Posts Tagged ‘economics’

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Common sense

Sunday, February 28th, 2010

There is a basic amount of shared experience that most people in this country have that is often referred to as common sense. People know how to go to the store and buy food, how to put gas in your car and how to get dressed in the morning to go to school or work. Then, there are people who seem to have missed out on some of these shared experiences. One of them is learning what car insurance does. When I was young and poor and a college student, I had an old car and did not have insurance. I probably drove a little more carefully but there was no law that said I had to have it and I was making a choice between insurance and eating.

Our president was presiding over a summit meeting on health insurance this week, but began with a story from his early experience with auto insurance. There is video at the link.

When I was young, just got out of college, I had to buy auto insurance. I had a beat-up old car. And I won’t name the name of the insurance company, but there was a company — let’s call it Acme Insurance in Illinois. And I was paying my premiums every month. After about six months I got rear-ended and I called up Acme and said, I’d like to see if I can get my car repaired, and they laughed at me over the phone because really this was set up not to actually provide insurance; what it was set up was to meet the legal requirements. But it really wasn’t serious insurance.

Now, it’s one thing if you’ve got an old beat-up car that you can’t get fixed. It’s another thing if your kid is sick, or you’ve got breast cancer.

It’s one thing to tell a story and another thing to know what the hell you are talking about !

When you are “rear ended,” the other driver is responsible for fixing your car ! You don’t call your own insurance company; you call the other driver’s insurance company !

OK, so let’s say the other driver doesn’t have insurance. Did he pay the premium for uninsured driver coverage ? Or did he just pay the minimum for liability coverage ? If he didn’t pay for uninsured driver coverage, why is that the insurance company’s fault ?

Some of us choose to buy high deductible health insurance because it is cheaper, we are healthy and we choose to pay for routine care out of pocket. Obama is planning to take away that choice. We will all have to buy Cadillac coverage and, if we can’t afford it, the government will subsidize it. Why is that better ?

How would he know if he doesn’t even know how car insurance works ?

I still wonder who was guiding this guy through life when he was young. It sounds to me like he would starve to death if left to his own devices.

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Posted in Uncategorized | 4 Comments »

The Greeks forecast the future

Thursday, February 18th, 2010

Victor Davis Hansen writes excellent essays on many topics but he outdid himself today on the Greek crisis in the EU.

Greece is the canary in the mine of the impending crack-up of the modern welfare state. It is a great gift to us all, this example. A year ago, the socialists, even as they were juggling and falsifying their books, were bragging that the Wall Street meltdown was a referendum — and capitalism was doomed. Now, the entire socialist dream is exposed and even the most ardent statist knows that there is no longer enough “others” to pay the tab.

The poor EU learned that the Greek siesta, the 10PM Athenian dinners, the state power company vans at the beaches in the workday afternoons, the kafenions full of 50-year-old men at 11AM, the angry students perpetually in the streets at each hinted reform, and the moonlighting telephone employees all came at the expense of far harder-working Scandinavian and German socialists, who apparently now realize a nice two weeks each year on Santorini or Crete aren’t worth billions of their own Euros in rescue bailouts.

The Greeks are the most extreme example. I wondered about their society as I watched the unfinished Olympic stadium two months before the Summer Games began in 2004. They scrambled and got it finished but I wondered about the cost at the time. Greece is a lovely theme park for tourists but, as a modern country, it has always been a bit ridiculous. The extreme socialists, like Andreas Papandreou, took Greece far left after a right wing dictatorship was displaced. His son, George, now presides over the inevitable collapse of the Socialist state his father constructed. He was also president of the Socialist International. Of course, he has a Harvard degree and was born in Minnesota, both excellent Socialist credentials.

Here in California we see the symptoms of the same Greek malady as we go from one budget shortfall to the next — dream-like borrowing, raising taxes, and furloughing, in lieu of the tough medicine of cutting government payrolls, changing pension payouts, and freezing the pay of state-workers until their compensation mirror images those in the private sector.

Postmodern Western society will soon witness a real showdown, analogous to the teenager who rebels and either accepts that he is still dependent on his parents and therefore subject to the rules of the house, or runs away and implodes in a sea of drugs and street-life.

In short, how will an entitled society react when the money runs out and it learns that it must change or wither away — and all the whining rhetoric about “social justice” and “a green future” and “spread the wealth” and “redistributive change” won’t bring another barrel of oil or bushel of wheat or Douglas fir 2” x 4”?

I should interject here that another of my daughter’s partying friends died yesterday of a presumed overdose. Fortunately, she is sober in all respects, a blessing for a parent.

California is probably doomed. It was a beautiful place when I moved here for college in 1956. Pat Brown was the last Democrat governor who had a positive effect on the state. His son, Jerry, began the decline with his election in 1975 as Governor. Now, ironically, he is the Democrat candidate this year and will probably be elected again as I don’t think the California voters are aware of how close the collapse is. The conservative voters have been leaving the state for ten years, being replaced by illegal aliens and their children, who are reliable Democrat votes. There was a warning in 1991 when Pete Wilson, a Republican, raised taxes in a recession and the state was the last to emerge from the slowdown. He was also the last Republican governor (I don’t count Schwartzenegger). One reason why he was the last was Prop 187, a ballot initiative that would have stopped many services for illegal aliens and required police to check immigration status of arrestees. It passed with 60% of the vote, even a plurality in Hispanic areas, but was invalidated by the state Supreme Court.

Bottom line: I don’t see how the state or federal government can up taxes much more and still find wealth-producing, law-abiding, motivated job creators.

On the other hand, as the money runs out, will state workers, pensioners, and entitlement recipients accept that there are too few wealth-creators to fund their pay-outs, or, as in Greece, hit the streets in protest, teenager style, each time some adjustments are necessary?

So if we can’t raise taxes and we can’t cut expenditures what is left? There is no Germany to bail us out? Cut defense? Keep borrowing from the Chinese and Japanese?

The Chinese are already dumping some of our debt, to the Japanese this week.

Where did all the wealth go? Modern Western society is in some sense becoming drone-like, its entitled sensitive citizens assuming ceremonial roles and attitudes about the very landscape they inherited from their industrious predecessors.

Here in California we idle farmland, though we have the water, expertise, and soil to produce far more food than we do. We put vast swaths of both land and sea off limits to gas and oil production, though we could produce far more petroleum and natural gas than we do. We snub nuclear power, though our population steadily increases and its desire for electronic appurtenance grows, not shrinks. We like “wilderness areas” (who doesn’t?) where we build no roads, harvest no timber, and build no damns. We strangle Silicon Valley with all sorts of labor and business regulations until it fabricates and outsources abroad. In other words, we are creating no real new sources of concrete wealth as we nuance the shrinking capital we inherited.

California is becoming a theme park like Greece. It produces nothing and tourists cannot afford to pay for the state’s budget. The lotus eaters, as California was once called, are awakening.

Suddenly in our media and politics the people are stupid, full of ingratitude, often racist, the system broken, the Congress bankrupt, all of us undeserving of our one chance in a lifetime state agenda. Yes, the petulant liberal attitude in 12 months went from “We, the People” to “You stupid idiots” — and all because some Democratic congresspeople discovered that the more they went out on the limb on Obama stimulus, health care, cap and trade, higher taxes, bigger government, bailouts and endless deficits, the more they were going to get sawed off in November by the ungrateful people. So naturally instead blame the filibuster, the people, the clingers — anything other than the self-preservation instincts of the political class of your own party.

We will see what happens this fall. It may be our last chance to avoid default. People do survive bankruptcy, even national bankruptcy. Argentina had largest gold reserves in the world in 1939. It was a rich country. That may be our future. The productive class emigrates or hides its money in Switzerland, the hoi polloi riot in the streets. We will see.

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Posted in corruption, economics, politics | 5 Comments »

Paul Ryan

Wednesday, February 10th, 2010

Congressman Paul Ryan has a proposed budget plan that could avoid the looming disaster we face with Obama’s spending and taxing plans. I’ll try to analyze it briefly but we will see much more about it, especially if Republicans take Congress this fall.

Here is one analysis in, of all places, the Washington Post.

His budget road map offers many proposals, but one big vision. Over time, Ryan concentrates government spending on the poor through means-tested programs, patching holes in the safety net while making entitlements more sustainable. He saves money by providing the middle class with defined-contribution benefits — private retirement accounts and health vouchers — that are more portable but less generous in the long run. And he expects a growing economy, liberated from debt and inflation, to provide more real gains for middle-class citizens than they lose from lower government benefits.

Ryan has been proposing this plan for several years but only now is it getting serious attention.

Spending. Our budget gives priority to national defense and veterans’ health care. We freeze all other discretionary spending for five years, allowing it to grow modestly after that. We also place all spending under a statutory spending cap backed up by tough budget enforcement.

A spending freeze has been a good option for years. It was a proposal of McCain’s in the campaign. Instead, the Obama administration has increased federal employees by 153,000 in one year. The deficits, of course, are notorious.

– Energy. Our budget lays a firm foundation to position the U.S. to meet three important strategic energy goals: reducing U.S. dependence on foreign oil, deploying more clean and renewable energy sources free of greenhouse gas, and supporting economic growth. We do these things by rejecting the president’s cap-and-trade scheme, by opening exploration on our nation’s oil and gas fields, and by investing the proceeds in a new clean energy trust fund, infrastructure and further deficit reduction.

I think “clean energy” is a boondoggle but this proposal was made last spring before the “Climategate” scandal punctured the AGW balloon.

– Entitlements. Our budget also takes steps toward fulfilling the mission of health and retirement security, in part by making these programs fiscally sustainable. The budget moves toward making quality health care affordable and accessible to all Americans by strengthening the relationship between patients and their doctors, not the dictates of government bureaucrats. We preserve the existing Medicare program for all those 55 or older; and then, to make the program sustainable and dependable, those 54 and younger will enter a Medicare program reformed to work like the health plan members of Congress and federal employees now enjoy. Starting in 2021, seniors would receive a premium support payment equal to 100% of the Medicare benefit on average. This would be income related, so low-income seniors receive extra support, and high-income seniors receive support relative to their incomes — along the same lines as the president’s Medicare Part D proposal.

I have my own ideas on health care reform. The Medicare reforms he proposed are an extension of the private accounts that Bush proposed in 2005. Social Security is in somewhat better shape than Medicare but it is not sustainable long term and fixing it is easier now than in 2017 when expenditures first begin to exceed revenue. There are comments that the “trust fund” will still not be exhausted until 2037 but that trust fund consists of Treasury IOUs. On Social Security, itself, he proposes only modest changes.

In one of the most valued government programs — Social Security — our budget begins to develop a bipartisan solution to the program’s pending bankruptcy by incorporating some of the reforms advocated by the president’s budget director. Specifically, we provide for a trigger that would make small adjustments in the benefits for higher-income beneficiaries if the Social Security Administration determines the Social Security Trust Fund cannot meet its obligations. This is a modest but serious proposal which would not affect those in or near retirement, but is aimed at helping develop a consensus, across party lines, toward saving this important retirement program. We also assure that benefits for lower-income recipients are large enough to keep them out of poverty.

I think he is avoiding the serious issues here in the interest of avoiding the worst demagogues.

The key to any success is getting the annual increases to stop. We will hear a lot more about Ryan’s plans although the loudest voices will be misrepresenting it and demogoguing the topic.

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Posted in economics, health reform, politics | 2 Comments »

Is this a parody ?

Saturday, February 6th, 2010

UPDATE: Here is an interesting article examining this phenomenon in the Washington Post. And here is a nice summary by David Freddoso.

I have been mulling the question of whether this incredible article was worth responding to. When I saw the title on Real Clear Politics, I assumed it was a parody. I’m still not 100% sure it isn’t.

In trying to explain why our political paralysis seems to have gotten so much worse over the past year, analysts have rounded up a plausible collection of reasons including: President Obama’s tactical missteps, the obstinacy of congressional Republicans, rising partisanship in Washington, the blustering idiocracy of the cable-news stations, and the Senate filibuster, which has devolved into a super-majority threshold for any important legislation. These are all large factors, to be sure, but that list neglects what may be the biggest culprit in our current predicament: the childishness, ignorance, and growing incoherence of the public at large.

The writer has not considered the possibility that Obama’s economic and national security policies are detached from reality. He does not give any thought to the possibility that millions of people have been running businesses and living their lives without the benefit of government and would like to continue to be left alone.

He also ignores the fact that, as a result of tax reforms the past two decades, about 35% of the tax payers pay no income tax. Thus, there is a constituency for new spending that knows the responsibility for paying those bills will be someone elses. In fact, by 2009, that percent who pay no tax had continued to rise and is now nearly 40%.

Maybe those people who pay no income tax are the “stupid and ignorant” group he is referring to. No, he seems to think that the middle class, which pays the vast majority of income tax, is the target of his ire.

The usual way to describe such inconsistent demands from voters is to say that the public is an angry, populist, tea-partying mood. But a lot more people are watching American Idol than are watching Glenn Beck, and our collective illogic is mostly negligent rather than militant. The more compelling explanation is that the American public lives in Candyland, where government can tackle the big problems and get out of the way at the same time. In this respect, the whole country is becoming more and more like California, where ignorance is bliss and the state’s bonds have dropped to an A- rating (the same level as Libya’s), thanks to a referendum system that allows the people to be even more irresponsible than their elected representatives. Middle-class Americans really don’t want to hear about sacrifices or trade-offs—except as flattering descriptions about how ready we, as a people, are, or used to be, to accept them. We like the idea of hard choices in theory. When was the last time we made one in reality?

I tend to agree with him about California but there is one characteristic about California that he doesn’t mention. Which political party dominates California government ? In 2005, Arnold Schwartzenegger, who had been elected two years before during the recall of his predecessor, Gray Davis, attempted to pass four reform initiatives to try to get control of the runaway entitlements of California. The teachers’ unions and the SEIU mobilized against him and all four initiatives went down to defeat. Arnold quickly caved in the political left and we are now on the verge of bankruptcy.

Schwarzenegger’s proposals to curb spending and weaken unions inflamed passions on both sides, partly because of the election’s roughly $50 million cost in a state that repeatedly faces budget shortfalls.

Appearing before supporters at a Beverly Hills hotel after learning that at least two of his initiatives had failed, a smiling governor did not concede defeat.

“Tomorrow, we begin anew,” Schwarzenegger said, his wife Maria Shriver beside him. “I feel the same tonight as that night two years ago … You know with all my heart, I want to do the right thing for the people of California.”

Though some of the measures were complex, Schwarzenegger cast the election in simple terms: Support him and the state moves forward — vote no and protect a broken system of government in Sacramento.

Actually, he gave up and the state has continued its decline as middle class tax payers flee to other states.

So who has good ideas to stop the financial whirlpool the US is caught in?

I don’t mean to suggest that honesty is what separates the two parties. Increasingly, the crucial distinction is between the minority of serious politicians in either party who are prepared to speak directly about our choices, on the one hand, and the majority who indulge the public’s delusions, on the other. I would put President Obama and his economic team in the first group, along with California Gov. Arnold Schwarzenegger. Republicans are more indulgent of the public’s unrealism in general, but Democrats have spent years fostering their own forms of denial. Where Republicans encourage popular myths about taxes, spending, and climate change, Democrats tend to stoke our fantasies about the sustainability of entitlement spending as well as about the cost of new programs.

Climate change ? He still thinks that AGW is a high priority ? Wow ! Plus he thinks Obama’s $3.8 trillion budget is drawn up by “serious politicians” ? Maybe he thinks that Gorbachev was on the verge of solving the Soviet Union’s problems in 1989. He thinks the Obama who raised discretional spending by $84 billion this past year is serious about deficits with his fake spending freeze? What about the federal employee situation ? The only place in the US which is not having a recession is The District of Columbia and environs. Federal employee numbers are climbing rapidly, where the numbers are expected to increase by 153,000 in fiscal 2010. Private industry, mostly small business, has lost about 4.5 million jobs.

The political left, having lost the confidence of the electorate in record time, is unhappy with that electorate. Imagine if Obama had really tried to be bipartisan and had incorporated Republican concepts in his first big “stimulus” bill. Imagine for a moment that, instead of the famously corrupt payments sometimes in non-existent Congressional districts, to interest groups and local government, the bill had included a six month holiday from FICA taxes. That would have resulted in a similar deficit but it would have had instantaneous effect and it would have been distributed to the working tax payers. Imagine if the health care bill had included exchanges in which individuals could have purchased insurance that was tailored to their needs, high deductible for young healthy workers for example, and the mandates of the special interests had been left out. Had that been done, Republicans would have much less to complain about and Weisberg might even like us voters more. We wouldn’t be so ignorant.

Alas, the chance was wasted and now the left is angry at us “ignorant” middle class voters. James Fallows has a pretty good essay on American decline until he gets to the last two pages. Then we get back to the tired old complaints about the electoral college and the Senate and the inability of Democrat phonies like Kerry to get elected.

America the society is in fine shape! America the polity most certainly is not. Over the past half century, both parties have helped cause this predicament—Democrats by unintentionally giving governmental efforts a bad name in the 1960s and ’70s, Republicans by deliberately doing so from the Reagan era onward. At the moment, Republicans are objectively the more nihilistic, equating public anger with the sentiment that “their” America has been taken away and defining both political and substantive success as stopping the administration’s plans. As a partisan tactic, this could make sense; for the country, it’s one more sign of dysfunction, and of the near-impossibility of addressing problems that require truly public efforts to solve.

Of course, when Bush tried to deal with the coming collapse of Social Security by allowing private accounts, the Democrats demagogued it mercilessly but the Republicans are the “nihilists.”

We could hope for an enlightened military coup, or some other deus ex machina by the right kind of tyrants. (In his 700-page new “meliorist” novel, Only the Super-Rich Can Save Us, Ralph Nader proposes a kind of plutocrats’ coup, in which Warren Buffett, Bill Gates Sr., Ted Turner, et al. collaborate to create a more egalitarian America.) The periodic longing for a “man on horseback” is a reflection of disappointment with what normal politics can bring. George Washington and Dwight Eisenhower were the right men on horseback.

Here we go with the left’s fondness for military coups and authoritarian government. They can’t win elections so it is the voter’s fault and they want to try to do without those ignorant voters.

I guess it wasn’t a parody.

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Posted in economics, politics | 7 Comments »

The left and economics

Tuesday, January 26th, 2010

Today Washington Monthly has another clueless post on economics which misrepresents the Reagan record on deficits and tax cuts. First, they post this graphic.

If someone believed this nonsense, the solution to unemployment would be obvious. Raise taxes ! Keep raising them until everybody has a job ! Of course, to believe it , you would have to be a left winger who doesn’t know anything about the economy.

There is one fact ignored by Benen and Krugman (who knows better). When the Reagan tax cuts passed, the “root canal” Republicans like Bob Dole included a provision that the tax cuts would not take effect until 1982. That guaranteed what we see. Anyone with a bit of sense would postpone economic activity until 1982 when the tax cuts would have taken effect.

Conservatives believe Obama’s stimulus didn’t work, and as proof, they point to the unemployment numbers 11 months after the policy became law. But if that’s the appropriate measure, wouldn’t Republicans also have to believe that Reagan’s 1981 tax-cut plan also failed, since unemployment went even higher the year after it passed?

They might if they believed Benen and ignored the fact that the tax cuts were postponed until the next year when passed.

On the contrary, the Obama tax increases will take effect in 11 months and will be a disaster, unlike young Mr Benen’s delusion.

But when the huge tax-increase agenda arrives a year from now, the economy will begin to decline, and will be some 3% to 4% smaller than it otherwise would have been. The artificially high growth in 2010 followed by artificially low growth in 2011 would “represent a larger collapse than occurred in 2008 and early 2009,” Mr. Laffer writes.

Hang on, rough water ahead.

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Posted in economics, politics | 2 Comments »

The debt limit

Thursday, January 21st, 2010

Congress wants to raise the debt limit.

By a lot.

This cannot go on much longer.

UPDATE: The world According to Krugman.

Quite aside from everything else going on, the economic recovery isn’t looking very good. Unemployment claims are stalled at a level that bodes ill for for the overall employment picture (don’t count on falling unemployment until that number falls well below 400,000). And the 10-year bond rate, which is my personal index of the market’s expectations about recovery, has been falling off again after rising for several weeks.

No reason to panic — but it does look as if this recovery is going to be jobless for quite a while.

He previously said this:

In the table above, spending peaks in the second quarter of 2010, but the peak impact on growth is in the third quarter of 2009, i.e., it’s behind us. That’s true even though by the end of 2009 less than a third of the money has been spent.

And when the spending begins to tail off, the effect on growth turns negative.

So growth will soon turn negative. I like the first comment on his blog post.

As Alesina and Ardagna showed in a recent study of 91 episodes in OECD countries since 1970 when governments attempted to stimulate the economy, cuts in business and income taxes are successful, while increases in government spending fail. There is no reason at all to ever propose a Keynesian “stimulus”.

Unfortunately, ideology often trumps fact and analysis. Accordingly, Prof. Krugman continues to propose Keynesian stimulus, even as he struggles to square his ideology with the failure of (now three) stimuli since 2008 to do anything other than destroy jobs.
Those who actually create jobs in small businesses struggle to manage the obstacles that governments create upon the advice of people like Prof. Krugman. We see nothing but future obstacles, as the promise of new taxes on investment, inheritances, and growth destroy seed capital, added regulations based on junk science (for example “climate change”) and health care “reform” raise the cost of business, and Obama’s corporate socialism transfers wealth to cronies in unions and Wall Street.
Pork-laden stimulus bills and the frantic vote-buying that preceded this week’s Senate health vote confirms our worst fears about liberal governance, with or without a “conscience”: it’s a racket rigged to benefit privileged insiders floated by our tax dollars.

Now, that fellow should be considered for a Nobel Prize.

Now comes this.

The fact is that the Senate [health care] bill is a centrist document, which moderate Republicans should find entirely acceptable. In fact, it’s very similar to the plan Mitt Romney introduced in Massachusetts just a few years ago. Yet it has faced lock-step opposition from the G.O.P., which is determined to prevent Democrats from achieving any successes. Why would this change now that Republicans think they’re on a roll?

This man is delusional. He doesn’t seem to understand economics or health reform. God help us.

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Posted in financial | 8 Comments »

Health reform as rent seeking

Wednesday, January 6th, 2010

I have been suspicious of most of the medical organizations pushing health reform of the Obama type. I have previously proposed that the problem with cost that we have is due to the effort to achieve pre-paid care, and ultimately free care. The medical organizations that have been pushing this type reform usually have an ulterior motive. The AMA gave up its credibility in 1986 with RBRVS. That was sold to the primary care organizations as a way to take money from specialists, especially surgeons, and give it to the primary care docs. I remember being told at the time that they were doing it for that reason. Well, it didn’t work. Everybody got screwed in a typical “prisoners’ dilemma” situation.

Now, here we go again and the usual suspects are pushing the same argument.

The Congressional reform proposals are based on a widespread consensus that the current model of fee-for-service payments undercompensate evaluation and management services as compared with procedures and technical services, do a poor job of providing incentives to clinicians for collaboration, do not improve efficiency, are not focused on quality and outcomes, and do little to encourage wellness and prevention.

It is well known by everyone in health care that “wellness and prevention” do not contribute to reduced costs except as general public health trends. If obesity is responsible for increasing levels of type II diabetes, for example, doctors are going to have little effect on that trend, no matter how they might scold patients. However, pushing “wellness and prevention” is a way of trying for a bigger piece of the reimbursement pie.

In fact, every step in the march toward government medicine has resulted in less, not more, money for primary care. That is why primary care physicians are leaving the Medicare program and selling their services, in a variation of the fee-for-service model, to patients for cash. The command economy types will never understand that because they do not understand private business. In their world, everybody works for the government, or academia which is the same thing.

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Did the Republicans do the right thing ?

Monday, December 21st, 2009

UPDATE: Obama has changed his mind and will put off health care until February. Wow ! If that’s true, there are some Senators who will plucking flak out of their asses for weeks over this and now they get blindsided. Way to go, big guy !

There are lots of post mortems going on this morning. Did the Republicans do the best they could to stop this bill in the Senate ? I think they had a terrible problem and probably did the best they could. They did delay passage until a lot of the public got a good view of the sausage factory. There is another question. Did the Republicans leave the door open by failing to produce an alternative the past 15 years since Clinton failed ?

The choices that they made, or didn’t make, across the last fifteen years are what made all the difference. Between the defeat of Clintoncare and the election of Barack Obama, the Republicans had plenty of chances to take ownership of the health care issue and pass a significant reform along more free-market, cost-effective lines. They didn’t. The system deteriorated on their watch instead. And now they’re suffering the consequences.

There are others who think the bill may still fail in the House but let’s look at the question about the past 15 years. The left, of course, thinks they made a huge blunder. I don’t accept his premise.

At the outset of this debate, moderate Democrats were desperate for a bipartisan bill. They were willing to do almost anything to get it, including negotiate fruitlessly for months on end. We can’t know for sure, but Democrats appeared willing to make enormous substantive concessions to win the assent of even a few Republicans. A few GOP defectors could have lured a chunk of Democrats to sign something far more limited than what President Obama is going to sign.

What ??? I don’t see that at all.

What about Douthat’s charge the Republicans missed a chance for an alternative ?

I think he is wrong. The Republican alternative was always The HMO. In 1973, Nixon signed a bill making HMOs mandatory as an option for all businesses with more than 25 employees.

In more recent years, “managed competition” was the model with other alternatives to HMOs created, like PPOs. These organizations enlist doctors and hospitals who agree to follow rules, chiefly rules about utilization. They may also, especially recently, include discounted prices for services. Those discounts have gotten quite large in recent years so that, in California, a state with heavy managed care, most medical groups were insolvent in 2008. It wasn’t just California as predatory practices left many doctors high and dry.

Managed competition was an aggressive strategy to control costs. It didn’t work. Why ?

The basic failure of all medical insurance the past 30 years is the inclusion of routine care making “health insurance” into “prepaid care.” People would know better than to buy auto insurance that included routine maintenance in the policy benefits. Why ? Because, instinctively, they understand moral hazard. They know that, if your insurance covered oil changes and the damage that might be incurred for failing to change oil, people would be less likely to take good care of the oil in their cars. Not everyone. But enough. Why doesn’t everyone buy one of those home maintenance policies ? Have you tried to get anything fixed under one ?

Now, it looks as though we may get a chance to see if the Democrats’ way is any more effective than the Republican way. I don’t think it will be but it does provide lots of jobs for Democrat functionaries. At least until the money runs out.

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The danger of models

Monday, December 14th, 2009

There is a very pertinent article today on the dangers of putting too much faith in models, based on inadequate information.

We’ve now lived through the same new disaster twice. Computer simulations, more or less universally adopted as the solution to a major problem, turned out to have been based on flawed assumptions and faulty data. As a result policy or markets became heavily skewed in an inappropriate direction. Wall Street’s risk managers and climate change scientists both acted as super-salesmen for a paradigm that turned out to be flawed. After two examples of the same error have each cost the world a substantial percentage of a year’s GDP, we’d better figure out how to avoid further examples of this syndrome.

I have previously linked to an article that compared Obama to Mikhail Gorbachev. I think this comparison is also valid and interesting.

As the credit crisis of 2008 recedes into history, the part in it played by misguided computer models, particularly in the risk management area, is becoming generally agreed. Rating agencies made assumptions about the probabilistic independence of different home mortgages that were unfounded. As a result many of their AAA ratings proved to be completely spurious, particularly in the subprime area where the loans’ vulnerability to a house price downturn was especially extreme.

Investment banks managed their risks based on the “Value-at-Risk” risk management paradigm, which assumed that the distribution of securities’ returns was approximately Gaussian (normally distributed), with a very low probability of high losses. The “Basel II” system of global capital adequacy standards for banks, which came into effect in 2008, just in time for the crash, was so impressed with these models that it ruled that any bank using such obviously sophisticated and superior modeling techniques could calculate risks on its own, without reference to the crude guidelines deemed appropriate for smaller, less mathematically attuned houses. The Securities and Exchange Commission (SEC) essentially agreed with the Basel Committee; from 2004, it allowed the largest U.S. investment banks to manage their own leverage, under the theory that no mere regulator could match the exquisite precision of a modern VaR-based risk management system.

The model and the confidence placed in it by financial managers who should know better resembles and old paradigm, confidence in machines that we don’t understand. The “black box” is an example. It had happened before. Programs were written by physics PhDs who did not understand finance for financial experts who did not understand programming.

It’s not as if Wall Street had no warning; mathematical models based on modern financial theory had caused huge losses as far back as 1987, and had caused the collapse of Long Term Capital Management in 1998. Yet the world’s best remunerated people went on using the mathematical models that had caused moderate sized disasters before, only to watch them cause a truly impressive disaster in 2008. It must have been some kind of compulsion.

Then we come to global warming and the cap and trade legislation that relies on the theory.

Turning now to my other example, that of global warming: the possibility that excess carbon dioxide, through a “greenhouse effect” might cause a global rise in temperature is based on well-established chemistry and physics. Deniers of the possibility of global warming are thus being as irrational as the extreme eco-alarmists; global warming is indeed possible because of physical and chemical processes that are perfectly well understood, indeed fairly elementary.

The difficulty arises in estimating whether it is actually happening. The rise in temperatures so far observed is well within the level of “noise” in global temperatures over a period of a century or so, let alone the more extreme fluctuations that have taken place when the observation period is extended to millennia. It is thus necessary to match the very limited temperature data we have, stretching back no more than a century on a worldwide basis, with secondary observations of such things as tree rings and ice cores, synthesizing the result with a computer model of what is believed to be the carbon forcing process in order to predict the range of possible future warming effects.

This is of course a very similar process to that undertaken by Wall Street’s rating agencies and risk managers. Assumptions and simplifications are made, without which it would be impossible to construct a model. Then the model is matched up against a few years’ observations in real time, being “tweaked” as real data comes in that does not quite fit with it. By the time this has been done, careers have been invested in the model, institutions have been built around its predictions and eminent people have become enthralled by its results. It thus takes on the appearance of a scientific reality as solid as Newtonian mechanics.

The economic effects of this model are even greater than the effects of the financial models.

The political left continues to lie about the causes of these recurrent crises, even Nobel Prize winners.

The first big wave of deregulation took place under Ronald Reagan — and quickly led to disaster, in the form of the savings-and-loan crisis of the 1980s. Taxpayers ended up paying more than 2 percent of G.D.P., the equivalent of around $300 billion today, to clean up the mess.

I’m sure that Paul Krugman knows the story of Fernand St Germain and the midnight amendment that brought down the S&Ls.

By the time Ronald Reagan took office in 1981, two-thirds of the nation’s S&Ls were losing money and many were broke. If all the problem thrifts had been shut down right then, the government’s insurance fund would have covered their debts.

Instead, the government delayed an average of two years-and, in some cases, as many as seven years-thus allowing bankrupt S&Ls to go on losing billions of dollars. This delay also gave S&Ls a chance to gamble on questionable investments, in an attempt to regain solvency. But first they had to convince Congress to deregulate them.

One night in 1980, Representative Fernand St Germain (D-Rhode Island), whose $10,000-to-$20,000-a-year restaurant and bar tab was paid for by the S&L industry’s chief lobbyist, proposed raising federal insurance on S&L savings accounts from $40,000 to $100,000- even though the average size of an S&L account was $6,000. He waited until after midnight, when only eleven representatives were still on the floor of the House; they approved his proposal unanimously.

But St Germain was just getting warmed up. In 1982, he cosponsored a bill that removed all controls on what S&Ls could charge for interest and released them from their century-old reliance on home mortgages.

That was Regulation Q.

Around the same time, the Reagan administration ended the requirement that S&Ls lend money only in their own communities, allowed them to offer 100% financing (i.e. no down payments), let real estate developers own their own S&Ls, and permitted S&L owners to lend money to themselves.

These changes were like taping a sign to the S&Ls’ backs that read, “Defraud me.

This has little to do with models but I ran across that Krugman column which is so duplicitous that I had to add a comment.

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The political left heads for the cliff

Saturday, December 12th, 2009

UPDATE: The Detroit News has a piece today on the Obama agenda and the possibility that a Depression could result. They make points similar to those I have been worried about.

The concerns of the majority of American citizens with out-of-control spending do not impress the left. They advise Obama and Congress to ignore those pesky voters.

MAJORITY STILL MISGUIDED ON ECONOMIC PRIORITIES…. The polling has been remarkably consistent on this all year. And it irks me every time.

Americans are more concerned with lowering the massive budget deficit than boosting the ailing economy, according to a new national poll.

Fifty-six percent of people questioned in a CNBC survey released Friday morning say President Barack Obama and Congress should worry more about keeping the budget deficit down even if that means delaying the economic recovery. That’s 23 points higher than the 33 percent who feel boosting the economy should be the top priority, even if that means larger deficits now and in the future.

This continues to be hopelessly backwards. Given the precarious state of the economy and widespread concerns about unemployment, common sense suggests concerns over the deficit should wane. But all of the recent polling suggests a majority of Americans really do care more about deficit reduction than growing the economy and creating jobs.

The left is still convinced of the efficacy of the command economy in spite of the collapse of the Soviet Union and the evolution of Communist China into a semi-capitalist economy.

They are convinced, in spite of all evidence to the contrary, that Roosevelt saved the country from the Depression by spending. The concept that the New Deal was the cause of the Depression is totally alien.

This is not just a repudiation of Amity Schlaes book, The Forgotten Man, but also new scholarship from serious academics.

Two UCLA economists say they have figured out why the Great Depression dragged on for almost 15 years, and they blame a suspect previously thought to be beyond reproach: President Franklin D. Roosevelt.

After scrutinizing Roosevelt’s record for four years, Harold L. Cole and Lee E. Ohanian conclude in a new study that New Deal policies signed into law 71 years ago thwarted economic recovery for seven long years.

“Why the Great Depression lasted so long has always been a great mystery, and because we never really knew the reason, we have always worried whether we would have another 10- to 15-year economic slump,” said Ohanian, vice chair of UCLA’s Department of Economics. “We found that a relapse isn’t likely unless lawmakers gum up a recovery with ill-conceived stimulus policies.”

In an article in the August issue of the Journal of Political Economy, Ohanian and Cole blame specific anti-competition and pro-labor measures that Roosevelt promoted and signed into law June 16, 1933.

“President Roosevelt believed that excessive competition was responsible for the Depression by reducing prices and wages, and by extension reducing employment and demand for goods and services,” said Cole, also a UCLA professor of economics. “So he came up with a recovery package that would be unimaginable today, allowing businesses in every industry to collude without the threat of antitrust prosecution and workers to demand salaries about 25 percent above where they ought to have been, given market forces. The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies.”

“Today” was 2004 when the Congress was still in the hands of Republicans. There are many things that Congress, and the Bush Administration, did wrong but no one would have predicted that the exact same policies these scholars condemned would again be enacted only five years later.

Another example that is never discussed is the 1920 recession. The fact that this recession was as severe as the 1929 crash is almost never discussed.

The end of World War I caused the federal budget to decline from $18.5 billion in 1919 to $6.4 billion in 1920. Although this decline in budgetary stimulus required an increase in investment and spending by the private sector, Congress raised taxes on individuals and corporations, while the Federal Reserve Bank restricted credit by raising its discount rate for member banks from 4.75 percent to 7 percent by 1920. Unemployment rose from 4.0 percent in 1919 to 11.9 percent in 1921, but subsided to 7.6 percent in 1922 and 3.2 percent in 1923. The recession contributed to the failure or merger of 2,024 banks (6.5 percent of the total) by 1925.The economy’s industrial and commercial sectors revived after 1921, but agriculture did not. Farm prices dropped sharply as world output rose after the war, and US farmers responded by overproduction, which created surpluses that drove commodity prices progressively downward through the 1920s. Farm income dropped from 15 percent of national output in 1920 to 9 percent in 1928; 454,866 owner-managed farms disappeared in the 1920s, and the farm population decreased by 3,000,000. The agricultural depression led to the closure of 5,400 rural banks during the decade.

The agricultural depression is usually emphasized in any discussion of the 1920s. My own family were farmers but left the farm during that decade. The fact is that national prosperity was also contributing as agricultural productivity soared with mechanization of farming and new technology with fertilizers and the systems of crop rotation.

What is almost never discussed is why the 1920 recession ended so quickly. Thousands of banks failed yet, by 1923 employment was back to normal even though a million men had been demobilized as the war ended in 1918. What happened ?

There is a good deal of speculation in the economic literature but the conclusions vary. What is clear, though, is that President Harding and VP Coolidge did NOT do what Hoover and Roosevelt did after the 1929 crash.

The 1920-21 deflation contains another striking feature. Not only was it sharp, it was large relative to the accompanying decline in real product. The ratio of the percentage decline in the GNP deflator for 1920-21 to the percentage decline in real GNP is 2.6 using the Department of Commerce figures, 3.7 using the Balke and Gordon data, and 6.3 using the Romer data. By contrast, during 1929-30, the first year of the Great Depression, the GNP deflator declined by 2.7 percent and real GNP by 9.4 percent, for a ratio of 0.3. The ratios of the percentage decline in GNP prices to the percentage decline in real GNP for 1930-31, 1931-32, 1932-33, and 1937-38, the other Great Depression years in which real GNP declined, were 1.0, 0.9, 1.2, and 0.3, respectively, all well below the 1920-21 figures.

The 1920 recession was more severe than the 1929 crash in its effect on prices and wages.

The contraction then became severe. By the year’s end, industrial production had fallen 25.6 percent below its January 1920 peak and bottomed out at 32.6 percent below its January 1920 level in July 1921, the general business trough. Wholesale prices were 42.9 percent below their May 1920 peak by July 1921. Industrial production had fallen by 32.6 percent in eighteen months, wholesale prices by 42.9 percent in fourteen months. The deflation eliminated more than 70 percent of the rise in wholesale prices associated with World War I.

In one year, 70% of the inflation of WWI was eliminated !

Friedman and Schwartz [1963, 205-39] attribute the severe phase of the 1920-21 recession and its attending deflation to monetary restraint. Monetary policy was expansive throughout World War I, including the period of U.S. neutrality. Policy remained expansive during most of 1919, even though by summer an inflationary boom was underway. The Federal Reserve was pegging interest rates at a low level using its loan discount rate in order to accommodate the Treasury’s funding of the war debt. The Fed also had an interest in protecting commercial bank portfolios, which contained substantial quantities of war bonds and loans secured by war bonds.

Monetary policy began to shift in December 1919, then changed markedly in January 1920.

What happened in 1920 ? There was an election.

The Federal Reserve Bank of New York’s discount rate, which had been pegged at 4 percent since April 1919, was raised to 4.75 percent in December 1919, to 6 percent in January 1920, and to 7 percent in June 1920. Similar discount rate increases were made at the other Federal Reserve Banks.

This was still Wilson’s Progressive administration but Wilson was disabled by a stroke. Colonel House and Mrs Wilson were basically running the administration. The 1918 election returned control of the Senate to Republicans, who picked up seven seats. The war ended with the Armistice a week later. The Republican Senate is often blamed for the failure to ratify the League of Nations although Wilson’s failure to compromise on some issues is also to blame. Its influence on monetary policy is usually ignored.

There is much speculation about why the recession was so severe but little about why it ended so quickly.

Austrian School economists and historians argue that the 1921 recession was a necessary market correction, required to engineer the massive realignments required of private business and industry following the end of the War. Historian Thomas Woods argues that President Harding’s laissez-faire economic policies during the 1920/21 recession, combined with a coordinated aggressive policy of rapid government downsizing, had a direct influence (mostly through intentional non-influence) on the rapid and widespread private-sector recovery.[11] Woods argued that, as there existed massive distortions in private markets due to government economic influence related to World War I, an equally massive “correction” to the distortions needed to occur as quickly as possible to realign investment and consumption with the new peace-time economic environment.

That is the last paragraph of the article. It may be the most important. Harding cut government spending and let the private economy alone to recover. It did so completely in one year. Ten years later, Hoover, followed by Roosevelt, enacted progressive prescriptions and the Great Depression followed. Now, we seem to be on the same path.

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