Greg Mankiw's Blog

CBO expects that Medicare spending under the legislation would increase at an average annual rate of roughly 6 percent during the next two decades—well below the roughly 8 percent annual growth rate of the past two decades (excluding the effect of establishing the Medicare prescription drug benefit). Adjusting for inflation, Medicare spending per beneficiary under the legislation would increase at an average annual rate of roughly 2 percent during the next two decades—well below the roughly 4 percent annual growth rate of the past two decades. It is unclear whether such a reduction in the growth rate could be achieved, and if so, whether it would be accomplished through greater efficiencies in the delivery of health care or would reduce access to care or diminish the quality of care.

At this point, there is a near mathematical certainty that the scheme of health insurance market regulation contemplated by the Reid bill will reduce the risk-adjusted rate of return below the level needed to keep these firms in the individual and small-group health-insurance markets. I am not aware of a single provision in the Reid Bill that looks to ensuring a minimum rate of return. And there are countless provisions in the bill that impose new obligations to cover services while eliminating the revenue sources to deal with them. It is just this combination of regulatory programs that leads the CBO to treat private health insurance issuers as part of a federal program—as though they have been subject to de facto nationalization.

1. Either a carbon tax or a cap-and-trade program will result in substantially lower economic costs than command-and-control regulations that mandate technologies, fuels, or energy efficiency standards.

2. Given the uncertainty of the future costs of climate policy, a carbon tax is more economically efficient than cap-and-trade.

3. Carbon allowances in a cap-and-trade program would be susceptible to price volatility. Price volatility causes economic disruptions and complicates investment decisions. It also could lead to political pressure on Congress to repeal or substantially loosen the cap.

4. A carbon tax, in which the revenues are used to offset economically harmful taxes or to pay down our deficit, would substantially lower the cost of climate policy compared to a cap-and-trade program that gives away allowances for free.

5. The currently proposed climate bills rely heavily on offsets to reduce the overall costs of cap-and-trade. Given the substantial potential value of offsets, there is a very real concern that offset integrity will not be maintained. This would result in a weakening of the cap, undermining its environmental benefits.

As a result of legislative convenience, bureaucratic imperative and historical happenstance, a variety of responsibilities have accreted to the Fed over the years. In addition to conducting monetary policy, the Fed also distributes currency, runs the system through which banks transfer funds, supervises financial holding companies and some banks, and writes rules to protect consumers in financial transactions. Mr. Bernanke argues that preserving this mélange is not only efficient but crucial to protecting the Fed's independence.

Apparently, the argument runs, there are hidden synergies that make expertise in examining banks and writing consumer protection regulations useful in setting monetary policy. In fact, collecting diverse responsibilities in one institution fundamentally violates the principle of comparative advantage, akin to asking a plumber to check the wiring in your basement.

There is an easily verifiable test. The arm of the Fed that sets monetary policy, the Federal Open Market Committee (FOMC), has scrupulously kept transcripts of its meetings over the decades. (I should know, as I was the FOMC secretary for a time.) After a lag of five years, this record is released to the public. If the FOMC made materially better decisions because of the Fed's role in supervision, there should be instances of informed discussion of the linkages. Anyone making the case for beneficial spillovers should be asked to produce numerous relevant excerpts from that historical resource. I don't think they will be able to do so.

The biggest threat to the Fed's independence is doubt about its competence. The more the Congress expects the Fed to do, the more likely will such doubts blemish its reputation.