Economist Channel

Last July, as the last Republican Obamacare bill was imploding, Greg Mankiw wrote "Why Health Care Policy is So Hard" in the New York Times. For once, I think Greg got it wrong. Health care policy isn't hard at all, at least as a matter of economics. (Politics, and ideological politics, is another question, but not Greg's question nor mine.)

There are some important underlying themes uniting how Greg's piece goes wrong (in my opinion)

• A little bit of economic education can be a dangerous thing

While most opinionated people and most "policymakers" are blissfully unaware of any economics, a little bit of economics education can sometimes mislead. Economics is full of pretty fairy tales, passed on through the decades or even centuries. The day after one sees the beautiful tale of the natural monopoly, or the externality, or the public good, then like a two-year-old with a hammer to whom everything looks like a nail, one starts to see natural monopolies, externalities and public goods all over the place. Wait a moment. Just because it's in the textbook -- even Greg's textbook -- doesn't mean every single industry and case fits.

The other rhetorical error is of the type, "well, we can't have homeless people who get heart attacks dying in the streets." No, of course not, but, is every single line of the ACA and tens of thousands of subsidiary regulations absolutely necessary to provide for homeless people who suffer heart attacks? Why must your and my health insurance be so totally screwed up -- and so totally micromanaged by the Federal government -- just to solve the problem of homeless people heart attacks? I'm struggling to find just the right category for this sort of argument

• Gross disregard of the size of effects. 
• Straw man -- a theoretical problem with a completely free market justifies any regulation. 
• Disregard of the choice at hand -- it's not benevolent perfection vs. free market. 
• Using problems as talking points. If the same "problems" exist elsewhere and you don't want to or need to fix them, then you're not serious about that "problem" for health. 

Maybe we can come up with a better one sentence characterization later. (There must be a Greek word for these rhetorical tricks!)

Let's review Greg's "why health care policy is so hard" problems.

"...free market sometimes fails us when it comes to health care. There are several reasons.

Externalities abound.  Take vaccines, for instance. If a person vaccinates herself against a disease, she is less likely to catch it, become a carrier and infect others. Because people may ignore the positive spillovers when weighing the costs and benefits, too few people will get vaccinated, unless the government somehow promotes vaccination. 

Another positive spillover concerns medical research. When a physician figures out a new treatment, that information enters society’s pool of medical knowledge. Without government intervention, such as research subsidies or an effective patent system, too few resources will be devoted to research." 

Well, ok. We require vaccinations to enroll children in schools. And basic research might be under funded. But basic chemistry research might be underfunded too. Does the Federal government need to buy half of all chemicals in the country and intensely regulate the other half just to keep basic chemistry research going? There are externalities everywhere. A neighbor mowing his lawn on a Saturday morning might wake you up. Does this justify the entirety of America's exclusionary zoning codes, or make "housing policy hard?" We do have research subsidies and a patent system, by the way. People like Greg and I are paid pretty handsomely to do research!

These "problems" exist in many markets -- and the ACA, or even pre-ACA regulation, is hardly a minimalist solution to the problem of vaccination and basic research!

The logical connection from "free markets sometimes fail us" to "and therefore the Federal Government needs to take a heavy hand as it does for health care" deserves its own place in the pantheon of fallacies. We have a choice between imperfect alternatives.

"Consumers often don’t know what they need. In most markets, consumers can judge whether they are happy with the products they buy. But when people get sick, they often do not know what they need and sometimes are not in a position to make good decisions. They rely on a physician’s advice, which even with hindsight is hard to evaluate."

"The inability of health care consumers to monitor product quality leads to regulation, such as the licensing of physicians, dentists and nurses. For much the same reason, the Food and Drug Administration oversees the safety and effectiveness of pharmaceuticals."

I am surprised that Greg, usually a good free marketer, would stoop to the noblesse oblige, the cute little peasants are too dumb to know what's good for them argument. This argument applies equally to car repair, tax advice, contracting, home repair, computer setup and repair, economics teaching... and just about everything else in our economy. We purchase complex personal services from people who know more than we do. It seems to work out ok.

Rhetorically, it's a good example of an argument that isn't serious because it isn't uniform. Why haul this out just for health care?

Again, is the ACA a minimal solution? All policy is a choice among alternatives. Do you really think government run insurance systems are better for figuring out what you "need?" Does Greg think he and his family are too dumb to make medical choices, so wishes for a government bureaucracy to determine his and his family's care?

Is inability to monitor quality a central economic problem? How much of the ACA is devoted to that? How much of the ACA and surrounding regulation is instead devoted to stopping the free flow of information,  to stop competition over quality, to maintain the illusion that all doctors are equal?

Licensing.. In this age when the Obama administration started to sound like the Cato institute on the subject of occupational licensing, 70 years after Milton Friedman showed how the AMA uses licensing to restrict supply and keep their earnings up, and as London Transport brazenly bans Uber, Greg gives us this vision of the wise benevolent government licensing for our protection? Those unlicensed dog-walkers sure are a national disgrace. And let's not start on the FDA's wise overseeing of the safety and effectiveness of pharmaceuticals, like, say, the epi-pen.

"Health care spending can be unexpected and expensive. Spending on most things people buy — housing, food, transportation — is easy to predict and budget for. But health care expenses can come randomly and take a big toll on a person’s finances." 

"Health insurance solves this problem by pooling risks among the population. But it also means that consumers no longer pay for most of their health care out of pocket. The large role of third-party payers reduces financial uncertainty but creates another problem." 

Greg surely knows better than this. Spending on houses and cars is not easy to predict and budget for -- when the house burns down or the car crashes. That's why we have insurance, regulated and perhaps over-regulated, but nothing like health insurance.

"Consumers no longer pay for most of their health care out of pocket" is not a necessary consequence of insurance. Insurance, in a free market would not cover routine predictable expenses, just as car insurance does not cover oil changes. This is entirely an artifact of regulation.

Let me skip to the last, most common and most important argument, most illustrative of how a little economics education can be a dangerous thing.

"Insurance markets suffer from adverse selection....If customers differ in relevant ways (such as when they have a chronic disease) and those differences are known to them but not to insurers, the mix of people who buy insurance may be especially expensive. "

"Adverse selection can lead to a phenomenon called the death spiral. ...Suppose that insurance companies must charge everyone the same price.... the healthiest people may decide that insurance is not worth the cost and drop out of the insured pool. With sicker customers, the company has higher costs and must raise the price of insurance. ...As this process continues, more people drop their coverage, the insured pool is less healthy and the price keeps rising. In the end, the insurance market may disappear."

We have all been to that beautiful econ 1 class, where we hear Ken Arrow's asymmetric information insurance spiral, or George Akerlof's justly famous proof that the used car market does not exist.

But are these fables true of our world, or is this a case of two year old with hammer? In the fable, you know things about your health that a pure free-market health insurer, armed with your entire history, every scan and test they can dream up, cannot know. In reality, the information advantage is exactly the opposite! They know a whole lot more about you than you do. That's not the asymmetric information of this fable.

In fact, a few paragraphs ago, Greg make exactly that opposite argument! Health care must be run by the government because the poor peasants don't know how sick they are and what to do about it, but now health insurance must be run by the government because the crafty little buggers know exactly what they need and private health insurers can't tell them apart.

We do have asymmetric information and a death spiral -- because the government forbids insurers to use information they have! The government forces insurers to take everyone at the same price, so only the sick sign up.  Maybe that's good or bad, but it's not the  fundamental asymmetric information problem of the fable. And somehow life insurers, car insurers, home insurers, and carmax exist.

Greg is a careful writer. "the mix ... may be expensive... the insurance market may disappear." Yes, every fable is a possibility. But we have to think whether in fact this is a real problem, whether it is a central problem, whether we advocate the same policies uniformly when we see this problem or whether it's just a talking point for policies advocated for other reasons, and whether the ACA or other regulation is a minimally crafted solution to this problem.

"One thing, however, is certain: The existence of a federal law mandating that people buy something shows how unusual the market for health care is."

Really? Does the existence of every federal law show how unusual the underlying market is? Agricultural subsidies prove how unusual the food market is? Solar panel subsidies show how unusual the market for energy is? Tariffs and quotas show how unusual steel is?

"policy wonks of all stripes can agree that health policy is, and will always be, complicated."

As a matter of economics, this wonk disagrees. 95% (made up number) of health expenses are relatively predictable complex personal services, bought by savvy shoppers who buy houses cars and cell phones. I will agree that it always will be complicated only because our government will always be screwing it up. But not that it must be complicated.

OK, health care policy is hard. But it's hard because so few in our political and commentary class have any trust that markets actually can work, and that by and large thoughtfully getting the heck out of the way can lead to a better system for health, as it has for just about everything else where it has been tried. Allowed to do so, competitors will come in and provide better service at lower prices. People and the businesses that want to serve them will find a way to overcome econ 101 problems. CarMax does exist, despite the lemons theorem. Companies really care about their reputations.  What a lot of economics education can do -- including a bit of economic history -- is to patiently remind people of these fact, rather than to give them excuses for endless mindless dirigisme.

Greg is careful, and this is a good review of the potential theoretical problems of health care and insurance markets, as presented in a standard (his!) econ 101 textbook. Greg does not say that the ACA, or even 5% of the ACA, is a necessary solution to these problems. But Greg does not say the opposite either. That these are small, manageable problems, which a government bureaucracy will likely mismanage for health as it does everywhere else, is absent in Greg's column. The average New York Times reader will come out thinking Greg's on board with the basic architecture of the vast complex mess coming out of Washington. If Greg thinks, as he may well do, that a regulatory system about 5% of the size of the ACA could handle all of these economic problems with your and my health insurance, that the rest of the ACA is a vast mess mostly designed to cross-subsidize health care from one group to another,  maintain rents for incumbents, and hide the cost of it all, you wouldn't know it from this article. Greg is a great writer, and knows his audience and the context in which he is writing, so it is a puzzling sin of omission.

I suspect I know what happened. It sounded like a good column idea, "I'll just run down the econ 101 list of potential problems with health care and insurance and do my job as an economic educator." If so, Greg failed his job of public intellectual, to help us digest just which economic fables are actually relevant.

(The last section of After the ACA goes through all these arguments and more, and is better written. I hope blog regulars will forgive the self-promotion, but if Greg hasn't read it, perhaps some of you haven't read it either.)

Update: Greg Responds. Thoughtfully, politely, and unlike me, concisely, as one expects. Yes, there is a great question as to what the role of an economics educator should be! Do we run through the standard list of theoretical possibilities for market failure? Or do we go to the second step of questioning just how much they apply, how central they are, how much they actually drive the regulatory outcome, how effective regulations are at addressing them; making sure they aren not just turned into talking points for political outcomes and rent seeking? All in 900 words or less!

Update 2: Sometimes I'm really slow. It occurs to me only this morning that both Greg and I missed the elephant in the room. The number one lesson that econ 1 has for health policy is: The demand for health care, and health care quality, is highly elastic. And Lesson 2, the income elasticity is pretty high too.

The standard vision in the policy world, the public, and too many health “economists” is that we “need” health care and it is a homogenous good. Translated to economics, they suppose a vertical demand curve.  The hard fact is exactly the opposite. Perhaps less obviously, quality is highly price elastic too. Your back hurts. Do you “need” surgery? (and if so what kind, performed where?) steroid injections? Ibuprofen? Physical therapy (an incredibly varied and price elastic service)? Many people looking at the cost go to chiropractors.

For the world of policy, this fact is what upends all health care schemes. If the cost is low, people will expand their demand for health care services enormously. If the demand curve were vertical, the supply curve could be flat. Sadly, if the demand curve is very flat, the supply curve must rise, and if not through price, through rationing. Someone else will decide what you "need."

Income elasticity is huge. What else is there to spend your money on, if you can? Plus, like business class, people are willing to pay a lot as income rises for the ancillary parts of health care services.

Even at my point in life, the moment of publishing an academic paper is a one to celebrate, and a moment to reflect.

The New-Keynesian Liquidity Trap is published in the Journal of Monetary Economics -- online, print will be in December. Elsevier (the publisher) allows free access and free pdf downloads at the above link until November 9, and encourages authors to send links to their social media contacts. You're my social media contacts, so enjoy the link and download freely while you can!

The paper is part of the 2012-2013 conversation on monetary and fiscal policies when interest rates are stuck at zero -- the "zero bound" or "liquidity trap." (Which reprised an earlier 2000-ish conversation about Japan.)

At the time, new-Keynesian models and modelers were turning up all sorts of fascinating results, and taking them seriously enough to recommend policy actions. The Fed can strongly stimulate the economy with promises to hold interest rates low in the future. Curiously, the further in the future the promise, the more stimulative.  Fiscal policy, even totally wasted spending, can have huge multipliers. Broken windows and hurricanes are good for the economy. And though price stickiness is the central problem in the economy, lowering price stickiness makes matters worse. (See the paper for citations.)

The paper shows how tenuous all these predictions are. The models have multiple solutions, and the answer they give comes down to an almost arbitrary choice of which solution to pick. The standard choice implies a downward jump in the price level when the recession starts, which requires the government to raise taxes to pay off a windfall to government bondholders. Picking equilibria that don't have this price level jump, and don't require a jump to large fiscal surpluses (which we don't see) I overturn all the predictions. Sorry, no magic. If you want a better economy, you have to work on supply, not demand.

Today's thoughts, though, are about the state of academic publication.

I wrote the paper in the spring and summer of 2013, posted it to the internet, and started giving talks. Here's the story of its publication:

September 2013. Submitted to AER; NBER and SSRN working papers issued. Blog post.
June 2014. Rejected from AER. 3 good referee reports and thoughtful editor report.
October 2014. Submit revision to QJE.
December 2014. Rejected from QJE. 3 more thoughtful referee reports and editor report.
January 2015. Submit revision to JME.
April 2016. Revise and resubmit from JME. 3 detailed referee reports and long and thoughtful editor report.
June 2016. Send revision to JME
July 2017. Accept with minor revisions from JME. Many (good) comments from editor
August 2017. Final revision to JME
September 2017. Proofs, publication online.
December 2017. Published.

This is about typical. Most of my papers are rejected at 2-3 journals before they find a home, and 3-5 years from first submission to publication is also typical. It's typical for academic publishing in general. Parts of this process went much faster than usual. Three months for a full evaluation at QJE is fast. And once accepted, my paper sped through the JME. Another year or two in the pipeline between acceptance and publication is typical.

Note most journals count average time to decision. But what matters is average time to publication of the papers they publish, and what really counts is average time to publication in the journal system as a whole.

Lessons and thoughts?

• Academic journal publication is not a useful part of communication among researchers or the communication between research and policy. 

Anyone doing research on zero bound in new-Keynesian models in the last 4 years, and carrying on this conversation, interacted with the working paper version of my paper (if at all), not the published version. Any work relying only on published research is hopelessly out of date.

Interest rates lifted off the zero bound quite a while ago, so in the policy conversation this publication at best goes into the shelf of ideas to be revisited if the next recession repeats the last one with an extended period of zero interest rates , and if we see repeated invocation of the rather magical predictions of new-Keynesian models to cure it. If the next recession is a stagflation or a sovereign debt crisis, you're on your own.

Rather than means of communication,

• Journal publications have become the archive, 

the ark, the library, the place where final, and perfected versions of papers are carved in stone for future generations. (Some lucky papers that make it to graduate reading lists more than 5-10 years after their impact will be read in final form, but not most.)

And this paper is perfected. The comments of nine very sharp reviewers and three thoughtful editors have improved it substantially, along with at dozens of drafts.  Papers are a conversation, and it does take a village.  The paper also benefitted from extensive comments at workshops, and several long email conversations with colleagues.

The passage of time has helped as well. When I go back to a paper after 6 months to a year, I find all sorts of things that can be clearer. Moreover, in the time between first submission and last revision, I wrote four new papers in the same line, and insights from those permeate back to this one.

So, in the end, though the basic points are the same, the exposition is much better.  It's a haiku.  Every word counts.

But such perfection comes at a big cost, in the time of editors and referees, my time, and most of all the cost that the conversation has now moved on.

The sum length of nine referee reports, four reports by three editors, is much longer than the paper. Each one did a serious job, and clearly spent at least a day or two reading the paper and writing thoughtful comments. Moreover, though the reports were excellent, past the first three they by and large made the same points. Was all this effort really worthwhile? I think below on how to economize on referee time.

Of course, for younger people

• Journal articles are a branding and sorting device. 

Many institutions give tenure, chairs, raises, and other professional advancement based at least in part on numbers and placement of publications. For that purpose, timeliness of publication is less of a problem, but with a six year tenure clock at many places and five year lags, timeliness of acceptance the quality rating is a big problem. The sorting and branding function isn't working that well either. But having journals outsource quality evaluation was always an imperfect institution.  Maybe we should just have star ratings instead -- seriously, start up a website devoted to crowd-sourcing working paper evaluation. Or, perhaps tenure committees will have to actually start reading papers. I don't think the journals see this as their main function either. They're set up to publish papers, not judge people's tenure, so improving journals as a tenure granting mechanism will be a hard sell.

There is some good news that this data point represents, relative to state of journal publishing 15-20 years ago. (See Glenn Ellison's superb "The slowdown in the economics publishing process," JSTOR, undated, one of my proudest moments as a JPE editor.)

• Journals are doing fewer rounds, more desk rejection, more one round and up or out.  

Journals had gotten in to a rut of asking for round after round of revisions. Now there is a strong ethic of either rejecting the paper, or doing one round of revisions and then either publishing with minor changes or not. Related,

• Journal editors are more decisive. 

Journal editors have become, well editors.  The referees provide advice, but the editor thinks about it, decides which advice is good and not, and makes the final call. Editors used to defer decisions to referees, which is part of the reason why there were endless revisions.  This change is very good. Referees have little incentive to bring the process to a close, and they don't see the pipeline of papers to the journal. They are not in a good position to find the right balance of perfection and timeliness.

In my case, editors were very active. The referees wrote thoughtful reports, but largely made similar points. In fact, the strongest advice to reject came at the JME. But the AER and QJE editors were not impressed in the end by the paper, and the JME editor was.

So, with this state of affairs in mind, how might we all work to improve journals and the publication process?

I will take for granted that greater speed, and making journals more effective at communication and not just archiving and ranking is important. For one reason, to the extent that they continue to lose the communication function, people won't send articles there. Already you can notice that after tenure, more and more economists start publishing in conference volumes, invited papers, edited volumes, and other outlets. (blogs!) The fraction willing to take on this labor of love for journal publication declines quickly with age.  Research productivity and creativity does not take quite such a parallel decline. (I hope!)

Always the free-market economist, I note that conference volumes, edited volumes, and solicited papers in regular journals seem to be healthy and increasing, which is a natural response to journal slowdown. This is a way to get papers in print more quickly.  In the early days of the internet I had a rule never to publish in volumes, as they disappeared to library shelves and could not be found electronically. Now many of them have solved that problem. The NBER macro annual and Carnegie-Rochester conferences are good examples. The Review of Finance editor recently solicited my "Macro-finance" essay which therefore sped through publication. My active editors are also often taking a more active role in soliciting promising working papers. This helps to break the editor-to-paper match. But this isn't an ideal state of affairs either. Conference volumes tend towards commissioned work. Original work by people out of the social network of the conference organizers and editors has a tough time. (The market responds, organize more conferences.)

Suggestion one:

• Adopt the golden rule of refereeing

Around any economist cocktail party, there is a lot of whining that journals should do x y and z to speed things up. I start with what you and I can do. It is: do unto others as you would have them do unto you. If you complain about slow journals, well, how quickly do you turn around reports?

My recommendation, which is the rule I try to follow: Answer the email within a day. Spend an hour or two with the paper, and decide if you will referee it or not. If not, say so that day. If you can give a quick reaction behind your reason, that helps editors. And suggest a few other referees. Often editors aren't completely up to date on just who has written what and who is an ideal fit. If you're not the ideal fit, then help the editor by finding a better fit, and do it right a way.

If you agree to do a report, do it within a week. If you can't do it this week, you're not likely to be able to do it 5 weeks from now, and say no.

More suggestions:

• Reuse referee reports

• Simultaneous submission. Competition (heavens!)  

Journals insist that you only send to one journal at a time. And then wait a year or more to hear what they want to do with it. Especially now that we are moving towards the editor-centric system, and the central question is a match with editor's tastes, why not let journal editors share reviewer advice and compete for who wants to publish it? By essentially eliminating the sequential search for a sympathetic editor, this could speed up the process substantially.

I don't know why lower-ranked journals put up with this. It's the way that the top journals get the order flow of best papers. Why doesn't another journal say, you can send it to us at the same time as you send it to the AER. We'll respect their priority, but if they don't want it we will have first right. The AER almost does this with its field journals. But the JME could get more better papers faster by competing on this dimension.

The journals say they do this to preserve the value of their reviewer time. But with shared or open reviews, that argument falls apart.

We advocate competition elsewhere. Why not in our own profession?

Update: An email correspondent brings up a good point:

• Journals should be the forum where competing views are hashed out. 

Another duet of headlines with an interesting lesson, both from the Wall Street Journal:

Solar power death wish

Suniva Inc., a bankrupt solar-panel maker, and German-owned SolarWorld Americas have petitioned the U.S. International Trade Commission (ITC) to impose tariffs on foreign-made crystalline silicon photovoltaic cells. 

Solar cells in the U.S. sell for around 27 cents a watt. The petitioners want to add a new duty of 40 cents a watt. They also want a floor price for imported panels of 78 cents a watt versus the market price of 37 cents. 

they’re resorting to Section 201 of the Trade Act of 1974 because they don’t need to show they are victims of dumping or foreign government subsidies. They only need to show that imports have harmed them

California Democrats Target Tesla

The United Automobile Workers are struggling for a presence in Tesla’s Fremont plant, and organized labor has called in a political favor. 

Since 2010 California has offered a $2,500 rebate to encourage consumers to buy electric vehicles. But last week, at unions’ behest, Democrats introduced an amendment to cap-and-trade spending legislation that would require participating manufacturers to get a sign-off from the state labor secretary verifying that they are “fair and responsible in their treatment of workers.” 

The legislation, which passed Friday, is a direct shot at Tesla. The Clean Vehicle Rebate Project has amounted to a $82.5 million subsidy for the company

Both moves ought to pose a liberal conundrum. If you want carbon reduction, you want cheap solar cells, so that more people will buy them. The planet does not care where the solar cells are produced. If you want electric cars, you want cheap electric cars so that more people will buy them.

But those who falsely sold green energy as a job producer, a boon to the economy; not a costly alternative to fossil fuels, a cost that must be borne to save the planet, now face this conundrum.

The deeper lesson here is the corrosive nature of subsidies and protection. Once the government starts subsidizing solar cells and electric cars, there is a quite natural force demanding access to the subsidies. Why should the owners of the Tesla company get largesse from the taxpayers, and not their workers too?

Solar cells are just the latest embodiment of the infant industry fallacy -- that protection from competition will allow an industry to grow and become competitive.  Instead, they become infantile industries, expert and getting protections and subsidies not producing cheap solar cells.

The infrastructure paradox is similar. We need infrastructure. Yet federal contracting requirements, requirements for union workers and union wages, and everything else attracted to federal money being handed out, drive costs up to astronomical levels.

For energy, this is an abject lesson in the wisdom of a simple carbon (and methane) tax in place of all the subsidies and winner-and-loser-picking our government does. (Let's not fight about whether to do it. The point is if we want to restrict fossil fuels and subsidize a move to non-carbon energy, this is how to do it.) Subsidies and protection invite demands for subsidies and protection, not clean energy.

The tax reform discussion includes the idea that by moving to a territorial system, US companies will bring lots of money stranded offshore back to the US, unleashing a wave of investment here. While I think a territorial system makes sense, as does reducing or eliminating the corporate tax, as a pure matter of economics, I don't think this repatriation argument makes sense.

Here's why. (The following is a story, not a fact about Apple accounting.) Apple sells an Iphone in Spain. Apple Spain pays a huge licensing fee on software, owned by Apple Ireland, so it's not a profit in Spain. Apple Ireland thus collects huge amounts of cash from all over the world, taxed at the low Irish corporate tax rate. Apple Ireland deposits this cash in an Irish bank. (I presume they do fancier things with the money, but I'm telling a story here). The cash is "stranded" overseas, right?

No. The Irish bank can lend the money anywhere. It can buy US mortgage backed securities, it can lend the money wholesale to US banks who lend it out to US businesses. It can even lend the money to Apple US. If Apple or any other US company wants to invest, they can borrow from the Irish bank. Conversely, if profits are repatriated to US banks, those banks can lend the money overseas.

If Apple's Irish bank invests exclusively in, say Spanish condos, then the Spanish bank that would have made the condo loan instead loans to the US. Conversely, even if the profits are "repatriated" to a US bank, if investment opportunities are better abroad, that's where the investment will happen.

You can't avoid two fundamental truths: 1) Money is fungible. 2) Savings - Investment = Net Exports.

Yes, there are some second order effects. If money comes back to US banks, US banks get to earn the fees. Internal capital can be cheaper then external; it's inefficient to send your own money to yourself through a bank. But these are second order, and that's not the argument being made.

It's still a good idea, but for other reasons. Reduction or elimination of corporate taxes will make US investment more profitable, and that will attract money from abroad. But don't count on a wave of repatriated profits to mean much more than a big financial change.  Even if it happens. There are many other reasons to keep pots of money overseas these days. Bad arguments for good policies are not, in the end, a good idea.

Sometimes the blog posts write themselves from contrasting newspaper headlines.

New York Times

New Gene-Therapy Treatments Will Carry Whopping Price Tags
By GINA KOLATA September 11, 2017

Emily Whitehead, the first pediatric patient to receive the gene-therapy treatment Kymriah, which put her leukemia into remission. The treatment has a $475,000 price tag, raising questions about how patients and insurers will pay. ...

One drug, to prevent blindness in those with a rare genetic disease, for example, is expected to cost between $700,000 and $900,000 per patient on average,..

Washington Post

The dam is breaking on Democrats’ embrace of single-payer
By Aaron Blake September 12 at 9:39 AM

Sen. Cory Booker (D-N.J.) became the fourth co-sponsor of Sen. Bernie Sanders's (I-Vt.) “Medicare for all” health-care bill Monday. In doing so, he joined Sens. Elizabeth Warren (D-Mass.) and Kamala D. Harris (D-Calif.). 

What do those four senators have in common? Well, they just happen to constitute four of the eight most likely 2020 Democratic presidential nominees, according to the handy list I put out Friday. 

Update: Gillibrand just signed on to Sanders's "Medicare for all" bill. So now 5 of my top 8 potential 2020 Democratic nominees have now come out for the bill -- before it is even introduced. "Health care should be a right, not a privilege, so I will be joining Senator Bernie Sanders as a cosponsor on his Medicare-for-All legislation," Gillibrand said.

Hint. Budget constraints? Hint 2: get ready to start making lots of noise if you want treatment.

By the way, let us watch for the crucial buzzword question. Does "single payer" mean there is a single payer that anyone can use -- but you're free to buy and sell your own insurance on top of that, hopefully deregulated since there is no need to regulate anymore, everyone has access to medicare for all? Or does "single payer" mean there is a single payer that everyone must use -- private insurance, private practice, just paying cash illegal, to cross-subsidize the system? I fear the latter. We'll see.

The previous champion was stories on the same page in WSJ, roughly ``self driving trucks coming soon'' and ``shortage of truck drivers.'' I lost the link.

The online Asset Pricing Ph.D. class is back! It died in a Coursera "upgrade," but it is now migrated over to Canvas.

Click here to go to the online class. My Asset Pricing webpage has links to the class, book, and many other useful materials.

It should be open and free to anyone, including all the quizzes, problem sets and exams.

Since it's on the Canvas system, if you are teaching at a University that uses Canvas, you should be able to integrate it with your class, assign all or part of it, and receive grades from quizzes and problem sets. Thus, you can use it as a flipped classroom, assign selected videos and quizzes in advance of a lecture.

It is also ideal for a Ph. D.  program summer school for year 0 or year 1. Again, through Canvas you should be able to assign the class, in whole or in part, and get grades.

It's also well suited to self-study. If you just want to watch the videos and read the notes, they are all here via youtube links on the Asset Pricing webpage.

Huge thanks to Emily Bembeneck and Allison Kallo at the University of Chicago, Mikhail Proshletsov, and above all to Nina Karnaukh now at Ohio State. Nina masterminded all the hard work of moving the class pages and quizzes from the Coursera system to the Canvas system, and fixing innumerable glitches along the way. Thanks also to the Booth School for paying for the transition.

Source: climatefeedback.org

"Climate Feedback" has produced a "scientific review" of my WSJ oped with David Henderson on (Oped ungated full text here, see also associated blog post.)

In the blog post, I wrote,

"If it is not clear enough, nothing in this piece takes a stand on climate science, either affirming or denying current climate forecasts. I will be interested to see how quickly we are painted as unscientific climate-deniers."

"Even these higher damage estimates may fail to capture the full costs of extreme events over time, as Martin Weitzman’s work has shown. But there’s another, and more difficult, rub. What if we don’t understand the full consequences of greenhouse gas emissions? "

"... some advocate that we buy some “insurance.” Sure, they argue, the projected economic cost seems small, but it could turn out to be a lot worse. "

A Wall Street Journal oped on tax reform. This complements an earlier oped and see the tax link at right for many others.

The bottom line: I argue for a national VAT instead of (and that is crucial) individual and corporate income taxes, estate taxes, and anything else.

Why? I want to break out of our stale argument. "Lower taxes to boost the economy"  vs. "you just want tax cuts for the rich." It's not going to go anywhere.

I also want to break out of the process. Proposing cuts within the current structure of the tax code, even if proposing them with offsetting cuts in deductions, leads naturally right back to the mess we're in.

Once you tax income much of the rest of the mess follows inexorably.  If we go back to the beginning, and tax spending not income, so much mess vanishes.

Once the government taxes income, it must tax corporate income or people would incorporate to avoid paying taxes. Yet the right corporate tax rate is zero. Every cent of corporate tax comes from people via higher prices, lower wages, or lower payments to shareholders. And a corporate tax produces an army of lawyers and lobbyists demanding exemptions. 

An income tax also leads to taxes on capital income. Capital income taxes discourage saving and investment. But the government is forced to tax capital income because otherwise people can hide wages by getting paid in stock options or “carried interest.”
The estate tax can take close to half a marginal dollar of wealth. This creates a strong incentive to blow the family money on a round-the-world cruise, to spend lavishly on lawyers, or to invest inefficiently to avoid the tax. 

Today’s tax code tries to limit this damage with a welter of complex shelters: 401(k), 526(b), IRA, HSA, deductions for corporate investment, and complex real-estate and estate-tax shelters. Taxing something and then offering complex shelters is a sure sign of pathology. But by taxing cars, houses and boats when people or companies buy them, all this complexity can be thrown out. With a VAT, money coming from every source—wages, dividends, capital gains, inheritances, stock options and carried interest—is taxed when it’s spent. [I left out the whole mess of corporate investment deductions and credits, plus foreign income. All vanishes with a VAT.]

A reformed tax code should involve no deductions—including the holy trinity of mortgage interest, employer-provided health insurance, and charitable deductions. The interest groups for each of these deductions are strong. But if the government doesn’t tax income in the first place, these deductions vanish without a fight.

Zero is important. Eliminating the personal income, corporate income and estate taxes is important. Taxes are like zombies. If you just reduce the rates but leave the taxes in the code, they come back.  And all the deductions, exclusions, credits and the rest come back too. If we just compromise for a VAT in exchange for lower individual and corporate rates, we really will end up at European levels of taxes -- 20%+ VAT, 50% income tax, 20-40% payroll tax, 40%+ estate taxes.

BTW, I should be clear what a VAT is. You pay the VAT, say 20%, on everything you buy. It's collected by the seller. You collect the same VAT on everything you sell, but you may deduct the VAT you have paid on your purchases. If I am in charge, period. Notice this gives people an incentive to collect the VAT.

In this way, a VAT is, in fact, something of a corporate tax, and is largely "paid by" corporations. But it does not distort rates of return as much. More importantly, it is clearer, more transparent, and allows us to throw out the mess of the corporate tax code. The border-adjusted corporate tax reform was sold as a step towards a VAT, and it was -- if you have a PhD in economics to figure that out -- though it retains all the special deductions and carve outs of the corporate tax code. We need a tax that the average voter can understand, and a clean slate.

A second theme of this oped, though for lack of space less visible: Tax reform is stalled because we try to do too much. We try simultaneously to

1) Raise revenue for the government
2) Redistribute income to people with lower incomes
3) Redistribute income to homeowners, electric car drivers, farmers, etc. etc. etc. (Despite the hullabaloo about income redistribution, there is a lot more of this)
4) Redistribute income away from "the rich"
5) Subsidize various activities and industries. Practically all of them. (We simultaneously tax, subsidize, regulate and promote most industries.)
6) Arguments about the structure of the tax code are mixed up with arguments about tax rates, the overall level of taxes, the overall level of spending.

Really, the current discussion is disheartening to an economist, who sees taxes as a necessary evil to raise revenue for the government, to be done with the lowest marginal rates and lowest distortions possible.  The current discussion, entirely on the left and mostly on the right, sees taxes pretty much only as an instrument of redistribution to one or another class.

Eliminating the income tax in favor of a uniform VAT, leaving the rate blank, lets us fix the structure of the tax code without getting sidetracked with all these other issues.

What about progressivity and redistribution? The oped explains briefly how to make a VAT progressive, if that's what you want. The idea is explained more at length in an earlier post. Briefly, you get a rebate for VAT on your first $10,000 of expenditures, half on the next $10,000 and so on. The rebate can happen instantly, like a giant rewards program for debit cards.

But it is becoming clearer to me that our redistribution system is just as chaotic as our tax system. A major observation: Why should every measure be assessed for its redistribution in isolation? For example, a major complaint on the left on the corporate income tax is the idea that corporate taxes end up being paid by shareholders, which are rich people, so it's redistributive. I don't think the fact is right -- corporate taxes are paid more by higher prices and lower wages, and we're all shareholders through our pension funds. But even if we admit the fact, that's a bloody inefficient way to achieve redistribution. The entire corporate tax, with all its shenanigans, exists to try to get more money out of shareholders? Just tax them directly! Get your redistribution elsewhere, and not this way.

So, the thought touched on in the oped: We need at least a comprehensive measure of redistribution, and much more fine-grained than just across income categories. We could have a much flatter tax code if we had a more aggressive social welfare state, no? We should be able to trade these things off, getting better taxes and more effective redistribution, to people who really need the money.

Both points are part of a more general point. We have become obsessed with income, both in taxation and in redistribution. America is becoming a class society with class defined by income. So many social programs treat income the way India used to treat caste. But income is a terrible measure, with little economic meaning. My mid 20's children are "low income." Consumption is a far better measure. And in terms of who deserves taxpayer funded help, we can think of a hundred characteristics that matter -- disability status, say -- much more than income. The income tax and vast amount of redistribution that happens on income alone is reinforcing this. Tax people by what they spend.

Related, a standard objection to the VAT is that it is "regressive." Poor people spend a larger fraction of their incomes, so in a flat VAT they will pay more of their income in tax. First, I answer that with the progressive VAT. But more deeply, why should progressivity be measured as a fraction of income which has little economic meaning, rather than as a fraction of consumption  in the first place? If I leave my income invested for others to use it to build factories, why tax that? Yes, I will be richer in the future, and we will tax that when and if I spend it. If I never spend it... well, good for me. Annual income is just not a particularly useful economic concept.

There are lots of other almost as good ways to implement a consumption tax. The Hall-Rabushka Flat Tax is one, various proposals to implement a progressive consumption tax via the current income tax mechanism is another. My VAT shares a lot with the Fair Tax proposal to replace the income tax with a national sales tax. But reflecting on it, I like the finality of not even measuring income any more. Remember the zombies. And a VAT works better than a sales tax.

However, the VAT is not a pure consumption tax, and I'm not persuaded it needs to be. (The title is a bit misleading, but I don't get to pick oped titles.) I would tax investment goods at the same rate as consumption goods. If not, then a lot of shenanigans will erupt trying to define what's an investment good and what is a consumption good. Is the corporate Ferrari a "investment?" A real corporate investment, like real corporate purchases of VAT taxed inputs, will yield profitable goods, and the VAT paid on investment can be deducted on the sale of those goods. Yes, it will be a few years later, but if the investment is worthwhile the profits should be larger if they come later. Yes, it's not as pure, but it's close -- we avoid the chaotic capital taxation of today, and we avoid trying to make a distinction between investment goods and consumption goods. Everyone pays the VAT. Everyone.

Please don't bother to comment that we can't have a VAT because the politicians will just add back the income tax.  I know the argument. If our country cannot legislate "we put in a VAT, we eliminate the income tax, and that's it," then democracy is doomed already.

As usual, full text in 30 days, or get creative with your Googling.

Update:  I learned of a precedent for the progressive VAT idea, Yaacobi Nir, "Progressive V.A.T. as a Substitute for Income Tax" December 2008

Now that 30 days have passed I can post the full Wall Street Journal climate change oped with David Henderson. The previous post has more commentary. A pdf is here.

By David R. Henderson and  John H. Cochrane
July 30, 2017 4:24 p.m. ET

Climate change is often misunderstood as a package deal: If global warming is “real,” both sides of the debate seem to assume, the climate lobby’s policy agenda follows inexorably.

It does not. Climate policy advocates need to do a much better job of quantitatively analyzing economic costs and the actual, rather than symbolic, benefits of their policies. Skeptics would also do well to focus more attention on economic and policy analysis.

To arrive at a wise policy response, we first need to consider how much economic damage climate change will do. Current models struggle to come up with economic costs commensurate with apocalyptic political rhetoric. Typical costs are well below 10% of gross domestic product in the year 2100 and beyond.

That’s a lot of money—but it’s a lot of years, too. Even 10% less GDP in 100 years corresponds to 0.1 percentage point less annual GDP growth. Climate change therefore does not justify policies that cost more than 0.1 percentage point of growth. If the goal is 10% more GDP in 100 years, pro-growth tax, regulatory and entitlement reforms would be far more effective.


Yes, the costs are not evenly spread. Some places will do better and some will do worse. The American South might be a worse place to grow wheat; Southern Canada might be a better one. In a century, Miami might find itself in approximately the same situation as the Dutch city of Rotterdam today.

But spread over a century, the costs of moving and adapting are not as imposing as they seem. Rotterdam’s dikes are expensive, but not prohibitively so. Most buildings are rebuilt about every 50 years. If we simply stopped building in flood-prone areas and started building on higher ground, even the costs of moving cities would be bearable. Migration is costly. But much of the world’s population moved from farms to cities in the 20th century. Allowing people to move to better climates in the 21st will be equally possible. Such investments in climate adaptation are small compared with the investments we will regularly make in houses, businesses, infrastructure and education.

And economics is the central question—unlike with other environmental problems such as chemical pollution. Carbon dioxide hurts nobody’s health. It’s good for plants. Climate change need not endanger anyone. If it did—and you do hear such claims—then living in hot Arizona rather than cool Maine, or living with Louisiana’s frequent floods, would be considered a health catastrophe today.

Global warming is not the only risk our society faces. Even if science tells us that climate change is real and man-made, it does not tell us, as President Obama asserted, that climate change is the greatest threat to humanity. Really? Greater than nuclear explosions, a world war, global pandemics, crop failures and civil chaos?

No. Healthy societies do not fall apart over slow, widely predicted, relatively small economic adjustments of the sort painted by climate analysis. Societies do fall apart from war, disease or chaos. Climate policy must compete with other long-term threats for always-scarce resources.

Facing this reality, some advocate that we buy some “insurance.” Sure, they argue, the projected economic cost seems small, but it could turn out to be a lot worse. But the same argument applies to any possible risk. If you buy overpriced insurance against every potential danger, you soon run out of money. You can sensibly insure only when the premium is in line with the risk—which brings us back where we started, to the need for quantifying probabilities, costs, benefits and alternatives. And uncertainty goes both ways. Nobody forecast fracking, or that it would make the U.S. the world’s carbon-reduction leader. Strategic waiting is a rational response to a slow-moving uncertain peril with fast-changing technology.

Global warming is not even the obvious top environmental threat. Dirty water, dirty air and insect-borne diseases are a far greater problem today for most people world-wide. Habitat loss and human predation are a far greater problem for most animals. Elephants won’t make it to see a warmer climate. Ask them how they would prefer to spend $1 trillion—subsidizing high-speed trains or a human-free park the size of Montana.

Then, we need to know what effect proposed policies have and at what cost. Scientific, quantifiable or even vaguely plausible cause-and-effect thinking are missing from much advocacy for policies to reduce carbon emissions. The Intergovernmental Panel on Climate Change’s “scientific” recommendations, for example, include “reduced gender inequality & marginalization in other forms,” “provisioning of adequate housing,” “cash transfers” and “awareness raising & integrating into education.” Even if some of these are worthy goals, they are not scientifically valid, cost-benefit-tested policies to cool the planet.

Climate policy advocates’ apocalyptic vision demands serious analysis, and mushy thinking undermines their case. If carbon emissions pose the greatest threat to humanity, it follows that the costs of nuclear power—waste disposal and the occasional meltdown—might be bearable. It follows that the costs of genetically modified foods and modern pesticides, which can feed us with less land and lower carbon emissions, might be bearable. It follows that if the future of civilization is really at stake, adaptation or geo-engineering should not be unmentionable. And it follows that symbolic, ineffective, political grab-bag policies should be intolerable.

Update: 

A good recent summary of the calculations of economic damage of climate change in an NBER working paper:


2.  A Survey of Global Impacts of Climate Change: Replication,
Survey Methods, and a Statistical Analysis
by William D. Nordhaus, Andrew Moffat  -  #23646 (EEE PE)

Abstract:

....the estimated impact is-2.04 (± 2.21) % of income at 3 °C warming and -8.06 (± 2.43) % of income at 6 °C warming.  We also considered the likelihood of thresholds or sharp convexities in the damage function and found no evidence from the damage estimates of a sharp discontinuity or high convexity.

http://papers.nber.org/papers/w23646

Fed Chair Janet Yellen gave a thoughtful speech at the Jackson Hole conference.

There is an opportunity for paid research experience assisting the development of the behavioural science and policy research group at UCD working with Professor Liam Delaney. Tasks include those below. Please note these are temporary positions and we also will advertise longer term positions as they arise. The typical duration will be one day per week for up to 12 weeks, with pay varying from 11 euro to 14 euro per hour depending on experience. Please send your CV to Emma.Barron@ucd.ie The posts would be particularly suited to economics and psychology graduates with a high degree of research aptitude and interest.

a) Assisting with events and social media relating to the research activities of the group, including minuting the weekly meetings.

b) Assisting in the background research on a book on the history of economics and psychology

c) Assisting in the development of a measurement methodology for examining decisions in everyday contexts.

d) Assisting in the background research for the development of an ethics framework for behavioural public policy.

e) Assisting on projects in the areas of health, environment, and education.

f) Assisting on the development of research funding proposals in the area of behavioural public policy

On September 8th, we will host a one-day workshop to launch our new programme on behavioural science and public policy at UCD Geary Institute for Public Policy. The programme is based at the Institute and works in conjunction with colleagues at the UCD School of Economics and College of Social Sciences and Law. The sign-up page for the event is here. The event will take place from between 9am and 430pm. Our keynote speaker will be Professor Peter John from UCL.

Please click here to register. Registration is free but spaces are limited so please register in advance.


Stirling Workshop on Self-Control and Public Policy (Friday, September 15th)

Self-control is the human capacity that enables people to control short-term impulses and desires in order to achieve long-term goals. This workshop brings together different perspectives in order to outline the implications of self-control for a range of policy issues spanning the areas of health, education, labour, and welfare policy. The speakers combine theoretical and methodological approaches from economics and psychology in novel ways to generate new approaches to policy problems, move forward in affecting change in these problems, and further uncover the policy implications of self-control.

Themes that will be discussed at the workshop include:

- Measurement of self-control for policy research.
- Capitalising more fully on the information collected in large-scale government surveys to

understand the development of self-control and its lifespan implications.
- Economic, health, and welfare consequences of different degrees of self-control.

- The effectiveness and scalability of interventions to improve self-control.

- Understanding self-control in the context of everyday life and social interactions.

- The relationship between environmental cues, 'nudge' interventions and trait self- control.

Event Programme

08.45-09.15: COFFEE

09.15-09.30: Opening and Registration

09.30-10.00: Ailbhe Booth (UCD) Examining disciplinary perspectives on self-regulation

10.00-10.30: Terry Ng-Knight (UCL) Predictors of self-control during childhood

10.30-11.00: Michael Daly (Stirling) Lifespan outcomes of childhood self-control

11.00-11.30: COFFEE