Kevin Drum

Some Follow-Up Notes on Thomas Piketty's "Capital in the 21st Century"

| Thu Apr. 10, 2014 10:47 AM PDT

I'm a little reluctant to dive ever deeper into the weeds of Thomas Piketty's Capital in the 21st Century since I'm woefully unqualified for the task. But I have a couple of follow-up comments that might be worthwhile. These are things I alluded to in my post on Tuesday but didn't elaborate on.

First: As you know by now, Piketty's primary argument is that, historically, r > g. That is, the return on capital is higher than economic growth, which means that owners of capital see their incomes grow faster than ordinary laborers. Since the rich own most of the capital, this means that the incomes of the rich naturally increase faster than the non-rich unless proactive steps are taken to stop it.

That's fine. But take a look at the highlighted region in the chart on the right. The first set of points is for 1950-2012, a period in which r was about 0.5 percentage points less than g. The next set of points is a projection for 2012-2050, a period in which r is roughly 0.5 percentage points greater than g. This is not a big difference, especially considering the inherent noise in the data. Even if it's correct, it means the next 40 years will see only small changes in the relative returns to capital and labor.

The real action is in the period 2050-2100, and it's almost entirely dependent on Piketty's projection that g will plummet by two full percentage points. Now, this might be correct. But keep in mind what's going on here. Piketty's main conclusion is (a) based on a projection more than 50 years in the future, which is inherently unreliable, and (b) primarily a guess that economic growth will plummet. So everything boils down to this: will global economic growth plummet during the period 2050-2100? I'd like to suggest that this is a very different question from the one most people are addressing in their reviews of Piketty.

Second: Another thing I mentioned on Tuesday is that if economic growth slows and capital stocks increase, then the return on capital should go down. Piketty acknowledges this—though not in the chart above—but contends that r will fall less than g. In technical terms, this all depends on the elasticity of substitution between capital and labor. However, over at Tyler Cowen's blog, Matt Rognlie argues that Piketty is confusing gross and net production functions. If you account for depreciation, then the elasticity is such that r is likely to fall much faster than Piketty thinks as capital stocks increase and economic growth slows down.

I want to be clear that I can't assess this independently. But it sounds plausible, and Cowen thinks it sounds plausible too. I'd very much like to hear Piketty or someone else address this.

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Behind the Scenes on Those Enormous Medicare Billing Numbers

| Thu Apr. 10, 2014 8:53 AM PDT

Yesterday's data dump of how much Medicare pays doctors has generated predictable outrage about the vast amounts some of the top doctors bill. Obviously there are a lot of reasons for high billing rates, but Paul Waldman points to an interesting one: the way Medicare reimburses doctors for pharmaceuticals is partly to blame. The #1 Medicare biller on the list, for example, was a Florida ophthalmologist who prescribes Lucentis for macular degeneration instead of the cheaper Avastin. Since Medicare pays doctors a percentage of the cost of the drugs they use, he got $120 for each dose he administered instead of one or two dollars. That adds up fast. (More on Avastin vs. Lucentis here.)

In the LA Times today, a Newport Beach oncologist who's also near the top of the Medicare billing list offers this defense:

For his part, Nguyen, 39, said his Medicare payout is misleading because all five physicians at his oncology practice bill under his name, and much of that money overall is reimbursement for expensive chemotherapy drugs on which he says doctors make little or no money. Other high-volume doctors voiced similar complaints about the data.

Anyway, Waldman wonders why we do this:

If nothing else, this story should point us to one policy change we could make pretty easily: get rid of that six percent fee and just give doctors a flat fee for writing prescriptions. Make it $5, or $10, or any number that makes sense. There's no reason in the world that the fee should be tied to the price of the drug; all that does is give doctors an incentive to prescribe the most expensive medication they can. That wouldn't solve all of Medicare's problems, but it would be a start. Of course, the pharmaceutical lobby would pull out all the stops trying to keep that six percent fee in place. But that's no reason not to try.

The backstory here is that Medicare used to set the reimbursement rate for "physician-administered drugs" based on an average wholesale price set by manufacturers. This price was routinely gamed, so Congress switched to reimbursing doctors based on an average sales price formula that's supposed to reflect the actual price physicians pay for the drugs. Then they tacked on an extra 6 percent in order to compensate for storage, handling and other administrative costs.

I don't know if 6 percent is the right number, but the theory here is reasonable. If you have to carry an inventory of expensive drugs, you have to finance that inventory, and the financing cost depends on the value of the inventory. More expensive drugs cost more to finance.

However, this does motivate doctors to prescribe more expensive drugs, a practice that pharmaceutical companies are happy to encourage. I don't know how broadly this is an actual problem, but it certainly is in the case of Avastin vs. Lucentis, where the cost differential is upwards of 100x for two drugs that are equally effective. And the problem here is that Medicare is flatly forbidden from approving certain drugs but not others. As long as Lucentis works, Medicare has to pay for it. That's great news for Genentech, but not so great for the taxpayers footing the bill.

Second Look: Greece May Be Recovering, But Only Barely

| Thu Apr. 10, 2014 7:16 AM PDT

Yesterday I linked to a Hugo Dixon column arguing that Greece is, improbably, starting to recover. Ryan Cooper points to Greece's stubbornly high unemployment rate and begs to differ:

With unemployment still over 27 percent, I'd say let's hold off on talk of a recovery.

Indeed, I rather fear this could be the worst of all worlds. Moving off the Euro would have been awful, but at least held the prospect of returning to growth and full employment within a couple years (from a much lower base). By contrast, the bank Natixis recently estimated that, given very generous assumptions, it will take Spain (which is in similarly dire straits) 25 years to return to 2007-era employment. A nation can do a great deal of catch-up growth in that time.

Realistically, I'd guess this means that Spain, Greece, Italy, Portugal, Ireland, etc., will never recover fully, and instead we're witnessing the birth of a crummy, tattered Franco-German empire with a permanently depressed periphery.

Fair enough. I think it's worth pointing toward signs of progress, but it's certainly true that the eurozone's can-kicking response to its financial crisis has had the effect of enormously protracting the misery of the mostly southern debtor countries. Recovery may be starting, but even if it is, it's going to be a very, very long time before Greece is actually in anything approaching decent shape.

Update: What Do Critics Mean Who Say Obamacare "Isn't Liberal Enough"?

| Wed Apr. 9, 2014 11:38 AM PDT

I periodically drone on about the laziness of polls that ask a simple approve/disapprove question about Obamacare. The problem is that a lot of people say they disapprove because Obamacare isn't liberal enough. These are folks don't necessarily disapprove of the concept of national healthcare in general or Obamacare in particular, and shouldn't really be counted among right-wing opponents of the law.

A couple of weeks ago, a Kaiser poll gave us a slightly deeper glimpse into all this. They asked the disapprovers why they disapproved, and it was clear that some of them had lefty criticisms of the law, not conservative criticisms. But the evidence was still a bit fuzzy.

Today, Mark Blumenthal goes further. In a recent HuffPo poll, about 9 percent of the respondents said they opposed Obamacare because it wasn't liberal enough. Then, in a follow-up question, they were asked, "In your own words, what do you mean when you say the health care law is not liberal enough?"

The results are on the right. There's still some ambiguity here, but I'd classify several of the responses as likely left-wing criticisms. Adding up the percentages, I get 6 + 4 + 15 + 4 + 4 + 3 = 36 percent. That's a little less than half of those who had a response.

So, very roughly speaking, in future polls I'd guess that about half of the "not liberal enough" folks are basically supporters of Obamacare but want the law to go further. It might even be more than that, but it remains hard to parse the motivations behind all of these responses with precision. Is "too complex" a liberal or conservative criticism? How about "lack of choice"? Hard to say.

In any case, this adds some context to the whole debate about Obamacare critics who say it's "not liberal enough." It's also an object lesson against assuming too much ideological coherence from survey respondents. A larger survey with a bigger sample size and a little more structure to the questions would be welcome.

Can Anyone Win the 2016 Republican Nomination?

| Wed Apr. 9, 2014 9:41 AM PDT

Ben Smith pours cold water on the idea of Jeb Bush running for president:

The notion that Jeb Bush is going to be the Republican presidential nominee is a fantasy nourished by the people who used to run the Republican Party. Bush has been out of a game that changed radically during the 12 years(!) since he last ran for office. He missed the transformation of his brother from Republican savior to squish; the rise of the tea party; the molding of his peer Mitt Romney into a movement conservative; and the ascendancy of a new generation of politicians — Marco Rubio, Paul Ryan, Scott Walker, Ted Cruz, among them — who have been fully shaped by and trained in that new dynamic. Those men occasionally, carefully, respectfully break with the movement. Scorning today’s Republican Party is, by contrast, the core of Jeb’s political identity.

There's more, and Smith makes a good case without even bothering to mention Bush fatigue.

But I have to say that I'm mystified right now. In 2012, from the very start, I thought Mitt Romney would win the nomination. Basically, the whole contest boiled down to Mitt and the Seven Dwarves, and eventually I figured Mitt would stomp each dwarf and then, battered and bruised, win the nomination.

But this time around, it's just dwarves. Like Smith, I have a hard time seeing Jeb Bush making a serious run. Chris Christie still seems terminally damaged by Bridgegate, though I suppose that's still up in the air depending on what future investigations reveal. Beyond that, I guess Scott Walker is still a possibility—though, in the immortal words of Ann Widdecombe, it's always seemed as if there's a bit of the night about him. And Paul Ryan, of course, though it sure doesn't seem like he's seriously interested in running.

Beyond that, it's just the usual clown show of nutballs and C-list wannabes. You can make a great case for why none of them can possibly win. And yet, someone has to win. It's a mystery.

Guess What? Greece Is Finally Starting to Recover

| Wed Apr. 9, 2014 9:00 AM PDT

Apropos of nothing in particular, I want to highlight this column from Hugo Dixon that I found at Counterparties yesterday:

Greece is undergoing an astonishing financial rebound. Two years ago, the country looked like it was set for a messy default and exit from the euro. Now it is on the verge of returning to the bond market with the issue of 2 billion euros of five-year paper.

There are still political risks, and the real economy is only now starting to turn. But the financial recovery is impressive. The 10-year bond yield, which hit 30 percent after the debt restructuring of two years ago, is now 6.2 percent....The changed mood in the markets is mainly down to external factors: the European Central Bank’s promise to “do whatever it takes” to save the euro two years ago; and the more recent end of investors’ love affair with emerging markets, meaning the liquidity sloshing around the global economy has been hunting for bargains in other places such as Greece.

That said, the centre-right government of Antonis Samaras has surprised observers at home and abroad by its ability to continue with the fiscal and structural reforms started by his predecessors. The most important successes have been reform of the labour market, which has restored Greece’s competiveness, and the achievement last year of a “primary” budgetary surplus before interest payments.

I don't have anything to say about this, but once a narrative takes hold we sometimes don't realize it when things change. If you had asked me last week how Greece was doing, I would have answered, "Oh, they're still screwed." But apparently they're doing better. Not out of the woods yet, but doing better. Update your priors.

POSTSCRIPT: If this keeps up—and that's still a big if—it also might be a lesson in the virtue of kicking the can down the road. Back in 2012, lots of commenters, including me, believed that the eurozone had deep structural problems that couldn't be solved by running fire drills every six months or so and then hoping against hope that things would get better. But maybe they will! This probably still wasn't the best way of forging a recovery of the eurozone, but so far, it seems to have worked at least a little better than the pessimists imagined. Maybe sometimes kicking the can is a good idea after all.

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Here's Some Stunning and Unexpected Good News About Obamacare

| Wed Apr. 9, 2014 8:27 AM PDT

Today brings yet another take on Obamacare from Rand's latest survey of the health insurance market. Rand's sample size is fairly small, so there are large error bars associated with their numbers, but they also break them down in interesting ways. The number we've been tracking most closely in the other surveys on insurance is the number of uninsured who got coverage via Medicaid or the exchanges, which Rand displays in the top row of this table:

About 5 million previously uninsured people got coverage via Medicaid and the exchanges. This is slightly lower than other estimates, but only slightly. When you account for the March surge and the sub-26ers on their parents policies, you're probably back up to about 8 million. We'll have a better idea about this next month, but so far this is roughly consistent with other surveys we've seen.

But there's one stunning number in the Rand survey that we haven't seen before: the dramatic surge in people who have employer insurance (ESI). According to Rand, 8.2 million new people—7.2 million of them previously uninsured—have gotten employer insurance since mid-2013. Adrianna McIntyre is agog:

I can’t overstate how stunning this finding is if it’s true; CBO expected that ESI gains and losses would pretty much break even in 2014 and that employer coverage would decline modestly in future years.

If it’s correct, it was probably motivated multiple factors—I hate the word “synergy” on principle, but it comes to mind. The economy has been improving, so some of the previously unemployed have secured jobs with benefits. But CBO built in expectations about economic recovery, so I don’t think it’s quite right to try pinning all (or even most?) of the 8.2 million on that. The individual mandate, while weak in its first year, might be a stronger stick than we expected, nudging people to take their health benefits where they’d previously been opting out. Employers could be helping this move this trend along; the University of Michigan, for example, eliminated “opt out dollars” in 2014 (cash compensation for employees who declined coverage).

If this finding is confirmed, it's a genuine shocker. Although CBO projected that ESI would stay steady, there's been a lot of chatter about the likelihood of employers dropping coverage thanks to Obamacare. But that sure doesn't seem to have happened. So in addition to the usual sources of coverage—Medicaid, exchanges, sub-26ers—it looks like Obamacare has yet another big success story to tell, one that was almost completely unexpected.

For now, this should all be considered tentative. We'll have firmer numbers in April and May, once the March surge is fully accounted for and we know how many people have paid for coverage. But for now, it looks as if Obamacare is not merely hitting its target, but in a broadly unforeseen way, it's wildly exceeding it. This is terrific news.

Nobody Cares What You Think Unless You're Rich

| Tue Apr. 8, 2014 5:36 PM PDT

In a simple model of democratic politics, there are three basic drivers of political decisionmaking:

  • The collective opinion of average citizens
  • The collective opinion of the affluent
  • The lobbying of interest groups

But which of these really matter? Martin Gilens and Benjamin Page studied 1,779 policy outcomes over two decades and came to a pretty simple conclusion: the collective opinion of average citizens doesn't matter a whit:

When the preferences of interest groups and the affluent are held constant, it just doesn't matter what average folks think about a policy proposal. When average citizens are opposed, there's a 30 percent chance of passage. When average citizens are wildly in favor, there's still only a 30 percent chance of passage. Conversely, the odds of passage go from zero when most of the affluent are opposed to more than 50 percent when most of the affluent are in favor.

Interest group lobbying, it turns out, also has an effect on policymaking—but business interest groups matter a lot more than mass interest groups. This comes via John Sides, who has much more detail about the study here. But none of it should come as a surprise. We've seen plenty of results like this before.

Quote of the Day: How Do You Solve a Problem Like Obamacare?

| Tue Apr. 8, 2014 2:22 PM PDT

From a Republican congressional health aide who was "granted anonymity to speak candidly," on the difficulties of creating a Republican plan to replace Obamacare:

The problem with replace is that if you really want people to have these new benefits, it looks a hell of a lot like the Affordable Care Act. ... To make something like that work, you have to move in the direction of the ACA. You have to have a participating mechanism, you have to have a mechanism to fund it, you have to have a mechanism to fix parts of the market.

That's a problem, all right. If you actually want to cover people, you have to pay for it. End of story. Republicans are steadfastly not willing to pay for it, so they aren't going to cover anyone with whatever plan they dream up. No matter what kind of smoke and mirrors they throw up to disguise this, that's the bottom line. No money, no coverage.

Really, though, all this GOP aide is saying is that Obamacare is fundamentally a pretty conservative plan. Liberals nearly all prefer a simpler, cheaper, more comprehensive riff on single-payer of some kind. But that couldn't pass in 2009—even moderate Democrats wouldn't have supported it—so instead we had to cobble together a bunch of conservative ideas into a kind of Rube Goldberg edifice that was at least better than nothing. It only works moderately well, but that's because the conservative take on healthcare is fundamentally incoherent. The more conservative your health care plan, the worse it works.

So Republicans have a choice. They can:

  1. Introduce a more liberal plan that's cheaper and works better.
  2. Introduce an even more conservative plan that's more expensive and works even worse than Obamacare
  3. Toss out a few of the usual pet rocks and just pretend it's a plan.

My money is on Option 3.

My Kinda Sorta Non-Review of Thomas Piketty's "Capital in the 21st Century"

| Tue Apr. 8, 2014 10:51 AM PDT

I'm having a hard time finishing Thomas Piketty's Capital in the 21st Century. Is this because it's a long, dense tome? Not really, though that doesn't help. Is it because he has nothing interesting to say? Not at all. Capital presents a very provocative thesis. Nevertheless, I started it once, put it down, finally picked it up again, and still haven't finished it.

So what's the problem? It's pretty simple: Piketty's provocative thesis is extremely elementary and he makes it right in the introduction. Here it is in a nutshell:

Over the long run, ordinary labor income grows at about the same rate as the broader economy. That's about 2-3 percent per year these days. Capital, however, tends to produce real returns of 4-5 percent. This means that over the course of, say, 50 years, labor income will increase about 3x while capital stocks will increase about 9x. That in turn means that income from capital will also increase 9x. And since rich people have by far the bulk of all capital income, income inequality inevitably grows forever unless something stops it.

The shorthand for this is r > g. That is, r (the return on capital) is historically greater than g (economic growth), which means that rich people with capital will always see their incomes grow faster than ordinary wage slaves. The rest of the book is a lengthy succession of charts and tables demonstrating that, historically, r really is greater than g. Since I was pretty easily persuaded of this, I had a hard time slogging through all the details.

In any case, the historical data isn't really why anyone other than specialists cares about this book. After all, the world has been ticking along for centuries, and somehow the rich have not, in fact, accumulated 99.9 percent of the world's income despite more than a thousand years of r being greater than g. Why? The simple answer, I gather, is war. This is the great leveler. The rich get richer for a while, but then they lose it all during periods of war, and the cycle starts all over. That's what happened in the 20th century: The rich were obscenely wealthy early on, and then came World War I, the Great Depression, and World War II. That wiped out lots of wealth, and the postwar rebuilding era was one of those rare eras when g was actually greater than r. (See chart on right.) So labor did relatively well for a few decades. This ended in the 80s, when the old historical pattern reasserted itself.

This brings us to the question we really care about: Now that we've reverted to a more ordinary r > g world, will this continue? I started skipping through the book to find Piketty's answer, and I was disappointed at what I found. After some preliminary throat clearing to get clear on some details (the nature of private savings, what components should be counted in capital accounts, etc.), we get....nothing.

Basically, Piketty says that historically r has been greater than g, and there's no reason to think this won't be true in the future. That's really about it. Oh, he addresses some technical issues, like the fact that a glut of capital should reduce the return on capital, but basically that's his argument. In the past r has almost always been greater than g, and we'd be foolish to think that's likely to change.

Don't get me wrong: Piketty may be right. Hell, he probably is right. But while the details are of keen interest to specialists and practitioners, the gist of his argument is simply that the future will probably look like the past. That's certainly plausible, but I'm frankly having a hard time plowing through a ton of background material in support of such a simple thesis.

I'm not sure why I'm fessing up to all this. I'm really doing nothing except admitting that I'm not sure what everyone else sees that I don't. As a data-gathering exercise, this book is unquestionably a tour de force, and I'm truly not trying to slight Piketty's seminal achievement here. But as a layman's guide to the future (and it's explicitly written for a lay audience), Capital has little to say except that current trends will probably continue. It might be unreasonable to expect more, since obviously no one can predict the future, but I guess I expected more anyway. Is r > g really a monocausal explanation for the evolution of the entire world economy? Is it possible that r might decline for structural reasons in the future? Or that g might increase thanks to automation? Or that other factors might come into play? That seems at least worth addressing in some depth.

In any case, this is Piketty's story. Capital grows faster than labor income. Rich people have most of the capital. Therefore rich people get richer faster than ordinary wage earners and income inequality inexorably rises. If we don't like that, we'll have to do something about it. Piketty thinks the only answer is a global wealth tax, which he admits is a political nonstarter. Dean Baker has some other ideas here. Or maybe war will once again take care of things. Or maybe the rise of smart robots will make things even worse than Piketty ever imagined. I guess we'll all know in another 50 years or so.