FedSim Followup

In my second attempt at Evan Soltas' FedSim, I was able to hold off rising inflation expectations for a while, mostly by raising the Funds rate when the pace of improvement in the labor market was encouraging, rather than when the level of unemployment was satisfactory. The cost of this, of course, is that I stifled that pace, and we found ourselves with unemployment stuck between 6 and 7%, and inflation, especially core, began to pick up significantly toward the end of the experiment. These are, of course, Milton Friedman's "long and variable lags." Oh, well, back to the woodshed.

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FedSim, by Evan Soltas

Blogger, college student, Wonkblog contributor, and all-around wunderkind Evan Soltas has created a monetary policy simulator called FedSim. The idea here is to do a better (more realistic) job of presenting a simulation of central banking action than those that are offered by the ECB and the San Francisco Fed.

In a followup post, Soltas outlined the gargantuan obstacles to the sort of modeling that underlies these sorts of simulators. I think he's all around done a great job overcoming them, however.

My first attempt was going along fine until Zimbabwe set in. I think I allowed the Funds rate to stay so low so long that my 'citizens' came to anticipate low rates forever. Thus my wild punches (2020 and onward) at inflation never landed. My next attempt, the results of which I will also post to CW, will hopefully be less Weimaresque.

I'd encourage readers to try the simulator out and see what you get.

First sad attempt

I am Emmanuel Saez.

I've been relatively neglectful of this blog over the last several weeks. I hope that is set to change, but I make no promises. In the meantime, enjoy this diversion.

In the interest of transparency, here are my answers.

Success and the perception of success

Ezra Klein writes that "Obamacare will never be a huge political success for Democrats," in response to Yglesias and Krugman, who are more optimistic. Klein believes that this is because the benefits to health care reform will be largely invisible to the majority of Americans, and that the costs will be "marginal." I mostly agree, but I will take an even more pessimistic tack by noting that, for the foreseeable future, some people will blame any poor healthcare outcome on the new law. Price of an MRI goes up? Obamacare! Longer wait for appointments? Obamacare! Unfortunate test results? Obamacare! Weird guy gave me the side-eye on the way to the doctor's office? Obamacare!

Now, it is likely that this group will never comprise more than five or ten percent of the population. Remember, however, that this group is likely only that big now, and yet they control two of the three branches of government.

Links of the Week - 28 June 2013

Short list again this week. -ed.


Robert Solow:
Hayek, Friedman, and the Illusions of Conservative Economics

Jared Bernstein:
The Top 1% and the College Earnings Premium: Don’t Confuse Them (as Mankiw Does)

Jared Bernstein:
Inequality and Mobility, Again

Noah Smith:
Some essential papers in behavioral finance

Links of the Week - 21 June 2013

Kevin Drum:
Chart of the Day: America's 30-Year Project to Make the Rich Even Richer

Mark Thoma:
7 Important Examples of How Markets Can Fail

Paul Krugman:
Rents and Returns: A Sketch of a Model (Very Wonkish)

Jonathan Chait:
Why Rand Paul Distrusts Democracy

Jonathan Chait:
Is Rand Paul’s Love of Ayn Rand a ‘Conspiracy’?

Harold Pollack:
The complacency of the meritocrats

Paul Krugman:
Greg Mankiw and the Gatsby Curve

Elias Isquith:
Rand Paul: Not Aristotle

The Economist:
The 1 percent needs better defenders

Links of the Week - 14 June 2013

A light list this week. -ed.

Jared Bernstein:
No, Public Sector Jobs Do Not Crowd Out Private Sector Ones

Neil Irwin:
How the Spurs beat the Heat: the principle of financial arbitrage

Paul Krugman:
Unproductive Finance

(related: Karl Smith: How Schlubs Get Taken By Wall Street Pros)

Neil Irwin:
Alan Krueger on how the music industry explains inequality

Jared Bernstein:
Pictures of the Corresive Linkage Between Higher Inequality and Diminished Opportunity

Links for the (two) week(s) - (31 May and) 7 June 2013

We got a little behind last week and forgot to put together the Links. -ed.


Jonathan Chait
Josh Barro, the Loneliest Republican

Ezra Klein
Josh Barro didn’t leave conservatism. Conservatism left Josh Barro.

Expecting the Unexpected
An Interview With Edmund Phelps

Noah Smith
What can you do with a DSGE model?

Noah Smith
What is an economic equilibrium?

Ta-Nehisi Coates
Health Care and Social Justice

Ezra Klein
No one really believes in ‘equality of opportunity’

Justin Fox
Who Should Actually Have Say on Pay?

Also: Corporate governance and banks: what have we learned from the financial crisis?

Paul Krugman
Ben Bernanke Endorses A 73 Percent Tax Rate [semi-satire]

more

Dylan Matthews
The black/white marijuana arrest gap, in nine charts

Dan Amira
Why Conservatives Hate Citi Bike So Much, in One Venn Diagram

The role of relative market power in compensation negotiations

Justin Fox on the new frontier of executive compensation.

I think Fox's idea that employees could (should?) have a say in determining executive compensation schemes is precisely what both managers and directors are most trying to avoid. It isn't really that revolutionary of an idea, however. One of the ancillary benefits of organized labor is the provision, indirectly, of this sort of input. There was certainly a time in which directors wouldn't dare pay managers 200-400 times that which they paid typical workers. Omitted variable bias notwithstanding, it's likely no accident that this fear began to evaporate with the decline of organized labor.

Also:

Corporate governance and banks: what have we learned from the financial crisis?

Jersey-Number Assignment Equilibrium

Abstract
This paper describes a market model in which property rights for the desired good are not assignable ex ante, using the example of professional athletes and the assignment of jersey numbers when two players have an equal inherent right to the number.

Links of the Week - 24 May 2013

Karl Smith:
Central Bank Competence Is A Technology

Paul Krugman:
The Mythical 70s

James Kwak:
Liberty for Whom?  (via)

How President Obama Won a Second Term -
Political strategist James Carville breaks down where the Republicans went wrong – and what it means for the future

Jared Bernstein:
Government Failure vs. Market Failure

Robert Solow:
It Ain't the Things You Don't Know That Hurt You, It's the Things You Know That Ain't So

Zack Beauchamp:
The Inside Story Of The Harvard Dissertation That Became Too Racist For Heritage

Dylan Matthews:
How our community colleges are falling behind

Economics-Illiteracy Whack-a-Mole: Health Insurance Market Edition

Gene Schwimmer, in a monster of a post, lays out a plan to "exploit - and have some fun" with the new health care law. He's clearly a guy given to intricate, complex plans, but he should've taken some economics classes at some point; he might've learnt something.

Or I could just save the money to do what I should be doing – and will be doing, once Obamacare is gone:  buying my own health insurance, with the services and from the firms that I choose, in a free market.  Though I must confess that the cute-nurse alternative does sound better – actually, a lot better. [emphasis added]

I responded directly to Mr Schmimmer, and I've reprinted my comment below because it illustrates one of the (myriad) ways in which Mr Schwimmer is mistaken.

You almost had me! As a student of economics, I am interested in incentives and rationality. You almost convinced me that, given your particular circumstances, your [Obamacare-avoidance-and-exploitation] plan was sound. I don’t know the ins and outs of filing as a self-employed person, but it seemed as if you do, just as it seemed as if you generally knew what the hell was going on. 

Seemed, that is, until you said that you could imagine a world in which health insurance could be bought in a free market, like a commodity. You see, Mr Schwimmer, in my discipline, we refer to something called ‘asymmetric information.’ Imagine if you wanted to buy a bunch of wheat, say, seven tons. I offer you my seven tons at the market rate, and you’re inclined to take the deal, except you don’t know if my wheat is rotten. Worse yet, you have no way of knowing. So, to hedge, you say you’ll only pay, say, 90% of the market rate, just in case. Then I only want to sell my crappiest wheat to you. Then you want to pay even less. This spiral will continue until there is no market for wheat. Asymmetric information sucks that way. Thankfully, the wheat market can solve this information problem. Presale inspections cover buyers beforehand, and tort law covers them afterwards. 

The market for health insurance has no such natural corrective to its information problem. Physical exams and questionnaires can weed out some undisclosed conditions. But insurers never really know what the hell sort of lives their customers and potential customers lead. Insurers would rather lump a bunch of folks together and let the actuaries figure out how many of each expensive procedure they should plan to pay for each year. This is why group plans are manageable for most folks. 

If an individual wants normal health insurance, outside of a group (such as through an employer), the insurer has really only one meaningful question: ‘Why? Are you sick?’ Since the cost of individual coverage is automatically going to be at least a little higher due to higher fixed costs, the insurer thinks ‘This guy must really be sick, if he’s willing to pay that much for insurance. We’d better charge him even more, just in case.’ Since the insurer is always going to imagine that anyone willing to pay the higher price is expecting to need more coverage than the amount of the premium, the premiums creep up. 

If there was only a way to get everyone into one big pool… Wait! There is! And my guy Mitt came up with it! I didn’t even know back when I voted for him that he had such a good idea! In fact, it worked so well that I resolved to vote for the next guy who wanted to try it. Along came my guy Barack! I’ve gotta admit, it got a little hairy there when my two guys were up against each other! Mitt made that really easy when he pretended not to remember that good idea he had way back when. 

Anyway, Mr Schwimmer, enough laughs. A lot of people yell and scream about ‘free markets,’ thinking that ‘free market’ is an antonym for ‘government intervention.’ You should read up on what ‘free market’ really means. I’m talking about many buyers and sellers, low entry costs for sellers, perfect information, reasonably balanced market power. Every one of these is violated by the ‘free market for health insurance’ you imagine. Now if you hate the ACA just because you want to hate it, or because you hate the President, or just because you hate government in general, that’s your right. Just don’t pretend like there is some sort of economics argument backing you up.