The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.
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September 08, 2017
When Health Insurance and Its Financial Cushion Disappear
Personal health care costs can skyrocket with a new diagnosis or accident, often leading to catastrophic financial costs for people. Health insurance plays an important role in protecting individuals from unexpected large financial shocks as a result of adverse health events. Just as homeowner's insurance helps protect you from financial devastation if your house burns down, health insurance helps protects you from burning through your savings because of a heart attack. This 2008 report from the Commonwealth Fund shows that the uninsured are far more likely to have to use their savings and reduce other types of spending to pay medical bills.
Much research has been done on the impact of health insurance on financial and health outcomes. (This paper , for example, summarizes the history and impact of Medicaid.) However, most of the studies look at the case of individuals who are gaining health insurance. In a recent Atlanta Fed working paper and the related podcast episode , we measure the impact of losing public health insurance on measures of financial well-being such as credit scores, delinquent debt eligible to be sent to debt collectors, and bankruptcies. We performed these measurements by studying the case of Tennessee's Medicaid program, known as TennCare, in the mid-2000s. At that time, a large statewide Medicaid expansion that began in the 1990s ran into financial difficulties and was scaled back. As the following chart shows, some 170,000 individuals were removed from TennCare rolls between 2005 and 2006.
Our analysis of this episode, using data from the New York Fed's Consumer Credit Panel/Equifax, revealed some striking findings. Individuals who lost health insurance experienced lower credit scores, more debt eligible to be sent to collections, and a higher incidence of bankruptcy. Those who were already financially vulnerable suffered the worst. In particular, individuals who already had poor credit, as measured by Fannie Mae's lowest creditworthiness categories , and then lost Medicaid see their credit scores fall by close to 40 points on average and are almost 17 percent more likely to have their debt sent to collection agencies. Our analysis also finds that gaining or losing health insurance is not symmetric in its impact—losing insurance has larger negative financial effects than the positive financial impacts of gaining insurance.
Our results provide evidence that losing Medicaid coverage not only removes inexpensive access to health care but also eliminates an important layer of financial protection. A cost-benefit analysis of proposed cuts to Medicaid coverage (see here, here, and here for a discussion of recent legislative efforts in the U.S. Congress) would need to consider the negative financial consequences for individuals of the type that we have identified.
September 07, 2017
What Is the "Right" Policy Rate?
What is the right monetary policy rate? The Cleveland Fed, via Michael Derby in the Wall Street Journal, provides one answer—or rather, one set of answers:
The various flavors of monetary policy rules now out there offer formulas that suggest an ideal setting for policy based on economic variables. The best known of these is the Taylor Rule, named for Stanford University's John Taylor, its author. Economists have produced numerous variations on the Taylor Rule that don't always offer a similar story...
There is no agreement in the research literature on a single "best" rule, and different rules can sometimes generate very different values for the federal funds rate, both for the present and for the future, the Cleveland Fed said. Looking across multiple economic forecasts helps to capture some of the uncertainty surrounding the economic outlook and, by extension, monetary policy prospects.
Agreed, and this is the philosophy behind both the Cleveland Fed's calculations based on Seven Simple Monetary Policy Rules and our own Taylor Rule Utility. These two tools complement one another nicely: Cleveland's version emphasizes forecasts for the federal funds rate over different rules and Atlanta's utility focuses on the current setting of the rate over a (different, but overlapping) set of rules for a variety of the key variables that appear in the Taylor Rule (namely, the resource gap, the inflation gap, and the "neutral" policy rate). We update the Taylor Rule Utility twice a month after Consumer Price Index and Personal Income and Outlays reports and use a variety of survey- and model-based nowcasts to fill in yet-to-be released source data for the latest quarter.
We're introducing an enhancement to our Taylor Rule utility page, a "heatmap" that allows the construction of a color-coded view of Taylor Rule prescriptions (relative to a selected benchmark) for five different measures of the resource gap and five different measures of the neutral policy rate. We find the heatmap is a useful way to quickly compare the actual fed funds rate with current prescriptions for the rate from a relatively large number of rules.
In constructing the heatmap, users have options on measuring the inflation gap and setting the value of the "smoothing parameter" in the policy rule, as well establishing the weight placed on the resource gap and the benchmark against which the policy rule is compared. (The inflation gap is the difference between actual inflation and the Federal Open Market Committee's 2 percent longer-term objective. The smoothing parameter is the degree to which the rule is inertial, meaning that it puts weight on maintaining the fed funds rate at its previous value.)
For example, assume we (a) measure inflation using the four-quarter change in the core personal consumption expenditures price index; (b) put a weight of 1 on the resource gap (that is, specify the rule so that a percentage point change in the resource gap implies a 1 percentage point change in the rule's prescribed rate); and (c) specify that the policy rule is not inertial (that is, it places no weight on last period's policy rate). Below is the heatmap corresponding to this policy rule specification, comparing the rules prescription to the current midpoint of the fed funds rate target range:
We should note that all of the terms in the heatmap are described in detail in the "Overview of Data" and "Detailed Description of Data" tabs on the Taylor Rule Utility page. In short, U-3 (the standard unemployment rate) and U-6 are measures of labor underutilization defined here. We introduced ZPOP, the utilization-to-population ratio, in this macroblog post. "Emp-Pop" is the employment-population ratio. The natural (real) interest rate is denoted by r*. The abbreviations for the last three row labels denote estimates of r* from Kathryn Holston, Thomas Laubach, and John C. Williams, Thomas Laubach and John C. Williams, and Thomas Lubik and Christian Matthes.
The color coding (described on the webpage) should be somewhat intuitive. Shades of red mean the midpoint of the current policy rate range is at least 25 basis points above the rule prescription, shades of green mean that the midpoint is more than 25 basis points below the prescription, and shades of white mean the midpoint is within 25 basis points of the rule.
The heatmap above has "variations on the Taylor Rule that don't always offer a similar story" because the colors range from a shade of red to shades of green. But certain themes do emerge. If, for example, you believe that the neutral real rate of interest is quite low (the Laubach-Williams and Lubik-Mathes estimates in the bottom two rows are −0.22 and −0.06) your belief about the magnitude of the resource gap would be critical to determining whether this particular rule suggests that the policy rate is already too high, has a bit more room to increase, or is just about right. On the other hand, if you are an adherent of the original Taylor Rule and its assumption that a long-run neutral rate of 2 percent (the top row of the chart) is the right way to think about policy, there isn't much ambiguity to the conclusion that the current rate is well below what the rule indicates.
"[D]ifferent rules can sometimes generate very different values for the federal funds rate, both for the present and for the future." Indeed.
August 30, 2017
Is Poor Health Hindering Economic Growth?
It is well known that poor health is bad for an individual's income, partially because it can lower the propensity to participate in the labor market. In fact, 5.4 percent of prime-age individuals (those 25–54 years old) reported being too sick or disabled to work in the second quarter of 2017. This is the most commonly cited reason prime-age men do not want a job, and for prime-age women, it is the second most often cited reason behind family responsibilities (see the chart). (Throughout this article, I use the measure "not wanting a job because of poor health or disability" as a proxy for serious health problems.)
In addition to being prevalent, the share of the prime-age population citing poor health or disability as the main reason for not wanting a job has increased significantly during the past two decades and tends to be higher among those with less education (see the chart).
Yet by some standards, the health of Americans is improving. For example, compared to two decades ago the average American is living two years longer, and the likelihood of dying from cancer or cardiovascular disease has fallen. These specific outcomes, however, may have more to do with improvements in the treatment of chronic disease (and the resulting reduction in mortality rates) than improvements in the incidence of health problems.
Another puzzle—which is perhaps also a clue—is the considerable variation across states in the rates of being too sick or disabled to work. For example, people living in Mississippi, Alabama, Kentucky, or West Virginia in 2016 were more than three times likelier to indicate being too sick or disabled to work than residents of Utah, North Dakota, Iowa, or Minnesota (see the maps below).
This cross-state variation is useful because it allows state-by-state comparisons of the prevalence of specific health problems. Among a list of more than 30 health indicators, the two factors that most correlate with the share of a state's population too sick or disabled to work were high blood pressure (a correlation of 0.86) and diabetes (a correlation of 0.83). Both of these conditions are associated with risk factors such as family history, race, inactivity, poor diet, and obesity. Both of these health issues have increased significantly on a national basis in recent years.
So how might poor health hinder economic growth? Health factors account for a significant part of the decline in labor force participation since at least the late 1990s. After controlling for demographic changes, the share of people too sick or disabled to work is about 1.6 percentage points higher today than it was two decades ago (see the interactive charts on our website). Other things equal, if this trend reversed itself during the next year, it could increase the workforce by up to 4 million people, and add around 2.6 percentage points to gross domestic product (calculated using our Labor Market Sliders).
Of course, such a sudden and large reversal in health is highly unlikely. Nonetheless, significant improvements to the health of the working-age population would help lessen the drag on growth of the labor supply coming from an aging population. Public policy efforts centered on both prevention and treatment of work-impeding health conditions could play an important role in bolstering the nation's workforce.
July 31, 2017
Behind the Increase in Prime-Age Labor Force Participation
Prime-age labor force participation has been on a tear recently. Over the last eight quarters, it is up by about 65 basis points (bps) and more than 40 bps in just the last year. When combined with declines in the rate of unemployment, this increase has helped lift the employment-to-population (EPOP) ratio for this key population group by around 120 bps during the last two years.
Placed in the context of an almost 260 bp decline in the prime-age EPOP ratio between 2007 and 2015, this development is significant. Although the unemployment rate is close to what most economists consider full employment, rising labor force participation can indicate that the labor market might still have some room to run before the employment gap is fully closed. (The Congressional Budget Office offers some analysis consistent with this idea.)
So what's behind the increase in prime-age (defined as people between 25 and 54) participation in the last year? Changes in the labor force participation rate (LFPR) either can be the result of changes in the mix of demographic groups in the population with different average rates of participation (for example, across education and race/ethnicity), or they can result from changes in average participation rates within demographic groups. It turns out that most of the increase in the prime-age LFPR has been because of increased LFPR within demographic groups—in particular, prime-age women and especially women without a college degree. Prime-age men have not contributed much to the rise in participation beyond the increased participation associated with a more educated population.
The following chart shows the contribution to the change in the prime-age LFPR over the last year as a result of changes in the relative mix of age-education-race groups (the blue bars) and changes in participation rates within age-education-race groups (the orange bars). It shows the contribution from both sexes combined and from prime-age women and men separately.
Note that the we computed the contributions using six five-year age groups, three education groups (less than high school, high school but no college degree, and college degree), three race/ethnicity groups (Hispanic, non-Hispanic black, and non-Hispanic white/other), and two sexes.
Of the total increase in the prime-age LFPR, most of that was the result of changes in labor force participation behavior within female demographic groups. In fact, changes in LFPR behavior from prime-age men served as a drag on the overall prime-age LFPR. The modestly positive demographic effect on the LFPR for both men and women reflects the higher LFPR for those with a college degree and the relative increase in the share of both prime-age men and women with a college degree.
This development stands in contrast to the drivers of the change in the prime-age LFPR between 2015 and 2016. Of the 24 bp increase in prime-age LFPR between the second quarters of 2015 and 2016, changes in the demographic composition of the population (primarily increased education levels) accounted for all of it rather than changes in average participation rates within demographic groups.
The next chart shows the contribution to the change in the prime-age LFPR between 2016 and 2017 due to changes in the LFPR behavior of women for specific education-race groups.
As the chart shows, the bulk of the demographically adjusted contribution from female labor force participation came from women without a college degree, and the largest contribution across female education-race groups was from Hispanics without a college degree. The increase in labor force participation among women with less education is consistent with evidence of recent improvement in the wage gains for relatively low-wage earners.
Although this simple decomposition doesn't explain why nondegreed women are increasingly finding the labor force to be an attractive option, we can infer some clues by looking at changes in the reasons people give for not participating. In particular, the largest contribution from changes in behavior among prime-age women over the last year came from a decrease in the propensity to be out of the labor force because of poor health or being in the shadow labor force (wanting a job but not looking).
Recently, former Minneapolis Fed President Narayana Kocherlakota has argued that macroeconomists should take more seriously the differences in behavior across demographic groups. The Atlanta Fed's Labor Force Dynamics web page contains more information on the behavioral trends in the reasons people give for not participating in the labor force across demographic groups, and the page was just updated to include data for the second quarter of 2017. Check it out, and we'll keep reporting here on the relative contributions to the labor force of behavioral versus demographic changes—and whether the winning streak for prime-age labor force participation continues.
- When Health Insurance and Its Financial Cushion Disappear
- What Is the "Right" Policy Rate?
- Is Poor Health Hindering Economic Growth?
- Behind the Increase in Prime-Age Labor Force Participation
- An Update on Labor Force Participation
- Another Look at the Wage Growth Tracker's Cyclicality
- GDPNow's Second Quarter Forecast: Is It Too High?
- Are Small Loans Hard to Find? Evidence from the Federal Reserve Banks' Small Business Survey
- Slide into the Economic Driver's Seat with the Labor Market Sliders
- The Fed’s Inflation Goal: What Does the Public Know?
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