Squeezing the 55-to-64 year olds

The Times reports that Defense Secretary Robert Gates is contemplating cuts to the military's Tricare medical insurance program, only reportedly for retirees who are under 65. The article states that fee hikes would not apply to soldiers on active duty (and presumably their families), nor to military retirees over age 65. That leaves an age range of about 55 to 64, maybe a little wider, given that retirees typically serve 20 years on active duty.

To my knowledge, Tricare for life, the over-65 piece, effectively provides a 100% subsidy of medical care by covering what Medicare does not. To be sure, working military retirees may be a group with greater means and thus more suitable candidates to shoulder the burden of fiscal adjustment. (Yes, you read that correctly; career soldiers typically retire from service and then obtain employment and receive a pension, although their earnings tend to lag those of equivalent nonveterans.)

Monetary policy here and abroad

With all the hullabaloo about the Fed's second round of quantitative easing or QE2 (which Bernanke argues is just monetary policy), recent actions by the People's Bank of China, that nation's central bank, offer some interesting insights into exchange rates and monetary policy.

The Times and the Journal both reported last week's 0.5 percentage point increase in the required reserve ratio for Chinese banks, from 17.5 to 18%, but the two reports offered different analytical perspectives. Both cited a domestic inflation rate of 4.4% in October over the previous year, above the Bank's target of 3%. But the Times report quoted arguments by banking analysts that raising reserve requirements was a way for the People's Bank to obtain more funds it could use to purchase foreign currencies. Tighter monetary policy would tend to appreciate the currency if interest rates rise, especially when the Fed is trying to lower long-term interest rates with its purchases of U.S. government bonds, but currency purchases could offset that.

For all the talk of an undervalued renminbi, it has been rising, at least prior to the crisis in 2008 and again since September.

Budgets, Taxes, and Spending, Oh My!

The award for the most self-referenced post goes to the Times, whose "Budget Puzzle: You Fix the Budget" online tool has captured a key element of recent media interest: trying to offer concrete ideas about fiscal policy rather than simple blanket statements. Republican Representative Paul Ryan of Wisconsin was one of the first to start talking about specifics, and a bipartisan fiscal commission has recently weighed in. Glenn Hubbard discusses it.

The Budget Puzzle is certainly nifty, but it doesn't do everything economists think is important. In particular, there's no behavioral or welfare response to any changes in taxes or spending. We'd like to know the costs of cutting spending, namely the lost welfare of recipients and market participants, as well as the benefit (the dollars not spent). Same goes for taxes, labor and capital supply, and growth.

Clickers for Classroom Critters

Today an article in the Times recounts the use of classroom clickers to engage students in large lectures. I particularly liked how students could foil their use as automatic attendance checks: just give it to your friend to bring in! But kidding aside, they seem like a useful tool to increase participation and learning. I gave Twitter a go this fall and it didn't take, probably because I didn't set up anything specific for students to use it for other than their own questions.

Brooks on psychology vs. rules in economics

Today David Brooks writes about psychology, economics, and to what extent we can formulate detailed policies that produced desired macroeconomic results. I think Brooks was talking more about fiscal policy, taxing and spending, as opposed to monetary policy, but his thesis about psychological factors mattering could also apply to the latter.

I think he feels that some of modern macroeconomics, in particular the part that thinks that government spending actually increases national income rather than perfectly crowding out private activities, leads the left-brain wing of the left to advocate such policies. But Brooks feels that the net result can be different because of psychology; people presumably fear higher debt and future taxes, or the uncertainty about them, and reduce or put off their current spending.

Brooks probably has a point about policymakers' poor understanding of this or their poor communication to voters about it, or some mixture of both of those. But like everything in an opinion column, it cuts all kinds of corners, and it caricatures modern and historical macroeconomics.

Keynes, whose writing provide the backbone behind the idea that public spending might be a good idea when the economy is down, was actually really big on such "animal spirits" being important for the macroeconomy. There are also plenty of neoclassical economists who feel that expectations are important, consumers are smart, and that many won't get fooled by spending or tax cuts. But a middle-of-the-road view held by many economists is that fiscal policy is a good idea to try in such hard times, if for no other reason than to offset the effects of budget cuts at the state and local level. The stimulus package seems not to have worked extremely well --- but it probably did work to some extent, especially when combined with the rescue of the financial sector, a great success --- so it would be worth trying something different, like more tax cuts rather than spending. Temporarily extending the Bush tax cuts seems like an attractive option.

The debate over monetary policy now is a little mystifying to me. The Fed is trying to increase the availability of credit any way it can, in order to get investment but especially consumption back on track, but banks and other financial institutions aren't really cooperating. They're hoarding credit, inflation is very low, and there are few signs it is on the rise. Arguably the bigger danger is deflation, which would raise the real costs of borrowing and reduce it even further.

Immigration and jobs

Tyler Cowen writes about immigration and its effect on domestic employment in a nice summary piece for the Times. He summarizes much recent work by Giovanni Peri at UC Davis, a solid researcher whom I met while at Berkeley in the 1990s.