201708

August 8, 2017 4:59PM

A Monetary Policy Primer, Part 11: Last‐​Resort Lending

So far, throughout this primer, I've claimed that central banks have one overarching task to perform:  their job, I said, is to "regulate the overall availability of liquid assets, and through it the general course of spending, prices, and employment, in the economies they oversee." I've also shown how, prior to the recent crisis, the Fed pursued this task, sometimes competently, and sometimes ineptly, by means of "open-market operations," meaning routine purchases (and occasional sales) of short-term Treasury securities.

But this picture isn't complete, because it says nothing about central banks' role as "lenders of last resort." It overlooks, in other words, the part they play as institutions to which particular private-market firms, and banks especially, can turn for support when they find themselves short of cash, and can't borrow it from private sources.

For many, the "lender of last resort" role of central banks is an indispensable complement to their task of regulating the overall course of spending. Unless central banks play that distinct role, it is said, financial panics will occasionally play havoc with nations' monetary systems.

Eventually I plan to challenge this way of thinking. But first we must consider the reasoning behind it.

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August 8, 2017 3:28PM

How Much Credit Can President Trump Take for the Secure Border?

Illegal immigration is at its lowest point since the Great Depression. President Trump has claimed success, but nearly all of the decrease occurred under prior administrations. The president’s campaign rhetoric does appear to have caused a small increase in illegal immigration prior to assuming office. Because immigrants moved up their arrival dates a few months, the typical amount in illegal entries failed to materialize in the spring. But these recent changes are small in the big picture: 98.2 percent of the reduction in illegal immigration from 1986 to 2017 occurred before Trump assumed office.


Naturally, illegal border crossings are difficult to measure. The only consistently reported data are the number of immigrants that Border Patrol catches attempting to cross. Border Patrol has concluded that the number of people who make it across is proportional to the number of people it catches. All else being equal, more apprehensions mean more total crossers. Of course, the agency could catch more people because it has deployed more agents. But we can control for the level of enforcement by focusing on the number of people each agent catches.


Figure 1 provides the number of people that each Border Patrol agent brought into their custody during each of the last 60 years. As it shows, illegal immigration peaked in the mid‐​1980s. From 1977 to 1986, each border agent apprehended almost 400 people per year. After the 1986 amnesty legislation that authorized new agents and walls, the flow fell at a fairly steady rate. Following the housing bubble burst, the 2009 recession, and the concomitant border buildup, the flow has essentially flatlined. In 2016, each border agent nabbed fewer than 17 people over the course of the entire year. That’s one apprehension every two and a half weeks of work. The “crisis” is over and has been for a decade.


Figure 1: Apprehensions Per Border Patrol Agent, FY 1957–2017

Media Name: apprehensions.png

Sources: Apprehensions 1957–2016: Border Patrol; Apprehensions FY 2017 (projected from October‐​June data): Border PatrolBorder Patrol Staffing: Border Patrol, INS Statistical Yearbooks and INS Annual Reports


Following Trump’s election, the flow did fall further, but this was mostly a continuation of the existing trend. Before Trump assumed office, there was a slight departure from the trend (represented as a dotted line in the Figure 2), but this June’s apprehension figures are roughly where we would expect based on the last decade and a half of data. I interpret this to mean that we saw a Trump effect before he assumed office, when some additional asylum seekers and immigrants came to the border a few months ahead of schedule in fear of the changes that he might bring. But the effect dissipated after he assumed office.

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August 8, 2017 2:00PM

Progressivity of Taxes and Transfers in the US and UK

“Europe’s Taxes Aren’t as Progressive as Its Leaders Like to Think,” wrote the Wall Street Journal’s Joseph C. Sternberg yesterday. Citing tax expert Stefan Bach from the German Institute for Economic Research, Sternberg shows how Germany’s tax system is only mildly progressive overall. Sternberg therefore states that politicians need to “tackle” indirect taxation if they want to have a major impact on the economy.


Now, Sternberg is undoubtedly right that broad‐​based tax systems which incorporate social contributions and VATs tend to be less progressive than those which rely more heavily on progressive income taxes. That is, if we narrowly look at the effects of taxes alone, rather than government spending. But does it make any economic sense to look at a tax system in isolation?


Good economic theory would suggest that to the extent we care about progressivity and redistribution, revenues should be collected in the least distortionary way possible, with redistribution done via cash transfers. So judging the desirability of a tax system by its degree of progressivity is not a good starting point. From an economic perspective, the assessment should be how distortionary different taxation systems across the world are. European tax systems have huge problems in this regard, but their progressivity or otherwise should not be a major consideration.


The second and more important related point is that assessing progressivity should not seek to separate the issues of taxes from transfers. To judge progressivity, one must look at the position of households across the income spectrum after both, not least because one person’s taxes are (now or later) another person’s cash transfer.


I cannot find figures to do this for Germany, but am familiar with some headline UK and US stats.


Every year when the UK Office for National Statistics (ONS) releases its publication The effects of taxes and benefits on household income, historical datasets a similar lament to Sternberg’s arises. Calculating total taxes paid as a proportion of gross income (market income plus government cash transfers), critics of the tax system assert that the poorest quintile pay 35.0% of their gross income in taxes, on average, which is almost identical to the average 34.1% for the top quintile (2015/16 figures). Like Sternberg, many conclude that the tax system is not progressive enough.


Yet a few seconds’ thought to what these figures show highlights how misleading this is. Gross income (the denominator in the calculation) includes cash transfers, which are transfers from one group to another. That a household uses money redistributed to it to spend, in turn paying what the ONS describes as indirect taxes (things like VAT, beer duty, tobacco duty, the TV license and fuel duty), can hardly be described as “regressive”. This is akin to taking from Peter to pay Paul and then saying that – because Paul spends a large proportion of this money – the tax system is unfair.

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August 7, 2017 5:00PM

Paid Family Leave Figures are Misleading

AEI scholar Abby McCloskey’s recent column on paid family leave argues that just “12 percent of private‐​sector employees have access to paid family leave from their employer.” For McCloskey, this is one of many reasons that the federal government should create a paid family leave entitlement program.


The 12 percent figure surely sounds appallingly low. In fact, it is so low that it seems suspect: it doesn’t match well with real‐​life experience or casual observation. The figure also doesn’t match with data from nationally representative surveys. For example, 63 percent of employed mothers said their employer provided paid maternity leave benefits in one national study, a 50 percentage point difference from the most recent BLS figure.[1]


So what gives? It seems many U.S. women take paid parental leave, but the Bureau of Labor Statistics (BLS) doesn’t count it. The BLS requires paid family leave be provided “in addition to any sick leave, vacation, personal leave, or short‐​term disability leave that is available to the employee.” This means that when employees take paid leave for family purposes, it doesn’t count if it could have been used for another purpose. 


In the real world, parents with conventional benefit programs often save and pool paid personal leave, vacation, sick leave, and short‐​term disability in the event of a birth or adoption. On average, employees with five years of service are provided 22 days of sick and vacation leave. A majority of private‐​sector employees can carry over unused sick days from previous years, which adds to the tally. Meanwhile, the median short‐​term disability benefit is 26 weeks for private‐​sector workers; six to eight weeks can be used toward paid maternity leave.


These benefits do exactly the same thing as paid family leave. As Human Resources Inc. puts it, “family‐​leave is usually created from a variety of benefits that include sick leave, vacation, holiday time, personal days, short‐​term disability…” And although not all employers, especially small businesses, have official paid family leave policies, “Many employers are flexible and can work out an agreement with you.” Benefits that aren’t spelled out in the company manual are surely undercounted by BLS figures, too.


Paid leave doesn’t always fit neatly under the BLS’s survey categories for other reasons. Unconventional benefit packages, like consolidated paid leave (or PTO banks) allow employees to use paid leave for any reason, family or otherwise. Consolidated paid leave is on the rise; the BLS reports that 35 percent of private‐​sector employees receive it. In some industries, more than half of employees receive this flexible benefit.


Unlimited paid leave plans are also growing in certain industries. These plans allow employees to take as much leave as they want, whenever they want, assuming they meet performance expectations. But unlimited and consolidated paid leave don’t provide paid family leave separately, so neither count.


As a result, BLS figures seem to grossly underestimate paid family leave availability. BLS methods penalize employers that provide flexible benefits, by pretending their benefits don’t exist.


This helps to explain why BLS figures differ dramatically from other surveys. In spite of that, don’t expect government‐​sponsored paid leave advocates to update their figures any time soon.






[1] Note that the Listening to Mothers III study focused on employed mothers; BLS focuses on private‐​sector employees.

August 7, 2017 3:56PM

Antitrust for Fun and Profit: The Democrats’ Better Deal (Part 1)

“Is Amazon getting too big?” asks Washington Post columnist Steven Pearlstein, in a 4000-word column seeking justification for the Democrat Party’s quixotic pledge to “break up big companies" in its recent “Better Deal." “Just this week,” notes Pearlstein, “Democrats cited stepped-up antitrust enforcement as a centerpiece of their plan to deliver ‘a better deal’ for Americans should they regain control of Congress and the White House.” He concludes by saying “it sometimes takes a little public power to keep private power in check.” But maybe it takes a lot of public power to write antitrust lawyers some big checks.

Politics aside, the question “Is Amazon getting too Big?” should have nothing to do with antitrust, which is supposedly about preventing monopolies from charging high prices. Surely no sane person would dare accuse Amazon of monopoly or high prices. 

Even Mr. Pearlstein has doubts: “Is Amazon so successful, is it getting so big, that it poses a threat to consumers or competition? By current antitrust standards, certainly not. . . Here is a company, after all, known for disrupting and turbocharging competition in every market it enters, lowering prices and forcing rivals to match the relentless efficiency of its operations and the quality of its service. That is, after all, usually how firms come to dominate an industry. . .”

That should have ended this story “by current antitrust standards.” But if we simply lower those standards, then “Better Way” antitrust shakedown threats could become far more numerous, unpredictable, and lucrative for politically-generous antitrust law firms

Among the 19 largest law firm contributions to political parties in 2015/2016, according to Open Secrets, all but one, Jones Day, contributed overwhelmingly to Democrats. More to the point, all of these law firms contributing most generously to the Democratic Party are specialists in antitrust and mergers: They appear on U.S. News list of top Antitrust attorneys. And the Trial Lawyers Association (now disguised as “American Association for Justice”) contributed over $2.1 million to Democrats, over $1 million to liberal organizations and $67,500 to Republicans.

Antitrust law is a very big, profitable and concentrated industry. Antitrust lawyers’ have a special interest in greatly expanding the reach and grip of antitrust law. They were surely delighted by Pearlstein’s prominent endorsement of law journal paper by Lina Khan, a 28-year old student and fellow at the “liberal-leaning” think tank New America.

Ms. Kahn believes it self-evident that low operating profits must prove Amazon is “choosing to price below-cost.” That’s uninformed accounting. What low profits actually show is that Amazon has been plowing-back rapidly expanding cash flow into capital expenditures, such cloud computing, a movie studio, and unique consumer electronics (Kindle and Echo).

 “If Amazon is not a monopolist, Khan asks, why are financial markets pricing its stock as if it is going to be?” That’s uninformed finance theory. Investors rightly see Amazon’s current and future growth of cash flow (the result of expensive investments) as the source of future dividends and/or capital gains (more net assets per share).

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August 7, 2017 1:47PM

The Debate over NAFTA Chapter 19

Generally speaking, the Washington Post editorial board does a great job on trade issues. They are pro-trade and they see trade agreements as a way to liberalize trade. However, I want to offer a response to something in a recent Post editorial about one particular technical aspect of the NAFTA renegotiation. Here’s the passage:

Alas, the administration also specified that the trade deficit with Mexico and the (smaller) one with Canada be reduced as a result of the talks, which isn’t possible and wouldn’t necessarily be desirable even if it were. Possibly even more counterproductive, Mr. Trump’s goals include the elimination of the so-called Chapter 19 dispute-resolution mechanism, which creates a special NAFTA-based forum to challenge a member country’s claims that another is selling exports below cost (“dumping”). This check against potentially protectionist litigation brought by U.S. industries in U.S. forums was Canada’s precondition for joining the U.S.-Canada free-trade agreement, upon which NAFTA was built; and it’s one reason that exports from Canada and Mexico are far less likely than those of other nations to face penalties in the United States.

Eliminating Chapter 19 probably would be a dealbreaker for Canada. And why would Mr. Trump seeks its elimination? After all, as he said in that call with Mr. Peña Nieto, “Canada is no problem . . . we have had a very fair relationship with Canada. It has been much more balanced and much more fair.” Perhaps he means the proposal as a bargaining chip, to be traded for some other, more valuable concession. Or perhaps he will be willing to finesse it behind closed doors, just as he pleaded with Mr. Peña Nieto to help him wiggle out of his unwise promise to make Mexico pay for a border wall. We certainly hope the administration can be pragmatic on this point, lest it trigger the trade war with our neighbors that Mr. Trump once promised but so far has sidestepped.

Starting with some technical points, let me note that dumping is defined as more than just sales below cost, as it could also mean export sales that are below the price in the home market or a third country market. (It’s a fundamentally arbitrary calculation, which you can read more about here.) Also, Chapter 19 covers countervailing duties (extra tariffs imposed on imports of subsidized goods) as well.

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August 7, 2017 12:32PM

Is The ACA Helping to Fuel the Opioid Overdose Rate?

Leaders at all levels of government and civil society are alarmed at the continued rise, year after year, in the death rate from opioid overdose. The latest numbers for 2015 report a record 33,000 deaths, the majority of which are now from heroin. Health insurers are not a disinterested party in this matter.

Cigna, America’s fifth largest insurer, recently announced it has made good progress towards its goal of reducing opioid use by its patients by 25% by mid-2019. To that end, Cigna is limiting the quantities of opioids dispensed to patients and requiring authorizations for most long acting opioid prescriptions. Cigna is encouraging its participating providers to curtail their use of opioid prescriptions for pain patients and is providing them with data from monitoring the opioid use patterns of their patients with an aim towards reducing abuse.

In a Washington Post report on this announcement Cigna CEO David Cordani said, “We determined that despite no profit rationale—in fact it’s contrary to that—that societally we needed to step into the void and we stepped in pretty aggressively.”

No profit rationale?

Paying for fewer opioids saves the insurer money in the short run. And opioids have become costlier as “tamper-resistant” reformulations, encouraged by the FDA, have led to new patents allowing manufacturers to demand higher prices.

There is growing evidence that, as doctors curtail their opioid prescriptions for genuine pain patients, many in desperation seek relief in the illegal market, exposing them to adulterated opioids as well as heroin. For the same reason, recent studies on the effect of state-based Prescription Drug Monitoring Programs (PDMPs) suggest they have not led to reductions in opioid overdose rates and may actually be contributing to the increase. It is reasonable to be skeptical that Cigna’s internal prescription drug monitoring program will work any differently.

Further research suggests the community rating regulations of the Affordable Care Act may be contributing to the problem. The ACA requires insurance companies to sell their policies to people who have very expensive health conditions for the same premiums they charge healthy people. At the same time, the ACA’s “risk-adjustment” programs systematically underpay insurers for many of their sickest enrollees. The overall effect is that the ACA penalizes insurers whose networks and drug formularies are desirable to those who are sick. Insurers respond to this disincentive by designing their health plans to have with provider networks, drug formularies, and prescription co-payment schedules that are unattractive to such patients, hoping they will seek their coverage elsewhere. This “race to the bottom” between the health plans results in decreased access and suboptimal health care for many of the sickest patients.

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