The Federal Reserve Bank of Philadelphia just released the first report on a new survey they are conducting quarterly. Some highlights:
Respondents in January 2024 were more positive about their income prospects than respondents a year earlier; one-third believed their income will increase, compared with 29 percent in January 2023
Younger, more affluent, male, or non-White respondents report a more positive outlook, compared with one year prior. Those who are older than 55 or earn less than $40,000 report notably negative changes in their personal outlook, compared with respondents in the same demographic segments surveyed a year ago
When asked about their ability to pay all of their bills in full this month, 23.5 percent of respondents in January 2024 indicated that they could not pay some or any of their bills; this was 1.5 percentage points higher than in January 2023 (22.0 percent) and the highest rate in the last five quarters
Overall, I’d say it shows an economy with mixed performance, but leaning more positive than negative.
Source: My graph of LIFE Survey data
It will be interesting to see if this ends up taking a place in the set of Fed surveys that are always driving economic discussions, like the Survey of Consumer Finances and the Survey of Professional Forecasters. If they keep it up and start putting out some graphics to summarize it, I think it will. My quick impression (not yet having spoken to Fed people about it) is that it will be the “quick hit” version of the Survey of Consumer Finances. It asks a smaller set of questions on somewhat similar topics, but is released quickly after each quarter instead of slowly after each year. If they stick with the survey it will get more useful over time, as there is more of a baseline to compare to.
It seems like we finally have anti-obesity drugs that are effective and come without deal-breaking side effects: GLP-1 inhibitors like semaglutide (Wegovy). But they are currently priced over $10,000 per year for Americans. Should insurance cover them?
So far Medicare has decided to cover these drugs only to the extent that they treat diseases like diabetes (which these drugs were originally developed to treat) and heart disease (Wegovy reduces adverse cardiac events by 20% in overweight patients with heart disease). Just based on the diabetes coverage, Medicare was already spending $5 billion per year on these drugs in 2022, making semaglutide the 6th most expensive drug for Medicare with prescriptions still growing rapidly. The addition of other indications for specific diseases, like heart disease coverage added last month, is sure to expand this dramatically, especially if trials confirm other benefits.
But with almost 3/4 of Americans now officially overweight, weight loss makes for a bigger potential market than any specific disease. Medicare currently spends about 15k per beneficiary for all medical care; if they actually paid for an 11k/yr drug for 3/4 of their beneficiaries, their spending could rise to 23k per beneficiary per year. The effect on Medicare Part D, which covers prescription drugs and currently spends about 2.5k per beneficiary per year, would be even more dramatic, with spending quadrupling. This would blow a huge hole in the federal budget, where health insurance already accounts for about 1/4 of all spending (and Medicare 1/2 of that 1/4).
Of course, the reality would not be nearly that bad. Not all overweight people would want to take a weight loss drug, even if it were covered by insurance; the side effects are real. To the extent people do take the drugs, the reduction in obesity could lead to lower spending on treatments for things like heart attacks. Rebates can already reduce the cost of these drugs to be less than half of their list price, and Medicare may be able to negotiate even lower prices starting in 2027. Key patents will expire by 2033, after which generic competition should dramatically lower prices. Competition from other brand-name GLP-1 drugs could lower prices much sooner.
Patents always come with a tradeoff: they encourage innovation in the future, but mean high prices and under-use of patented goods today. The government does have one option for how to lower the marginal price of a drug without discouraging future innovation: just buy out the patent. This would likely cost hundreds of billions of dollars up front, but this could be recouped over time through lower spending, while bringing large health benefits because the drug would be much more widely used if it were sold at a price near its marginal cost of production.
Of course, for now supply of these medications is the bigger problem than the cost. Even with the current high prices and insurers tending not to cover drugs of weight loss alone, demand exceeds supply and shortages abound. The manufacturers are trying to ramp up production quickly to meet the large and growing demand, but this takes time. Insurers like Medicare covering weight loss drugs wouldn’t actually mean more people get the drugs in the short run, it would simply change who gets to use them.
But once production ramps up, I do expect that it will make sense for Medicare to cover weight loss drugs. The health benefits appear to be so large that the drugs are cost effective even at current prices, and prices are likely to fall substantially over time. The big restriction I suspect will still make sense is to require that patients be obese, rather than merely overweight, since being “merely” overweight (BMI 25-29) probably isn’t that bad for you:
Update 4/18/24: I started thinking about this question because of an interview request from Janet Nguyen at Marketplace. She has now published an excellent article on the subject that also includes quotes from John Cawley of Cornell, who knows a lot more than I do on the subject.
Daniel Kahneman, the psychologist who won a Nobel prize in economics and wrote the best-selling book “Thinking Fast and Slow“, died yesterday at age 90. Others will summarize his biography and the substance of his work, but I wanted to highlight two aspects of his style that I think fueled his unusual success among both the public and economists.
Daniel Kahneman’s new book amazes me. Not so much due to the content, though I’m sure that will blow your mind if you haven’t previously heard about it through studying behavioral economics or psychology or reading Less Wrong. It is the writing style: Kahneman is able to convey his message succinctly while making it seem intuitive and fascinating. Some academics can write tolerably well, but Kahneman seems to be on a level with those who write popularly for a living- the style of a Jonah Lehrer or Malcolm Gladwell, but no one can accuse the Nobel-prize-winning Kahneman of lacking substance.
This made me wonder if it is simply an unfair coincidence that Kahneman is great at both writing and research, or causation is at work here. True, in more abstract and mathematical fields great researchers do not seem especially likely to be great writers (Feynman aside). But to design and carry out great psychology experiments may require understanding the subject intuitively and through introspection. This kind of understanding- an intuitive understanding of everyday decision-making- may be naturally easier to share than other kinds of scientific knowledge, which use processes (say, math) or examine territories (say, subatomic particles) which are unfamiliar to most people. Kahneman says that he developed the ideas for most of his papers by talking with Amos Tversky on long walks. I suspect that this strategy leads to both good idea generation and a good, conversational writing style.
But how did a psychologist get economists to not just take his work seriously, but award him the top prize in our field? One key step was learning to speak the language of our field, or coauthor with people who do. For instance, summarizing the results of an experiment as showing indifference curves crossing where rationally they should not:
Finally, something that helped Kahneman appeal to all parties was that he avoided the potential trap of being the arrogant behavioral economist. Most economists have a natural tendency toward arrogance, kept somewhat in check by our belief that most people are fundamentally rational. Behavioral economists who think most people are irrational can be the most arrogant if they think they are the only sane one, and should therefore tell everyone else how to behave. But Kahneman avoided this by seeming to honestly believe he is just as subject to behavioral biases as everyone else.
I’ve always told my health economics students that Medicaid is both better and worse than all other insurance in the US for its enrollees.
Better, because its cost sharing is dramatically lower than typical private or Medicare plans. For instance, the maximum deductible for a Medicaid plan is $2.65. Not $2650 like you might see in a typical private plan, but two dollars and sixty five cents; and that is the maximum, many states simply set the deductible and copays to zero. Medicaid premiums are also typically set to zero. Medicaid is primarily taxpayer-financed insurance for those with low incomes, so it makes sense that it doesn’t charge its enrollees much.
But Medicaid is the worst insurance for finding care, because many providers don’t accept it. One recent survey of physicians found that 74% accept Medicaid, compared to 88% accepting Medicare and 96% accepting private insurance. I always thought these low acceptance rates were due to the low prices that Medicaid pays to providers. These low reimbursement rates are indeed part of the problem, but a new paper in the Quarterly Journal of Economics, “A Denial a Day Keeps the Doctor Away”, shows that Medicaid is also just hard to work with:
24% of Medicaid claims have payment denied for at least one service on doctors’ initial claim submission. Denials are much less frequent for Medicare (6.7%) and commercial insurance (4.1%)
Identifying off of physician movers and practices that span state boundaries, we find that physicians respond to billing problems by refusing to accept Medicaid patients in states with more severe billing hurdles. These hurdles are quantitatively just as important as payment rates for explaining variation in physicians’ willingness to treat Medicaid patients.
Of course, Medicaid is probably doing this for a reason- trying to save money (they are also trying to prevent fraud, but I have no reason to expect fraud attempts are any more common in Medicaid than other insurance, so I don’t think this can explain the 4-6x higher denial rate). This certainly wouldn’t be the only case where states tried to save money on Medicaid by introducing crazy rules hassling providers. You can of course argue that the state should simply spend more to benefit patients and providers, or spend less to benefit taxpayers. But the honest way to spend less is to officially cut provider payment rates or patient eligibility, rather than refusing to pay providers as advertised. In addition to being less honest, these administrative hassles also appear to be less efficient as a way to save money, probably because they cost providers time and annoyance as well as money:
We find that decreasing prices by 10%, while simultaneously reducing the denial probability by 20%, could hold Medicaid acceptance constant while saving an average of 10 per visit.
Medicaid is a joint state-federal program with enormous differences across states, and administrative hassle is no exception. For administrative hassle of providers, the worst states include Texas, Illinois, Pennsylvania, Georgia, North Dakota, and Wyoming:
Source: Figure 5 of A Denial a Day Keeps the Doctor Away, which notes: “The left column shows the mean estimated costs of incomplete payments (CIP) by state and payer. The right column shows the mean CIP as a share of visit value by state and payer. “
The Fed made two mistakes during the Great Recession of 2007-2009: being too slow and weak in their initial reaction to the financial crisis, and being too hurried in their attempts to return to a ‘normal’ policy stance. The first mistake turned what could have been a minor road bump into the worst recession in decades, and the second mistake meant it took a full decade from the start of the crisis in 2007 for unemployment to return to pre-crisis levels.
The rapid recovery from the Covid recession shows that the Fed learned from its first mistake in 2007. In 2020, the Fed acted quickly and decisively, so that despite the worst pandemic in a century the US experienced a recession that lasted only months, and it took unemployment barely 2 years to return to pre-Covid levels. But the Fed’s talk about cutting rates this year makes me worry they did not learn the second lesson. Despite all their talk of being “data driven”, I don’t see how a dispassionate look at current inflation, labor market, or financial data could lead them to be considering rate cuts; if anything it currently suggests rate hikes.
Why then is the Fed talking rate cuts? Of course you can dig and find a few data points to support cuts, but I think the driving factor is simply a feeling that interest rates are currently above “normal”. They are digging to find data points to support cuts because they want to return rates to “normal”, just as in the early to mid 2010’s they were digging for reasons to raise rates to “normal”. Rather than being consistently too hawkish or too dovish, they are consistently too eager to return rates to “normal” when circumstances are still abnormal.
This is not simply out of a social and political desire to avoid appearing “weird”, though that is definitely a factor. There is also a long academic tradition of measuring the stance of monetary policy by comparing current interest rates to a neutral, “natural” rate of interest, r*. But this tradition has problems. The “natural” rate of interest is always changing, and at any given time we can’t really know for sure what it is. The current Fed Funds rate may be higher than it has been in recent years, but that doesn’t necessarily mean it is above the current natural rate of interest; the natural rate itself could have risen too. This is why interest rates aren’t a great way to measure the stance of monetary policy. At times Chair Powell himself has made the same point, saying that trying to set policy by comparing to the “natural” rate of interest r* is like “navigating by the stars under cloudy skies”.
Lacking such celestial guidance, I can only hope the Fed will make good on their promise to be data-driven and navigate by the guideposts they can see around them: measures like current inflation and unemployment, or market-based forecasts of such measures.
Everyone else keeps asking when the Fed will cut rates, and yesterday Chair Powell said they will likely cut this year. Either they are all crazy or I am, because almost every indicator I see indicates we are still above the Fed’s inflation target of 2% and are likely to remain there without some change in policy. Ideally that change would be a tightening of fiscal policy, but since there’s no way Congress substantially cuts the deficit this year, responsibility falls to the Federal Reserve.
Lets start with the direct measures of inflation: CPI is up 3.1% from a year ago. The Fed’s preferred measure, PCE, is up 2.4% from a year ago. Core PCE, which is more predictive of where inflation will be going forward, is up 2.8% over the past year. The TIPS spread indicates 2.4% annualized inflation over the next 5 years. The Fed’s own projections say that PCE and Core PCE won’t be back to 2.0% until 2026.
The labor market remains quite tight: the unemployment rate is 3.7%, payroll growth is strong (353,000 in January), and there are still substantially more job openings than there are unemployed workers. The chattering classes underrate this because they are in some of the few sectors, like software and journalism, where layoffs are actually rising. Real GDP growth is strong (3.2% last quarter), and nominal GDP growth is still well above its long-run trend, which is inflationary.
I do see a few contrary indicators: M2 is still down from a year ago (though only 1.4%, and it is up over the past 6 months). The Fed’s balance sheet continues to shrink, though it is still trillions above the pre-Covid level. Productivity rose 3.2% last quarter.
At least over the past year I think fiscal policy is more responsible than monetary policy for persistent inflation. But I can’t see Congress doing a deficit-reducing grand bargain in an election year; the CBO projects the deficit will continue to run over 5% of GDP. That means our best chance for inflation to hit the target this year is for the Fed to tighten, or at least to not cut rates. If policy continues on its current inflationary path, our main hope is for a deus-ex-machina like a true tech-fueled productivity boom, or deflationary events abroad (recession in China?) lowering prices here.
A good strength workout includes a push, a pull, and legs. When I can get to the gym I like to alternate bench press and incline press for the push; rows and pulldowns for the pull; and squats and deadlifts for the legs. But with a baby to take care of at home, its been hard to find time for the gym. Between driving, waiting for equipment, and the actual lifts, the gym takes an hour. Doing a similar workout at home can take just 10 minutes, and has the advantage that you can watch a baby while doing it.
But the big challenge with home workouts was finding a good leg exercise. Pushes are easy: just do pushups. Pulls are pretty easy: just buy a $15 pullup bar to hang over a door. But how to do a good leg workout without costly barbells and plates that take up lots of space? Enter the pistol squat.
The idea is simply to start from a stand and lower yourself down almost to the ground on a single leg, then come back up on one leg, with the other leg out front for balance:
Source: Snapshot from this video, which shows how to do the standard pistol plus many variations
I find this to be about as difficult as doing a traditional two-legged barbell squat with 1x bodyweight on the bar. The traditional squat has two legs lifting 2x bodyweight (your body itself, plus 1x bodyweight on the bar); the pistol squat has one leg lifting 1x bodyweight (just your body itself), which is about equal. This was perfect for me because I was doing about 3 sets of 5 reps of squats with 1x bodyweight on the bar, so I just do the same number of pistol squats. But what if you’re not exactly at that weight?
Going lighter is easy– just put one hand on something sturdy nearby like a table and lean on it until it takes enough of your weight that you can do the squat. This helps with balance too if that is an issue. Going heavier is harder, but you could carry something heavy in your hands, turn the rise into more of an explosive jump, or just do more reps.
I’d still rather be at the gym, but the complete home workout seems like a good application of the Pareto Principle– you get most of the benefits of the gym while paying only a small fraction of its time and money costs.
Last week Scott offered a very negative review of one popular personal finance book, Rich Dad Poor Dad. My own take on the book is less negative, but I still wouldn’t recommend it to most people. That still leaves the question of which personal finance books are worthwhile. I gave my answer back in 2020 in a post on my personal blog. You can read the full reviews there, but I’ll give my short answers here:
Despite the title, the book is really about the basics of how to get out of debt, save for retirement, and manage credit. The material is stuff most people will figure out on their own by their 30’s or 40’s, but it’s a nice presentation all in one place and can save people from learning lessons the hard way. Perfect for a college student, someone at their first real job, or someone older who feels like they missed the memo on how all this works. His big idea is that once you set and meet good savings goals, you don’t need to feel guilty about the things you do spend money on.
This book is built around surveying millionaires and finding the commonalities in what they did to get wealthy. The core idea is that Americans with millions saved tend to have moderately high incomes but very high savings rates. Even someone with a normal income can become a millionaire- income is different from wealth. The key is to live frugally and let the compound returns on your savings work for you. The original version of the book is inspiring, but has out of date numbers; the author’s daughter recently updated it (The Next Millionaire Next Door) with more current numbers.
There are many more books about how to invest, but for broad takes on personal finance overall these are the best two I have found, and the ones I recommend to students. Still interested to hear your thoughts on more recommendations.
Americans have moved westward in every decade of our history. But after over 200 years, that trend may finally be ending.
A new report from Bank of America notes that the share of Americans who live in the West has been falling since 2020:
The absolute population of the West is still growing slightly, but the Southeast is growing so quickly that it makes every other region of the country a smaller share by comparison:
I think this has a lot to do with the decline in housing affordability that Jeremy discussed yesterday. Americans always went West for free land, or cheap land, or cheap housing. Or in more recent decades on the Pacific coast, they went for nice weather and good jobs with non-insane housing prices. But now all that is gone, and if anything housing prices are pushing people East.
I see some green shoots of zoningreform with the potential to lower housing costs in the West. But I worry that this is too little too late, and that 2030 will confirm that our long national trek Westward has finally been defeated by our own poor housing policy.
My paper “Missouri’s Medicaid Contraction and Consumer Financial Outcomes” is now out at the American Journal of Health Economics. It is coauthored by Nate Blascak and Slava Mikhed, researchers at the Federal Reserve Bank of Philadelphia. They noticed that Missouri had done a cut in 2005 that removed about 100,000 people from Medicaid and reduced covered services for the remaining enrollees. Economists have mostly studied Medicaid expansions, which have been more common than cuts; those studying Medicaid cuts have focused on Tennessee’s 2005 dis-enrollments, so we were interested to see if things went differently in Missouri.
In short, we find that after Medicaid is cut, people do more out-of-pocket spending on health care, leading to increases in both credit card borrowing and debt in third-party collections. Our back-of-the-envelope calculations suggest that debt in collections increased by $494 per Medicaid-eligible Missourian, which is actually smaller than has been estimated for the Tennessee cut, and smaller than most estimates of the debt reduction following Medicaid expansions.
We bring some great data to bear on this; I used the restricted version of the Medical Expenditure Panel Survey to estimate what happened to health spending in Missouri compared to neighboring states, and my coauthors used Equifax data on credit outcomes that lets them compare even finer geographies:
The paper is a clear case of modern econometrics at work, in that it is almost painfully thorough. Counting the appendix, the version currently up at AJHE shows 130 pages with 29 tables and 11 figures (many of which are actually made up of 6 sub-figures each). We put a lot of thought into questioning the assumptions behind our difference-in-difference estimation, and into figuring out how best to bootstrap our standard errors given the small number of clusters. Sometimes this feels like overkill but hopefully it means the final results are really solid.
For those who want to read more and can’t access the journal version, an earlier ungated version is here.
Disclaimer: The results and conclusions in this paper are those of the authors and do not indicate concurrence by the Agency for Healthcare Research and Quality or the US Department of Health and Human Services. The views expressed in this paper are solely those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Philadelphia or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.
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