For Fed Presidents, Economics Is Local

The Federal Reserve’s dissenters often are portrayed as ideologically motivated. They are said to oppose the Fed’s stimulus campaign because they are more worried about inflation, or less worried about unemployment, than their peers.

But it is fascinating to consider that the four Fed districts whose presidents have dissented most frequently are also the Fed districts that had the fastest economic growth between 2008 and 2011, the most recent year for which data is available.

“Specifically, the four fastest-growing districts since the crisis erupted have been Dallas, Minneapolis, Kansas City and Richmond,” the Citigroup economists Nathan Sheets and Robert A. Sockin wrote in a research note earlier this month. “Presidents from these four districts have cast a historically significant 28 dissents for tighter policy since the fall of 2007, the vast majority of such dissents.” (I first learned about the note from a blog post by Victoria McGrane of The Wall Street Journal.)

The Chicago Fed’s district, by contrast, had the weakest growth, and its president, Charles Evans, has twice dissented in favor of doing more. He played a key role in pushing the Fed to undertake the latest expansion of its stimulus campaign.

This linkage of region and outlook only goes so far, as the authors are quick to concede. The Boston Fed’s district ranked fifth in growth, but its president, Eric Rosengren, is a leading proponent of additional asset purchases. The Philadelphia Fed’s district ranked near the bottom of the growth table, but its president, Charles Plosser, has dissented over concerns about inflation. And the president of the Minneapolis Fed, Narayana Kocherlakota, has left the ranks of conservative dissenters to become the only Fed official who still wants to do more.

Still, the pattern is striking. The evidence suggests regional presiden! ts are seeing the national economy through the lens of local experience. Which, as it happens, is exactly what they are supposed to be doing. The Fed’s structure was meant to ensure that regional perspectives were heard. It seems to be working.

A Closer Look at College Completion Rates for Full-Time Students

In response to my post on Tuesday about college completion rates, a reader named Mark Elliott wrote in with a good point: that some of these students are enrolled part time, so maybe it’s not so unrealistic for them to take longer than six years to graduate.

Fair, although if you break down the figures by part-time/full-time status and school, I would argue that the completion rates are still not particularly impressive.

Source: National Student Clearinghouse Research Center.

For full-time students who originally enrolled at a four-year public institution â€" in other words, a school whose curriculum is designed for graduation within four years â€" one in five did not graduate within six years. For their counterparts at private four-year schools, about one in seven didn’t graduate within six years.

The record at two-year schools is much worse. For full-time students who originally enrolled at two-year schools, only about half had graduated with some degree within six years â€" that is, within three times the advertised schooling duration. (Of those who graduated within six years after enrolling at a two-year school, for most their first degree was a two-year degree. About 12 percent of those who started out at a two-year school received their first degree from a four-year school.)

As other readers observed, there are a lot of reasons that ! students are not finishing their programs on time, if they ever do. Academic struggles, debt and family responsibilities all play roles. The perceived opportunity cost of not graduating also matters, even though over the long run a college degree brings in a much higher return than the cost of the debt associated with it.

A new study, for example, finds that men are less willing to tolerate loan debt than women are. The authors argue that in the short term men without college degrees can find jobs that pay about the same salary as those for college graduates, which makes going directly to work and forgoing additional debt a very tempting proposition. The same short-term career options are generally less available for women. (Women who drop out of college are more likely to work in low-paying service jobs, while male dropout are more likely to find positions in higher-paying, male-dominated fields like manufacturing, construction and transportation.)

Labs for Testing Fiscal Policy Positions

Owen Zidar, a doctoral student in economics at the University of California, Berkeley, was previously a staff economist at the Council of Economic Advisers and, in 2008-9, an analyst at Bain Capital Ventures.

Many of the fiercest disagreements about fiscal policy today stem from disagreements about the causes of the slow recovery - whether government-induced uncertainty and excessive spending or low aggregate demand and insufficient government spending.

Because of the economic, political and social differences between the United States and other countries, or even the altered circumstances oday in comparison with past American recoveries, there may seem to be little evidence from which to project the likely outcomes of such policy choices. But as it happens, economists have increasingly been using regions within the United States as labs of democracy, measuring contrasting approaches in various states to determine both why the recovery is sluggish and what to do about it.

This regional analysis about different types of economic medicine and their effects on job creation points to some useful insights for policy makers and Congress as they struggle through another standoff on fiscal policy. The findings on the effects of government spending in hard economic times strongly suggest, for example, that cutting spending today will hurt growth and reduce job creation.

Here are a few instances in which this research approach has been fruitful.

UNCERTAINTY: In a study published this month, AtifMian of Princeton and Amir Sufi of the University of ! Chicago pointed out that if uncertainty about prospective government regulation and taxes is the primary reason for the sluggish recovery, then states where policy uncertainty is high should tend to have lower job growth. Using state-level data from National Federation of Independent Businesses, however, they found almost no relationship between job growth and the share of small businesses that cite regulation and taxes as their top concern. (Rather, they found a strong correlation between weak job growth and complaints of a lack of demand.) Their results do not provide much support for idea that apprehensiveness about regulation and taxation is holding back the recovery.

FISCAL RELIEF: Gabe Chodorow-Reich of the University of California, Berkeley, and three colleagues used similar methods toinvestigate whether fiscal relief during the Great Recession increased employment. In an article published last August in the American Economic Journal, they looked at how much faster employment grew in states that received more fiscal support (for Medicaid because of mechanical and predetermined reasons). The findings showed that focused fiscal relief during hard times can effectively stimulate employment. An important and timely implication of this finding is that the contrary policy of cutting spending during hard times can reduce employment. Nonpartisan private forecasters, like Macroadvisers, agree - in an analysis last week of the prospective impact of the mandatory spending cuts known as sequestration, it estimated that the spending cuts due to the sequester will result in 700,000 lost jobs by the end of next year.

SPENDING CUTS VS. TAX INCREASES: Many Republicans say that spending cuts ! from the ! sequester would have a less damaging effect on the economy than increasing taxes on upper-income earners. But some of my own recent research uses regional variation to show that this belief is at odds with the evidence. I find that modestly sized tax increases on upper-income taxpayers have a negligible to small impact on job creation. These magnitudes are much smaller than those of cutting government spending in hard times, which suggests that using modest upper-income tax increases to offset some required spending cuts would help cushion the impact of the sequester on the labor market.

Labs for Testing Fiscal Policy Positions

Owen Zidar, a doctoral student in economics at the University of California, Berkeley, was previously a staff economist at the Council of Economic Advisers and, in 2008-9, an analyst at Bain Capital Ventures.

Many of the fiercest disagreements about fiscal policy today stem from disagreements about the causes of the slow recovery - whether government-induced uncertainty and excessive spending or low aggregate demand and insufficient government spending.

Because of the economic, political and social differences between the United States and other countries, or even the altered circumstances oday in comparison with past American recoveries, there may seem to be little evidence from which to project the likely outcomes of such policy choices. But as it happens, economists have increasingly been using regions within the United States as labs of democracy, measuring contrasting approaches in various states to determine both why the recovery is sluggish and what to do about it.

This regional analysis about different types of economic medicine and their effects on job creation points to some useful insights for policy makers and Congress as they struggle through another standoff on fiscal policy. The findings on the effects of government spending in hard economic times strongly suggest, for example, that cutting spending today will hurt growth and reduce job creation.

Here are a few instances in which this research approach has been fruitful.

UNCERTAINTY: In a study published this month, AtifMian of Princeton and Amir Sufi of the University of ! Chicago pointed out that if uncertainty about prospective government regulation and taxes is the primary reason for the sluggish recovery, then states where policy uncertainty is high should tend to have lower job growth. Using state-level data from National Federation of Independent Businesses, however, they found almost no relationship between job growth and the share of small businesses that cite regulation and taxes as their top concern. (Rather, they found a strong correlation between weak job growth and complaints of a lack of demand.) Their results do not provide much support for idea that apprehensiveness about regulation and taxation is holding back the recovery.

FISCAL RELIEF: Gabe Chodorow-Reich of the University of California, Berkeley, and three colleagues used similar methods toinvestigate whether fiscal relief during the Great Recession increased employment. In an article published last August in the American Economic Journal, they looked at how much faster employment grew in states that received more fiscal support (for Medicaid because of mechanical and predetermined reasons). The findings showed that focused fiscal relief during hard times can effectively stimulate employment. An important and timely implication of this finding is that the contrary policy of cutting spending during hard times can reduce employment. Nonpartisan private forecasters, like Macroadvisers, agree - in an analysis last week of the prospective impact of the mandatory spending cuts known as sequestration, it estimated that the spending cuts due to the sequester will result in 700,000 lost jobs by the end of next year.

SPENDING CUTS VS. TAX INCREASES: Many Republicans say that spending cuts ! from the ! sequester would have a less damaging effect on the economy than increasing taxes on upper-income earners. But some of my own recent research uses regional variation to show that this belief is at odds with the evidence. I find that modestly sized tax increases on upper-income taxpayers have a negligible to small impact on job creation. These magnitudes are much smaller than those of cutting government spending in hard times, which suggests that using modest upper-income tax increases to offset some required spending cuts would help cushion the impact of the sequester on the labor market.

Hawaii Still the Happiest State, and Only Getting Happier

For the fourth year in a row, Gallup reports that Hawaii ranked No. 1 in its well-being index.

Also for the fourth year in a row, poor West Virginia came in last.

The Gallup-Healthways well-being metric, akin to happiness, is intended to measure the elements of “the good life.” In daily surveys of at least 1,000 people each time, Gallup asks respondents about their health, work satisfaction, whether they worried r smiled the previous day, and so on.

Hawaii actually got happier from 2011 to 2012, and West Virginia got a little worse off. The country as a whole has not changed much over the last five years even as the economy has improved.

As I reported a couple years ago, other traits besides geography correlate with higher levels of well-being, including being male, Asian, tall, a religious Jew, self-employed, higher-income, married and a parent. I actually found such a person, Alvin Wong, who says he is indeed very happy.

Bernanke’s Credibility on ‘Too Big to Fail’

Simon Johnson, former chief economist of the International Monetary Fund, is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

In testimony to the Senate Banking Committee this week, Ben Bernanke made a clear statement acknowledging that very large American banks receive implicit subsidies because the market believes they are too big to fail. This was one of the most forthright public statements on this topic by a top Fed official, and Mr. Bernanke should be congratulated for being honest and direct on this important point./p>

Unfortunately, when it came to discussing how to bring down this subsidy - and addressing the problem of “too big to fail” financial institutions - Mr. Bernanke’s answers were disappointing.

Mr. Bernanke was pressed hard on these topics by Senator Elizabeth Warren, a Massachusetts Democrat - you can watch a clip of their exchange. The concerns that Senator Warren expressed are shared by some across the aisle - including Senator David Vitter, a Louisiana Republican, who said at the hearing, “There is growing bipartisan concern across the whole political spectrum about the fact â€" I believe it’s a f! act â€" that ‘too big to fail’ is alive and well.”

At the hearing, Mr. Bernanke readily conceded that there is a “too big to fail” subsidy, in the form of cheaper funds than big banks would otherwise receive, because market participants think the government provides some downside protection, i.e., implicit insurance that limits losses. Even after the Dodd-Frank financial reform legislation, the extent of implicit creditor protection remains high.

Senator Warren cited a recent study by the staff at the International Monetary Fund, and Mr. Bernanke did not push back on the findings by those researchers. I recommend that you read the paper by Kenichi Ueda of the I.M.F. and Beatrice Weder di Mauro, a leading European academic. (I was previously director of the Research Department at the I.M.F., but I left that job in 2008 and had nothing to do with this paper.) Senator Warren also cited a Bloomberg View editorial on the issue, and a follow-up editorial; these put the subsidies around $83 billion. (The work by Bloomberg, for which I am also a commentator, has attracted some controversy. For an assessment I recommend a piece by Yves Smith and one by my M.I.T. colleague John E. Parsons; see also the latest in the Bloomberg View series, published Wednesday.)

There is a growing chorus of Wall Street “deniers,” claiming that big banks do not actually receive any funding advantage. This is a bizarre and indefensible position.

The G.A.O. is expected to report in detail on banking subsidies soon - we should thank Senator Sherrod Brown, an Ohio Democrat, and Senator Vitter for pushing them in this direction. (Senator Brown has been working long and hard on too-big-to-fail issues for years; now he is starting to get serious traction.) In the meantime, I also recommend “Too-Systemic-To-Fail: What Option Markets Imply About Sector-Wide Government Guarantees,” by Bryan Kelly, Hanno Lustig, and Stijn va Nieuwerburgh. Or if that is too technical, you could read one of Andrew G. Haldane’s brilliant speeches, like “The $100 Billion Question.” Mr. Haldane is a senior official at the Bank of England who speaks and writes with great clarity about both the scale of subsidies for global megabanks - and the distortion and damage this does to the rest of the economy.

And everyone on Wall Street must engage with “The Bankers’ New Clothes” by Anat Admati and Martin Hellwig. See Chapter 9 on the issue of bank subsidies (which are received by all banks, but to a greater degree when banks and bank holding companies are larger).

Unfortunately, Mr. Bernanke seems to be in denial about whether the problem of “too big to fail” is receding. This is about probabilities, and the market expectation is everything.

Mr. Bernanke’s vie! w, as sta! ted in the hearing, is that the market is wrong - there will be no bailouts. Market participants understand all too well that Mr. Bernanke’s promises are probably not time-consistent - meaning that he can say what he wants now, but in the next systemic financial crisis he would feel compelled by his legal mandate to provide an effective backstop to asset values and to many institutions.

For example, Mr. Bernanke cited the new liquidation powers granted under Dodd-Frank, which apply to bank holding companies. But the orderly resolution of any very large and complex cross-border financial institution is not really possible.

I am fully aware that the Federal Deposit Insurance Corporation and the Bank of England are trying to cooperate on this issue. This is a valiant effort but not one likely to succeed. In any big crisis, it is every national interest for itself.

The problems associated with cross-border failure would become more straightforward if the United States authorities would use teir powers under the “living wills” provision of Title I in Dodd-Frank to force big financial institutions to become simpler - and to provide much higher levels of capital by country of operation. There is no indication that we are moving in this direction. In fact, William C. Dudley - president of the New York Fed - last year gave a speech in which even he suggested that the living wills process has not yet proved effective (or, in my view, even meaningful).

And Mr. Dudley recently sent the opposite signal to the market from what Mr. Bernanke was trying to convey on Tuesday. In a speech on Feb. 1, he floated the idea that we should consider:

“…to expand the range of financial intermediation activity that i! s directl! y backstopped by the central bank’s lender of last resort function. This expanded range could be defined either in terms of access by the types of firms that are systemically important in market-based finance, or by types of activity or assets.”

To be fair, Mr. Dudley also asked if we should allow as much risk in our financial system as our current arrangements permit. And he did emphasize that if insurance is provided, it should be paid for (good luck getting Wall Street to pay a fair premium for any government backstop).

The broader philosophy at the New York Fed has long been that, in the event of a crisis, it is important to “foam the runway.” The expression is a favorite of Timothy F. Geithner, former head of the New York Fed, and it was one of his guiding principles when he became Treasury secretary - with the implication that the authorities should do everything possible to cushion the blow for banking executives, shareholders, and creditors in the event of a systemiccrisis (see Neil Barofsky’s book, “Bailout,” for context and details).

But such instincts long predate Mr. Geithner; the New York Fed has been in the bailout business for 100 years. You can trace its origins (and the Federal Reserve System) to the crisis of 1907.

Benjamin Strong arranged private bailouts on behalf of J.P. Morgan (the man) during the 1907 crisis. Mr. Strong went on to become the first president of the New York Fed and the dominant personality in the Federal Reserve System until his death in 1928.

And the modern Fed can do a great deal to help banks and their creditors at times of stress, including quantitative easing, which pushes up asset prices and therefore helps all balance sheets.

Market participants are wise not to take Mr. Bernanke at face value. And Senators Brown, Warren and Vitter are right to press Mr. Bernanke and his colleagues on these issues. Why should large b! anks get ! free insurance and implicit encouragement to become larger, take more risk and blow themselves up The true downside costs to the economy of a financial crisis are far in excess of $80 billion. Most reasonable estimates are that we lost, in a tangible sense, at least one year’s worth of gross domestic product.

The Federal Reserve should establish a transparent set of benchmarks, published regularly, that measure the funding subsidies received by very large financial institutions. This would help drive out the nonsense put forward by Wall Street deniers.

The Fed staff has done something like this before in regard to federal subsidies to Fannie Mae and Freddie Mac - in a 2003 paper that calculated the financing advantage to be around 40 basis points, and in a 204 speech by Alan Greenspan, then the Fed chairman.

Mr. Bernanke is promising that market perceptions will change and that the subsidies will fall. It hasn’t happened so far, nearly three years after Dodd-Frank. He should be held accountable, in public, for what happens to megabank subsidies going forward.

A Metaphor

I just received an (unsolicited) package of “Austerity”-brand wine, marketed as an inexpensive booze for our age of austerity. Appropriately, the wines were packed in shredded $1 bills.

Perhaps because of this austere packaging, one of the bottles arrived broken and empty:

Now I’m surrounded by broken glass and a rancid alcoholic smell. A metaphor for our times, indeed.

Putting a Number on Federal Education Spending

Jason Delisle is the director of the Federal Education Budget Project at the New America Foundation.

In his State of the Union address, President Obama proposed to expand access to preschool, but offered few details on how much money the federal government would contribute. When the White House eventually releases that figure, everyone will want to know how it stacks up against what the federal government already spends on education each year. The trouble is, that number is tough to pin down.

You might try to look it up. But beware: most tallies, even official government figures, are incomplete or inaccurate because of the way they treat student loans, refundable tax credits and education programs run by agencies other than the United States Department of Education. Other tallies go too far, lumping veterans’ education benefits andother programs into the mix.

Before explaining how to get to a good number, I’ll give you mine. The federal government spent $107.6 billion on education in fiscal year 2012. As a point of reference, that sum is about one-eighth as much as Social Security spending and about a fifth of Medicare spending. Most of our national education budget comes from state and local governments. But the $107.6 billion provides a dose of perspective for when federal policy makers pledge to “invest in education” and make education a “top priority.” Federal education spending accounts for just 3 percent of the $3.5 trillion the government spent in 2012.

The figure includes the annual appropriation for the entire Department of Education ($67.4 billion), so-called mandatory spending at the department ($16.3 billion), the school breakfast and lunch programs ($14.8 billion), the refundable portion of a higher edu! cation tax credit ($6.6 billion), the Head Start program ($8.0 billion) and the subsidy provided on all of the student loans the government will disburse in one year (which happened to be negative â€" -$5.5 billion â€" last year).

*Congressional Budget Office fair-value estimate for fiscal year 2013 cohort.
Sources: U.S. Department of Education, Department of Health and Human Services, U.S. Department of Agriculture, Presdent’s Fiscal Year 2013 Budget Request, Congressional Budget Office, New America Foundation Federal Education Budget Project

The annual appropriation for the Department of Education is an obvious figure to include, but as you can see, education spending includes a significant amount outside annual appropriations, much of which goes to support the Pell Grant program for college students from low-income families.

The school meal programs are less obvious components, but should be included. The programs help ensure that more than 31 million children each year do not go hungry at school, a prerequisite for good educational outcomes. Surely when a local district builds a new school it doesn’t consider the cafeteria an optional line item tangentially related to the school’s purpose. Feeding children during the school day is, in fact, integral to their education.

Similarly, the Head Start program, although housed in the Department of Health an! d Human S! ervices, is a national preschool program dedicated to early education. When people think of federal education spending, Head Start often comes to mind.

The federal government also provides a long list of tax benefits (i.e., credits, exemptions and deductions) to support education. They totaled $33.2 billion in 2012 by one count, but I’ve excluded them in the spending tally. Experts argue over whether tax benefits are part of federal spending policy or tax policy. No funds leave the Treasury to finance these programs; instead, funds fail to arrive as revenue in the first place. Others argue that the benefits are not different from spending because a $1,000 tax credit has the same bottom-line effect on the federal budget as a $1,000 grant.

A “refundable tax credit” is, however, a different matter. No one debates the fact that a refundable tax credit is government spending. The recipient owes notaxes but receives a refund check as if he did. He pays negative federal income taxes. Even the Treasury Department treats the payments as “outlays.” Last year the government spent $6.6 billion in refundable payments under the America Opportunity Tax Credit, which I include in my measure of education spending. Tax filers can claim up to $1,000 of the credit against expenses for higher education, even if they have no tax liability to offset.

Finally, the federal government disbursed $112 billion in student loans in 2012. Most of that will be paid back, with interest. So what does the government spend on the loans The government measures the cost of its loan programs by the subsidy that they provide to the borrower. Put simply, if the government lends at very favorable terms, then the borrower receives a subsidy equal to the discount the borrower received relative to a loan he or she otherwise could have taken out. Even though the benefit is spread over the life of the loan, this calculation ! treats th! e subsidy as one lump sum in the year that the loan is made.

By that measure, official figures show that the government’s student loan programs provide negative subsidies, which is to say, interest rates and fees are set high enough that the government makes money. But there is a big flaw with those figures.

The Congressional Budget Office and many economists argue that official figures don’t factor in all of the risks inherent in the loans. In response, the Congressional Budget Office publishes fair-value estimates to more fully reflect risk, and I use those figures in my tally of federal education spending. Note that even after the adjustment, the one year’s worth of loans still show a net gain to the government of $5.5 billion.

Excluded from my tally are any of the education enefits provided through the Department of Defense and Department of Veterans Affairs. Funds for those programs should be considered military and veterans’ spending rather than federal education spending. The benefits are part of the compensation packages that the government provides to support an all-volunteer military. Similarly, a housing allowance for a member of the military is not a federal housing assistance program. The benefits are in-kind costs associated with financing the military. If included, those programs would add more than $10 billion to the $107.6 billion total.

The $107.6 billion figure, despite excluding military and veterans’ programs, reflects a more comprehensive measure of federal education spending than most. Even so, it is probably surprising to many that education spending comes in at just 3 percent of the $3.5 trillion the federal government spent in 2012. It is hardly the ! figure th! at comes to mind when a lawmaker or the president speaks of investments and priorities.

In Massachusetts We Trust

Casey B. Mulligan is an economics professor at the University of Chicago. He is the author of “The Redistribution Recession: How Labor Market Distortions Contracted the Economy.”

From a labor-market perspective, the Affordable Care Act has little in common with the 2006 health reform law implemented in Massachusetts.

Some employers are complaining about the $2,000 per-employee-per-year penalty theywill pay beginning next year when the main provisions of the Affordable Care Act go into effect. The Congressional Budget Office also warned about the astonishing increase in marginal tax rates that middle-income Americans will experience, because the additional income earned by a family will be considered by the Internal Revenue Service as available for additional health insurance payments.

One might guess that large changes like these would shock the nation’s labor markets, especially the markets for less-skilled workers for whom $2,000 is a significant sum, not to mention the costs of health insurance.

The United States Department of Health and Human Services rejects these concerns, saying that the experience in Massachusetts suggests “that the health care law will improve the affordability and accessibility of health care without significantly affecting the labor market,” Th! e Washington Examiner reported. The Urban Institute also thinks the Massachusetts results will accurately model the national market.

If there were another country or region that had already tried the federal Affordable Care Act, we would learn a lot from the results, regardless of how much business people might be complaining. However, even though the Affordable Care Act and the Massachusetts law are both forms of “health reform,” and both seek to reduce the number of people without health insurance, they are quite different in terms of the labor-market incentives they create.

One of several unique features of the Massachusetts law is that it attempts to leverage the exclusion of employer-provided healt insurance from federal personal income tax for the purpose of getting insurance to the previously uninsured. The law encouraged employers to set up a “125 plan” that allows employees to use their own pretax dollars to buy health insurance.

Under a 125 plan, an employer need not pay for employee health insurance: the employer only assists a bit in the administration of the premium payments and withholding. The premium payments themselves come from employee paychecks. And the 125 plans are for employees (who may buy insurance on behalf of their families), not for people without jobs.

Even before the law was passed, Massachusetts employers typically offered some kind of health insurance plan to employees. The state law pushed a significant fraction of the remaining few to try the 125 approach by threatening to bill noncompliant employers for the uncompensated care their employees received around the state, a penalty known as the “free-rider surcharge.” So far, studies have found that enough employers took on 125 plans that ultimately no employers were liable for the surcharge.

In contrast, the federal Affordable Care Act attempts to nudge the national labor market away from the federal tax exclusion for employer-provided insurance by offering large subsidies only to people who are not part of an employer plan, including people who are not employed. The act also passes judgment on the affordability of employer plans and penalizes employers who offer “unaffordable” plans and then have employees who receive the subsidies. The federal penalties can reach $3,000 per employee and are not deductible from business taxes.

As long as they do something like the 15 plan to help their employees use the federal tax exclusion, Massachusetts employers are only nominally responsible for the “affordability” of health insurance or for failures of their employees to take advantage of the plan offered. The Massachusetts penalty is only $295 per employee-year (as far as I can tell, it is business tax-deductible, which makes the $295 less than one-tenth of the federal penalty); it can be avoided by an employer that makes nominal contributions to its employees’ premiums and induces enough employees to participate.

Perhaps it’s wise for the Affordable Care Act to push in a different direction than Massachusetts did, because many economists think the federal personal income tax exclusion promotes health care inefficiencies and diverts much-needed revenue from the United States ! Treasury.!

But that wisdom doesn’t change the fact that the federal law will put very different pressures on employers and employees than the Massachusetts law does. It would be unwise to assume that next year’s national labor market will follow the patterns that the labor market in Massachusetts experienced after 2006.

Bernanke: By Unemployment, Not So Good

As Catherine Rampell notes, Ben S. Bernanke pointed to the low inflation in his tenure in Senate testimony on Friday. Inflation has been lower during his tenure than during that of any postwar Fed chairman. But the Fed has a dual mandate:

“The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.”

That mandate was established in 1977, but we took all postwar Fed chairmen and ranked them by average unemployment rate during their tenure. Mr. Bernanke has the second-worst record:

Paul Volcker, 7.7%
Ben S. Bernanke, 7.3%
Arthur Burns, 6.3%
G. William iller, 5.9%
Alan Greenspan, 5.5%
Thomas McCabe, 5.0%
William McC. Martin, 4.6%

If his term ended now, the rate would also have gone up more in his tenure than during any previous chairman since World War II.

All this means very little in determining how good a job Mr. Bernanke has done. He, along with others, deserves credit for keeping the Great Recession from being even worse than it was. The weak world economy had a lot to do with keeping inflation low and unemployment high. He does not deserve credit for the first, or blame for the latter.

Does Bernanke Have the Best Inflation Record

In his testimony before the Senate Banking Committee on Tuesday, the Federal Reserve chairman, Ben S. Bernanke, boldly declared: “You called me a dove. Well, maybe in some respects I am, but on the other hand, my inflation record is the best of any Federal Reserve chairman in the postwar period, or at least one of the best, about 2 percent average inflation.” (To which the Twitterverse responded, #ohsnap.)

Does he really have the best inflation record Michael Feroli, an economist at JPMorgan Chase, crunched the numbers.

“If the definition of ‘best’ is 2 percent inflation, then it’s hard to question his record, as he is spot on that number,” Mr. Feroli wrote in a note to clients.

Other Fed chairmen have had lower inflation rates; Eugene Meyer’s tenure, from 1930 to 1933, averaged negative 9 percent inflation, whch is not exactly desirable. But Mr. Feroli calculates that no one in the postwar period had a lower inflation track record.

Here are his calculations for the average rate of inflation for Fed chairmen, using the headline Personal Consumption Expenditures Price Index for as far back as it goes (to 1947) and the headline Consumer Price Index in the years before then:

Chairman	Years	Average inflation rate (%)
Daniel R. Crissinger	1923-27	0.9
Roy A. Young	1927-30	-0.9
Eugene Meyer	1930-33	-9
Eugene Black	1933-34	1.3
Marriner Eccles	1934-48	3.6
Thomas McCabe	1948-51	2.6
William McChesney Martin Jr.	1951-70	2.2
Arthur F. Burns	1970-78	6.2
G. William Miller	1978-79	8.8
Paul Volcker	1979-87	5.3
Alan Greenspan	1987-2006	2.6
Ben S. Bernanke	2006-Present	2

Only Half of First-Time College Students Graduate in 6 Years

As we’ve covered here many times before, there is an abundance of evidence showing that going to college is worth it. But that’s really only true if you go to college and then graduate, and the United States is doing a terrible job of helping enrolled college students complete their educations.

A new report from the National Student Clearinghouse Research Center digs deeper into these graduation rates. It finds that of the 1.9 million students enrolled for the first time in all degree-granting institutions in fall 2006, just over half of them (54.1 percent) had graduated within six years. Another 16.1 percent were still enrolled in some sort of postsecondary program after six years, and 29.8 percent had dropped out altogether.

Source: National Student Clearinghouse Research Center.

As you can see, many of the students who ultimately graduated did so at a different institution than the one where they had originally enrolled. Of the whole cohort of 2006 matriculants, 42 percent graduated where they had first enrolled, and another 9.1 percent graduated from a place to which they had transferred.

The graduation and transfer rates varied greatly by state, and by the type of institution in which the student first enrolled. In Minnesota, for example, 27 percent of students who enrolled at four-year public institutions graduated at a different school within six years. That was the highest share for any state in this metric.

A small share of students (3.2 percent) who started out at four-year schools ended up ! receiving their first degree or certificate instead from a two-year school, with rates above 5 percent in Minnesota, North Dakota and Wisconsin. On the other hand, 9.4 percent of all students who initially enrolled at a two-year public institution received their first degree at a four-year school.

The report also looked at the state-level completion rates for students who are “traditional” (that is, age 24 and younger) versus “nontraditional” or “adult” (over age 24).

Not surprisingly, in almost every state, traditional-age students starting at public four-year schools had higher completion rates than nontraditional-age students. The smallest gap was in Arizona (1 percentage point, 68.4 percent of traditional students graduating versus 67.6 percent of adult students) and the highest was in Vermont (42 percentage points, 74.3 percent versus 32.2 percent).

For more on this release, check out the Chronicle of Higher Education’s neat interactive visualization of the study.

Mismeasurement of Federal Spending, Investment and Saving

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform - Why We Need It and What It Will Take.”

Much of the motivation for deficit reduction, a goal shared by policy makers across the political spectrum, is the belief that deficits consume the nation’s seed corn. That is, deficits represent negative saving. Because saving is presumed to be the key determinant of long-term real economic growth, deficits deplete the supply of saving and thus reduce growth.

There are many problems withthis analysis. One is that it assumes that all government spending is consumption. In fact, much of it consists of investment. According to the 2013 budget (see Section 21, Page 356), the federal government will invest $550 billion this year in physical capital (buildings, equipment), research and development and human capital (education). This includes grants to state and local governments for these purposes.

It is perfectly reasonable to finance long-lived capital projects with borrowing. Because the benefits will accrue over many years, it would be silly to treat things like highways as if they were consumed within a single year for budget purposes. Virtually all homeowners know this and borrow to buy homes. They understand that the flow of housing services they receive on an annual basis compensates for the interest that is paid.

Unfortunately, the federal budget is silly in this respect. I! t treats investment spending the same way every other budgetary item is treated - as if it were consumption with no long-lasting benefits for the nation.

An unfortunate consequence of this budgetary convention is that reducing federal investment is viewed as beneficial if it reduces the deficit. Moreover, it is often easier to cut investment spending than consumption, just as homeowners suffering from an income loss may find that deferring maintenance or planned improvements is the easiest way to conserve cash.

But just as deferred maintenance on our homes, like putting off repairs to the roof, can be very costly in the long run, reducing the value and hence the net worth of our principal asset, the same is true of government investment. Maintenance that is deferred too long may require assets that would have lasted many more years to be replaced prematurely at much higher cost.

According to the American Societ of Civil Engineers, the nation is already in a net deficit position as far as building and maintaining its basic public infrastructure. The society estimates that the added costs to people and businesses from this underinvestment will reduce the aggregate gross domestic product by $3 trillion over the next decade. The group recommends an additional $1.1 trillion of public investment through 2020 to what is currently planned, $157 billion per year.

Of course, the federal government is not going to spend that much more because it would make the goal of balancing the budget more difficult, based on the way deficits are calculated, making no allowance for capital outlays. Indeed, it will be difficult to prevent cuts in investment outlays that will reduce such spending below current projections.

One solution to this problem would be to have a capital budget that segregates government investment spending from consumption spending. Virtually all the states do this already. Conservatives who! routinel! y defend a balanced-budget amendment to the Constitution, on the grounds that the states must balance their budgets annually, appear to be unaware that such requirements apply only to operating budgets, excluding capital outlays.

If households were required to balance their budgets the way balanced-budget amendment supporters want the federal government to operate, they would almost never be able to buy homes or cars. Such outlays almost always exceed their annual incomes over and above consumption and would thus constitute deficit spending.

Of course, families could draw down savings to buy homes and cars. But that’s an option not available to the government because it has no savings, only a large debt. Treating it and private individuals the same way, as balanced-budget supporters propose, would require the entire national debt to be paid off and a surplus accumulated before it would be permitted to make new investmens in roads, bridges, buildings and other long-lived assets.

Of course, no one actually believes that. But it follows logically from arguments one often hears about why the government should balance its cash income and outlays annually, because that is supposedly how families and the states are said to operate. In fact, they don’t.

The distinction between capital spending and consumption spending also affects the way economists interpret the rate of saving. The standard measure, produced by the Commerce Department, calculates personal income and personal outlays. The difference between these two figures is assumed to be personal saving. Thus saving is not calculated directly, but is merely a residual between income and spending.

An alternative measure of saving that treats consumer durables, like autos, as investments would raise the measured rate of saving considerably. Alternatively, one could measure savi! ng direct! ly from financial institutions and other sources, as the Federal Reserve does (see Page 17). This yields a much higher measure of saving. In 2011, the last full year available, the Commerce Department estimated the personal saving rate at 4.2 percent, while the Fed put it at 10.3 percent.

Periodically, administrations have suggested creating a capital budget, both to give clearer picture of the economic effects of federal spending and to shield investments from budget cuts that should be limited to consumption outlays. The Reagan administration floated the idea in 1986, and the Clinton administration created a commission to study it.

A common criticism has always been that the definition of “capitl” is too slippery and could too easily become a loophole through which consumption spending could escape. The obvious answer is to assign some entity, like the Government Accountability Office, to audit investment spending and ensure that it truly represents investment and not consumption.

Many economists say they believe that the best thing the federal government can do to raise the long-term economic growth rate is increase infrastructure spending. It would have the double benefit of mobilizing idle resources, especially unemployed workers, while low interest rates permit capital projects to be financed very cheaply.

One main barrier to achieving this double benefit is the confusion between investment spending and consumption spending, which is distorted by the way the budget is presented and the way we calculate saving.

Memo to Europe: What About T-Bills

In my column on Friday, I looked at the proposed European transaction tax from a stock market perspective, and found it to be reasonable.

A friend who is a tax lawyer says â€" rightly â€" that I should have considered bonds, particularly short-term Treasury securities. He has a point.

The proposed tax would be applied to all trades in stocks, bonds and derivatives that were engaged in by European financial institutions, or in European markets. That encompasses about everything. For stocks and bonds that tax would be one-tenth of 1 percent of the value of the bond. There would be no tax when the bond is sold at issuance, but there would be a tax whenever it changes hands after that.

The trouble is that Treasury bills these days yield almost nothing. The current rate on one-month bills is a little under 0.1 percent. A tax of 0.1 percent would ipe out the yield entirely.

Treasury bills are prized for their liquidity, meaning that if you need cash you can sell one at any moment. Who would buy it in the secondary market with this tax When I asked one European official about that, he pointed out that there would be no tax on borrowings, so you could repo the T-bill without paying the tax.

The tax would not apply if American institutions traded the bills, but would if banks from the European countries planning to levy the tax chose to do so. That list includes France, Germany, Italy and Spain.

The tax would apply to any bank anywhere trading German government securities. Their yields are â€" believe it or not â€" a tad bit lower than American yields.

It seems to me that there will need to be some exceptions made.

Trading More and Sharing Nicely

Nancy Folbre is an economics professor at the University of Massachusetts, Amherst. She recently edited and contributed to “For Love and Money: Care Provision in the United States.“

The online economy may be helping us in ways that are hard to measure. The declining cost of individual transactions increases both trading and sharing among individuals, increasing the “poductivity” of consumption in ways that are underestimated by conventional indicators of economic output such as gross domestic product.

You can increase the value of things that you own but don’t use regularly in three ways:

- Sell them online through Craigslist, eBay or similar peer-to-peer sales, with more flexibility - and less time commitment - than the traditional yard sale. These exchanges increase the utilization rate of stuff that has already been produced, but they aren’t necessarily recorded as market transactions. Purchases of used goods probably displace some purchases of new goods that might otherwise take place, though they can also have the paradoxical effect of increasing the demand for new goods by increasing their long-term value. You might be more likely to buy a new commodity, for instance, if becomes easier to sell it, in turn, to someone else.

- Rent your goods to ! other people through the use of online interfaces that speed transactions, help address liability and insurance problems, and provide quick publicly available feedback on the behavior of both parties. You can rent space in your home to others through services like Airbnb, rent your car through services like Wheelz or drive people around for pay as in the Lyft model. You get money; your renters get a room or transportation at a substantially lower cost than they would pay a traditional company. A recent article in Forbes on peer-to-peer rentals asserts that they will grow 25 percent this year, “moving from an income boost in a stagnant wage market into a disruptive economic force.”

- Share your goods with other people, either by giving away things you no longer use through a ite like Freecycle or by participating in a reciprocity-based exchange like Couchsurfing, which connects travelers looking for places to stay with hosts interested in meeting new people. Snapgoods offers opportunities for both sharing and rental of consumer durables; NeighborGoods and Acts of Sharing match borrowers and lenders of shareable goods; and Yerdle provides a platform for giving and getting stuff from friends.

The reciprocity-based model of “collaborative consumption” may take longer to catch on than new technologies for buying and renting, but it could have bigger effects in the long run, because it represents an especially low-cost form of exchange and it helps develop social networks that offer ! some intr! insic benefits.

Anders Fremstad, a graduate student at the University of Massachusetts, Amherst who is planning dissertation research on this topic, has shared some of his ideas about this model with me. He observes that Couchsurfing has achieved an impressive scale, with more than 5.5 million registered Couchsurfers living in 97,000 cities across 207 countries. Compare that with the 4.9 million rooms offered by the lodging industry in the United States.

The service is successful partly because it provides an interesting social experience as well as a place to sleep. Previous empirical research shows a high level of reciprocity. Over 40 percent of people with two Couchsurfing experiences have been both surfers and hosts. Further, 12 to 18 percent of Couchsurfing stays are directly reciprocated, suggesting that they lead to new friendships.

It sems harder to promote sharing of consumer durables, as with the NeighborGoods model (which Mr. Fremstad plans to analyze). The value of services provided by lawnmowers, vacuum cleaners and food processors is smaller relative to the costs of organizing and taking part in a sharing transaction. On the other hand, such items often sit idle most of the time.

Many consumer durables are already shared among household members. Indeed, one reason it is cheaper to live with others than to live alone is the capacity to use household equipment, as well as space, more efficiently. But for a variety of reasons, average household size has shrunk by about half in the United States over the last 150 years, to about three people from six. This shift has increased privacy, but it has also raised living expenses.

Further, as more women have entered employment ! and ferti! lity has declined, the percentage of homes that remain largely empty during the day - along with the percentage of cars on the road with only one passenger - has almost certainly increased over time. Much of our consumption infrastructure now goes underused.

We know that the Internet has increased social networking, so it seems likely that it could encourage economic networking as well. If new sharing technologies could be combined with social scripts that make it easier for people to interact positively with others, the economy as a whole could become more productive and more environmentally sustainable.

Prof. Yorchai Benkler of Harvard Law School describes sharing as a new mode of production that is likely to grow in importance over time. Perhaps we should call it a new mode of consumption.

Whatever we call it, we should recognize its potential contributions to conomic efficiency.

Trading More and Sharing Nicely

Nancy Folbre is an economics professor at the University of Massachusetts, Amherst. She recently edited and contributed to “For Love and Money: Care Provision in the United States.“

The online economy may be helping us in ways that are hard to measure. The declining cost of individual transactions increases both trading and sharing among individuals, increasing the “poductivity” of consumption in ways that are underestimated by conventional indicators of economic output such as gross domestic product.

You can increase the value of things that you own but don’t use regularly in three ways:

- Sell them online through Craigslist, eBay or similar peer-to-peer sales, with more flexibility - and less time commitment - than the traditional yard sale. These exchanges increase the utilization rate of stuff that has already been produced, but they aren’t necessarily recorded as market transactions. Purchases of used goods probably displace some purchases of new goods that might otherwise take place, though they can also have the paradoxical effect of increasing the demand for new goods by increasing their long-term value. You might be more likely to buy a new commodity, for instance, if becomes easier to sell it, in turn, to someone else.

- Rent your goods to ! other people through the use of online interfaces that speed transactions, help address liability and insurance problems, and provide quick publicly available feedback on the behavior of both parties. You can rent space in your home to others through services like Airbnb, rent your car through services like Wheelz or drive people around for pay as in the Lyft model. You get money; your renters get a room or transportation at a substantially lower cost than they would pay a traditional company. A recent article in Forbes on peer-to-peer rentals asserts that they will grow 25 percent this year, “moving from an income boost in a stagnant wage market into a disruptive economic force.”

- Share your goods with other people, either by giving away things you no longer use through a ite like Freecycle or by participating in a reciprocity-based exchange like Couchsurfing, which connects travelers looking for places to stay with hosts interested in meeting new people. Snapgoods offers opportunities for both sharing and rental of consumer durables; NeighborGoods and Acts of Sharing match borrowers and lenders of shareable goods; and Yerdle provides a platform for giving and getting stuff from friends.

The reciprocity-based model of “collaborative consumption” may take longer to catch on than new technologies for buying and renting, but it could have bigger effects in the long run, because it represents an especially low-cost form of exchange and it helps develop social networks that offer ! some intr! insic benefits.

Anders Fremstad, a graduate student at the University of Massachusetts, Amherst who is planning dissertation research on this topic, has shared some of his ideas about this model with me. He observes that Couchsurfing has achieved an impressive scale, with more than 5.5 million registered Couchsurfers living in 97,000 cities across 207 countries. Compare that with the 4.9 million rooms offered by the lodging industry in the United States.

The service is successful partly because it provides an interesting social experience as well as a place to sleep. Previous empirical research shows a high level of reciprocity. Over 40 percent of people with two Couchsurfing experiences have been both surfers and hosts. Further, 12 to 18 percent of Couchsurfing stays are directly reciprocated, suggesting that they lead to new friendships.

It sems harder to promote sharing of consumer durables, as with the NeighborGoods model (which Mr. Fremstad plans to analyze). The value of services provided by lawnmowers, vacuum cleaners and food processors is smaller relative to the costs of organizing and taking part in a sharing transaction. On the other hand, such items often sit idle most of the time.

Many consumer durables are already shared among household members. Indeed, one reason it is cheaper to live with others than to live alone is the capacity to use household equipment, as well as space, more efficiently. But for a variety of reasons, average household size has shrunk by about half in the United States over the last 150 years, to about three people from six. This shift has increased privacy, but it has also raised living expenses.

Further, as more women have entered employment ! and ferti! lity has declined, the percentage of homes that remain largely empty during the day - along with the percentage of cars on the road with only one passenger - has almost certainly increased over time. Much of our consumption infrastructure now goes underused.

We know that the Internet has increased social networking, so it seems likely that it could encourage economic networking as well. If new sharing technologies could be combined with social scripts that make it easier for people to interact positively with others, the economy as a whole could become more productive and more environmentally sustainable.

Prof. Yorchai Benkler of Harvard Law School describes sharing as a new mode of production that is likely to grow in importance over time. Perhaps we should call it a new mode of consumption.

Whatever we call it, we should recognize its potential contributions to conomic efficiency.

Americans Want to Cut Spending. They Just Don’t Know What to Cut.

As the sequester looms, it’s worth noting that there’s no significant federal spending category that a majority of Americans wants to cut:

Survey was conducted among 1,504 adults. The margin of sampling error is plus or minus 3 percentage points.

That chart comes from a Pew Research Center poll conducted Feb. 13-18. In every category except for “aid to world’s needy,” more than half of the respondents wanted either to keep spending levels the same or to increase them. In the “aid to world’s needy” category, less than halfwanted to cut spending.

This is part of the problem with heeding any public concerns about getting the budget under control. According to Pew, 70 percent of Americans say it is essential for Washington to pass major legislation to reduce the federal budget deficit this year. But they can’t identify anything worth axing, and it’s not as if tax increases are so terribly popular, either.

By the way, Pew asked similar questions about what categories of government spending to cut in 2011. There has been little change since then, with the exception of attitudes toward military spending. In the most recent poll, 24 percent said the government should cut spending for the military, compared to 30 percent two years ago.

Note that the military would bear a major share of the sequestration-related spending cuts, and as a result much has been written in the last few months abou! t the scary consequences that such cuts would cause. So it’s possible public attitudes have shifted in response to greater coverage of this spending category.

Here Comes Earnings Puffery. So Buy the Stock.

The American International Group is about to start â€" for the first time in years â€" trying to make its financial numbers look really good. And that is a reason to buy the stock.

At least that is the opinion of Whitney Tilson, a hedge fund manager. He writes in a e-mail he sends out with investment opinions:

“For the first time in a while, Berkshire isn’t my largest position - AIG is (Berkshire is #2). The company reported solid earnings last night and the stock is up a bit today, but it remains crazy cheap. The key to understanding why this is such a great investment is rooted not in financial analysis, but rather management incentives. When the government was a shareholder (from late 2008 until just a few months ago), AIG’s pay practices were severely restricted. With the government now out, AI can adopt a normal (ridiculously lucrative) corporate incentive package, including a big stock option package for senior management, which I expect in the near future now that Q4 earnings have been reported. The options will be struck at whatever the market price is at the time so, unlike pretty much every other company, AIG’s management has had incentive to keep the stock price LOW by DEPRESSING earnings. It’s hard to prove, but I think AIG has been doing exactly this by being over-reserved, paying claims extra fast, and taking their time returning capital to shareholders.

Well, all this is about to change. Once the new compensation plan is in place, management’s incentives reverse and I think AIG’s results will be spring-loaded over the next year, which is why I think the stock will double in the next 1-2 years.”

Companies often do have a lot of discretion in reporting earnings, and nowhere is that more true than in the insurance business, where such things as re! serve estimates can vary widely even if one assumes complete good faith on the part of those making the estimates.

Mr. Tilson, it would appear, does not assume such good faith.

In late trading Friday, A.I.G. shares were at $38.28, up $1. If he is right, they will approach $80 by early 2015.

Here Comes Earnings Puffery. So Buy the Stock.

The American International Group is about to start â€" for the first time in years â€" trying to make its financial numbers look really good. And that is a reason to buy the stock.

At least that is the opinion of Whitney Tilson, a hedge fund manager. He writes in a e-mail he sends out with investment opinions:

“For the first time in a while, Berkshire isn’t my largest position - AIG is (Berkshire is #2). The company reported solid earnings last night and the stock is up a bit today, but it remains crazy cheap. The key to understanding why this is such a great investment is rooted not in financial analysis, but rather management incentives. When the government was a shareholder (from late 2008 until just a few months ago), AIG’s pay practices were severely restricted. With the government now out, AI can adopt a normal (ridiculously lucrative) corporate incentive package, including a big stock option package for senior management, which I expect in the near future now that Q4 earnings have been reported. The options will be struck at whatever the market price is at the time so, unlike pretty much every other company, AIG’s management has had incentive to keep the stock price LOW by DEPRESSING earnings. It’s hard to prove, but I think AIG has been doing exactly this by being over-reserved, paying claims extra fast, and taking their time returning capital to shareholders.

Well, all this is about to change. Once the new compensation plan is in place, management’s incentives reverse and I think AIG’s results will be spring-loaded over the next year, which is why I think the stock will double in the next 1-2 years.”

Companies often do have a lot of discretion in reporting earnings, and nowhere is that more true than in the insurance business, where such things as re! serve estimates can vary widely even if one assumes complete good faith on the part of those making the estimates.

Mr. Tilson, it would appear, does not assume such good faith.

In late trading Friday, A.I.G. shares were at $38.28, up $1. If he is right, they will approach $80 by early 2015.

Predicting a Crisis, Repeatedly

Economists are not very good at predicting crises, but the problem is generally an absence of warnings. It’s not easy to anticipate which low-probability catastrophe will end up happening.

That clearly won’t be the problem if the United States has a debt crisis. Here we have the opposite phenomenon: a possible crisis that economists love to predict.

The chart below, from a paper presented Friday morning at the U.S. Monetary Policy Forum in New York, shows one such warning. The green line, labeled CBO Projections, shows the relatively sanguine expectation of the Congressional Budget Office about the average interest rate that investors will demand on federal debt as the debt rises in coming decades.

The purple, upwardly mobile line shows the average interest rate that the authors project that investors will demand. Suffice it to say that such an outcome is unsustainable.

Sources: Haver Analytics, Congressional Budget Office and authors’ calculations Actual and projected 10-year bond yields under Congressional Budget Office assumptions and baseline simulations of the authors. From “Crunch Time: Fiscal Crises and the Role of Monetary Policy,” by David Greenlaw, James D. Hamilton, Peter Hooper and Frederic S. Mishkin.

The authors, two professors and two market economists, compared interest rates on the sovereign debt of 20 developed ! nations with the size of those debts in comparison to their gross domestic product, and with each nation’s current-account surpluses or deficits.

The headline conclusion: A one-percentage-point increase in debt as a share of gross domestic product increases 10-year borrowing costs by 4.5 basis points. That means an additional $450,000 in annual interest payments on every $1 billion in debt.

Secondly, a one-percentage-point increase in the current-account deficit raises borrowing costs by 18 basis points, or $1.8 million in interest on every $1 billion in debt.

Third, the penalties increase at higher debt levels, and the increases are not linear. In other words, debt levels can cross thresholds that lead investors to demand significantly higher interest rates, and once that kind of cycle begins, it can be very hard to escape.

Where is the line “Countries with debt above 80 percent of G.D.P. and persistent current-account deficits are vulnerable o a rapid fiscal deterioration as a result of these tipping-point dynamics,” write David Greenlaw, an economist at Morgan Stanley; James D. Hamilton, a professor at the University of California, San Diego; Peter Hooper, an economist at Deutsche Bank Securities; and Frederic S. Mishkin, a professor at Columbia University. The paper was presented at a conference convened by the University of Chicago Booth School of Business.

This is bad news for the United States because, as it happens, the national debt is 80 percent of annual economic ! output, t! he nation has a persistent current-account deficit, and it is planning to significantly increase the scale of borrowing, relative to output, in coming decades.

A host of other studies have reached similar conclusions. The estimated thresholds range from about 60 percent to 120 percent, but the bottom line is always the same: the federal debt cannot continue to grow relative to the size of the economy, or else investors will start demanding much higher interest rates and the United States will fall into crisis.

“We should be scared,” said Professor Mishkin, a former Federal Reserve governor. “Something needs to be done,” he added, although he acknowledged there was no sign of crisis just yet.

This is undoubtedly true in an absolute sense. But there are reasons to doubt the basic premise that the history of other nations can tell us how close we are to the cliff.

The problem with every attempt to look for debt limit thresholds has a name, and that name is Japan, a country that s able to borrow at one of the lowest average interest rates of any developed country despite a debt burden that is the largest, relative to its economic output, of any developed country. Nor is this an ephemeral anomaly. It has been true for years.

Japan’s debts total about 230 percent of its annual output, and so far, investors don’t mind.

In part, the authors address this in the traditional manner, by lopping off 5 percent of their 20-nation sample and simply declaring, “There is something very special about Japan.”

This is quite possibly true. But because there are not very many developed countries â€" in this study Japan is just one of 20 â€" it also might cause a reader to wonder about the universality of any rules derived from the remaining 19 cases, particularly since half of the remaining sample share a currency and an economic union. They are not exactly independent variables.

Furthermore, it’s quite possible that the United States also is something of a sp! ecial cas! e.

Which brings us to the more important acknowledgment, buried deep in the paper: 80 percent is not a magic number. It’s not even a particularly good summary of past experience. Rather, it’s an average of widely divergent experiences. And it doesn’t necessarily tell us much more than common sense: countries with more debt run greater risks of losing the confidence of investors, and have less flexibility to deal with new economic problems.

“We don’t know where the tipping point is,” Jerome H. Powell, a Federal Reserve governor, said in a response to the paper. But, he continued, “Wherever it is, we’re getting closer to it.”

Twelve Angry Central Bankers

Simon Johnson, former chief economist of the International Monetary Fund, is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

This does not happen very often: the 12 presidents of Federal Reserve Banks have spoken with great clarity and in public on a financial reform issue: the need to change the rules for money-market funds. They are explicitly taking on the biggest banks and their allies, including some recalcitrant officials.

While this will be a long haul - and these central bankers need a lot ofexternal support - we are starting to see some progress toward building a new, more skeptical understanding of how the financial system works.

As far as I have been able to determine, the comment letter submitted on Feb. 12 by the Federal Reserve Bank of Boston - on behalf of all the regional Fed banks - was literally the first time these 12 organizations have spoken with one public voice without involving the Fed’s Board of Governors.

The Federal Reserve System - 100 years old this year - has a curious legal structure. The system comprises a very powerful Board of Governors and the 12 regional banks, with each of the latter nominally owned by member banks in its region. (Before the 1930s, the Washington-based board was less important, and the New York Fed was arguably the most powerful element of the system; see Liaquat Ahamed’s brilliant Pulitzer Prize-winning history of that period, “Lords of Finance: The Bankers Who Broke the World.”)

Ben Bernanke, as chairman of the Board of Governors, sits on the Financial Stability Oversight Council, a new body created by the Dodd-Frank financial-reform legislation to watch for systemic risks. This council has called for comments regarding a proposal for the reform of money-market funds, and Mr. Bernanke can hardly comment on his own ideas.

But the regional Feds are separate legal entities, and they are allowed to comment, so we get some unusual insight into sensible official thinking.

The problem is straightforward. Money-market funds operate in some ways like banks - their liabilities are regarded by investors to be just like bank deposits when times are good. Bt when times are scary - as when Lehman Brothers failed in September 2008 - there can be rapid and destabilizing runs by investors out of the funds. What we saw in fall 2008 had the potential to become even more damaging than the bank runs that characterized moments of panic before the introduction of deposit insurance.

The industry proposes to deal with this by allowing temporary restrictions on withdrawals when the pressure is on. This is a terrible idea that will just encourage people to run sooner and faster.

Of course, what the industry really wants is an implicit government guarantee - downside insurance for funds, preferably without any insurance premium or effective regulation, which is the current status quo. In fall 2008, these funds got an explicit guarantee, and they know that similar support would be available in the future â€" unless a way is found to make this part of the system less prone to collapse and contagion.

In principle, the Securities and Exchange Commission! is in ch! arge of changing money-market fund rules. Unfortunately, the financial-sector lobby has fought this issue to a deadlock at the highest levels of the S.E.C. Fortunately, post-Dodd-Frank, the Financial Stability Oversight Council has the ability to push for stronger standards, which it can either use directly or by bringing enough pressure to move the S.E.C. forward.

On this issue, the 12 regional Fed presidents have their priorities exactly right. There are some nuances on the details, but the most important idea is to float the net asset value for money-market funds, i.e., eliminate the illusion that these investment products necessarily have a stable value. The value of your equity mutual funds goes up and down every day, in a way that you can measure and understand. The same is true for money-market funds, but this reality is currently masked from investors.

We need more transparency and honesty around the nature of these invetment products. This is good for consumers and absolutely essential for system stability. The Systemic Risk Council, led by Sheila Bair, the former chairwoman of the Federal Deposit Insurance Corporation, has also been pushing in this direction (I’m a member of this council).

You might also want equity buffers at money-market funds, and the Fed presidents bring this up as a possibility. It is encouraging to see these individuals push for higher equity (less debt relative to total assets); I favor much higher equity throughout the financial system. But I doubt the levels of equity under discussion will be enough to make a significant difference.

(In addition, the New York Fed is indicating, at least at the technical level, a preference for a minimum balance at risk. In this approach! , an inve! stor pulling money out of a fund would have some fraction set aside, perhaps five cents on the dollar, that would be in first-loss position for a period of 30 days or more - with the goal of discouraging runs. I see no sign that this idea is getting traction either among officials or more broadly.)

A generation ago, many banks viewed money-market funds with suspicion and even hostility, as they were competing for part of the same investor base. Now, however, the big bank-holding companies like money-market funds. Some banks manage money-market funds, and almost all of them rely on them for short-term cheap funding.

But this funding is cheap in part because of the implicit government guarantees provided to money-market funds. This encourages banks to rely on unstable funding, and we should be pushing in the other direction - toward longer-term, more stable sources of funding.

Expressing these concerns is not populism; the Fed is perhaps the least populist organization in the country. This i sensible economics with a clear and powerful rallying cry: Float the net asset value.

Health Care Aside, Fewer Jobs Than in 2000

Uwe Reinhardt had a fascinating post Friday about the buffer that health care spending has provided in the last few years. Health care has provided a steady contribution to gross domestic product even as other sectors cut back dramatically. He also notes that in the last two decades, it has created more jobs on a net basis than any other sector.

I’d like to point out one other important accomplishment of the much-maligned health care industry. Not only has it added more jobs than any other sector, but without it, there would actually be slightly fewer jobs in the United States today than in 2000.

In 2000, the economy had about 121 million non-health-care payroll jobs. Today, on a seasonally adjusted basis, there are 120 million non-health-care jobs. Meanwhile, the health care industry has added about 3.6 million jobs in that time frame, growing about 33 percent (14.5 million health care jobs tody versus 10.9 million in 2000).

Source: Bureau of Labor Statistics, via Haver Analytics. January 2013 figures are seasonally adjusted; 2000 figures are annual numbers.

There have been times since 2000 that the country has had more non-health-care jobs on net than it had at the turn of the millennium, but that has not been true since late 2008. Here’s a look at the longer-term monthly numbers. Note that the vertical axis does not go down to zero to better show the change:

Source: Bureau of Labor Statistics, via Haver Analytics. Note that the vertical axis does not start at zero, better showing the change over time.

Is it a good thing that the health care industry has been basically keeping the job market afloat That depends on your perspective.

Health care is a notoriously inefficient industry â€" in 2008, there were five people performing administrative support for every one doctor â€" and a lot of the jobs that have been created in recent years probably involve feeding that inefficiency.

Market pressures donâ™t force streamlining in health care the way they do in other industries. That’s partly because of the way Americans pay for health care and the way the government subsidizes health care consumption. It’s also partly because health care is relatively shielded from international competition, since many medical services are difficult to offshore. It’s hard to have someone draw your blood from India, for example.

In any case, given how weak the economy is right now, it seems unlikely that the health care industry is snatching many workers away from other industries where their skills would be put to more productive use.