John Taylor Espouses The Republican Line on…Everything

August 21, 2013Danny Vinik Leave a comment

Stanford economics professor John Taylor has had a long career both in public service and in academia. The most well known monetary policy rule, the Taylor Rule, is named after him (he came up with it). The man is a big shot in the financial world.

But over the past couple of years, he’s hewed to the Republican Party line on both monetary and fiscal policy more and more. That was never more apparent than in today’s panel hosted at the National Press Club on rejuvenating America’s economy. Former CFTC Chairperson Sheila Bair and PIMCO Head Mohamed El-Erian also took part in the discussion, which covered a wide array of topics that the panelists mostly agreed upon.

All three advocated that the Fed begin to pull back its Quantitative Easing program, with Bair arguing doing so over a longer timeframe. But Taylor was the most adamant that Fed should pull out of those policies as quick as they can.

“I see no positive effect on rates from quantitative easing,” he said. “People really need to realize that we don’t know the impact of these policies. I see them as basically negative.”

Taylor also repeatedly complained about the weak economic growth. “I’m worried this recovery will never become a real recovery,” he said. He offered similar sentiments in a recent Wall Street Journal op-ed. In response, Money Monetarist (and Republican) Scott Sumner showed the inconsistency of Taylor’s remarks:

Taylor seems to think that growth has been too slow, complaining about only 2% RGDP growth in 2012. That suggests that easier money is needed. But he also complains about QE, claiming it didn’t help the recovery. However the stock market responded very positively to rumors of QE, not once but three times. That suggests QE boosts growth.

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Like John Taylor, I’d like to see higher interest rates. Unlike Taylor, I explicitly favor a more expansionary monetary policy. I favor a higher NGDP target, which would raise long term Treasury bond yields. He seems to favor higher interest rates via a tighter monetary policy boosting short rates (the liquidity effect.) In my view that policy would depress long term bond yields to Japanese levels, as markets (correctly) expected a replay of the US in 1937, or Japan in 2000, or Japan in 2006, or the eurozone in 2011—4 attempts to raise short rates above zero—all premature, all 4 attempts failed. They all drove aggregate demand and risk free long term interest rates even lower.

Taylor’s prefered policy has been repeated by Republicans ad nauseam. It’s the standard GOP line. But it isn’t right and it’s a shame that Taylor is buying into it.

The discussion also touched on fiscal issues, where Taylor continued to promote Republican policies. He advocated for reducing the budget deficit through entitlement reform, revenue neutral tax reform that broadens the base and reduces the top rate and corporate tax reform. He also lamented the uncertainty of current federal policies.

“One of the things we need to face up to is the huge increase in regulatory policies,” he said.

He then called for greater predictability of government actions. I’m more sympathetic to this view-point than most liberals, but it’s still overblown. Reducing uncertainty is a good idea. It’s not a magical cure that will unlock 5% GDP growth. What would unlock 5% GDP growth is an explicit NGDP target by the Fed. I’m sure Taylor wouldn’t support such a proposal, but it would accomplish his goal of bringing about a real recovery. Unfortunately, he’s too caught up repeating Republican lines about the worries of easy money to think about effective monetary policy.

Common Core Standards Still Relatively Unknown

August 21, 2013Danny Vinik Leave a comment

A new poll from Phi Delta Kappa/Gallup today finds that an alarming number of parents with kids in public school have never heard of the new Common Core standards that are changing student testing throughout the country. This is a big deal. The standards have been implemented by 45 states plus the District of Columbia, though a growing political backlash could reduce that number in the near future. And yet, less than half of parents know about it:

Almost two of three Americans have never heard of the Common Core State Standards, arguably one of the most important education initiatives in decades, and most of those who say they know about the Common Core neither understand it nor embrace it.

That’s not good. A majority of parents believe that the Common Core Standards will make the U.S. less globally competitive. But it’s tough to evaluate those beliefs when “many said — erroneously — that the standards are based on a blending of state standards, that the federal government is insisting that all states adopt the standards, and that there is a plan to create standards in all academic areas.” This is a revolutionary change in American school testing and just about no one knows about it.

And it’s not like these standards were just passed yesterday. The proposal was agreed upon by the National Governor’s Association and the Council of Chief State School Officers in June 2009. Four years later, parents are still unaware of it, even though new testing has been implemented. New York’s sharp drop in test scores this years was a result of them. As I noted at the time, Mayor Bloomberg should be praised for accepting the standards while knowing that he would take blame for the reduced scores. As this poll proves, parents are going to see those scores and blame the Mayor, not realizing that they are the result of a tougher, better test.

But Bloomberg is a special case. He’s no longer up for reelection and isn’t seeking higher office so the political consequences of accepting the blame is limited. Other mayors will find themselves in different situations. They will see steeper political consequences and may react by blaming the test or worse, pulling out of it. The best way to combat this is to educate the public about Common Core. At the very least, parents need to be aware of the new standards. If not, mayors are going to feel increased political pressure to withdraw from the program so that test scores rise back to their previous levels with the easier tests. That may be good politics, but it’s not good policy. Ultimately, students pay the price.

Obamacare is a Good Deal for Young People in the Long Run

August 20, 2013Danny Vinik 18 Comments

The Washington Examiner’s Phillip Klein wrote an article this morning outlining the financial incentives for young people to forego insurance. This is a hotly debated part of the law because if young people don’t sign up for health care, the law will almost certainly fail. The Obama Administration has focused its outreach efforts on young people for precisely that reason. In Klein’s article, he links to a recently released study by the National Center for Public Policy Research, which calculated how much better off 18-34 year olds would be if they didn’t sign up for the exchanges and paid the penalty instead. Here are their findings:

About 3.7 million of those ages 18-34 will be at least $500 better off if they forgo insurance and pay the penalty. More than 3 million will be $1,000 better off if they go the same route. This raises the likelihood that an insufficient number of young and healthy people will participate in the exchanges, thereby leading to a death spiral.

This isn’t surprising. Obamacare is set up so that the young and healthy pay more to offset the high costs of the old and sick. After all, those young and healthy people are going to be old and sick some day. They pay extra now, but save on costs in the future. This gets to a problem with studies like the one above: it only examines the financial incentives for young people in the short-term, not overall.

In the next ten years, the average young person will likely face minor medical costs. Insurance will be unnecessary. Young people may look at the money they are paying for a bronze plan each month and decide to drop their health insurance. As the Center above calculated, this will save them money each year (barring an unlucky health catastrophe – something the study ignores as well).

Let’s say an individual doesn’t get sick throughout his 20s and when he turns 35, he figures the risks are high enough now that he should purchase insurance. Over the next 30 years, he will likely come down with some illness. It may even be so serious that insurers would not cover him in the pre-Obamacare age. Under those circumstance, he’s very thankful that insurers can’t deny him coverage for having a pre-existing condition. Suddenly, he finds that Obamacare isn’t so bad after all. He paid a modest fee in his young years for not purchasing insurance and now that he’s older, he can buy reasonably priced coverage to cover his health bills. And those bills are paid for by the new young “suckers” who aren’t following in his footsteps and foregoing insurance.

Obamacare is a good deal for young people in the long run.

But what if those new young people aren’t suckers? What if everyone looks at the world as he does and forgoes insurance? Well, Obamacare will descend into a death spiral and collapse under its own weight. How does that young person’s lifetime costs look now? Well, he saves a bit more money by not having to pay the fee for ignoring the now-defunct individual mandate. He grows older and suddenly finds himself with a pre-existing condition and insurers refuse to cover him. He racks up huge health care costs and can do nothing about them. Suddenly, he realizes how much better off he would be under Obamacare and regrets the choice that he and all his friends made to forego coverage. If only they had paid the $1,000 extra so that the law didn’t collapse, he would be covered right now.

There’s an even deeper problem here though. All young people understand the financial incentives they have to forego insurance. If they believe that everyone else is going to listen to those incentives and not purchase coverage, then they don’t have a reason to purchase it either. After all, if I’m the only one buying health insurance, the law is going to fail anyways and I’m just wasting my money. This is a classic collective action problem. All young people are better off in the long run if they all agree to purchase insurance. But they all have individual financial incentives in the short-run to forego it. The individual mandate is supposed to correct this, but the penalty ramps up over time so the incentives still exist next year to not purchase insurance.

This is why Klein is wrong in his article. On an individual level, each person has a financial incentive in the short-run and long-run to not purchase insurance. In the short-run, the person saves money. In the long-run, the collective action problem will cause the law to collapse anyways. But, in aggregate, young people should purchase insurance. It may not be financially beneficial in the short-run, but in the long-run it almost certainly is. Klein misses this distinction in his piece:

It’s worth keeping in mind that purchasing health insurance, in aggregate, is a bad deal for younger Americans. This isn’t even very controversial. The design of Obamacare rests on the very assumption that windfall profits from selling younger and healthier Americans more insurance than they need will be enough to subsidize older and sicker Americans.

In aggregate over the long-term, young Americans will face higher costs at the beginning, but significantly lower ones later in their life – and for those who develop a pre-existing condition, they will save a huge amount of money. This part of the law is tough to explain to young people. No one my age is thinking about how Obamacare will save them money 40 years from now. But that’s exactly how they should be thinking about it. Klein’s article only looks at the short-term financial incentives and this obscures the long-term benefits that young people gain as well. In aggregate, it is a good deal for them. It just requires a longer time horizon to see it.