Archives: 08/2008

A Falling Oil Price Is NOT Lower Inflation

I recently explained that, “If [the price of] oil keeps falling, then headline inflation will drop below the ex-energy rate, and the ex-energy rate will itself drop thanks to cheaper transportation and petrochemicals.”  This followed my equally controversial (at the time) June 3 column, “Get Ready for the Oil-Price Drop.”

Blogger Stefan Karlsson thought I had said “inflation is not a problem.”  Huh?

What I said was that a monthly or year-to-year increase in the overall CPI “gives us a fair picture of what has happened to the cost of living over the past month or year. But it’s near-useless for telling us where inflation is headed in the future.” 

I offered a graph and several examples. The price of oil fell this February, for instance, and that month’s CPI was unchanged - zero.  Did that mean inflation was zero?  Of course not. Should the Fed have eased that month because oil prices fell?  Of course not.  So why couldn’t reporters follow that same common sense when oil prices spiked in June?

The May 1991 CPI was 5 percent from a year earlier, I noted, “but it dropped to 2.9 percent within five months, as oil fell 35.3 percent.” When that happens again this year, it will not mean inflation is any less of a problem than it is right now.  It will just mean the price of oil came down.

What I wrote is backed by recent research within the Federal Reserve:

  • Todd Clark of the Kansas City Fed found “the CPI ex-energy offers statistically significant explanatory power for future [headline] inflation.” 
  • Robert Rich and Charles Steindel of the New York Fed found “the ex-energy measure generally maintained its better forecasting record for … inflation over the longer sample period.”
  • On a closely related topic, Rajeev Dhawan and Karsten Jeske of the Atlanta Fed found that “using headline inflation” to guide Fed policy “appears to be a bad idea, both in terms of the output drop and the inflation impact.” 

Those who thought the Fed should have raised interest rates in June because oil prices pushed the CPI up will soon be logically obliged to say the Fed should keep interest rates low or lower just because falling oil prices will be pushing the CPI down.  I agree with Dhawan and Jeske on this.  I think the Fed should and will raise the (fed funds and discount) interest rates on bank reserves.  But I won’t revise that opinion with every up and down in the price of oil.

Disclosure: I own shares in an ETF that shorts oil (DUG) and a mutual fund than shorts precious metals (SPPIX).  This is called putting your money where your mouth is. SPPIX was $16.81 on July 18 when my inflation article appeared, but up 26% to $21.22 by August 5.

Are the Uninsured Free-Riding?

Should government require people to purchase health insurance?  My answer is no.  Here are three reasons.

  1. The uninsured bear the health costs of their decision not to insure.  If my neighbor doesn’t buy health insurance, that doesn’t threaten my health.  (He might threaten my family’s health if he doesn’t get his family vaccinated.  But vaccinations can easily be obtained without insurance.)
  2. As a group, the uninsured bear the financial costs of their own health care.  Many uninsured people show up at the hospital, get treated, and then don’t pay their bills.  Doctors and hospitals scream an awful lot about having to deliver “uncompensated” care.  But two recent studies – one on doctors services by Jonathan Gruber and David Rodriguez, the other on hospital services in California by Glenn Melnick and Katya Fonkych – show that the uninsured who do pay their bills more than make up for the uninsured who don’t.  Why?  The uninsured pay the highest prices.  Gruber and Rodriguez write, “Our best estimate is that physicians provide negative uncompensated care to the uninsured, earning more on uninsured patients than on insured patients with comparable treatments.”  Melnick and Fonkych write that in 2005, “uninsured patients as a group still paid a higher percentage of charges, on average, than Medicare and Medicaid.”  Note that this is an average: some providers may provide lots of uncompensated care, but that appears to be offset by those that provide negative uncompensated care.  As a group, the uninsured appear to pay for themselves.
  3. The uninsured pay higher taxes.  Federal and state governments offer large tax breaks for employer-sponsored health insurance.  The uninsured, by definition, do not obtain employer-sponsored health insurance.  Because they forgo those tax breaks, they pay higher taxes.  Those additional tax payments help fund things like subsidies to hospitals that provide (positive) uncompensated care (see #2).

So it’s not at all clear that when people don’t buy health insurance, they are imposing costs on the rest of us.  The uninsured mostly just hurt themselves.

What “Open Discussion?”

Over at New Talk, a public policy discussion project that purports to bring in “experts…who have different points of view…and a commitment to the kind of open discussion that might take place around a dinner table,” anything but an open discussion is going on about the No Child Left Behind Act. Yes, the e-talkers range from neoconservative Chester E. “Checker” Finn to American Federation of Teachers President Randi Weingarten, but in one way or another all of the discussants believe in significant federal involvement in education. That’s left out one very important perspective: the Constitution’s.

Here’s moderator John Merrow’s reason for keeping away those who think that the federal government has neither the Constitutional authority, nor the ability, to run American education:

Any talk of abandoning No Child Left Behind is foolish because NCLB is the continuation of a long trail of federal education legislation that traces back to the Elementary and Secondary Education Act of 1965.

Congress and the next Administration must do something, but what? That’s the question posed to a remarkable roster of deep thinkers and activists.

Merrow’s question framing has, predictably, produced not the “open discussion” promised by New Talk, but a very narrow exchange dominated by “national standards” chat. Indeed, former Columbia Teachers College president Arthur Levine remarked in his first contribution to the forum that he “was surprised at the commonality of views the group shares.” He shouldn’t have been: For the most part, the group is a collection of education policy insiders with a big bias toward government “doing something,” and the moderator made certain that asking whether the feds actually can do something — at least of value — was off limits.

Of course, it isn’t rational to just assume that NCLB — or any federal interference in education—will remain forever just because it is the continuation of legislation dating back to 1965. Consider that as recently as 1996 the Republican Party had eliminating the U.S. Department of Education in its platform. Or that two major pieces of legislation that would essentially dismantle NCLB — the LEARN and A-PLUS acts — are working their ways through Congress. Or that several states have seen considerable efforts to leave NCLB behind, despite the sizable financial blow doing so could entail. Or that in polling Americans often express great distaste for NCLB.

So what about the question of whether the federal government is actually capable of producing good education? The evidence, whether we bury our heads in the sand or not, is that it can’t. Since 1965, real federal funding for elementary and secondary education has grown nearly six times larger, while achievement has been essentially flat or declining. Under NCLB, what scores were increasing have seen improvements slow while others have seen losses. And why is this? Politics. Washington, like all government, is more responsive to special interests that make their living off of government programs than the people those programs are supposed to help. So the feds keep lavishing cash on the public schools, while the states keep setting almost subterranean “proficiency” bars, using statistical gimmicks to exclude the groups the law is supposed to make visible, and the administration cheers NCLB’s “success.”

The one highlight of the New Talk discussion so far (it runs through tomorrow) has been education historian Diane Ravitch, whose past calls for national standards I’ve taken to task. She’s still calling for national standards, but she has nonetheless been the most realistic of the discussants. After asserting that “there is little to commend NCLB,” she made clear that any national standards would have to be disconnected from federal sanctions because “states and localities” — not Washington — “are closer to the schools and likelier to come up with workable reforms.” She also deflated the soaring rhetoric of those who talk about NCLB as an historic shift because it has finally shone light on the kids left behind (though she also leads one to conclude that she might actually want stronger national tests than she outlined earlier):

OK, so NCLB is historic. No doubt about it. Never before has the federal government reached so deeply into each and every public school in the nation. There was a fundamental error, however, in allowing states to define their own standards and write their own tests. As a result of this error, the public does not have the information that Checker speaks about; instead, in most states, the public gets a wildly inflated picture of student performance.

Unfortunately, as Ravitch being the highlight portends, another perspective is almost wholly absent from the discussion: that accountability exercised by parents through universal school choice, not continued top-down accountability from states or Washington, is the key to truly effective education reform. Consumer choice is the primary driver of accountability for almost everything in America that we take for granted — consumer electronics, package delivery, automobiles, greeting cards, sneakers, home construction, and on and on — but not so for schooling. Maybe that’s why over the decades education hasn’t progressed at all, while almost every other good or service has gotten much better. Maybe that’s also why school choice should be a part of any “open discussion” about how best to deliver education.

New Talk could have put together a truly valuable forum on federal education policy if it had included all perspectives. Sadly, it chose not to.

Feldstein the Flip Flopper

Harvard’s Martin Feldstein was strongly for the “stimulus” rebates earlier this year, but now he is against them.

In his Wall Street Journal article today, he looks at the data and finds that consumer spending increased little compared to the amount of the rebate checks, thus it appears that households used most of the rebate money to pay down debt. In his article, Feldstein seems to be saying that he still believes in Keynesianism, but that this particular Keynesiam stimulus didn’t work very well. 

Yet Feldstein also says that recent data “corresponds to what both basic economic theory and common experience imply,” that this tax rebate effort didn’t work because it was temporary, not permanent.

I used basic economic theory to oppose the stimulus package from the start, calling it Kindergarden Keynesianism.

Good for Feldstein to now admit that he was wrong. But I found the rush by so many top economists six months ago to ”solve” the problem of slowing growth with central planning techniques very disturbing. Future taxpayers are $150 billion further into debt because of their mistake.