Baum on Money: Greenspan Digs Deeper

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Good morning, all. Here's a glance at what I'm reading to start my day.

Greenspan finds the answer in animal spirits.

Perhaps you've been trying to understand why most economists, including those at the Fed, missed the financial crisis. Alan Greenspan has the answer for you. In two words, animal spirits. The problem is that animal spirits are hard to measure, which means the behavior can't be modeled. And if you can't model it, then what? You aren't responsible for missing the financial crisis? Poor Greenspan. He keeps digging himself into a deeper hole.

Madame Chairman it is.

The U.S. Senate voted 56-26 last evening to confirm Janet Yellen as the first female chairman in the 100-year history of the Federal Reserve. Ben Bernanke will preside at the Fed's Jan. 28-29 meeting before departing. Yellen has been Vice Chairman since October 2010, served as a Fed governor in the mid-1990s and was president of the San Francisco Fed from 2004-2010. The transition should be smooth, which is more than one can say about the challenges the Fed faces over the next couple of years.

The year that central banks break ranks.

Reuters' Breaking Views says the policies of the world's major central banks are about to diverge, which matters more to financial markets than to the real economy. The Fed has started to move away from exceptional policy. If all goes according to plan, it could wind down its asset purchase program by the end of this year, putting the Fed funds rate back in charge as the policy instrument. Neither the ECB nor the BOJ is about to take the first baby steps in that direction. That said, monetary policy at all three central banks will remain highly stimulative.

How to subsidize homeownership, not debt.

Here's a novel idea: Use the tax system to create incentives to own a home, not to load up on debt. Tax expenditures for housing cost the U.S. $121 billion last year, which is bad enough. When one considers that those tax breaks for mortgage interest and such are inefficient and regressive, it makes sense to try something else. In a new paper for the Tax Policy Center, the authors propose a permanent first-time buyer's refundable credit; a flat annual subsidy for housing; and a flat-rate credit for property taxes paid. If the goal is to get people to buy homes, "any of these alternatives would be superior to the current deductions for mortgage interest and property taxes," the authors write.

Still shrinking after all these years.

A new report from the Centers for Medicare and Medicaid Services says U.S. health care spending as a share of GDP fell in 2012 to 17.2 percent from 17.3 in the prior year. What that means is, the 3.7 percent increase in health-care spending in 2012 was about a percentage point less than the growth in nominal GDP. The big question is why health care costs have increased so slowly -- less than 4 percent a year -- since 2009. Some of the candidates are: a residual from the recession; a shift to generic medications when patents on some popular drugs expired; and a reduction in Medicare payments to nursing homes. The White House took credit, but CMS says the Affordable Care Act had a "minimal" impact.

(Caroline Baum is a Bloomberg View columnist. Follow her on Twitter.)

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.