Archive for June 16th, 2009

Inflation targeting framework completes 20 years

June 16, 2009

Inflation targeting framework (ITF) has completed its 20 years. It looks like a very new framework but has already completed 20 years.

It started in NZ in 1989 (New Zealand passed the legislation for inflation targeting in late 1989, with implementation from the beginning of 1990) At present 28 economies have adopted ITF last being Ghana in 2007.

Now, there are numerous  research papers weighing the +ves and -ves of ITF. This crisis has led to particularly sharp criticism of  ITF (Joe Stiglitz in particular. see in particular Yellen. She says ITs need to be revised upwards). The ITF Central Bankers though are united in their commitment to ITF. More is to come for sure.

Norges Bank (started best practice monetary policy) hosted a conferenceto review ITF’s 20 years. It has some great papers which tell you about evolution of ITF, experiences so far and challenges. A useful set of papers for Mon pol students.

If it was not this crisis, one would get to see more central banks hosting conferences,seminars to discuss the same.

Economics of Healthcare: new buzzword

June 16, 2009

I am suddenly seeing a big rush for research work and policy work on economics of healthcare.

Growth Commission has issued a full report on whether healthcare focus leads to better growth:

This book has been prepared for the Commission on Growth and Development to evaluate the state of knowledge on the relationship between health and economic growth. It does not pretend to provide all the answers, but does review the evidence as well as identify insights and policy levers to help countries pinpoint critical health investments that can enhance and strenghen national growth strategies.  It examines a variety of topics, including policy imperatives in assessing the benefits of health investments, the methodological challenges in measuring the link between health and economic growth at the macroeconomic leve, and the nature of the evidence on the types and timing of interventions that promote health, productivity, and earnings.

Council of Economic Advisers has prepared a reporton US healthcare with a surprise element. Unlike most reports which argue for an increase in investments in healthcare, this one suggests to reduce expenditure in this sector and make it more efficient:

The Council of Economic Advisers (CEA) has undertaken a comprehensive analysis of the economic impacts of health care reform. The report provides an overview of current economic impacts of health care in the United States and a forecast of where we are headed in the absence of reform; an analysis of inefficiencies and market failures in the current health care system; a discussion of the key components of health care reform; and an analysis of the economic effects of slowing health care cost growth and expanding coverage.

The findings in the report point to large economic impacts of genuine health care reform:

  • We estimate that slowing the annual growth rate of health care costs by 1.5 percentage points would increase real gross domestic product (GDP), relative to the no-reform baseline, by over 2 percent in 2020 and nearly 8 percent in 2030.
  • For a typical family of four, this implies that income in 2020 would be approximately $2,600 higher than it would have been without reform (in 2009 dollars), and that in 2030 it would be almost $10,000 higher. Under more conservative estimates of the reduction in the growth rate of health care costs, the income gains are smaller, but still substantial.
  • Slowing the growth rate of health care costs will prevent disastrous increases in the Federal budget deficit.
  • Slowing cost growth would lower the unemployment rate consistent with steady inflation by approximately one-quarter of a percentage point for a number of years. The beneficial impact on employment in the short and medium run (relative to the no-reform baseline) is estimated to be approximately 500,000 each year that the effect is felt.
  • Expanding health insurance coverage to the uninsured would increase net economic well-being by roughly $100 billion a year, which is roughly two-thirds of a percent of GDP.

This is quite interesting really. I have never read any govt proposing to lower the total costs of healthcare. Though reading on making it more efficient is pretty common. So what Obama wants to do is curtail total expenditure on healthcare and make whatever remaining more efficient and reachable to American public. Tyler Cowen has an article saying Obama should do something to control the rising expenditure under healthcare

Christy Romer is busy discussing this ambitious plan by Obama. Here is her speech where she says:

A former chair of the Council of Economic Advisers once described the job as playing economic pinball. Issues come flying at you from every direction. The Chair’s job is to respond quickly with good economic analysis. For the first several months that I was on the job, most of the balls flying at me were at least squarely in my comfort zone. Recession, fiscal stimulus, financial crises, and banking were all topics I had studied and felt I understood well.

But recently, the balls have been coming predominantly from less familiar territory. In particular, having made it through a macroeconomic-centered first one hundred days, the President declared health care reform his number one domestic priority. For me, as I would tell my children, this was a chance to grow. I was encouraged along by the head of the White House effort on health care, Nancy-Ann DeParle, who asked me to write a report explaining the economic effects of successful reform.

What followed was surely the most intense six weeks of my life. My staff and I threw ourselves into serious analysis and economic modeling. Our findings are summarized in a report that the CEA just issued last week. The results can perhaps be best summarized by describing how my own views have evolved. As a result of the study, I have gone from being a positive, but somewhat passive, supporter of health care reform to a passionate advocate. What I would like to do this afternoon is describe some of what we found.

Then Romer discusses the findings at Brookings with other experts (Like David Cutler, noted healthcare economist from Harvard). I have not read the testimony but should be very interesting.

Health care is such an important part of our economy and it’s such an important part of our fiscal outlook. I think I’ve heard from both Christina Romer who will be speaking shortly, and David Cutler one of our panelists, that if you’re an economist working on public policy, sooner or later you’re going to become a health economist and I think this event reinforces that. I think that’s true for Doug as well.

Then we have CBO which keep taking out reportson US healthcare, medicaid etc. The latest discusses the cost and benefit analysis of health insurance coverage which also makes a interesting reading. WP explainsthe crucial role CBO plays in the new Obama healthcare plan. Its report would suggest whether the CEA report is worth the salt or not.

And this is just US. Rising Healthcare and medical costs are always an issue for European economies. Healthcare economics looks a hot topic for research.


Via CBO Director blog I got to know of CBO and its work. It is pretty impressive and a high pressure job. It will be great if India also has its version of CBO office which reviews the various govt policies. There is CGA which does some evaluation but is too limited in scope. We need an allrounder providing easy to read reports for the general public. A place where you can evaluate govt policies from an independent and different lens.

Obama to announce Financial sector reforms yet again

June 16, 2009

Despite Larry Summer’s wish I don’t think this crisis will be remembered for the change Obama and his team is trying to make. It will mainly be remembered for how this crisis wiped out a sector (and its ivy league firms) which looked so promising otherwise, how it then became a huge economic crisis and how policymakers struggled to make proper policies. After a while off course all recessions end and so some policies will obviously take the credit.

Today, blogs  are discussing this new Washigton Post piece by Summers and Geithner (SG). The duo say:

This current financial crisis had many causes. It had its roots in the global imbalance in saving and consumption, in the widespread use of poorly understood financial instruments, in shortsightedness and excessive leverage at financial institutions. But it was also the product of basic failures in financial supervision and regulation.

Our framework for financial regulation is riddled with gaps, weaknesses and jurisdictional overlaps, and suffers from an outdated conception of financial risk. In recent years, the pace of innovation in the financial sector has outstripped the pace of regulatory modernization, leaving entire markets and market participants largely unregulated.

That is why, this week — at the president’s direction, and after months of consultation with Congress, regulators, business and consumer groups, academics and experts — the administration will put forward a plan to modernize financial regulation and supervision. The goal is to create a more stable regulatory regime that is flexible and effective; that is able to secure the benefits of financial innovation while guarding the system against its own excess.

On reading this, I was like again – Oh no not again? How many times do they want to come up with similar reform packages? We had Paulson’s Blueprint, followed by Geithner’s Financial Stability plan, then we keep having proposals linked to financial stability off and on and now this new plan. And it is not just about financial stability but things like executive compensations keep making a comeback. By keeping basic issues open-ended endlessly we are just getting nowhere.

Simon Johnson has already called the new Obama finance planas a plan which will help build the next crisis. He looks at the 5 proposals highlighted by S-G and says how each are just plain-talk. Unless , the proposed reform check the financial oligarchy, the system will only produce crisis more severe than this one.

Now let’s see what comes up on Wednesday.

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