I thought that I would highlight some recent research done by a former fellow Ph.D student at WSU, Chris Brunt, and a current WSU faculty member, Gail Jensen, on the effect of price restrictions enacted by states for Medicare Part B reimbursement. Here is a link (gated) and the abstract:
The maximum amount physicians can charge Medicare patients for Part B services depends on Medicare reimbursement rates and on federal and state restrictions regarding balance billing. This study evaluates whether Part B payment rates, state restrictions on balance billing beyond the federal limit, and physician balance billing influence how beneficiaries rate the quality of their doctor’s care. Using nationally representative data from the 2001 to 2003 Medicare Current Beneficiary Survey, this paper finds strong evidence that Medicare reimbursement rates, and state balance billing restrictions influence a wide range of perceived care quality measures. Lower Medicare reimbursement and restrictions on physicians’ ability to balance bill significantly reduce the perceived quality of care under Part B.
Economic theory clearly predicts that a mandated reduction in price will result in non-price rationing. However, prior to this paper there was a lack of empirical evidence with regards to the reductions in quality predicted by economic theory.
Bernanke gave a speech at the AEA meetings defending the actions of the Federal Reserve in the early part of the decade. Scott Sumner makes a keen observation:
Bernanke’s explanation for the Fed’s actions in 2002 show exactly how monetary policy failed in 2008. In particular, Bernanke made the following three observations regarding 2002:
1. Monetary policy needs to focus on the macroeconomy, not specific sectors.
2. Monetary policy must be forward-looking, must target the forecast.
3. Monetary policy must be especially aggressive when there is risk of liquidity trap (which would render conventional policy ineffective.)
In 2008 the Fed did exactly the opposite. Between September and December 2008 the Fed focused on banking, not the macroeconomy, they adopted a backward-looking Taylor Rule, and they were extremely passive when the threat of a liquidity trap was already obvious.
BTW, the quote of the day comes from Sumner’s post as well:
Unlike [Arnold] Kling, the stock market does believe monetary policy has a near-term impact on the economy.
UPDATE: David Beckworth on why we should doubt the claims put forth in the speech.
Throughout the current recession, John Taylor has exemplified what an economist should be. He continuously provides careful and thoughtful commentary on the financial crisis and the recession — both in scholarly papers and on his blog. Taylor’s recent post on the stimulus package highlights precisely what I am talking about.
In late November the NYT had a piece on the stimulus package which showed that certain forecasts of GDP were shown to be much higher with the stimulus package than those forecasts would have been without the stimulus package. However, Taylor reminds us of an important point:
It’s been nearly a year since the stimulus package of 2009 was passed. Unfortunately most attempts to answer the question “What was the size of the impact?” are still based on economic models in which the answer is built-in, and was built-in well before the stimulus. Frequently the same economic models that said, a year ago, the impact would be large are now trotted out to show that the impact is large. In other words these assessments are not based on the actual experience with the stimulus. I think this has confused public discourse.
I would take this criticism one step further. As I have mentioned before, there are major fundamental differences between the New Keynesian and Old Keynesian models. What’s more, our priors should be based on the model that we believe to be the best description of reality and subsequently adjusted accordingly. While there is certainly much to quarrel with in New Keynesian models, I find it difficult to believe that we should elevate the Old Keynesian models in light of these potential shortcomings.