Repeat After Me: Association is Not Causation

The goal of Tortured Data is to make wise data consumers out of our over-eager data-loving culture. Don't believe me when I say we have a sometimes unhealthy reliance on data? How about the last time you wanted to talk about labeling fruit as GMO? Don't tell me nobody brought out the statistics on how much happier blue whales were before we introduced genetically modified zooplankton off the California coast. So when you were shown that chart (and it invariably looked like the chart below), if you are a data ninja, (as you will be shortly) you repeated the hypnotic chant: "Association is Not Causation" (I'm thinking like Master Splinter when he hypnotized Michelangelo to reject pizza. Splinter = Me, Michelangelo = You).

"Oh Aaron, you're just being ridiculous. That sort of data doesn't even exist!" you may protest. Yet I cry out, like Noah as the rain fell, behold:

This data comes from UN Office of Drugs and Crime (UNODC). I took a sampling of countries similar to the U.S. in terms of per capita GDP, political structure, etc. This is essentially Western Europe, North America, Australia and Japan. If you're for gun control, you focus on Japan and the U.S. (circled in blue) and draw a line roughly like the blue line shown (an actual regression looks similar to this). If you're against gun control, you look at Turkey and Iceland (circled in red) and draw a line like the red line shown (this is roughly what you'd get in a regression if you dropped the U.S.)

(Disclaimer: I really don't care about gun politics right now. See the forest, not the tree young padawan).

Let's ignore the red now. As I said, an actual regression line looks like the blue line shown. Thus the implication is more guns = more crime, and the obvious corollary, fewer guns = less crime. Thus, let us work to remove guns in any way possible. We could restrict the sale of guns in the U.S. so that we have no more than 10 guns per 100k people. That would put us right near Spain and Italy, and according to this ineffable formula for crime reduction, we would have roughly 1.25 crimes per 100k people. That's a near 75% reduction in crime!

("But Aaron, the 2nd amendment, the right to bear arms-" No grasshopper! Listen to your sensei, and focus!)

I've created a formula that would single-handedly produce the greatest reduction in crime in the history of the US! Though this beautiful graph is so compelling, we must remember: association is not causation. If you're not saying that aloud, you can never expect to be Michelangelo! Now repeat! "Association is not causation!" Shout it till you mean it!

There may be a statistical association between firearms per 100k people and crime per 100k people, but that does not mean that firearms cause greater crime. More guns is associated with more crime, but we cannot say from this data alone that more guns causes more crime. Establishing causality is hard but possible in some cases with tricky math and other cool things (technical term).

In this gun scenario, we could just as easily say that crime causes the number of guns per 100k people to go up. Thus if we want to remove guns from a nation, we simply have to lower crime. BAM! *That was logic hitting you square in the face!*

To finish this up, another fun chart (real data).

As you can see, perhaps an even more viable way to reduce violent crime in the U.S. would be to eliminate all use of Internet Explorer. Bet you didn't know that Firefox and Google Chrome were the greatest crime deterrents we know of! But before you write your representative and call the White House, let's have a lesson on logic. As you now  know, association is not causation. Have a look at my awesome diagram.

When we see an associative relationship, there are three possible general scenarios. One is that A causes B (causation shown by solid arrow). Similarly, another is that B causes A. As you can see, these fall under "Causation". However, the third option is the kicker. There may be a third element C that we can't measure or isn't accounted for where C causes both A and B. Thus whenever we have C, we will see both A and B, and it may also be the case that whenever we don't have C, we see less of A and B. This would make A and B associated in our data when they are certainly not causal. (The other possible explanation which I haven't included is simply that the association is purely coincidental as is likely the case in the Internet Explorer market share and murders in the U.S. especially if the scale is messed with).

Less abstractly, in the case of guns and crime rates, it may be the case that more guns cause more crime, or that more crime causes there to be more guns. If either of these causal relationships is established, it's much easier to know what to do if our goal is to lower crime or lower gun ownership. However, there may be another element that we're not accounting for or can't measure. An example would be cultural factors that lead to increased crime (disproportionate income distribution in urban areas, racial conflicts, prevalence of gangs, etc.) Those cultural factors may lead to more U.S. citizens owning guns for protection while also being a cause for more crime. But if this is the case, it would mean that increased gun ownership is not causing violence.

Another example of an unknown variable could be that we have an extremely happy blue whale population off the coast of California (because we labeled all GMO food for blue whales with a bright yellow sticker and, health conscious as blue whales are, they stopped eating it), and happier blue whales means less krill but more other food for other sealife, which means Americans eat more seafood, and since everybody knows that gangs and mobs eat a ton of seafood, we have a ton of gangs and mobs, and thus more violence. Seafood also causes extreme paranoia (because of the mercury) so Americans feel a stronger need to own guns (breathe) so clearly, happier blue whales has caused more crime and more gun ownership. Damn those yellow labels! Monsanto was right all along!

Getting to Know You - Affordable Care Act: States

As promised, this part of the ACA is shorter, but still useful. If you wish to impress your in-laws with your political clout, you're welcome. For the rest of you, consider it your investment in being a better citizen.

ACA Impact on States

States are required to maintain their current Children’s Health Insurance Program (CHIP) eligibility levels until 2019. Also, beginning in 2015, there will be a 23 percentage point increase in the CHIP match rate[1]. In Utah, children under 19 who are not currently covered by health insurance and are US citizens or legal residents qualify for CHIP if their family is at or below 200% federal poverty line (FPL)[2]. Although the Medicaid expansion to cover all citizens and legal residents up to 133% FPL (138% if the 5% income disregard is included) is no longer required, the current legal opinion is that the Supreme Court’s decision regarding this expansion referred only to the adult Medicaid programs, thus requiring states to expand child Medicaid eligibility to 133% FPL[3].

States must create state-based American Health Benefit Exchanges and Small Business Health Options Program Exchanges. These exchanges are intended to aid individuals and small businesses with up to 100 employees to purchase coverage that meets the individual mandate requirements[4]. Utah is one of only two states to currently have a health exchange.

The exchanges must maintain a call center for customer service and have established procedures for enrolling businesses and individuals. It is also required to have established procedures for determining eligibility for tax credits. As part of this process, states must have a single application form for state health subsidy programs that can be filed online, by mail, or in person. The exchanges must provide financial reports to the Secretary and submit to oversight investigations[5].

As part of this process, states are also required to modify their Medicaid eligibility testing criteria to remove the asset test[6]. This will simplify the application process and may lead to increased enrollment, as will be discussed later.

States are required to establish an office of health insurance consumer assistance. This is intended to serve as an advocate for people with private coverage[7].

The PPACA increases Medicaid drug rebate percentage for brand name drugs to 23.1% and for off-brand drugs to 13%. It also reduces the Medicaid Disproportionate Share Hospital (DSH) payments over the next 8 years[8].

Conclusion

Some of the largest impacts will come from establishing health exchanges. As some may know, Utah established its own health exchange back in 2008. Though a small enterprise still today, it has been successful in its stated goals. The Affordable Care Act, however, requires several modifications and additions to the exchange that will still prove costly to Utah. Other states have a much longer road ahead of them. Other big expenses come from opting to expand medicaid coverage to 133% FPL (Utah has not officially stated it's opinion on this as of yet). Even though all costs of expansion are covered for the next few years, those costs eventually will be shifted back to the states.

---

[1] Kaiser Summary, page 2.

[2] The Utah Department of Health has a website with more detailed information. See http://health.utah.gov/chip/faq.htm#2, for example.

[3] This has not yet been tested or verified in court, but see “Implementing the ACA’s Medicaid-Related Health Reform Provisions After the Supreme Court’s Decision” by the Kaiser Family Foundation, available at http://www.kff.org/healthreform/8348.cfm for a summary of current opinion and more detailed sources.

[4] Kaiser Family Summary, page 4.

[5] Kaiser Family Summary, page 5.

[6] See PPACA section 2001.

[7] Kaiser Family Summary, page 7.

[8] Kaiser Family Summary, page 9.

Economic Devotional: Principle-based economics

How easily our culture worships facts or educated models (often without distinction), particularly in Economics.

I love facts, and I love data. I think data are incredibly useful and important. If there were anything I enjoy pondering more than data, however, it would be principles. Ultimately, our nation was founded on principles, not on data. Whether they came on the Mayflower or just last year, they came -- in part at least -- because of principles.


I would posit our principles usually run along the lines of our rights as expressed in the Declaration of Independence and the Bill of Rights. I would expect that most of us consider our principles to be those of freedom to own land and property, freedom to vote and elect leaders, an expectation of community and care.

I certainly believe that principle should always guide our actions, though it is to be tempered with reality. Recently, most economists argue based on a model or data, but not on principle. Hayek and Friedman, on the other hand, frequently argued on principle. Friedman had, in my opinion, a realistic view of the world, as evidenced by his famous quote: "One of the great mistakes is to judge policies and programs by their intentions rather than their results."

Friedman has been the subject of much of my recent study. His arguments in Capitalism and Freedom are entirely based on principles. My admiration of Friedman is due to his ability to couch sound principles into sound economic arguments, but more, he argued on principle, not economic expediency:

Now here's somebody who wants to smoke a marijuana cigarette. If he's caught, he goes to jail. Now is that moral? Is that proper? I think it's absolutely disgraceful that our government ... should be in the position of converting people who are not harming others into criminals, of destroying their lives, putting them in jail. That's the issue to me. The economic issue comes in only for explaining why it has those effects. But the economic reasons are not the reasons.

Many may have heard arguments as to how we could save money by making marijuana legal. But fundamentally, Friedman believed that a man or woman choosing to get high was certainly within his or her own rights. Similarly, the economic reasons for supporting a free market are not, in fact, the reasons why we do so. We have a free market because we believe in the principles of freedom to associate, to exchange, to own and to lend.

So in a time when a Nobel Laureate will stoop to absurd punditry disguised as sound economic reason (if you don't know who I'm talking about, all the better), how do we address the sophistication of arguments that seem so contrary to our principles? I would suggest research, but with a healthy respect for your principles. Many economic issues truly are complicated, but few cannot be explained in a way that would satisfy or address your fundamental principles.

For example, a factory that floods a river with toxic waste is against my principles. But I don't like to hamper and regulate business beyond what is necessary. Economics provides an explanation to satisfy both principles: the factory is not paying the full cost of their production. There is, in econ-speak, an externality. Thus it is simple to satisfy my principles and support the strict regulation of toxic disposal. But overly-simplistic arguments that cannot jive with your principles are almost always sophistry. For example, recent talk as to the irrelevance of the national debt is dishonest. Though a (good) argument can be made that we need not pay off our entire national debt, if we become untrustworthy as borrowers, we will face a rapidly declining state of affairs. Economists can reasonably disagree as to when we reach that tipping point from credit-worthy to Greece, but to represent the situation by simply stating, "the national debt does not matter," is both grossly over-simplified and dishonest. Your principles of credit-worthiness, honor, a sense of dignity at paying your debts are sound. Listen to them!

I find the frequent use of economic reasoning to support principle-less arguments disheartening. Whether to support unjustified tax breaks for businesses (whose owner happens to be some well-to-do politician's friend) or as an argument to cut spending on charitable and important programs (like Medicaid), Republicans are constantly at odds with their own proposed principles. Democrats are no different. Proposing increases on taxes for the wealthy "because we need to reduce the deficit," while still running around acting as if the deficit does not matter smacks of the wanderings of an un-moored ship.

Establish your principles. Establish what you think to be a just treatment of your fellow man. Do not be afraid of the sophistication of economic theories and research, for at heart it should always be able to address your principles. Do not disregard meaningful and reputable research, but be mindful of the sophists among us disguised as economists.

taxation without representation

"We're just gonna make sure the wealthy pay their fair share." I genuinely hate that statement. I really do. I can't emphasize enough how gross it makes me feel.

I'm not really that interested in talking about whether it's better for us to raise taxes on the wealthy to pay for some of the deficit, or whether or not it's good for the economy etc. I simply want to bring us back to what we do, implicitly, when we use rhetoric like "fair share" and "ask them to" and raise the taxes on a minority (and yes, being in the top 2% of earners is, by definition, a real minority).

Also, just to be clear, I think taxes are important and necessary. I am very pleased to pay for medicaid and medicare, even if I have issues with their efficiency and management. I think public education is critical, and I like my well-maintained roads and strong military.

Now to the meat of the matter. First some economics. In economics, there are a few classifications of taxes: regressive, proportional, progressive, and lump sum.

Regressive: a regressive tax is when the tax rate decreases as income increases. Thus if somebody earns 40k and pays a 10% tax while somebody earning 80k pays 8% in taxes.

Proportional: this is when the tax rate is the same regardless of income (also known as a flat tax rate).

Progressive: this is when the tax rate increases as income increases. This is the system we currently have in the U.S.

And finally, a lump sum tax means that everybody pays the same dollar amount of taxes, regardless of income. This would, in reality, be a highly regressive tax since as my income increases, the lump sum as a proportion of my income would decrease (similar to sales taxes).

So of these types of taxes, which do we generally consider fair? I genuinely don't know what the rest of the world thinks on this matter, but I would suspect most people would consider a proportional tax to be fair. I'm not sure why we consider that fair, but for whatever reason that's about where most of us probably fall.

But this is a point on which reasonable people can disagree. Some may -- and do -- argue that wealthy people disproportionately benefit from government spending (e.g. they have more assets the government protects, property rights have a higher value for the wealthy, etc.). Many argue that taxation should be used as a form of wealth redistribution from the wealthy to the poor, and their concept of fair is that everybody has a certain minimum living standard. Yet others would consider it most fair that we all pay a lump sum as a form of social insurance, arguing that by and large wealthy people use roads as much as the rest of us, benefit as much from freedom and security, etc. The point is, there are many arguments concerning what fair really is, and it's certainly not something I think we've definitively settled.

So why do I bring this up? Well honestly, I'm concerned. I'm worried for what we do to our soul as a nation when we decide to make somebody else, somebody that has such a small vote as to render them disenfranchised, foot a bill that we decided to incur. Let's get dramatic here. The top 2% of earners is a small number of Americans indeed. According to the Census Bureau, those of Hispanic origin make up 16.7% of Americans. Those that consider themselves black by race make up 13.1% of Americans. We're still way too large! Asians are too large a group, making up 5% of the population. American Indians and Alaska Natives are the only remaining group, making up 1.2% of those counted by the Census. This, in absolute terms, is the closest to the 2% we're trying to consider.

So let me ask you. How would you feel if we, as a nation, said, "we should tax all American Indians and Alaska Natives more." What if we were to say things like, "we're just going to ask all Native Americans to pay their fair share, to pitch in a little more."

This would be insane! Legislating based on race is both abhorrent and immoral, and that's my point. Legislating based on income is not as abhorrent or immoral to most people. Fundamentally, that's because we as a society have accepted the idea that being wealthy comes with added obligations, and I'm ok with that (though people tend to show an inordinate amount of ingratitude towards the wealthy). I'm ok saying that as Americans, as we have more, we give more. But how far will we go?

Another key argument is that many people believe the wealthy pay a lower tax rate. In many cases, this is true, though the issue is a bit more complicated.

People are going to think I'm serious about raising taxes on Native Americans. I'm not. Nor do I think we are all evil for having a progressive tax system. But I want everybody to be perfectly cognizant of what we are doing. We are singling out a minority to pay a disproportionately larger share of taxes. Our politically correct phraseology has dulled our senses to this fact. Many of us can reasonably disagree on what a fair share is, thus I'm not sure the President is representing a majority opinion when he says we need to make sure the wealthy pay their fair share.

Most importantly, we are not asking anything. We are demanding it, and since the government has the guns and the jails, we're demanding it at gunpoint. If the wealthy don't want a higher tax, tough. They're too small a group to remove political leaders, so they'll have to rely on the rest of us taking their side if they're truly unhappy. I know many that disagree with me will say, "but Aaron, the wealthy do control our leaders! They fund campaigns and provide special treatment for politicians." If that were true, I could make a good argument that the wealthy would have no taxes.

Suddenly taxation without representation means something different. If we're going to single people out by their income when it comes to taxes, should we not also consider their representation? If we single out women, they at least have a stronger vote. If we single out Hispanics or Blacks, they too have a stronger voting bloc. People over 65 are 13.3% of the population, they too have a much bigger voice. Requiring taxation without adequate representation used to be considered oppression.

Raise taxes on the wealthy; they'll survive. Just be clear in your heart what we're doing. At what point will you feel ashamed for marching from wealthy home to wealthy home with a police force requiring that family give up a larger share of their earned income when you pay no more than 25 percent? Is 60 percent too much? 80 percent?

Econ Myths: Their gain is my pain - Part 2

We last left off with the idea that trade creates value, which means if my neighbor is getting wealthy, it can't be costing me anything, and both people in the trade are better off. But if my neighbor happens to be Larry Page, does it matter that such an enormous amount of wealth is flowing into his account? It seems that at some point, he would be affecting the amount of money available to the rest of us.

This line of thinking is flawed for one main reason. There may be a finite amount of money at any given time, but there is not a finite amount of wealth. When economists talk about wealth, they are not only talking about dollars and fat bank accounts. The majority of Larry Page's wealth is not even held in liquid assets like currency or checking and savings accounts. It's in investments and shares of Google stock. The value of these assets is only that somebody will pay Larry for them at some point in the future. So again, these are voluntary exchanges that people in the future may conduct, but it affects them positively. If we want to get more detailed, let's consider the unthinkable: Larry sells all his assets.


Here's where we have to introduce the idea of fractional reserve banking. When you put money in a checking or savings account, the bank marks the amount in your account and then promptly proceeds to try to lend your money to somebody else. Supposing you deposited $100 at bank A, the bank must keep some of that $100 on hand in case you want to withdraw some of it. This requirement is set by the Fed, and let's suppose it's 10%. Thus the banks must keep $10 in their vault (or in their account with the Fed) and then try to loan the rest out to another person. Suppose, then, that your friend takes out a loan for $90. When they receive that money, they will either spend it or put it in their checking account. If spent, that money ends up in somebody else's checking account, so either way it ends up in a checking account at bank B. So bank B has $90 on their books and they must keep $9 in their vault, but then they can loan the remaining $81 to yet a third person. As you can see, this process will continue. In the end, the original $100 will effectively become $1,000 spread out over different accounts and banks.

If you withdraw your $100 from bank A, they need to get their $90 loan back from your friend. That means your friend withdraws $90 from their bank to pay the loan, and so bank B must provide $90 but they've loaned $81. Again, you can see how this effects many people. Eventually, the $1,000 that your $100 deposit created will be removed from circulation when you withdraw $100. Of course, this isn't exactly what happens. Because the bank has other depositors, they can use their pooled reserves to pay you your full $100 on the spot and then look to replenish their reserves later.

Now when Larry sells all his assets (a really unlikely event), the money he's paid comes from somebody else's bank account or cash they had on hand. If those funds are then kept in a regular bank account, there's no real change to the money supply, since only 10% of that has to be kept on hand, which is relatively small compared to the $2.3 trillion money supply. Thus the only real problem occurs if he puts all that money in a vault somewhere, effectively removing $17.5 billion from the money supply. Now what? How are you affected?


Remember, as he pulls out this money, banks are prepared to provide this cash since they have reserves from everybody else's deposits still available. If the bank he withdraws from doesn't have the money on hand, they'll borrow from another bank or from the Fed, and as the money they've loaned gets paid back, they'll pay back the other banks. Of course, I'm simplifying this a great deal, and there are certainly complications and objections to somebody withdrawing $17.5 billion in cash, but those are technicalities irrelevant to the overall effect.

The overall point is that, supposing the reserve requirement were still 10% (it varies based on the type of deposit and other things, thus making the actual figure difficult to use), then withdrawing $17.5 billion really removes $175 billion from the money supply (again, I'm simplifying a lot, since there are various ways of measuring what the money supply is depending on what types of accounts you use. For this discussion, we're talking about M1). $175 billion is 7% of the current money supply, so that could be quite a shock. However,
the Fed is prepared to handle such shocks pretty easily.

This isn't the place to describe the tools used by the Fed, but suffice it to say they could increase the money supply to compensate for this shock. This is precisely the role of the Fed. But fundamentally, the idea is that the money supply is not necessarily a measure of wealth, and whether somebody has a lot of it or a little, they only receive that money by creating or trading something of value. Therefore, as we become more productive, the money supply is increased to facilitate that increase in trade through the daily operations of the Fed.

This has some important implications. First, the Fed is not creating wealth. They are only creating a means for exchanging goods. Furthermore, if the Fed creates too much money, we will experience inflation. If they create too little, we'll experience deflation. Thus they can't artificially create value in the long run.

The wealth of your neighbor, therefore, has not removed any value from your life. It hasn't changed the money supply. In every respect (barring market failures or illegal activity), your neighbor's wealth has made you better off through trade.

Tortured Data: Stalinist Statistics

Buried among the heap of old reports to the governor (and I'm talking back to, like, 1940s), after I'd blown the dust off, I came across a gem, an ancient text (1970s) preserved for those on a quest for truth. It glowed in the dimly lit room as I opened the pages within (I'm thinking Macaulay Culkin in the Pagemaster style). The book, as I'm sure you're anxious to know, was Flaws and Fallacies in Statistical Thinking by Stephen Campbell (a 2004 version is available on Amazon).

Ok, so we were cleaning out the library in the GOPB office, and there were a bunch of old textbooks that were going to be thrown away, so I picked up a couple, who could blame me? As I recently learned, the '70s were remarkably more different from my time than I previously thought. I mean, apparently my dad didn't use gloves in dental school, "unless we were absolutely positive the patient had hepatitis." (0_0) But odd '70s-style writing and cartoons aside, the book is a good pastime while waiting for code to compile; and I can say I've come across my fair share of mega-super-duper statistical fallacies in my work.

I have to say, I think Campbell stole my idea. I mean, I was gonna right a book (someday) on how to win any argument with statistics (though that idea is technically copyrighted by Apple I'm sure), but he sort of beat me to the punch. In any case, this old text has plenty of fascinating examples (some incomprehensibly not politically correct), and they make for excellent warnings about statistics gone crazy.

To begin, do not suppose that I think all statistics are meant to mislead or beguile you. Quite the contrary, I think many statistics are meaningful and highly useful. Some wilt at the absolute power of a figure or phrases like, "studies have shown..." or "statistics prove...", while others immediately dismiss all figures and studies as biased. Both positions are easy to fall back on, and our goal is to help you fit into neither category. Enough of that; let's tell some stories.

What better place to start than with communists? Stalin put forth the first five year plan with fantastic promises. From advances in consumer industries and food production to housing and prices. Gosplan (the planning agency) expected a rise of 20 percent in the purchasing power of their currency while real wages would increase by 66 percent and the cost of living would go down by 14 percent.

At the end of the period, Stalin nearly admitted the plan was a dismal failure in a speech. Only 18 months later, however, he declared that the plan was a fantastic success at 93.7 percent fulfillment. Great success! The subtle sleight of hand in that figure demonstrates the ease with which we can mislead an unwary public.

The calculation was based on ratios of (total output)/(total planned output). This seems reasonable, right? Wrong! For example, in 1928 steel output was 4.2 million tons. The plan expected an increase to 10.3 million tons. Actual production was 5.9 million tons by the end of the five years. Thus the plan predicted an increase of 6.1 million tons and achieved an increase of only 1.7 million tons. However, Stalin's statistic was based on simply taking 5.9/10.3=57%, quite a bit larger than the actual 28% "success" they really achieved. I've even charted this out for you:

Thus with the same logic, suppose steel output hadn't grown one bit. Then at the end of the plan, they would have achieved 40% success!

To put this in perspective, let's look at the Obama stimulus package (this is not to grind a political ax, nor am I saying the stimulus was a failure. Furthermore, I'm not saying the Obama administration used statistics inappropriately. I'm just illustrating what the Stalinist way would have been). 

The Obama administration said the stimulus plan would bring us to 137,550,000 jobs as opposed to the 133,846,000 jobs we'd have without stimulus (these are actual figures from the Romer/Bernstein plan proposal). Then when we look at the actual jobs in December 2010, 130,346,000 (BLS seasonally adjusted), the Stalin approach would have been for the Obama administration to say, "Hey look, we've achieved 94.8% success!" Of course, in reality, the projection was to gain 3.9 million jobs but we actually lost 3.2 million so we achieved -80% of our goal (that's a weird statistic). Now the Obama administration didn't say we had 94.8% success; I'm merely helping you see the absurdity of Stalin's statistic. Aren't you glad we aren't communists?

And now, the next time you want to become a dictator and rule over a communist nation, you've got a great new trick!

Subscribe to see the fun future tortured data examples! Also, favorite this and share it on Facebook because, let's face it, we all need to learn how to healthily consume statistics!

Getting to know you - Affordable Care Act: Citizens and Legal Residents

Let it be known that we have officially incorporated The King and I into economics. Huzzah! Tortured Data is now cultural!

Love it or hate it, the Affordable Care Act (ACA or PPACA for Patient Protection and Affordable Care Act) will impact you. In this series, we'll go through some of the key elements of the Affordable Care Act as they apply to various key groups: citizens and legal residents, employers, health insurance providers, states, and a handful of specific industries. Much of this information is a synthesis of the Kaiser Family Foundation's "Summary of New Health Reform Law." I've also read much of the actual legislation (yes, I am one of the few people that can now win any debate, "have you read the bill? because I have!") As many of you know, there are a great deal of unknowns about the nuts and bolts of this legislation that will be written through regulation. Those nuts and bolts I obviously can't explain, but there is plenty to learn. This series comes from excerpts of a special report I have been writing for the Governor. Let's get started.

Citizens and legal residents

Establishment of benefit tiers and plan standards: Several areas of the PPACA establish rules and guidelines to streamline the insurance industry to make plans more easily comparable. First, the PPACA requires a definition of Essential Health Benefits (EHB). These will be benefits that all insurance plans must provide, though the exact definition is not yet determined. Furthermore, the PPACA initiates the term actuarial value. In one of the federal proposed guidelines, actuarial value is “… a measure of the percentage of expected health care costs a health plan will cover and can be considered a general summary measure of health plan generosity.”[1] In general, this will be calculated by computing the ratio of the total expected payments by the plan for EHB over the total costs for EHB the standard population is expected to incur. That is, actuarial value is a measure of the expected payout from the plan given a standard person’s health costs. For example, if the standard person is expected to incur $5,000 in healthcare costs over the year, and the insurance expects to pay $4,000 of it, then the actuarial value would be 4k/5k=0.8, or 80%. Estimating these values in reality is actually much more complicated, but the idea is the same. It is not difficult to see, therefore, that a higher actuarial value translates to a higher value insurance plan. As part of this process, the Federal Government will provide an actuarial value calculator that will use actual claims data weighted to reflect the expected population of the market[2].

This introduces the benefit tiers, or categories, of plans to be offered on the insurance exchanges and elsewhere[3]:

Bronze plans are intended to represent the minimum creditable coverage to fulfill the individual mandate and provide the essential health benefits. They have an actuarial value of 60-69% with an out-of-pocket limit equal to the Health Savings Account (HSA) current limit. Currently, those limits are $5,950 for individuals and $11,900 for families.

Silver plans also provide the essential health benefits and have an actuarial value of 70-79% with the HSA out-of-pocket limits.

Gold plans provide the essential health benefits and have an actuarial value of 80-89% with the HSA out-of-pocket limits.

Platinum plans provide the essential health benefits and have an actuarial value of 90-100% with the HSA out-of-pocket limits.

Catastrophic plans are available to those up to age 30 or those who are exempt from the mandate. 

They provide catastrophic coverage only with the coverage level set at the HSA levels. Prevention benefits and coverage for three primary care visits are exempt from the deductible.

Premium and Cost-Sharing Subsidies[4]: The PPACA provides several subsidies for individual insurance plans purchased on the exchange. The availability of such subsidies is limited to citizens and legal immigrants. Employees who are offered employer-sponsored coverage are not eligible unless the employee-sponsored coverage does not have an actuarial value greater than 60% or if the employee’s share of the premium exceeds 9.5% of income. The subsidies come in two forms. The first is premium credits to subsidize insurance premium costs. The second is cost-sharing subsidies to lower the effective cost-sharing expenses of those insured.

The law requires the federal government to provide premium credits to individuals and families with incomes between 100-400% of the federal poverty level (FPL) to purchase insurance on the exchange. The credits are tied to the second lowest cost silver plan available in the area. These credits are intended to set the following limits on an individual’s premium expenses:

-         100-133% FPL: premium to be no more than 2% of income
-         133-150% FPL: premium to be no more than 3-4% of income
-         150-200% FPL: premium to be no more than 4-6.3% of income
-         200-250% FPL: premium to be no more than 6.3-8.05% of income
-         250-300% FPL: premium to be no more than 8.05-9.5% of income
-         300-400% FPL: premium to be no more than 9.5% of income

Cost-sharing subsidies reduce cost-sharing amounts and annual cost-sharing limits. They therefore have the effect of increasing the actuarial value of a plan[5]. These effects can be summarized as follows:

-         100-150% FPL: subsidize plan to have an actuarial value of 94%

-        150-200% FPL: subsidize plan to have an actuarial value of 87%

-        200-250% FPL: subsidize plan to have an actuarial value of 73%

-        250-400% FPL: subsidize plan to have an actuarial value of 70%

There are also included in the PPACA provisions that prevent any federal subsidies from being applied towards abortion services, except in cases of rape or to save the life of the woman.

Tax changes to individuals: The most noticeable tax change to individuals comes from the individual mandate. All U.S. citizens and legal residents are required to have health coverage that meets certain qualifications (not yet established). Those that do not obtain coverage are to pay a tax penalty of the greater of $695 per year up to a maximum of $2,085 per family or 2.5% of household income. The penalty is to be phased in, starting at $95 in 2014, $325 in 2015, and $695 in 2016 for the flat fee; 1.0% of taxable income in 2014, 2.0% of taxable income in 2015, and 2.5% of taxable income in 2016. Afterwards, the penalty will be increased annually by the cost-of-living adjustment.

There are some exemptions available to the mandate. These are available in cases of financial hardship, religious objections, American Indians, those without coverage for less than three months, undocumented immigrants, incarcerated individuals, those whose lowest cost plan available exceeds 8% of income, and those with incomes below the tax filing threshold. In 2009, the threshold was $9,350 for singles under 65 and $18,700 for couples under 65. The term “financial hardship” has not yet been clearly defined[6].

Furthermore, the bill increases the Medicare Part A (hospital insurance) tax rate on earnings over $200,000 for individual taxpayers and $250,000 for married couples filing jointly. The increase is 0.9%, raising the tax from 1.45% to 2.35%. Also, it imposes a 3.8% tax on unearned income for higher-income taxpayers[7].

Also, the bill makes several changes to health savings accounts (HSA), health flexible spending accounts (FSA), HRAs and Archer Medical Savings Accounts. For example, it prohibits reimbursing the costs for over-the-counter drugs not prescribed by a doctor through an HRA or health FSA account. The PPACA also increases the tax on distributions from an HSA or an Archer MSA that are not used for qualified medical expenses[8].

Other provisions: PPACA requires the federal government to create an essential health benefits package. This will provide a comprehensive set of services and will have an actuarial value of 60%. It will also have annual cost-sharing limits at the current HSA limits. It won’t be more extensive than the typical employer plan[9].

The bill establishes a temporary national high-risk pool to provide health coverage to individuals with pre-existing medical conditions. It also allows for dependent coverage of children up to the age of 26 for all insurance policies[10]. It establishes an internet website to help consumers identify health coverage options, as well as establishes a standard format to present information on coverage options[11].

Don't you feel so much better acquainted? I'm sure Anna would be proud. This is the longest of the posts about PPACA, so don't worry. Getting to know the other aspects will be a breeze. 

---

[1] See “Actuarial Value and Cost-Sharing Reductions Bulletin” available at http://cciio.cms.gov/resources/files/Files2/02242012/Av-csr-bulletin.pdf

[2] See “Patient Cost-Sharing” by the Kaiser Family Foundation, available at http://www.kff.org/healthreform/8303.cfm

[3] Kaiser Family Summary, page 5.

[4] Kaiser Family Summary, page 2.

[5] The process for adjusting and managing the cost-sharing subsidies is complex. See PPACA section 1402 and the Kaiser Family Foundation’s explanation titled “Patient Cost-Sharing” available at http://www.kff.org/healthreform/8303.cfm for more information.

[6] Kaiser Family Summary, page 1.

[7] Kaiser Family Summary, page 3.

[8] Kaiser Family Summary, page 3.

[9] Kaiser Family Summary, page 6.

[10] Kaiser Family Summary, page 6.

[11] Kaiser Family Summary, page 7.

Economic Devotionals: As Americans

This post is for the Good Doctor, my dad, who recently asked -- in reference to the issues in DC -- "Aaron, what's going to happen; I mean, really. Are we gonna be ok?" I regret to say that my response to his question was overly-pessimistic. I talked about issues with national debt and the arguments for and against taking action. More than that, my emphasis was on my loss of faith in the American people. I reflected on the feeling that our nation had lost hold of its roots, on both sides of the aisle. I've thought a lot about that conversation since, and I want to revise my statement, if I may.

Regardless of the color of your ballot, there are principles I have faith we still maintain as Americans. Have we sold ourselves short under international scrutiny? Sometimes I think we have. Certainly we've had our catastrophes as a nation, blunders that seem to disregard party affiliation. But one thing that seems to remain true of us, regardless of the powers that be, is that we have always kept on going. Whether a nation torn through the horrors of slavery and race discrimination or the tragedies of the Great Depression, we kept on going. We certainly haven't righted all the wrongs, but we certainly will keep trying.

Blue or red, we are siblings borne by the ideals that were meant to bind us. My nine siblings cover the political spectrum from end to end. Regardless, we are bound by blood, by a history short and unique to us alone. Our propensity to fight for one another is chiseled in our marrow. Are we not all children of that same Lady Liberty?

Are we no longer a people of independence, of ambition, of humility? Can we not see that regardless of your thoughts on tax rates or national debt, we are a people seeking compassion, equality, and justice? Feel that ground under your feet! It is American soil, earth rich with hope and expectation. Have faith that the policies of any president, senator or congressman must never change that! We may disagree on how to reach equality, or whether or not our leaders have attempted to usurp our rights, but your politics have blinded you to the very fact that we all agree that we must all be free. We all agree that we must all have opportunities, rights, and a voice.

Economics as a science may directly only concern the distribution of scarce resources. But our economy is much more than the sum of patent law, tax policy, safety nets and stimulus packages. Our economy is innovation; it is passion and service. What makes our economy are the efforts we each make individually to chisel out our place in this world, whether in the stars or nestled on the earth.

Do we not all still cry out, "Give me your tired, your poor, your huddled masses yearning to breathe free;" do we not all still with pride shout to the world, "Keep, Ancient Lands, your storied  pomp!" Ours is a story not yet written. There are no ancient stones that will whisper our tale, it is instead forever imprinted on our souls. It is emblazoned in the earth our ancestors so recently toiled over.

So sew your crops, and plant deep, for no matter the efforts in Washington, the rain still comes and the sun still shines. Have faith that we will always rise up and fight for our freedom, our land and our enterprise. Wolves appear as donkeys and elephants alike, so look beyond the noise and join with Lady Liberty, not as Democrats and Republicans, but as Americans.

Weekly Read: 2012-12-2

This week's absolute must-read comes from the aptly named "Grumpy Economist," John Cochrane. It is an excellent summary of several (right-leaning) arguments about the health industry and the Affordable Care Act.

Favorite Part:
Cochrane accurately emphasizes the reality of tradeoffs. Two paragraphs:

More deeply, you are probably squirming in your seats at my observation that quality varies enormously in efficient industries: some fly economy middle seat, and some fly in private jets. Some get shirts from Walmart and some get shirts from Macys. Surely, doesn’t every American deserve the best when it comes to health care? 

If so, you’re not serious about reducing costs, i.e. finding the efficient point on the quality-cost curve. This is simply a fact: you’re adding other goals to the mix, so you’re accepting rising costs to fund those other goals. Or you’re fantasizing that you can have it both ways. 

When it comes to healthcare, we can't have it all. Whether we want better quality, lower costs, or equal access to everybody, there are tradeoffs that we need to accept.

Strongest Criticism:
I would be particularly cautious with comparisons of the health industry to other industires. The health industry is particularly unique by the simple fact that people's lives are sometimes at risk. Furthermore, the health industry struggles from tremendous asymmetries of information. These asymmetries can be improved through tremendous developments in communication technology, but it should always be remembered that people shop differently for their health than they do for their TV. I think the key points Cochrane makes in his comparisons are valid, and they take the parts of his comparison industries that are in fact comparable to the health industry, but be careful not to extend the comparison beyond its reasonable bounds.

Good luck, and certainly read the article. It will be worth every minute spent.

Econ Myths: Their gain is my pain - Part 1

Let's face it. When Mark Zuckerberg makes billions of dollars off a website, we're all jealous. Never mind how much time went into that idea, I'd put twice as much time in for half the pay if I could. But alas, I'll likely never make those billions. On top of that, who's paying him all this money? Does Mr. Zuckerberg's billions mean there's less money floating around for a budding businessman to snatch up?

In economics, this myth is known as, "the economic pie is fixed" myth. I mean, there is truly a finite amount of dollars available, right? How could that not necessarily mean, then, that if Mark Zuckerberg is sucking up 14+ billion of those precious greenbacks, aren't there 14+ billion fewer opportunities for me? Well my jealous friend, I'm happy to report that the economic pie is not fixed, and let's talk about why.

This explanation involves several topics, thus it's broken up in three parts. In this part, we'll discuss the concept of value.

To begin, you must separate "value" from "dollars". Sometimes they overlap, but sometimes they don't. It can be confusing. Sorry. To illustrate, my mom's time spent at home raising me and my numerous siblings was unpaid and, face it, priceless. Yet the value of her endless toil is real, regardless of any dollar amount we can (or can't) assign to it. Economists frequently use utils as a measurement of value, but don't get too attached to them; they're finicky units of measure.

Now, thankfully my wife Jaimie doesn't read this blog, so I can reveal to the world that her version of a salad has four main ingredients: lettuce (NOT spinach), cheese, bacon, and bacon. If there were a fifth ingredient, it would be bacon. As you can imagine, when we go to restaurants, she is unlikely to get a salad with enough bacon and few enough tomatoes (or any other vegetable). Of course you'll believe me when I say that I love vegetables on my salad. Thus when we're at dinner, we both order salads (with bacon), but I give Jaimie my bacon (because I'm health-conscious), and she gives me any and all vegetables. The total dollar amount of salad available is unchanged, yet we are both better off than had we stuck with our individual salads.... A miracle has occurred! Poof! Value was created out of nowhere, even without any extra production or added input (aside from moving vegetables and bacon around).

This is the ever-important result of trade: it creates value. This is the fundamental reason why Zuckerberg's billions don't make it more difficult for me to become wealthy. Before we get too far into this, remember that these results are assuming functioning markets. There are known cases in which markets fail, and in those cases, not all people involved are better off. Those important exceptions aside, we'll continue. The money sent to Mr. Mark is like advertisers giving him their tomatoes (money) and, in return, he gives them croutons (ad space). Both are better off; nobody involved in the voluntary trade is worse off (assuming functioning markets).

Let's look at Microsoft as another example. We've all given Bill Gates an enormous fortune. What did we get in return? We got a consistent and valuable operating system that revolutionized the personal computer. Offices could buy software that added enormous efficiency. This then made it cheaper to produce goods and services, and in turn, the goods we buy are cheaper and produced with greater efficiency.

And so we see that Bill Gates gets wealthy in exchange for making our lives more efficient. This isn't always the case, and there are many known problems that may occur in this process, but the concept is the same. This is the first part of understanding why the economic pie is not fixed. Bill Gates got wealthy in exchange for providing some service or good. Whoever paid him is also better off, and therefore we can know that a single wealthy person does not make any other person directly worse off.

But what about the dollars available? There seems to be a finite money supply, so even though the people who traded with Bill Gates are better off and Bill himself is better off, now there's less money floating around for me to peddle my widgets for, right? We'll look at this next when we address the process of money creation and the money supply in relation to our production. Until then, rejoice in the miracle of the value you're creating from the ether every time you trade your dishwashing services for a more... enjoyable evening.

Unemployment Rate Caution

As Greg Mankiw points out here, unemployment figures don't tell the whole story. This is a good example of tortured data, and comes up repeatedly in post-crisis times.

The unemployment rate is a relatively useful measure of employment health in normal (non-recession) times. In protracted recessions and recoveries, it becomes less useful. As people change their lifestyles (two-income homes become single-income, workers go back to school, children move in with parents and leave the workforce, etc.) the fundamental meaning of the unemployment rate changes.

As you know, unemployment is the ratio of unemployed people actively seeking employment to those with jobs, so those groups of people I just mentioned have all left the numerator, and thus they cause unemployment to fall.

If you don't think this makes a difference, consider the chart Greg Mankiw posted:

Though employment to population isn't a perfect measure of employment health either (what happens if we have a big population boom or there was a rut in births 16 years ago?), it can function as another view of employment health.

In Utah, we've seen a huge exodus out of the labor market, unlike anything we've seen in the past two decades. The following charts show why and how this is significant. (The data all comes from the Utah Department of Workforce Services; I've used Utah as an example because it has fared better than most states and because this state-level data is accurate and compiled from tax returns and other administrative records instead of surveys).

If you look back at the recession of 2001, you'll see the spike in unemployment, but you see almost no change whatsoever in the employment and labor force levels. This shows a healthy continuation of the growth of the labor force (unemployment rate went up because labor force grew faster than employment). In the most recent recession, we see that the employment dropped (more than the labor force, which is why unemployment rate went up significantly), but instead we also see a relatively massive loss of people in the labor force. This loss in the labor force is unprecedented (except for the Great Depression), and the enormous drop in available jobs would have shown through much stronger in the unemployment rate if people hadn't made drastic life changes.

I unfortunately don't have time to show other data on the changes in household composition. Maybe next post. In Utah (and I imagine elsewhere) we've seen an abnormal drop in household formation (note this is not home purchases, this is how many independent groups of people there are, be they renters or homeowners or roommates), which describes what I mentioned earlier: kids moving back in with parents, families (cousins or multi-generation homes) moving back together, etc. We've also seen a large spike in enrollment at the state schools. Income per household has always been low in Utah (due to single-income homes, which are more prevalent in Utah than other states), but it has also dropped (though this is also in part due to other factors).

All in all, my point is that the unemployment rate may get back to 6 or 7 percent nationally, but it is no likely to drop much below that soon as we try to get our labor force back. I'm not trying to be Mr. Doom and Gloom, but certainly I want people to respect the severity of our situation and remember that 8.3% unemployment is better than 9.0%, but there are still many people that don't have jobs who used to but are no longer looking.

The Fed is not out to get us

Today I read an article here by Roger Lowenstein about Ben Bernanke. It was particularly relevant because of the growing discussion about inflation and how the Fed can unwind its quantitative easing without stifling the economy.

The article is honest and fair, discussing mostly the issues Bernanke faces and his opinion on them. I thought, while I'm at it, I'll throw in my opinion on the matter.

The first order of business is understanding inflation. Inflation is, as the great Friedman said, always the result of increased money supply (in the long run). This is something people should remember when they discuss inflation, since the huge recent upswing in gas prices is not because of an increase in the money supply, but politics and market dynamics.

Inflation in the US is measured by the Bureau of Labor Statistics (not the Fed), and is a very involved process. It should also be noted that there are many different measures of inflation. It is not a cut-and-dry indicator. For example, there is the consumer price index (CPI) that measures inflation as experienced by the consumer. There is the Producer Price Index (PPI) that measures inflation as experienced by producers, and the Employment Cost Index (ECI), which measures inflation in labor costs. Within each of these broad categories are many different baskets and groups of inflation measurement.

Just so you know, the CPI-U is the broadest most commonly version of inflation. The U stands for Urban, and CPI-U is a broad measurement of the inflation experienced by urban consumers (which is different from poor consumers or rural consumers or wealthy consumers). To quote from the BLS website,

Which index is the "Official CPI" reported in the media?

Our broadest and most comprehensive CPI is called the All Items Consumer Price Index for All Urban Consumers (CPI-U) for the U.S. City Average, 1982-84 = 100.

In addition to the All Items CPI, BLS publishes thousands of other consumer price indexes. One such index is called "All items less food and energy". Some users of CPI data use this index because food and energy prices are relatively volatile, and these users want to focus on what they perceive to be the "core" or "underlying" rate of inflation.

That last paragraph is important. The Federal Reserve is one such user that bases its decisions on the "All items less food and energy" measure. To quote from the Federal reserve:

[P]olicymakers examine a variety of "core" inflation measures to help identify inflation trends. The most common type of core inflation measures excludes items that tend to go up and down in price dramatically or often, like food and energy items. For those items, a large price change in one period does not necessarily tend to be followed by another large change in the same direction in the following period. Although food and energy make up an important part of the budget for most households--and policymakers ultimately seek to stabilize overall consumer prices--core inflation measures that leave out items with volatile prices can be useful in assessing inflation trends.

What does that mean? It does not mean the Fed is trying to hide a multitude of sins by using an inflation measure that does not include energy and housing costs. It is a statistics argument. Let me explain.

The Fed must look into the future. Have you ever done that? It's hard. Very hard. It's even harder when what you're trying to predict doesn't even have a clear indicator. In order to look into the future, the Fed must employ elaborate statistical/econometric models that use current and historical data.

Data can vary dramatically in its usefulness both in statistical terms and in econometric terms. What do I mean? From a strictly mathematical and statistic perspective, if a variable (i.e. the inflation measure) has too much white noise (movements that are not associated with past or future values; I'm using this term loosely by the way, the statistical definition is much more... involved) then it provides less predictive information. There are several methods for trying to remove the white noise and assessing the trend, but if the white noise is too erratic, you will likely find no trend at all. If this is the case, your variable is, alas, useless. From an econometric perspective, it may make sense that the variable (gas prices) be included in the model (gas prices do, in fact, effect our living expenses), but if it makes the whole model useless, you must get rid of it.

So, my astute reader, you will quickly see that price fluctuations in gasoline are very dramatic (relatively). For example, just two months ago gas was around $2.35 a gallon (ha, Utah has its benefits), but it is now up around $3.60. That's a full 49% price increase in less than two months. If inflation was 49% in the US, I'd recommend getting as many credit cards as possible and maxing them out on cigarettes, whiskey, diet Coke, and ammo, since that's what you'll need in the ensuing barter system. However, I am not recommending such action, nor would anybody argue we are actually experiencing 49% inflation.

Some may argue that on average if we include gasoline along with all the other things, we would be closer to reality. Statistically speaking, this is not true at all. The variability of gasoline makes it a very abnormal commodity. You do not see the price of your furniture, or your tv, or your cars, or books, or dishes, etc. change by more than 2% on average. And that's the point.

So it is not political maneuvering or deviousness on the Fed's part, but rather a realization of the limitations of statistics and data that has led to the use of the "core" inflation measure. The extreme variation in gasoline prices would literally make it impossible for the Fed to even attempt to predict inflation.

We can gnash our teeth at them and shake our fists as much as we like, but until somebody provides a reasonable way to filter out the white noise of erratic commodities and expenses, we cannot include them in the Fed's inflation predictions. Sorry. (as a side note, I don't think it's possible to "filter" the erratic nature of gasoline prices since they are not, strictly speaking, white noise, but rather reflections of the erratic nature of politics, markets, and many other things, maybe even butterfly wings)

So with that discussion of inflation completed, I return to the case at hand. Bernanke's issue is complex, and he is aware of the fine line he must tread (as he himself admits in the article I linked to but you probably did not read). The main issue is to unwind the $2.9 trillion in reserves on the Fed's balance sheet without killing the economy. Unwinding too fast could cause the mortgage market and other credit markets to freeze since prices would fall dramatically, among other things. Not unwinding could be disastrous if banks suddenly (as in, over a couple months) unleashed that $2.9 trillion to the world through lending, thus leading to horrific levels of inflation.

The San Francisco Fed's chairman, Dann Bowman, back in October, discussed this issue when he visited Salt Lake. Some argue that as soon as inflation starts to pick up (i.e. banks unleash a torrent of lending suddenly), the Fed cannot stop it because they would be stifling the economy. This is a misleading argument. Technically speaking, yes, the Fed would be limiting the credit supply, and thus, yes, technically speaking, they would be hindering economic expansion. But this makes it sound as though they would plunge the economy back into recession. This is false. Very false. Please don't think like this.

The current recovery is not based on an exorbitant or abnormal amount of lending. Does that make sense? What I mean is, we are currently weakly recovering, and even though interest rates are uber low, we are not actually lending out a ton of money. People are saving and reducing their debt (which is why we've had to lower interest rates so much just to get some lending going). So if lending suddenly picks up, putting the kabosh on super loose credit markets won't kill the economy again (within reason; if interest rates were hiked too fast it would be a problem, but there is a relatively wide margin to get this right). What it will do is allow lending to increase but at a more reasonable rate. As we can see, we do not need excessive lending for the economy to continue its recovery, and in fact we don't want excessive lending to fuel the recovery. We just want some lending to keep recovering.

Bowmann's point was that we can easily stop up the credit market if it begins to unwind too fast. The concern that the Fed won't do it is bordering on conspiracy theories, since the Fed has every reason and incentive to do so, and to do so properly. Furthermore, the Fed does have the tools to detect that inflation quickly. In fact, the fed has more data and more up-to-date information than ever before. In the '70s, inflation measures were less accurate and less immediate. Before World War II they were difficult at best to get publicly. I'm not saying we have it right this time, or that this time is different, but I am saying we are in a better position than any other high-inflation period.

One final note on the topic is that Ben Bernanke has been thinking about this very issue from the start. Before he even implemented the quantitative easing, he requested express permission to pay banks interest on their reserves at the Fed. This provides incentives for banks to leave their money in reserves, since it's earning interest there. Though this has complications and isn't strictly what the Fed wants to keep forever, it provides extra time for the Fed to unwind its balance sheet slowly.

But oh how easy and fun it is to blame the Fed, and to create and propagate apocalyptic predictions of inflation. Bill O'Reilly and Glenn Beck may disagree with me, but they're selling air time. They're trying to make the Fed's "failures" look like Obama's failure, which is fine I guess, but it's not genuine. There are real issues here, and the path isn't certain. We've never been in this position, but logical minds have thought through this as best as they can, I promise. I like the discourse and the concern; it keeps us all honest and informed. But I give my unsought opinion that '70s-level inflation is not on the horizon.