Brad DeLong's Semi-Daily Journal: A Weblog

Took that series for 1994-2004 only.

A couple random notes:

There are some WEIRD "outlier" months (Mar 03 on the high side; Nov 03 on the low).

The data doesn't appear to jibe with the Percent Employed numbers in a delta-value context.

There is a minor Sep 11 effect--no where NEAR the "we lost one million jobs" declaration of Bush's economy-spin people.

The entire economic history of the past four years can be described in terms of the business community having been told that they could have exactly one wish; and they replying that, in that case, they would wish for a labor surplus.

So Brad, do you agree with Andrew's conclusion in the next post:

"With this measure, as with the other augmented measures of unemployment discussed in the original post, there is no empirical support for a proposition that the reduction in the unemployment rate (since its peak) is due to in any substantial way to a greater fraction of the potential labor force being involuntarily out of job."

Samwick says, in a comment to the post: "The key issue is to recognize that there are (at least) two ways for that ratio to stay the same, while having the labor force participation rate and the unemployment rate fall. The first is the one that Krugman pointed out: some people who are actively looking for work may stop looking. The second is the one that I postulated: some people who are working drop out of the labor force voluntarily and are replaced by unemployed people. Krugman's error is to say that only the first way is operative."

Personally, I think his postulated second group is a very, very small number of people. Given the job market, and the problems obtaining health insurance these days, I seriously doubt many people were leaving jobs voluntarily in this way.

Further, it's clear that employers prefer to hire employed persons, rather than unemployed persons. So IMHO it's more likely that a person who leaves a job (and the job market) voluntarily would be replaced by someone who is merely changing jobs.

The people Andrew postulates are undoubtedly a far, far smaller group than the set of discouraged unemployed people leaving the market involuntarily.

Um, Brad?

Samwick writes: "Sadly, if you are going to read Krugman, then you probably also have to read Luskin, and you should double-check for yourself any facts asserted by either one."

Pointing people to *Luskin*?

One last note: Samwick assumes that going back to school necessarily removes one from the labor force.

In fact, many graduate programs and adult education programs are specifically designed to be compatible with a full-time day job. Indeed, many students are working full-time.

Personally, I think his postulated second group is a very, very small number of people. Given the job market, and the problems obtaining health insurance these days, I seriously doubt many people were leaving jobs voluntarily in this way.

Although I agree with the general point your post makes, I'm not sure about this part. Given that so many people are employed but underemployed (part-time work, no benefits, crappy insurance), there might be a bigger number of people sizing up the votality of the labor market and deciding to take another route for a while. Many of my female friends who have young children could work, but decided it wasn't worth it; all of my adult students have left the labor force in order to speculate on a BA.

The capital market is in a wait-and-see period, and my (totally unscientific) sense is that many individuals in the labor market are biding their time as well.

Jackmormon: This sounds to me just mostly like a variation on the "discouraged worker" theme. What's the substantial difference between it not being worth it for a mother, and "difficulty arranging daycare" and "lack of job prospects"? (And before anybody considers it, no I don't want to hear "their spouse got sooo much of a raise/investment gain they don't have to work".)

http://www.nytimes.com/2004/10/18/business/18insure.html?pagewanted=all&position=

Once Again, Spitzer Follows E-Mail Trail
By ALEX BERENSON

Several years ago, the manager of a big insurance company received an odd request from a counterpart at Marsh & McLennan Companies, the world's largest insurance broker.

The Marsh executive asked the insurance company in an e-mail message to send someone to a meeting to pretend to make a bid for an insurance policy being sought by a customer - even though Marsh had already decided to steer the business to another insurer that agreed to pay a kickback to Marsh.

The e-mail message - written in 2001 and disclosed last week as part of a New York State lawsuit asserting that Marsh Inc., a unit of Marsh & McLennan, cheated customers - even made a joke about creating an illusion of competition.

"This month's recipient of our Coordinator of the Month Award requests a body at the rescheduled April 23 meeting," wrote the Marsh executive, whose name was blacked out in the released documents. "He just needs a live body. Anyone from New York office would do. Given recent activities, perhaps you can send someone from your janitorial staff - preferably a recent hire from the U.S. Postal Service."

The manager from the other company, whose name had also been blacked out in the documents, evidently did not find bid rigging quite so funny.

In all capital letters, he responded, "We don't have the staff to attend meeting just for the sake of being a 'body.' While you may need 'a live body,' we need a 'live opportunity.' We'll take a pass."

The e-mail exchange is one of numerous potentially embarrassing communications that were disclosed by Eliot Spitzer, the New York State attorney general, who used similarly damaging e-mail messages to help press his successful conflict-of-interest investigation of Wall Street analysts two years ago. The accusations against Marsh also assert there was a conflict of interest in its role as a broker.

Marsh is supposed to help its customers find the most complete insurance coverage at the best possible price. In reality, the lawsuit contends, Marsh directed business toward insurance companies that paid it kickbacks, while using sham bids from other insurers to create the illusion of competition. As a result, the suit says, the customers ended up paying more than they should have.

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CONCORD DISCORD

There is no entitlement problem in the Federal budget. There is a health care problem, embodied in just two big entitlement programs -- Medicare and Medicaid. The problem is that these two programs are growing at double-digit rates, while our ability to finance them grows at single-digit rates. This cannot continue indefinitely. This trend is mirrored in the private sector, where likewise health insurance premiums are growing much faster than income. That can't go on indefinitely either.

The problem with Concord's treatment of entitlements is that their indictment is too general, and their remedies are empty. Too general because Social Security's problems are tractable. Empty because they only propose to arbitrarily cut health care spending and push it out of the public sector.

Privatizing health care spending does not solve the affordability problem. It means that insurance and health care will be increasingly denied to the unhealthy and unwealthy. You can always save money by dying, but that doesn't mean you will be better off.

In and of itself, the notion of cutting (or capping) entitlement spending is a non sequitur. An entitlement program is a bundle of benefits promised to persons meeting specific eligibility criteria. In order to really cut such spending, you need to stipulate whose ox gets gored. The budget hawks like Concord never get around to this problem.

Concord is also blind to the economic implications of reducing non-entitlement spending, which includes public investment and services the private sector requires to function.

Much of what goes under the rubric of health insurance is really an argument about cost-shifting, or sharing if you will. I, for instance, am uninsurable. By virtue of my enrollment in a group plan, my co-workers pay a portion of my medical bills. Only my inspirational presence in the office allays their disquiet with such an arrangement. So too with many of the elderly, in Medicare they are not getting insurance. They are being billed for the public sector equivalent of co-pays and deductibles.

Arnold Kling had a piece which pointed this out a while back. He thinks people should save for their own health insurance needs. Of course, for many it is too late to save. Or saving would grind one's standard of living down to nothing.

Too much of a requirement to save for contingencies leads to very unsatisfactory financial constraints. You could easily end up saving more than you need, depriving yourself of consumption. Or you could miscalculate in the other direction. By the time you figure out you're going to need a lot of medical care in your declining years, it could be too late. That's why we have insurance, but insurance markets don't necessarily work well.

We could have said the same thing in the 1930s -- all those rubes who became destitute in their old age didn't save enough. The political answer was a cost-shifting of retirement benefits across generations. Current workers financed benefits for retirees who had paid little, nothing, or less than the value of their benefits.

This is often thought of as a Ponzi game. If you give me some money, I promise you a handsome return. I use your money to pay off some previous clients. Word spreads of this wonderful deal, people flock to me with their contributions, and it goes on for a while. Along the way, I rake off something generous for myself. Eventually the new clients run out, I stop paying, and then I'm on the next boat to Bali.

A pay-as-you-go system need not be a Ponzi scheme. If you have a growing workforce, compounded by growing productivity per worker, and you don't promise too high a return on contributions, you can finance a pay-as-you-go system indefinitely. A downturn in labor force growth, such as the retirement of the Baby Boom, creates a potential problem, but not necessarily an insuperable problem.

The problem in this context with Medicare is that the implied rate of return is too high. New specializations, treatments, technology, and drugs drive up usage of medical services. You don't fix this by dumping it into the private sector.

If you were well enough to merit low insurance rates, chances are you would just as soon do without it. If your payments for insurance are subsidized, your incentive to pursue a healthy life-style and economize on medical costs is reduced. These sorts of problems make health care a bad candidate for private sector markets.

Because the market solution is unappealing, even President Bush makes a nod towards increased public subsidies. Kerry's proposed increase is much larger. Neither grapples with the very difficult question of economizing on consumption of medical services in the face of growing costs.

These sorts of considerations are what drive us to emphasize that fiscal solutions to entitlement spending are not solutions at all, but barren arithmetic exercises.

"If you were well enough to merit low insurance rates, chances are you would just as soon do without it."

Why? Insurance is meant to guard against the unlikely possibility of catastrophic costs, which a healthy person can incur (through severe injury, usually) and would have plenty of reason to insure against, especially if he's getting a fair price on it.

"If your payments for insurance are subsidized, your incentive to pursue a healthy life-style and economize on medical costs is reduced."

Well, yeah. So don't do that.

"Neither grapples with the very difficult question of economizing on consumption of medical services in the face of growing costs."

Well, it might pay to look into where those growing costs are coming from. Advancing technology isn't it - they introduce new treatments, but do nothing to raise the cost of existing treatments. It takes a political decision that people have a "right" to new treatments to force costs to rise every time a new treatment appears. Existing treatments, in a properly functioning market, would tend to get cheaper over time - or, put another way, the same spending should get you progressively better treatment, unless a dumb intervention is screwing things up.

So where do we see interventions? Every fricking place you look. Drugs take forever to get through the FDA, to the point where more people die waiting for the drugs than could have been saved by the rejection of bad drugs. If your employer "provides" you a health plan, there's a tax break involved; this leads to all sorts of trouble, as insurance companies end up competing to please employers rather than policyholders. Strict limits on the number of medical school seats restricts the supply of doctors. Vaccine makers find their profits limited and their potential legal liability nearly unlimited, and either bug out or own just enough infrastructure to meet demand and make a profit if nothing goes wrong. And every so often someone threatens to nationalize the whole shebang, or stiff the pharmas on their intellectual property, and there's plenty of bitching and moaning (and threatened legislative action) when the insane risks associated with drug development pay off and generate insane profits.

Instead of trying to stick the other guy with the bill, how about getting rid of these nasty bugs that are driving up the costs in the first place?

"If you were well enough to merit low insurance rates, chances are you would just as soon do without it."

Why? Insurance is meant to guard against the unlikely possibility of catastrophic costs, which a healthy person can incur (through severe injury, usually) and would have plenty of reason to insure against, especially if he's getting a fair price on it.

"If your payments for insurance are subsidized, your incentive to pursue a healthy life-style and economize on medical costs is reduced."

Well, yeah. So don't do that.

"Neither grapples with the very difficult question of economizing on consumption of medical services in the face of growing costs."

Well, it might pay to look into where those growing costs are coming from. Advancing technology isn't it - they introduce new treatments, but do nothing to raise the cost of existing treatments. It takes a political decision that people have a "right" to new treatments to force costs to rise every time a new treatment appears. Existing treatments, in a properly functioning market, would tend to get cheaper over time - or, put another way, the same spending should get you progressively better treatment, unless a dumb intervention is screwing things up.

So where do we see interventions? Every fricking place you look. Drugs take forever to get through the FDA, to the point where more people die waiting for the drugs than could have been saved by the rejection of bad drugs. If your employer "provides" you a health plan, there's a tax break involved; this leads to all sorts of trouble, as insurance companies end up competing to please employers rather than policyholders. Strict limits on the number of medical school seats restricts the supply of doctors. Vaccine makers find their profits limited and their potential legal liability nearly unlimited, and either bug out or own just enough infrastructure to meet demand and make a profit if nothing goes wrong. And every so often someone threatens to nationalize the whole shebang, or stiff the pharmas on their intellectual property, and there's plenty of bitching and moaning (and threatened legislative action) when the insane risks associated with drug development pay off and generate insane profits.

Instead of trying to stick the other guy with the bill, how about getting rid of these nasty bugs that are driving up the costs in the first place?

"If you were well enough to merit low insurance rates, chances are you would just as soon do without it."

Why? Insurance is meant to guard against the unlikely possibility of catastrophic costs, which a healthy person can incur (through severe injury, usually) and would have plenty of reason to insure against, especially if he's getting a fair price on it.

"If your payments for insurance are subsidized, your incentive to pursue a healthy life-style and economize on medical costs is reduced."

Well, yeah. So don't do that.

"Neither grapples with the very difficult question of economizing on consumption of medical services in the face of growing costs."

Well, it might pay to look into where those growing costs are coming from. Advancing technology isn't it - they introduce new treatments, but do nothing to raise the cost of existing treatments. It takes a political decision that people have a "right" to new treatments to force costs to rise every time a new treatment appears. Existing treatments, in a properly functioning market, would tend to get cheaper over time - or, put another way, the same spending should get you progressively better treatment, unless a dumb intervention is screwing things up.

So where do we see interventions? Every fricking place you look. Drugs take forever to get through the FDA, to the point where more people die waiting for the drugs than could have been saved by the rejection of bad drugs. If your employer "provides" you a health plan, there's a tax break involved; this leads to all sorts of trouble, as insurance companies end up competing to please employers rather than policyholders. Strict limits on the number of medical school seats restricts the supply of doctors. Vaccine makers find their profits limited and their potential legal liability nearly unlimited, and either bug out or own just enough infrastructure to meet demand and make a profit if nothing goes wrong. And every so often someone threatens to nationalize the whole shebang, or stiff the pharmas on their intellectual property, and there's plenty of bitching and moaning (and threatened legislative action) when the insane risks associated with drug development pay off and generate insane profits.

Instead of trying to stick the other guy with the bill, how about getting rid of these nasty bugs that are driving up the costs in the first place?

For a graph of BLS data on unemployment with and withoput discouraged workers see Random Jottings http://www.randomjottings.net/

Just scroll down to Krugman Report #166. Doesn't look like a very big issue to me.

http://thelowestdeep.blogspot.com/2004/10/notes-on-unemployment-rate.html

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