Moneybox

Correction, Dec. 31, 2012: This chart does not accurately show what I purported it showed. The data reflect only health care spending by the governments of these countries, and therefore it is unsurprising that the amount rises so much for seniors in America, because that spending represents Medicare outlays, for which young people are generally not eligible. Because of this misunderstanding, the contents of my blog post are largely no longer valid. The original post remains printed below, and my fuller explanation is here.

That per capita health care spending is higher on older people than younger ones will surprise nobody. Nor will it surprise anyone to learn that American health care spending is systematically higher than what you see in other rich countries. But this chart via Austin Frakt and Dan Munro is pretty shocking.

Starting in the mid-fifties, American per capita health care spending goes from marginally higher than Germany or Sweden to a lot higher. Then as Americans reach their late sixties, a large share of that spending is shifted onto the public books as Medicare and the spending gap keeps on rising.

Read Frakt for a bit of an account of how this arises operationally, but what I think is more important is that it arises on a meta-level because we have such a fragmented health care system. When your health care spending is all in one bucket, then at any given level of spending you face a question about how to allocate it. And when allocating spending between young and old, you're cross-pressured. On the one hand, older people have more need for health care services which militates in favor of allocating spending to them. On the other hand, providing health care services to younger people generally offers better value in terms of years of life and quality of life saved. A 25 year-old who's in a bad car accident can, if found in time and treated, still live a very happy and healthy life. If you're 95 and get into the same car accident, then treatment is going to be much more difficult, recovery will be much less complete, and in the grand scheme of things you're not going to live very long anyway. 

In all countries, the majority of health care spending goes to the older half of the population distribution in deference to the greater demand for health care services among the elderly. But the less unified, less planned American system takes this to the extreme. To an extent, this reflects what people want. The "death panels" charge was a potent one for a reason. But not only is this health care spending on the elderly the key issue in the federal budget, our disproportionate allocation of health care dollars to old people surely accounts for the remarkable lack of apparent cost effectiveness of the American health care system. When the patient is already over 80, the simple fact of the matter is that no amount of treatment is going to work miracles in terms of life expectancy or quality of life.

Hanging over Washington, DC for the past two months is the idea that full implementation of the fiscal cliff will likely push the economy into recession early next year. That's a conclusion driven by the Congressional Budget Office's August 22 report "An Update to the Budget and Economic Outlook: Fiscal Years 2012 to 2022." You more often see references made to CBO's November 8 report "Economic Effects of Policies Contributing to Fiscal Tightening in 2013" because it's more directly on-point to the negotiations, but the November report doesn't do any updating of the underlying August model. So it's worth noting that the August report is outdated in a few important ways that may make the recession call obsolete.

Most notably, here's what CBO said about monetary policy:

CBO expects monetary policymakers to work to keep short- and long-term interest rates low, not only for the rest of the year but also over the next few years. Shortterm interest rates remained near zero in the first half of 2012, and they are likely to stay there for the rest of the year. Longer-term rates declined to extremely low levels in the first half of this year and have remained quite low, reflecting several factors: investors’ expectation that the U.S. economy will remain below its potential for quite a few years, investors’ concern over the banking and fiscal problems in Europe, and the Federal Reserve’s plan to continue purchasing long-term Treasury securities (under the maturity extension program, also known as Operation Twist).

In other words, in August the CBO basically forecast a continuation of then-current monetary policies. But in its September and December statements, the Fed shifted its policies in a way that may be relevant. What CBO said in August was that the combination of status quo monetary policy and the fiscal cliff would produce a situation in 2013 where real GDP falls 0.5 percent and the core PCE price index drops to 1.5 percent—well below the Fed's target. More recent policy statements from the Federal Reserve ought to give us some doubt that this would really take place. Ben Bernanke has said that the Fed neither can nor will fully offset the negative impact of the fiscal cliff, but the CBO call is based on the idea that the Fed won't do anything at all which strikes me as unlikely.

Now that's not to minimize the potential damage here. Even under a utopian scenario about monetary policy, the cliff has meaningful supply side consequences. I also don't think that resources idled by public sector spending cuts can be frictionlessly repurposed into private output simply by determined central banking. But the bottom line is that even under the very unlikely scenario where the full cliff is implemented, I think it's very unlikely that things would get as bad as CBO said in August or people fear today.

What are the stories that will really matter in 2013? My guess is these:

India: Zero expertise here from me, but it's clear from the rape protests over the past couple of weeks that the country is primed for some political upheaval. Its economic slowdown over the past year is a bigger deal than China's, coming from a lower level of prosperity and a lower previous growth rate, and yet along with China this is where everyone lives. Will things get better?

Coalition politics in Europe: Germany and Italy, facing very difficult political and economic circumstances, both look set to deliver indecisive election outcomes. Angela Merkel's Christian Democrats will triumph in Germany, but her right-wing coalition partners are going to falter forcing her to forge either a grand coalition with the Social Democrats or a never-seen-before-federally black-green coalition. In Italy meanwhile, the center-left Democratic Party is going to win against an Italian right that's fragmenting into three or four factions. There are a lot of different possibilites here, some of which make constructive action much more likely (grand coalition in Germany, plus Bersani-led coalition in Italy that relies on Mario Monti for support and ditches the furthest-left elements of the Italian left) and others that make it much less likely.

Debt ceiling: It used to be the case that "divided government" produced just as much constructive legislating as unfied party control in the United States. But with today's more ideological parties, that seems to clearly no longer hold. Still, divided government could mean an era of domestic policy stasis rather than a period of repeated domestic policy crisis. The coming 2013 standoff over the federal debt ceiling is probably the biggest indication of which way we're going. If Obama blinks, welcome to the era of permanent political crisis. If the GOP blinks, we'll be fine. If nobody blinks, well, now we've got another kind of crisis on our hands.

Japan: If Shinzo Abe can bring Rooseveltian resolve to Japan and break the back of deflation, it'll be important not just for the world's #3 economy but as an example to the rest of the developed world. Noah Smith, who knows Japan much better than I do, says we shouldn't put our faith in Abe who's really just an ugly nationalist and not any kind of monetary policy wonk. I would say there's no contradiction there. The ugly nationalists running Japan in the 1930s were the first to ditch gold and beat the recession. Adolf Hitler ran a very intelligent and forward-thinking monetary policy regime. Sometimes it takes a national security hawk to beat the inflation hawks. That said, if the upshot is an invasion of Manchuria and a sneak attack on Hawaii we may end up missing the good old days of prolonged Japanese economic stagnation.

Global fracking: Natural gas and oil extraction via hydraulic fracturing ("fracking") has had a transformative impact on select regions of the United States, is a partial driver of a manufacturing recovery, and is giving us what looks like a painfully earnest Matt Damon movie. But right now the impact has been to a large extent confined to the USA. But the spread of the technique to China seems inevitable and it'll presumably head elsewhere as well. Worldwide fracking will have a bigger worldwide influence, obviously, but should also mute the America-specific impacts like advantaging US manufacturing.

That's what I'll be keeping my eyes on.

Jonathan Chait is one of the smartest explicators, defenders, and exponents of the Obama administration's domestic policies, so when he says the White House has lost the plot by repeatedly indicating a willingness to agree to a top marginal-income-tax threshold higher than $250,000, it gets my attention. But in this case I think he's misreading what's happening.

Ever since Election Day, Obama has consistently and rightly taken the view that the baseline against which he judges a deal is a scenario in which we go "over the cliff" and then pressure mounts on Republicans to agree to the "Obama tax cuts" restoring Bush-era rates on income below $250,000. That raises about $800 billion, and as Obama told John Boehner, he gets it for free. But Obama's always wanted more than what he can get for free. So during the Grand Bargain talks with Boehner he was willing to make considerable compromises as to what the tax code looks like in exchange for Boehner agreeing to $1.2 trillion in revenue. As action shifted from the Obama-Boehner talks to Reid-McConnell talks, the nature of the bargaining also changed. Now they're discussing a Lesser Bargain aimed more narrowly at minimizing the fiscal contraction in 2013. But again, the expiration of the Bush tax cuts for AGI over $250,000 is Reid's baseline. He's willing to give ground on that number not for the sake of compromise, but in an effort to rope things like a delay of sequester cuts, the doc fix, and unemployment insurance funding into the bill.

This strategy does have a substantial downside relative to a line-in-the-sand approach, namely that it's a little confusing to communicate to the public and it does encourage Republicans to doubt Obama's resolve on the debt ceiling.

But it also has substantial virtues. Rescinding the high-end Bush tax cuts doesn't feed the hungry, educate children, or treat the sick. It doesn't curb pollution and it doesn't reduce unemployment. It's something Democrats think should be done in the long term to reduce the need for long-term cuts to federal retirement programs, but in the short term it's not something that would make anyone in America better off in any concrete way. The stuff Reid is talking about trading for would.

The problem here does come back to the debt ceiling. The administration came out of the election talking a good game about the need to permanently neutralize this weapon, and about the pointlessness of trying to resolve the fiscal cliff while leaving another bigger fight hanging out there. But they blinked almost immediately on that. And now the perception that Obama didn't really mean what he was saying on taxes is only going to strengthen House Republicans' determination on the debt ceiling.

I'm feeling a bit under the weather and it's making me cranky, but it's worth pointing out that at this late hour the fiscal cliff drama has become totally pointless.

Once upon a time, the idea—for better or for worse—was that the threat of the fiscal cliff might inspire congress to reach a "grand bargain" that reduced the budget deficit by several trillion dollars relative to current policy even while providing the economy with much-needed short-term stimulus. But that bargain already fell apart. It's dead. Instead, the back-and-forth over the weekend is about a "small" deal—a deal that would have some-but-not-all of the Bush tax cuts expire and maybe delay implementation of the budget sequester pending a further agreement or maybe not.

That's all great stuff to talk about, but when you think about it Congress could easily just tell everyone to go home, watch the Redskins game, enjoy their New Year's Eve plans, and revisit this on Wednesday. If there's not going to be a grand bargain (and there's not) then it really doesn't matter whether we go "over the cliff" or not. Congress can pass a tax cut bill on Wedesday using the new baseline just as easily as they can pass a tax hike bill on Monday using the old baseline. Obama can delay implementation of the sequester administratively pending ongoing negotiations.

Continuing to burn the midnight oil at this late hour is just ruining people's weekends for no good reason.

Alyse Nelson writes that when it comes to houses, bigger isn't always better:

My husband and I think we’ve found a way to pay off our mortgage early, without taking on an extra job or working nights. We’ve decided to construct a rental unit — a “mother-in-law suite” — within our home. If it pans out as we hope, the rental income will let us pay off our loan 10 years early. And who knows: It could give us a chance to live closer to family as we, or they, get on in years.

Jason and I are not alone; lots of folks across the country are experimenting with adding a second (or third) dwelling to an existing single-family home. And in perhaps the most interesting development, more and more people are choosing to buck the “bigger is better” trend in North American housing. They’re taking small spaces — backyards, side lots, or freestanding garages — and using them to build tiny houses.

What's left out of this discussion, however, is that this isn't just a question of taste. It's a question of law. In Washington, DC for example accessory dwellings are currently illegal in all the areas marked yellow, orange, or red on this map. The Office of Planning is proposing to change that, but it's fairly controversial. Montgomery County in the suburbs recently relaxed its rules against accessory dwellings but they're still pretty strict, limited  "to one per house, with no two apartments being within 300 feet of one another" and each "apartment would need to have its own parking space -- two if the main house does not have a driveway."

And I think you'll find that this is quite frequently the case all across America. It's a shame since the demographics of the country have changed quite a bit. Compared to 50 or 100 years ago, a much larger share of Americans are either childless or empty nesters. Families that do have kids have fewer kids on average. There are more single people. Under the circumstances, it's extremely sensible to re-purpose certain kinds of older structures as multiple dwellings. But the prevailing legal climate in most places is fairly hostile to this.

Speaking just now at the White House, President Obama said Harry Reid and Mitch McConnell are still negotiating on a big package of some sort to avert the fiscal cliff. But what was more interesting was what Obama outlined as a fallback possibility if Reid and McConnell couldn't agree.

In that case, he said he thought congress should enact a kind of mini-bill that would extend Bush-era income tax rates on households with AGI below $250,000 (he characterized this as avoiding a middle class tax hike, but in fact payroll taxes will go up regardless of what happens) and that extends federal Unemployment Insurance funding. Most interestingly of all he specifically delved into congressional procedure and called for up or down votes in both houses of congress on such a bill.

This is an important difference. In the Senate, it's the difference between what the median senator (roughly Ben Nelson) will back, and what the sixtieth senator (a fairly conservative Republican) will back. In the House, it's the difference between what the median House member (a moderate Republican, such as they are these days) will back and what the median House Republican (a ferocious right-winger) will back. Now Obama has no authority to force either Mitch McConnell or John Boehner to do that. But open votes might be appealing to GOP leaders. It would be a way for them to refuse to agree to a deal with Obama without actually bearing the consequences of going over the fiscal cliff.

I'm closing on a new house for myself and my wife on Monday, and when I mentioned that on Twitter some people asked me for my perspective on whether buying makes sense right now.

Obviously in many ways it depends on the details of your personal situation, but I think the basic case is simply that right now if you qualify for a standard mortgage you can get money for cheap. The average interest rate on a 30-year fixed rate mortgage is down to 3.35 percent. I got a slightly better rate than that. It would be extraordinary if aggregate nominal income in the United States doesn't grow that fast over the next thirty years, so on average people who borrow money to buy land are going to make a profit. Now that said, it's important to note that homeownership in the sense of "buying a house for you to live in with your family" remains a questionable investment strategy. In the abstract it'd be better to borrow money at 3.35 percent and buy land in a city you don't live in to diversify your exposure to idiosyncratic shocks to particular metropolitan economies. Even better would be to borrow money at 3.35 percent and buy a small share in a diversified land trust of some kind that owns parcels scattered across the country. Or you might just want to buy an S&P 500 index fund.

The investment case is that if you qualify for a cheap loan, you ought to seize the opportunity. Homeownership comes into play because buying an owner-occupied house is the main way a typical American person can actually obtain a cheap loan. That reflects some questionable public policy ideas deeply ingrained in American political economy.

So the question facing any individual is the conflict between the fact that right now is a great time to borrow money and buy long-term assets and the fact that the primary thing you might be able to buy that way is a house inconveniently located in the very city where you live.

Neat chart from Barry Ritholtz shows that America's cars and appliances are getting old as households slow the replacement/upgrade cycle of durable goods in response to the bad economic situation. He calls this "a potentially bullish data point" on the grounds that "all of this stuff eventually has to get replaced."

That's about right. But it's also a reminder that waiting for a "natural" economic recovery rather than relying on "artificial" stimulus in the form of fiscal or monetary policy is really just a slow motion version of creating economic growth via the broken windows fallacy. If five percent of America's cars, fridges, toasters, washing machines, and blenders vanished suddenly tomorrow that would be "good for the economy" in the sense that boosting orders for consumer durable goods would lead to a higher GDP growth rate. But the purpose of having an economy is to make people better off, and you clearly don't make people better off by destroying their appliances.  

By the same token, even a steep recession will generally come to an end sooner or later. Cars and trucks and buildings and appliances will get old and need to be replaced, in effect raising the "natural rate of interest" and bringing intended savings and desired investment into equilibrium. But this happens by impoverishing the country, just as much as running around smashing windows would.

I'm not sure I can adequately summarize Seth Ackerman's essay on market socialism* (I think John Rawls' term "liberal socialism" is probably a better one) in the new issue of Jacobin but suffice it to say that involves the idea of public ownership of all large-scale financial assets while retaining separate management of separate firms. If that sounds like the kind of thing you'd be interested in, you should just read it. The interesting issue it raises, however, is much more general than the specific details of the proposal and has to do with how a statist economic system deals with entrepreneurs and small firms:

And while individuals could still be free to start businesses, once their firms reached a certain size, age and importance, they would have to “go public”: to be sold by their owners into the socialized capital market.

Details matter here, of course, but one very plausible consequence of this would simply be to strongly discourage the owners of small firms from pursuing growth. And the big winners from that kind of disincentive to firm growth will be the owners of other small firms that simply aren't as lucky or well-managed as the growing ones. This is something that arises not only with radical proposals for collective ownership of the means of production. Any time you have a proposal to regulate "big business" while exempting small firms, you're partially regulating existing large firms and partially granting existing small firm owners protection from expropriation at the hands of rival business owners.

In general, this kind of small business promotion is not such a hot idea. If you look at Europe it's striking that Greece, Italy, Spain, Portugal, and Poland have lots of people working for small firms while Germany, Denmark, the UK, Latvia, and Finland have few people working for small firms. In other words poorer, lower-wage countries seem to have economies more dominated by small firms. Doug Henwood has emphasized that you see this at the firm level in the United States where small firms pay lower wages and the big/small pay gap gets bigger and more important as move down the occupational status hierarchy.

I'm not sure the reasons for this are fully understood, but it probably has something to do with the fact that as long as you're going to be bossed around it's desirable to be bossed around by somebody who knows what he's doing and can deploy the resources available to him in a reasonably skillful way. When a country prevents the emergence of large pharmacy chains, it's essentially bailing out inept pharmacy owners. In the short-term, obviously an employee of an inept pharmacy owner would rather have the owner bailed out than lose his job. But in the long-term, cashiers are going to be better off if they can avoid working for idiots which is more likely in a world where idiots can be driven out of business.

* Correction: An early draft attributed the article to Peter Frase.