I recently pointed out that back in the good old days, Krugman would have graciously granted that a payroll tax hike is an especially bad idea when unemployment is high.  In response, Kevin Drum notes that the tax hike doesn't take effect until 2013.  That's news to me, and I thank him for pointing it out.  It's less bad to impose a payroll tax it in 2013 than it is to impose it today.  Still, it's facile for Kevin to remark, "if the recession isn't over by then we've got way bigger things to worry about than a minor increase in payroll tax receipts."  Recoveries take years, and some employers have been known to look ahead a year or two when they decide whether it's worth hiring someone today.

In contrast, Krugman reiterates Kevin's point about timing, then stops making sense:

Actually, it's even worse: Caplan frames the argument in terms of the nasty effects of raising labor costs. Um, we have a problem with demand, not supply; time to reread Keynes on wages.

Um, low demand does not cause businessmen to stop weighing whether another worker's marginal productivity exceeds his wage.  Yes, when demand is low, workers' marginal productivity is effectively lower.  A waiter in a half-empty restaurant brings in less revenue per hour for his employer.  But if the cost of keeping the waiter around in slack times goes up, employers are still going to want fewer waiters around.

Now if you check out Krugman's "Keynes on wages" link, he's making another argument that I already criticized: That wages cuts won't increase employment because they hurt (or at least don't help) aggregate demand.  As I explained before, this is logically possible, but extremely unlikely:

1. Cutting wages increases the quantity of labor demanded.  If labor demand is elastic, total labor income rises as a result of wage cuts. 

2. Even if labor demand is inelastic, moreover, wage cuts reduce labor income by raising employers' income.  So unless employers are unusually likely to put cash under their matresses, wage cuts still boost aggregate demand.

Not convinced by mere theory?  Scott Sumner shows that the experience of the Great Depression strongly contradicts Krugman.  Even when there were tons of idle resources, output sharply fell when labor costs spiked.

In any case, if Krugman were right in theory, than he shouldn't be crowing about the delayed arrival of the payroll tax.  On the contrary, he should want to impose the payroll tax immediately, and make it vastly higher.  I know this sounds like crazy implication to pin on a Keynesian, but it's true. 

How so?  Firms only have to pay the extra tax if they fail to give their employees health insurance.  If the penalty payroll tax were high enough, then, all employers would opt to buy health care for their workers.  And if, like Krugman, you believe that cutting labor costs reduces aggregate demand, you should also believe that increasing labor costs raises aggregate demand.  By this logic, now is a perfect time to make labor more expensive.  Is Krugman ready to bite that bullet?

P.S. In his link, Krugman seems to merely doubt that wage cuts increase aggregate demand.  In a related piece, however, he seems to believe that wage cuts actually decrease aggregate demand: "And soon we may be facing the paradox of wages: workers at any one company can help save their jobs by accepting lower wages, but when employers across the economy cut wages at the same time, the result is higher unemployment."

I highly recommend the one-season wonder Day Break to fans of social science.  It starts as a standard crime conspiracy: A cop framed for murder tries to clear his name.  Then we get the twist: He's in a time loop.  The day after the murder keeps repeating.  The protagonist wakes up every day at 6:17 AM, and only he remembers how the day played out before. 

As a result, his knowledge of the conspiracy keeps growing.  More importantly, though, his effective social intelligence keeps rising.  Through trial and error, he discovers the right way to deal with every other character in the story to repair a seemingly impossible situation.  It's experimental social science on a scale undreamed of even before Human Subjects Review Boards came along and spoiled all the fun.

Some will say that the premise of Day Break is a gimmick.  I say it shines a powerful spotlight on one of the greatest tools of social intelligence: The hypothetical conversation.  How will X react if I put it this way?  How about that way?  Maybe I'd just be better-off talking to Y - wouldn't he respond differently?  In real life, you only live each day once.  But you can make those days better for yourself - and other people too - if you subject the crucial choices of your day to a few thought experiments before you pull the trigger.
 

He writes that in order to cite the CBO criticism of the Democrats' health care reform proposals, one

must do some combination of the following:

a) Support, as the CBO says you should, the eradication of the tax exclusion that protects employer-based health-care insurance;

b) Support, as Lewin and Commonwealth say you should, a public insurance option that can bargain at Medicare's rates;

c) Support, as the Office of Management and Budget and every health-care wonk in town says you should, one of the various policies floating around to give MedPAC authority to continually reform and modernize Medicare;

d) Support some form of aggressive cost-sharing that would make people extremely angry because it will save money by reducing their access to health-care services;

e) Support comparative effectiveness review that can judge not only the effectiveness but also the cost-effectiveness of various treatments, and give the federal government authority to use that data when deciding reimbursement rates.

I pick (a), (d), and (e)*. What do I win?

Oops, there's some fine print. Ezra's rules apply to "Politicians." I'm not eligible.

*Bear in mind that with aggressive cost-sharing, the decisions about reimbursement rates will be driven more by consumers and less by government.

Keith Hennessey writes

Yesterday Senate Minority Leader Mitch McConnell (R-KY) appointed me to be a member of a new Financial Crisis Inquiry Commission...The purpose of the Commission is "to examine the causes, domestic and global, of the current financial and economic crisis in the United States."

I can remember my father telling me that a question such as, "What caused the first World War?" cannot be answered scientifically. We cannot run a controlled experiment to verify a hypothesis The financial crisis poses a similar challenge.

I could come up with a very long list of controlled experiments that would help sort out difficult issues. Off the top of my head....

Daniel Indiviglio reports on a chart from the Wall Street Journal that shows more than one quarter of mortgage loan modifications are redefaulting. He comments,

Re-default is a huge problem, because it means those homes should have just undergone foreclosure instead of modifying their underlying mortgages. After all, if those borrowers default again, the modification merely delayed the inevitable. This might indicate that the modification efforts are more focused on getting all troubled homeowners to modify, without really determining who can successfully manage those modification terms.

I've said from the very beginning that most cost-effective thing government can do is pay for moving vans to get these people out of the homes they should never have bought in the first place. The advocates of loan mods tend to be folks like Martin Feldstein, who have never held a job in mortgage servicing. The reality is that the borrowers often redefault, and the administrative costs of modifying a loan can be even higher than those of going through foreclosure.

All sorts of people tout loan mods as a win-win. The truth is that more often than not they are a lose-lose.

Here's an excerpt from my chapter, "Free and Healthy at Half the Cost," in The Joy of Freedom: An Economist's Odyssey. I was writing about the single-payer health care system in my native Canada.

It's hard to say that the Canadian government guarantees health care, at least in the usual sense of the word "guarantee." In fact, what the government really guarantees is that if you get health care, you won't be allowed to pay for it, and it is this guarantee that makes you have to wait to get it. The government also guarantees something else: If health care providers try to set up their own clinics and charge willing patients for medical care, the government will shut them down.

I was reminded of it by an e-mail I received yesterday from an economist friend in California. He has asked that I not use his name. The term "MediCal" is California's version of Medicaid. He wrote:

My wife is a psychotherapist and accepts many low-income patients who are referred to her by the County Mental Health Dept. which also reimburses her (at less than half of her normal rate). Some of those patients are covered by MediCal and their funding has been yanked due to the budget crisis. My wife offered to continue seeing these people as private patients at a very low rate, e.g. $30/hr. She was informed that such a transgression would not only cut her off from all future County referrals but might also cost her her license to practice her profession.

To save money for consumers, Waxman is willing to allow certain drugs, called biologic drugs, to enter the market without clinical testing that proves their efficacy. He realizes that requiring clinical testing for efficacy will slow things down and needlessly keep important drugs out of the hands of suffering patients.

But by that same principle, he should favor repealing that requirement for all new drugs. Just as his proposal would get drugs into patients' hands more quickly and create more competition, so too would a wholesale repeal of the efficacy requirement save lives and create more competition. The case for repealing the efficacy requirement for regular drugs, moreover, is just as strong as the case for repealing such requirements for biologic knockoffs.

This is from David R. Henderson [me] and Charles L. Hooper, "Markets Can Determine Drug Efficacy," published today on Forbes.com.

Henry Waxman seems to understand the arguments when they lead to a conclusion he favors.

Compelling, as usual. I'll post some excerpts below the fold, but I recommend reading Lewis' whole piece.

Lewis writes it very much as a suits-vs.-geeks story. He portrays the head of AIG financial products, Joseph Cassano, as a suit who did not listen to the warnings of the geeks until it was too late. In fact, I worry that because Lewis' sources are geeks, his story may be one-sided.

One small quibble is that Lewis does not want to get into the details of structured finance. He talks very loosely about "risks" being passed around, and he makes it sound as if AIG was taking on all the risk, leaving everyone else risk-free. I think that's an exaggeration.

Also, it is noteworthy that AIG backed out of the market late in 2005. Lewis says that the suckers who came in to take AIG's place were Wall Street firms. But one should not overlook Freddie Mac and Fannie Mae, which had lost market share in 2004 and 2005, but which jumped in big time in 2006 and 2007.

What Lewis hints at, but does not spell out clearly enough in my opinion, is that the "AIG bailout" did not benefit AIG nearly as much as it benefited Goldman Sachs and other large financial firms, foreign and domestic, who are not necessarily deserving recipients.

The man in Roomette 3, Car No. 11, was a sniveling little neurotic who wrote cheap little plays into which, as a social message, he inserted cowardly little obscenities to the effect that all businessmen were scoundrels.

                                         -Ayn Rand, Atlas Shrugged

The association between Emotional Stability and conservative economic attitudes might be understood in similar, but differently-valenced terms. The positive pole of this trait is associated with emotional security and hardiness. The negative end (sometimes labeled "Neuroticism") is associated with a tendency to feel anger, guilt, and sadness. Thus, people scoring low on Emotional Stability may be more prone to feelings of guilt or pity for those in need and may, in turn, support liberal economic policies intended to help these populations.

   -Alan Gerber et al, "Personality Traits and the Dimensions of Political Ideology"

Ayn Rand once again anticipates modern social science: Critics of the free market are more neurotic (i.e. lower in Stability) than proponents.  As Gerber et al note, there is more than one way to interpret this pattern, but I'm inclined see it in cognitive terms.  First pass:

People high in Stability realize that, objectively speaking, life in First World countries is good and getting better all the time.  As long as government leaves well enough alone, our problems will take care of themselves. 

People low in Stability, on the other hand, habitually blow minor problems out of proportion.  Even when they live in First World countries, they manage to convince themselves that the sky is falling.  Their typically neurotic response is to beg for Big Brother to save them from their largely imaginary problems.  When government solutions don't work out, they misinterpret it as further proof that life is hopeless - not that their "solutions" were ill-conceived.

P.S. If the neurotic are moderately more prone to anti-market bias, I wonder how much more inclined they are to pessimistic bias?

David Leonhardt talks about the real issue in health care spending (it's not administrative costs). Tyler Cowen calls the column "superb." I would give it no more than a B, because the question is posed in terms of which centralized solution will work. The idea of having consumers foot more of the bill for medical procedures is so crazy that no one ever mentions it. They don't mention it in this morning's Washington Post story on the need for health care rationing. Obviously, individual consumers are irrelevant. Only Robert McNamara can solve health care.

Also in the Post, we have an article on the stimulus that features this priceless quote:

"It is clear from the data that there needs to be more fiscal stimulus in the second half of the year than there was in the first half of the year," White House economic adviser Lawrence H. Summers said. "Fortunately, the stimulus program designed by the president and passed by Congress provides exactly that."

In other words, the delay in spending is not a bug, it's a feature!

Note to Greg Mankiw: when Larry comes back to Harvard, you should invite him to take ec 10. He seems to have no concept of how the multiplier is supposed to work.