It’s always fun to follow the Washington Post columnist on his expedition in economic confusion as he mangles one topic after another. Today we go with Samuelson to visit the claim that the Affordable Care Act (ACA) is a job killer.
Samuelson notes the evidence produced by the White House showing that there has been no rise in part-time employment as a result of the ACA. (CEPR produced a study confirming this claim. The share of workers putting in less than 30 hours a week was lower in the first half of 2013 than in 2012.) However he then turns to a study from the San Francisco Federal Reserve bank, which he says “fortifies my convictions:”
“It’s usually cited in the ACA’s favor, concluding that the law won’t erode full-time work much. The increase in part-time jobs “is likely to be small, on the order of a 1 to 2 percentage [points] or less.” But that few percentage points amounts to between 1.4 million and 2.8 million more part-time jobs. Not trivial.”
In fact, the study does not conclude that the ACA will increase part-time employment, rather it refers to another study that found this impact. That sudy examined the impact of an employer mandate in Hawaii. It found zero impact after the law had been in effect for more than a decade. The 1-2 percentage point increase in part-time employment was only evident more than 20 years after the employer mandate went into effect.
It’s also worth noting that the vast majority of part-time workers are employed part-time voluntarily. Even now more than two-thirds of part-time workers only want part-time employment. In more normal times this figure is over 80 percent. It is entirely possible that any rise in part-time employment over the next two decades as a result of the ACA will be filled mostly by workers who want to work part-time. This is especially likely to be true if part-time workers are able to get health care insurance as a result of the ACA.
It’s always fun to follow the Washington Post columnist on his expedition in economic confusion as he mangles one topic after another. Today we go with Samuelson to visit the claim that the Affordable Care Act (ACA) is a job killer.
Samuelson notes the evidence produced by the White House showing that there has been no rise in part-time employment as a result of the ACA. (CEPR produced a study confirming this claim. The share of workers putting in less than 30 hours a week was lower in the first half of 2013 than in 2012.) However he then turns to a study from the San Francisco Federal Reserve bank, which he says “fortifies my convictions:”
“It’s usually cited in the ACA’s favor, concluding that the law won’t erode full-time work much. The increase in part-time jobs “is likely to be small, on the order of a 1 to 2 percentage [points] or less.” But that few percentage points amounts to between 1.4 million and 2.8 million more part-time jobs. Not trivial.”
In fact, the study does not conclude that the ACA will increase part-time employment, rather it refers to another study that found this impact. That sudy examined the impact of an employer mandate in Hawaii. It found zero impact after the law had been in effect for more than a decade. The 1-2 percentage point increase in part-time employment was only evident more than 20 years after the employer mandate went into effect.
It’s also worth noting that the vast majority of part-time workers are employed part-time voluntarily. Even now more than two-thirds of part-time workers only want part-time employment. In more normal times this figure is over 80 percent. It is entirely possible that any rise in part-time employment over the next two decades as a result of the ACA will be filled mostly by workers who want to work part-time. This is especially likely to be true if part-time workers are able to get health care insurance as a result of the ACA.
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I try not to use BTP to carry on personal exchanges, but I can’t resist this one. I see that Nick Gwiazda takes issue with me in the International Business Times arguing that Alan Greenspan does not owe the United States and the world an apology for allowing the housing bubble to grow large enough that its collapse would destroy the economy.
Apparently, Mr. Gwiazda thinks that I am Monday morning quarterbacking on this one. That is 180 degrees at odds with reality. I was warning about the bubble from the summer of 2002 and yelling at the top of my lungs. I was also telling Alan Greenspan what he should do about it. Here’s a brief summary from a few weeks back.
The point here is that Greenspan had no excuse. It was easy to see the bubble for anyone with open eyes and easy to see that its inevitable collapse would be a disaster for the economy.
As an economist I think that we have to reward workers when they do their jobs well and sanction them when they perform poorly. Few workers have ever performed their job more poorly than Alan Greenspan. He indeed owes us a big apology and should stop wasting our time by trying to tell us that the dog ate his homework.
I try not to use BTP to carry on personal exchanges, but I can’t resist this one. I see that Nick Gwiazda takes issue with me in the International Business Times arguing that Alan Greenspan does not owe the United States and the world an apology for allowing the housing bubble to grow large enough that its collapse would destroy the economy.
Apparently, Mr. Gwiazda thinks that I am Monday morning quarterbacking on this one. That is 180 degrees at odds with reality. I was warning about the bubble from the summer of 2002 and yelling at the top of my lungs. I was also telling Alan Greenspan what he should do about it. Here’s a brief summary from a few weeks back.
The point here is that Greenspan had no excuse. It was easy to see the bubble for anyone with open eyes and easy to see that its inevitable collapse would be a disaster for the economy.
As an economist I think that we have to reward workers when they do their jobs well and sanction them when they perform poorly. Few workers have ever performed their job more poorly than Alan Greenspan. He indeed owes us a big apology and should stop wasting our time by trying to tell us that the dog ate his homework.
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It’s rare that people involved in public debates openly acknowledge that they were wrong and change their position. (I’m sure that I would if it ever happened.) For this reason David Crane deserves enormous credit for acknowledging in his Bloomberg column that pension funds should fully disclose the fees and returns from their alternative investments.
This acknowledgement came about as a result of an exchange with David Sirota. Sirota had criticized a number of public pension funds (especially Rhode Island’s pension fund) for turning over a substantial portion of their assets to hedge funds. The managers of these hedge funds charge high fees for managing pension assets, often taking 2 percent off the top and then a share of the earnings.
Crane argues that this arrangement benefits the pension funds because the hedge fund managers are able to outpace the market by enough to cover these fees and still leave the pensions coming out ahead. Sirota disputed this claim, but noted that we don’t have the information that would allow us to answer this question.
It was in this context that Crane acknowledged that most pension funds don’t disclose enough information for the public to be able to determine whether they are benefiting from their investments with hedge funds. There is no excuse for not making this information available to the public and it’s good to see that Crane agrees with this position.
It’s rare that people involved in public debates openly acknowledge that they were wrong and change their position. (I’m sure that I would if it ever happened.) For this reason David Crane deserves enormous credit for acknowledging in his Bloomberg column that pension funds should fully disclose the fees and returns from their alternative investments.
This acknowledgement came about as a result of an exchange with David Sirota. Sirota had criticized a number of public pension funds (especially Rhode Island’s pension fund) for turning over a substantial portion of their assets to hedge funds. The managers of these hedge funds charge high fees for managing pension assets, often taking 2 percent off the top and then a share of the earnings.
Crane argues that this arrangement benefits the pension funds because the hedge fund managers are able to outpace the market by enough to cover these fees and still leave the pensions coming out ahead. Sirota disputed this claim, but noted that we don’t have the information that would allow us to answer this question.
It was in this context that Crane acknowledged that most pension funds don’t disclose enough information for the public to be able to determine whether they are benefiting from their investments with hedge funds. There is no excuse for not making this information available to the public and it’s good to see that Crane agrees with this position.
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What put the suggestion in my mind was Tamara Keith’s comment on Morning Edition that the Democrats support “small” cuts to Social Security and Medicare as part of a small bargain with Republicans over the budget. The preferred cut to Social Security is to reduce the annual cost-of-living adjustment by roughly 0.3 percentage points annually. If the typical beneficiary collects benefits for twenty years this would amount to roughly a 3 percent reduction in benefits.
Social Security accounts for more than 90 percent of the income for 40 percent of seniors. It accounts for more than half of the income of 70 percent of seniors. As a result, this proposed cut would be a larger share of the income of the typical senior than the hit from the restoration of pre-Bush era tax rates on the typical wealthy person. Morning Edition’s reporters never described that tax increase as “small.”
It should have been a simple matter to save time in the piece and increase its accuracy to leave out the word “small” in referring to the cuts that President Obama and the Democratic leadership want to impose on Social Security and Medicare.
What put the suggestion in my mind was Tamara Keith’s comment on Morning Edition that the Democrats support “small” cuts to Social Security and Medicare as part of a small bargain with Republicans over the budget. The preferred cut to Social Security is to reduce the annual cost-of-living adjustment by roughly 0.3 percentage points annually. If the typical beneficiary collects benefits for twenty years this would amount to roughly a 3 percent reduction in benefits.
Social Security accounts for more than 90 percent of the income for 40 percent of seniors. It accounts for more than half of the income of 70 percent of seniors. As a result, this proposed cut would be a larger share of the income of the typical senior than the hit from the restoration of pre-Bush era tax rates on the typical wealthy person. Morning Edition’s reporters never described that tax increase as “small.”
It should have been a simple matter to save time in the piece and increase its accuracy to leave out the word “small” in referring to the cuts that President Obama and the Democratic leadership want to impose on Social Security and Medicare.
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The Washington Post joined Republicans in hyping the fact that many individual insurance policies are being cancelled with insurers telling people that the reason is the Affordable Care Act (ACA). The second paragraph comments on this fact:
“The notices [of plan cancellation] appear to contradict President Obama’s promise that despite the changes resulting from the law, Americans can keep their health insurance if they like it.”
It would have been useful to point out that the plans that were in effect as of the passage of the ACA were grandfathered. This means that any insurers that cancel plans that were in effect prior to 2010 are being misleading if they tell their customers that the cancellation was due to the ACA. It was not a mandate of the ACA that led to the cancellation of the plan, but rather a decision of the insurer based on market conditions.
This is almost certainly the case with one of the plans described in the article. It refers to a “special plan for the hardest to insure” run by Highmark Blue Shield of Pennsylvania. This plan, which the article says covers 40,000 people, is being cancelled.
Highmark Blue Shield likely decided to cancel this plan because its customers would almost certainly be able to buy cheaper insurance through the exchanges. The main point of the ACA is to create a system of insurance in which the “hardest to insure” can buy insurance at the same price as everyone else. In contrast, Highmark Blue Shield was undoubtedly charging them a considerable premium to cover their larger than normal expected health care costs. Contrary to the theme of the article, it is unlikely that many customers of the Highmark Blue Shield plan will be unhappy about losing the opportunity to pay more for their insurance as a result of the ACA.
The Washington Post joined Republicans in hyping the fact that many individual insurance policies are being cancelled with insurers telling people that the reason is the Affordable Care Act (ACA). The second paragraph comments on this fact:
“The notices [of plan cancellation] appear to contradict President Obama’s promise that despite the changes resulting from the law, Americans can keep their health insurance if they like it.”
It would have been useful to point out that the plans that were in effect as of the passage of the ACA were grandfathered. This means that any insurers that cancel plans that were in effect prior to 2010 are being misleading if they tell their customers that the cancellation was due to the ACA. It was not a mandate of the ACA that led to the cancellation of the plan, but rather a decision of the insurer based on market conditions.
This is almost certainly the case with one of the plans described in the article. It refers to a “special plan for the hardest to insure” run by Highmark Blue Shield of Pennsylvania. This plan, which the article says covers 40,000 people, is being cancelled.
Highmark Blue Shield likely decided to cancel this plan because its customers would almost certainly be able to buy cheaper insurance through the exchanges. The main point of the ACA is to create a system of insurance in which the “hardest to insure” can buy insurance at the same price as everyone else. In contrast, Highmark Blue Shield was undoubtedly charging them a considerable premium to cover their larger than normal expected health care costs. Contrary to the theme of the article, it is unlikely that many customers of the Highmark Blue Shield plan will be unhappy about losing the opportunity to pay more for their insurance as a result of the ACA.
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When Morning Edition had former Treasury Secretary Larry Summers on saying that we may not have to focus so much on reducing the deficit, it immediately followed up with a discussion from Wall Street Journal editor Mike Wessell, which told people that Summers position was not politically serious. In Washington we have to talk about reducing the deficit.
Apparently feeling the need to further refute the idea that the deficit is not a problem, Morning Edition invited Maya MacGuineas, the President of the business backed group Fix the Debt (correctly identified on the show) to explain why the deficit is such a big problem. In the course of her interview she dismissed Paul Krugman’s correct claim that she and her group have been wrong about every single prediction they have made since the crisis began. Most importantly, they have repeatedly asserted that interest rates would skyrocket because of the deficit.
She also wrongly asserted that the debt to GDP ratio is rising. The Congressional Budget Office numbers show that the debt to GDP ratio is falling. While it does reverse direction by the end of the decade, the latest projections show that the debt to GDP ratio will be lower in 2023 than it is today.
Source: Congressional Budget Office.
This piece might have caused listeners to be confused about the fact that tens of millions of people are needlessly unemployed, underemployed, or out of the work force altogether because of the efforts of deficit hawks to prevent the government from spending the money necessary to put people back to work. The deficit hawks’ efforts to keep the economy below its full employment level of output also has the effect of reducing wages of the bottom 50-80 percent of the workforce.
Note: links fixed.
When Morning Edition had former Treasury Secretary Larry Summers on saying that we may not have to focus so much on reducing the deficit, it immediately followed up with a discussion from Wall Street Journal editor Mike Wessell, which told people that Summers position was not politically serious. In Washington we have to talk about reducing the deficit.
Apparently feeling the need to further refute the idea that the deficit is not a problem, Morning Edition invited Maya MacGuineas, the President of the business backed group Fix the Debt (correctly identified on the show) to explain why the deficit is such a big problem. In the course of her interview she dismissed Paul Krugman’s correct claim that she and her group have been wrong about every single prediction they have made since the crisis began. Most importantly, they have repeatedly asserted that interest rates would skyrocket because of the deficit.
She also wrongly asserted that the debt to GDP ratio is rising. The Congressional Budget Office numbers show that the debt to GDP ratio is falling. While it does reverse direction by the end of the decade, the latest projections show that the debt to GDP ratio will be lower in 2023 than it is today.
Source: Congressional Budget Office.
This piece might have caused listeners to be confused about the fact that tens of millions of people are needlessly unemployed, underemployed, or out of the work force altogether because of the efforts of deficit hawks to prevent the government from spending the money necessary to put people back to work. The deficit hawks’ efforts to keep the economy below its full employment level of output also has the effect of reducing wages of the bottom 50-80 percent of the workforce.
Note: links fixed.
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If the Fed were to pursue a policy of deliberately promoting a higher rate of inflation, it is not necessarily the case that the higher inflation would precede a rise in wages, as suggested in Binyamin Appelbaum’s Economix post. The point of a higher inflation policy is to convince businesses that prices will be higher in the future than they would have thought otherwise. For example, if they expected 1.0 percent annual inflation, they would think that prices would be 5 percent higher in 5 years than they are today. If the Fed manages to convince them that inflation will average 2.0 percent, then they will think that prices will be 10 percent higher in 5 years. (I’ve ignored compounding for simplicity.)
This should not cause businesses to directly raise their prices. If they thought they could raise their prices, they presumably would have already done so. Rather, it would likely change their investment behavior. They know what it costs to invest in new machinery, research and development, new software, etc. If they think they will be able to sell the products that come from this new investment at a higher price in the future, then they will be likely to undertake more investment today.
This would increase investment in the economy and also the demand for labor. Businesses would also be prepared to pay higher wages to workers to carry through this investment. This would allow them to pull workers away from other firms, as well as hiring currently unemployed workers. If this led to upward pressure on wages, all firms would be seeing higher costs, which then lead to the higher prices that the Fed was trying to bring on. By this logic, higher inflation is the result of higher wages. Therefore, there is little basis for concern that wages on average will not keep pace with inflation.
Of course this will not apply to all workers. Some workers will not be in a position to ensure that their wages keep pace with inflation. These workers will be losers from this policy. This is unfortunate, but there are two points to keep in mind.
First, the reason some workers will not be a position to have wages keep pace with inflation is that there is little demand for their labor. In other words, these are workers who are already in a precarious position. A somewhat higher inflation rate (e.g. 3-4 percent rather than 1-2 percent) may cause their real wages to fall more rapidly than they would have otherwise, but they likely were on a downward path already.
The second point is that we don’t know how to carry through economic policies that don’t result in some people losing. For example, if we have a great new infrastructure project for high speed rail or fast Internet, then people will lose jobs in businesses that were associated with the old modes of transportation or Internet (e.g. restaurants and gas stations along the highway). In some cases, we opt not to think about the losers, but that is a political decision, not a result of having a policy that doesn’t produce losers.
We need safety net policies such as unemployment benefits that protect losers, but if a requirement of economic policy is that it have no losers, then we would have to give up on economic policy.
Addendum:
The folks worried about how inflation will leave most workers worse off need to figure out a theory of where the inflation is coming from. I gave a story where the expectation of higher future prices leads firms to increase investment, hiring, and wages, which could then make the expectation of higher inflation self-fulfilling. If we don’t see this additional hiring, investment, and wages, then it is difficult to see the process through the Fed can bring about a higher targeted rate of inflation.
Of course if inflation does comes through this channel, then we don’t have to worry about wages keeping up with inflation, higher wages will have caused the inflation. Again, not everyone’s wages will keep up, but welcome to the world. If increased direct hiring of workers led to a higher rate of inflation, then some workers wages will also not keep up. Should we therefore be fervent supporters of keeping high unemployment forever?
If the Fed were to pursue a policy of deliberately promoting a higher rate of inflation, it is not necessarily the case that the higher inflation would precede a rise in wages, as suggested in Binyamin Appelbaum’s Economix post. The point of a higher inflation policy is to convince businesses that prices will be higher in the future than they would have thought otherwise. For example, if they expected 1.0 percent annual inflation, they would think that prices would be 5 percent higher in 5 years than they are today. If the Fed manages to convince them that inflation will average 2.0 percent, then they will think that prices will be 10 percent higher in 5 years. (I’ve ignored compounding for simplicity.)
This should not cause businesses to directly raise their prices. If they thought they could raise their prices, they presumably would have already done so. Rather, it would likely change their investment behavior. They know what it costs to invest in new machinery, research and development, new software, etc. If they think they will be able to sell the products that come from this new investment at a higher price in the future, then they will be likely to undertake more investment today.
This would increase investment in the economy and also the demand for labor. Businesses would also be prepared to pay higher wages to workers to carry through this investment. This would allow them to pull workers away from other firms, as well as hiring currently unemployed workers. If this led to upward pressure on wages, all firms would be seeing higher costs, which then lead to the higher prices that the Fed was trying to bring on. By this logic, higher inflation is the result of higher wages. Therefore, there is little basis for concern that wages on average will not keep pace with inflation.
Of course this will not apply to all workers. Some workers will not be in a position to ensure that their wages keep pace with inflation. These workers will be losers from this policy. This is unfortunate, but there are two points to keep in mind.
First, the reason some workers will not be a position to have wages keep pace with inflation is that there is little demand for their labor. In other words, these are workers who are already in a precarious position. A somewhat higher inflation rate (e.g. 3-4 percent rather than 1-2 percent) may cause their real wages to fall more rapidly than they would have otherwise, but they likely were on a downward path already.
The second point is that we don’t know how to carry through economic policies that don’t result in some people losing. For example, if we have a great new infrastructure project for high speed rail or fast Internet, then people will lose jobs in businesses that were associated with the old modes of transportation or Internet (e.g. restaurants and gas stations along the highway). In some cases, we opt not to think about the losers, but that is a political decision, not a result of having a policy that doesn’t produce losers.
We need safety net policies such as unemployment benefits that protect losers, but if a requirement of economic policy is that it have no losers, then we would have to give up on economic policy.
Addendum:
The folks worried about how inflation will leave most workers worse off need to figure out a theory of where the inflation is coming from. I gave a story where the expectation of higher future prices leads firms to increase investment, hiring, and wages, which could then make the expectation of higher inflation self-fulfilling. If we don’t see this additional hiring, investment, and wages, then it is difficult to see the process through the Fed can bring about a higher targeted rate of inflation.
Of course if inflation does comes through this channel, then we don’t have to worry about wages keeping up with inflation, higher wages will have caused the inflation. Again, not everyone’s wages will keep up, but welcome to the world. If increased direct hiring of workers led to a higher rate of inflation, then some workers wages will also not keep up. Should we therefore be fervent supporters of keeping high unemployment forever?
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That’s what Neil Irwin tells us in his column today. Irwin says the Fed is divided:
“There has been a long-simmering battle within the central bank over this basic question: Should they still be focused all-out on fixing the economic damage wrought by the last crisis? Or should they worry more about risks building in the financial system that could contribute to a future crisis?”
The idea that the Fed should be worried about bubbles in the price of platinum or Twiiter stock is just silly. In a market economy people will always be making bets. Some will pay off and some won’t. The correct answer at the Fed to the prospect of some people making losing bets is “so what?”
The issue that the Fed should concern itself with is a bubble that actually moves the economy as the stock bubble did in the 1990s and the housing bubble did in the last decade. It wasn’t necessary to have complex computer programs and super-sophisticated economic knowledge to see the impact of these bubbles on the economy. Intro econ and third grade arithmetic were pretty much adequate for the job.
In both cases the wealth generated by the bubbles led consumption to soar and savings rates to plummet. In the former case, the ability to sell shares of stock in Garbage.com for billions of dollars led to a boom in investment by nonsense Internet based companies. In the latter case we got a clearly unsustainable construction boom. Both of these booms predictably collapsed when the bubbles burst.
There is no comparable story in the economy today as should be readily apparent to anyone who reads the data. The Fed’s hawks are looking to crack down on phantom bubbles and to keep millions of people out of work as the cost of their war.
Addendum:
As some folks have pointed out — the housing market was getting into worrying ground. My guess is that the interest rate hike spurred by Bernanke’s taper talk headed off that bubble. We will know as more data comes in over the next few months.
That’s what Neil Irwin tells us in his column today. Irwin says the Fed is divided:
“There has been a long-simmering battle within the central bank over this basic question: Should they still be focused all-out on fixing the economic damage wrought by the last crisis? Or should they worry more about risks building in the financial system that could contribute to a future crisis?”
The idea that the Fed should be worried about bubbles in the price of platinum or Twiiter stock is just silly. In a market economy people will always be making bets. Some will pay off and some won’t. The correct answer at the Fed to the prospect of some people making losing bets is “so what?”
The issue that the Fed should concern itself with is a bubble that actually moves the economy as the stock bubble did in the 1990s and the housing bubble did in the last decade. It wasn’t necessary to have complex computer programs and super-sophisticated economic knowledge to see the impact of these bubbles on the economy. Intro econ and third grade arithmetic were pretty much adequate for the job.
In both cases the wealth generated by the bubbles led consumption to soar and savings rates to plummet. In the former case, the ability to sell shares of stock in Garbage.com for billions of dollars led to a boom in investment by nonsense Internet based companies. In the latter case we got a clearly unsustainable construction boom. Both of these booms predictably collapsed when the bubbles burst.
There is no comparable story in the economy today as should be readily apparent to anyone who reads the data. The Fed’s hawks are looking to crack down on phantom bubbles and to keep millions of people out of work as the cost of their war.
Addendum:
As some folks have pointed out — the housing market was getting into worrying ground. My guess is that the interest rate hike spurred by Bernanke’s taper talk headed off that bubble. We will know as more data comes in over the next few months.
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If the economy were humming along at 3.0 percent growth and 4.0 percent unemployment it would be reasonable for economists and economics reporters to worry about strange and unlikely state of affairs with little consequence. But at a time when the economy is down almost 9 million jobs from its trend level, wages are going nowhere, and growth is not much above zero, worrying about the Fed losing money on its bond purchases is more than a bit bizarre. But apparently this is the concern that occupies the Los Angeles Times business section and apparently some members of Congress.
The basic idea is that if interest rates suddenly soar then the bonds held by the Fed will be worth less, so the Fed will take a loss on its bond holdings. If the losses are large enough and the Fed realizes its losses by selling its bonds, then it could actually be insolvent.
The idea that long-term bonds fall in value when interest rates rise is not exactly new. Some of us suggested taking advantage of this fact to get around the nutty debt cult that controls Washington these days.
But what would these mean for the Fed? First, we should ask under what circumstances would interest rates rise suddenly? Presumably this would be the result of a rapid recovery of the economy. If that happened, and we suddenly get back the 9 million jobs we lost, a shortfall at the Fed would be a pretty silly thing to worry about.
Alternatively, we get a sudden spike of interest rates because aliens dump their bonds in huge amounts, even though the economy is still weak. Guess what the Fed could do then? That’s right, if the economy is still weak, it can buy up those bonds and keep interest rates low and bond prices high. Are you scared yet?
Alright, but one of these days the economy will recover and the Fed will want to take reserves out of the system to prevent inflation. If it felt it had to sell off its bonds quickly, and then take a loss, it could face insolvency.
There are two points on this one. First, this is pure and simply an accounting issue. Congress could change the law and allow the Fed to have a negative balance. The consequence for the government and the economy would be precisely zero. The other possibility, for those who find the first solution to be too simple, would be to have the Fed slow the economy by raising bank reserve requirements. This would accomplish the same result. It is also a simple and old-fashioned mechanism.
So put the insolvency of the Fed off the list of things to worry about in your lifetime. Unfortunately we do have real world problems to deal with.
If the economy were humming along at 3.0 percent growth and 4.0 percent unemployment it would be reasonable for economists and economics reporters to worry about strange and unlikely state of affairs with little consequence. But at a time when the economy is down almost 9 million jobs from its trend level, wages are going nowhere, and growth is not much above zero, worrying about the Fed losing money on its bond purchases is more than a bit bizarre. But apparently this is the concern that occupies the Los Angeles Times business section and apparently some members of Congress.
The basic idea is that if interest rates suddenly soar then the bonds held by the Fed will be worth less, so the Fed will take a loss on its bond holdings. If the losses are large enough and the Fed realizes its losses by selling its bonds, then it could actually be insolvent.
The idea that long-term bonds fall in value when interest rates rise is not exactly new. Some of us suggested taking advantage of this fact to get around the nutty debt cult that controls Washington these days.
But what would these mean for the Fed? First, we should ask under what circumstances would interest rates rise suddenly? Presumably this would be the result of a rapid recovery of the economy. If that happened, and we suddenly get back the 9 million jobs we lost, a shortfall at the Fed would be a pretty silly thing to worry about.
Alternatively, we get a sudden spike of interest rates because aliens dump their bonds in huge amounts, even though the economy is still weak. Guess what the Fed could do then? That’s right, if the economy is still weak, it can buy up those bonds and keep interest rates low and bond prices high. Are you scared yet?
Alright, but one of these days the economy will recover and the Fed will want to take reserves out of the system to prevent inflation. If it felt it had to sell off its bonds quickly, and then take a loss, it could face insolvency.
There are two points on this one. First, this is pure and simply an accounting issue. Congress could change the law and allow the Fed to have a negative balance. The consequence for the government and the economy would be precisely zero. The other possibility, for those who find the first solution to be too simple, would be to have the Fed slow the economy by raising bank reserve requirements. This would accomplish the same result. It is also a simple and old-fashioned mechanism.
So put the insolvency of the Fed off the list of things to worry about in your lifetime. Unfortunately we do have real world problems to deal with.
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