Good and bad local news

Revealing bits of good and bad local news from the Chicago Tribune: Food trucks and congestion pricing.

NBER Asset Pricing conference

I spent Friday at the NBER Asset Pricing conference in Palo Alto. All the papers were really good, and the discussions were especially thoughtful. Here are a few highlights that blog readers might like.

There's no better way to wake up than with a good puzzle. Emanuel Moench presented his paper with David Lucca,The Pre-FOMC Announcement Drift.(If these links don't work for you, most papers can be found with google.)

Here are average cumulative returns on the S&P 500 in the day preceding scheduled FOMC announcements (when the Fed says what it will do with interest rates). The grey shaded areas are 2 standard error confidence intervals. The S&P500 drifts up half a percent in the day before FOMC announcements!  In fact, 80% of the total return on the S&P500 over this period was  earned on these days.

Christina Romer on Stimulus

(Small update to clarify in response to early comments)
Christiana Romer has an important column in Sunday's New York Times on the stimulus. You will recall that as chair of the Council of Economic advisers, she played a big part in designing the stimulus, and forecasting its effects. She also is one of the preeminent academics who have done empirical work evaluating the effects of stimulus programs. You expect a thoughtful essay.

Pile of paper

In response to my long health-care essay, a friendly doctor sent me the image at the left, with an explanation:

"You want to talk about filling out forms? Here are two hospital privilege renewal applications. Most of my info - such as where I graduated from, where I trained, license #, etc - has not changed. That includes my face, yet they want a new photo. My staff tabbed all the places where I have to sign or initial. This is a standardized form, yet I have to fill one out for every hospital and they all want extra information (including a copy of my signature on a check made out to the hospital)."

Comment: And, amazingly this is all on paper!  

After the ACA: Freeing the market for health care

This is an essay, based on a talk I gave at the conference, “The Future of Health Care Reform in the United States,” at the University of Chicago Law School. The pdf version on my webpage may be easier to read than this version, which is a bit long for a blog post. Also, I'll update the pdf over time as I collect comments, but not this blog post.

Update 2/6/2013 I revised the essay on my webpage which is now better than this one. 

Clearly, two important items on the policy agenda are, if we could get rid of the ACA and Dodd-Frank, what would we replace them with? This essay thinks about ACA, I'll be back on Dodd-Frank. Here goes:

After the ACA: Freeing the market for health care
John H. Cochrane¹
October 18 2012

Most of the current policy debate, and the optimistically-named “Affordable Care Act,” focuses on health insurance. I think we need to move on to think about the economics of health care. If the ACA is repealed, we still have a mess on our hands, and just fixing insurance will not be enough to clean up that mess.

Are recoveries always slow after financial crises and why

Carmen Reinhart and Ken Rogoff have an interesting new Bloomberg column, "Sorry, U.S. recoveries really aren't different." They point to the great Barry Eichengreen and Kevin O'Rourke "Tale of two depressions: what do the new data tell us" columns. (Hat tip, commenter Tim to "slow recoveries after financial crises" who asked what I think. Here's the answer)

Reinhart and Rogoff go after the sequence of studies who have questioned their assertion that recessions after financial crisis are deeper and recoveries slower.

If air travel worked like health care

I spent the day at the Law School's "Future of Health Care Reform in the United States." I'll post my talk soon. In the meantime, Einer Elhauge from Harvard showed this hilarious video. Enjoy!

Dynamic Tax Scoring

The Tax Foundation study, "Simulating the Effects of Romney's Tax Plan" is worth reading and thinking about, especially in contrast to the standard static analysis that I complained about at the CBO.

Gov. Romney has proposed, at heart, a reduction in marginal rates, together with tightening of deductions. He hopes to make the latter large enough so that the program is revenue neutral, or at least deficit neutral when some spending cuts are included, and as close to neutral across the income distribution as possible.

Unlike a Keynesian plan, whose purpose is to transfer wealth to the hands of people (voters) likely to "consume" it, or a redistributionist plan, whose purpose is to transfer wealth from one category to another of people, the point of a revenue-neutral, income-neutral tax reform is to permanently and predictably lower marginal rates, giving rise to incentives to work, save, invest, and increase economic growth over the long run.

What possible sense does it make, then, to evaluate such a plan by assuming off the bat that it has no effect at all on output, employment, investment and so forth? Yet that is precisely what the standard "static" scoring does!  We build a rocket ship to go to the moon, and we evaluate its cost effectiveness by assuming that it never leaves the launch pad?

Europe's payroll taxes

The Wall Street Journal made this nice graph on Saturday.

Forget "who bears," it's the totals here that are mind-boggling. In most countries, if you add up the "employer" and "employee" contributions, you get between 30 and 40%. So, if a worker produces 100 euros worth of output, 30-40 euros immediately go to the government. And there is an additional 20%+  VAT when the worker goes to buy something. So, right out of the gate, we have a 50-60% wedge between working and the fruits of labor. Income taxes, corporate taxes and property, excise, and other taxes are all on top of that! It's a wonder anyone in Europe bothers to work at all.

(I haven't looked in to the numbers, but I presume the European numbers include financing of their health systems, and the US number does not. Don't feel so cheeky.) 

Two views of debt and stagnation

Two new papers on economic stagnation in periods of high government debt (i.e. now) are making a splash: 

Public Debt Overhangs by Carmen  Reinhart,Vincent Reinhart and Ken Rogoff
The Output Effect of Fiscal Consolidations by Alberto Alesina, Carlo Favero and Francesco Giavazzi

This review is mostly about the former, with a little mention of the latter (maybe I'll get back to that later)

Sargent and interest-rate options

By now, you've probably seen Tom Sargent's great Ally Bank TV spot.


But, were I to needle Tom just a bit, I might ask, "Tom, the Ally Bank CD allows you the option of raising your CD rate once over its two-year life. Can you explain when to optimally exercise that option?''  Or (second beer), "Tom, to what portfolio optimization question is the answer, combine a two-year CD with an American option to raise the rate once?  You must have some great robust-control result here about parameter uncertainty in dynamic interest-rate models."

Unraveling the Mysteries of Money

Harald Uhlig and I did a fun interview run by Gideon Magnus (Chicago PhD) at Morningstar. We talk about the foundations of money, fiscal theory, monetary policy, European debt problems, etc. Gideon framed it well, and Harald is really sharp. Somebody combed my hair. A cleaned up version of the interview appeared in the Morningstar Advisor Magazine (html) (A prettier pdf)



A link in case the video doesn't work or doesn't embed well (if you see "server application unavailable" the link usually still works), or if you want the original source.

The video starts a little abruptly, as it left out Gideon's thoughtful introduction (it's in the Magazine) and framing question:

Gideon Magnus: I want to discuss the value of money and the idea that money is valued similarly to any other asset. Are there really assets backing money? If so, what are they? John, please explain.

How not to blow it with phase-outs

Today's Wall Street Journal article, How Not to Blow It With Financial Aid, appparently about financing college education, has important lessons for the ongoing grand fiscal debate.

The article is about college financial aid, especially federally funded, and unwittingly exposes the atrocious incentives of the system.

"Every $10,000 reduction in income is going to improve your aid eligibility by [about] $3,000" if you have one child in college..

Bad Hair Day

A short interview by Betty Liu on Bloomberg TV: (if that doesn't work a link). The ECB's big bond buying program, how "sterilizing" won't solve everything, and discussion of the WSJ Oped on the future of the Fed

Woodford at Jackson Hole

Mike Woodford's Jackson Hole paper is making a big buzz, and for good reasons. Readers of this blog may be surprised to learn that I agree with about 99% of it. (Right up to the "and hence this is what we should do" part, basically!)

Any student of economics should read this paper. Mike lays out in clear if not always concise prose, and remarkably few equations, the central ideas of modern monetary economics, on all sides, along with important evidence.

Mike's central question is this: how can the Fed "stimulate," now that interest rates are effectively zero, and given that (as Mike reviews), "quantiative easing" seems extremely weak if not completely powerless? He comes up with two answers: (Hint: starting with the conclusions on p. 82 is a good way to read this paper!)

CBO and fiscal cliff, again

I turned last week's CBO post into an Op-Ed for Bloomberg. This version is better.

Last month, the Congressional Budget Office released a report warning that the “fiscal cliff” would cause a new recession. It came to the right conclusion for all the wrong reasons.

Reasons matter. A policy response crafted to satisfy the CBO’s analysis would hurt the economy. Reports such as this one would be much more useful if the agencies that publish them were more transparent about the calculations, and explained the logic of their models.

Mermaids

This has nothing to do with economics or finance, but it's way cooler...If you or your teenage children are into young-adult fiction.

My wife  Beth's young adult novel, Monstrous Beauty, published by Farrar, Straus and Giroux, will be released September 4.

Fierce, seductive mermaid Syrenka falls in love with Ezra, a young naturalist. When she abandons her life underwater for a chance at happiness on land, she is unaware that this decision comes with horrific and deadly consequences. Almost one hundred forty years later, seventeen-year-old Hester meets a mysterious stranger named Ezra and feels overwhelmingly, inexplicably drawn to him. For generations, love has resulted in death for the women in her family. Is it an undiagnosed genetic defect . . . or a curse? With Ezra’s help, Hester investigates her family’s strange, sad history. The answers she seeks are waiting in the graveyard, the crypt, and at the bottom of the ocean—but powerful forces will do anything to keep her from uncovering her connection to Syrenka and to the tragedy of so long ago.

There will be a launch party at 57th street books in Chicago, Tues. Sept. 4, at 6 PM. A second larger coming out will happen at the Plimoth Plantation, Plymouth MA (the book is set in Plymouth, and partly on the plantation) Sept. 7, at 5 pm, information here.

Then Beth will be off on Macmillan's Fierce Reads Tour with three other YA authors.

• September 18: Changing Hands Bookstore, Pheonix
• September 19: Tattered Cover, Denver
• September 20: Left Bank Books, St. Louis
• September 21: Joseph-Beth Booksellers, Cincinatti
• September 22: Next Chapter Bookshop, Milwaukee
• September 23: Malaprop’s Bookstore, Asheville 

For a taste of Beth's mermaid lore, try the extra short story "Men Who Wish to Drown" on tor.com, (cover art to the left).

Monstrous beauty at Amazon and the publisher's website 
 
Visit Beth at her blog and on Twitter

(My plot suggestion, "Syrenka, Libertarian Mermaid" went nowhere. I guess I'd better keep my day job!)

The future of central banks

A WSJ Op-Ed. Here is a pdf for non subscribers:

Momentous changes are under way in what central banks are and what they do. We are used to thinking that central banks' main task is to guide the economy by setting interest rates. Central banks' main tools used to be "open-market" operations, i.e. purchasing short-term Treasury debt, and short-term lending to banks.

Since the 2008 financial crisis, however, the Federal Reserve has intervened in a wide variety of markets, including commercial paper, mortgages and long-term Treasury debt. At the height of the crisis, the Fed lent directly to teetering nonbank institutions, such as insurance giant AIG, and participated in several shotgun marriages, most notably between Bank of America and Merrill Lynch.

These "nontraditional" interventions are not going away anytime soon.

Gordon on Growth

Bob Gordon is making a big splash with a new paper, Is US Growth Over?

Gordon's paper is about the biggest and most important economic question of all: Long-run growth. It's easy to forget that per-capita income, the overall standard of living, only started to increase steadily in about 1750. The Roman empire lasted centuries, but the average person at the end of it did not live better than at the beginning.

Gordon's Figure 1, reproduced here shows how growth picked up in the mid 1700s, reached 2.5% per year -- which made us dramatically better off than our great-grandparents -- and now seems to be tailing off.

As Bob reminds us with colorful vignettes of 18th and 19th century living, nothing, but nothing, is more important to economic well being than long-run growth.

And modern growth economics is pretty clear on where the goose is that lays this golden egg: Innovation. New ideas, embodied in new products, processes and businesses. For example, see Bob Lucas' "Ideas and Growth" which starts

CBO and the fiscal cliff

The CBO has released a report warning that a new recession could follow the  "fiscal cliff"

Background: Here's the CBO report and a Washington Post story  A few snippets from the CBO: