Evening Must-Read: Narayana Kocherlakota on Monetary Policy
Noted for Your Evening Procrastination for March 24, 2014

Things to Read on the Evening of March 24, 2014


  1. Narayana Kocherlakota: "I view the March 19 Federal Open Market Committee (FOMC): statement as an unusually significant one. In that statement, the FOMC adopted new forward guidance about the evolution of its target for the federal funds rate. I see that new guidance as being intended to describe the Committee’s decisions for some time to come. I dissented from the new guidance for two reasons. The first reason is that the new guidance weakens the credibility of the Committee’s commitment to target 2 percent inflation. The second reason is that the new guidance fosters policy uncertainty and thereby suppresses economic activity. In what follows, I’ll elaborate on these reasons, discuss an alternative form of forward guidance, and conclude by strongly endorsing one aspect of the FOMC’s new forward guidance."

  2. Kevin Otterson: The other oral argument on Tuesday: "To the Cato Institute, the tax credit cases (Halbig v. Sebelius and a related case in the Fourth Circuit, King v. Sebelius) represent their last shot to cripple the four-year-old law by wiping health insurance subsidies to millions of people in the 36 states that did not create state exchanges.... The amicus brief filed on Thursday March 20, 2014 by the Commonwealth of Virginia in King v. Sebelius... the Pennhurst doctrine, which requires Congress to give states 'clear notice' if conditions on states are attached to federal spending.... Did Congress give 'clear notice' that the penalty for failing to build a state exchange would be the loss of billions of dollars of health insurance subsidies?  When you put it that way, Cato’s argument collapses. From the brief: 'For no one can reasonably claim that the federal government gave Virginia clear notice that its citizens would be denied premium tax-credit assistance as punishment for the Commonwealth’s decision to forgo building its own health insurance exchange.... [The Plaintiffs argue] that everyone in Congress silently but mistakenly assumed that every State would create its own Exchange. (Appellants’ Br. 6, 42.) That claim finds no support in the record....' The brief also notes that no Member of Congress expressed such a view and even the architects of this litigation (Cannon and Adler) were surprised by this 'glitch' after the fact. The brief also reviews the official correspondence to and from the Governor on this issue; any notice whatsoever is lacking, much less 'clear notice'. What bothers me the most about this litigation is Cato’s willingness to hurt millions of vulnerable people in order to score political points, even after losing the 2012 Presidential election and the first bite of the Supreme Court apple in NFIB v. Sebelius. The Virginia brief puts the emphasis on the people: 'Two sovereign interests compel the Commonwealth of Virginia to file this brief. First, the Commonwealth represents the interests of the hundreds of thousands of Virginians who depend on federal premium tax-credit assistance to afford the health insurance that is now available under the Patient Protection and Affordable Care Act of 2010 (the “Affordable Care Act” or “ACA”). Their interests are not represented by the Appellants here, four individual Virginians who do not want health insurance. Second, the Appellants’ legal theory contradicts the fundamental assumption on which the Commonwealth elected to forgo building its own health insurance exchange in favor of a federally-facilitated exchange: that doing so would not harm the interests of Virginians...'"

  3. James Bessen: How Technology Creates Jobs for Less Educated Workers: "Since 1999, however, the number of LPNs has risen nearly 50% and wages have grown substantially. The reason: a combination of new technology and a new business model. New technologies, including advances in in electronics, fiber optics and anesthetics, allowed the widespread adoption of techniques for minimally invasive surgery. Using these techniques, surgical patients recover quickly enough to return home the same day.... Medical outcomes improved while avoiding the extra cost of a hospital stay and the complications that tend to arise from more invasive procedures.... Hospitals treat all sorts of patients with all sorts of symptoms. Many diseases, however, are difficult to diagnose.... The ambulatory surgery centers, by contrast, work in specialized areas where diagnoses are well identified, patients are screened for complications, therapies are well known and medical outcomes are predictable, if not always successful.... Because the procedures are standardized, an LPN learns valuable skills on the job.... Increasingly, doctors and dentists are performing a smaller share of the work and a variety of mid-skill providers, from LPNs and dental hygienists to nurse practitioners and physician’s assistants, are performing more. Over the last two decades this shift has created two million new jobs for mid-skill healthcare providers..."

  4. Mark Duggan, Amanda Starc, and Boris Vabson: Who Benefits when the Government Pays More? Pass-Through in the Medicare Advantage Program: "In the Medicare Advantage (MA) program the federal government contracts with private insurers to coordinate and finance health care for more than 15 million Medicare recipients.... Additional reimbursement leads more private firms to enter this market and to an increase in the share of Medicare recipients enrolled in MA plans... [but] only about one-fifth of the additional reimbursement is passed through to consumers in the form of better coverage. A somewhat larger share accrues to private insurers in the form of higher profits and we find suggestive evidence of a large impact on advertising expenditures. Our results have implications for a key feature of the Affordable Care Act that will reduce reimbursement to MA plans by $156 billion from 2013 to 2022."


  • Dirk Hanson: Drowning in Light

    1. Nick Rowe: Alpha banks, beta banks, fixed exchange rates, market shares, and the money multiplier: "Suppose the US Fed... pegged... to the Canadian dollar... promise[s] to ensure the US dollar will always be.... convertible into Canadian dollars at par.... Suppose... the Bank of Canada decided to double the Canadian price level.... The Fed would need to follow along and double the US price level too.... Doubling the Canadian price level would mean approximately doubling the supplies of all Canadian monies.... Doubling the US price level would mean approximately doubling the supplies of all US monies.... The money issued by the Bank of Canada... is a very small share of the total Canadian+US money supply.... The money multiplier would be the reciprocal of the Bank of Canada's share in the total Canadian+US money supply. 1/1%=100.... In the real world... the Bank of Montreal and TD Bank do fix the exchange rates of their dollars to the Bank of Canada dollar. The Bank of Canada is the alpha bank, and BMO and TD are beta banks.... The simple money multiplier story is a story about market shares, and about beta banks fixing their exchange rates to the alpha bank.... It is the beta banks' responsibility to keep their exchange rates fixed to the alpha bank. The Law of Reflux ensures that an individual beta bank cannot overissue its money beyond the share the market desires to hold. The alpha bank can do whatever it likes, because it makes no promise to keep its exchange rate fixed..."

    2. Erik Loomis: The Foxes: "Climate skeptic Roger Pielke['s] final paragraph: 'When you next hear someone tell you that worthy and useful efforts to mitigate climate change will lead to fewer natural disasters, remember these numbers and instead focus on what we can control. There is some good news to be found in the ever-mounting toll of disaster losses. As countries become richer, they are better able to deal with disasters — meaning more people are protected and fewer lose their lives. Increased property losses, it turns out, are a price worth paying.' A price worth paying for what precisely? And what are the limits of this price? This is the kind of data-centered reporting we were promised by Silver? Uh…. People who actually know climate data, i.e., the kind of data Silver is supposed to provide, are more than unhappy by Pielke’s article and worried about what FiveThirtyEight is going to bring.... Silver probably should understand that there are some fields where ridiculous fact-free bloviating dominates and some where it doesn’t. It exists in politics because of the need to fill 24 hours of cable content and generate website hits. It does in sports because sports don’t really matter that much. It does not in climate science–except from the kind of people Silver himself is hiring.... Allowing sketchy climate skeptics to present 'data' to question the actual data is basically him becoming what he says he hates."

Claude S. Fischer: Dr. Pangloss, Economist | David Ramsey: More states consider Medicaid expansion — is the tide beginning to turn? |

Should Be Aware of:

  1. Joachim Fels: Joachim Fels On Client Bullishness: "I do worry that investors may be too complacent about... a sell-off in US Treasuries as predicted by our US rates strategists as the Fed’s forward guidance becomes ‘woolier’ and the US economy rebounds from the cold freeze, a renewed bout of weakness of the double-deficit club economies in EM on the back of this external shock, a period of weaker economic data and policy procrastination in Japan before another round of BoJ easing in 3Q, and more signs of Japanification in the euro area as banks keep deleveraging and the euro pushes higher. In fact, my biggest surprise was that the majority of investors now assume a broad-based QE program by the ECB at some stage later this year as their base case..."

  2. John Y. Campbell, Tarun Ramadorai, and Benjamin Ranish: Getting Better or Feeling Better? How Equity Investors Respond to Investment Experience: "Both years of investment experience and feedback from investment returns have significant effects on investor behavior, favored stock styles, and performance.... Experienced investors generally behave in a manner more consistent with the recommendations of finance theory, although this tendency is weakened by strong investment performance. High trading profits increase turnover, while high returns to equity styles have a short-term negative and a longer-term positive effect on investors' style demands, possibly reflecting the offsetting effects of disposition bias and style chasing."

  3. Paul Krugman: Favoring Wealth Over Work: "Paul Ryan likes to lecture the poor about the dignity of work; but his famous initial 'roadmap' called for the complete elimination of... all taxes on income derived from wealth. Now, Ryan casts this as policy that favors saving. But the truth is that it would mainly favor people born on third base or beyond. Even now, 6 of the 10 wealthiest Americans are heirs rather than self-made entrepreneurs — the Koch brothers plus a bunch of Waltons. There’s every reason to believe that the role of inheritance will only grow over time. And if it does, half our political system will be cheering it on and offering the ever-more-empowered heirs as much assistance as possible."

  4. Andrew Gelman: Greg Mankiw's utility function: "I think the above story is important, in that it illustrates how a smart guy can get trapped inside a mathematical model and not even realize it, sort of the philosophical equivalent of a person living on a large, interesting island who naively thinks that this island is the entire world.... I don’t think Mankiw is being insincere. My guess is that he’s being sincere but is working within an impoverished model... He can accept that he plays with his kids for non-monetary reasons; why is it so difficult to accept that he writes newspaper columns for nonmonetary reasons also?... It’s a bit silly to analyze that decision based on his dollar compensation for them, given that this has got to be the most minor reason for writing them."


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