Wednesday, March 15, 2017

To Succeed, Healthcare Reform Must Include Action on Prices

 Republican reformers have repeatedly promised affordable healthcare for all Americans — doubly affordable, in fact. They promise to put premiums and out-of-pocket costs within reach of low- and middle-income consumers, and at the same time, that the plan will be affordable to the federal budget, even given the constraints their most conservative members would like to impose on federal revenues.

Unfortunately, the American Health Care Act (AHCA) now before Congress will make healthcare affordable in the budgetary sense only while making it less affordable in the individual sense. According to analysis by the Congressional Budget Office, the AHCA will reduce the budget deficit by $337 billion over a ten-year period, but only at the expense of reducing the number of insured by 14 million in the near term and by 24 million after the full effects of the bill come into force. As the CBO points out, even many people who retain coverage will find it more expensive because the ACHA tax credits will be less than the subsidies available through exchanges under the current Affordable Care Act (ACA or "Obamacare"). For others, the only option that will become more “affordable” is that of going without insurance, due to the ACHA’s elimination of the ACA’s individual mandate.

Under the ACHA or ACA, one uncomfortable fact remains unavoidable: There is no way to make healthcare affordable for either the budget or individuals without strong action to control prices for drugs, medical devices, hospitals, and doctors’ fees that are higher than in any other country. The current draft of the ACHA does nothing to deal with that critical problem.

Monday, March 13, 2017

Why California's Push for a 100 Percent Carbon Free Grid is the Wrong Way Forward


Although there is a clear lack of will to do much about climate change at the federal level, California is another story.  In a recent poll, 69 percent of California voters backed policies to cut emissions. The latest sign of enthusiasm is a bill introduced by State Senate leader Kevin De León that would completely decarbonize the state's electric grid by 2045. Currently, California state law calls for half of all retail electricity to be produced from renewable sources by 2030, with an intermediate goal of 25 percent by 2016, reached slightly ahead of schedule.

Is 100 percent decarbonization feasible? Anne C. Mulkern, writing for E&E News, reports that several experts she talked to said it was. Utility executives were somewhat more skeptical, but Pedro Pizarro, CEO of Edison International, agreed that 100 percent renewable power was technically possible, while expessing concerns about reliability, and timing.

Even if the goal is technically it possible, though, does it make sense to mandate a goal of 100 percent renewable electric power by a certain date? In my view, it does not. Carbon pricing remains a better tool for reducing California's carbon footprint.

Carbon pricing California style

But, you might say, hasn't California already tried carbon pricing with its flagship cap-and-trade scheme? Yes, and it isn't working very well. However, if we look carefully, we will see that the problems arise from circumstances particular to the state, rather than from any inherent flaw in carbon pricing as a concept.

The economic reasoning behind cap-and-trade is to give companies an incentive to reduce emissions by requiring them to buy a permit for each ton of carbon dioxide they emit. The higher the price of permits, the greater the incentive. Prices are set by monthly auctions supplemented by a secondary market, in which permits can change hands privately.

Wednesday, March 8, 2017

How "Ryancare" Would Inrease the Risk of a Healthcare Death Spiral

 On March 6, the Republican House leadership finally released a draft plan for repealing and replacing the Affordable Care Act (ACA). Although only a draft, it has already earned the name of "Ryancare." As this is written, with the ink not yet dry, it already is running into political trouble. Influential Republicans are dismissing it as a “framework for reform” or a “work in progress.”

Still, it is not too early to address one question that will demand an answer no matter what happens to this early draft: will it, or any replacement for the replacement, stop the impending death spiral in the individual insurance market that is at the heart of the ACA’s problems?

From what we know of Ryancare so far, the answer is “No.” Here is why.

What is the “death spiral”?

Just how does this notorious “death spiral” work? Start with a basic truth: A private insurer can profitably offer healthcare coverage to a pool of customers only if it can find a premium that is low enough to be affordable, yet high enough to cover expected claims and administrative costs, with enough left over to keep shareholders happy. In order for that to happen, the pool of customers must contain enough healthy people to keep claims and premiums low.

Thursday, March 2, 2017

Paradox: Why Do Analysts Say Higher Interest Rates are Driving Bank Stocks Higher, When Earlier They Said Low Rates Were Good for Banks?



As the stock market soars to one record high after another, analysts do not hesitate to tell us why. One popular explanation is that expectations of higher interest rates are pushing up the stocks of banks and other financial companies  (example). Yet not so long ago, the same analysts were telling us that Wall Street in general and banks in particular were getting rich on the “free money” that the Fed was supplying to them at historically low rates (examples here and here). What gives?

To understand how interest rates affect bank profits, we turn to a wonky concept of financial economics known as the duration gap. Setting the precise mathematics to one side (read this if you really care), the duration gap refers to the difference between the maturity of a bank’s assets and its liabilities. If a bank funds itself with from short-term sources like deposits and uses those funds to make fixed rate mortgage loans or buy long-term bonds, then it has a positive duration gap. Interest rates tend to be higher on long-term financial instruments than on those with short maturities, so is the way banks traditionally made a profit.

The downside of the traditional banking model is that a positive duration gap means that profits fall when interest rates rise.  Suppose, for example, that your bank makes 30-year fixed-rate mortgages and funds them with deposits that pay an interest equal to the federal funds rate (the rate on overnight loans that the Fed uses at its primary interest rate target). If the loans earn 4 percent and the fed funds rate is 0.5 percent, you have a nice spread of 3.5 percent  between return on assets and cost of funds, allowing a good profit even after deducting  operating expenses.  However, if short-term rates went up, your bank would be in trouble. If the fed funds rate went up to 2 percent while your old fixed-rate mortgages still brought in just 4 percent your spread would be cut to 1.5 percent and your profits, after operating expenses, might evaporate altogether.

Falling Government Investment Casts Doubt on Pie-in-the-Sky Growth Estimates

  •  The budget proposals being prepared by the Office of Management and Budget incorporate revenue estimates based on GDP growth rates of 3 percent or more.
  • The proposals include across-the-board decreases in nondefense discretionary spending
  • Such cuts will make it difficult to reverse the long decline in government investment, casting doubt on the likelihood of achieving ambitious growth estimates.
Government investment at all levels accounts for only about 15 percent of gross fixed investment in the United States, but its economic significance is greater than that modest share suggests. Government investment affects investors in private industry in several ways through its impacts on growth of the economy as a whole, on suppliers of construction services and materials for government investment projects, and on users of government infrastructure. Negative trends in government investment raise concerns for all of these reasons.

Three charts reveal the extent of these negative trends. The first chart takes a long-term look at gross investment in fixed assets at all levels of government. It shows that total government investment has fallen by about half since the 1960s. Investment at the federal level and at the state and local levels contribute roughly equal shares of the total, but the federal share has fallen more rapidly. Federal gross investment in fixed assets as a share of GDP in 2015 was just a third of its 1961 peak value. >>>

Follow this link to read the full post and view the charts on SeekingAlpha.com
 

Friday, February 24, 2017

Questions Republican Healthcare Reformers Must Answer


Republicans do not yet have a full replacement for the Affordable Care Act (ACA or “Obamacare”), but the outlines of one are emerging. The Policy Brief on Repeal and Replace issued by House Republicans on February 16 points the way toward a three-tier system. It promises to provide  “coverage protections and peace of mind for all Americans—regardless of age, income, medical conditions, or circumstances,” while ensuring “more choices, lower costs, and greater control over your health care.”

Those are lofty aspirations, but reformers will have to address many difficult questions before they can be met. To find realistic answers, they will have to overcome divisions within the party, ideological constraints, outside pressures, and some hard realities of healthcare economics.

Conceptual framework

The new policy brief, and similar plans put forward by Rand Paul, Mark Sanford, Paul Ryan, and others, include many common elements. Together, they point to a three-tier system that, in broad outline, would look like this:

Central tier, for individuals and households with incomes well above the poverty line in which no member suffers from a serious chronic health condition. Such people account for roughly 70 percent of the population and roughly 25 percent of personal healthcare spending. Members of this tier would be served by conventional commercial health insurance. The cost of premiums would be covered by a combination of individual payments, advanceable healthcare tax credits (HCTCs), and employer contributions. Premiums and HCTCs could rise with age, but insurers would not be allowed to charge differential premiums based on pre-existing conditions or to refuse coverage. High-deductible policies would be encouraged by using health savings accounts (HSAs) for covering out-of-pocket costs.

Thursday, February 23, 2017

Multiple Job Holders Represent a Still-Untapped Labor Reserve


The Office of Management and Budget is due to release tax and spending plans for the 2018 fiscal year soon. As reported recently by the Wall Street Journal, the plans are expected to be based on relatively optimistic growth forecasts of 3 to 3.5 percent per year, well above consensus estimates. The debate over the realism of the budget plan will turn, to a significant degree, on whether there are a sufficient reserves of untapped labor to support higher growth rates.

Although the headline unemployment rate is approaching levels that the Fed and many other observers equate with "full employment," other indicators, not so well known, suggest that there are still significant untapped labor reserves. This post looks at one such neglected indicator, multiple job holders. (In a post earlier this month, I looked at another neglected indicator, nonemployment index, which also suggests the existence of hidden labor reserves.) >>> 

Follow this link to read the full post at SeekingAlpha.com