Health Care Costs for Employers: Amity Shlaes v. Greg Mankiw

Steve Benen has a little fun with the latest nonsense from Amity Shlaes:

I'm a big science-fiction fan, so when I heard that conservative writer and FDR critic Amity Shlaes had compared contemporary politics to "The Matrix," I was anxious to see what she'd come up with.

But it was this claim that caught my eye:

Take one of the biggest problems in the U.S. economy today: jobs. Long before “subprime” or “cram down” became routine components of our language, we understood that employers need incentives to create new jobs to replace ones that are disappearing. We knew too that health-care costs are a growing deterrent to hiring or rehiring. Between 1996 and 2005 health care costs for employers rose by 34 percent relative to payrolls.

Didn’t Greg Mankiw and Doug Elmendorf suggest that this cost is fully passed onto workers in the form of lower wages? While I suggested that this may be an extreme assumption as to the lack of elasticity of the labor supply curve (see this post), Shlaes is arguing that none of these costs are passed onto workers in the form of lower wages. Maybe she should have read her own source:

Most economists believe that health insurance premium costs are ultimately passed back to employees in the form of reduced wages, so long-run compensation costs for employers are not affected by rising health care prices.

What is the Crisis About? Fictitious Capital or the Destruction of Wealth?

This short essay briefly describes the financial side of my interpretation that the crash reflected a disconnect between the underlying investment in the economy and its financial representation -- what Marx called fictitious capital. The stock market people call this realignment, "destruction of wealth," even though what is destroyed is the illusion of wealth. The illusion may have been capable of purchasing valuable things so long as other people accept that illusion.

Long ago people accepted the illusion as an illusion and went on with their business. Here is what a former governor of Illinois wrote:

Ford, Thomas. 1854. History of Illinois (Chicago: S. C. Griggs and Co.).

227: "Our Whig friends contended that the continual and violent opposition of the democrats to the banks destroyed confidence; which, by-the-bye, could only exist when the bulk of the people were under a delusion. According to their views, if the banks owed five times as much as they were able to pay and yet if the whole people could be persuaded to believe this incredible falsehood that all were able to pay, this was 'confidence'."

Ordinary people understood what was happening. Here is an incident from Chicago about the same time:



Peyton, John L. 1869. Over the Alleghenies; extracted in Warren S. Tryon, ed. A Mirror for Americans, 3 vols. (Chicago: University of Chicago Press, 1952): III, pp. 589-607.

605: Visiting Chicago in 1848, Peyton objects to taking wildcat notes from an obscure Atlanta bank [meaning that the unregulated bank probably had little or nothing backing up its money]. The hotelkeeper responds, is discussing notes:

"Why, sir, ... this hotel was built with that kind of stuff .... I will take "wild cats" for your bill, my butcher takes them of me, and the farmer from him, and so we go, making it pleasant all around. I only take care ... to invest what I may have at the end of a given time in corner lots .... On this kind of worthless currency, based on Mr. Smith's [the issuer's] supposed wealth and our wants, we are creating a great city, building up all kind of industrial establishments, and covering the lake with vessels -- so that suffer who may when the inevitable hour of reckoning arrives, the country will be the gainer, Jack Rossiter [the speaker] will try, when this day of reckoning comes, to have "clean hands" and a fair record .... A man who meddles, my dear sir, with wild-cat banks is on a slippery spot, and that spot the edge of a precipice."

A few years earlier, a Philadelphia banker wrote about this arrangement to the famous economist, David Ricardo:

Raguet, Condy. 1821. "Letter to David Ricardo, 19 April." In David Ricardo. Minor Papers on the Currency Question, 1809-1823, Jacob Harry Hollander, ed. (Baltimore: The Johns Hopkins Press, 1932): pp. 201-3.

202: "The circulating medium is there [in interior of the country] principally depreciated and inconvertible paper, and so far is the delusion still kept up, that in Kentucky and Tennessee new banks without a specie capital or [any] obligation to pay their notes and gold or silver, have lately been established."


202: "You state in your letter that you find it difficult to comprehend why persons who have a right to demand coin from the Banks in payment of their notes, so long forbore to exercise it. This no doubt appears paradoxical to one who resides in the country were an act of Parliament was necessary to protect a bank, but the difficulty is easily solved. The whole of our populations are either stockholders of banks, or in debt to them. It was not in the interest of the first to press the banks and the rest were afraid. This is the whole secret. Any independent man who is neither a stockholder nor a debtor, who would have ventured to compel the banks to justice, would have been persecuted as an enemy of society, and during the whole period of suspension of specie payments, not an instance occurred in this City of a suit being brought before a court of Justice. A friend of mine in New York was however bold enough to attempt it toward the close of the scene ... The Banks became alarmed, and began to call in their loans -- the local currency of New York became 5 percent better than it was -- millions of dollars worth of goods ordered from Europe were countermanded."

Here is the way a modern capitalist sees the same situation. Steve Palmer posted this on Lou Proyect's Marxism list:

Davies, Megan and Walden Siew. 2009. "45 Percent of World's Wealth Destroyed: Blackstone CEO." Reuters (10 March).
http://www.reuters.com/article/wtUSInvestingNews/idUSTRE52966Z20090310
Private equity company Blackstone Group LP (BX.N) CEO Stephen Schwarzman said on Tuesday that up to 45 percent of the world's wealth has been destroyed by the global credit crisis. "Between 40 and 45 percent of the world's wealth has been destroyed in little less than a year and a half," Schwarzman told an audience at the Japan Society. "This is absolutely unprecedented in our lifetime"."

Even Sam Malone Has Been Laid Off

While Sam Malone and the Boston bar called Cheers were only make believe, Eddie Doyle tended bar at the Bull & Finch since 1974. One has to love the tag “Senior Liquor Dispersement Engineer”. Alas, Eddie has been laid off:

a few weeks ago he was told by Tom Kershaw, owner of the Cheers bar, that the recession had hit his industry and he was being laid off. Doyle, who is in his late 60s, said he's surprised but not bitter. "I'm a casualty of the economic situation that we're in," said Doyle, who spent part of this week cleaning out his office. Kershaw acknowledged that it was a difficult decision. "Business is way off," he said, adding that he would continue to send Doyle a weekly paycheck until the end of the year. "It was very tough. Personally, for me, it was a disaster. Eddie and I have been friends for 40 years."

Defending The Fed

Now that everybody is all over the Fed for all of our problems, I guess I shall be idiosyncratic and defend the institution. I think that they are struggling mightily, as well as the can, against an overwhelming tide that is now engulfing the entire world economy. They saw it coming, and at an early point engaged in very innovative wave of policymaking, including taking on the role of world central banker this past fall after the Minsky Moment of mid-September. It is easy to say, "well look how bad things are," but I think this is one of those situations where things would be far worse if they had not done what they had, and I am hard pressed to think of an alternative set of policies they could have done that would have made things better.

Now, I am not defending the Fed under Greenspan. Clearly there was an overly loose policy in 2003-2004 that aggravated the housing bubble. While Bernanke and others justified this on "complexity" grounds of worrying about asymmetries associated with a possible Japanese-style deflation (which we are now facing much more seriously), my cynical side says it was Greenspan wanting to help W. get reelected so that he, Greenspan, would not be on the receiving end of the sort of whining he got from W.'s dad after he supposedly was responsible for Clinton beating him in 1992 on an "It's the economy, stupid!" campaign. However, I think that in the last two and a half years, the leaders of the Fed have been aware that trouble was coming and were preparing for it, with their immediately rolling out alternative lending bodies and policy approaches immediately upon the eruption of troubles in the subprime markets in August, 2007.

A further piece of evidence is the speech that then New York Fed president, Timothy Geithner, gave in Hong Kong on September 15, 2006, "Hedge funds and derivatives and their implications for the financial system". While the opening part of the speech was pretty pollyannaish, the latter half of it was pretty scary, given the nature of Fedspeak, never wanting to spook the markets and trigger a crash that might be avoided. I shall close by simply quoting from it.

Understanding and evaluating “tail events”—low probability, high severity instances of stress—is a principal, and extraordinarily difficult, aspect of risk management. These challenges have likely increased with the complexity of financial instruments, the opacity of some counterparties, the rapidity with which large positions can change, and the potential feedback effects associated with leveraged positions.

Yes, folks, the Fed knew.

Laurence S. Moss Dies

The History of Economics Society has announced that Larry Moss died on February 24, cause unknown, although he had suffered from various illnesses for several years. Larry had served as editor of the American Journal of Economics and Sociology (AJES) for a number of years, and did an admirable job in my view, even though I did not see eye to eye with him on a variety of topics. That journal has long had a link with "Georgist" economics, although Larry's own interestes tended towards the libertarian and Austrian, having written books on both Joseph Schumpeter and Ludwig von Mises, and having coauthored with Israel Kirzner more than once.

Nevertheless, Larry always was open-minded and published papers that he clearly disagreed with. Thus, he was the editor who accepted the paper, "Keynesian Comparative Economics: The Iconoclastic Vision of Lynn Turgeon (1920-1999)," published in AJES in 2003 62(3), 491-508, Tim Canova, Ric Holt, Bob Horn, me, and Marina Rosser as coauthors. Turgeon, who died a decade ago tomorrow (and Canova has just issued a revised version of the paper on SSRN) held dramatically idiosyncratic views, but there is no way that they could be described as either libertarian, Austrian, or conservative. In any case, I guess this post is in memory and respect for both of these individuals, neither with us anymore.

Making Government Efficient

The Sacramento Bee reports that California's Employment Development Department spent $1.1 million to Verizon, which played a recorded message for jobless people who couldn't reach operators at the organization's call center, charging five cents for each call. The brain-dead assembly decided something has to be done. Naïvely I expected that they would recognize that the call centers were understaffed. Instead, they offered three options: reducing the number of hours that the message is available; offering other targeted toll-free numbers for specific inquiries; or just using a standard busy message.

Rogoff on Government Deficits and Interest Rates

Kenneth Rogoff is worried about how rising government debt will lead to higher interest rates:

No one yet has any real idea about when the global financial crisis will end, but one thing is certain: Government budget deficits are headed into the stratosphere. In the coming years, investors will need to be persuaded to hold mountains of new debt. Although governments may try to cram public debt down the throats of local savers (by using, for example, rising influence over banks to force them to hold a disproportionate quantity of government paper), they eventually will find themselves having to pay much higher interest rates as well. Within a couple of years, interest rates on long-term U.S. Treasury notes could easily rise 3 per cent to 4 per cent, with interest rates on other governments' paper rising as much, or more ... In research that Carmen Reinhart and I have done on the history of financial crises, we find that public debt typically doubles, even adjusting for inflation, in the three years following a crisis. Many nations, large and small, now are well on the way to meeting this projection.

As of March 5, the interest rate on 30-year Treasury notes was only 3.5%. Unless the market is unaware of this fiscal forecast, one would think that the market has priced in its view on these matters and apparently does not share Rogoff’s pessimism.

Mark Thoma is not so full of “gloom and doom”:

So I want to emphasize one more time that stabilization policy does not have to change the size of government in the long-run (and see pgl for a debunking of some of the claims about the size of government. i.e. he notess that "Federal spending as a share of GDP was about as high in 1985 as it is projected to be for 2019"). Fiscal policy can increase the size of government, but it can also shrink the size of government (lower taxes in the downturn, then cut spending when things are better to eliminate the deficit and government will shrink). So the criticism is not about the use of stabilization policy to help people during the downturn and to give the economy a boost, instead it's a claim about the long-term political aims of the administration with respect to the size of government. However, according to pgl's calculations, the projections are that the size won't exceed what we had under that well known socialist sympathizer Ronald Reagan.

While Mark was kind enough to mention this post, all I noted was the White House’s own projections of Federal spending, which do not indicate that President Obama has some big government agenda (as Greg Mankiw tried to suggest).

Rogoff is worried that Federal debt may double. It will certainly rise relative to GDP over the next few years. We have seen a doubling of the Federal debt to GDP ratio before. This chart shows the gross Federal debt to GDP ratio from 1792 to today and projected through the end of 2010. From 1913 to 1921, the ratio rose from less than 7.5% to more than 32.5% - but then fell to 16.3% by 1929. Then we had the Great Depression followed by World War II and this ratio skyrocketed to more than 120% by 1946. U.S. fiscal policy had a period of long-run fiscal responsibility, which lowered this ratio to less than 32% by 1981. Alas, we had an era of fiscal irresponsibility that saw this ratio to more than double by 1995. The Clinton era fortunately was a return to fiscal responsibility which allowed this ratio to decline to 57.34%. Alas, this was short-lived as the fiscal irresponsibility of George W. Bush tenure in office allowed this ratio to rise to almost 70%.

Our chart shows the interest rate on AAA long-term corporate bonds from January 1919 to February 2009. Interest rates did not skyrocket after World War I or World War II. One reason is that long-term fiscal policy turned to retiring the Federal debts generated by these two wars. It is true that the Reagan fiscal fiasco led to higher real interest rates – even as supply-side worshipers of St. Ronnie love to talk about what happened to nominal rates. Long-term interest rates have been relatively low in recent years even in the face of Bush43’s fiscal irresponsibility. I would suspect that if the Obama Administration delivers on its promise of long-term fiscal responsibility, we can avoid Rogoff’s pessimistic forecast.

The Case for Working Less

by the Sandwichman

The Sandwichman steps out and guest posts at the Relentlessly Progressive Economics Blog.

Health Care Reform and Supply-side Arguments

Greg Mankiw and Sally Pipes note what CBO director Doug Elmendorf said about the use of a supply-side argument by Democratic proponents of health care reform:

The point is that for employers, health care is merely a part of total compensation: It reduces cash compensation for employees but it does not increase costs of employment. To argue otherwise is to argue for lower total U.S. compensation -- that is, lower wages for U.S. workers. Said Mr. Elmendorf, "the costs of providing health insurance to their workers are not a competitive disadvantage to U.S.-based firms."

If one assumes that the labor supply curve was perfectly inelastic, then any increase (decrease) in the amount of employee health care cost borne by the employer would be fully passed onto employees in the form of lower (higher) wages. The analysis is similar to an analysis of the effect of reducing the payroll tax - a proposal that Greg Mankiw has made. If the labor supply curve is perfectly inelastic, reducing either the payroll tax or the amount of employee health care cost borne by the employer would have no effect on the cost of employment to employers or the amount of workers hired.

But wait a second - I thought moderate supply-siders such as Greg Mankiw (Dr. Mankiw is not one of those lunatic supply-siders like Art Laffer) argue for reductions in the payroll tax in order to induce an increase in employment as if the labor supply curve were not perfectly inelastic. So why wouldn’t a reduction in the amount of employee health care cost borne by the employer have at least modest benefits for the US economy?

Update: CBO provides Elmendorf’s testimony on February 25, 2009. On the last two pages of this 31 page document, there is a brief discussion entitled “Effects on the Economy”. While Elmendorf did make the sensible statement that any cost of employer provided health care would at least be borne in the form of lower wages, this section also begins with:

Proposals that made large-scale changes affecting the provision and financing of health insurance could also have an impact on the broader economy. Because most health insurance is currently provided through employers, proposals could affect labor markets by changing individuals’ decisions about whether and how much to work and employers’ decisions to hire workers.

Glass Houses Alert

by the Sandwichman

Paul Krugman groans about the news media's penchant for one-sided debate

One major sin of news coverage, especially on TV, is the way certain points of view just get excluded from consideration — even if many of the best-informed people hold those views. Most famously and disastrously, the case against invading Iraq was just not heard in the months before the war.

And one major sin of economics education and the public discourse of economics is the way certain points of view just get excluded from consideration. The perspective that work time reduction might be a key part of a progressive economic recovery strategy — as Keynes pointed out, one of three ingredients of a cure and the ultimate solution — is not only excluded, it is ridiculed by economists as a lump of labor fallacy. I’ve researched the alleged fallacy and I’ve found the claim to be fraudulent. The results of my research have been published in the Review of Social Economy as “Why Economists Dislike a Lump of Labor”. I’ve even offered a $10,000 prize if someone could refute my rebuttal and get it published in a leading economics journal. No takers of course.

Meanwhile, Dean Baker has offered a policy proposal for reducing working time as part of an economic recovery package. Just listen to the spirited discussion among economists of Dean’s proposal! What’s that you say? Silence? Oh.

What Would James Tobin Say About Today’s GOP Fiscal Stance?

AP reports:

The top Republican in the House is seizing on the latest spike in unemployment to call for a freeze on government spending and to urge President Barack Obama to veto a $410 billion spending bill. Rep. John Boehner, R-Ohio, said the jump in unemployment to 8.1 percent and the loss of 651,000 jobs in February is a sign of a worsening recession that demands better solutions from both parties. Boehner criticized the spending bill as chocked full of wasteful, pork-barrel projects. The Senate postponed a vote on the bill until Monday amid the criticism. Boehner said he hoped Obama would veto the bill. He urged the president to work with House Republicans to impose a spending freeze until the end of this fiscal year.

Josh Marshall calls this proposal a joke:

I'm not even sure it's fair to say that this is a replay of the disastrous decisions the magnified the Great Depression between 1929 and 1933. It's more a parody of it. When the crisis is a rapid and catastrophic drop off in demand, you handcuff the one force that can create demand (i.e., the federal government) in the throes of the contraction. That's insane.

As the recession during the early 1980’s worsened, one of the calls from certain supply-side types was that we could increase aggregate demand by cutting government spending. In a speech echoing this insane theme by one of the practitioners of a large econometric model of the US economy, James Tobin asked the speaker a simple question. He asks the practitioner to tell the audience the sign of his fiscal policy multiplier. In other words – as Dr. Tobin explained – what would be the predicted effect on output if the model entertained an increase in government spending? The practitioner thought about the question for a moment and replied that the predicted impact on output from an increase in government spending would be positive. To which – Dr. Tobin politely noted that the entire speech made no sense.

Now if Congressman Boehner can point to a credible econometric model of the US economy where the fiscal policy is negative, maybe he can defend his spending freeze proposal. Otherwise, as Josh notes:

DC Republicans are simply not part of the discussion when it comes to repairing the US economy or arresting our slide into deep economic misery. And any reporters who aren't clear about this are just lying to their readers or viewers.

Request for comments on the new intro for my book

I just completed a nearly final version of The Invisible Handcuffs of Capitalism: How Market Tyranny Stifles the Economy by Stunting Workers. I have put earlier versions here, but this one is very different. The second half is totally new.

I would very much appreciate any comments.

This site would not let me upload the file for some reason. I put here:

http://michaelperelman.wordpress.com/2009/03/07/request-for-comments-on-new-introduction-for-my-new-book/

Thanks in advance.

First the "Good" News...

by the Sandwichman

According to the BLS, nonfarm payrolls fell by "only" 651,000 last month. This was "not as horrific as many traders feared."

Meanwhile, back on earth,

The change in total nonfarm employment for December was revised from -577,000 to -681,000 and the change for January was revised from -598,000 to -655,000. Monthly revisions result from additional sample reports and the monthly recalculation of seasonal factors.

Let's do the math. 651,000 + 161,000 = 812,000 (not counting next month's likely upward revision of this month's 651,000). Not as horrific as many traders feared?

Quote of the week

A monetary crisis rapped inside a liquidity crisis; all rapped inside a quality crisis;

All rapped inside a fiscal crisis rapped inside a financial crisis;

All rapped inside a confidence crisis rapped inside a crisis in the dominant growth paradigm;

All rapped inside a contradiction rapped inside an enigma.

Travis Fast

Fujita on Krugman

I have suggested here that Masahisa Fujita deserved to share the Nobel Prize with Paul Krugman. Fujita has coauthored with Krugman in the late 1990s, after Krugman published his 1991 paper that was cited in his prize. However, Fujita has now published a paper with Jaques-Francois Thisse in Regional Science and Urban Economics (RSUE), "New economic geography: An appraisal on the occasion of Paul Krugman's 2008 Nobel prize in economic sciences," March 2009, 39(2), 109-119. The abstract is as follows:

Paul Krugman has clarified the microeconomic underpinnings of both spatial economic agglomerations and regional imbalances at national and international levels. He has achieved this with a series of remarkably original papers and books that succeed in combining imperfect competition, increasing returns, and transportation costs in new and powerful ways. Yet, not everything was brand new in New Economic Geography. To be precise, several disparate pieces of high-quality work were available in urban economics and location theory. Our purpose in this paper is to shed new light on economic geography through the lenses of these two fields of economics and regional science.

The paper provides quite a list of these predecessors, and although the paper does not highlight them too much, they include his paper in 1988 in RSUE that pretty much fully covered what is in the 1991 paper by Krugman, "A monopolistic competition model of spatial agglomeration: a differentiated product approach." The extensive literature he cites includes two important papers in 1980 and 1982 by him with H. Ogawa, as well as highlighting the foundational work in the 1940s and 1950s by the "Father of Regional Science," the still-living at 90 years old, Walter Isard, also one of the founders of "Peace Economics."