Mining for Gold - the 3 reports for searching unscheduled treatment

When I worked in a dental practice, we still had paper charts until 2009 when I helped my practice transition to a paperless environment. This means that we had a ton of treatment sitting in these paper charts that we had to search for manually in order to find patients who were unscheduled. It was an extremely time-consuming process but it is what we had to do in order to keep our doctor’s schedule full.

When you are working in a chartless environment and all your treatment plans are sitting in the computer, you still must follow up with patients who are not scheduled … but the process is much more streamlined. What I love about computer data is that it is all trackable and you can filter it onto a report. I call it “Mining for Gold.”

In Dentrix, there are actually three reports for you to use to track down unscheduled treatment to follow up with patients. I do have a favorite but I will let you decide for yourself what works best in your practice.

1. The Unscheduled Treatment Plan Reporthas been in Dentrix forever and it is what I used back in the olden days. This report gives you information on unscheduled treatment but you have to print it in order to work it and it can be very lengthy. Also, we have to remember that every time we print a report, things will change quickly and then your report is obsolete. To find this report, go to the Office Manager > Reports > Lists > Unscheduled Treatment Plans.
2. The Practice Treatment Case Report is also a printed report but you can filter it by very specific data points that you cannot find in other reports. What I like about this report is that you can search for treatment that has been Accepted, Rejected or Proposed if you are marking your cases with this status. This is good information for your doctor to see. In this report, you can also search by the case severity if you are using the stop light feature (for more information on this, CLICK HERE). This report can only be found on the Patient Chart and Treatment Planner modules. Click on the printer icon as if you were printing a treatment plan estimate, but instead click on Practice Treatment Case Report. Then select the parameters you want and click OK.
3. The Treatment Manager Report This is by far my favorite report in Dentrix. It offers you a way to search for patients with unscheduled treatment and create your own interactive spreadsheet where you can resort the columns to organize the report any way you want. You also do not have to print this report because everything you need to follow up with the patient is at your fingertips. For more details about using this report, refer to the blog I wrote called “Holes in your Doctor’s Schedule?” and learn more.

“Mining for Gold” is my motto when it comes to looking for patients with unscheduled treatment. You need to be proactive when it comes to following up with patients. You cannot expect them to pick up the phone and call you. Keeping your schedule full is something that requires a little bit of work from you. I hope these report options help make the task a little more efficient.

A Behavioral new-Keynesian Model

Here are comments on Xavier Gabaix' "A Behavioral new-Keynesian model." Xavier presented at the October 21 NBER Economic Fluctuations and growth meeting, and I was the discussant. Slides here

Short summary: It's a really important paper. I think it's too important to be true.

Gabaix' irrationality fixes the pathologies of the standard model by making a stable model unstable, and hence locally determinate. Gabaix' irrationality parameter M in [0,1] can thus substitute for the usual Taylor principle that interest rates move more than one for one with inflation.


Gabaix imagines -- after three papers worth of careful math -- that people pay less attention to future income when deciding on consumption than they should.  Making today's consumption less sensitive to future income, means expectations of future income are larger for any amount of today's consumption. Thus, it makes model dynamics unstable.

But just a little irrationality won't do. If you move a stable eigenvalue, say 0.8, by a bit, say 0.85, it's still stable. You have to move it all the way past 1 before it does any good at all.

Thus, Gabaix puts irrationality right in the  middle of monetary policy. If Gabaix is right, you simply cannot explain monetary policy in simple terms with money supply and money demand, or interest rate rises lower investment and inflation via a Phillips curve, as simple approximations that more complex models, perhaps involving some irrationality, improve on. Monetary policy is centrally about the Fed exploiting irrationality, full stop, and cannot be explained or understood at all without that feature.

More in the comments. There are too many equations and figures to mirror it here, so you have to get the pdf if you're interested. This is for academics anyway.

Tracking the ROI on your marketing campaigns in three easy steps

You spend a lot of money on marketing, direct mailers and advertising. I am

shocked sometimes when I see how much these advertising campaigns cost the practice. How do you know if they are working? Do you know the ROI on your investment? I can help you see the statistics you need to know to help make decisions on your referral programs and new patient acquisition.

First things first . . . your team must be recording where your new patients are being referred from. If you are starting a new patient referral program or just signed up with a marketing company that is launching some direct mail campaigns, I want you to add these into your referral sources. Go to the Office Manager > Reference > Referral Maintenance. Then click on add new and enter the name of the campaign. Make sure to check Non Person and then, at the bottom, click on Referred By. The reason you want to select Non Person is because these campaigns will be tracked as Referred by Marketing on the Practice Advisor Report.

Second, make sure your team is checking the new patients against the referring sources on a daily basis. The easiest way to do this is using the Daily Huddle Report. Look at the Daily Huddle each day and make sure the total number of new patients is accurate and make sure the total number of new patients matches the total number of referral sources. This makes sure that every new patient is tracked with how he or she found you.

Now the juicy stuff . . . you can run a report that will show you the total number of patients by each referral source, see how much their treatment plan is worth and how much production has been completed. This is invaluable because you can not only see how many patients this campaign is bringing you, but also how much revenue. AMAZING!

Go to the Office Manager > Reports > Management > Referred By Report. Next, select the referral dates, production dates and select the referring source you want to analyze. Then at the bottom make sure to check Show Production Detail.

This will be great information when you are looking to renew a campaign or just great feedback to your marketing company

Levinson on growth

I disagree rather profoundly with crucial parts of Marc Levison's essay "Why the Economy Doesn't Roar Anymore" in the Saturday Wall Street Journal.

Yes, growth is slow. Yes, the ultimate source of growth is productivity. But no, sclerotic productivity is not "just being ordinary." No, our economy is not generating as much productivity growth as is possible, so just get used to it. No, productivity does not fall randomly from the sky no matter what politicians do.

Mark starts well, with a nice and vivid review of the post WWII growth "miracles."

He stumbles a bit at the 1973 Yom Kippur war and oil embargo

"Politicians everywhere responded by putting energy high on their agendas. In the U.S., the crusade for “energy independence” led to energy efficiency standards, the creation of the Strategic Petroleum Reserve, large government investments in solar power and nuclear fusion, and price deregulation. [JC: ?? The 1970s had price controls, not deregulation!] But it wasn’t the price of gasoline that brought the long run of global prosperity to an end. It just diverted attention from a more fundamental problem: Productivity growth had slowed sharply."

"The consequences of the productivity bust were severe.."

More good descriptions of eurosclerosis follow. But you see him veer off course, as  he sees little connection between the litany of ham-handed responses to the oil shock and the decline in productivity.


Briefly back to a sensible point

"Government leaders in the 1970s knew, or thought they knew, how to use traditional methods of economic management—adjusting interest rates, taxes and government spending—to restore an economy to health. But when it came to finding a fix for declining productivity growth, their toolbox was embarrassingly empty."

Let us speak the word: the methods of Keynesian demand-side economic management were, as any honest Keynesian will tell you, utterly unsuited to solving productivity, the ultimate "supply" problem. Given the Economist's enthusiasm for fiscal stimulus a bit more honesty on this one would be appreciated.

But then then he veers off course entirely

"Conservative politicians such as Margaret Thatcher in the U.K., Ronald Reagan in the U.S. and Helmut Kohl in West Germany swept into power, promising that freer markets and smaller government would reverse the decline, spur productivity and restore rapid growth." 

"But these leaders’ policies—deregulation, privatization, lower tax rates, balanced budgets and rigid rules for monetary policy—proved no more successful at boosting productivity than the statist policies that had preceded them. Some insist that the conservative revolution stimulated an economic renaissance, but the facts say otherwise: Great Britain’s productivity grew far more slowly under Thatcher’s rule than during the miserable 1970s, and Reagan’s supply-side tax cuts brought no productivity improvement at all. [My emphasis] Even the few countries that seemed to buck the trend of sluggish productivity growth in the 1970s and 1980s, notably Japan, did so only temporarily. A few years later, they found themselves mired in the same productivity slump as everyone else.."

This is just a whopper of... what to call it... factual error.

The US embarked on a second boom from 1980 to 2000. See John Taylor's excellent response, "Take off the muzzle and the economy will roar" for more discussion, and the graph reproduced at the left. Call it the Reagan-Bush-Clinton boom if it makes you feel better. But the boom was real.

(Update: A correspondent writes "the author's claim that productivity growth was worse in the UK under Thatcher than in the 1970s is very wrong.  Indeed, productivity growth was one area in which I thought there was wide agreement that the Thatcher period was a success (see, for example, Krugman's chapter on the UK in his book Peddling Prosperity).")

From off course, Levinson arrives at a strange harbor. His bottom line is the astonishing proposition that productivity growth just happens; manna from heaven (or not) dissociated from any economic or political structure:

"Productivity, in historical context, grows in fits and starts. Innovation surely has something to do with it, but we have precious little idea how to stimulate innovation—and no way at all to predict which innovations will lead to higher productivity..."

"It is tempting to think that we know how to do better, that there is some secret sauce that governments can ladle out to make economies grow faster than the norm. But despite glib talk about “pro-growth” economic policies, productivity growth is something over which governments have very little control. Rapid productivity growth has occurred in countries with low tax rates but also in nations where tax rates were sky-high. Slashing government regulations has unleashed productivity growth at some times and places but undermined it at others. The claim that freer markets and smaller governments are always better for productivity than a larger, more powerful state is not one that can be verified by the data."

I'm sorry, the data -- and the immense literature that study that data -- come to the opposite conclusion. There is a reason that this manna seems to fall on the US and not, say, on Haiti. There is a reason it falls on South Korea and not North  Korea -- the most tragic but decisive controlled experiment known to economics.

Yes, the answers are not as simplistic as the minor tweaks represented by "pro-growth" policies of established parties in western democracies. But experience and formal analysis tell us clearly that innovation and productivity happen where there is rule of law, simple and predictable regulation, property rights, reasonable taxation, an open and competitive economy, and decent public infrastructure.  These, politicians do have ample control over, and ample opportunity to screw up.

(Update and clarification. Levinson is thinking about the experience over time in single countries. There, indeed, the variation of policies is small, and its correlation with growth hard to tease out. Growth takes a while to get going or to kill, and causality can run both ways. Countries often reform after bad times, and squeeze the golden goose after good times. I'm thinking more about the variation across countries. If you look at the yawning gaps in "pro-growth" policy across US, UK, China, India, North Korea, say, you see also yawning gaps in productivity.)

"Here is the lesson: What some economists now call “secular stagnation” might better be termed “ordinary performance.” ... 

"Ever since the Golden Age vanished amid the gasoline lines of 1973, political leaders in every wealthy country have insisted that the right policies will bring back those heady days. Voters who have been trained to expect that their leaders can deliver something more than ordinary are likely to find reality disappointing."

I've got news for Mr. Levinson. "Ordinary performance" is what people experienced from the beginning of time to about 1750. Steady grinding poverty, 0% growth rate, each farming in his parents' footsteps. Even 2% was the result of an amazing and unprecedented set of "pro-growth" political institutions.

Not only can we do better we can do worse. A lot worse.

If  good policy does not help, then it follows that bad policies do not hurt. No matter how much our politicians abandon "pro-growth" policies, to nativism, trade barriers, over-regualation, legal capture, arbitrarily high taxes, more controlled markets and larger government, growth will just bumble along at 2% anyway. Both the US and UK may soon put that one to the test.

Note: I use block quotes and embedded graphs. These show up on the original blogger verision of this post. I notice they get garbled at various other feeds. If you want better formatting, come back to the original

Five Books to Change Liberals' Minds

"Five Books to Change Liberals' Minds" is the title of a remarkable post by Cass Sunstein.

It can be easy and tempting, especially during a presidential campaign, to listen only to opinions that mirror and fortify one's own. That’s not ideal, because it eliminates learning and makes it impossible for people to understand what they dismiss as “the other side.”

If you think that Barack Obama has been a terrific president (as I do) and that Hillary Clinton would be an excellent successor (as I also do), then you might want to consider the following books, to help you to understand why so many of your fellow citizens disagree with you:

“Seeing Like A State: How Certain Schemes to Improve the Human Conditions Have Failed,” by James Scott.....

and  closes

Having read these books, you might continue to believe that progressives are more often right than wrong, and that in general, the U.S. would be better off in the hands of Democrats than Republicans. But you’ll have a much better understanding of the counterarguments -- and on an issue or two, and maybe more, you’ll probably end up joining those on what you once saw as “the other side.”

Most public intellectual commentary these days takes a tone of parochial demonization -- the hilarious "how Paul Krugman made Donald Trump possible" is good to ponder. When such people even consider views the other side, it's  bulveristic speculation -- did bad childhoods make them evil, or are they bought? The next sentence usually bemoans polarization. This piece by Sunstein is a breath of fresh air.

Those who listen buy themselves an ear.  I usually find I disagree with Sunstein about most things (though his attempt to rein in regulation from inside the Administration is both praiseworthy and instructive in its failure). But knowing that his opinions come from such consideration, they carry more weight. It's more effective than upping low Krugmanian insult to high Bergeracian disdain.

I'm sure many of my blog readers could suggest additional books for Mr. Sunstein -- Friedman, Sowell, Murray, and so on. That's not the point. When grandma sends you books about how to clean your room, you never read them. If you want to send suggestions, send good liberal and progressive books that lovers of freedom should read.

Personal goals = personal growth = practice success

Did one of my recent articles get you thinking about planning for the end of the year? I talked about how you can make adjustments in your appointment book to make room for those last-minute new patients who are trying to get in before the end of the year so you can make your new patient goal number. I also discussed how you can forecast your appointment book production numbers to see if you are coming up short for your production goals. If you would like to re-read this article, CLICK HERE to be redirected.

These practice goals are not only important, but they are critical to the health of the office overhead and the stress level of the team. But what about you? What are your personal goals? When I was working in a practice, I got my hands on as much CE as I could handle. Do you know what goal I think you could set and accomplish by the end of the year? You could become a Dentrix Master and receive a certificate to prove it. This could be your personal end of the year goal.

Clinical CE is great and, for some of you in the dental practice, it is a requirement in order for you to maintain your license. Your entire day revolves around your practice management software and most offices have zero training or continuing education for the software you use every day. You all must maintain a certain level of knowledge of Dentrix in order to function on a daily basis. I am asking you to up your game and not just function, but excel. Become a Dentrix Master.

It’s easy to start and extremely rewarding to finish. The Dentrix Mastery Tracks were launched to help you learn more about your software, things you might not know exist and things you want to learn more about. This is your chance to set a personal goal and help your office at the same time.  I believe in you.

Your first test is free! 

To get started CLICK HERE and Create New User. Then enter code FreeTestDOM

Volume and Information

This is a little essay on the puzzle of volume, disguised as comments on a paper by Fernando Alvarez and Andy Atkeson, presented at the Becker-Friedman Institute Conference in Honor of Robert E. Lucas Jr. (The rest of the conference is really interesting too, but I likely will not have time to blog a summary.) 

Like many others, I have been very influenced by Bob, and I owe him a lot personally as well. Bob pretty much handed me the basic idea for a "Random walk in GNP" on a silver platter. Bob's review of a report to the OECD, which he might rather forget, inspired the Grumpy Economist many years later. Bob is a straight-arrow icon for how academics should conduct themselves. 

On Volume:  (also pdf here) 

Volume and Information. Comments on “Random Risk Aversion and Liquidity: a Model of Asset Pricing and Trade Volumes” by Fernando Alvarez and Andy Atkeson 

John H. Cochrane

October 7 2016 

This is a great economics paper in the Bob Lucas tradition: Preferences, technology, equilibrium, predictions, facts, welfare calculations, full stop.

However, it’s not yet a great finance paper. It’s missing the motivation, vision, methodological speculation, calls for future research — in short, all the BS — that Bob tells you to leave out. I’ll follow my comparative advantage, then, to help to fill this yawning gap.

Volume is The Great Unsolved Problem of Financial Economics. In our canonical models — such as Bob’s classic consumption-based model — trading volume is essentially zero.

The reason is beautifully set out in Nancy Stokey and Paul Milgrom’s no-trade theorem, which I call the Groucho Marx theorem: don’t belong to any club that will have you as a member. If someone offers to sell you something, he knows something you don’t.

More deeply, all trading — any deviation of portfolios from the value-weighted market index — is zero sum. Informed traders do not make money from us passive investors, they make money from other traders.

It is not a puzzle that informed traders trade and make money. The deep puzzle is why the uninformed trade, when they could do better by indexing.

Here’s how markets “should” work: You think the new iPhone is great. You try to buy Apple stock, but you run in to a wall of indexers. “How about $100?” “Sorry, we only buy and sell the whole index.” “Well, how about $120?” “Are you deaf?” You keep trying until you bid the price up to the efficient-market value, but no shares trade hands.

As Andy Abel put it, financial markets should work like the market for senior economists: Bids fly, prices change, nobody moves.

And, soon, seeing the futility of the whole business, nobody serves on committees any more. Why put time and effort into finding information if you can’t profit from it? If information is expensive to obtain, then nobody bothers, and markets cannot become efficient. (This is the Grossman-Stiglitz theorem on the impossibility of efficient markets.)

I gather quantum mechanics is off by 10 to the 120th power in the mass of empty space, which determines the fate of the universe. Volume is a puzzle of the same order, and importance, at least within our little universe.

Stock exchanges exist to support information trading. The theory of finance predicts that stock exchanges, the central institution it studies, the central source of our data, should not exist. The tiny amounts of trading you can generate for life cycle or other reasons could all easily be handled at a bank. All of the smart students I sent to Wall Street for 20 years went to participate in something that my theory said should not exist.

And it’s an important puzzle. For a long time, I think, finance got by on the presumption that we’ll get the price mostly right with the zero-volume theory, and you microstructure guys can have the last 10 basis points. More recent empirical work makes that guess seem quite wrong. It turns out to be true that prices rise when a lot of people place buy orders, despite the fact that there is a seller for each buyer. There is a strong correlation between the level of prices and trading volume — price booms involve huge turnover, busts are quiet.

At a deeper level, if we need trading to make prices efficient, but we have no idea how that process works, we are in danger that prices are quite far from efficient. Perhaps there is too little trading volume, as the rewards for digging up information are not high enough! (Ken French’s AFA presidential speech artfully asks this question.)

Our policy makers, as well as far too many economists, jump from not understanding something, to that something must be wrong, irrational, exploitative, or reflective of “greed” and needs to be stopped. A large transactions tax could well be imposed soon. Half of Washington and most of Harvard believes there is “too much” finance, meaning trading, not compliance staff, and needs policy interventions to cut trading down. The SEC and CFTC already regulate trading in great detail, and send people to jail for helping to incorporate information in to prices in ways they disapprove of. Without a good model of information trading those judgments are guesses, but equally hard to refute.

How do we get out of this conundrum? Well, so far, by a sequence of ugly patches.

Grossman and Stiglitz added “noise traders.” Why they trade rather than index is just outside the model.

Another strand, for example Viral Acharya and Lasse Pedersen’s liquidity based asset pricing model, uses life cycle motives, what you here would recognize as an overlapping generations model. They imagine that people work a week, retire for a week, and die without descendants. Well, that gets them to trade. But people are not fruit flies either.

Fernando and Andy adopt another common trick — unobservable preference shocks. If trade fundamentally comes from preferences rather than information then we avoid the puzzle of who signs up to lose money.

I don’t think it does a lot of good to call them shocks to risk aversion, and tie them to habit formation, as enamored as I am of that formulation in other contexts. Habit formation induces changes in risk aversion from changes in consumption. That makes risk aversion shocks observable, and hence contractable, which would undo trading.

More deeply, to explain volume in individual securities, you need a shock that makes you more risk averse to Apple and less risk averse to Google. It can be done, but it is less attractive and pretty close to preferences for shares themselves.

Finally, trading is huge, and hugely concentrated. Renaissance seems to have a preference shock every 10 milliseconds. I last rebalanced in 1994.

The key first principle of modern finance, going back to Markowitz, is that preferences attach to money — to the payoffs of portfolios — not to the securities that make up portfolios. A basket of stocks is not a basket of fruits. It’s not the first time that researchers have crossed this bright line. Fama and French do it. But if it is a necessary condition to generate volume, it’s awfully unpalatable. Do we really need to throw out this most basic insight of modern finance?

Another strain of literature supposes people have “dogmatic priors” or suffer from “overconfidence.” (José Scheinkman and Wei Xiong have a very nice paper along these lines, echoing Harrison and Kerps much earlier.) Perhaps. I ask practitioners why they trade and they say “I’m smarter than the average.” Exactly half are mistaken.

At one level this is a plausible path. It takes just a little overconfidence in one’s own signal to undo the no-trade-theorem information story — to introduce a little doubt into the “if he’s offering to sell me something he knows something I don’t” recursion.

On the other hand, understanding that other people are just like us, and therefore inferring motives behind actions, is very deep in psychology and rationality as well. Even chimps, offered to trade a banana for an apple, will check to make sure the banana isn’t rotten.

(Disclaimer: I made the banana story up. I remember seeing a science show on PBS about how chimps and other mammals that pass the dot test have a theory of mind, understand that others are like them and therefore question motives. But I don’t have the reference handy. Update: A friend sends this and this.)

More deeply, if you are forced to trade, a little overconfidence will get it going. But why trade at all? Why not index and make sure you’re not one of the losers? Inferring information from other’s offer to trade is only half of the no-trade theorem. The fact that rational people don’t enter a zero-sum casino in the first place is the other, much more robust, half. That line of thought equates trading with gambling — also a puzzle — or other fundamentally irrational behavior.

But are we really satisfied to state that the existence of exchanges, and the fact that information percolates into prices via a series of trades, are facts only “explainable" by human folly, that would be absent in a more perfect (or perfectly-run) world?

Moreover, that “people are idiots” (what Owen Lamont once humorously called a “technical term of behavioral finance”) might be a trenchant observation on the human condition. But, by being capable of “explaining” everything, it is not a theory of anything, as Bob Lucas uses the word “theory.”

The sheer volume of trading is the puzzle. All these non-information mechanisms — life-cycle, preference shocks, rebalancing among heterogeneous agents (Andy Lo and Jiang Wang), preference shifts, generate trading volume. But they do not generate the astronomical magnitude and concentration of volume that we see.

We know what this huge volume of trading is about. It’s about information, not preference shocks. Information seems to need trades to percolate into prices. We just don’t understand why.

Does this matter? How realistic do micro foundations have to be anyway? Actually, for Andy and Fernando’s main purpose, and that of the whole literature I just seemed to make fun of, I don’t think it’s much of a problem at all.

Grossman and Stiglitz, and their followers, want to study information traders, liquidity providers, bid-ask spreads, and other microstructure issues. Noise traders, “overconfidence,” short life spans, or preference shocks just get around the technicalities of the no-trade theorem to focus on the important part of the model, and the phenomena in the data it wants to match. Andy and Fernando want a model that generates the correlations between risk premiums and volume. For that purpose, the ultimate source of volume and why some people don’t index is probably unimportant.

We do this all the time. Bob’s great 1972 paper put people on islands and money in their hands via overlapping generations. People live in suburbs and hold money as a transactions inventory. OLG models miss velocity by a factor of 100 too. (OLG money and life-cycle volume models are closely related.) So what? Economic models are quantitative parables. You get nowhere if you fuss too much about micro foundations of peripheral parts. More precisely, we have experience and intuition that roughly the same results come from different peripheral micro foundations.

If I were trying to come up with a model of trading tomorrow, for example to address the correlation of prices with volume (my “Money as stock” left that hanging, and I’ve always wanted to come back to it), that’s what I’d do too.

At least, for positive purposes. We also have experience that models with different micro foundations can produce much the same positive predictions, but have wildly different welfare implications and policy conclusions. So I would be much more wary of policy conclusions from a model in which trading has nothing to do with information. So, though I love this paper’s answer (transactions taxes are highly damaging), and I tend to like models that produce this result, that is no more honest than most transactions tax thought, which is also an answer eternally in search of a question.

At this point, I should summarize the actual contributions of the paper. It’s really a great paper about risk sharing in incomplete markets, and less about volume. Though the micro foundations are a bit artificial, it very nicely gets at why volume factors seem to generate risk premiums. For that purpose, I agree, just why people trade so much is probably irrelevant. But, having blabbed so much about big picture, I’ll have to cut short the substance.

How will we really solve the volume puzzle, and related just what “liquidity” means? How does information make its way into markets via trading? With many PhD students in the audience, let me emphasize how deep and important this question is, and offer some wild speculations.


As in all science, new observations drive new theory. We’re learning a lot about how information gets incorporated in prices via trading. For example, Brian Weller and Shrihari Santosh show how pieces of information end up in prices through a string of intermediaries, just as vegetables make their way from farmer to your table — and with just as much objection from bien-pensant economists who have decried “profiteers” and “middlemen” for centuries.

Also, there is a lot of trading after a discrete piece of information hits the market symmetrically, such as a change in Federal Funds rate. Apparently it takes trading for people to figure out what the information means. I find this observation particularly interesting. It’s not just my signal and your signal.

And new theory demands new technique too, something that we learned from Bob. (Bob once confessed that learning the math behind dynamic programming had been really hard.)

What is this “information” anyway? Models specify a “signal” about liquidating dividends. But 99% of “information” trading is not about that at all. If you ask a high speed trader about signals about liquidating dividends, they will give you a blank stare. 99% of what they do is exactly inferring information from prices — not just the level of the price but its history, the history of quotes, volumes, and other data. This is the mechanism we need to understand.

Behind the no-trade theorem lies a classic view of information — there are 52 cards in the deck, you have three up and two down, I infer probabilities, and so forth. Omega, F, P. But when we think about information trading in asset markets, we don’t even know what the card deck is. Perhaps the ambiguity or robust control ideas Lars Hansen and Tom Sargent describe, or the descriptions of decision making under information overload that computer scientists study will hold the key. For a puzzle this big, and this intractable, I think we will end up needing new models of information itself. And then, hopefully, we will not have to throw out rationality, the implication that trading is all due to human folly, or the basic principles of finance such as preferences for money not securities.

Well, I think I’ve hit 4 of the 6 Bob Lucas deadly sins — big picture motivation, comments about about whole classes of theories, methodological musings, and wild speculation about future research. I’ll leave the last two — speculations about policy and politics, and the story of how one thought about the paper — for Andy and Fernando!

A first step to progressive consumption taxes

What's an easy way to get going on progressive income taxes? Simply remove all limits on contributions to and withdrawals from IRAs. (I thank my Hoover colleague Michael Bernstam for this clever idea, and the Hoover coffee room for bumping us into each other.)

Background: Once people see that a consumption tax, in place of income tax, corporate tax, estate tax, etc. is much simpler and more economically efficient, the natural question is "what about progressivity?" The answer is that there are lots of ways to make a consumption tax progressive.


My favorite (today) is a flat consumption tax, with the same rate on everything, collected as a VAT.

Then, realize that progressive taxation is the same thing as flat taxation plus redistribution. If I pay 40% tax and you pay 20% tax, that's the same thing as both of us paying 40% tax and you receiving a check from the government. So, I think, separate taxation (raising revenue for the government at minimum cost), subsidy, and redistribution. Make redistribution coherent, integrate it with other programs, and implement it by sending people checks, on budget.

Most countries try to make it progressive by charging different rates for things that rich people buy vs. poor people. But that is a mistake as it distorts the economy. Even rich people can buy more tacos and less yachts, and maybe a poor person wanted to buy a yacht and start a rental business.

An alternative implementation is to turn the current income tax system into a progressive consumption tax. If you can fully deduct savings from income, the "income" tax becomes a consumption tax. Alternatively, pay taxes on all "earned" income, but no tax on  dividends, interest, or capital gains. That works out to the same thing -- no tax distortion on whether you consume the day you get the income, or later after returns compound.

That approach leads to all sorts of definitional problems, which is why I haven't been a huge fan. (Though I'm not strongly opinionated, recognizing that people who advocate it know a lot more about the tax code than I do.)

So, along comes Michael. Why not just remove all limits on IRAs? Contribute as many pre-tax dollars as you want. Interest, dividends, and capital gains accumulate tax free. No minimum distributions, estate taxes, etc. But when you take money out of the IRA, to consume it (otherwise you'd leave it in!) you pay income tax.

Yes, it's imperfect. It doesn't solve the Trump issue that what is "income" is an elastic concept in the hands of lawyers and lobbyists. But it's a quick and easy step that gets us a long way there.

Our tax code sort of recognizes that taxing rates of return is a bad idea. We tax "unearned" income -- but then there is a huge list of complex exemptions. 401(k), 526(b), IRA, Roth IRA, health savings accounts, college savings accounts, step up of capital gains at death, like-kind exchanges, and on and on, each with complex rules to follow. Just removing all limits on IRAs would be a big step towards a consumption tax, and then we wouldn't need all these other ones either.

Objections? I'm not great on tax law, so it will be fun to hear comments.

Bracing for Hurricane Matthew or any natural disaster

As I write this blog for you all today, I am sitting in a hotel in Jacksonville, Fla., because I am working with an amazing periodontal office with their systems, health history updates and overall practice efficiency. Last night, I spoke to their study club members on some practical measures when it comes to protecting their patient records. It is ironic that, as I write this, we are on the verge of Hurricane Matthew hitting the east coast of Florida … so this post becomes so much more important.

It is up to the practice to make sure that their patients’ Protected Health Information (PHI) is kept confidential, the integrity of the record is sound and your patients’ records are accessible. So as I watch the Weather Channel from my hotel room tonight, I wanted to put together some tips you can follow to help you protect your patient’s information.

Notice what I said “some tips you can follow to help you protect your patient’s information.” It is not the job of your software, your hardware or your office design to ensure the protection of your patient’s data. It is up to you to put systems in place.

Since Florida is on the verge of a Category 4 hurricane, I want to point out a few things that could potentially affect the confidentiality, integrity and accessibility of your patient’s protected health information.

• Power outages are going to be a huge issue with this upcoming storm. If you are going to close the office and want to have access to some of your patients’ information for returning calls, phoning in medications or following up with your patients after some surgeries, I would recommend you using Dentrix Mobile. When you use Dentrix Mobile, you have the opportunity to remote in using a mobile device and having access to some of your patients’ critical information.
• Make sure an authorized team member has access to the backup of all the patient data in case of flooding or destruction of the practice. The backup of the data might be on an external hard drive or in an online secure backup system. Dentrix has the option of using eBackup to store your patients’ information securely and safely. This would give your practice a good option to access patient data in case of an emergency.
• Make sure you have your Business Associate Agreements in place with your outside contractors. What if you are working with a consultant, accountant, attorney or computer company who has access to your patients’ information and they are the ones who are affected by the storm which jeopardizes the confidentiality of your patients’ information?

You can never do too much to prepare for a disaster and you have an obligation to protect your patients’ health information. It is not something you want to take lightly. Seeing this storm and looking back on storms in the past makes me realize we should be prepared for anything.

Trump Taxes

As I see it, important points about the Trump tax affair are not yet reflected in media coverage. 1) This affair reflects the intrinsic difficulties of an income tax. A consumption tax can be more progressive -- Mr. Trump would have likely have paid a lot more. 2) Raising personal income tax rates and especially capital gains and estate tax rates will do little to raise tax payments from the likes of Mr. Trump. No taxable income = no tax at any rate. It will likely have the opposite effect, making more lawyer, accountant, and lobbyist time worthwhile.

The main issue, really, is not what taxes Mr. Trump did or did not pay after the big loss. The big issue is what taxes he did or did not pay beforehand.


If we're going to tax income, the principle of net operating loss carry-forward (this sort of taxese by itself tells you a lot about what's wrong with the system) makes a lot of sense. Suppose you run a business that makes $1,000,000 in even years, and loses $900,000 in odd years. On average, you make $50,000 per year. But if you pay a 40% Federal income tax rate (plus state, local, etc.) in the good years, then you pay $200,000 per year on average in taxes, a 400% tax rate.

So, if Mr. Trump really had earned $1,000,000,000 of income, paid taxes on that income, then lost $900,000,000 as reported, allowing him to deduct future income against that $900,000,000 until he pays taxes only on the net $100,000,000 makes abundant sense. (I'm struggling to keep track of the zeros here.)

Now you see the big issue. The real question is, did Mr. Trump actually make income, pay taxes, and then suffer that $900,000,000 loss? Or, did other people suffer the loss, and Mr. Trump got to use the losses to protect his future income? Or, are the losses basically fictitious?  The reporting (New York Times ) suggests the latter

...net operating loss, or N.O.L., allows a dizzying array of deductions, business expenses, real estate depreciation, losses from the sale of business assets and even operating losses to flow from the balance sheets of those partnerships, limited liability companies and S corporations onto the personal tax returns of men like Mr. Trump.

The  follow up offered more detail on where fictitious or other people's losses come from:

... he might have been able to record write-downs of assets under a doctrine known as “abandonment,” an aggressive accounting tactic used when an investor walks away from a worthless or nearly worthless asset and writes off the entire capital investment in the property. ["The" does not mean "his?"] 

... Mr. Trump personally guaranteed $832 million of debt related to his casinos and other assets. Under tax code provisions available to real estate developers, he could take the full amount as a deduction even if he didn’t invest a dime of his own money. [my emphasis] 

Ordinarily, that deduction would be recaptured when the debt was forgiven or the underlying assets sold. If the debt were forgiven, Mr. Trump would have to report that as income. But there are various exceptions. If Mr. Trump was insolvent at the time — if his debts exceeded his assets — he might have avoided having to report the forgiveness of debt as income...

There are other provisions, too, that might have allowed Mr. Trump to deduct the loans but never have to report them as income. 

Real estate developers are also uniquely able to realize losses as soon as they occur, but defer gains, often indefinitely, through such tactics as like-kind exchanges. “It’s heads Trump wins, and tails the government loses,” Mr. Knoll said.

As a simple version, lunch conversation had the following anecdote: If you rent out property here, you can depreciate the cost of the house. But the cost of the house in the bay area is 99% value of land which doesn't depreciate. So you can cut your taxable income by this fictitious depreciation. I don't know if it's true, but it is a similar story.

Now, for lessons.

Income and corporate taxes.  Compare this outcome to a consumption tax. Suppose that no matter what his income, Mr. Trump had to pay, say, 25% VAT on

...Mr. Trump’s opulent lifestyle over the years. At the nadir of his personal financial crisis in the early 1990s, his lenders put him on an annual “budget” of $450,000 in personal expenses — more than enough to sustain his lifestyle of lavish homes, private jets, country clubs and golf courses 

Assuming that he did not, in fact, pay 40% taxes on the $900,000,000 before he "lost" it, he would have ended up paying a lot more in consumption taxes. A consumption tax can be more progressive than an income tax. The attempt to tax income is at the root of all this mess.

It's not just Trump. The great news of this story is that it shines a light on the affairs of America's "dynastic families" (aristocracy), and the puzzle of why they all seem to be so heavily invested in real estate. From the Times again,

...America’s dynastic families, which, like the Trumps, hold their wealth inside byzantine networks of partnerships, limited liability companies and S corporations.  

...According to Mr. Mitnick, Mr. Trump’s use of net operating losses was no different from that of his other wealthy clients.

“If it wasn’t clear before, it is now: The tax code is tilted toward the rich in its statutory framework, its exceptions, and in how it is enforced and administered,” said Steven M. Rosenthal, a real estate tax specialist and senior fellow at the Urban-Brookings Tax Policy Center. 

It goes on. A real estate lawyer once explained to me how she set up trusts for one of these "dynastic families." On Junior's first birthday he gets complex shares in a limited partnership worth just under the gift tax limit. 50 years later, what do you know by capital gains it's worth $50 million, so the property passes outside of estate taxes.

What fixes it? Neither candidate's tax plan does anything that I see to eliminate these shenanigans among the super-rich who can afford to hire armies of lawyers. (Correct me if I am wrong, please. I have not read them in great detail as I know they will be shredded on Nov. 7). Mrs. Clinton's plans to raise personal income tax rates doesn't raise more taxes from people who have sheltered all their income. Raising capital gains and estate tax rates just raises the incentive to pursue shelters. (See for example Zuckerberg's GRAT)

The right response to this affair is outrage at the astonishing crony complexity of the tax code, not really Mr. Trump's apparently perfectly legal behavior.  I can't see a way to get around this than to abandon the attempt to tax income, and just tax consumption instead.

As for Mr. Trump, I actually have a kind thing to say: This affair makes it clear that politics is indeed a recent avocation.  You can tell which economists want government jobs and which don't by how they pay their nannies. Nobody planning to run for office would have done this!

Update: Debt Parking by John Hempton (HT Marginal Revolution). Short version: Borrow lots of money. Lose it, take tax loss. Sell worthless debt to offshore entity. Get creditors to forgive debt. Normally, debt forgiveness counts as income and eats back your tax losses. But since that "income" is not cash, it's easy to hide it. The big question will be whether Mr. Trump did this, or whether he later paid taxes on the forgiven debt or not.

Hampton speculates he did not pay that tax:

There is a vehicle out there (say an offshore trust or other undisclosed related party effectively controlled by Donald Trump) - which owns over $900 million in debt and is not bothering to collect it. 

I do not have the time or energy to find that vehicle. But it is there. Now that this blog has gone public journalists are going to look for it. 

There is a Pulitzer prize for whoever finds it. Just give me a nod at the acceptance ceremony

Update 2: Josh Barro writes about a more plausible explanation from Lee Sheppard -- the "Gitlitz loophole." Until 2002, someone in Mr. Trump's position could, in fact, set up a company, borrow a ton of money, lose it, have the debt forgiven in the company's bankruptcy, but use the lost borrowed money against future personal taxes. Apparently, it was an error in writing the tax code, which Congress fixed when it came to light.

I stick to my interpretation that the episode reveals more about insane complexity of the tax code, a necessary result of trying to tax income, than much of anything else.

Will you finish the year at goal?

Okay teams, we are down to the last three months of the calendar year. Now is Are we going to meet our YTD goals?” You still have time to prepare and make some adjustments in your schedule if you are coming up short for the year. Just a couple of weeks ago, I talked about reaching out to patients with unscheduled treatment and how to make sure you have an accurate list of patients with whom to follow up. Now is the time to give your patients a gentle nudge and get them in before they lose out on those precious dental benefits.

the time to ask yourself, “

But there is more to goal-setting than just production goals. You have new patient goals and collections to strive for if you want a healthy practice. You might be asking, “Okay, what can we do over the next three months to maximize the time we have left in the year?” Let’s talk about some things you can do to set your practice up for an end of the year success.

• Make sure you have time set aside for those new patients who are going to procrastinate and want to schedule in November and December. If you have read my blog for a while, you know that I love Perfect Day Scheduling and it is ideal for blocking out time for new patients. If you have a goal of 20 new patients per month, then using Perfect Day Scheduling will ensure that your new patients calling in will have some options when they call you. It kills me when I am working with practices that say, “We can’t get a new patient in for two months.” This is unacceptable if you want to grow your practice. For more information on how to use Perfect Day Scheduling, refer back to these articles . . .
• What if Every Day Could be a Perfect Day
• The New Patient Experience
• Monitoring your production goals on a daily basis can give you and your team the statistics needed to make adjustments throughout the month and hopefully end the month on a positive note. You can enter your monthly goals into the software and use the Daily Huddle Report to manage your production goals on a daily basis. Also, when you enter your monthly goals into the software, you can use the monthly calendar as a quick visual to see where you are in respect to your goal. This is a great tool for your morning huddle. For more information on how to enter goals into Dentrix, refer back to these articles . . .
• Let’s Do Some Goal Setting
• Your Daily Motivation
• Tracking your collections and forecasting where you will end up for the year is also an extremely important piece for the last three months of the year. Monitoring your collections and accounts receivable can be watched from the Daily Huddle, Practice Advisor and the Practice Analysis. You can have amazing production … but if you are not collecting it, then none of it matters. If your collections are short for YTD so far, then let’s look for ways to step it up and find out where the outstanding money is. For more information on managing your accounts receivable, refer back to these past articles . . .
• Your Own Practice Management Consultant at your Fingertips
•  Your Daily Motivation

You can do this! Give your team the tools and reports they need to look ahead toward the end of 2016. 

EconTalk

I did an EconTalk Podcast with Russ Roberts. The general subject is economic growth, the reasons it seems to be slipping away from us and policies (or non-policies) that might help.

As in other recent projects (growth essay, testimony) I'm trying to synthesize, and also to find policies and ways to talk about them that avoid the stale left-right debate, where people just shout base-pleasing spin ever louder. "You're a tax and spend socialist" "You just want tax cuts for your rich buddies" is getting about as far as "You always leave your socks on the floor" "Well, you spend the whole day on the phone to your mother."

We did this as an interview before a live audience, at a Chicago Booth alumni event held at Hoover, so it's a bit lighter than the usual EconTalk. This kind of thought helps the synthesis process a lot for me.  Russ' pointed questions make me think, as did the audience in follow up Q&A (not recorded). Plus, it was fun.

I always leave any interview full of regrets about things I could have said better or differently. The top of the regret pile here was leaving a short joke in response to Russ' question about what the government should spend more on. Russ was kindly teeing up the section of the growth essay "there is good spending" and perhaps "spend more to spend less" ideas in several other recent writings. It would have been a good idea to go there and spend a lot more time on the question.


From the growth essay, I think the government could profitably spend a lot more money on the justice system. That so many of our fellow citizens rot in jail awaiting trials, that the vast majority never receive a trial anyway but a hasty plea-bargain, that their legal representation is so thin, is a disgrace -- and causing huge problems. If a wrongly accused young man spends two years in jail before charges are dropped, the consequences for him and his family are awful. Business relies on a speedy and efficient justice system to adjudicate commercial disputes, and that seems to be falling apart too, partly for lack of resources.  The cost here is peanuts compared to, say, peanut subsidies.

Our public infrastructure doesn't just consist of steel and asphalt. The public software needs investment as well, or more.

Public health is one of the most essential public goods. Of all the civilization-ending scenarios you can think of, nuclear war and a pandemics top my list. Many past pandemics followed a surge in globalization -- the plague of the 1350s, that wiped out half or more of the population; the smallpox that wiped out native America in the 1500s, the 1918 flu. (Larry Summers has a good article on this point.) We are ripe for antibiotics to stop working and new diseases to spread catastrophically, if not among humans among the plants and animals on which we depend. Don't count on the UN and the WHO.

The government can profitably fund basic research. "Yes, 95% of funded research is silly. Yes, the government allocates money inefficiently. Yes, research should also attract private donations. But the 5% that is not silly is often vital, and can produce big breakthroughs." (Basic research is not the same thing as subsidies for commercializing research.)

Yes, Martha, I should have said, there are public goods here and there.

Of course, more spending on things like these does not imply more spending overall. They're all remarkably cheap, and could easily be funded by spending a little less on some of the colossal waste. (Example: We spend $6 billion on the FBI and $13 billion on border control.) Of course, one must also spend wisely and use the results wisely. And one could add a lot to the list. But repeating a fun joke about spending is not the right answer.

Furman on zoning

On this day (Clinton vs. Trump debate) of likely partisan political bloviation, I am delighted to highlight a very nice editorial by Jason Furman, President Obama's CEA chair, on the effects of housing restrictions. A longer speech here. The editorial is in the San Francisco Chronicle, ground zero for housing restriction induced astronomical prices. Furman:

 When certain government policies — like minimum lot sizes, off-street parking requirements, height limits, prohibitions on multifamily housing, or unnecessarily lengthy permitting processes — restrict the supply of housing, fewer units are available and the price rises. On the other hand, more efficient policies can promote availability and affordability of housing, regional economic development, transportation options and socioeconomic diversity...

...barriers to housing development can allow a small number of individuals to enjoy the benefits of living in a community while excluding many others, limiting diversity and economic mobility. 

This upward pressure on house prices may also undermine the market forces that typically determine patterns of housing construction, leading to mismatches between household needs and available housing. 

What's even more praiseworthy is what Furman does not say: "Affordable" housing constructed by taxpayers, or by forcing developers to provide it; rent controls; housing subsidies; bans on the construction of market-rate housing (yes, SF does that); bans on new businesses (yes, Palo Alto does that), and the rest of the standard bay-area responses to our housing problems.  The first few may allow a few lucky low-income people to stay where they are, as long as they remain low-income, but does not allow new people to come chase opportunities. Subsidies that raise demand without raising supply just raise prices more. As in child care or medicine.



When President Obama's CEA chair writes an oped, most of which could easily have come from Hoover or CATO, it's a hopeful day, no matter what happens tonight.

Moreover, Furman recognizes that a thousand-point federal program imposed on states and local governments by regulation is not the answer:

While most land use policies are appropriately made at the state and local level, the federal government can also play a role in encouraging smart land use regulations

We have found the enemy, as Pogo said, and it is us.

The real political economy is tough, of course. Current residents vote for restrictions, and not just out of misunderstanding.  Current residents (people like me), who buy expensive houses in this beautiful area, vote to keep things just as they are. Restrictions mean they can't sell houses for $10 million to a developer who wants to put up a 100 story office building and turn it in to Manhattan. But restrictions mean they can sell for $2 million and retire comfortably to Mendocino.  Or stay  right where they are, paying property taxes based on the 1965 value of their house (another big impediment to housing mobility and affordability) and making sure the neighbors don't sell and ruin their view. Renters vote for rent control, affordable housing mandates, and so on that applies to current residents but not to newcomers.  This behavior has a  negative externality on low-income ("low" means out of top 0.5%in SF!)  people who want to move here. But a Trumpian mini-wall of regulation keeps them out. The most local government is not always the best. The most liberal government often acts with effects that are surprisingly conservative.

Negative rates and inflation

Have negative interest rates boosted inflation? Here is a nice graph (source macro-man blog, HT FT alphaville)

Source: Macro-man blog

Not really. Explanations? Choose the chicken or the egg:

1) But for negative rates, inflation would have been even lower

2) We're living in a Fisher effect world. Lower rates lower inflation. (Which is arguably a good, if unintended, thing)

Medical Billing or Bust - what you need to know now

I had the pleasure of speaking last week at the annual American Association of Dental Office Managers (AADOM) meeting in Boca Rotan, Fla. My topic, Medical Billing or Bust, is a passion of mine and anytime I have the opportunity to spread the word about how you can change the world and change the lives of your patients is important to me. Keep your eyes open for registration to The Business of Dentistry Conference coming up in August 2017 where I will be teaching the Medical Billing or Bust to Dentrix users.

There are several things I can bring you up to speed now in this article that will help you understand how to set it up in your Dentrix software. Medical billing is not only about trying to maximize your patients’ benefits that they might not have access to, but it is also about providing the necessary coding for other organizations to use for growing awareness about disease patterns. With this being said, you can use medical coding on both the ADA claim form and the HCFA medical claim form.

Here are a few things to know now . . .

• You will need to upgrade your Dentrix software to G6.1 in order to using medical coding on any claim form and send out a claim. This upgrade was released on October 1, 2015 so it has been out for almost a year.
• When you upgrade to Dentrix G6.1, the software will include the most common ICD-10 codes for a dental office. This will save you a ton of time with having to input these codes. If there are some codes not included that you need, you can manually enter them into your system.
• Make sure the HCFA claim form is added into the Definitions because you will need to attach it to the insurance plan information. There are several medical claim forms available. If you need a different format than the HCFA, you can search the Dentrix Knowledge base for the article that lists all the medical claim forms available so you can add the one you need into the Definitions.
• When you upgrade to Dentrix G6.1 and you have not done any medical billing yet, you will need to add in all your CPT codes, Modifiers, Place or Service codes and Type of Service codes. If you need resources for these codes, please email me directly and I can send you a resource page at dayna@raedentalmanagement.com

For more information on medical billing, please read these past articles . . .

Medical Billing - the new shiny toy

Jump Start Your Medical Billing

Immigration, trade, and child care

Both Mr. Trump and Mrs. Clinton want to lower the cost and, presumably, increase the amount of child care. A quick economics quiz: What is the policy change that would have the greatest such effect?


I hope you answered: legal immigration of child care workers! And remove the large number of restrictions on providing child care.  As the WSJ points out in a recent editorial,

... regulation drives up the cost of care. States set minimums on square feet per child; licensing requirements; ratios for staff-to-children; group sizes. Zoning laws prevent care centers in convenient places such as residential neighborhoods. Regulation also limits options like informal care at grandma’s house or families who share nannies.

On the latter, zoning, for example, forbids commercial activity in residential-zoned areas, like the ones where people live. And WSJ left out the full weight of American labor law and taxation. Anyone who has tried to legally hire a nanny has a good sense of that. (See also Ivanka Trump's oped  describing the plan.)

Needless to say, that is not the candidates' preferred approach, who were vying with each other to offer federal subsidies. Mr. Trump is, needless to say, simultaneously vowing to deport large number of child-care workers. Mrs Clinton is not making any noises about removing legal restrictions or taxes on low-skill part time employment. (The WJS offers that "Mr. Trump deserves credit for noting" the above comments on regulation, but did not offer a link. If anyone knows where this is, put it in a comment, as I had not heard about it.)

A lot of economics comes down to: Supply competition is the best answer to just about every economic problem. 

This is a small example of a spreading disease in American economic policy. The recipe: 1) introduce strong supply and competition restrictions, usually to politically favored groups. Soon, however, those groups start charging higher prices. So 2) give subsidies so people can pay the higher prices induced by 1). It's perfect: now both sides depend on politicians. See, most egregiously, health care and housing.

The trouble is, you can only make one thing (child care, now) cheaper by making everything else more expensive. A tax credit for child care means higher taxes on everything else. We're running out of everything elses fast!

This is a good moment for supply and demand, and a good illustration of how this basic economic tool gives insights that are not obvious.

(If you can't see the supply and demand graph, try here.)  Demand slopes down. The less child care costs, the more of it people buy.  Supply curve slopes up. If child care workers can charge more, more people take those jobs or set up child care businesses.

The red graph shows what happens if we allow lots of immigration, and also deregulate supply. The supply curve shifts to the right -- more child care offered at the same price. Moreover, if we allow immigration, the supply curve becomes flatter -- a smaller increase in price produces a larger increase in the amount of child care.

There is a very important distinction between domestic and international supply. In the end, the US workforce is limited. The more people who go in to child care, the fewer do something else. The upward slope of the child-care supply curve represents an inward shift of the supply curves of everything else, meaning higher prices and lower quantities. Immigration gives us a free upward slope.

This graph analyzes a federal subsidy for child care. If people get a $100 subsidy, they are willing to pay $100 more for the same amount of child care, so the demand curve goes up by $100, as shown. I drew the supply curves with more extreme slopes, to make a deeper point.

The "restricted" supply curve is nearly vertical. This is what happens in an industry with strong supply restrictions, like, say, epi-pens. The subsidy means people are willing to pay $100 more. With no more supply forthcoming, the result is simply that people pay $100 more and get the same quantity.

Subsidizing something with restricted supply does not benefit consumers. It just raises the price and benefits the producers. 

The consumers, unaware of what's going on, become dependent on the subsidy of course. See health care and education.

With lots of supply competition, and a flat supply curve, the subsidy instead raises the quantity of child care delivered, which is presumably what both Mrs. Clinton and Mr. Trump desire from the policy. A subsidy only increases quantities if there is lots of supply competition and easy entry. 

The journal gets this

Mrs. Clinton raises the Trump offer in every regard, from more Head Start funding to salary support for day-care workers. And if you think care is expensive now, wait until Mrs. Clinton wades in. She likes to say that child care can be more expensive than college tuition, which is false. The irony is that her day-care blowout would recreate what has made college notoriously expensive—large subsidies for the provider and buyer. Day-care centers and pre-Ks could raise prices, confident that government will cover the increase.

The graph offers a little more precision. Subsidies only raise college expenses because of restricted supply. The Administration's war on for profit colleges unambiguously pushes the supply curve to the left.

On the human side of our immigration restrictions, I recommend a beautiful New Yorker article by Rachel Aviv on the life of a woman who immigrated illegally from the Phillippines to care for the children of... well, people like the Trumps and Clintons. The US will not kick out illegal immigrants because deep down we know that without them the cost of child care will skyrocket. But the cost to a low-wage worker of illegal status -- never being able to see family again -- is worth remembering.

The New Yorker article makes clear also how much immigration to the US is driven by desperate conditions elsewhere. If you don't want immigration to the US, the best possible solution is to aggressively buy what other countries have to sell, so people can make a living there. Needless to say, neither Mr. Trump nor Mrs. Clinton seem at all aware of this obvious connection.

(Vaguely competent foreign policy is the second best possible solution. Refugees from Syria and Honduras would not be coming here if we had not let their country fall apart, or fueled a drug war.)

Most child care is not Mrs. Trump, handing off children to a loving nanny in Manhattan as she speeds off to her job as.. whatever it is she does. Tellingly, the Trump plan takes the form of a tax credit and a new addition to the bewildering number of tax sheltered savings vehicles. What, doesn't everyone have a tax lawyer? A lot of child care is done off the books, for people who also work off the books.  This is also a good moment to reflect on the wisdom of the new ban-cash movement plus e-verify so that every single transaction in the US is taxed and appropriately monitored for compliance with labor laws, licensing, OSHA, and so on...

Testimony 2

On the way back from Washington, I passed the time reformatting my little essay for the Budget committee to html for blog readers. See below. (Short oral remarks here in the last blog post, and pdf version of this post here.)

I learned a few things while in DC.

The Paul Ryan "A better way" plan is serious, detailed, and you will be hearing a lot about it. I read most of it in preparation for my trip, and it's impressive. Expect reviews here soon. I learned that Republicans seem to be uniting behind it and ready to make a major push to publicize it. It is, by design, a document that Senatorial and Congressional candidates will use to define a positive agenda for their campaigns, as well as describing a comprehensive legislative and policy agenda.

"Infrastructure" is bigger in the conversation than I thought. But since there is no case that potholes caused the halving of America's trend growth rate, do not be surprised if infrastructure fails to double the trend growth rate. It's also a bit sad that the most common growth idea in Washington is, acording to my commenters, about 2,500 years old -- employment on public works.

Washington conversation remains in thrall to the latest numbers. There was lots of buzz at my hearing about a recent census report that median family income was up 5%. Chicagoans used to get excited about the 40 degree February thaw.

The quality can be very very good. Congressman Price, the chair of my session, covered just about every topic in my testimony, and possibly better. Congressional staff are really good, and they are paying attention to the latest. If you write policy-related economics, take heart, they really are listening.

The questions at my hearing pushed me to clarify just how will debt problems affect the average American. What I had not said in the prepared remarks needs to be said. If we don't get an explosion of growth, the US will not be able to make good on its promises to social security, health care, government pensions, credit guarantees, taxpayers, and bondholders. Something's got to give. And the growing size of entitlements means they must give. Even a default on the debt, raising taxes to the long-run Laffer limit, will not pay for current pension and health promises. Those will be cut. The question is how. If we wait to a fiscal crisis, they will be cut unexpectedly and by large amounts, leaving people who counted on them in dire straits. Greece is a good example. If we make sensible sustainable promises now, they will be cut less, and people will have decades to adjust.


Ok, on to html testimony:

Growing Risks to the Budget and the Economy.

Testimony of John H. Cochrane before the House Committee on Budget.

September 14 2016

Chairman Price, Ranking Member Van Hollen, and members of the committee: It is an honor to speak to you today.

I am John H. Cochrane. I am a Senior Fellow of the Hoover Institution at Stanford University¹. I speak to you today on my own behalf on not that of any institution with which I am affiliated.

Sclerotic growth is our country's most fundamental economic problem.² From 1950 to 2000, our economy grew at 3.6% per year.³ Since 2000, it has grown at barely half that rate, 1.8% per year. Even starting at the bottom of the recession in 2009, usually a period of super-fast catch-up growth, it has grown at just over 2% per year. Growth per person fell from 2.3% to 0.9%, and since the recession has been 1.3%.


The CBO long-term budget analysis⁴ looks out 30 years, and forecasts roughly 2% growth. On current trends that is likely an over-estimate, as it presumes we will have no recessions, or that future recessions will have not have the permanent effects we have seen of the last several recessions. If we grow at 2%, the economy will expand by 82% in 30 years, almost doubling.⁵ But if we can just get back to the 3.6% postwar normal growth rate, the economy will expand by 194%, almost tripling instead. We will add the entire current US economic output to the total. In per-person terms, a 1.3% trend gives the average American 48% more income in 30 years. Reverting to the postwar 2.3% average means 99% more income, twice as much. And economic policy was not perfect in the last half of the 20th century. We should be able to do even better.

Restoring sustained, long-term economic growth is the key to just about every economic and budgetary problem we face.

Nowhere else are we talking about doubling or not the average American's income.⁶

Nowhere else are we talking about doubling or not Federal revenues. Long-term Federal revenues depend almost entirely on economic growth. In 1990, the Federal Government raised $1.6 trillion inflation-adjusted dollars. In 2016, this has doubled to $3.1 trillion. Wow! Did the government double tax rates? No. The overall federal tax rate stayed almost the same -- 18.0% of GDP in 1990, 18.8% of GDP today. Income doubled.

Whether deficits and debt balloon, whether we our government can pay for Social Security and health care, defend the country, and fund other goals such as protecting the environment, depend most crucially on economic growth.

Why has growth halved? Some will tell you that the economy is working as well as it can, but we've just run out of new ideas.⁷ A quick tour of the Silicon Valley makes one suspicious of that claim.

Others will bring you novel and untested economic theories: we suffer an ill-defined "secular stagnation" that requires massive borrowing and spending, even wasted spending. The "multiplier" translating government spending to output is not one and a half, and a temporary expedient which can briefly raise the level of income in a depression, but six or more, enough to finance itself by the larger tax revenues which larger output induces --a proposition long derided of the "supply side" --and it can now kick off long-term growth.⁸ Like 18th century doctors to whom disease was an imbalance of humors, modern macroeconomic doctors have one diagnosis and remedy for all the complex ills that can befall a modern economy: "demand!"

I'm here to tell you the most plausible answer is simple, clear, sensible, and much more difficult. Our legal and regulatory system is slowly strangling the golden goose of growth. There is no single Big Fix. Each market, industry, law, and agency is screwed up in its own particular way, and needs patient reform.

America is middle aged, out of shape and overweight. One voice says: well, get used to it, buy bigger pants. Another voice says: 10 day miracle detox cleanse! I'm here to tell you that the only reliable answer is good old-fashioned diet and exercise.

Or, a better metaphor perhaps: our economy, legal and regulatory system has become like a hoarder's house. No, there isn't a miracle organizer system. We have to patiently clean out every room.

Economic regulation, law and policy all slow growth by their nature. Growth comes from new ideas, new products, new processes, new ways of doing things, and most of these embodied in new companies. And these upend old companies, and displace their workers, both of whom come to Washington pleading that you save them and their jobs. It is a painful process. It is natural that the administration, regulatory agencies, and you, listen and try to protect them. But every time we protect an old company, an old industry, or an old job, from innovation and competition, we slow down growth.

How do we solve this problem and get back to growth? Our national political and economic debate has gotten stale, each side repeating the same base-pleasing talking points, but making no progress persuading the other. Making one or the other points again, or louder, will get us nowhere. I will try, instead, to find policies that think outside of these tired boxes, and that can appeal to all sides of the political spectrum.

Rather than "more government" or "less government," let's focus on fixing government. We need above all a grand simplification of our economic, legal, and political life, so that government does what it does competently and efficiently.

Regulation: fix the process.

"There's too much regulation, we're stifling business. No, there's too little regulation, businesses are hurting people." Or so goes the tired argument. Regulation is strangling business investment, and especially the formation of new businesses. But the main problem with regulation is how it's done, not how much. If we fix regulation, the quantity will take care of itself. We can agree on smarter regulation, better regulation, not just "more" or "less" regulation.⁹

Regulation is too discretionary --you can't read the rules and know what to do, you have to ask for permission granted on regulators' whim. No wonder that the revolving door revolves faster and faster, oiled by more and more money.

Regulatory decisions take forever. Just deciding on the Keystone Pipeline or California's high speed train --I pick examples from left and right on purpose --takes longer than it did to build the transcontinental railroad in the 1860s. By hand.

Regulation has lost rule-of-law protections. You often can't see the evidence, challenge witnesses, or appeal. The agency is cop, prosecutor, judge, jury and executioner all rolled in to one. [And, a Congressman pointed out during the discussion, recipient of collected fines.]

Most dangerous of all, regulation and associated legal action are becoming more politicized. Each week brings a new scandal. Last week¹⁰, we learned how the Government shut down ITT tech, but not the well-connected Laureate International. The IRS still targets conservative groups¹¹. The week before, we learned how the company that makes Epi-pens, headed by the daughter of a Senator, got the FDA to block its competitors, Congress to mandate its products, and jacked up the price of an item that costs a few bucks to $600. This is a bi-partisan danger. For example, presidential candidate Donald Trump has already threatened to use the power of the government against people who donate to opponents' campaigns.¹²

America works because you can lose an election, support an unpopular cause, speak out against a policy you disagree with, and this will not bring down the attentions of the IRS, the EPA, the NLRB, the SEC, the CFPB, the DOJ, the FDA, the FTC, the Department of Education, and so forth, who can swiftly put you out of business even if eventually you are proven innocent, or just slow-roll your requests for permissions until you run out of money.

This freedom does not exist in much of the world. The Administrative state is an excellent tool for cementing power. But when people can't afford to lose an election, countries come unglued. Do not let this happen in the US.

Congress can take back its control of the regulatory process. Write no more thousand-page bills with vague authorizations. Fight back hard when agencies exceed their authorization. Insist on objective and retrospective cost benefit analysis. Put in rule-of law protections, including discovery of how agencies make decisions. Insist on strict timelines --if an agency takes more than a year to rule on a request, it's granted. [I later learned this is called a "shot clock" in Washington, a nice metaphor.]

Health care and finance are the two biggest new regulatory headaches. The ACA and Dodd-Frank aren't working, and are important drags on employment and economic growth. Simple workable alternatives exist. Implement them.

The real health care problem is not how we pay for health care, but the many restrictions on its supply and competition.¹³ If hospitals were as competitive as airlines, they would work darn hard to heal us at much lower --and disclosed! --prices. If the FDA did not strangle new medicines and devices, even generics, prices would fall.

Competition is always the best disinfectant, guarantor of good service and low prices. Yet almost all uncompetitive markets in the US are uncompetitive because some law or regulation keeps competitors out.

Rather than guarantee bank debts, and unleash an army of regulators to make sure banks don't risk too much, we should instead insist that banks get their money in ways that do not risk crises, primarily issuing equity and long-term debt. Then banks can fail just like other companies, and begin to compete just like other companies.¹⁴

"The planet is dying, control carbon!" "Your crony energy boondoggles and regulations are killing the economy!" Well, that argument is not getting us anywhere, is it? The answer is straightforward: A simple carbon tax in exchange for elimination of all the growth-killing, intrusive, cronyist, and ineffective micromanagement. We can continue to argue about the rate of that tax, but it will both reduce more carbon, and increase more growth, than the current ineffective policies --and stagnant debate.

None of these recommendations are ideological or partisan. These are just simple, clean-out-the-junk, workable ways to get our regulatory system to actually work, for its goal of protecting consumers and the environment, at minimal economic and political damage.

Social programs: Fix the incentives.

"Cut spending, or the debt will balloon!" "Raise spending or people will die in the streets!" That's getting nowhere too. And it ignores central problems.

In many social programs, if you earn an extra dollar, you lose a dollar or more of benefits. Many programs have cliffs, especially in health care and disability, where earning one extra dollar triggers an enormous loss. Even when one program cuts benefits modestly with income, the interaction of many programs makes work impossible.¹⁵ No wonder that people become trapped. We need to fix these disincentives. Doing so will help people better. If we fix the incentives, though it may look like we spend more, in the end we will spend less --and encourage economic growth as well as opportunity.

Spend more to spend less. "Spending is out of control! We need to spend less or there will be a debt crisis!" "Oh there you go being heartless again. We need to invest more in programs that help Americans in need." I feel like I'm at a dinner party hosted by a couple in a bad marriage. This isn't getting us anywhere.

It is important to limit Federal spending. However, we tend to just limit the appearance of spending by moving the same activities off the books. Off-the-books spending does the same economic damage. Or more.

For example, we allow an income tax deduction for mortgage interest, in order to subsidize homeownership. From an economic point of view, this is exactly the same thing as collecting higher taxes, and then sending checks to homeowners. It looks like we're taxing and spending less than we really are. But from an economic growth point of view, it's the same thing.

Actually, it's worse, because it adds unfairness and inefficiency. Suppose a colleague proposes a bill to you: The U.S. Treasury will send checks to homeowners, but high income people get much bigger checks, as will people who borrow a lot, and people who refinance often and take cash out. People with low incomes, who save up to buy houses, or don't refinance, get a lot less. You would say, "You're out of your mind!" But that's exactly what the mortgage interest deduction achieves!

If we were to eliminate the mortgage deduction, and put housing subsidies on budget, where taxpayers can see where their money is going, the resulting homeowner subsidy would surely be a lot smaller, much more progressive, helping lower income people, better targeted at getting people in houses, and less damaging of savings and economic growth. Both Republicans and Democrats should rejoice. Except the headline amount of taxing and spending will increase. Well, spend more to spend less.

We allow a tax deduction for charitable deductions. This is exactly the same thing as taxing more, but then sending checks to non-profits as matching contributions --but much larger checks for contributions from rich people than from poorer people. Then, many "non-profits" spend a lot of money on private jet travel, executive salaries, and political activities. Actual on-budget federal spending, convoluted and inefficient as it is, at least has a modicum of oversight and transparency. If we removed the deduction, but subsidized worthy charities, with transparency and oversight, we'd do a lot more good, and probably overall tax less and spend less. Except the headline amount of taxing and spending might increase. Well, spend more to spend less.

Mandates are the same thing as taxing and spending. Many European countries tax a lot, and then provide services, like health insurance. We mandate that employers provide health insurance. It looks like we're taxing and spending less, but we're not. A health insurance mandate has exactly the same economic effects as a $15,000 head tax on each employee, financing a $15,000 health insurance voucher.

Economics pays no heed to budget tricks. Spending too much rhetorical effort on lowering taxes and spending induces our government to such tricks, with the same growth-destroying effects. If you want economic growth, treat every mandate as taxing and spending.

Taxes: break up the argument.

The outlines of tax reform have been plain for a long time: lower marginal rates, broaden the base by getting rid of the massive welter of special deals. But it can't get done. Why not?

When we try to fix taxes,¹⁶ we argue about four things at once: 1) What is the right structure for a tax code? 2) What is the right level of taxes, and therefore, of spending? 3) What activities should the government subsidize -- home mortgages, charitable contributions, electric cars, and so on? 4) How much should the government redistribute income?

Tax reforms fail because we argue about all these together. For example, the Bowles-Simpson commission got to an improvement on the structure of taxes, but then the reform effort fell apart when the Administration wanted more revenue and congressional Republicans less.

I am back at my dysfunctional dinner party. Sometimes, in politics as in marriage, it is wise to bundle issues together, each side accepting a minor loss to ensure what they see as a major gain. You clean up your socks, I'll clean up my makeup. Sometimes, however, we bundle too many issues together, and the result is paralysis, as each side vetoes a package of improvements over a small issue. Then, it's better to work on the issues separately.

So, let's fix taxes by separating these four issues, in four commissions possibly, or better in four completely separate sections of law.

1) Structure. Agree on the right structure of the tax code, with its only goal to raise revenue at minimal economic distortion, but leave the rates blank.

2) Rates. Determine the rates, without touching the structure of the tax code. A good tax code should last decades. Rates may change every year, and likely will be renegotiated every four. But those who want higher or lower rates know they can agree on the structure of the tax code.

3) Separate the subsidy code from the tax code. Mortgage interest subsidies? Electric car subsidies? Sure, we'll talk about them, but separately. Then, we don't have to muck up raising revenue for the government with subsidies, and the budgetary and economic impact of subsidies can be evaluated on their own merits

4) Separate the redistribution code from the tax code. Then we don't muck up raising revenue for the government with income transfers.

The main point is that by separating these four elements of law, each with fundamentally different purposes, we are much more likely to make coherent progress on each. You need not oppose beneficial aspects of an economically efficient tax simplification, say, if you wish to have a greater level of redistribution --well, at least any more than you might oppose any random bill in order to force your way on that issue.

Some thoughts on how each of these might work:

Structure. The economic damage of taxation is entirely about "marginal'' rates --if you earn an extra dollar, how much do you get to enjoy it, after all taxes, federal, state, local, sales, estate, and so forth. Economics has really little to say about how much taxes people pay. The economists' ideal is a tax system in which people pay as much as the Government needs --but each extra dollar earned is tax-free. Politics, of course, focuses pretty much on the opposite, how much people pay and ignoring the economically-distorting margins.

Thus, if you ask 100 economists, "now, forget politics for a moment --that's our job --and tell me what the right tax code is, with the only objective being to raise revenue without distorting the economy,'' the pretty universal answer will be a consumption tax --with no corporate tax, income tax, tax on savings or rates of return, estates, or anything else, and essentially no deductions. (They will then say "but..." and go on to demand subsidies and income redistribution, at which time you have to assure them too that we'll discuss these separately.)

A massive simplification of the tax code is, in my opinion, as or more important than the rates --and it's something we're more likely to agree on. America's tax code is an obscenely complex cronyist nightmare.

For example, that's why I favor, and you should seriously consider, eliminating the corporate tax. Corporations never pay any taxes. All money they send to the government comes from higher prices, lower wages, or lower returns to shareholders --and mostly the former two. If you tax people who receive corporate profits, rather than collecting taxes from higher prices and lower wages, you will have a more progressive tax system.

But more importantly, if you eliminate the corporate tax, you will eliminate the constant stream of lobbyists in your offices each day asking for special favors.

Far too many businesses are structured around taxes, and far too many smart minds are spending their time devising corporate tax avoidance schemes and lobbying strategies. A much simpler tax code even with sharply higher rates --but very clear rates, that we all know about and can plan on --may well have less economic distortion than a massively complex code, with high statutory rates, but a welter of complex schemes and deductions that result in lower taxes.

Subsidy code. Tax expenditures --things like deductions for mortgage interest, employer provided health care, charitable contributions, and the $10,000 credit my wealthy Palo Alto neighbor got from the taxpayers for buying a Tesla -- are estimated at $1.4 trillion,¹⁷ compare with $3.5 trillion Federal Receipts and $4 trillion Federal Expenditures.¹⁸ Our Federal Government is really a third larger than it looks.

While the subsidy code could consist of a separate discussion of tax expenditures, it would be far better for the rules of the subsidy code to be: all subsidies must be on budget, where we can all see what's going on.

Redistribution. Even a consumption tax can be as progressive as one wants. One can use the regular income tax code with full deduction of savings and omitting capital income, thus taxing high consumption at higher rates and low consumption at lower rates.

Again, however, it might well be more efficient to integrate income redistribution with social programs. Put it on budget, and send checks to people. Yes, that makes spending look larger, but sending a check is the same thing as giving a tax break. And spending can be more carefully monitored.

Infrastructure

Infrastructure is all the rage¹⁹. America needs infrastructure. Good infrastructure, purchased at minimum cost, that passes objective cost-benefit criteria, built promptly, can help the economy in the long run. Soft infrastructure --a better justice system, for example --matters as much as hard infrastructure --more asphalt.

However, there is no case that the halving of America's growth rate in the last 20 years is centrally due to potholes and rusting bridges. Poor infrastructure is not the cause of sclerosis, so already one should be wary of infrastructure investment as the central plan to cure that sclerosis.

The claim that infrastructure spending will lift the economy out of its doldrums lies on the "multiplier" effect, that any spending, even wasted, is good for the economy. That is a dubious proposition, especially when the task is to raise the economy by tens of trillions, over decades.

Modern infrastructure is built by machines, and not many people; even less people who do not have the specialized skills. A Freeway in California will do little to help employment of a high school dropout in New York, or a middle-aged mortgage broker in New Jersey. Neither knows how to operate a grader.

The problem with infrastructure is not lack of money. President Obama inaugurated a nearly trillion dollar stimulus plan 8 years ago. His Administration found out there are few shovel-ready projects in America today. They're all tied up waiting for historic review, environmental review, and legal challenges.

The problem with infrastructure is a broken process. Put a time limit on historic, environmental, and other reviews. Require serious, objective, and retrospective cost-benefit analysis. Repeal Davis-Bacon and other contracting requirements that send costs soaring. If the point is infrastructure it should be infrastructure, not passing money around. You ought to be able to agree on more money in return for assurance that the money is wisely spent.

Debt and deficits

This hearing is also about budgets and debts, which I have left to the end. Yes, our deficits are increasing. Yes, every year the Congressional Budget Office declares our long-term promises unsustainable.

I have not emphasized this problem, though in my opinion it is centrally important, and I think I was invited here to say so.

Recognize that computer simulations with hockey-stick debt, designed to frighten into submission a supporter of what he or she feels is necessary government spending, are as ineffective as computer simulations with hockey-stick temperatures, designed to frighten into submission a supporter of current economic growth and skeptic of draconian energy regulation. Yelling about each, louder, is not going to be productive.

And there are many voices who tell you debt is not a problem. Interest rates are at record lows. Why not borrow more, and worry about paying it back later? So, let me offer a few out of the box observations, and suggestions that you might agree on.

It is useful to clarify why debt is a problem. The case that large debts will slowly and inexorably push up interest rates, and crowd out investment, is hard to make in this era of ultra-low rates. Debt does place a burden of repayment on our children and grandchildren, but if we have reasonable economic growth they will be wealthier than we are.

The biggest danger that debt poses is a crisis.

Debt crises, like all crises that really threaten an economy and society, do not come with decades of warning. Do not expect slowly rising interest rates to canary the coalmine. Even Greece could borrow at remarkably low rates. Until, one day, it couldn't, with catastrophic results.

The fear for the US is similar. We will have long years of low rates. Until, someday, it is discovered that some books are cooked, and somebody owes a lot of money that they can't pay back, and people start to question debts everywhere.

For example, suppose Chinese debts blow up, and southern Europe as well. Both Europe and China will start selling Treasury debt quickly. Suppose at the same time that student loans, state and local pensions, and state governments are blowing up, along with some large U.S. companies, and banks under deposit insurance. A recession looms, which the US will want to fight with fiscal stimulus. The last crisis occasioned about $5 trillion of extra borrowing. The next one could double that.

So, the U.S. needs to quickly borrow additional trillions of dollars, while its major customers --foreign central banks --are selling. In addition, the U.S. borrows relatively short term. Each year, the U.S. borrows about $7 trillion to pay off $7 trillion of maturing debt, and then more to cover the deficit.

Imagine all this happens 10 years from now, with social security and medicare unresolved and increasing deficits. The CBO is still issuing its annual warnings that our debt is unsustainable. Now, bond investors are willing to lend to the US government so long as they think someone else will lend tomorrow to pay off their loans today. When they suspect that isn't true, they pull back and interest rates spike.

But our large debts leave our fiscal position sensitive to interest rate rises. At 100% debt to GDP ratio, if interest rates rise to just 5%, that means the deficit rises by 5 percentage points of GDP, or approximately $1 Trillion extra dollars per year. If bond investors were worried about sustainability already, an extra trillion a year of deficits makes it worse. So they demand even higher interest rates. Debt that is easily financed at 1% rates is not sustainable at 5% rates and a catastrophe at 10% rates --if you have a large debt outstanding.

This is a big part of what happened to Greece and nearly happened to Italy. At low interest rates, they are solvent. At high interest rates, they are not.

Debt crises are like an earthquakes. It's always quiet. People laugh at you for worrying. Buying insurance seems like a waste of money. Until it isn't.

So, the way to think about the dangers of debt is not like a predictable problem that comes to us slowly. View the issue as managing a small risk of a catastrophic problem, like a war or pandemic.

The easy answers are straightforward. Sensible reforms to Social Security and Medicare are on the table. Fix the indexing, improve the incentives for older people to keep working. Convert medicare to a premium support policy.

The harder problems are those less recognized. Underfunded pensions, widespread credit guarantees, and explicit or implicit too big to fail guarantees add tinder to the fire. Dry powder and good credit are invaluable.

Above all, undertake a pro-growth economic policy. We grew out of larger debts after World War II; we can do that again.

You can also buy some insurance. Every American household that takes out a mortgage faces the choice: fixed rate, or variable rate? The fixed rate is a little higher. But it can't go up, no matter what happens. The variable rate starts out lower. But if interest rates rise, you might not be able to make the payments, and you might lose the house. That is what happens to countries in a debt crisis.

For the US, this decision is made by the Treasury Department and the Federal Reserve. The Treasury has been gently lengthening the maturity of its borrowings. The Federal Reserve has been neatly undoing that effort.

Both Treasury and Fed need direction from Congress. The Treasury does not regard managing risks to the budget posed by interest rate rises as a central part of its job, and the Fed does not even consider this fact. Congress needs to decide who is in charge of the maturity structure of US debt, and guide the Treasury. I hope that guidance leans towards the fixed rate plan. By issuing long-term debt --I argue in fact for perpetuities, that simply pay a $1 coupon forever with no fixed roll over date -- and engaging in simple swap transactions that every bank uses to manage interest rate risk, the U.S. can isolate itself from a debt crisis very effectively.²⁰ But at least ask that fixed or floating interest rate question and make a decision.

As I have warned against focusing too much attention on on-budget spending, so let me warn against too much attention on deficits rather than spending. If you focus on debt and deficits, the natural inclination is to raise tax rates. Europe's experience in the last few years argues against "austerity" in the form of sharply higher tax rates, as always adding to the disincentive to hire, invest, or start innovative businesses.

Concluding comments

I have sketched some novel and radical-sounding approaches to restoring robust economic growth. Economic growth, together with commonsense fiscal discipline are keys to solving our budget problems.

This is not pie in the sky. These are simple straightforward steps, none controversial as a matter of economics. And there really is no alternative. Ask of other approaches: Does this at all plausibly diagnose why America's growth rate has fallen in half? Does the cure at all plausibly address the diagnosis? Is the cure based on a reasonable causal channel that you can actually explain to a constituent? Does the cure have a ghost of a chance of having a large enough effect to really make a difference?

You may object that fundamental reform is not "politically feasible." Well, what's "politically feasible" can change fast in this country. This is an exciting time politically. The people are mad as hell, and they're not taking it any more. They are ready for fundamental changes.

Furthermore, it is time for Congress to take the lead. These are properly Congressional matters, and no matter who wins the Presidential election you are unlikely to see leadership in this direction.

Winston Churchill once said that Americans can be trusted to do the right thing after we've tried everything else. [NB: apparently this is an urban legend. Oh well, it's a good quip if not a quote] Well, we've tried everything else. It's time to prove him right.

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<sup>1. You can find a full CV, a list of all affiliations, and a catalog of written work at http://faculty.chicagobooth.edu/john.cochrane/index.htm. ↩

2.This testimony summarizes several recent essays. On growth and for an overview, see "Economic Growth." 2016. In John Norton Moore, ed., The Presidential Debates Carolina Academic Press p. 65-90. http://faculty.chicagobooth.edu/john.cochrane/research/papers/cochrane_growth.pdf; "Ending America's Slow-Growth Tailspin." Wall Street Journal, May 3 2016. http://www.wsj.com/articles/ending-americas-slow-growth-tailspin-1462230818, and "Ideas for Renewing American Prosperity" Wall Street Journal July 4 2014. http://online.wsj.com/articles/ideas-for-renewing-american-prosperity-1404777194. ↩

3. https://fred.stlouisfed.org/series/GDPCA, Continuously compounded annual rates of growth. Per capita https://fred.stlouisfed.org/series/A939RX0Q048SBEA ↩

4. https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/reports/51580-LTBO-2.pdf ↩

5. 100*exp(30 x 0.02) = 182. 100*exp(30*0.035) = 286. ↩

6. As an example of agreement on the fundamental importance of growth among economists of all political leanings, see Larry Summers, "The Progressive Case for Championing Pro-Growth Policies," 2016. http://larrysummers.com/2016/08/08/the-progressive-case-for-championing-pro-growth-policies/ ↩

7. For an excellent recent exposition of this view, see Robert J. Gordon, The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War. Princeton University Press 2016. http://press.princeton.edu/titles/10544.html ↩

8. An influential example of these views, including self-financing stimulus: J. Bradford DeLong and Lawrence H. Summers, "Fiscal Policy in a Depressed Economy" Brookings Papers on Economic Activity. Spring 2012. https://www.brookings.edu/bpea-articles/fiscal-policy-in-a-depressed-economy/. Interestingly, DeLong and Summers condition their view on interest rates stuck at zero, a cautionary limitation that current stimulus advocates seem to have forgotten. ↩

9. See "Rule of Law in the Regulatory State." 2015. http://faculty.chicagobooth.edu/john.cochrane/research/papers/ rule_of_law_and_regulation essay.pdf ↩

10. http://www.wsj.com/articles/the-clinton-for-profit-college-standard-1473204250 ↩

11. http://www.washingtontimes.com/news/2016/sep/7/irs-refuses-to-abandon-targeting-criteria-used-aga/ ↩

12. http://www.usatoday.com/story/news/politics/onpolitics/2016/02/22/trump-ricketts-family-better-careful/80761060/ ↩

13. See "After the ACA: Freeing the market for health care." 2015. In Anup Malani and Michael H. Schill, Eds. The Future of Healthcare Reform in the United States, p. 161-201, Chicago: University of Chicago Press. http://faculty.chicagobooth.edu/john.cochrane/research/papers/after_aca_published.pdf ↩

14. See "Toward a run-free financial system." 2014. In Across the Great Divide: New Perspectives on the Financial Crisis, Martin Neil Baily and John B. Taylor, Editors, Stanford: Hoover Institution Press, p. 197-249. http://faculty.chicagobooth.edu/john.cochrane/research/papers/across-the-great-divide-ch10.pdf, and "A Blueprint for Effective Financial Reform." 2016. In George P. Shultz, ed, Blueprint for America Hoover Institution Press, p. 71 - 84. http://faculty.chicagobooth.edu/john.cochrane/research/papers/george_shultz_blueprint_for_america_ch7.pdf ↩

15. See Casey Mulligan The Redistributon Recession, Oxford University Press 2012. ↩

16. See "Here's what genuine tax reform looks like." Wall Street Journal, December 23 2015. http://www.wsj.com/articles/heres-what-genuine-tax-reform-looks-like-1450828827 ↩

17. https://www.whitehouse.gov/omb/budget/Analytical_Perspectives Table 14; http://www.taxpolicycenter.org/briefing-book/what-tax-expenditure-budget ↩

18. https://fred.stlouisfed.org/series/W019RCQ027SBEA ↩

19. See "The Clinton Plan's Growth Deficit." Wall Street Journal, August 12 2016. http://www.wsj.com/articles/the-clinton-plans-growth-deficit-1470957720. Also, for an excellent and well documented review of these issues, see Edward L. Glaeser, 2016, "If you Build it..." City Journal, Summer 2016, http://www.city-journal.org/html/if-you-build-it-14606.html ↩

20. For more details see: A New Structure For U. S. Federal Debt." 2015. In David Wessel, Ed., The $13 Trillion Question: Managing the U.S. Government's Debt, pp. 91-146. Washington DC: Brookings Institution Press. https://www.brookings.edu/book/the-13-trillion-question/ and http://faculty.chicagobooth.edu/john.cochrane/research/papers/Cochrane_US_Federal_Debt.pdf. For a clear analysis of the problem, that recommends the opposite action --shortening the maturity structure to take advantage of low rates --see Robin Greenwood, Samuel G. Hanson, Joshua S. Rudolph, and Lawrence H. Summers, "The Optimal Maturity of Government Debt" and "Debt Management Conflicts between the U.S. Treasury and the Federal Reserve," also in David Wessel, Ed., The $13 Trillion Question: Managing the U.S. Government's Debt.↩</sup>