March 29, 2016
The last issue of the NEP-DGE report has two interesting papers on the cost and financing of US healthcare. Instead of featuring just one paper, I decided to show both.
Aging and Health Financing in the US: A General Equilibrium Analysis
By Juergen Hung, Chung Tran and Matthew Chambers
We quantify the effects of population aging on the US healthcare system. Our analysis is based on a stochastic general equilibrium overlapping generations model of endogenous health accumulation calibrated to match pre-2010 U.S. data. We find that population aging not only leads to large increases in medical spending but also a large shift in the relative size of public vs. private insurance. Without the Affordable Care Act (ACA), aging itself leads to a 36.6 percent increase in health expenditures by 2060. The group based health insurance (GHI) market shrinks, while the individual based health insurance (IHI) market and Medicaid expand significantly. Additional funds equivalent to roughly 4 percent of GDP are required to finance Medicare in 2060 as the elderly dependency ratio increases. The introduction of the ACA increases the fraction of insured workers to 99 percent by 2060, compared to 81 percent without the ACA. This additional increase is mainly driven by the further expansion of Medicaid and the IHI market. Interestingly, the ACA reduces aggregate health care spending by enrolling uninsured workers into Medicaid which pays lower prices for medical services. Overall, the ACA adds to the fiscal cost of population aging mainly via the Medicare and Medicaid expansion.
Health-care reform or labor market reform? A quantitative analysis of the Affordable Care Act
By Makoto Nakajima and Didem Tuzemen
An equilibrium model with ﬁrm and worker heterogeneity is constructed to analyze labor market and welfare implications of the Patient Protection and Affordable Care Act (ACA). Our model implies a signficant reduction in the uninsured rate from 22.6 percent to 5.6 percent. The model predicts a moderate positive welfare gain from the ACA, due to redistribution of income through Health Insurance Subsidies at the Exchange as well as Medicaid expansion. About 2.1 million more part-time jobs are created under the ACA, in expense of 1.6 million full-time jobs, mainly because the link between full-time employment and health insurance is weakened. The model predicts a small negative effect on total hours worked (0.36%), partly because of the general equilibrium effect.
These two papers show that the simple solutions for healthcare that are thrown about are not nearly enough. Things are complicated, and despite all the aspects that these papers have considered, I am sure there are more that are important (issues about lack of competition and administrative burden come to mind).
March 25, 2016
By Marek Antosiewicz, Jan Witajewski-Baltvilks and Piotr Lewandowski
Environmental taxes constitute a crucial instrument aimed at reducing resource use through lower production losses, resource-leaner products and more resource-efficient production processes. In this paper we focus on material use and apply a multisector DSGE model to study two types of taxation: tax on material inputs used by industry, energy, construction and transport sectors, and tax on output of these sectors. We allow for endogenous adaption of resource saving technologies. We calibrate the model for the EU27 area using IO matrix. We consider taxation introduced from 2021 and simulate its impact until 2050. We compare the taxes along their ability to induce reduction in material use and raise revenue. We also consider the effect of spending this revenue on reduction of labour taxation. We find that input and output taxation create contrasting incentives and have opposite effects on resource efficiency. The material input tax induces investment in efficiency improving technology which in the long term results in GDP and employment by 15-20% higher in comparison to comparable output tax. We also find that using revenues to reduce taxes on labour has stronger beneficial effects for the input tax.
Interesting use of a DSGE model. Note that the input or output taxes a levied on the industry, energy, construction, and transportation sectors, that is, roughly the sectors using the most intensively physical resources. One could of course do better by taxing the resources one is worried about (say, carbon tax). That is probably also politically more feasible than taxing “manufacturing,” a sector that somehow seems to be worshiped above all others.
March 23, 2016
By Markus Kirchner and Rodrigo Tranamil
Most existing DSGE models used for monetary policy analysis and forecasting assume that the labor market always clears at a sticky nominal wage (à la Calvo) through variations along the intensive margin of labor supply (i.e. hours), with no role for the extensive margin (i.e. employment). The latter contrasts with research on the macroeconomics of labor markets that has emphasized the relevance of the extensive margin and employment fluctuations using search and matching theory. Against this background, in this paper we conduct a horse race of a labor market specification with Calvo wages versus a search and matching specification with endogenous separations in an otherwise standard New Keynesian small open economy model, estimated with Chilean data. We conclude that the search and matching specification “wins” by a wide margin as it significantly improves the model’s ability to explain and predict both labor market data and other macroeconomic variables.
A further nail in the coffin of the Calvo fairy. Which must be shut and hermetic by now.
March 19, 2016
By Enrico Mallucci
This paper examines how domestic holdings of government debt affect sovereign default risk and government debt management. I develop a dynamic stochastic general equilibrium model with both external and domestic debt that endogenously generates output contraction upon default. Domestic holdings of government debt weaken investors’ balance sheets and induce a contraction of credit and output upon default. I calibrate the model to the Argentinean economy and show that the model reproduces key empirical moments. Introducing domestic debt also yields relevant normative implications. While domestic debt is crucial to determining the risk of default, the efficient internal-external composition of debt cannot be achieved without government intervention. Pigouvian subsidies can restore efficiency.
Government debt owed to domestic or foreign creditors is not equal. Clearly, if there is a risk of default, you want that debt held by people that are not otherwise affected by the default. If debt were largely domestic, residents would lose not only an asset in their portfolio, but also an important collateral, which can further precipitate the economy into a crisis. You want thus to encourage external holding of the debt. Note that as domestic debt is typically more defaulted than external debt, this may mean that a higher proportion of external leads to less default, and thus lower interest rates.
March 15, 2016
By Javier Bianchi
We develop a quantitative equilibrium model of financial crises to assess the interaction between ex-post interventions in credit markets and the buildup of risk ex ante. During a systemic crisis, bailouts relax balance sheet constraints and mitigate the severity of the recession. Ex ante, the anticipation of such bailouts leads to an increase in risk-taking, making the economy more vulnerable to a financial crisis. We find that moral hazard effects are limited if bailouts are systemic and broad-based. If bailouts are idiosyncratic and targeted, however, this makes the economy significantly more exposed to financial crises.
This is a controversial and unfortunately too politicized subject: Is bailing out banks go or bad. As so often, the answer is “it depends.” Here, it depends on the type of bailout. Helping out an individual bank is more hurtful than helping them all. This is the result of the fact that systemic crises are much rarer than individual ones, and the the systemic crises influence little behavior. Individual crises are a direct consequence of bank choices, thus any targeted bailout will influence them.
February 25, 2016
By Sagiri Kitao
In an economy with aging demographics and a generous pay-as-you-go social security system established decades ago, reform to reduce benefits is inevitable unless there is a major increase in taxes. Often times, however, there is uncertainty about the timing and structure of reform. This paper explicitly models policy uncertainty associated with a social security system in an aging economy and quantifies economic and welfare effects of uncertainty as well as costs of delaying reform. Using the case of Japan, which faces the severest demographic and fiscal challenges, we show that uncertainty can significantly affect economic activities and welfare. Delaying reform or reducing its scope involves a sizeable welfare tradeoff across generations, in which middle to old-aged individuals gain the most at the cost of young and future generations.
Much has been written how policy uncertainty can have an impact of the economy, including on this blog. But as far as I can see, this uncertainty was pertaining to fiscal or monetary policy. The uncertainty this paper addresses, social security reform, is an order of magnitude more important because it implies bigger policy shifts that are perceived as permanent and have potential large impact on many people, in particular regarding labor supply decisions. And the uncertainty is potential larger, too, as policy makers tend to put off such politically dangerous reforms for many years.