crisis is fundamentally different, its scope is far smaller, and the response of policymakers has been quicker and more effective...

The Japanese and U.S. crises differ in many ways, but the starkest contrast is in the response of policymakers. Denial, dithering, and delay were the hallmarks in Tokyo. It took the Bank of Japan nearly nine years to bring the overnight interest rate from its 1991 peak of eight percent down to zero. The U.S. Federal Reserve did that within 16 months of declaring a financial emergency, which it did in August 2007. It has also applied all sorts of unconventional measures to keep credit from drying up.

It took Tokyo eight years to use public money to recapitalize the banks; Washington began to do so in less than a year. Worse yet, Tokyo used government money to help the banks keep lending to insolvent borrowers; U.S. banks have been rapidly writing off their bad debt. Although Tokyo did eventually apply many fiscal stimulus measures, it did so too late and too erratically to have a sufficient impact. The U.S. government, by contrast, has already applied fiscal stimulus, and the Obama administration is proposing a multiyear program totaling as much as five to six percent of U.S. GDP. When it comes to crisis management, it is far better to do too much than too little.