Lily, Rosemary & the Jack of Hearts

Longtime KPC friend and advisor @GaddieWindage interrupted his pilgrimage to St. Andrews to commune with us about SCOTUS, the ACA, and the GOP.

Here’s Keith:

Why was a vague liberal law passed by Congress upheld by a conservative Court?

And why is Congress actually lucky that the Court upheld the law?

Precedent and legislative intent saved the law.  The Court, confronted with ambiguity in the law, looked to the broader structure of the law.  Chief Justice Roberts and the 6-3 majority assessed Congress’s intent, determining that it “passed the Affordable Care Act to improve health insurance markets, not to destroy them. If at all possible, we must interpret the Act in a way that is consistent with the former, and avoids the latter.” 

In looking at the act, the Court determined that ‘inartful drafting’ of the massive law was insufficient grounds to strike down a key provision.  Congress’s larger intent was to have all Americans be eligible for insurance tax credits, regardless of technical failures in the legislative language.

The outcome saved the Republican-controlled Congress from a potentially disastrous situation. Had the Court overturned the PPACA tax credit for individuals covered by the national health exchange, it would have wiped out expanded coverage for millions of low-income earners. The result would be two health insurance systems: one made of state health exchanges where people had broad-based coverage and also received a national subsidy; and another made up of states with far more uninsured who nonetheless paid taxes to subsidize healthcare elsewhere.

The chaotic disruption of the marketplaces in those states would have created a ‘death spiral’ for insurers who had organized and invested based on the new regulatory regime. Those insurers are also major campaign donors.  If Congress failed to restore the tax credit, voters who lost health coverage might have mobilized against congressional Republicans in the 2016 elections.

I have seen a lot of people excoriating John Roberts and talking about how liberal SCOTUS has turned under his leadership, but I am not buying it.

This decision was a no-brainer, and was far from a liberal decision, just as the ACA is not really a liberal policy.

Here’s Keith again:

It is, in many ways, a conservative decision. The Court has moved to protect a rent-seeking market.

Indeed.  The ACA is a massive, fugly, boondoggle that just backs more voters and more firms up to the trough.

A liberal policy would be government-run single-payer with tough price controls that ate into the incomes of doctors and cut the profits of big medicine.

A libertarian policy would be to stop the AMA from shrinking the supply of doctors, loosen licensing on many types of health care, allowing interstate competition among insurers, and so on.

The ACA is rent seeking on steroids. You know, just the way most conservatives like things.

Easter at Chez Mungowitz

So Mungo is finally home for a few days before his travels bring him to Texas and other exotic locales, and here is how he has chosen to spend his Easter Sunday:

If you say "it looks like he's preparing for the Zombie Apocalypse", you'd be right. Batteries, bleach, powdered milk and mustard (don't ask), canned food................

Looks like Mungo has seen America, and he is not amused!

Hat tip to the LMM

The college degree premium and the Lucas critique

Bob Lucas showed us that relying on reduced form historical correlations to predict the effects of a new policy regime is likely to end in tears.

Yet this seems like exactly where we are going with government policy toward higher ed.

Historically, college degree holders earn more money and have lower unemployment rates than to non-degree holders.

So, in an attempt to increase earnings and employment, we are pushing for "everyone" to get a college degree.

Here's David Leonhardt from "The Upshot", after showing that the wage premium for a bachelor's degree has never been higher:

"Those returns underscore the importance of efforts to reduce the college dropout rate"

and,

"At some point, 15 years or 17 years of education will make more sense as a universal goal. That point, in fact, has already arrived."

People, I know this sounds bad, but maybe it's because so many people drop out that the degree premium is so high.

Maybe if twice as many people got a bachelor's degree, the wage premium would fall dramatically.

Degree attainment and wages are outcomes of a complex, simultaneous structural socio-economic model. Making policy recommendations based on one reduced form relationship from that model without an understanding of the deep parameters is very bad science and the recommended policy is extremely unlikely to have the desired results.

It may seem strange for a college professor to be arguing that not everyone should be getting a college degree. But I have seen kids drift along for years, racking up debt and not human capital only to drop out and struggle. I have also seen thousands of kids make an economically unwise choice of major, get their degree and then struggle mightily.

Not all "colleges" produce that big premium and more importantly, not all majors produce a big premium, as I discussed in an earlier post.

The revolution will be pre-announced

So people, it's that time of year again. You know, time for the Taliban spring offensive!

In case you had forgotten to mark your calendars or buy tickets, the group officially announced that the offensive will begin on May 12th!

Now personally I find the Taliban offensive 24/7/365, but you gotta admire their confidence, no?

Hey infidels: we are coming for you next Monday and we don't care if you know it or not!

Funniest part of the article though is this:

The Afghan government and Nato have not yet responded to the Taliban’s announcement.

What are they supposed to say? Thanks for the warning numbnutz? Don't bother, we give up? I know you are but what am I?


I love the phrase, Taliban spring offensive. Like rush week or fashion week. Also a good name for an indie band.

Unhedged economists are vulnerable economists

People the econ job market is pretty good. So it seems surprising that the University of Florida is defunding, and thus effectively killing, their PhD program in Econ as reported here.

But, it is perhaps not so mysterious when you consider the unhedged financial position of that department. As the article points out, it generates a lot of credit hours and tuition money from its classes, but most of those hours come in the Arts and Sciences College. Meanwhile, the Econ department is in the business school.

So its revenues accrue to one accounting unit while its costs are borne by another. No wonder the department has shrunk from 38 to 11 and there are plans to shrink it further still to 6!**

This is a classic case of unhedged risk, the academic equivalent of a firm who earns its revenues in Pesos but pays its costs in Dollars.

Note that the department was offered the option of moving to Arts & Sciences, "where, deans say, the Ph.D. program might have survived. The faculty voted not to move because, they say, the liberal-arts college has its own financial problems, and they were concerned about salaries, research budgets, and teaching loads."

My department at OU was in the B-school back in the day and faced a similar situation. They decided to move (or got kicked out, depending on who is telling the story) to A&S and our program lives to this day!


**Mrs. Angus says that if she was one of the 11, she'd be very careful about accepting a drink or any food from the B-school dean!

Hat tips to PrisonRodeo and RKG

Entropy is Everywhere

"O Lord, help me not to despise or oppose what I do not understand."


"Truth often suffers more by the heat of its defenders than the arguments of its opposers."

William Penn circa 1700


"They are cheap. They don't want to pay taxes because they have already raped this country and gotten everything out of it they possibly could," 

 "I'm a college professor. If I find out you're a closet racist, I'm coming after you. OK. This country still is full of closet racists."  

"I absolutely don't mean to offend you.  Even if you are a Republican, I don't mean to offend you in this class." 

William Penn circa 2013

Career Advice from Tyler Cowen:

LeBron says, study this!

Looks like 8 dissertations there at least.

Looks like all will be revealed on September 12th.

Hat tip to Tim Harford.

The new breed of business journalism still stinks!

I've mocked business journalists before for always having an authoritative ex-post "explanation" for why the market moved one way or another.

Now I meet a business journalist who simply berates the market for not doing what he wants it to.

People, meet Joe Weisenthal.

He's mad that the the stupid stupid market is uptight about the impending Fed taper and not sufficiently angry and worried about the Republican Party!

Here's his headline:

Wall Street Is So Obsessed With The Taper, It's Missing The Bigger Threat Coming Out Of Washington

Gee Joe, maybe the market is worried about how unwinding QE appears to be crashing markets across Asia? You know, those events you so insightfully report on by tweeting "BOOM!"?

Even F. Scott Sumner has kind of sort of figured out that there may be a problem.

And maybe the market isn't too concerned about the debt ceiling because we've been there and done that with little damage.

I for one welcome the debt fight because we can go back to the oh so productive "mint the coin" rants.  Krugman has gotten that bandwagon out of mothballs and back on the street already!

Must.Have.The.Precious

I don't want to cause no fuss ....

....but can I drive your magic desert bus?


People, meet "Desert Bus", designed by Penn & Teller and widely considered the worst video game ever made.

How so, you ask?

The drive from Tucson, Arizona, to Las Vegas, Nevada, takes approximately eight hours when travelling in a vehicle whose top speed is forty-five miles per hour. In Desert Bus, an unreleased video game from 1995 conceived by the American illusionists and entertainers Penn Jillette and Teller, players must complete that journey in real time. Finishing a single leg of the trip requires considerable stamina and concentration in the face of arch boredom: the vehicle constantly lists to the right, so players cannot take their hands off the virtual wheel; swerving from the road will cause the bus’s engine to stall, forcing the player to be towed back to the beginning. The game cannot be paused. The bus carries no virtual passengers to add human interest, and there is no traffic to negotiate. The only scenery is the odd sand-pocked rock or road sign. Players earn a single point for each eight-hour trip completed between the two cities, making a Desert Bus high score perhaps the most costly in gaming.

 The game was never released (somehow the company that owned it went bankrupt), but it is available today, and is used as the basis of a "desert bus for hope" charity that has raised over $400,000  by taking pledges from people for playing the game a certain length of time. 

If you want to play this game, you can.

I personally live a version of this game multiple times each year. The drive from Norman OK to Santa Fe NM is 8 hours (at around 80 mph) on a flat boring road. My 2003 Honda Element doesn't pull to the right, but the only way I can fend off the frequent spousal demands for bathroom breaks is to let her play the same cuts off a Jim Gaffigan CD. Over......and over.......and over............

I think this post was mistitled

Yikes: Check out this professor's guide called "How not to write a PhD Thesis".

I would have to say it should be called "How not to be a thesis advisor"

Check out this gem:

I make my postgraduates pay for such statements. If they offer a generalisation such as “scholars of the online environment argue that democracy follows participation”, I demand that they find at least 30 separate references to verify their claim. 


I guess this professor subscribes to the "two wrongs make a right" theory of mentoring.

The other thought I had from reading the list was that I'm glad I work in economics and not literary theory!

Sequester this!

The sequester doesn't actually cut federal spending, episode 113.

This one comes from the Congressional Budget Office (CBO):

(clic the pic for an even more savage image)

The full document is available here.

Outlays/Spending are recorded in the second line of the table, and yes this includes the sequester!

Federal Spending is expected to be flat between 2012 and 2013 at around $3.55 trillion before beginning to rise again. It rises each and every year of the sequester.

Spending hits $4,000,000,000,000 in 2016, $5,000,000,000,000 in 2020 and flirts with $6,000,000,000,000 in 2023

People, these are the "savage cuts" that are going to wreck havoc on the American economy. This is Paul Krugman's "doomsday machine".

They are not actual cuts at all, but simply a lowering of the planned growth in Federal spending.

If this level of "cutting" is not politically possible, then we are all doomed.

Please to calm down about the minimum wage

As we all know, President O has called for raising the Federal minimum wage to $9.00 an hour. This has caused many of my friends to get fairly upset and argue that this is a bad policy that will raise unemployment.

But....

(1) In truth, we don't really know what the minimum wage does to unemployment. Studies are mixed at best on that issue. It's just not that easy to isolate causal effects here.

(2) We just don't live in a principles of micro world where markets are perfectly competitive and firms have no market power / economic profits, so any wage above an individual's marginal product is impossible to sustain.  Besides the difficulty of identification, this is probably the main reason why it's so hard to find employment effects of minimum wage changes.

(3) A better reason to object to the minimum wage increase is that there are much more efficient ways to help the working poor. It doesn't seem to be well appreciated, but a substantial fraction of workers earning the minimum wage do NOT live in poor households. They are teenagers living at home or second workers in a household. If we wish to aid the working poor, increasing the earned income tax credit (EITC) is a much more effective approach.

(4) It is also good to remember that there are still a lot of jobs out there where the minimum wage does not apply (some classes of young worker, workers who earn tips).

(5)  This is a bit of a stretch but if the higher minimum wage did price someone out of the labor market, perhaps it would propel them into upgrading their human capital, with a GED or some vocational training or community college.

Finally, I'd like to ask my conservative friends to stop making the "if a higher minimum wage is good why stop at $9, why not make it $90 and everyone would be rich" argument.

It's just silly.

Obviously, we could find a minimum wage that would have serious employment effects. But it's not in the $9.00 neighborhood, and no one is proposing even a doubling of the current minimum wage.

If Reid & Pelosi (in 2014 after the Dems take back the House) propose a $20 minimum wage, then I'll join y'all on the ramparts.

Otherwise, let's consider giving it a rest. There are far far far worse policies that are actually in effect which deserve our attention and effort.

Questions entirely relevant for investing in 2013

You Stressed Bro?

Forbes magazine has declared that "University Professor" is the least stressful job in America, and university professors across America have been going nuts disputing it (check #RealForbesProfessors on Twitter or read this).

People, the simple fact is that there is no one set of experiences, working conditions, or stress levels that describe the job of "university professor".

If you are a "full-time adjunct", man that is a stressful life. Low pay, low status, no job security, little to no benefits. If I were to give someone in that situation advice, it would be to find another line of work.

At the other extreme, if you are a tenured professor at all but the most elite of institutions, that can be a very stress-free life. Or to put it another way, most stress that may come there is self imposed. For example, I find it stressful to have PhD. students on the job market. I am to a certain degree responsible for their placements and that weighs on me. However, I could always just not be a thesis advisor or greatly restrict the number of students I advise and avoid this "stress".

Prepping a new class, or mastering new research tools can be difficult and stressful. However, most tenured professors can avoid doing these things unless they at some level want to do them. Again, the stress involved is self imposed.

It's true that many tenured professors check out every spring and are not heard or seen again until the new academic year starts in the fall. They don't do research. They don't update their class notes. They work the system. Not only is there no stress, there's no sweat.

However, many other tenured professors work pretty hard year-round, continue to publish and continually work on their teaching. A lot of sweat, perhaps some stress, but most of it is self imposed. Getting significant pay raises, getting promoted, getting a chair, are post-tenure goals that often require continued productivity, but the basic fact is that you can hunker down and hibernate for the rest of your natural life with few overtly negative repercussions.

Assistant professors on tenure track have another different set of experiences. Sometimes they have no clear idea of what it will take to earn tenure. That can be stressful. Sometimes their colleagues or university bureaucrats will take advantage of them, pressuring them into spending time on things that won't pay off at tenure. That can be stressful too.

The job experiences of professors are way to diverse to be captured in a single description. The stress-level is extremely context dependent.

The Fetish of Manufacturing

Great column by John Kay at the FT.

Teaser:

Physical labour incorporated in manufactured goods is a cheap commodity in a globalised world. But the skills and capabilities that turn that labour into products of extraordinary complexity and sophistication are not. The iPhone is a manufactured product, but its value to the user is as a crystallisation of services.

The Button Down Mind of Matt Yglesias

Matt has an amazing ability to compartmentalize. He doesn't seem to notice or care that this tweet, awesome though it is, completely conflicts with his beliefs about how monetary policy can work:

"Given that nobody in congress wants to do the sequester, why not just not do it? Don't let the stupid debt deal force our hand!"

Here Matt recognizes that future laws can just be repealed if, when the time comes, they are no longer in the best interest of Congress.

However, he absolutely refuses to acknowledge that this exact same idea holds equally well for the Fed and monetary policy.

Suppose it's February of 2014, and unemployment has fallen to 6.2% (through reductions in the numerator, not the denominator). Suppose core inflation is now running around 4.5%. Then consider the following Fed scenario.

"Given that none of us on the FOMC want to still keep the policy rate at zero, why not just not do it? Don't let the stupid previous forward guidance force our hand!"

Works just as well, if not better, because the Fed's process for "just not doing it" is much simpler than is Congress's process.

No policymaker who enjoys discretion can credibly commit to undertaking a future action that will likely not be in their best interest to undertake when the time comes!

Why do you think the Super-committee failed? Part of the reason was they didn't fully believe the doomsday cuts that accompanied failure would actually happen.

Monetary policy is no different. To the extent that policy effects depend on people believing the Fed will act against its own interest in the future, the policy just won't be very effective.

Now this new package of monetary policy actions may help. I'm in favor of trying more stuff like buying MBS. But if you think the Fed will not tighten when the economy recovers, there's an upcoming sequester I'd like to bet you about.

"you didn't write that"

I want to highlight the two best pieces I've read on the Obama "you didn't build that" - gate.

The first  comes from Josh Barro over at Forbes.

The second comes from Carolina's own Kindred Winecoff.

Both are highly recommended.

People, what do you think about this issue?

Is it an out of context molehill made into a mountain, or a disturbing peek behind the curtain?

You know where to let me know.

Is the upcoming election holding the Fed back?

The US economy is going nowhere fast. Growth is low, unemployment is high and inflation (core and headline) are falling below 2%, re-kindling worries about deflation.

But the Fed is sitting pat. Sure they've done a lot in my view. Dropped rates to zero, promised to keep them there a while, pumped trillions of reserves into the system, ran a couple rounds of quantitative easing and don't forget about "operation twist". Nor do I have much confidence that, at this point in the proceedings, monetary policy is capable of a miracle cure for the economy.

But holy spumoli people, don't they have to do something? Sure they do; they're the Fed, dammit!

Bernanke can't keep saying that the Fed is not out of ammo but never fire the gun. The Wolfersons are KILLING him!

Could it be possible that the Fed does not want to be seen "goosing" the economy in the run-up to the Presidential election?

Might the Fed be guarding its vaunted "independence" by avoiding any actions that could be considered politically motivated?

Will we see QE3 or a higher inflation target on the first Wednesday in November?

I think this has to be a factor in the Fed's decision about the timing of further action. Things may worsen enough for them to feel they have to act no matter what, but I think they may be trying to muddle through with the status quo until after the election.

Tell me why I'm wrong in the comments.

Another sh*&^y jobs report

Wow. 80,000 net new jobs in June. The last three months (after revisions) now come out to 68,000 - 77,000 - 80,000 and that "trend" is not going to help anyone anytime soon. As Mungo noted, job growth needs to almost triple for unemployment to significantly fall.

People, an infrastructure bank is not going to fix this. QE III is not going to fix this. Retroactive NGDP level targeting is not going to fix this. Tax increases are not going to fix this.

This morning Twitter is again ablaze with calls for the Fed to "finally" act.

Remember this is a Fed that has already kept its policy rate at nearly zero for multiple years and promised to do so until late 2014. A Fed that has vastly expanded its balance sheet pumping trillions of new reserves into the system. A Fed that has already engaged in a couple rounds of quantitative easing.

I believe that at the core of the calls for the Fed to act is a desire for higher inflation. Sure, that's fine with me, lets give it a try. But I don't think running inflation at say 4% is going to be a magic bullet.

Are there still nominal contracts that haven't yet been expired, adjusted or abrogated 4 years into this mess?

Can inflation double and nominal interest rates stick at their current rates? Will the Fisher effect really be neutered?

Even if real rates become a bit negative, will firms really start to make massive investments in projects they would expect to be unprofitable when discounted at zero percent or one percent?

When people call for the Fed to finally act or accuse Bernanke of dereliction of duty ask them this question:  What can the Fed do that will fix this mess, how exactly would the policy action be implemented and by what mechanism would it effect the cure?

And if their answer is that merely adopting a new policy target will cause an expectational change that fixes the mess?

RUN!!!