The market mechanism is a remarkable process. Buyers and sellers exchange money in an open system that produces prices and production levels to equate supply and demand. (Also known as Keynes’ invisible hand, the market mechanism is an alternative to central planning.) Chinese leaders added the market mechanism to its communist political system, and economic growth skyrocketed. In theory, the market mechanism leads to an ideal allocation of goods, services and workers’ efforts for society. In practice, ideal output misses the mark when prices fail to reflect societal benefits and costs, consumers are not well-informed, or monopolistic-like power exists. One area where the market mechanism often fails is healthcare. A healthy population benefits everyone, from employers in need of a productive workforce to the government (and taxpayers) who cover the costs of the social safety net to each of us as individuals…
Recession questions: Time for scenario-based planning
The current economic expansion, albeit slower than many in the past, has earned a record in longevity. That fact alone does not indicate an imminent recession. But it is worth asking, “What could be next?” Economic trends can foretell a continued expansion or downturn, so it’s essential to monitor them. An excellent July 29, 2019, WSJ article looks at such trends and concludes storms are on the horizon. Low interest rates are keeping the stock market and consumer economy chugging along, but early indicators like housing and business investment have turned down. Remember that economists, unlike umpires, make their calls well after the fact. Those downturn signals are troublesome, especially when coupled with a slowdown in Gross Domestic Product growth (2018 versus 2017 based on revised numbers and 2019: Q2 versus 2019: Q1). The expected drop in interest rates and continued growth in federal…
Keeping the ACA baby, but changing the bathwater
The Affordable Care Act (ACA) got a couple of things right, so right that we should not throw the baby out with the bathwater if we want to move towards a cost-effective, value-driven, and equitable healthcare system. There are four parts of healthcare insurance reform: private insurance reform; subsidies for low-income individuals who cannot otherwise afford insurance; government coverage (such as Medicare and Medicaid); and operation of markets (exchanges) where insurance is purchased. The ACA scored high grades on the first three elements and poor grades on the latter. Let’s examine why. Private insurance reform included adding children up to age 26 in insured groups (also called pools). Including young people improved the risk diversification of the pool, which was good for everyone’s rates as those twenty-year-olds are so healthy. This policy also kept more young people insured. Pre-ACA private insurance benefited insurers’…
Can we at least agree on the role of Government?
With President-elect Trump’s arrival in the Executive Branch, perhaps it’s time to step back and think about the role of government. If we agree on the role, we can better debate from the left and right how this role is best carried out. Free markets have many advantages, but also offer some real pitfalls. The government’s role stems from the self-serving interest of market participants – companies and consumers alike. This greed is good: it leads to innovation, wealth creation, productivity, striving to improve, and many other positives propelling our economy and society forward. But what is best for the individual or family is not necessarily best for the nation, hence the role of government. What are the big things that markets can’t carry out well on their own? They cannot set laws or ensure their just enforcement. In fact, a comprehensive legal…
Top 5 Productivity Sinkholes
Whichever way you measure national productivity, it’s growing at a snail’s pace both in absolute terms and compared to past growth rates. (See Sidebar.) And that’s not a good thing as increases in productivity improve our standard of living. SIDEBAR: Measures of Productivity Labor productivity, the measure most often cited, captures the amount of goods and services produced (output) with the number of hours worked to produce those goods and services. Multi-factor productivity compares output to the amount of combined inputs (labor, capital, energy, materials, and purchased services) used to produce that output. Economists argue this measure better captures the impact of technology advances. Not all experts agree productivity is an issue. Bloomberg blogger and investment expert Barry Ritholtz argues that productivity is higher than we think because our current measures fail to capture innovations in the digital world that have changed how…
The good, bad, and ugly of trade
Economists argue that trade is good, essential in fact to growing an economy. If you excel at growing tomatoes, and I carrots, we will each have a healthier and more plentiful diet by bartering carrots for tomatoes. Once you add in far more people (across the globe no less), more goods (beef, cars, iPhones), services, and a monetary system that converts the value of any item to a price, gains in our simple local barter example grow exponentially. The world benefits when people trade, exporting what they are uniquely good at and importing what others are more efficient at making. We end up with more goods and services at a lower price when trade crosses city, state, regions and national boundaries. But what is true in theory is not always true in fact. The theory of trade assumed scarcity of labor in developed…
Markets vs. governments: An economist’s view
It’s not possible to resolve political debates such as “Should we raise taxes to revitalize our aging transportation infrastructure?” without first achieving consensus on the role of government. The role debate, at least in my mind, is far less divisive than “how.” So, as we enter elections to determine the next US President and Congress, I thought it would be a good time to share an economist’s perspective on the role of government. There would be no role for government in our economy if – in our roles as citizens, business owners, shareholders, employees, and consumers – we acted in the best interests of society as a whole. Rather, we act out of real or perceived self-interest. There is nevertheless a huge advantage to individuals acting in their self-interest. It creates an invisible hand enabling a market-based economy. Adam Smith argued (correctly) that…
Fearing inflation, deflation becomes the unnecessary evil
Was the US Central Bank right to delay a planned rise in interest rates? The increase was anticipated to beat down inflation before it got out of hand. Instead, Chairwoman Yellen and her team “wimped out.” Let’s provide some context first. Following the banking crisis that resulted in the 2008 recession, The US Federal Reserve engaged in unprecedented monetary stimulus through buying bonds, driving real and nominal interest rates to historic lows. Most GOP commentators forecasted high inflation because all else equal that much monetary stimulus should have driven inflation into the double digits. Many business leaders accepted these projections as fact. The fear still hangs over us. Those inflation projections were flat out wrong. Why? Because the “all else equal” condition did not hold true. Banks used extra reserves to build up capital rather than lend, preventing the Fed’s bond-buying action from…