Friday, February 1, 2019

Properly Measured, It's Never Cost Less to Drive your Car


You have probably noticed that the price of gasoline has fallen a little lately. In January, the national average retail price of gasoline in the US fell to $2.20, as low as it's been in 15 years. I filled my car at Costco a few weeks ago for just $1.92 a gallon.

But how much does it really cost to fuel your car? Or, as an economist would put it, what is the opportunity cost of buying motor fuel? I would argue that the proper measure of opportunity cost in this case is the number of hours your have to work to buy the gasoline you need to drive your car 100 miles. That turns out to be lower now than it has ever been in the history of the automobile. Let's take a little tour through the ages to see just how cheap gasoline is today.

Thursday, January 31, 2019

Two Charts That Show Why We Are Not Ready for the Next Recession

Writing recently for Project Syndicate, Brad DeLong offers some sobering thoughts on our readiness for the next recession:
If a recession comes anytime soon, the US government will not have the tools to fight it. The White House and Congress will once again prove inept at deploying fiscal policy as a counter-cyclical stabilizer; and the Fed will not have enough room to provide adequate stimulus through interest-rate cuts.
Running the economy hot has produced some good numbers in the short run, but warning signs are beginning to accumulate. Although there is no natural life-span for a business cycle, this one has already been the longest on record, measured the previous peak of December 2007. It is only prudent to give some thought to our preparedness for the next recession — or our lack of it.

Let’s start with the monetary side. The Fed’s primary tool for fighting recessions is to cut its key interest rate, the federal funds rate, in order to encourage lending and maintain liquidity of the banking system. However, for that tool to work well, the rate has to be high enough before the downturn starts to make room for significant cuts.

The following chart, in which gray bars show recessions, allows us to compare the present situation with business cycles of the past. For example, in late 2000, as the dot-com boom began to wind down, the fed funds rate stood at 6.5 percent. Over the next year, the Fed cut the rate by four and a half points, helping to keep the 2001 recession short and shallow. That still left room to cut another point over the next two years, speeding the recovery.


By the summer of 2007, when it was becoming hard to ignore the growing weakness of the housing sector, the fed funds rate had risen to 5.25 percent. Between July 2007 and December 2008, the Fed cut it as close to zero as was technically possible. This time, even a 5-percentage-point rate cut was not enough to avoid a serious slump.

In both 2001 and 2007, the Fed was able to begin cutting the fed funds rate based on early indications of trouble, and still have room for maneuver. Today’s situation is not as favorable. If a strong expansion continues through 2019, the rate may rise a bit higher than its current 2.4 percent, but if a recession were to come sooner, the Fed would have far less countercyclical ammunition than it did at the two previous cyclical peaks.

Let’s turn now to fiscal policy. As the next chart shows, the federal deficit normally moves toward surplus as the business cycle approaches its peak. When a recession begins, or seems about to begin, having the deficit under control creates “fiscal space” that makes it easier to use tax cuts and spending increases to moderate the downturn and boost the subsequent recovery.


This time, however, the budget began moving toward deficit already in 2016. The turning point came with a package of spending increases and tax cuts, designed to keep the government running through the 2016 elections, that was passed in December 2015. That was followed by an even larger tax cut, not matched by spending cuts, at the end of 2017. Although final numbers for 2018 are not yet available, the deficit for 2018 (shown by the extension of the line at the far right) is estimated to have been 3.9 percent of GDP. That makes the downturn earlier and the pre-recession deficit larger than in any other business cycle since World War II.

Under these conditions If a recession were to come any time soon, the deficit will quickly eclipse the 10 percent mark that it approached at the bottom of the Great Recession. Even if we accept the technical feasibility of large-scale stimulus under those conditions, it would take a Congress with a lot more political courage than the one we have now to pass a robust countercyclical package of tax cuts and spending increases under those conditions.

The bottom line: DeLong is right. We are not ready for the next recession.

Previously posted at Medium.com

Wednesday, January 9, 2019

Podcast: Russ Roberts Talks with Ed Dolan on Employer Sponsored Health Insurance


In early December, Russ Roberts of EconTalk was kind enough to invite me to talk with him for an hour or so for his podcast series. The podcast was posted on January 7. You can listen to it in full here.

Our discussion centers on employer-sponsored health insurance, but toward the end we also get into universal catastrophic coverage as a possible path to reform.

Thursday, January 3, 2019

Why Do We Work So Much and Take So Little Leisure?


America’s obsession with work has produced a record-low unemployment rate and the developed world’s shortest vacations. It has also produced a backlash.

A loosely organized movement has emerged that urges its members to live modestly and work less. One version, known as FIRE (Financial Independence, Retire Early), is popular among high-earning young professionals. Adherents aim to save much of what they earn and retire at 40. However, as financial independence guru Mr. Money Mustache points out, the basic idea of living within your means and rejecting slavery to work is just as good an idea, or even a better one, for people with modest incomes.

None of this is new. In a 1928 lecture, John Maynard Keynes predicted that his grandchildren would live in a world where people worked fare less than they did in his own time:

We may be on the eve of improvements in the efficiency of food production as great as those which have already taken place in mining, manufacture, and transport. In quite a few years — in in our own lifetimes I mean — we may be able to perform all the operations of agriculture, mining, and manufacture with a quarter of the human effort to which we have been accustomed. . . .
Thus for the first time since his creation man will be faced with his real, his permanent problem — how to use his freedom from pressing economic cares, how to occupy the leisure, which science and compound interest will have won for him, to live wisely and agreeably and well. . . .
Three-hour shifts or a fifteen-hour week . . . is quite enough to satisfy the old Adam in most of us!

Paradoxically, it turns out that we are actually ahead of Keynes’ schedule in terms of productivity, yet we still work only about 20 percent fewer hours per week than they did in the 1920s. Why?

Tuesday, November 27, 2018

Ed Dolan and Chris Pope Debate the Future of Health Care Reform


Exit polls from the recent midterm election suggest over 40 percent of voters consider health care as the top issue facing the country. Yet after a unified Republican government tried and failed to repeal and replace the Affordable Care Act, the conservative vision for health care reform remains something of an open question.

Here at the Niskanen Center, senior fellow Ed Dolan has been beating the drum for the reform path known as Universal Catastrophic Coverage (UCC) for more than two years. But not everyone agrees. That’s why we invited Chris Pope, a senior fellow of the Manhattan Institute and formidable conservative health care policy thinker, to join Ed Dolan in a debate.

Be it resolved:
Universal catastrophic coverage is a reasonable path to universal and affordable health care.

PRO — Ed Dolan

People have many basic needs, including food, shelter, education, and access to health care, which, if unsatisfied, can make our treasured rights to life, liberty, and pursuit of happiness meaningless. Of these, health care poses unique problems for public policy.

To understand why, imagine a society in which no one’s resources fall below the poverty level. Regardless of whether those resources come from a state-sponsored universal basic income or from some combination of work, family support, and private charity, I argue that such a society could adequately meet needs for food, shelter, and so on but not health care.

There are two reasons for that. One is the highly skewed distribution of the demand for health care services. In the United States, the healthiest half of the population account for just 3 percent of services consumed, while the sickest 5 percent account for 50 percent. For comparison, if the need for food were distributed similarly, half the population would need just 120 calories in their daily diet (one small potato), while the hungriest 5 percent would starve on anything less than 20,000 calories (35 Big Macs). For the top 5 percent, health care consumption exceeds the national median income.

The second reason health care is unique is its uninsurability. To be commercially insurable, a risk must be unpredictable and an actuarially fair premium must be affordable to the insured. Because of pre-existing conditions and advances in genetic testing, health risks are highly predictable. As a result, for many risk-prone individuals, actuarially fair premiums can exceed income.

The combination of skewed need for services and uninsurability means there is no simple market mechanism that would give everyone access to health care. That leaves us either with a nation of medical haves and have-nots, or a major role for government.

Thursday, November 8, 2018

What's Wrong with Employer-Sponsored Health Insurance and How to Fix It

The high proportion of people who get their health insurance through their jobs is one of the most distinctive features of the U.S. health care system. According to the Census Bureau, 56 percent of the population had employer-sponsored health insurance (ESHI) as of 2017. ESHI accounts for 83 percent of all of those with private insurance of any kind. People whose health insurance is tied to their jobs far outnumber the 38 percent of the population served by government insurance of all kinds.

What is more, most people on ESHI appear to be satisfied with the coverage they get. A survey by America’s Health Insurance Plans (AHIP), an insurance industry group, found that 71 percent of respondents were satisfied with their ESHI plans, compared with just 19 percent who were not satisfied. An independent survey by Gallup came up with similar results, finding 69 percent of people on employer-sponsored plans to be satisfied. A study by the Employee Benefit Research Institute found that 50 percent of workers were extremely or very satisfied with their own ESHI plans, with another 39 percent somewhat satisfied.

How should would-be reformers interpret these numbers? Clearly, one possible reaction is, “If it ain’t broke, don’t fix it.” The Affordable Care Act took that approach. Rather than trying to replace ESHI, it made it mandatory for employers with 50 or more workers.

Despite its popularity, though, serious health economists tell us that ESHI is “broke,” after all. No comprehensive reform can succeed unless it is phased out. This commentary examines three of ESHI’s biggest problems: job lock, which reduces labor mobility for ESHI beneficiaries; the fundamental inequity of the way the benefits of EHSI largely accrue to the highest -paid workers; and the increased fragmentation of health care finance inherent in a system administered by thousands of separate employers. We conclude with a plan for phasing out EHSI in a way that can fix these problems while minimizing the disruption for workers who are satisfied with their current coverage.

A Coasean Rationale for a Carbon Tax

Executive summary:

This policy analysis develops a rationale for a carbon tax based on two key insights from the work of Ronald Coase.

The first insight is that problems of pollution should not be viewed simply as situations in which A harms B, so that A should be restrained with a tax, a suit for damages, an injunction, or a regulatory prohibition. Instead, they should be seen as coordination problems in which the plans of two parties conflict. Reaching optimal coordination typically requires action by both parties. Those will usually include both action by polluters to cut emissions (abatement) and action by pollution victims to reduce harm (adaptation). Putting too much of the burden of coordination on either party is inefficient.

The second insight is that a complete analysis must take into account the direct costs of abatement and adaptation, but also the transactions costs of achieving coordination. Transactions costs include the costs of identifying victims and sources of pollution, assessing damages, reaching agreements on actions to be taken, and enforcing those agreements once they are in place. In some cases, superficially attractive policy solutions turn out to be unsuitable because of their high transaction costs.

The analysis uses the example of coastal flooding caused by climate change as a case study in coordination. The polluters are fossil fuel burning power plants and the victims are coastal property owners. The former have a number of abatement options, including fuel switching and carbon capture, while the latter have abatement strategies that include building sea walls, improving construction, and retreating to higher ground. Following Coase, a full range of policy options are examined for their impact on the behavior of both polluters and pollution victims. When all aspects of the coordination problem are considered, including transaction costs, carbon taxes emerge as an attractive mechanism for dealing with climate change.

Read the full brief here.