Posts Tagged ‘Martin Feldstein’

an alternative to Obamacare

Sunday, November 3rd, 2013

Harvard economist Martin Feldstein dislikes the design of Obamacare, and fears that its failure “could lead to renewed political pressure from the left for a European-style single-payer health-care system”. To his credit, he acknowledges that the current system is also fatally flawed. It is very expensive, and leaves 15% of the population without public or private health insurance.

Feldstein has a better idea. He would like government to

eliminate the current enormously expensive tax subsidy for employer-financed insurance and use the revenue savings to subsidize everyone to buy comprehensive private insurance policies with income-related copayments. That restructuring of insurance would simultaneously protect individuals, increase labor mobility, and help to control health-care costs.

Martin Feldstein, “Obamacare’s Fatal Flaw“, Project Syndicate, 29 October 2013.

I agree with Prof Feldstein’s analysis of the flaws of Obamacare, but do not share his dislike of single payer systems such as Medicare (health insurance for the elderly). I agree, though, that mandated individual insurance is potentially better than Obamacare, and definitely better than the existing system of huge government susidies (tax breaks) for employer-provided insurance. The existing system leaves many uninsured, and workers lose their insurance when they lose their jobs.

What Feldstein recommends is a version of the Swiss system, which mandates purchase of individual health insurance policies, from private companies, with considerable regulation of the industry. Insurance can be purchased from any of 30 or more companies, depending on the canton. Prices charged vary from firm to firm, but each firm’s prices can vary only by gender and age group. All policies must cover pre-existing conditions: no applicant can be refused insurance. The Swiss government specifies what a basic policy must contain, and allows the insured to purchase optional extras such as dental care or private hospital rooms. Approximately a third of the population receives subsidies intended to keep the cost of premiums to a maximum of 8% to 10% of household income, depending on the canton. Co-pays of 10% are allowed, and are capped at a maximum of 700 Swiss francs per year. All policies are for individuals, not families. Even children have their own individual policies.

If the US decides to follow the example of Switzerland, numerous questions have to be answered. Will private companies insure families, or individuals? Will subsidies come from state and local governments, or from the federal government? Will subsidies vary from state to state (as in Swiss cantons), or will they be uniform throughout the country? Will there be a deductible and/or co-payments? If so, how much, what form, and will consumers have a choice of options for out-of-pocket payments? These are just some of the details that have to be resolved.

Professor Feldstein (born 1939) was chairman of the Council of Economic Advisers and chief economic advisor to President Ronald Reagan from 1982 to 1984.

Thanks to Greg Mankiw for the pointer.

Mitt Romney, tax reformer?

Monday, September 3rd, 2012

Columbia University economist Joe Stiglitz dares Mitt Romney to seize the moment, to reform the income tax code of the federal government of the United States, to make it more equitable.

There is an old adage that a fish rots from the head. If presidents and those around them do not pay their fair share of taxes, how can we expect that anyone else will? ….

The billionaire investor Warren Buffett argues that he should pay only the taxes that he must, but that there is something fundamentally wrong with a system that taxes his income at a lower rate than his secretary is required to pay. He is right. Romney might be forgiven were he to take a similar position. Indeed, it might be a Nixon-in-China moment: a wealthy politician at the pinnacle of power advocating higher taxes for the rich could change the course of history.

Joseph E. Stiglitz, “Mitt Romney’s Fair Share“, Project Syndicate, 3 September 2012.

Romney appears willing to say or promise anything to get elected. Wouldn’t it make sense for him to take on the difficult but important job of tax reform, to close the loopholes that let the wealthy get away with paying less than their fair share of taxes? Wouldn’t this be popular with voters? Professor Stiglitz predicts that Romney will not follow this path, only because of ignorance: “He evidently does not recognize that a system that taxes speculation at a lower rate than hard work distorts the economy.”

This assertion must have been written tongue-in-cheek. Romney is an intelligent, informed person. The real reason he will not increase the taxes paid by the wealthy surely must be that the wealthy have enormous influence as donors to the Republican party and to his own campaign. And … they dislike paying federal taxes, or any taxes.  (more…)

the falling euro

Wednesday, July 25th, 2012

In the past year, the euro has fallen from US$1.44 to less than US$1.21. Harvard economist Martin Feldstein would like to see it fall further, to near parity with the US dollar. The euro would still be above its historic low of 84 US cents, and depreciation would provide a much needed boost for Spain and other troubled eurozone economies. I agree.

A lower value of the euro would reduce the prices of eurozone exports and raise the cost of imports, reducing or eliminating the current account deficits of the peripheral European countries, since about half of their trade is with countries outside the eurozone. The weaker euro would also boost Germany’s net exports, raise German wages and prices and reduce the trade imbalance within the eurozone.

The increase in peripheral country net exports would also raise their gross domestic product and so reverse their recessions that were caused by higher taxes and cuts in government spending. ….

In recent weeks I have discussed the case for a declining euro with current and former eurozone officials. I expected that they would just say that I am a long-time “eurosceptic” who is always critical of the euro. But the opposite happened. These eurozone experts all agreed that a lower value of the euro is necessary for the survival of the single currency.

Martin Feldstein, “A rapid fall in the euro can save Spain“, Financial Times, 25 July 2012.

Update: Martin Feldstein published another column on the same subject last month in the US edition of The Wall Street Journal (28 June 2012), with the title “A Weaker Euro Could Rescue Europe“. The column is not gated, and there are 21 comments, many of which oppose devaluation of the euro.


the euro dream

Sunday, May 27th, 2012

Harvard economist Martin Feldstein reminds us that the euro was a French project from the beginning. Germany opposed creation of the euro, but was persuaded to join the monetary union in exchange for French support of German reunification.

Establishing the EEC [European Economic Community] had favorable economic effects, but, like the North American Free Trade Area, it did not reduce national identification or create a sense of political unity.

That was the purpose of the 1992 Maastricht Treaty, which established the European Union. The influential report “One market, one money,” issued in 1990 under the leadership of the former French Finance Minister Jacques Delors, called for the creation of a single currency, relying on the specious argument that the single market could not function well otherwise. More realistically, advocates of a single currency reasoned that it would cause people to identify as Europeans, and that the shift to a single European Central Bank would herald a shift of power away from national governments.

Germany resisted the euro, arguing that full political union should come first. …. Germany eventually agreed to the creation of the euro only when French President François Mitterrand made it a condition of France’s support for German reunification. ….

The pro-euro politicians ignored economists’ warnings that imposing a single currency on a dozen heterogeneous countries was bound to create serious economic problems. They regarded the economic risks as unimportant relative to their agenda of political unification. ….

The European project has clearly failed to achieve what French political leaders have wanted from the beginning. Instead of … amity and sense of purpose …, there is conflict and disarray.

Martin Feldstein, “France’s Broken Dream“, Project Syndicate, 26 May 2012.

what is “universal pension”?

Friday, April 13th, 2012

Definitions matter. I have been giving considerable thought lately to the confusion surrounding use of the term “universal pension”. This concern surfaced again when I read a paper by Manchester economist Armando Barrientos that draws on work by Harvard economist Martin Feldstein. Barrientos writes

Feldstein (1987: 468–84) considered the welfare effects of categorical versus means tested social pensions.

Armando Barrientos, A., “What is the Role of Social Pensions in Asia?“, Working Paper 351, Asian Development Bank Institute, Tokyo, April 2012, p. 21.

Barrientos goes on to discuss Feldstein’s findings at some length. Barrientos (p. 3) carefully explains that social pensions are “noncontributory pensions because entitlements are not based on employment or on a record of payroll contributions”. By “categorical”, Barrientos means “universal”, “providing benefits to all citizens above a particular age” (p. 9). “Means tested” benefits are provided only to those classified as poor.

This sounded unbelievable to me. I had read much of Feldstein’s work on pensions, and never came across anything on noncontributory pensions, much less on universal versus means-tested pensions. I retrieved the relevant article, and began reading it. Here is the first paragraph:

Every society must solve the problem of supporting those individuals who become too old to work but have not made adequate provision for their own old age by saving when they were young. At the present time, the major industrial countries of the world have responded to this problem by creating social security programs that tax the working population and use the proceeds to provide a “universal” benefit to all retirees regardless of their financial condition.

Martin Feldstein, M., “Should Social Security Benefits be Means Tested?Journal of Political Economy 95:3 (1987), pp. 468–484.

Already, I was suspicious. In the US, “social security” refers to contributory pensions (tier 2) and “supplemental security income” to social pensions (tier 1). Reading more, it became very clear. Feldstein was referring to contributory pensions, not noncontributory pensions. When he writes that “social security” is “universal”, he doesn’t mean that every elderly resident receives a pension, nor that the size of the pension is a decreasing function of financial wealth. What he means is that the same rules apply to everyone, and that all workers can (and should) participate in the scheme.

Why, then, does Feldstein refer to a social security “tax” on workers. If it is a tax, it is an unusual tax: the more you pay, the larger the benefit. It is widely-known that social security is not very redistributive, and Feldstein does not argue that contributions are a tax in this sense. In fact, in his model he assumes that all workers earn the same wage and pay the same “tax”; they differ only in their propensity to save. Feldstein nonetheless considers social security to be a tax because the implicit rate of return on contributions (equal to the rate of growth of aggregate wages) is lower, on average, than the return on savings invested in the “real” economy (the stock market).

This is nothing new. Feldstein has made the same point in numerous articles. He has been criticised for neglecting investment risk in stocks, and for ignoring the high cost of inflation-indexed, life annuities in financial markets. “Social Security” benefits, after all, increase each year along with prices, whereas private annuities (pensions) generally do not.

Even with these omissions, which tilt the findings against “universal” social security, Feldstein finds that means-tests for benefits may not be such a good idea. Why? Because “a means-tested program … may induce some utility maximizing workers to save nothing” (p. 470). In other words, a means-test is a tax on saving, which induces participants to save less in order to qualify for social security benefits. With flat, noncontributory pensions, it is even easier to show that universality trumps targeted benefits. This is not just a theoretical point. One need only look at Australia to see how means-tested social pensions can distort savings patterns.

Feldstein on complaints of the French

Sunday, January 1st, 2012

I am not a great fan of Harvard economist Martin Feldstein, but enjoyed his recent holiday column. In it, Feldstein chastises the French for reacting to a possible credit rating downgrade by “lashing out at Britain”, a country which, unlike France, does not fear a rating downgrade.

French officials apparently don’t recognize the importance of the fact that Britain is outside the eurozone, and therefore has its own currency, which means that there is no risk that Britain will default on its debt. When interest and principal on British government debt come due, the British government can always create additional pounds to meet those obligations. By contrast, the French government and the French central bank cannot create euros.

If investors are unwilling to finance the French budget deficit – that is, if France cannot borrow to finance that deficit – France will be forced to default. That is why the market treats French bonds as riskier and demands a higher interest rate, even though France’s budget deficit is 5.8% of its GDP, whereas Britain’s budget deficit is 8.8% of GDP.

Martin Feldstein, “The French Don’t Get It“, Project Syndicate, 28 December 2011.

Feldstein goes on to explain that “stopping the eurozone financial crisis does not require political union or a commitment of German financial support”. Of course not. The financial crisis could end if only individual countries, such as Greece, Italy, Spain, Portugal and France, would follow the example of Ireland, Latvia or Estonia, and pursue policies of fiscal austerity.

Feldstein fails to mention, however, the pain and suffering that would accompany this fiscal austerity if there is no help from stronger economies or from the European Central Bank.

Martin Feldstein on the euro

Wednesday, November 30th, 2011

I rarely agree with Harvard economist Martin Feldstein, but his writings always make me think. His latest Project Syndicate column is no exception. The essay is not original, but it is didactic, and for this reason useful. Feldstein explains in clear language why some countries who adopted the euro are in difficulty, although he stops short of offering them advice on how to get out of the mess they find themselves in.

Feldstein argues that a common currency works well in the United States, but not in Europe, because of three characteristics of the American union. First, US labour is very mobile across state borders. Unemployed Americans move easily from states with high unemployment to states where jobs are plentiful. Second, the US has a centralized fiscal system, with automatic transfers to states in recession: “… each dollar of GDP decline in a state like Massachusetts or Ohio triggers changes in taxes and transfers that offset about 40 cents of that drop, providing a substantial fiscal stimulus”. Third, US states are required by law to balance their budgets. “Even a state like California, seen by many as a poster child for fiscal profligacy, now has an annual budget deficit of just 1% of its GDP and a general obligation debt of just 4% of GDP.”

None of these features of the US economy would develop in Europe even if the eurozone evolved into a more explicitly political union. ….

The most likely effect of strengthening political union in the eurozone would be to give Germany the power to control the other members’ budgets and prescribe changes in their taxes and spending. This formal transfer of sovereignty would only increase the tensions and conflicts that already exist between Germany and other EU countries.

Martin Feldstein, “Europe is Not the United States“, Project Syndicate, 29 November 2011.

I would add that Feldstein’s third point, which implies a ‘no bailout rule’, is the most important, and possibly a sufficient, explanation for currency union success. Panama, since it broke away from Colombia in 1904, has used the US dollar as its sole legal currency, albeit with the name ‘Balboa’. The government of Panama issues Balboa coins (of 50 cents or less value), but not paper notes, and has no political ties with the United States, other than treaties governing commercial trade and capital flows.

The list of independent countries that followed the example of Panama includes two Latin American countries (El Salvador and Ecuador), Zimbabwe in Africa, two small territories in the Caribbean (British Virgin Islands, Turks and Caicos Islands) and four in the South Pacific (East Timor, Marshall Islands, Micronesia, Palau). None of them suffer from belonging to the US currency union, despite the fact that they do not enjoy free access to the US labour market, nor do they benefit from automatic fiscal injections in times of economic recession. One characteristic they share with US states, however, is the ‘no bailout rule’,

An important caveat: I am neither a macroeconomist nor an expert on finance, so I might be totally off base with these comments. Sometimes, though, it takes a non-specialist to see that the emperor is not wearing clothes!

Scott Sumner on Martin Feldstein on mortgage debt

Monday, October 17th, 2011

During the Great Depression prices fell by about 25%.  You might think that a deflation that bad would convince even the most hard-hearted conservative that monetary stimulus was needed.  Not so, conservatives were horrified by FDR’s attempt to reflate, even though the price level remained far below 1929 levels for the rest of the 1930s. ….

If we’ve got a demand problem, why not simply have a bit more demand, and leave the free market system in place?  I just don’t get it.  What is it about demand deficiencies that makes people become unglued? ….

I thought of the Great Depression when I read this essay by Martin Feldstein:

HOMES are the primary form of wealth for most Americans. Since the housing bubble burst in 2006, the wealth of American homeowners has fallen by some $9 trillion, or nearly 40 percent. In the 12 months ending in June, house values fell by more than $1 trillion, or 8 percent. That sharp fall in wealth means less consumer spending, leading to less business production and fewer jobs.

But for political reasons, both the Obama administration and Republican leaders in Congress have resisted the only real solution: permanently reducing the mortgage debt hanging over America. The resistance is understandable. Voters don’t want their tax dollars used to help some homeowners who could afford to pay their mortgages but choose not to because they can default instead, and simply walk away.

Gee, I can’t imagine why someone who lives frugally would be resentful of seeing an affluent neighbor with a good job use his house like an ATM machine, with one re-fi after another to buy boats and fancy vacations, and then dump his mortgage on the taxpayer, even though he could afford to pay it, just because his house was underwater.  Why would anyone have a problem with that?

Scott Sumner, “Martin Feldstein and Francisco de Goya“, The Money Illusion, 13 October 2011.

Scott Sumner, a political conservative and ‘market monetarist’, teaches economics at Bentley University in Waltham, Massachusetts. Harvard economist Martin Feldstein was chairman of the Council of Economic Advisers and chief economic advisor to President Ronald Reagan from 1982 to 1984.

Update: See the excellent exchange of views between Nick Rowe and ‘John’ on this post at The Money Illusion.

the US jobs crisis

Tuesday, July 26th, 2011

Harvard economist Martin Feldstein thinks that the crisis the US faces is a shortage of jobs, not the national debt.

The US unemployment rate reached 9.2 per cent in June, … double the 4.6 per cent rate in 2007 just before the recession began. ….

Labour market conditions are even worse than the unemployment rate implies. … [A]bout 3m Americans who would like to work but cannot find jobs are not officially counted as unemployed because they have not looked for work in the past month. And there are another 9m employees who would like to work full-time but are only able to get part-time work. Add together all of this and we find 29m Americans who cannot find the full-time work they want, a number equal to almost 20 per cent of the labour force.

The high unemployment reflects the lack of demand rather than any fundamental problems with the US labour market. ….

Since the central bank had not caused the downturn by raising interest rates, it could not cure the downturn by lowering rates. It focused successfully on fixing the credit markets but that was not enough to turn the economy around.

The policies of the Obama administration did not reverse the large initial fall in demand …. Although the “stimulus” package enacted in 2009 was too badly designed to add much to national spending, it did add more than $800bn to budget deficits, causing households and businesses to worry about the consequences of the exploding national debt.

Martin Feldstein, “Forget the debt: its jobs that will define Obama’s future“, The A-List, Financial Times, 26 July 2011.

I share Professor Feldstein’s view that strong fiscal stimulus is needed, and that the 2009 package failed because it was too small and poorly designed. Forty percent of the package was in the form of tax cuts. Tax cuts have limited effect on consumer demand because taxpayers save much of their increased disposable incomes, or use the money to repay debts. Much of the stimulus went also as block grants to state governments. States tended to use this grant money to balance their budgets, not to create jobs with increased spending.

Feldstein’s essay is noteworthy, not for its content, but for its authorship. It is remarkable – and praiseworthy – that such a statement was written by a conservative who was chief economic advisor to President Ronald Reagan.

Feldstein states clearly that “reducing the unemployment rate requires increased spending by households and businesses”, but gives no advice on how to accomplish this. Berkeley professor Robert Reich, who was labour secretary in the cabinet of Bill Clinton, spells out what is needed.

The only way out of the vicious economic cycle [jobs crisis] is for government to adopt an expansionary fiscal policy — spending more in the short term in order to make up for the shortfall in consumer demand. This would create jobs, which will put money in peoples’ pockets, which they’d then spend, thereby persuading employers to do more hiring. The consequential job growth will also help reduce the long-term ratio of debt to GDP. It’s a win-win.

This is not rocket science. And it’s not difficult for government to do this — through a new WPA or Civilian Conservation Corps, an infrastructure bank, tax incentives for employers to hire, a two-year payroll tax holiday on the first $20K of income, and partial unemployment benefits for those who have lost part-time jobs.

Robert Reich, “Vicious Cycles: Why Washington is About to Make the Jobs Crisis Worse“, 25 July 2011.

Unfortunately, Washington policymakers are focusing their attention on reducing the deficit, not on stimulating demand.

the weak US economy

Wednesday, June 29th, 2011

Harvard economist Martin Feldstein is worried about weak consumer demand in the US economy.

The American economy has recently slowed dramatically, and the probability of another economic downturn increases with each new round of data. ….

Businesses have responded negatively to the weakness of household demand, with indices maintained by the Institute of Supply Management falling for both manufacturing and service firms. ….

Monetary and fiscal policies cannot be expected to turn this situation around. The US Federal Reserve will maintain its policy of keeping the overnight interest rate at near zero; but, given a fear of asset-price bubbles, it will not reverse its decision to end its policy of buying Treasury bonds – so-called “quantitative easing” – at the end of June.

Moreover, fiscal policy will actually be contractionary in the months ahead. The fiscal-stimulus program enacted in 2009 is coming to an end, with stimulus spending declining from $400 billion in 2010 to only $137 billion this year. And negotiations are under way to cut spending more and raise taxes in order to reduce further the fiscal deficits projected for 2011 and later years.

So the near-term outlook for the US economy is weak at best.

Martin Feldstein, “What’s Happening to the US Economy?”, Project Syndicate, 29 June 2011.

Professor Feldstein (born 1939) was chairman of the Council of Economic Advisers and chief economic advisor to President Ronald Reagan from 1982 to 1984.