More Hope for American Health Care

Previously I noted that globalization may the catalyst that brings real reform to U.S. health care. According to an article in the City Journal, another glimmer of hope may be found in "health care's new entrepreneurs":

For seriously ill patients, American health care is second to none. Our commitment to innovation is unmatched; our researchers have won more Nobel Prizes for medicine than all other countries’ combined; our biotech and pharmaceutical industries, thanks partly to lavish federal funding for basic science research, are the envy of the developed world. So lopsided is the field that thousands of European scientists have relocated to companies in the U.S., where they have a better chance of transforming cutting-edge research into lifesaving new medicines.

But American health care is also much more confusing, impersonal, and expensive than it needs to be. Conflicting opinions from doctors and insurers often strand patients with complex diseases in a medical maze. Many primary-care physicians, frustrated with red tape and puny reimbursements, limit the number of Medicare and Medicaid patients whom they see, or they drop out of the profession altogether. Adding insult to injury, employers and employees face seemingly endless cost increases, with health-insurance premiums rising much faster than inflation or income.

Thankfully, entrepreneurs are finding ways to bring innovative, consumer-oriented health care to market—simplifying medical decisions, reinvigorating primary care, and lowering health-care costs. From health insurance to DNA-driven medicine, American health care is experiencing a revolution from below that promises to improve quality, lower costs, and empower people to control their own health care.

Read the rest of the article here.

Willem the Bold

That is my new name for Willem Buiter who boldly challenged the Federal Reserve and its policies at one of its own meetings. Buiter presented a paper that was very critical of the Fed's actions leading up to, during, and after the housing boom-bust cycle at the Fed's annual Jackson Hole, Wyoming retreat. The Wall Street Journal and Bloomberg both report his paper generated a heated debate at the meeting. Coming to Buiter's rescue in the blogosphere is Yves Smith while Mark Thoma sides with the Fed. I have only scanned his paper (144 pages!) , but here is a section from it that summarizes his critique of the Fed:

I argue that three factors contribute to Fed’s underachievement as regards macroeconomic stability. The first is institutional: the Fed is the least independent of the three central banks and, unlike the ECB and the BoE, has a regulatory and supervisory role; fear of political encroachment on what limited independence it has and cognitive regulatory capture by the financial sector make the Fed prone to over-react to signs of weakness in the real economy and to financial sector concerns.

The second is a sextet of technical and analytical errors: (1) misapplication of the
‘Precautionary Principle’; (2) overestimation of the effect of house prices on economic activity; (3) mistaken focus on ‘core’ inflation; (4) failure to appreciate the magnitude of the macroeconomic and financial correction/adjustment required to achieve a sustainable external equilibrium and adequate national saving rate in the US following past excesses; (5) overestimation of the likely impact on the real economy of deleveraging in the financial sector; and (6) too little attention paid (especially during the asset market and credit boom that preceded the current crisis) to the behaviour of broad monetary and credit aggregates.

[...]

The third cause of the Fed’s macroeconomic underachievement has been its tendency to use the main macroeconomic stability instrument, the Federal Funds target rate, to address financial stability problems. This was an error both because the official policy rate is a rather ineffective tool for addressing liquidity and insolvency issues and because more effective tools were available, or ought to have been. The ECB, and to some extent the BoE, have assigned the official policy rate to their price stability objective and have addressed the financial crisis with the liquidity management tools available to the lender of last resort and market maker of last resort.

Yves Smith says points 1 and 3 are valid, but 2 is debatable. It will be interesting to see what other observers say on these points. On a different note, I found interesting his suggesting for addressing asset bubbles:

Therefore, while I agree with the traditional Greenspan-Bernanke view that the official policy rate not be used to target asset market bubbles, or even to lean against the wind of asset booms, I do not agree that the best that can be done is for the authorities to clean up the mess after the bubble bursts...[Rather,] [c]ountercyclical variations in capital and liquidity requirements [or] an automatic financial stabiliser [is needed.]

This is something to consider, but I submit that a nominal income targeting rule would go far in avoiding the formation of asset bubbles in the first place. But I digress. This is a provocative paper that should fuel debate for some time to come.

Alan Greenspan's Many Black Swans

Caroline Baum of Bloomberg had an entertaining column on Alan Greenspan this past week that makes for good material in Nassim Nicholas Taleb's Black Swan theory:

Alan Greenspan has presided over more hundred-year events in the last 20 years than the rest of us do in a lifetime...

Read the rest here.

Globalization's Big Payoff?

Thomas Friedman argued in "The World is Flat" that one reason that the 2001-2002 India-Pakistan standoff did not turn into a war--a potentially nuclear one at that--was because of the influence of foreign investment in those countries. These foreign investors more or less threatened to pull out their current and any future investments should war break out. So no war broke out and diplomacy ruled the day. I am sure there were many other factors in the mix, but Friedman's interpretation makes for a great story on the positive externalities created by globalization. I mention this because this past week Daniel Gros had a similar take on the Russian-Georgian conflict:

Russia's occupation of Georgia and the U.S. signing of a missile-defense deal with Poland have grizzled Cold Warriors partying like it's 1979.... But don't go dusting off your copies of George Kennan's "X" Foreign Affairs article and NSC 68 just yet. It's going to be a lot harder to have a Cold War between Russia and the West in 2008 than it was in 1948.

During the Cold War (this is for all the under-40 set), the world was to a large degree divided between the Communist world—the Soviet Bloc and China—and the free world. And while there were exchanges and a limited amount of trade (in the 1970s, Pepsi began bartering Pepsi-Cola for Stolichnaya vodka, and the United States exported grain to the Soviet Union), commercial ties between the Eastern Bloc and the West were extremely limited.

Today, nearly 20 years after the fall of the Berlin Wall, Russia may not be a free-market paradise. But it has evolved into an important part of the global trading system and has built deep, enduring, and significant economic ties to the West. As a result, the implications of increasing tensions are as much economic as they are geopolitical. And a renewed chill between Moscow and Washington will trouble the sleep of CEOs as much as it will agitate peaceniks. On the other hand, the close economic ties make it less likely that political tensions will erupt into actual warfare since the executives in Moscow and New York (and London, and Frankfurt, and Milan …) will be lobbying for peace.

I hope he and Friedman are correct. One has to remain cautiously optimistic on this point, though, since similar arguments were made during the last great globalization wave just prior to the outbreak of World War I (See Krugman).

The 'Great Moderation' in an IS/LM Model with Full Employment

What explains the sustained nature of low inflation in the advance economies--and to a lesser extent in the emerging economies--since the end of the 'Great Inflation'? William White has a recent paper that takes a looks at this question. In it, he evaluates the standard reasons given for the ongoing low inflation: (1) better monetary policies, (2) increased deregulation and competition in domestic markets, (3) increased globalization, and (4) a global saving glut. White concludes that no one reason can explain the sustained drop in inflation. He does, however, believe that a broader story that involves these factors acting in a complimentary manner can explain the facts. Interestingly, he weaves a story using these factors with the help of an IS/LM model that has a vertical full employment line, such as the one used in the Abel/Bernanke/Croushore textbook:

Perhaps the key to a better understanding is to recognise that the character of the shocks hitting the global economy has changed over time, and that some forces affecting inflation have been more important at some times than others. Demand side factors, driven largely by domestic monetary policies, seem to have been central to macroeconomic developments in the 1970s and 1980s. Gradually, however, supply side elements, arising from both domestic deregulation and globalisation, have risen in importance. Consider both the early period and the later period in turn, using as the basic analytical framework a global model of the traditional IS/LM sort, with a vertical real output line at full capacity.

It seems generally agreed that the rise in inflation in the ICs in the late 1960s and 1970s was a by-product of excessive demand, fuelled in many countries by expansionary monetary policies and a failure to recognise how easily inflation expectations might rise. In effect, the LM function shifted to the right, raising aggregate demand and pushing up inflation. While oil price increases are commonly thought to have arisen from supply side shocks, in fact the sharp increases in prices in the early and late 1970s were in large part discrete upward adjustments to re-establish earlier relative prices that had been eroded by generalised inflation.34 Inflation was brought down quite rapidly in the early 1980s by a sudden, sharp tightening of monetary policy. In both the expansionary phase and the contractionary phase of policy, real growth and interest rates moved in a fashion consistent with nominal forces being behind the observed outcomes. That is, inflation rose when demand exceeded potential (estimated on the basis of earlier “normal” growth rates) and fell when growth receded. Interest rates also rose as the expansion proceeded, first only in nominal terms (real rates actually fell) but then rose sharply in real terms as well. After inflation did begin to decline in the early 1980s, nominal rates fell as did real rates, but with the latter declining more slowly.

Explaining the more recent phenomenon of continuing low inflation, in spite of rapid real side growth and continuing low interest rates, demands recourse to all of the arguments above. In effect, it is necessary to postulate changes in all three functions of the model to obtain all three of the observed results. For simplicity, assume here that inflationary expectations are fixed although they would most likely be biased downwards during any period of excess supply. Begin by accepting the assumption of disinflationary pressures arising from some combination of increased domestic deregulation and competition, increased global competition and higher productivity. This provides an explanation for a rightward shift in the real output (aggregate supply function). Then consider the “saving glut” hypothesis, or perhaps more accurately the “investment strike” hypothesis. This constitutes a downward shift in the IS curve, leading to a transitional phase of output being below potential, thus accentuating the disinflationary pressures arising from supply side developments. Finally, in response to these developments, one must postulate a rightward shift in the LM function. In effect, more effective (expansionary) monetary polices lower interest rates, inducing an additional expansion of demand, determined by the slope of the IS curve, until in equilibrium aggregate demand and supply are once equal at full employment. This occurs at a higher level of output, with no further pressure on prices, and with the real interest rate at a lower level than previously.

Does this seem like a reasonable interpretation to you? And do you like the use of the IS/LM model with the full employment line?

Milton Friedman's Legacy Debated

In case you missed it, here is the Edward Nelson-Anna J. Schwartz (N-S) paper that takes on Paul Krugman's assessment of Milton Friedman. Here is Krugman's response to N-S and, in turn, here is the N-S rejoinder to Krugman. These are gated papers at the Journal of Monetary Economics, but you can find an non-gated version of the N-S paper here.

A Real Catalyst for Reforming Health Care

The Economist magazine has a great article that details how the opening of U.S. health care to trade is improving it. Bringing foreign competition to this bloated sector of the U.S. economy may be just the catalyst needed to spur real reform in the U.S. health care industry. This may be globalization's big moment.

Here is the article.