Should the government intervene in healthcare?

When appraising the economic debate regarding government intervention in healthcare, it is vital to consider three areas of impact: individuals, firms and the wider UK economy as a whole. These areas will be affected directly through potential new access to health care provision and related price changes, and also indirectly through impacts on wider incentive mechanisms and market structures.

Highlighting the main arguments, the anti-intervention position rests upon the supposed merits of the free-market’s ability to direct resources to those that value the services – via price signals. Additionally, the anti-intervention argument suggests that any government intercession in the sector will likely “crowd-out” more cost efficient private firms from the health care market, whilst spending public funds that could be more effectively used elsewhere.

The pro-intervention position highlights that because of the unique nature of health care, an efficient allocation of is far from certain. Therefore the government should intervene to guide the market to a correct level of demand and supply of health care services. Elsewise, in a free market, many individuals may not use health care even though it would be in their best interest due to imperfect knowledge of the long-term value of health care. Nor importantly, individuals may not potentially have access to vital services purely because of high health care costs. Moreover, as the government would not be solely reliant on market signals to guide its actions, its intervention can consider a wider range of factors than price when debating provision – e.g. the positive impact on the overall economy of having a uniformly healthy workforce on national productivity.

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What’s the point in low interest rates?

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It’s the simplest of all policies. If a central banker wishes to stimulate an economy – they cut the central bank base interest rate. If they wish to moderate it – they raise the rate. The classical theory being that manipulating the rate alters the cost of credit and thus encourages/hampers individuals and firms spending incentives accordingly.

As we can see from the charts above, developed economies have maintained persistently low interest rates ever since 2008 and the Global Financial Crisis (and in Japan’s case, a lot longer…). The central banks have been attempting to gee up economies with cheap credit, exactly as the theory advises. However, as has been seen in the years subsequent – economic growth in each of the same economies has been relatively anaemic in spite of the historically low interest rates.

Thus this post will investigate the channels that interest rates are supposed to affect the economy – looking how it is supposed to affect both individuals and firms. Although it is an elementary discussion, its apparent ineffectiveness in recent years highlights that an assessment is a worthy exercise.

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The Minskyian Model of Economic Crises

Minsky - Credit Supply and Crashes

Minskyian economic theory directly links an oscillating aggregate supply of credit in an economy to the potential for economic crisis. It suggests that credit supply has a cyclical nature in highly financial economies. Thus the seeds of crisis are endogenously sown during seemingly productive booming previous periods. This piece will describe the model’s principles and note how its theories stray from mainstream economic thought. This analysis will come in useful in future posts, as the model seems to well approximate numerous historical crises – and of current importance: the ongoing travails of the Chinese economy in 2015.

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It’s Not The What, It’s The How: Central Banks And Their Ever Expanding Balance Sheets

The balance sheets of central banks have massively expanded since the Global Financial Crisis in an attempt to help stimulate demand.

Between 2008-2015 the Fed’s balance sheet grew from $858 billion to $4.3 trillion. Relative to the US economy, this was a massive expansion from 6% of GDP to 25.4% of GDP. Similarly the Bank of England’s (BoE) balance sheet grew from 5.9% of GDP to 22.5% of GDP. However the biggest expansion was in Japan – where the balance sheet grew from 22.1% of GDP pre-crisis to 30% of GDP mid-2012, and then exploded to 65.4% of GDP in 2015 in the Abenomics climate. It is now a huge 320441.8 billion JPY.

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Defending a Peg: Theoretically weighing the benefits of Denmark’s Fixed Exchange Rate

This week, Denmark’s Central Bank promised the market to defend the Krone’s unilateral currency peg against the Euro. The methodology and the phraseology came directly out of the standard Central Banker’s playbook in an attempt to solidify and engage market sentiment. The Central Bank governor Lars Rohde said:

There is no upper limit to the size of the foreign exchange reserve… The Danish National Bank has the necessary instruments to defend the fixed exchange rate policy for as long as it takes.”” [BBC; 2014 – emphasis added]

In parallel, the bank simultaneously lowered interest rates from -0.5% to -0.75% on top of the $16 billion of Open Market Operations already actioned. To put this into some context, this is the fourth time that Denmark has lowered its interest rates in three weeks and to a rate lower than even the most serious point of the Global Financial Crisis.

The immediate impetuses of this situation is fairly clear – in reaction to the ECB’s increasingly loose 2014-2015 monetary policy and surprisingly large promised figure of QE (€1.1 trillion), and Switzerland’s unforeseen retraction of its own currency peg, Denmark has been pressured to assure the market that “We’re not next”. The Danish National Bank (DNB) will uphold the status quo, no matter the cost.

In these circumstances however, it must be asked – is it worth it? Many nations have vainly attempted to defend currency pegs in the past, with varying policy success -vs- uniform punishment of foreign exchange reserves, employment rates and output costs. Famously, the UK (1992 – £3.3 billion) and Thailand (1997 – $5 billion) provide the counterfactuals of failure and success.

This piece will attempt to weigh the theoretical benefits of maintaining a currency peg against the practical costs that the policy incurs.

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Forward Guidance: Should the SNB have shocked the world?

There has been a very public divergence in central bank practice this week.

For six months, the European Central Bank (ECB) has been slowly building towards an expected announcement implementing Quantitative Easing (QE) in the Eurozone. Carefully tailored releases and winks have unsubtly alerted the markets that QE was coming to Europe and that market actors better be prepared.

By contrast, the Swiss National Bank (SNB) shocked the markets with a surprise announcement that it would be both abandoning their 3 year-old currency peg to the Euro and cutting interest rates. The effects have been likened to a future “nuclear explosion” [Logutenkova & Vögel; 2014], with immediate impacts including a 41% increase in the Swiss Franc against the Euro and a 20% decrease in Credit Suisse’s stock price.

Whilst it is clear that the policies themselves are debatable, the issue to be discussed here is not centred on evaluating economy management strategies.

Rather this week has highlighted a broader question: what is the best style for central banks to take action? Should banks use a long lead-up time to corral market agents into calmly closing arbitrage opportunities and perhaps suffer a reduced impact of their actions? Or should they hide their planning and shock economies into a given direction and risk volatilit and credibility?

This piece shall first explore what is the currently recommended practice and critique it. Subsequently we will look into the merits of the alternatives and attempt to highlight the best approach.

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Critiquing “Orthodox” Central Banking

Modern mainstream economic recommendations for central banking encourage a strict monetary policy remit of singularly managing inflation through the policy interest rate. [e.g. Woodford; 2004] The justification for this position mainly arises from New Consensus Economic’s abstract micro-foundations methodology and the practical inhibitor of the Lucas Critique. By complying with this simplified framework, orthodox central bankers believe their modern practices have a supposed universality of applicability that defends their narrow intentions and renders creative thought unnecessary .

Yet, even a simple analysis of the methodological idiosyncrasies of the mainstream practice immediately expose the limitations of its recommendations. Furthermore once heterodox economic opinions are introduced to recount theoretical oversights and contrasting suggested practices, it becomes apparent that the supreme universality claimed by the orthodoxy collapses. Additionally, political economy evidence of monetary policy from central banks around the world illustrate the feasibility and greater beneficial capacity of contrary practices – especially for developing nations and during times of economic stress.

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