Billy Mays Died of Heart Disease

Or so it seems.  But of that day and hour knoweth no man, no, not the angels of heaven . . . 

Markets in Everything

Spend your vacation hunting pirates.

Omnibus blog post written at 5:30 CDT

Blogging will be light today, as I am wending my way west towards the Aspen Ideas Festival, where I'll be blogging, and moderating a few panels.  If I have time between flights, I will try to provide you with a couple of posts on intellectual property and other goodies.  Meanwhile, a few thoughts to tide you over:

Really moving article on black autoworkers in Detroit.  This seems mostly like a hook, because the core story is the same as that of white autoworkers in Detroit.  Liberals often accuse conservatives of hating union workers, and maybe some do, but I think it's great that people who maybe weren't cut out for college had a decent way of earning a good living, getting ahead a little.  I think it's really sad that era is over, especially for people who were encouraged to bet their whole futures on a deeply troubled industry.  It's just that I'm also aware that the reason people could have well-appointed jobs-for-life was an oligopolistic cartel which was able to cut rich side deals in order to buy labor and political peace.  The culmination of this was the hideous junk of the 1970s, which is the kind of place that oligopolistic cartels tend to end up.

But that doesn't make all this any less tragic for the workers.

Next tragedy:  Michael Jackson.  Oxycontin.  Discussion question for libertarians:  assume we all agree that drugs should be legal.  Is a doctor who enables an addicted patient to take fatal doses a good doctor, or should he be liable for malpractice?  Discussion question for non-libertarians:  how, pray tell, is this an argument in support of our current draconian drug laws?

Third tragedy: now we've lost Billy Mays too.  Whatever cosmic force is targeting celebreties, I think it's time to stop, 'kay?  I was really enjoying Pitchmen, though of course, I'm not sure there's really a wide market for business-and-economics themed reality shows.  (The Apprentice doesn't count as either, thank-you-very-much).

Off to Aspen, where Madras goes to die.

The Moral of the Zicam Story

Derek Lowe:

A lot of people are convinced that zinc is good for colds - I'm agnostic, having not seen much convincing evidence - so if that's the case, why not snort zinc up your nose? That, at any rate, seems to be the condensed version of the Zicam pitch, although I don't believe that they used that exact wording in their ads. (A gift for advertising copy might not be one of my more robust talents. . .) At any rate, snorting zinc salts has actually been known, for some time now, to injure the sense of smell in some people. So it's proved with Zicam, with several hundred victims.

The moral? If you're going to sell homeopathic medicine - and boy, is it a lucrative business - make sure that you don't put anything in there except sterile water. That'll cut down on your expenses, too, since most ingredients cost more than water, anyway. Stick with that strategy, and you can be absolutely sure that nothing bad will happen to your customers. Nothing good will happen to them either, but they won't know that. When their cold/headache/whatever goes away of its own accord, they'll ascribe it to your miracle product. Sit back and profit! Be sure to thank Senator Hatch while you count your money, though - it's only proper.

Rethinking the CRA

John Carney has been doing a lot of blogging about the role of the CRA in the financial meltdown.  That role is overstated by conservatives who are unwilling to admit that markets can have bad outcomes, but it is understated by liberals who are unwilling to admit that regulation, too, can produce hideous unintended consequences.

The CRA did not singlehandedly cause the meltdown.  But the relaxation of credit standards that allowed the meltdown did start, as far as I can tell, with the CRA.  And perhaps more importantly, the CRA, and the mentality behind the CRA, made regulators extremely unwilling to intervene.  Everyone wanted to make credit more widely available to the poor.  Well, the poor aren't good lending risks.  So if you want to give them access to credit, you need to relax your lending standards.  Any attempt to tighten lending standards on the part of the government would have resulted in a massive contraction in the credit available to core Democratic constituencies.  Meanwhile, the Republicans were hoping that turning poor people into homeowners would make them more Republican.

Regardless of how much causal blame you assign it, the financial crisis has certainly proven that the CRA seems to have been a very, very bad idea.  Yet Barney Frank is still trying to keep risky loans flowing in the hope that things will all somehow come right in the end if we just pretend, as hard as hard can be, that there isn't substantial risk attached to doing things like buying a condo in a building that is less than 50% occupied.

Michael Jackson, RIP

Ben Bernanke Faces Congress

I'm on the record as thinking Bernanke has done a pretty good job in a pretty scary crisis.  Nothing I've heard recently has changed my mind on that.  However, I have to say, watching his testimony to Congress today, I suspect that he's not going to be reappointed when his term ends next year.  Whatever happened between him and Paulson and Ken Lewis, he is now giving a very good impression of someone who is lying.  And Congress wants someone to blame.  Besides, firing Bernanke lets Obama portray all of the failures of this year as Bush errors in policy or appointment.

I think if he's pushed out it will be a real pity, for several reasons.  First, Bernanke really is the most superbly qualified economist out there to deal with this particular sort of crisis.  But perhaps more importantly, regulatory uncertainty is not what we need now.  Bernanke may be tempted to keep monetary policy loose in order to make the economy look better and save his job.  Obama may be tempted to appoint someone insufficiently interested in inflation, both to goose the economy ahead of the midterms, and to ease his debt problem.  And whoever it is will be getting his feet wet at exactly the wrong time.  There's a strong argument to be made that one of the reasons the Great Depression was so bad in America was that the Fed power vacuum left behind by the death of Benjamin Strong left the central bank too divided to take appropriate action.

The Perils of the Second Derivative

One of the alleged "green shoots" perking up the economy was that unemployment was getting worse more slowly.  Economic and financial journalists have been calling this the "second derivative" argument:  measuring the state of the economy by the rate of change in the rate of change.  There's something to this, but not as much as was made out of it--if unemployment continues to grow more slowly for another two years, that's still bad news.

Then, of course, how are you supposed to feel when the initial jobless claims figures start going back up, as they did this week?  I'm more inclined to credit jobless students flooding the market than some disastrous turn in our economy's fortunes.  But then, I was never that cheered by the second derivative in the first place.  I'll feel cheerful when the unemployment figures start going down.

Time and Tide

I don't want to make too much of myself, but at the age of 22, I wrote what may be the worst novel ever penned in the English language.  So I was particularly interested in John Scalzi's explanation of why writers tend to be older.  But even if you have not written the worst novel in the English language, you will be interested too.

The Magic of the VA

Bruce McQuain says that the problems at Walter Reed prove that the VA isn't so hot.  Ezra Klein snaps back :

Walter Reed is an army hospital, not a veteran's hospital. The two systems have nothing to do with one another. That's why the problems at Walter Reed led to the resignation of the Secretary of the Army and not the Secretary of Veterans Affairs.

Ezra wins on points.  But here's the thing:  Army hospitals have all the advantages that single-payer advocates love about the VA.  They're unified.  There's no profit incentive--indeed, the doctors are on quite low salaries.  They have great incentives for preventive care.  They certainly don't have any profit motive to provide bad care.  So why did Walter Reed suck?  And what guarantees that the VA is the system we'll follow, rather than the multiple other dysfunctional government systems everyone hates?

Blast from the Past

Last month, I wrote about my adventures in 1930 primary sources.  I did a lot of 1930s reading for this month's business column, but truthfully, I've been reading old magazines for years, just because I'm kind of obsessed with historical pop culture.  What always surprises me is the optimism of those early depression years--during what may well have been the worst financial crisis in American history, people mostly expect things to get better.  This gives me pause whenever I examine our "green shoots", even though I'm very sure we've got much better fiscal and monetary policy than our ancestors did.

Now you can experience some of the magic of cognitive dissonance yourself, through a blog that simply summarizes the daily newspaper from 1930.   A sample of yesterday's entry:

Economic news and individual company reports:

US merchandise exports in May fell to $322 million, lowest for any month since July 1924. Imports fell to $285M, lowest since August 1924. Attributed to general decline in business and commodity deflation.

Metro-Goldwyn-Mayer production plans for upcoming year include 50 feature films, 60 comedy/novelty shorts, and 104 Hearst Metrotone newsreels.

Ford Motor Company has found it's practical to salvage materials from antiquated cars; currently has 120 men dismantling the old cars at a rate of 375 every 16 hours, plans to expand the operation.

Goldman Sachs continues to hit new record lows, now selling at less than one sixth its 1929 high.

Growers and packers are uniting to try and cope with a large oversupply of cling peaches. Number of cases has increased from 1.5 million in 1910 to almost 15 million in 1928. Similar glut conditions in the raisin grape industry.

Heard on the Street:

"'Things are getting back to normal,' remarked the head of a Broadway house. 'Again the main topic of discussion among our customers is the 18th amendment.'" [Prohibition]

The Boring Stuff

Commerce Department reports a reduction of $561M in net capital exports from the US during 1929. This includes money spent abroad for tourist travel, investments abroad, payments of debt abroad, etc. One major result was an inflow of gold of $307M, or about 3% of total world gold stock. This may be causing problems by reducing money supply in the rest of the world; it would be good to smooth out these major fluctuations in US capital exports.

Many stock buyers are waiting for commodity prices to stop declining. Q2 earnings are also expected to be poor. Therefore we can expect bears to launch another attack on the Dow Jones panic low of 198.69 reached last Nov. 13. Based on the history of previous bear markets, however, it's likely this level will not be substantially broken, if at all. Also further declines are expected to be dull and low volume as is typical of the tail end of bear markets.

Last Friday marked the anniversary of the low from the panic of 1921 when the Dow 20 Industrials hit 64.90 and 20 rails hit 65.52. A couple of months later the greatest bull market in this country's history began.

Actual market bottom:  Dow 42.48 on April 1st, 1932.

This is your Head, Blogging

Noam Scheiber and I on health care, finance, and so forth. No, I don't have a black eye--just bad lighting in our dining area.

Comment Sense: What if the Kindle Had Been Invented First?

Commenter Kindler writes:

I was walking through a bohemian part of town and ran across this place called a "bookstore". I thought, "Hmm, that's interesting. I've always gotten my books electronically on my kindle, but this could be an interesting idea." So I stepped inside. What I saw was an unfamiliar way of experiencing books: on hundreds of of sheets of paper, bound up on one side with glue and wrapped in a hard cardboard cover. They even smell a little musty, at least the old ones.

At first I was excited; but then I began to think, well how would I do a text search in such a book? Supposing it was a reference book, or I wanted to find a quote that was particularly memorable? Also, I can resell it if I don't want it, but I can't take notes in the book without ruining its value. Plus, where am I going to keep these books if I buy a whole bunch of them? They're really heavy! And it uses a lot of paper - especially newspapers! What if it's dark and I need a bigger font? What if I'm on the train to work and decide I want to buy the paper version of the Times that day? Can't get it!! Not only that, but they wanted to charge me MORE for these clunky, static, physical, books than the normal electronic price! Honestly, with all these limitations and disadvantages, they should be giving them away for free. I decided I'm never going to pay a single red cent for a paper book until these issues are addressed. No way.

Healthcare Economics: Standing Athwart History, Shouting "Stop!"

I'm very interested to see Herb Stein's famous quote being invoked by liberals to talk about healthcare.  When Herbert Stein first said "If something cannot go on forever, it will stop" in 1980, he was arguing against people who were using scary charts mindlessly extrapolating some trend out to 100% of the total economy in order to demand immediate government action on a problem--in that case, the balance-of-payments problem. 

The problem with these extrapolations is twofold.  First, you definitionally cannot see the feedback systems that will probably mitigate the trend--all trends seem inevitable until they stop.  Think about the population explosion literature of the 1970s.  Now, in theory the people of the 1970s had a piece of information available to them that should have warned them that their charts were likely to be off:  to wit, that women in the wealthy West no longer averaged six or seven children apiece.  In practice, they were distracted from this data point by a lot of other factors, including their own racism.

But also, especially in cases like this, we react inappropriately to future extrapolations, because we project them onto our own situations--we ignore the fact that the changes in income shares devoted to a given product arise from economic growth.  It is true that I cannot afford to spend 40% of my income on healthcare.  It was equally true that my great-great grandparents could not afford to spend a third of their income on housing, and another half on clothing, manufactured good, transportation, and services--Land o' Mercy, everyone in the future is going to starve to death!!!

Obviously this is ridiculous.  I am not consuming less food than my ancestors; I am consuming more.  (Too much more, according to the waistband of my favorite pants.)  But my income is vastly higher than theirs in real terms, so that the food I consume is 10% of my household budget, rather than 50%.  Similarly, our descendents in 2100 giving over 40% of their income to health care (if indeed they do), will not be skimping on housing, transportation, clothing, entertainment, or what have you.  In all probability, they will be consuming more of everything than I do, except maybe energy and housing.  It's just that they'll be devoting a large share of their extra income to health care.  This prospect doesn't worry me.  And it probably won't worry them, other than the way it (mostly) worries us:  because we'd always like everything we consume to cost less, and be more equally distributed. 

Department of Regulatory Risk

Clear, aka the "Registered Traveller" program, is no more.  Between airlines that allowed an increasing number of "elite" fliers to jump the security queues, and the TSA itself getting better at making the lines move, the company's value proposition rapidly eroded.  Did competition from the registered traveler program encourage these developments?  I guess we'll find out soon.  

Rethinking the Kindle

I've been an unabashed Kindle booster.  So you can imagine my shock when I saw this:

The customer rep asked me to send every one of the books in my Amazon library to my iPhone. Most of them gave the message that they were sent but a number of them returned the message "Cannot be sent to selected device".

"Oh that's the problem," he said "if some of the books will download and the others won't it means that you've reached the maximum number of times you can download the book."

I asked him what that meant since the books I needed to download weren't currently on any device because I had wiped those devices clean and simply wanted to reinstall. He proceeded to tell me that there is always a limit to the number of times you can download a given book. Sometimes, he said, it's five or six times but at other times it may only be once or twice. And, here's the kicker folks, once you reach the cap you need to repurchase the book if you want to download it again.

Quick aside -- all of the books that are in my Fictionwise bookshelf having been downloaded numerous times and although I have to go through the pain of unlocking them each and every time, I'm able to download them to any iPhone or iPod touch I'm using without a problem. It's the reason that I've been using Stanza,  now owned by Amazon, a fair bit these days as I read through some of the books remaining in my account.

It gets worse.

I asked the customer representative where this information was available and he told me that it's in the fine print of the legalese agreement documentation. "It's not right that they are in bold print when you buy a book?" I asked. "No, I don't believe so. You can have to look for it."

We're not done- it gets even worse.

"How do I find out how many times I can download any given book?" I asked. He replied, "I don't think you can. That's entirely up to the publisher and I don't think we always know."

I pressed -- "You mean when you go to buy the book it doesn't say 'this book can be downloaded this number of times' even though that limitation is there?" To which he replied, "No, I'm very sorry it doesn't."

Here is the major problem with this scenario.

First, it's not clear that this is the policy.

Second, there's no way to find out in advance how many times a book is able to be downloaded. You can buy a book and it can only be downloaded numerous times or you can buy a book and only then discover that it can be downloaded only once. (The rep even put it this way!) There is no way to know.

In the meantime, Amazon wants us to upgrade our Kindles every year or two. Apple wants us to upgrade our iPhone or iPod touch every year or two. This means that although the books remain in your Kindle library online you may not be able to download them once you upgrade your hardware. And there is no way to know -- at least according to what the customer service rep told me.

We were thinking of becoming a two-Kindle family.  Now I'm rethinking the one I've got.  I'm a total supporter of hard DRM.  But if I have to wipe my Kindle, or upgrade to a new one, I don't want to find out I have to buy all my books again.

Then I saw the update.  Apparently, the limits are on simultaneous devices, not downloads.  Except, apparently, Amazon customer service reps didn't know that.

This is why customer service matters. It's often the first thing to be cut by companies, because bad customer service doesn't show up anywhere on the bottom line.  Not until much later, and not very clearly even then.  But I'm willing to bet they'll lose substantial sales to people who see the first post, but not the second.

Steve Jobs Is Very, Very Sick

So, Steve Jobs was a lot sicker than Apple let on--like, liver transplant sick.  The Wall Street Journal is reporting that Jobs underwent a liver transplant two months ago in order to deal with the liver metastes of his neuroendocrine pancreatic tumor.

Orac has some extended explanation.  Key points:

• Steve Jobs' wealth and power let him jump the queue for organ transplants in a way that even I am uncomfortable with--and I am in favor of paying organ donors.
  
• The transplant is highly controversial with an unknown success rate
• There's a pretty good chance that in the next five years, we'll find out whether CEOs matter--at least to Apple.

The Singular of Data is Anecdote

If it's a recession when your neighbor loses his job, and a depression when you lose yours, the depression just ended for the McArdle-Suderman household.  Peter has accepted a Koch fellowship* to work at Reason for the next eleven months, and today's his first day.

Oddly, the stock market does not seem to have gotten the message that the depression is over.  So I thought this blog post might help.

*  Yes, that Koch.  No, I had no idea when I wrote about them that he would be applying for a fellowship.  We both thought he'd have a job by now.  But journalism seems second only to auto manufacturing in job losses during this recession; by our count, about 20% of our friends have lost jobs in the last six months.

Marking Up Waxman-Markey

There is some very angry back and forth about the CBO's scoring of the Waxman-Markey climate change bill.  Economically, I agree, the per-household costs seem to be small.  Politically, they may be much larger than their economic cost, for two reasons:  first, I'm not sure people are going to put any rebate in the same mental basket as the higher prices, and second, people aren't going to pay the costs on a per-household basis.  Some households will suffer a lot, while others will be net beneficiaries.  Matt, Ezra, Ryan and I are all probably among the net beneficiaries.

But the real question, I think, is whether the low cost is a feature or a bug.  The only way a bill is going to have an impact is if it causes real financial pain to American households--enough to get them to change their behavior.  Waxman-Markey obviously is not going to do that.  And indeed, the projections of its effect on global warming are entirely negligible.

So the reason to get this mad about Waxman-Markey is either that you think it provides a framework for future action, or that you think it will persuade China and India to get on board.  The latter is, I think, entirely wishful thinking on the part of American environmentalists.  China is not going to let its citizens languish in subsistence farming because 30 years from now, some computer models say there will be some not-well-specified bad effects from high temperatures. Nor is India.  Global warming isn't even high on the list of environmental concerns they'll want to attack as they get rich; local air pollution is far more pressing.  Thinking that we're somehow going to lead them by example is like thinking that poor rural teens are going to buy electric cars because Ed Begley jr. has one.

No, I think the argument has to rest on the notion that Waxman-Markey gives us a framework to advance.  And it might.  But then again, Europe's much-vaunted system has had multiple spectacular failures, and the only reductions it has actually achieved seem to come largely from controversial offsets with large auditing problems.

I don't say this happily; I take climate change seriously.  But I am a pessimist about the prospects for control; the coordination problems so far seem insurmountable.  Unless Waxman-Markey serendipitously leads to the development of some clean technology that makes carbon obsolete, I'm pessimistic about how much it will accomplish. 

Moving Towards Prosperity

It's customary to deride mainstream media outlets as simply "reprinting press releases" from their favorite interest groups.  Well, color me guilty today, because this, from Ball State's Center for Business and Economic Research, is pretty interesting:

Many Americans are mired in a housing gridlock: They can't afford to sell their homes because property values have fallen, causing millions of people to owe more on their homes than they are worth. And, many can't move to take new jobs until they sell their homes.
 
Michael Hicks, director of Ball State University's Center for Business and Economic Research (CBER), has found the migration of people from one part of the country has nearly ground to a halt. He analyzed data from a variety of sources, including United Van Lines (UVL) migration numbers.
 
Fewer Americans are moving now than in any year since 1962, when the population was 120 million smaller.
 
"The economy is playing havoc, since property values have dropped significantly in the last few years," Hicks said. "Many people simply cannot just pick up and move. They have a home they have to sell first. 
 
"It many cases, one spouse moves to another state to work while the other stays home in their main residence in an attempt to sell it. With the current market, homes are selling at thousands less than what people paid for them a few years ago. Some people may just be stuck for a while until the economy improves and homes begin to sell again."
 
Since 1977, UVL has tracked where the firm takes its customers in the 48 contiguous states. UVL says Michigan is the No. 1 outbound traffic state for 2008. Nearly 67.1 percent of all Michigan-related United Van Lines traffic was leaving the state. Despite large job losses in the manufacturing sectors, Indiana actually gained population in 2008.

One of the justly celebrated strengths of the United States economy is its labor mobility.  By this account, at least, our housing market has basically destroyed that critical asset.

A recession like this is the worst time to lose your labor mobility.  I am quite convinced by the argument that since the 1980s, recessions have been characterized by structural, rather than cyclical, unemployment.  Rather than temporary layoffs of workers during periods of slack demand, modern recession-driven unemployment tends to result from the destruction of jobs, firms, even industries.  That's why long-term unemployment creeps up, and skilled workers are having a harder time than they used to during downturns:  it takes longer to match a skilled worker with an appropriate position than to slot body into a low-skilled place.

In those conditions, workers need geographic mobility to offer them a wider variety of potentially appropriate jobs.  But this time around, they're tied down by overpriced real estate and underwater mortgages.

The article suggests that families may pick up the strain, with one spouse staying behind to sell the house while the other spouse moves.  But that's a very temporary, and a very bad, fix--at best, that means trying to support two households rather than one on family income.

Rogue Cancer Unit at the Veterans Administration

We often hear wonderful things about what the VA can do because it's not a private sector system.  I suspect this is also one of the things that can only happen at the VA:

For patients with prostate cancer, it is a common surgical procedure: a doctor implants dozens of radioactive seeds to attack the disease. But when Dr. Gary D. Kao treated one patient at the veterans' hospital in Philadelphia, his aim was more than a little off.

Most of the seeds, 40 in all, landed in the patient's healthy bladder, not the prostate.

It was a serious mistake, and under federal rules, regulators investigated. But Dr. Kao, with their consent, made his mistake all but disappear.

He simply rewrote his surgical plan to match the number of seeds in the prostate, investigators said.

The revision may have made Dr. Kao look better, but it did nothing for the patient, who had to undergo a second implant. It failed, too, resulting in an unintended dose to the rectum. Regulators knew nothing of this second mistake because no one reported it.

Two years later, in 2005, Dr. Kao rewrote another surgical plan after putting half the seeds in the wrong organ. Once again, regulators did not object.

Had the government responded more aggressively, it might have uncovered a rogue cancer unit at the hospital, one that operated with virtually no outside scrutiny and botched 92 of 116 cancer treatments over a span of more than six years -- and then kept quiet about it, according to interviews with investigators, government officials and public records.

The team continued implants for a year even though the equipment that measured whether patients received the proper radiation dose was broken. The radiation safety committee at the Veterans Affairs hospital knew of this problem but took no action, records show.

Not because hospitals are above covering up malpractice, or because doctors don't protect other doctors, but because any private hospital would have been terrified of getting sued.  The VA is very hard to sue because of sovereign immunity.

Fear of Failure

I'm a big proponent of the transformative power of failure.  Failure is nature's way of saying "Don't do that any more!", and is therefore a necessary part of achievement and innovation.  And so I'm inclined to like this speech very much. 

On the other hand, something niggles me about the end:

So here is the point:  you are going to meet the dragon of failure in your life.  You may not get into the school you want, or you may get kicked out of the school you are in.  You may get rejected by the girl of your dreams, or, God forbid, get into an accident beyond your control.  But the point is, everything happens for a reason.  At the time, it may not be clear.  And certainly the pain and the shame are going to be overwhelming and devastating.  But as sure as the sun comes up, there will come a time on the next day or next week or next year when you will grab that sword and tell him "Be gone, dragon."

This seems like a pretty safe bet when you're talking to Buckley students, who have an ample safety net underneath them to allow them to bounce back from nearly any failure.  But would he really say this to, say, a 55 year old man who'd just been fired from his sales job?  Bad things--persistent bad things--happen to good people, and while it's comforting to think of them as merely a waystation, for lots of people that isn't really true.   It only seems true to people who have been spectacular successes, because for them every failure actually just one more step towards the happy place they enjoy today.  Sure, you can always rise over adversity.  But a significant number of people will never again rise to the level they previously enjoyed.

Regulating Risk Systemically, But Not Systematically

Kevin Drum responds to Tyler Cowen's post on the Fed as systemic risk regulator:

It's true that the Fed is the agency with the brute force to make things happen in an emergency.  But I'm not sure that's the relevant thing to think about.  What we want is some kind of body that works to prevent emergencies.  That requires credibility and influence, but it doesn't necessarily require a trillion dollar balance sheet.

I guess the model I have in mind here is the Congressional Budget Office.  The CBO is unknown to most people, but despite its small size and low public profile it has a remarkable amount of power.  This power comes from two sources.  First, it has institutional credibility.  I honestly don't know how it's managed to keep this credibility in the face of what must be enormous partisan pressure, but it has.  It's widely considered an honest broker and its budget estimates are taken seriously by everyone.

Second, although the CBO itself doesn't have a huge staff or control of a huge budget, Congress has agreed to abide by its cost estimates for legislative programs.  This means that CBO analysts have considerable indirect control over a lot of money.  And in Washington, money equals power.

So my question is: could we create an agency like the CBO, but charged with monitoring systemic risk in the financial system?  It would have to be nonpartisan and independent.  It would need to have risk management baked into its DNA as its primary mission, rather than being #7 on a list of ten goals -- with everyone knowing that only the top three get any real attention anyway.  Its director would need the kind of credibility that makes people listen when he warns that other agencies are allowing too much giddiness on Wall Street.  And, finally, it would need the right mix of authority, either direct or indirect, that's enough to force people to take it seriously when its mere credibility isn't quite enough.

But here's the incoherent part: I'm not quite sure how you'd construct such an agency or what authority might be sufficient for it to do its job without getting it hopelessly at odds with other regulatory agencies.  One way or another, though, I feel that giving this mission to the Fed is simply a waste of time.  Right now, virtually every impulse -- both at the Fed and in the private sector -- works in the direction of either ignoring credit bubbles or actively cheering them on.  If we're going to put a brake on this, we need to think about institutional priorities and balances of power, and figure out what it would take to get systemic risk established as a bureaucratic turf with a built-in constituency dedicated to protecting it over the long term.

My thoughts:

• In finance, the power to stop crises is often the power to prevent them.  The FDIC stops a hell of a lot of bank runs from ever happening because people know their deposits are insured.
• More broadly, attempting to build systems that can't fail have generally . . . failed.  Such systems tend to be brittle--a single failure is catastrophic.  In general, we should seek ways to let systems fail gracefully.  I.e.  no matter how strongly you try to ensure that nuclear power plants can't overheat, you also build them so that if they do, there is no critical mass to create a bomb-like nuclear blast.
• A systemic risk regulator outside the Fed would spend a lot of time at war with the Fed.  It would probably lose.  And if it did not lose, the result might be ugly.  A regulator that is only focused on preventing downside will be too conservative.  Right now, that seems like a good thing.  But inefficient capital allocation also has a high cost.  Whether the systemic risk regulator won or lost, the battle would create great instability in financial markets at a time when we don't need more of it.
• A systemic risk regulator will probably have a harder time staying independent of Congress than the Fed, because the inflationary history of fiat currency puts a high cost on Congressional meddling.  The systemic risk regulator will have no such insulation, making it less effective at its job.
  

Can GM Become Competitive?

The other day I was at an event with a representative from a foreign car company, who pointed out that with all the explicit and implicit subsidies from the bailout and bankruptcy, GM and Chrysler were getting a major market advantage handed to them.  "How can we compete?" the car exec asked rhetorically.  Everyone else in the room responded, nearly in unison, "You make better cars."

Still, at some price point, the GM/Chrysler cost advantage gives them a compelling value proposition.  Have the various subsidies gotten them to that point?  Well, I kind of doubt it.  On the other hand, their sales are apparently doing surprisingly well in bankruptcy. 

One of the biggest fears of a GM bankruptcy filing -- a collapse of revenue -- appears to not be as prominent an issue as originally thought.

Car buyers appear undaunted by GM's bankruptcy, assuaging one of the auto maker's biggest fears heading into Chapter 11. Early signs point to stable demand for GM cars and trucks since the company filed for Chapter 11.

Mr. Henderson said June retail sales are tracking higher than May. "June sales are moving along just fine," Mr. Henderson told reporters at a summit in Detroit. Sales to rental and other fleets are down from last month, he said. "We're very gratified for the support of dealers and customers that we've received through this."

Perhaps people are taking their patriotic duty to go out and buy an American car seriously. 

DNA Test=FAIL

Okay, can some legal genius explain to me, using small words and maybe some charts, why denying convicted felons the right to DNA tests that might prove their innocence is not a gross miscarriage of justice?  It's not that I think that every good thing is therefore a constitutional right.  But the basic outline of the rules for determining guilt and innocence is right there in the constitution.

What's even more depressing is that libertarians like me can't even count on getting a better result on things like this from our new liberal judge.  Reputedly, she's very pro-prosecutor.

Did I Malign Paul Krugman Yesterday?

Many of my commenters think so.  I don't. 

Joe Weisenthal calls Krugman a serial bubble blower, which I don't think is right.  But Krugman, like many people, was in favor of a sizeable stimulus to help inflate the housing market from an already pretty high level.  As Weisenthal and others have noted, that wasn't the only thing he wrote which at least strongly implied support for a housing-led recovery.

Rather, I'm literally glad I didn't write that paragraph.  All pundits have at least partially supported policies that turned out to be a bad idea.  There was absolutely no reason whatsoever, IMHO, for Krugman or anyone else to have foreseen the disaster seven years later.

But I do think that this raises an interesting question which really has very little to do with Paul Krugman: what are we doing now?  Are we just blowing more bubbles?  If we do stimulate our way out of the current mess, what's waiting for us seven years down the road?

Dubya on Defense

I was prepared to get all angry about this headline:  George W. Bush's swipes at Obama The former president publicly criticizes his successor for the first time.  I am firmly of the belief that former presidents should spend most of their public time nodding and smiling.  If they wish, they may do conspicuous acts of public charity, or play golf.

But actually, the "swipes" seem like pretty weak tea. Mostly, he's defending his own policies, not criticizing Obama's.  And given that Obama has been blaming everything from his budget deficits to Swine Flu on one George W. Bush, you can hardly blame him.

Froomkin Fired

Dan Froomkin is out at the Post, for reasons that aren't clear to me.  Was there really room for only one liberal political blogger?

Who Will Regulate the Regulators?

Should the Fed be the systemic risk regulator?  On the plus side:  the Fed has great institutional credibility and independence developed over many decades.  On the negative side:  the Fed already has quite a lot on its plate.  And it's not accountable for its mistakes in the same way that other government regulators are.

Tyler Cowen makes the case for making the Fed the systemic regulator:

Assuming we are going to do it, I think it has to be the Fed, whether we like it or not.  It's the Fed who is the fireman with the awesome power to print money, move markets, lend to the banking system on a large scale, and now even conduct fiscal policy, all without Congressional approval.  Our textbooks speak of the Fed as a lender of last resort but very often it is the lender of first resort too.

If you stuck another agency into that mix, it would end up waiting for the Fed's go-ahead, once an actual crisis arrived.

OK, so the systemic regulator is the Fed.  But then you can't make the systemic regulator too accountable to Congress without eliminating the quasi-independence of the central bank.  There's not any comfortable point on the power-accountability continuum, mostly because we don't trust Congress to run monetary policy.

The stinger on the tail is this: we want the Fed to deliver low inflation.  That means we let it be influenced by financial creditor interest groups but not so much by populist interest groups (Adam Posen had a good piece on this but I cannot recall the reference).  Right now a lot of people are asking for more populist regulation without realizing that also requires more populist monetary policy.

I think systemic resolution is important, and it certainly wouldn't hurt to keep an eye on systemic risk.  But Tyler is probably right that we cannot get the financial regulation we want until we decide what we want:  low inflation, low interest rates, and broad credit availability; or low risk and low profits in the banking sector.

I'm also generally skeptical that we're going to achieve the implied goal of making sure that financial crises never happen.  If anyone, including congressmen or regulators, had believed that there was a reasonable risk of the financial crisis we just experienced, it never would have happened.  That's what you have to fight, not some perceived imperfections in the regulatory structure.

Is Comprehensive Health Care Reform Dead?

There's a lot of sadness on liberal blogs these days.  What happened to Hope and Change?  Climate change is coming sometime next year, maybe.  Financial regulation also isn't coming anytime soon, and what's proposed is the minimum set of politically feasible propositions rather than a sweeping overhaul.  And health care?  What the @#%! is Congress doing messing around with expensive, incremental [expletive deleted]?  How can such a popular president be so powerless?

There are a lot of answers to this.  The first is to point out, as The Economist ably does, that the reports of the end of the honeymoon have been greatly exaggerated. 

But two things are also clear:  the Democrats overestimated the boost they'd get from both the crisis and Obama's popularity.  And they dissipated a hell of a lot of the money and political capital they'd now like to spend on the stimulus and the GM bailout.  They got very carried away with visions of 1932. 

But this is not 1932, and Obama is not FDR.  FDR came into office with 20+% unemployment and a banking crisis that was wiping out peoples' life savings every day.  FDR also came into office with a trivial national debt, and a Federal government that consumed less than 4% of GDP.  He had a lot of run room.

Maybe more importantly, he came into office without the kinds of institutional arrangements that made it politically difficult to pass his policies.  There are a lot of these, but some highlights:

• There was no institution like the CBO to model the impact of his programs, and implacably report that they were going to cost huge amounts of money
• There was no vast fraternity of tax lawyers to help blunt the revenue enhancements from new taxes
• Discipline in the Senate and the House was much stronger
• Corporate lobbying was relatively weak, and interest group lobbying was in its infancy
• There was no existing infrastructure of programs with constituents fighting change

What's happening now is precisely the kind of political gridlock I--and a lot of libertarians and conservatives--predict when it comes time to actually cut costs in healthcare.  Why can't we tax employer health benefits?  Liberal answer:  because Ben Nelson is a big fat jerk.  My answer:  because then the awesome health care package that Democrats want to run on in 2010 would come packaged with a non-awesome hefty decline in everyone's weekly paycheck.  The number of people who would get a benefit out of the program would be much smaller than the number of people who would pay a noticeable cost. 

Jonathan Rauch's book, Government's End, is one of the best popular books on the political process I've ever read.  It outlines precisely this problem:  the longer your government has been around, the less room there is for changing the government.  For decades, there have been a lot of theories about how various politicians were going to overcome this glacial inertia.  Clinton thought he had an overwhelming mandate for health care reform.  The Contract with America folks thought they had an overwhelming mandate to shrink government.  The Bush team thought that 9/11 had created a permanent Republican majority.  What's astonishing, in retrospect, is how little any of them really changed.

Many Democrats thought this time was different, and I confess, so did I:  Obama was popular, the war was not, the financial crisis offered cover and rationale for sweeping change.  And maybe it still will be.  But part of the problem is that if all that stimulus money works, it will rob not only the funds, but the sense of crisis, he needs to make really substantive change in the face of a loss-averse electorate.

The Cost of Taxation

Reader MJ argues that the Laffer Curve remains important because even if we're not actually maximizing tax revenue, it offers an insight into the economic cost of taxation:  "I also take it to mean that as you move right at any position the economic cost of gathering an additional tax dollar increases. So at a 5% flat tax rate collecting the marginal tax dollar might cost the economy $1.10 (number made up). While at a 35% flat tax rate the marginal tax dollar might cost the economy $2, (or $4). Saying the Laffer curve is not relevant if we are to the left of the apex seems to say the effect on the economic loss ratio isn't relevant. Or do you read Laffer more narrowly to not include this issue?"

Yes.  No.  Maybe.  It's complicated.

I do think there is economic loss to taxation, but that it's probably more vividly and accurately depicted as deadweight loss.  The Laffer Curve shows tax revenue, which is only a poor proxy for economic activity.

There's undoubtedly economic loss from every cent of tax (though liberals would argue, at least as much economic gain from the resultant spending).  But those economic losses do not necessarily show up on the Laffer Curve.  Consider a universe without taxation (because, she explained to her liberal readers, society is so perfect we do not need a government).  Everyone manages the tradeoff between leisure and consumption (aka work) as best they can so as to maximize their perceived utility.

Now say we introduce a 25% tax on income.  At least some people will change the amount of leisure they consume as a result.  But contra conservatives, we do not necessarily know that they will decide to work less.  That's because people are now poorer.  If you're suddenly making 75% as much for working the same number of hours, maybe you cut back your hours because it's just not worth the hassle.  But maybe you get a second job, because you've got a mortgage and a car payment and you want to go to Maui with the family next year.

A tax increase could thus raise the number of hours worked, which would show up on the Laffer Curve as a gain to the government.  But it would still be an economic loss to the country, because it would mean that a large number of people would be consuming less leisure in order to keep their consumption flat.

(Again, I understand that some readers will wish to interject that the spending of the tax revenue represents an economic gain to someone else.  This is true, if not perfectly so.   But right now, let's focus on one thing at a time.)

Whether tax revenues rise or fall, taxes have an economic cost.  It's just that one is easier to measure.

A New Era for Financial Regulation

Obama has announced a sizeable overhaul of the structure of financial regulation in this country.  Here's a look at the provisions, and some thoughts about their costs and benefits.

• Giving the Fed systemic risk regulation authority  The Fed has, unsurprisingly, been talking up this idea for quite some time.  No one was really in charge of regulating the bank holding companies, and more importantly, no one had the legal or political tools to deal with such a vast failure.  This seems like a good idea.  The biggest worry is that this will seriously challenge the independence of the Federal Reserve.  Congressmen really like to fiddle with their friendly neighborhood banking regulations.
  
• Eliminating the Office of Thrift Supervision  There's been a lot of talk about regulatory arbitrage as a source of the instability that brought the system down, and President Obama name-checked this idea in his speech.  I think this is overblown; the actual examples of regulatory forum-shopping, rather than a theoretical belief in same, are pretty thin.  On the other hand, I'm hard pressed to come up with a good argument as to why the Office of Thrift Supervision should exist.
• Creating a new consumer protection agency.  I can only presume that the hand of Elizabeth Warren is in here somewhere, as this is one of her pet ideas.  As it stands, it's at worst harmless, and at best mildly helpful; Obama's speech put the focus on transparency.  On the other hand, I'm hard-pressed to see that it will make much of a difference.  The problems that are now bringing consumers low are not the things hidden in the fine print.  They're the things that were right out there on the front page:  their interest rate.  The size of their loan relative to their income.  The fact that the interest rates on adjustable rate loans can adjust upward.  The people who took out Option ARMs or borrowed $40,000 in credit card debt on a $45,000 income were not unaware of these things.  They ignored them.  It's not a terrible idea, but I'm skeptical that it will have any effect.
• Making originators retain a percentage of the loans they originate.  Again, not a bad idea.  But I'm skeptical that this will change much.  The biggest problem with firms like Lehman is that they held onto too much of the toxic waste they were churning out.  Nor has a similar regulation saved Spain from an enormous housing bubble, and a correspondingly enormous messy pop.
  

Paul Krugman's Prophetic Prescience

Wow.  Just . . . wow.

The basic point is that the recession of 2001 wasn't a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

As Arnold Kling says, there's a paragraph I'm sure glad I didn't write.

The Politics of Controlled Crisis

Longtime AI commenter John Thacker, at Marginal Revolution:

It's also certainly not a foregone conclusion that the US will get a medical system "more like those medical systems that get better healthoutcomes for less money."

My theory is that we'll get a system just like Medicare expanded to cover more people. But Medicare doesn't get health outcomes for less money. The primary evidence about 30% inefficiency that people keep quoting are studies showing that in some places Medicare spends 30% more for equal outcomes.

I completely fail to grasp this magical argument whereby Medicare is unreformable now, but adding even more patients to the rolls will create the incentive for exactly the sort of cost-cutting reforms that people hated when the HMOs were doing them in the early '90s, and got laws passed to prevent.

I have asked this question a number of times, less pithily.  Few wonks are even willing to acknowledge that expanding a program does not usually make it then easier to reform.  Those who concede this fairly empirically well-established point offer a sort of hazy version of the old Marxist belief in "heightening the contradictions".  Only a really nasty crisis can show people the need for change, so apparently what we need to do is make health care much, much more expensive in order to garner the political support for gut renovating the system.  That's not exactly what they say, of course.  They say that once "everyone's on board", we'll have to control costs, because the problems will be "too obvious to ignore".  Or something similarly anodyne.

As far as I'm aware, the actual track record of heightened contradictions is pretty poor.  The crisis tends to straggle on far longer than you thought possible, a large number of people suffer, and it turns out that you don't get the exciting new system you were hoping for, but whatever terrible idea looked most expedient during the crisis.  See Argentina, Nation of.

The Laffer Curve of the Left

Several days ago, Tyler Cowen triggered some righteous rage for suggesting that the administration's promises to cut health care costs "runs the risk of becoming the new voodoo economics".  He was expressing a growing frustration among reputable conservative economists that the promises of health care cost control have turned into the Laffer Curve of the left:  a way to pretend that their favored policies don't have any costs.

It is true that some countries have controlled costs, and therefore made it easier to afford coverage for more people.  It is also true that some countries have cut marginal tax rates, and thereby actually raised the tax revenue they collected.  For all the derision about the Laffer Curve, it is absolutely correct--indeed, it has to be; it's basically just an identity.  Tax revenues peak somewhere.  If you're to the right of that peak, you could raise revenue by lowering rates.

What's left is the empirical question:  are we to the right of that peak?  Empirical answer:  no we are not.  It was not unreasonable for Ronald Reagan to believe that we might be, since the world didn't have all that much experience with lowering 70-90% marginal tax rates.  (Indeed, arguably, we were to the right under JFK, and his tax cuts may actually have raised revenues).

But the empirical answer, when all was said and done, is that we were on the left-hand side of the curve.  Moreover, we remain on the left-hand side of the curve.  Moving further left will just make the revenue picture even worse.  The Republican wonks and politicians who claim otherwise are either really, really dimwitted, or engaged in an intellectual sham of breathtaking dishonesty.  The rank-and-file who have accepted this nonsense have been hoodwinked, and should be righteously angry at their leaders.

And what about health care costs?  Is it reasonable to believe that we are going to control them?  After all, other countries have.

I'd say we have substantial empirical evidence that we are not going to control the health care cost inflation which is busting Medicare's budget, much less the new costs the administration is planning to add.  We have been trying to control health care costs since the 1970s made it clear that Medicare was going to get really, really expensive.  And any idea that you care to name, from comparative effectiveness research to healthcare IT to preventive medicine . . . these have all been on the table for more than thirty years, under one name or another.  They haven't happened.

The answer that those promising magical cost reductions need to ask is "Why haven't they happened?" and "What has changed to make them feasible now?"  But when I ask this question, I get angry demands that I put forward my plan for cost control, rather than merely critiquing everyone else's.  This seems rather like demanding that I put forward my design for a perpetual motion machine before I am allowed to point out problems in the US energy market.

To those who say, pretty reasonably, "Why not demonstrate that you can control these costs in Medicare before asking us to believe you can do it with a broader program?"  the response is something like a snapped, "But I don't want to just control Medicare costs!  I want universal coverage!"  Ah.  Well, Republicans don't want to maximize tax revenue; they want to cut taxes.  This does not make their now-deliberate wishful thinking any prettier.  Nor obligate the rest of us to fulfill their desire at the expense of sound budget policy.

Both Medicare cost control and Republican tax cuts are like the Red Queen's strategy in Alice in Wonderland:  "Jam yesterday, and jam tomorrow, but never jam today".  They promise sweeteners to sell their favored policies, but when the day actually arrives, time and time again we're left holding an empty jar.

A Whole New Idea (Blog)

Good friend and uber-talented journalist Conor Friedersdorf is going to be blogging for us for the next six weeks in conjunction with the Atlantic Ideas issue, and the Aspen Ideas Festival.  The blog is, of course, utterly terrific, and if you don't check it out, you're missing a good thing.

A Bearish Day

What happened today to send the markets spiraling downwards?  Unlike the vast majority of financial pages, I'm going to go out on a limb and say I don't know.  There wasn't any particularly awful piece of news on Friday or today, except maybe Capital One's announcement that a shocking 9.4% of its credit card business needs charge-off.  (Shocking . . . but surprising?  Not exactly). 

Maybe the lesson is that the markets need a steady stream of good news to keep from sliding backwards.  Or maybe everyone was just crabby and hungover.  I'm wary of too many generalizations from one bearish day.

Your daily Andy Rooney Moment

Why are there so many networks devoting half of their coverage to weddings?  Don't get me wrong, I love weddings.  But I like watching weddings because I know the people involved.  I've got a team to root for.

Okay, I admit that when we were moving last fall, I briefly became addicted to Bridezillas.  I needed the reminder that there is actually something worse than moving:  planning a big wedding.  But that cannot be the general explanation for the plethora of wedding based shows that now seems to dominate two or three television networks at least 50% of the time.

I presume that the demographic is mostly women still young enough to fantasize about dressing up like a meringue and blowing the cost of a luxury car on a six-hour party.  The "pre-married", let's call them.  But are enough of them interested in watching other peoples' wedding disasters to support simultaneous programming on three networks?  And how many of them are home right now, when I am observing this phenomenon?

The Missing Iran Coverage

One of Andrew's readers asks where the MSM is on Iran.  The New York Times and numerous internet sites have wall-to-wall coverage, including Andrew's sterling work.  Other outlets practically ignored the biggest story currently going on in the world over the weekend.

I haven't commented on it because other than the obvious--elections should result in the election of the person who got the most votes--I don't have anything to add.  I know nothing about Iran, and I don't blog much about foreign policy because I don't know much about foreign policy.

But I think Andrew's reader's question is ultimately a business story.  Why doesn't the MSM have more coverage?  Because they don't have the manpower.  The cable networks are hamstrung by the fact that they don't have much footage of what's going on in Iran.  As I watch, they're showing a combination of shots of peaceful protests in Western countries, lying propaganda footage from Iran's state television system, and random b-roll of unidentified protests in some unidentified country that does not seem to be Iran.  This is less than must-see-TV.

The print media is hamstrung by the fact that they've slashed their foreign bureaus to the bone--and then amputated the bone.  There are too few journalists in too few places to cover a big story like this. 

Why Doesn't the Market Produce Non-Smoking Bars?

Henry Farrell's interesting post on smoking bans reminds me of an ongoing question that I have never heard a libertarian answer satisfactorily.  Smoking in bars and so forth is dangerous to bystanders who have pulmonary disease (the dangers of secondhand smoke to those who are not already breathing-impaired seem to be largely mythical). It's noxious to some other number of people who do not smoke.  The libertarian rejoinder to the smoking bans is that bars could choose not to smoke if people wanted it.  But in practice, despite the fact that smokers are a minority, and most people hate it, almost no establishment went non-smoking without government fiat.

This seems like a market failure.  You can explain it through preference asymmetry and the profitability of various customer classes:  heavy drinkers are more likely to also be heavy smokers, and they are the most profitable customers.  Bar owners don't want big groups of people who are going to take up three tables for an hour and a half while nursing one white wine spritzer apiece.  They want people who are there to drink.  In a competitive equilibrium, they couldn't afford to go non-smoking because they'd lose their most profitable customers to all the other bars.

You can explain it, but this doesn't seem like a good market outcome by any measure.  Let me be clear, I'm still against the smoking ban, even though I personally vastly prefer smoke-free environments; I think interfering with property rights like this has even heavier costs.  But I also recognize that I'm in a minority.  And I think that politically, if not intellectually, the success of smoking bans is a heavy blow to libertarian credibility.

Delphi Deal Undone by Bankruptcy Judge

A lot of energy and commentary has been focused on the government's intervention in the GM, and especially the Chrysler, bankruptcies.  Meanwhile, the government has apparently also been intervening in the case of Delphi, the GM parts supplier spinoff which has now been struggling with bankruptcy for years.  The plan called for the operations crucial to GM to be sold to the former parent, while everything else was sold off to Platinum Equity for $500 million worth of equity investment and loans.

The lenders argued that Platinum was a puppet of the government and GM, which needs Delphi to emerge from bankruptcy for its GM bailout to succeed. Platinum "is an entity funded principally by GM (and thus controlled by the Auto Task Force) in which GM's and the Auto Task Force's hand-picked private-equity buyout partner Platinum provides the appearance of an independent third-party in exchange for disproportionate economic returns," wrote lawyers for a group of lenders in court papers.

The lenders "believe that the GM-Platinum transaction will siphon an extraordinary amount of value from Delphi's stakeholders to Platinum by offering Platinum rewards incommensurate to its relatively modest investments," wrote separate lawyers for J.P. Morgan, the agent on a $4.5 billion loan provided to Delphi in 2007 so it could continue to operate under Chapter 11.

The plan calls for some DIP lenders, including the most senior creditors owed about $2.5 billion, to receive 20 cents on the dollar for their loans. These lenders argue that Delphi's plan overstates the amount they would receive. A Delphi reorganization plan that collapsed in April 2008 called for DIP lenders to receive full payment.

If true, this is an even more heavy-handed intervention than Chrysler, and considerably more disturbing.  Debtor-in-Possession financing, or DIP, is the financing that allows companies to reorganize in bankruptcy.  It's senior to everything else because if it weren't, no one would be willing to lend money to companies that definitionally have a high probability of failure. Stiffing those creditors in order to make GM, or even Delphi, better off, is incredibly short-sighted. 

It also has some potentially scary implications for our political economy.  The quasi-legitimate argument in favor of the government's interventions in favor of the UAW was that Uncle Sam was the only available debtor-in-possession financier, and therefore had a right to call the tune. Screwing over the DIP providers would, of course, make it harder for other companies to get DIP.  What new rights could the government discover in those bankruptcies?

In this case, however, the bankruptcy judge wasn't buying.  He ordered Delphi to put its assets up for auction.  Now we get to test the theory that the government is acting in ways that actually make all the creditors getting cramdowns better off.  If the government has indeed been acting in everyone's best interest, the auction will be a dismal failure.  Either way, however, the judge has gone a long way to limiting the scope of the damage from the previous automaker interventions, by demonstrating that the courts are willing to put real limits on the ability of administrations to rearrange economic transactions at will. 

Nominal Versus Real Friendship

Emily Bazelon has a piece at XX factor that strikes a chord with me:  how hard it is to keep friends when your economic circumstances radically change.  In 2001, when I lost my job and was dong a bunch of odd stuff to keep my finances together, I found it hard to hang out with my old friends from business school.  Some of them just didn't understand that a Chinese food dinner with a couple of beers wasn't a discount treat, but an unaffordable luxury--and when they figured it out, offered to pay, which seemed like a quick route to life as a permanent sponge.  Others didn't quite know what to say, and avoided me. 

Some of them I avoided, because they had what seemed like a psychopathic need to view my straitened circumstances as my own fault, even though the broad unemployment rate was rising.  They would ask me if I'd done X,Y, and Z--say, network, send resumes, try volunteering for what I wanted to do--and when I said yes, and that I'd also done A, B, and C, they got quite aggressively, visibly annoyed.  It felt a little bit like being interrogated by a special prosecutor.  As far as I could make out, they were trying to prove that what had happened to me couldn't possibly happen to them. 

Nonetheless, I kept plenty of friends from business school, and other, flusher eras.  And I did it all with four little words, which I practiced saying in a mirror for a while before I tried them on my friends.  Those words were:  "I can't afford it."

It's remarkably easy to keep those friendships, or at least the valuable ones, through a recession.  Those were the people I told the obvious, which is that I didn't have any money.  Then we did things that didn't involve money.  Those were the people who offered suggestions, but took no offense if those suggestions weren't useful. 

Of course, it's always hard when a friend or loved one is suffering.  You will never say or do the perfect things you want to.  The difference between the friends I kept, and the ones I lost, is that the ones I kept were trying--trying to take care of the friendship, and a friend in need.

Let Them Sleep!

Turi McNamee says that shelling out $1.6 billion to let doctors sleep more is too expensive in our current straitened circumstances.  Au contraire, I think it's a bargain.

I am a gold medalist in the macho Sleepless Working Olympics.  I once worked a 60-hour shift without sleep.  (Yes, that's 2.5 days without any shuteye.)  One stormy February, I put in 468 hours, almost 120 hours a week for four weeks straight, sleeping an average of less than 4 hours a night.  I have enjoyed all the exciting side effects of prolonged sleep deprivation, like uncontrollable "microsleep" which once almost caused me to walk into the path of a cab, or the hallucinations that set in after 48 hours or so--not fun hallucinations, either, just long conversations with co-workers who turned out to have left the building hours or even days before.  I was essentially dreaming with my eyes open. 

So I know whereof I speak when I think about interns training on gruelling regimens.  And you know what I learned on all those sleepless nights?

Well, actually, not much.  It turns out that adequate sleep is crucial to memory formation.  But I did manage to process and retain one fact:  when you have not had enough sleep, you. are. stupid.

Your attention span shortens.  Your decision making process slows down to a crawl.  Your emotions fray--towards the end of that fateful February, I burst out crying when I learned that the delivery of a hot-swappable backup drive had been delayed.  In fairness, that drive was the only thing between me and going home to sleep.

That's probably the most pernicious problem:  on the margin, you start making decisions based on how quickly they get you back to bed.  If wretches have hung that jurors might dine, how many patients have gotten shoddy treatment that interns might sleep?  The answer is surely not, as we might hope, "none".

The value of a human life is generally placed at $5-7 million by regulatory agencies.  If letting doctors sleep more saves only 230 lives a year, it's worth it.  Moreover, since you can't learn well when you're tired, we might save many more, by training up doctors who actually remember what they learned as interns.

I understand that against this, you have to set the benefits of continuity of care.  But there's a funny thing:  if continuity of care were really that great, attendings would only have four days off a month, instead of the sybaritic five or more that McNamee is deploring.  Most doctors I know work really hard.  But they don't work a lot of 36 hour shifts, and they don't think that two weekends a month off is the height of decadence.

Question of the Day: In Search of Egg-cellence

Daniel Davies on the Laffer curve in egging British fascists:

And still they come ... in response to the latest pieing episode (actually an egging of Nick Griffin, leader of the British National Party), the usual crowd of wowsers and pursed-lip good-government types come out of the woodwork, sorrowfully wagging their fingers and telling us "this is just what the BNP want", and "this sort of thing makes people sympathetic to the BNP". And once more I say "where's the evidence?" Nick Griffin certainly doesn't look like he's executing the culmination of a cunning master plan to gain favourable publicity - he looks like he's being egged and not enjoying it. And I really don't understand the sort of mind that would look at the chubby fascist with yolk running down his coupon and say to themselves "gosh they must have a really important point to make if the so-called anti-fascists have to stoop to these depths to silence them". Rather than, say, my own reaction, which was roughly "Cracking shot, sir!". As I've noted before, there's a Laffer Curve implicit here. If nobody ever egged Nick Griffin, then he'd never get egged, which I presume nobody wants. On the other hand, if he was egged every single time he went out, then he'd never leave his house - result, no eggings. But I really don't believe that we're on the right hand side of that Laffer Curve, not yet.

And in this particular case, the egging itself is actually a very important speech act and a significant contribution to our national debate. Based on the fact that they got two MEPs elected, non-white British citizens might justifiably be looking with suspicion at their white neighbours today, thinking that a significant proportion of us were secretly harbouring fascist sympathies. In fact this isn't true; the absolute number of BNP votes was slightly down on 2004, and their electoral success was purely an artefact of overall low turnout. It's therefore an important point to be made, to our own population and to the world's watching media, that Nick Griffin isn't in fact a newly popular and influential political figure; he's a widely reviled creep who not only doesn't lead a phalanx of jackbooted supporters, but actually can't even set up for a TV interview without being pelted with eggs. The voice of the British populace does not shout "Hail Griffin!", it shouts, "Oi Fatty, cop this! [splat]". And the only efficient and credible way to demonstrate to the world that Griffin is regarded as an eggworthy disgrace, is to actually and repeatedly pelt him with eggs.

Tangentially related question:  should egging fascists be an acceptable form of speech?  Should the Supreme Court protect it?  I mean, in practice, presumably it is not a crime with a heavy penalty.  But should it be a crime at all?

What Would Gore Do?

Andrew writes:

Maybe that "about" saves Megan from total surrealism. But is she actually saying that any president would have cut taxes heavily and also increased domestic spending heavily and added a new (unfunded) crippling healthcare entitlement - as he launched a $3 trillion war on two countries? Is she saying that Al Gore was proposing this in 2000? That any president would have put two open-ended, enormously expensive wars off-budget? Is she also saying that the massive deficits projected under current plans have nothing to do with Medicare D? Or that Bush's lax regulation of the banking industry had no role in the depression that has devastated government finance?

No you cannot blame Bush for the deeper issues of Medicare A-C, or social security, although you could argue that his failure to restrain them before the boomers retired was an act of omission no real fiscal conservative would have countenanced. But really: this faux world-weary, pox-on-both-your-houses excuse-making for one of the most fiscally reckless presidencies in history won't play.

No, I didn't say that any president would have spent on the specific, often stupid things that Bush did.  They would have found their own specific, often stupid things to spend on, and maybe, hopefully, even some non-stupid things.  Some of those things would have resembled what Bush did:  Medicare Part D was coming, and a Democratic package was going to cost more.  But more broadly, when the stock market bubble evaporated, the surplus would have gone away regardless of who was president--and so would the political will for high taxes or cutting spending.

But Andrew's post really illustrates why I say no one cares about the budget deficit.  What does it matter what he spent the money on?  The problem with budget deficits is that they will crowd out private investments, or that they bequeath a legacy of high interest costs and/or principal repayments to future presidents, and the taxpayers they represent.  The market does not care whether we spent it on invading Iraq or finding a cure for AIDS, or a flat panel in every home.  It will charge us interest, or deprive the private sector of capital, just the same.

Would Andrew let Bush off the hook for the Iraq war spending if he'd raised taxes to pay for it?  Would anyone stop complaining about the hundreds of billions we've spent so far? 

The budget is just a side show--because it has hard numbers, it seems to lend some sort of "provability" to peoples' prior policy preferences.  But the actual provable harm from the Bush budget deficits is small.  As I pointed out earlier, net debt has risen very little as a percentage of GDP, net interest has actually fallen in real terms and as a percentage of GDP, and it is demonstrably false that Bush deficits diverted investment capital from the private sector--or at least, if they did, they did us a favor, by keeping the mortgage bubble from getting even bigger than it did.

Now, you can say that Medicare Part D makes it harder for Obama to close the budget deficit.  But that's true of every program.  Why pick on Medicare Part D?  Because Bush enacted it while the budget was in deficit?  But Medicare Part D was enacted in 2006, late in Bush's presidency, and until the financial crisis, the deficit was basically closed.

But more to the point, it's not like Obama has evinced any interest in closing the budget deficit.  Right, he says he wants to deal with it.  Bush said the same thing, and I don't see Andrew or anyone else giving him brownie points for his good intentions (nor should they).  Whatever Obama says he wants to do about the budget deficit, what he's doing is making it bigger.  And not just this year, when he arguably should be:  I give him a total pass on 2009 spending, and am prepared to be convinced on 2010.  But Obama is making the deficit bigger in 2011, 2012, 2016, 2018, and beyond.

Of course, a lot of that is due to Medicare and Social Security--not Medicare Part D, but the boring old kinds, enacted by Lyndon B. Johnson and FDR.  But I don't think that the main problems with the programs are that both Johnson and Roosevelt enacted those programs while running sizeable budget deficits.  The problem is that they are very expensive and their costs are growing just as the taxes that support them start to fall.

Obama has more reason to be mad at Johnson and FDR for bequeathing him intractable legacy costs than at Bush:  they will substantially reduce the scope of the things that Obama can do.  But I don't expect to hear him explain that he has to run a budget deficit because he inherited a legacy of unsustainable spending by his Democratic predecessors.  The fact remains that Bush actually left him very little legacy of permanent spending to be drivng his future deficits.  Once we withdraw from Iraq (I assume we can all agree that any president would have invaded Afghanistan), and the tax cuts expire next year, the actual net contribution of everything Bush did to Obama's structural deficits will be well under $100 billion a year of the $1 trillion or so Obama is projected to spend.

Not that I want to get all hysterical about the Obama deficits either.  I presume he's planning to deal with them, mostly in ways I don't like. But I'm not going to start claiming that I have scientifically proven, through the awesome power of budget math, that Obama is like the worst president ever:  I will hate his health care plans, etc. exactly as much if he raises taxes to pay for them.  My worries about his deficits are more prosaic:  is he borrowing so much money that we're at risk of a fiscal crisis brought on by excess debt and spiking interest rates, or is he crowding out private investments?  These are empirical questions, and it's far too early to have more than hints at the answers. But Obama's deficits, even in 2012 and beyond, are the largest since World War II by any measure.  And that's good reason to worry, in a non-hysterical fashion.

I also worry that he's using the deficits to slip through programs that we'd never support if we had to pay up front, his health care plans among them.  But that doesn't make him the worst president ever; it makes him, umm, president.

This is your head, blogging

Mark Schmitt and I discuss, well, nearly everything.

Adventures in Real Estate

You explain the price gyrations on this nice looking, but pricey, one bedroom in Kalorama.  I give up:

PREVIOUSLY SOLD PRICE
Date	Sold Price	Subsidy	Net Price
4/17/2009	$250,000	$0	$250,000

PREVIOUS LISTING PRICE HISTORY
Date	Price	% Change	Days at Price
5/9/2008	$399,000		102
8/19/2008	$395,000	-1.0%	6
8/25/2008	$375,000	-5.1%	172
2/13/2009	$875,000	+133.3%	20
3/5/2009	$265,000	-69.7%	27
4/1/2009	$719,000	+171.3%	31
5/2/2009	$679,000	-5.6%

CURRENT LISTING PRICE HISTORY
Date	Price	% Change	Days at Price
4/30/2009	$415,000		42
6/11/2009	$399,000	-3.9%

So far, all I can come up with is "severely undertreated bipolar.  Client probably crazy too."

NB:  I'm not interested in living in Kalorama, for all those who suggested alternate climes; I agree it's too expensive.  It just happens to share a zip code with places I might live.

Adventures in Self Publishing

So it's come to my attention that you can publish your own books on Kindle.  Since I'm one of those cutting edge techno-types, I thought I would try this.  Problem:  I don't have a book written.  So I'm inviting my readers to help me.  Nominate your favorite posts for inclusion in a Kindle e-book by email, or in this comment thread.  If enough of you nominate posts, I will bundle them with my own favorites into a modestly priced blog e-book with (wait for it) a special introduction written just for e-book readers.

Otherwise, I guess I'll just work on my needlepoint.  Five years from now, I will post a picture of the cushion.  So really, you win either way.

More on Interest Rates

There are some really good comments in the interest rate post.  RW thinks the yield curve is just the normal sign of healthy growth returning:

The usual school of thought is that steepness signifies growth, because bonds yields have to rise in order to compete with stocks.

It's an inverted yield curve that signifies problems, not a steep one. Go back in history to look at when the curve was this steep, and good things generally happened thereafter. An inverted curve leads recessions.

It also seems that you've redefined what it is. The yield curve is typically the spread between the 10-year and the 3-month. As I type this, that's 368 bp. We've certainly been at these levels before, and no apocalypse came of it on those other occasions.

The one possible problem at the moment is mortgage rates. However, mortgage rates are not tied directly to the long bond, and bank spreads are exceptionally high at the moment (they get much of their money for next to nothing), so they have room to cut their spreads and still be profitable.

A some thoughts in response:

• I don't think there's any one interpretation of a steepening yield curve.  It can be inflationary expectations, it can be default risk, it can be equity markets perking up, or any number of idiosyncratic factors on a given day.  In this case, however, traders say they're worried about inflation and the size of the government debt.  And the equity market looks pretty fully priced, at least on EPS.
• Likewise, obviously a steepening yield curve does not necessarily herald an apocalypse.  And it's certainly too early to say it does so right now.
• The question is, what does the steepening yield curve mean in this context.  And right now, I think it at least calls into question the idea that rising interest rates simply herald a reversal of the winter's "flight to quality".  The flight to quality happened across government securities.  It's reversing much more unevenly.  Maybe that's because traders are expecting growth.  But maybe because they're expecting infaltion or default.  The traders themselves seem to be saying the latter, at least to financial reporters.
• That said, I don't think these things are reasons for hysteria.  They're possible reasons--good ones, I think--not to be as optimistic as the Pollyannas.
• An inverted yield curve usually signals recession, but that's because it's a sign the Fed has overtightened.  This is not a worry now.  But that does not mean that everything's fine.  Yield curves can signal more than one problem, in more than one way.
• There may be ample room for mortgage lenders to cut.  But they're not.  Why?  Another data point that does not suggest optimism.

Meanwhile, AT QB says:

The curve is steepening in part because of *where* the Fed is choosing to buy. They've chosen not to defend the 10 year rate.

The below bond investor makes the point that they are doing this because they believe the belly of the curve has more influence on consumer borrowing rates.

http://accruedint.blogspot.com/2009/04/fed-to-treasury-market-it-is-you-who.html

But reader lc thinks I'm being too optimistic:

My only quibble is your characterization of the move in interest rates as an uptick. Bond markets are getting routed, and the real problem is that there is an enormous amount of additional supply coming onto the market.

Further many large foreign buyers are already signalling interest in moving away from treasuries. This is going to get worse before it gets better, especially if we spend north of $1 Trillion on healthcare reform.

I presume bond investors would be find if we spent $1 trillion on healthcare reform, and raised taxes to pay for it.  (Oh, hear that hollow laugh).  But the foreign investors are a huge worry, one I meant to mention.  Russia is just another in a long line of large countries saying they plan to diversify out of Treasuries.

The Goldilocks Theory of Racial Intelligence, Cont'd

Reader Balfegor writes:

True, but Balfegor's post was still pretty interesting.

How Much Should We Worry About Interest Rates?

There are two schools of thought about how we should interpret the recent uptick in interest rates on government debt.  Pessimists say this is the inevitable result of all this hog-wild deficit spending; markets are pricing in inflation, and possible default.  Optimists (pronounced "Democrats") respond that it's simply a rebound from the Treasury bubble that followed the financial panic in November.  Back then, investors were literally practically paying the Treasury to take their grubby cash.  Eventually, the market was going to rebound as people who had fled to the safety of treasuries started lending into the broader economy.  So why get so excited about the return to "the highest levels since September 2008"?

The optimists have a point.  But I'm not sure how much of a point.  Treasury yields don't look so bad in nominal terms.  But when you remember that inflation is now in the zero-to-negative range, despite rising oil prices, they look a little pricey.  Real yields on the ten-year are now on the order of 4.5%.  As David Rosenberg of Gluskin Sheff noted in this morning's email:

We have already crammed into six months what it took 48 months to accomplish in the 2003-07 bear market -- to see the 10-year yield soar 180 basis points from the low.  With inflation running at -0.7% YoY, we now have a 'real yield' of 4.5% -- the last five times we got to this level, the nominal yield rallied 50 basis points in the next three months.  As an aside, a 4.5% real government yield and 8.0% real corporate bond yield is serving up some major competition for equities right now.

Moreover, the yield curve is getting steeper.  In layman's terms, this means that rates investors charge the federal government for long-term borrowing are rising much faster than the price of its short-term borrowing.  That signals one of two things, neither of them good:  investors are pricing in expected inflation, or they are pricing in a higher risk of default.

Meanwhile, the evidence of strengthening in other markets is uneven.  Mortgage markets are collapsing as interest rates (usually pegged to US debt) rise.  Corporate debt yield spreads seem to be tightening; state and municipal yields, less so.  But as Rosenberg points out, the real yield on corporate debt has risen along with that of treasuries (though at a slower pace) and is now pretty high.

But perhaps the biggest reason to worry about the rising interest rates is this:  the Fed is buying big blocks of treasuries.  That's the "quantitative easing" you've been hearing so much about.  If rates are rising even though the Fed is in the market, trying to keep credit cheap, that ought to give us pause.  What would they look like if Ben Bernanke weren't trying quite so hard? 

Because eventually, either political pressure or the financial markets will force him to stop.  That's when we'll find out what the "natural" interest rate is.  And I hope we're not in for an ugly surprise.

Can We Really Bail Out California?

So California's fiscal doomsday clock is now officially set at one to midnight.  The state has just 50 days until financial meltdown, according to its comptroller.   The consensus seems to be that the Federal government simply has no choice but to bail it out.

But what happens if we bail California out?  New York had a fifteen billion dollar budget deficit; why should the Empire State struggle to balance its budget while its citizens' federal tax dollars leak westward?  Why not Texas, or Florida?  Why not all the states, for that matter?  And if the Federal government does bail them out, why bother with any fiscal restraint at all?

I'm pretty sure that the feds can afford to bail out California.  I'm pretty sure they can't afford to bail out fifty states who have learned that if they are just intransigent enough about spending more money than they make, Uncle Sugar will come in and pay the bill.

 Presumably, the way you avoid this is by putting harsh conditions on the money.  But what harsh conditions can the Feds impose?  California has the largest and most powerful Congressional delegation.  And I'm struggling to think of any penalty the Feds can hand down without alienating critical constituents like the public sector labor unions.

Initial Jobless Claims Could Have Been Way More Horrifying Than They Actually Were!

Green shoots?  Well, maybe for the people who aren't filing for unemployment.  Meanwhile, the unemployment rate continues to rise.  It's very exciting that the second derivative is turning negative, but I'm going to hold the champagne for some first-derivative action.

The Goldilocks Theory of Racial Intelligence

In the comments, Rob Lyman writes:

Actually, until now I never thought W.A.R. at all, which qualifies as thinking "less," I suppose.

But I confess I've always been highly amused by the thinking that goes into being anti-black and anti-Jew. They don't like blacks because of "inferior intelligence," and they don't like Jews because of...well...because of apparently superior intelligence, which permits Jews to control everything over the wishes of "whites."

So I guess they think "the white race" has managed to find the marvelous Goldilocks level of intelligence: just right. Not too smart, and not too dumb.

One Lone Nut Making a Whole Movement Look Bad

A lot of people have picked up on the fact that white separatists are apparently worried that the shooting makes them look bad.  This is hilarious in a laugh-until-you-cry sort of way, as is their strenuous efforts to ensure that we all realize he's nuts.  Trust me, folks--we think you're all nuts.

But like Yglesias, what really struck me is that John de Nugent telling the Washington Post that "the responsible white separatist community condemns this."  What, one wonders, characterizes the responsible white separatists?  Are their swastika armbands all made from 100% biodegradeable materials?  Do they take care that the leather in their jackboots comes from humanely raised cows?  Do they carefully follow the Forest Service's wildfire prevention guidelines when burning crosses?  Are their white separatist brownie points for attending school board meetings or chairing the Community Chest drive?

But their concern does raise one interesting point:  it's not actually possible for the white separatist movement to look any worse than it does.  George Tiller's killing cast some genuine shame over the pro-life movement that nurtured his killer.  But did yesterday's horror make you think any less of W.A.R.?  You couldn't actually think any less of them, could you?

Memento Mori

This Nick Gillespie post on the probably-doomed Chrysler-Fiat deal reminds me of the Chrysler Cordoba, which he uses to illustrate Chrysler's many problems:




Reminds me, I say, because this is the car the McArdle family drove.  Though not in 1975.  The McArdle family does not buy new cars.  Buying new cars causes hair to grow on your palms.  No, my family drove this car when I was in high school in the late 1980s.  Needless to say, I was, like, the only kid in America who never wanted to borrow the family car.

On the other hand, I do credit the Chrysler Cordoba, with it's "thickly crucial luxury of seats available in soft Corinthian leather" for ensuring that I passed my driver's test on the first go.  In 1975, it may have been "the small Chrysler", but a decade and a half later, it was about as zippy and manoeuverable as the Love Boat.  After that, parallel parking a regular car was as easy as falling off one of the soft corinthian leather bucket seats.

The Deficit Blame Game

I am a long-time believer in the notion that nobody cares about the budget deficit.  People say they care about the budget deficit, but people say they care about a lot of things.  Almost everything, in fact.  What people flogging the budget deficit actually care about is the programs it goes to pay for.  Every time the presidential party turns over, I get the pleasure of watching deficit-hawk Democrats suddenly discover that borrowing hundreds of billions of dollars actually has no moral or economic implications, especially when compared to national health care.  Meanwhile, Republican scientists who presumably spent the last eight years locked in a vault in the basement of Heritage run out into the metaphorical street screaming that they have just made a shocking, horrible, and totally unexpected new discovery:  budget deficits will make the economy melt down into a pool of manufacturing-depleted sludge, and also, cause rabies.

Economically, much of the talk about deficits is hysteria.  A budget deficit of less than 4% of GDP is not a good thing, but it rarely results in catastrophe either, because inflation and GDP growth steadily erode the value of past debt.  As long as the deficit is less than inflation + GDP growth, the government is unlikely to get into much trouble.  It's possible that this borrowing may crowd out private borrowing, but at least over the last decade, this has obviously not been the case. 

The reason not to run budget deficits (other than in times of war and depression) is prosier:  it's bad political economy.   Governments shouldn't run deficits to fund ongoing spending for the same reason that it's not a good idea to run up credit card debt to pay for groceries.

But that's not the point of worrying about the budget deficit.  The point of worrying about the budget deficit is to bash your political opponents.  Why this works, given the obvious hypocrisy of all parties on this score, is beyond me.  But apparently it does, or at least a lot of people think it does, and so we're stuck with the current silly debate over how bad our budget deficits are, and more importantly, who we can blame them on.

Hence this graphic from David Leonhardt and the New York Times has touched off another round of how much can we blame on Bush?



These responses from Andrew Sullivan and Kevin Drum, both serious people, are about par for the course:

Kevin writes:

That is: It Was President Bush, Stupid.  That's just a thumbnail on the right, but you can click on it to see the full-size version.

While Andrew says:

Overwhelmingly: the GOP and Bush, a fact the vast majority of the right simply ignored for the past eight years. Leonhardt lays out the facts that Glenn Reynolds and his fellow partisans  keep denying

Well, actually, I think there was a Democratic congress involved a couple of times.  But who cares?

No, I mean that seriously.  Who cares?  The whole debate seems totally weird to me, and highly inflected by an arbitrary choice of endpoints which makes it seem as if George Bush squandered an $800 billion deficit bequeathed to him by Clinton, which was his sacred duty to preserve in amber.

But, just for starters, that $800 billion was not a real number.  The budget surplus was $232 billion in 2000, about $292 billion in today's dollars, or about 2.5% of GDP.  That is, coincidentally, about what we lost in revenue when the stock market bubble burst and we lost all that lovely capital gains revenue. The imaginary number comes from assuming "current law" as of 2000.  Due to some quirky rules, this does not just mean assuming that Bush didn't spend more or tax less than Clinton.  It actually means assuming away some things Clinton *did* do, like the $50 billion annual "temporary" AMT fix.

Moreover, even if this had been something like a real number, we would not have arrived in 2008 with an $800 billion surplus.  Any president would have done about what Bush did--some combination of spending it, and cutting taxes.  The American public was not going to happily pay an extra 6% of its income to Uncle Sam so that we could pile up some massive wad of cash.  And if they had, by 2008, we'd simply have been pointlessly imposing deadweight loss on the American public through unnecessary taxes.

The correct assessment, I think, is how much of the change from zero that Bush bequeathed Obama.  And there, the picture is more complicated.  Bush left a very small structural budget deficit--until the massive financial crisis.  The change since then has mostly been either structural (tax declines), things that Obama participated in as president-elect or senator (the bailout) or things he authored (the stimulus).

But more importantly, the deficit now is not what matters.  Any Republicans who are using it as a political tool to bash Obama should be ashamed of themselves; whatever you think of the stimulus package, one year of massive borrowing is not going to kill us, and the impact on future generations will be small.  

The graphic's equally arbitrary end date obscures the real worry:  the years after the current crisis.  By then, it will make about as much sense to blame them on Bush's fiscal policy, or Medicare Part D, as it would on FDR's fiscal policy, or Medicare Part A.  Social Security and Medicare Parts A-C will be driving far more of Obama's deficits than anything Bush did.

Don't believe me?  Iraq is now at $120 billion a year, and scheduled to decline.  It seems churlish to blame Bush for Medicare Part D, given that the Democrats' main complaint was that it wasn't expensive enough, but let's go ahead and blame him anyway:  $35 billion a year. The tax cuts sunset in 2010; after that, Obama has to affirmatively act to extend them.  The structural deficit projected in 2010 was a little over $100 billion. 

But what about all the debt he racked up?  Net public debt rose less than 4% of GDP during Bush's presidency.  Net interest (aka Cash Interest We Pay Bondholders) went from $223 billion in 2000 to $244 billion in 2008; adjusted for inflation, and as a percentage of GDP, it actually fell.  If we are entitled to expect Bush to close the budget deficit with those kinds of numbers, then we ought to be able to expect it from Barack Obama.  Bush's deficits are not holding him back.

But this is what we have been told to expect:




How is a $118 billion structural deficit, $35 billion in Medicare Part D, and a theoretical end to the Iraq presence forcing Barack Obama to spend nearly $1 trillion in 2018?  How is it forcing him to spend roughly $650 trillion more than he takes in in 2012? 

This is not Bush's fault.  And you know what?  Even if it were Bush's fault, who cares?  It's like those people in their thirties who spend the whole decade in therapy and get into long weepy conversations over bottles of wine about how they can never have a healthy relationship because their father was so cold and distant, and their mother was a perfectionist harpy.

I mean, hey, it sounds like your parents were terrible.  But this is not actually very useful information.  Dad could get down on his hands and knees and admit that he was the most horrible father in the entire world, and beg for your forgiveness, and guess what?  You're still lonely and balding and drinking way too much mid-priced Chardonnay.  No matter what Dad did, he can't fix it.  You have to be the one to call your girlfriend and say "I love you."  If Dad does it, she'll just get all creeped out.

The problem with the budget deficit is not any particular program, or even any particular tax cuts.  It is not that George Bush or Obama is a bad person who does bad things.  The problem with the budget deficit is that, unlike the deficits George Bush ran, the deficits projected under Obama (and beyond) are actually large enough to potentially precipitate a fiscal crisis.  If our interest rates suddenly spiked up, perhaps because lenders were worried about the size of our budget deficits, we'd find ourselves in the kind of nasty fiscal jam that regularly plagues third-world countries.  The difference is, no one has enough money to bail us out.

Obama is the one who will have to prevent this.  Yet instead of plans, we're getting fairy numbers from the OMB.  That's worrying, and it's sure not George W. Bush's fault.  His OMB liked to inflate the deficit projections, so that they could take credit for a mostly imaginary reduction.

Not that I want to use the budget projections to bash Obama.  For one thing, those out-year projections have hte same fantasy quality as that $800 billion surplus we never had; reality will be very different, and if it follows the pattern of the last ten years, the deficits won't be as high as these projections.  (Though cutting them in half would still leave a giant deficit). Also, I assume that Barack Obama does, in fact, have some plans to cut the deficit.  I probably won't like those plans, since I expect they involve hog-wild spending and very large tax hikes. 

If (when) he does those things, I'll probably scream like a stuck pig.  But I promise to confine my criticism to the actual programs, not their theoretical effect on the budget deficit.

Why I Think the Housing Bubble Has Not Yet Bottomed

I have a desultory interest in possibly entering into the happy state of homeownership, so I get the MLS listings for my favorite zipcodes emailed to me.  This one appeared in my inbox this morning, and it seems to encapsulate everything that is still wrong with our current housing market.

FABULOUS NEW PRICE. Sunny, renov. corner apartment listed at NEW LOW PRICE to sell quickly. Almost 1000 sq ft w/ old world charm and fabulous light. Great roof deck, front desk, near metro. No pets. Seller will pay one year's condo fee.

What, you may ask, is this fabulous new low price?

CURRENT LISTING PRICE HISTORY
Date	Price	% Change	Days at Price
5/15/2009	$499,000		26
6/10/2009	$495,000	-0.8%

That's right--they've dropped the price almost 1%.  Perhaps you did not want this house at $499,000.  But now that it is $495,000 how can you resist acquiring two small bedrooms and a bathroom on an okay block?  Assuming a 10% downpayment and a 30-year mortgage at a 7% fixed annual rate, you could save nearly a dollar a day--almost the price of a cup of coffee (if you are not picky about where you buy your coffee)--off of your roughly $3,000 monthly payment.

Snarking aside, check out what the buyers paid for the place in 2005:

10/4/2005

$460,000

-$5,000

$455,000

They bought near the height of the bubble.  Yet they think their house has appreciated by nearly 10% in the intervening four years.  Maybe they did a hell of a renovation, but usually buyers who have extensively renovated advertise that fact.  And they're not in a gentrifying neighborhood--Kalorama gentrified decades ago.

People's expectations still have pretty substantial price increases baked in.  Until people let go of the assumption that offering a mere 2.5% annual profit from the market's peak is a real bargain, prices will not have bottomed.

Public Service Announcement for Graduating Students

I gave a talk to young journalism students last night, followed by a breakout session.  I'm sure I was full of folksy, useless advice about working hard and keeping your nose clean and always calling mother on Sunday.  But once piece of advice that I will now repeat, because they seemed so surprised too hear it, was financial:  do not default on your student loans.

The temptation to just kind of forget to pay your student loans back when you're a freshly minted student is high, particularly in a job market like this one.  Do not give in.  This is phenomenally stupid.  Defaulting on your student loans will put a gigantic black mark on your credit record that will not go away for seven long years.  If you are a freshly minted senior, that means that missing a payment now will drop off your credit report just in time for your thirtieth birthday.

That means you'll have a hard time getting a cell phone:  no iPhone for you once Mom takes you off the family plan.  You'll have a hard time getting a credit card.  You will have a hard time buying a car, particularly if the tight credit market persists.  Don't even think about a house.  You may even have a hard time renting, since landlords check your credit, and so do some employers.  Any of those loans you do manage to get will cost you a lot more:  trashing your credit score can mean an interest rate of 16% on a 5 year auto loan, instead of 6% for someone with top-notch credit.   You can't afford much car at a 16% interest rate.

Nor can you default, trash your credit, go bankrupt, and recover in time for your 30th birthday.  Lenders, and Congressmen, foresaw that this strategy might become attractive.  So you cannot discharge student loan debt in bankruptcy.  That's right--if you don't pay, they'll eventually garnish your social security checks.

There is no reason you need default.  If you can't pay, call your lender.  They don't want to take you to court or garnish your paychecks, so they will work with you.  Not necessarily on terms you'll like--they'll lower your payment, or let you skip it altogether, but the interest charges will pile up.  On the other hand, as we just discussed, the interest (and penalties!) will eventually be added to the bill that you cannot get out of paying.  Much better to do it voluntarily and avoid a nasty mark on your credit report.

The Benefits of a Public Health Plan Alternative

Tyler Cowen is assessing the current state of debate over a public plan option.  The central question we need to get straight is whether or not the public plan needs a subsidy.  Clearly, the government can drive out private insurance options by providing a service below cost.  But of course, this has unpopular implications.  The taxes need to subsidize such a service would be high, and the subsidy might crowd out private insurance, as employers dump their employees into the public plan.  Or at least, that's what Wal-Mart's bashers tell me inevitably happens.

Assume no public subsidy, however.  Does the public plan cost more or less than a comparable private plan?  In part, that depends on what you think the adverse selection problem will be.  To review for those who slept thorugh Health Care Economics 101, adverse selection is what happens when you have severe information asymmetries in a market.  Say the average cost of insuring the entire US population is $200 a month.  Well, if you don't use much health care, you might not want to spend the money.  On the other hand, if you consume $400 worth of health care a month, it's a fabulous deal; you'll definitely sign up.

So all the people who are sicker than average sign up, and some of the people who are healthier than average don't.  The average cost of the insurance rises to $250, and so do premiums.  Some more healthy people drop out.  The average cost of the insurance rises to $325, and so do premiums . . . rinse and repeat until all you've got is an insurance pool of very sick people.  In autos, this is familiarly known as "the lemon problem". 

Now, the adverse selection story is not as strong as you might think, but the one CBO estimate suggests that community rating (which prevents insurers from charging sick people more) adds about a 30% premium. 

Ezra Klein thinks that in his "strong" plan, where the government gets to use Medicare reimbursement rates, the plan can save enough money to offset the losses on sick people, and drive down the overall cost of insurance to attractively competitive rates.  I am unconvinced. 

Thirty percent is a big savings.  Where is it going to come from?  Before you blurt out "administrative costs" remember that even if it sets reimbursements on the Medicare schedule, the new plan is not going to enjoy all of Medicare's low administrative costs.  Medicare shares administrative infrastructure with Social Security for current retirees.  Once people have passed a threshhold--they are over 65, they have contributed to FICA for a certain number of quarters--Medicare doesn't spend much more time worrying about them.  Virtually everyone who is qualified joins, and once enrolled, they never leave.  Any premiums owed are deducted from their social security checks.  If they join an HMO, Medicare deals with bulk billing.

Medicare-for-all, or whatever we're calling the strong plan, is going to need a large new administrative apparatus for doing things like billing customers.  It is going to have to verify that their accounts are current.  It is going to need (oh, fun!) a collections mechanism.  To compete with a private plan it will need prescription drug coverage, which means integrating with pharmacies. If it is going to attract the low-risk patients who will keep the average cost down, it will need to advertise its prices, which implies a marketing department.  Patty Duke probably isn't going to bring them in.

But I think that in many places, at least, the state system is going to find it hard to attract low-cost patients.  It seems to me that given the existence of a state program that will not turn patients away, the optimal behavior for someone who is currently basically healthy is not to buy it.  Buy some super-cheap catastrophic plan to deal with a car accident or similar, and then enroll in the public plan if and when you get cancer or something longer term.  People try not to do this now because continuity of care affects your ability to get insurance for pre-existing conditions.  (Also, places like New York have made cat coverage effectively illegal).  But if the public plan exists, gambling actually becomes more practical.  Contra Tyler, I expect that Ezra's strong plan would actually hurt private plans as some of their healthiest, youngest patients made the rational decision to join the ranks of the uninsured.

And what about the government's infamous ability to wrestle new savings out of "providers"?  They are large, but they are not unlimited.  Medicaid patients find it very difficult to get doctors to take them, since the doctors tend to lose money on their care.  (I've heard persuasive arguments that "Medicaid mills" adept at fraud are integral to providing care to the poor--without the fraud, Medicaid doesn't reimbursements won't cover the bill.)  Medicare patients are starting to have the same problem. 

Moreover, I'm fairly hard put to see how jawboning providers is going to save huge sums over a private insurance plan.  Yes, the government is a gigantic provider.  So is Aetna, and it's pretty motivated to negotiate.  I think the government has some extra bargaining power.  But enough to knock, say, 20% off prices, compared to a private insurance plan?  Without getting any of that 20% stealthily reclaimed by doctors who run extra lab tests, etc?

Ultimately it's an empirical question though, and perhaps I'm wrong. 

Coup in Albany: What Does It All Mean?

I'm not clear on why the primary reporting on the Republican coup that just seized control of the state senate from the Democrats is being reported nearly exclusively as a gay marriage thing.  Yes, I understand that this is a blow to gay marriage, but it has a lot of implications for the state on spending, rent control, and any of a number of other issues--you may have hear that they're having something of a financial crisis. 

Nor does gay marriage seem to me to have been driving their switch.  The two Democrats who crossed over to vote their party out of control are neutral-to-supportive on gay marriage; what they really have in common is that they are both under a legal cloud.  Since they both come from safe Democratic districts, the party leadership had no need to stand behind them, and they've been fighting for more support from the leaders for a while.  Tom Golisano, who seems to have orchestrated the coup, isn't so much a social conservative as a pro-business guy; he's part of a "good government" coalition that has been building up in Western New York for quite some time, trying to topple the heavy taxation and regulation imposed by downstate, which they believe cripples the upstate economy.  Whatever his personal views on gay marriage, I don't see it being his primary motivation.

You've got internicene warfare among a suddenly ascendant party, and a state in chaos.  Gay marriage will undoubtedly be affected by this, but it's not obvious to me that it's the main story.  So what am I missing?

Will the Government Enact Compensation Limits on Non-TARP Banks?

Apparently, the government is getting ready to enact a new round of restrictions on financial services pay:

The Obama administration plans to require banks and corporations that have received two rounds of federal bailouts to submit any major executive pay changes for approval by a new federal official who will monitor compensation, according to two government officials.

The proposal is part of a broad set of regulations on executive compensation expected to be announced by the administration as early as this week. Some of the rules are required by legislation enacted in the wake of the worst financial crisis since the Great Depression, and they would apply only to companies that received taxpayer money.

Others, which are being described as broad principles, would set standards that the government would like the entire financial industry to observe as banks and other companies compensate their highest-paid executives, though it is not clear how stringent regulators will make them

It's not clear what the restrictions on non-TARP firms will be.  But depending on what these restrictions are, we could finally be seeing the administration give full-throated voice to the moral outrage of its voters--an understandable, but dangerous, precedent.

There is a decent argument for regulating how broad compensation at banks is structured.  More than one smart analyst thinks that the yearly bonus regime encouraged both traders and their managers to take excess risk.  I'm not sure, as an empircal matter, that I buy this argument.  Most of those bankers who were allegedly gambling for free with (implicit) taxpayer money in fact lost half or more of their own fortunes in the ensuing crash.  From this I infer that they did not, in fact, realize that they were gambling.

There's also the problem that wise men have spent years and fortunes seeking compensation structures that more perfectly align the interests of employees with those of shareholders and, in this case, us.  To sum up their findings:  simple schemes like bonuses and stock options leave wide gaps between employee and shareholder interests.  Complex schemes are easier to game, usually lead to higher turnover, and tend to blow up in some entirely unexpected way.

Maybe Uncle Sam will discover the perfect scheme that has so far eluded everyone else.  But we'd probably get a better return on their mental effort if we had them figure out how to turn lead into gold.

But enforcing, say, a multi-year bonus scheme wouldn't be terribly destructive, and it might help.  On the other hand, if the government starts meddling with the level of compensation, this will be disturbing both because it will not do good things for the American financial services industry, and because, well, who the hell is the government to start telling private firms that are not receiving any taxpayer money how much to pay their employees?

But this feels more like a trial balloon than a fleshed out plan, so for now, I'll hold off on the capitalist panic.

Should Bush have Finished off the Automakers?

Austan Goolsbee recently complained on television that they're only embroiled in the auto mess because the Bush administration "kicked the can down the road".  Keith Hennessy, who was in the Bush administration, says that's not quite how it happened: the administration proposed a more definitive resolution process, but the Obama transition team, which wanted more control over the process, declined.

It seems to me that the Bush administration could hardly have resolved things any more quickly than they did; restructuring a company takes time.  Nor did they have much political scope for bold action.  But perhaps my old professor was voicing my secret suspicion:  that the Bush administration only gave the automakers loans because they wanted to leave the incoming Democrats with an ugly, expensive, mess on their hands.  If Bush had had a few more years in office, he might simply have let the automakers fail.  But this way, he kept Michigan competitive, and forced the Democrats to spend huge, unpopular sums on a fairly naked bailout of a key labor constituent.

That would imply, of course, that like me, my former professor thinks GM should have been allowed to fail.   

Readers Respond on Medical Bankruptcy

Zaleriana:

Warren's 2007 data shows $33,882 with N=2371. The sec'd debt median was $35,000. The 2001 amount (in 07 $$) was $23,594, based on N=1233, w/ Sec'd median=$28,970. So, your recollection is better than mine, but I seriously question their results.


Notwithstanding statistical equivalence of the samples (adequately demonstrated to my barely-trained eye), I am skeptical of a doubling of N out of a smaller cohort of filers. Indeed, the explanation for their presumed equivalence is:


"Our prior studies were not random national samples but random samples drawn from five judicial districts. We have no reason to believe this affects the comparisons we make to these earlier cohorts of bankruptcy filers."


Yeah, right. Because one doesn't care to think about it, does not equal no basis for doubt.


Another, unrelated, absurdity in the Study article (fn 63)


"The authors believe that the higher proportion of legal service clients in Philadelphia drove down the average homeownership rates in that district unrepresentatively"


Uh, no, the lower HOMEOWNERSHIP RATE of Philly residents, across (almost) all income levels, drove down the homeownership rate of petitioners in Philly. This is soo simple, I have a hard time taking their conclusions seriously.

Readers Respond on Medical Bankruptcy

Reader Mark writes:

Readers Respond on Medical Bankruptcy

Reader Russ writes:

I do not know how the Warren report gathered data. I am a chapter 7 bankruptcy trustee who sees about 60 new cases each month . we examine each petition to determine the reasons for filing. we do this for a number of reasons. for example a person with a lot of medical bills may have a personal injury claim that we may pursue, settle and give that money to creditors. In our experience the 50% amount is very close. I often ask what did you use the credit cards for? the answer,"we paid medical and hospital bills." another factor that is often overlooked is the cost of health insurance as an expense that depletes household income. As the cost of health insurance increases, more of the cost is shifted from employers to wage earners. this increasing costs reduces the amount of income available to the family. for people forced to purchase private insurance, this 3-600 or what ever a month may occasion default on a car, a home , a credit card.

Readers Respond on Medical Bankruptcy

Susan Feinberg of Rutgers Business School writes:

I'm a professor at Rutgers and an economist.  After reading your piece, I had a look at the article and a few things came out clearly.

First, it's somewhat shocking that the authors in the paper tolerated a nearly 50% attrition in the sample in conducting phone interviews.  906 out of 2314 people who filled out surveys couldn't be contacted?  There is a huge selection problem here.  One can think of all kinds of reasons why people who were contactable might disproportionately suffer from medical conditions.  Many of the 906 "disappeared" people doubtless moved on - physically - because they *could*.  One could speculate ad infinitum on systematic differences between the 1032 interviewees and the 906 "disappeared."  But the problem is, these 906 are lost, and it would idle speculation.

Accepted practice, particularly for scholars with resources (!), would be to try to track down the 906 people and, at least, attempt to obtain some information on them so that the final econometric model would be a Heckman-type selection model which estimates the joint probability that a person would be in the phone interview sample along with the bankruptcy prediction model.

This is the main issue I see, but there are many others.  I find the use of means, rather than medians very odd.  The median medical bill is probably zero, or close to zero, and, as you point out, the means are likely biased up by a small group of large numbers.  There would have been no need to "trim outliers at 100K" if medians, rather than means, were used to describe the sample. 

I am also bothered by the use of "debtor or spouse lost 2+ weeks of income due to illness or disability."  Again, what we don't observe here is individual heterogeneity.  This is the issue with regard to the selection problem discussed above.  It's probably true that people who file for bankruptcy are at the margin of society for all kinds of reasons.  They probably have more stress and financial concerns generally, miss more days off work for reasons like car trouble and childcare (which they count as "sick days"), etc.  If the individuals called the time off "sick days" with regard to their employers, it's not surprising that such a high proportion of people - 38+% fall into the 2+ week category.  I don't think a positive answer to this question should qualify as a "medical" bankruptcy.

Another strange entry in Table 2 is "Medical Bill Problems" which are people who have positive answers to any of the first three questions.  We can infer from the fact that 57% of respondents have "medical bill problems" but only 29-35% of people say their bankruptcy was due to medical bills OR report having high medical bills that there is very little overlap between the first and second question.  I would expect an almost perfect mapping of question 1 (self-report that medical bills caused bankruptcy) and question 2 (self-reported large medical bills).  And yet, there seems to be almost no overlap, since 57% of people answered yes to EITHER question 1 or question 2, but only about 30% answered yes to each individual question.  I'm ignoring question 3 because of the small numbers.


Finally, there are all the obvious problems with self-report data, and the fact that this is a very sensitive topic.  Getting "true" self-report data on reasons for bankruptcy is like trying to get "true" self-report data about sex.  I hope the authors consulted a reputable psychometrician to help them design their survey instrument!

The only point you make that I would quibble with regards the absolute drop in number of medial bankruptcies.  Even if we take the paper's estimates of 500K to be correct, this represents a large increase in medical bankruptcies as a percent of total bankruptcies.  This is an important number that, if correct, should not be ignored.  It's the weakest point in your critique. 

Thanks again for your thoughtful piece.  I would have posted this as a comment if I could have figured out how to do it!  I strongly believe in a national health insurance option, but I feel that my cause is poorly represented by bad science.

I should make it clear as I didn't in my earlier posts that I think the proportion is relevant, and indeed points to a possibility that would tell us a lot about medical bankruptcies:  that they're much "stickier" than other sorts of bankruptcies.  They may be harder to time, or they may simply be less sensitive to the various costs of filing for discharge.  Indeed, I think that the authors' drive to prove that medical bankruptcies were being increased due to pressure from steadily higher medical bills obscured this potentialy quite important finding.

But I think that without knowing that the absolute number fell, the proportion by itself is misleading.  The reverse is also true.  If I had reason to believe that the absolute number of medical bankruptcies had fallen, I would never write about it without also pointing out that bankruptcy overall had fallen much more sharply than medical bankruptcies had.  If I omitted that latter fact, my article would be grotesquely misleading.  If I had omitted this fact, and instead filled my article with descriptions of S-Chip expansion, the growing proportion of the population eligible for Medicare, and a downtick in immigration (immigrants disproportionately tend to be uninsured), I would deserve all the righteous hell I would no doubt receive from the liberal blogosphere.

Readers Respond on Medical Bankruptcy

Reader Ted writes:

As a social scientist, I agree with Megan on this: this paper is not sufficiently transparent about its data and methodology, and may contribute to some misleading inferences due to a lack of contextualization and selective use of statistics. This is not to say I know the conclusions of the articles are wrong, but rather to say I can't be sure from what is presented in this published paper. Megan in fact barely touches on the problems in transparency, which would have led to this paper to be sent back for revisions by any leading social science journal with which I'm familiar. It is a surprising fact to some (including myself a few years back) that medical and health journals seem to have lower standards for statistical evidence than journals in sociology, economics, political science, and psychology.

Time won't permit me to run through all of the issues now, but a few highlights:

First, let's address the percentage versus absolute numbers debate. Both pieces of information can be useful for answering distinct questions. Sometimes we're mostly interested in compositional numbers (proportions), like when we discuss the changing ethnic or racial make-up of the U.S. In the latter case, it would be more useful to know not the absolute population increase among Latinos, but instead whether Latinos have increased as a proportion of the U.S. population. In other cases, we're may be interested in the actual numbers, for example, how many people have contracted a new deadly disease. Often both numbers are valuable.

That's likely the case with medical bankruptcy. While we might want to know whether medical costs are a leading cause of bankruptcy, we also surely wish to know whether medical costs are causing an increase in the number of bankruptcies. (To take a simple example for illustration, many people wouldn't care as much about gun violence, even if guns were involved in 90% of violent deaths IF there were also only 10 violent deaths in the country per year. The size of the overall "problem" and whether it is decreasing or increasing are relevant considerations, especially for an important public policy debate. The paper should indeed have been more forthcoming about this. Had it been so, the authors would come across as more fair minded without necessarily minimizing the problem (there's still plenty of bankruptcies). By giving us more context, the paper's argument becomes somewhat less dire but hardly unimportant.

On top of that, we'd want better time trend data before inferring that the role of medical costs in bankruptcies changed between 2001 and 2007. All we know from their multivariate logistic analysis (accepting it on face value) is that the share of medical bankruptcies (by their definition) was higher in 2007 than 2001. Okay, but was that due to some change in the nature of medical costs, medical insurance, or anything else do to with health? Or was it due to how the intervening change in national bankruptcy laws differentially affected the composition of bankruptcies? (They address this only superficially at the end of the paper.) Or perhaps due to other changes in the financial environment - a plummeting housing market, a change in the lending environment, and so on? We can't tell from these data, because the binary variable for year of study would capture anything and everything that was different between the years (and not otherwise controlled for). One might be able to use court data to construct a dataset of annual bankruptcy filings and then add variables to control for other factors, and in that case a better outcome variable is probably number of bankruptcies per thousand people (or similar). This would allow researchers to monitor whether medical costs were causing actual increases in bankruptcy (not just becoming an increasing share of bankruptcies), yet still control for population growth and other causes.

Second, there are a number of other problems with the paper. These don't clearly invalidate the conclusions of the paper, but they do make me skeptical that we can have confidence in those conclusions from the data as presented.

Example 1: Tables and analyses don't report the number of respondents in the particular analyses, which is an issue because evidently the baseline or reference group shifts from analysis to analysis without explanation for why. See the note to Table 2, where the key percentages on medical bankruptcy are reported; the note indicates that these percentages are based not on the full sample but only the home-owning half of the sample. Does this make a difference? I don't know. Why was it done? I don't know, it's not explained.

Example 2: Unless I'm missing an explanation somewhere, it appears like the 2001 to 2007 comparison is based on different populations. The former was a 5-state study, the latter seems to be a national study. If that's true, then we really don't know in fact anything about the national trend from these data (but the authors could try to shed light on it by using their 2007 data to tell us the trend for the 5 states from 2001, which may or may not mirror the national trend).

Example 3: They provide a fair amount of information about their sampling and survey procedures, but not enough. One case in point is that they provide a verbal assurance that respondents to their initial mail survey "resemble" non-respondents on many basic characteristics. Given that they have the data to reach this judgment, most studies would provide more precise numbers to demonstrate that the two groups are statistically indistinguishable. We also don't learn much about what respondents were told about the study, so that we can assess whether "demand" effects may have inflated reports of medical problems. The researchers may have been very careful about this, but they need to report what they did.

Example 4: Most seriously, the authors invite improper inferences by conducting a national survey of bankruptcy filers, rather than a national survey of all households. By doing what they did, the researchers can study how often medical costs are an issue among bankruptcy filers. But many of us, including in all likelihood the researchers and the journalists and politicians who will be talking about this study, are more interested in whether and how much medical costs are causing Americans to file for bankruptcy. If that's so, then the researchers would appear to have committed a cardinal sin in principles of scientific research design: selecting on the dependent variable. They are examining only people for whom the problem has occurred. If we want to know whether a factor is causing that problem, then we need to collect data on instances where the problem did AND did not occur (i.e., those who did and did not file for bankruptcy). Then one can conduct a multivariate analysis to determine the impact of the variable in question (medical costs), controlling for other factors, on the outcome of interest (the likelihood of filing for bankruptcy). When you select on the dependent variable as these researchers did, you can't tell something as basic as whether more Americans with high medical costs actually avoided bankruptcy than Americans without high medical costs.

Perhaps had researchers fixed these and other problems, we'd discover the problem is even worse than they currently report. Or perhaps we'd discover things are actually getting better, or there is no change. We just can't tell from their data as conducted and presented, and that's a shame because that means it really can't inform an important on-going discussion about national conditions and public policy.

(By the way, this is what a real peer review looks like, and it is how these sorts of problems can be fixed (and often are) before a study is released to the public.)

Will GM Rewards Points Survive Bankruptcy?

Like other automakers, GM has a lot of credit card holders who accumulate rewards points towards the purchase of a new GM auto.  But what happens to them in bankruptcy?  Frequent flyer programs have previously been gutted when an airline went bankrupt, so it's not unreasonable for GM cardholders to worry.

But fear not!  The airlines whose frequent flier programs were dismantled mostly filed for liquidation, not reorganization.  Frequent flier programs are a valuable customer loyalty program, and they're relatively low-cost, since upgrades and even free tickets often simply fill empty seats. 

GM's case is a little more complicated--I don't think any of their cars have a near-zero marginal cost.  Nonetheless, the program has been affirmed in the bankruptcy, according to Tom Wilkinson, GM's spokesman.  And very wise indeed this was of Judge Gonzalez, since if there's anything the company could use right now, it's a captive market for GM cars.

Why Warren's New Bankruptcy Study is So Bad

So why am I so angry about Elizabeth Warren's study? Aren't I just miffed because, as one commenter put it, she has "failed to present her results in the way most congenial to libertarian ideology?"

Er, no. The world is full of studies that do this. I get mad at only a minority of their authors. I am mad, first of all, because Elizabeth Warren is not a third-year statistically illiterate policy analyst at a health care advocacy group. She's a professor at Harvard, and the head of the Congressional TARP oversight panel. This conveys a certain responsibility to present data in the most illuminating way, not in the way that will induce journalists to say things that aren't true.

And they have done just that. Read a sampling of the stories about this study on Google News. It's clear that none of the authors of the stories I've read understand that we're talking about a smaller absolute number of medical bankruptcies, representing a larger proportion of a much smaller overall number:  that this increase in the proportion could at least as easily have been driven by less need for non-medical bankruptcy, than by bigger, scarier medical bills. Indeed, many of the stories indicate that medical bankruptcies have risen since 2001, which is not true even according to Warren's figures.

I submit that the study is designed to get that result from journalists. Readers have responded that my criticism is out of line, because after all, they only talk about the proportion, so who am I to say they're misleading the readers?

Yes, but why do they only talk about the proportion?  In general, economics papers talk about absolute numbers whenever they can, and use proportions only when things like changes in income and inflation make comparisons between years too difficult.  I submit that we want to know, not whether medical bankruptcies are a bigger or smaller proportion of overall bankruptcies, but whether more people are being pushed into bankruptcy by their medical bills.  To take the extreme absurd case, if only one person had declared bankruptcy in 2007, but that one person had had huge medical bills, would this be a sign that we need national health care?

We can measure the absolute number of medical bankruptcies, and the changes in income, GDP, and population between 2005 and 2007 were too small to much affect these.  Therefore, the appropriate measure was the absolute number.  The proportion would have been an interesting inclusion.  And it would have been the basis for a different, fascinating study:  the relative "stickiness" of medical bankruptcies.  But it was not the obvious choice if you are going to use one or the other.  That is, unless you are determined to give the impression that rising medical bills are pushing ever-more people into bankruptcy.

Warren's defenders in my comments seem to think that this is simply libertarian bluster--after all, what we're concerned about is whether medical bills are driving the post 2005 increase.  But, as Warren surely knows, it is very unlikely that medical bills are driving either the post-2005 increase in bankruptcies, or a post 2005 increase in medical bankruptcies. 

Let's review the history.   In 2005, Congress passed a law changing the bankruptcy rules. There were a number of different changes to the code, but for our purposes, the relevant changes* are these:

• It became more difficult to do rapid serial filings
• Debtors were required to enter debt counseling before they filed
• Attorneys had to sign off on the debtor's claims
• Debtors had to provide pay stubs and tax returns
• Debtors whose income, after allowable expenses, was higher than the median for their area, had to file Chapter 13 instead of Chapter 7.  This means they'd be forced into a five-year repayment plan.

In practice, these modestly increased the barriers to filing bankruptcy, and I was against them at the time.  (Still am.)  But overall, the barriers were not particularly costly.  The requirement for high-income filers to enter Chapter 13 is theoretically the most onerous, but in practice, it affects almost no one.  In 2005, it was widely estimated that 80% of filers were below their state's median income, and the allowable expenses are pretty generous.  To return to an earlier story, Patty Barreiro, who I wrote about the other week, filed bankruptcy despite a household income above $150,000.

But the hype about the bankruptcy barriers was formidable.  This seems to be why so many people rushed to file in 2005--basically, everyone who thought they might end up in bankruptcy hurried to complete their filing before the law took effect in October 2005.  And afterwards, filings stayed low, much to the puzzlement of bankruptcy experts.  Everyone had expected some fall simply because 2006 and 2007 bankruptcies had been shifted forward into 2005, and a slight decrease due to the small percentage of filers who were really abusive or fraudulent.  But the sustained decrease puzzled everyone.  It simply hadn't gotten that much harder to file bankruptcy.

The dominant theory I heard is simply that people had become irrationally afraid of bankruptcy.  The consumer groups who had hyped this "draconian" change to the bankruptcy law had done their PR job too well, and now people who thought that it was impossible to get a discharge weren't even bothering to contact an attorney.

This is what the filing pattern looks like through 2008:



The post 2005 increase in bankruptcies isn't being driven by medical bankruptcies.  It's simply rebounding from what every single analyst at the time, including Elizabeth Warren, agreed was an unsustainable drop.

Nor can we say, as some of my readers have argued, that the post-2005 increase in medical bankruptcies is likely being driven by medical bills.  Here's why:  there is no post-2005 increase in medical bankruptcies.  Or at least, not one we know of.  All we know about is the post 2001 fall in medical bankruptcies.  You may think that there was a rise in bankruptcies after 2005, but the number of medical bankruptcies in 2007 (ca. 550,000) is smaller than the total number of bankruptcies in 2006.  For all we know, both the proportion and number of medical bankruptcies fell between 2005 and 2007.

Now, I find Warren, et. al's results fairly implausible.  Bankruptcy, as they themselves note, is an incredibly delicate topic, and the refusal rate on surveys is high.  I would not be surprised to find that they'd gotten a sample heavily weighted towards people who had problems with medical bills, because people with more personal and possibly less sympathetic problems, like divorce and addiction, would presumably be less willing to chat about those.

But even assuming that their sample was valid, given what bankruptcy experts (including Warren) know, it seems likely that they uncovered an interesting statistical artifact.  Most bankruptcy filings are at least partly strategic--Warren herself urges troubles consumers to run up credit card bills rather than missing a mortgage payment.  (This is very good advice).  The people with the least room for strategic behavior are presumably people who can't work at all, and/or must run up large bills:  i.e., very sick people.  Those people did not shift their bankruptcies forward to 2005, because they had no warning that they were going to get sick.  Nor could they alter their behavior, as people who were running up less urgent debts may have.

Now, Warren et. al. may disagree that this is the most likely explanation of the data, though I will happily debate any of them who care to defend their interpretation.  But I do not think you can get around the fact that they had to mention it.    The post-2005 fall in bankruptcies, then the steady subsequent rise back towards the pre-2005 mean, is the central fact about US bankruptcy in the last ten years.  It's like doing a study on bank capital without reference to the financial crisis.

Yet they not only fail to mention it, but include a lot of window dressing about the proportion of the uninsured, healthcare bills, and their 2001 study, which are designed to leave the reader with the followng impression:  medical bills are a growing problem in our society, driving people into bankruptcy in ever higher numbers.  Sure, they don't actually say this.  But it's not a scientist's job to mislead only by omission.  Had they simply included this fairly obvious statistic, it would have substantially altered the conclusion that readers drew.  That makes it a material omission, and I think that Warren, of all people, ought to hold herself to a higher standard.

*  Things like KERP treatement in corporate Chapter 13, modifications to the homestead exemption provisions to make it harder to evade legal judgements, and changes in the relative seniority of reaffirmed auto debt are actually quite important, but it's not likely they've noticeably altered the national propensity to file for consumer bankruptcy protection.

Elizabeth Warren and the Terrible, Horrible, No Good, Very Bad, Utterly Misleading Bankruptcy Study

Elizabeth Warren has another study out showing that medical expenses contribute to more than half of all bankruptcies--indeed, this time, it's 70%, up from the 50% she found in 2001. 

Now, it is possible that this is true.  The fact that it seems to disagree with every other study I've ever read that is not authored by Elizabeth Warren, and also, the self-reports of the people in her study (only about a third of whom attribute their bankruptcy to a health problem) could just be a fluke.  It doesn't necessarily mean that it's wrong.  

Yet upon closer examination, it turns out that it is not just wrong, but actively, aggressively wrong.  Warren and her co-authors have obscured important and obvious facts that call the integrity of the work into serious question.

The text itself raises a huge red flags.  It's hard to believe that more than half of people who have been pushed into bankruptcy by a medical issue don't understand this fact.  Perhaps they are not the brightest bulbs on the Christmas tree, but could it really be true that most people catapaulted into a financial crisis by their medical bills don't even notice that health care expenses are their main problem?

My radar is further engaged by the fact that they're implying a really astonishing surge in medical-bill-driven bankruptcies, in a healthcare environment that just didn't change all that massively.  Their study opens:

As recently as 1981, only 8% of families filing for bankruptcy did so in the aftermath of a serious medical problem.  By contrast, our 2001 study in 5 states found that illness or medical bills contributed to about half of bankruptcies.

Since then, the number of un- and underinsured Americans have grown, health costs have increased, and Congress tightened the bankruptcy laws.

In those six years, the percentage of uninsured families ground upward, and health care cost continued to rise at about twice the rate of inflation.  But a 2.5% real annual increase in the cost of a budget item  that accounts for something like 5% of annual household expenditures shouldn't make the bankruptcy stats jump that much. 

Perhaps there was a big increase in the volatility of those expenditures, with the average growing slowly, but a larger number of people being hit by truly massive bills?  Perhaps, but I'm aware of no data that show it.  Yes, people complain about deductible increases and more cost-shifting, but a $500 or $1000 increase in the annual deductible won't tip any family into bankruptcy, and the complaints about denied claims go back long before 2001.   For this to be causing such a huge surge in bankruptcies, health care companies would have had to discover some extraordinarily clever new way to deny people health care benefits without being sued, or fired by the companies who buy their insurance.  If they have, it hasn't been a prominent feature in the recent health-care debate.  As far as I know, they're still using the same old strategy of outlasting and/or confusing their patients.

Yet Warren, et al. claim their current results both show a dramatic increase, and are in robust agreement with their earlier study.  How could steadily, moderately rising medical bills, a roughly static business and legislative environment, and a small increase in the uninsured, possibly have driven up bankruptcies so massively?

Answer:  they didn't.  What Warren et. al. neglect to mention is that bankruptcies fell between 2001 and 2007.  In fact, they were cut in half.  Going by the numbers Warren et. al. provide, medical bankruptcies actually fell by almost 220,000 between 2001 and 2007, a fact that they not only fail to mention, but deliberately obscure.

Are Warren, et. al. unaware that bankruptcies fell by half?  No bankruptcy analyst could possibly be unaware of this fact; it has been the most talked-about phenomenon in the bankruptcy area since the 2005 law was passed.  Moreover,  they're clearly familiar with the filings data, because they use it to make their point:

The number of filings spiked in mid-2005 in anticipation of the new law, then plummeted.  Since hten, filings have increased each quarter.  They are likely to exceed one million households in 2008, representing about 2.7 million people.

What's left out here?  That in 2001, 1.45 million households filed for bankruptcy.  In 2007, that number was 727,167.   Had their paper done the basic arithmetic, readers would easily have seen that their own numbers imply a decrease in medical bankruptcies, from about 750,000 to slightly over 500,000.  Yet their paper does not merely ignore this fact; it uses language that seems deliberately designed to conceal it.  I invite any of my readers to scan the paper for any hint that medical bankruptcies had fallen significantly over 6 years.

This is elementary social science.  A huge change in the composition of your sample needs to be noted.  It certainly should not be artfully disguised.  If the 2005 bankruptcy form made it more difficult to file bankruptcy, the people who still file bankruptcy will largely be those who are forced to it by events totally beyond their control.  Medical bankruptcies seem to fill that bill. 

Yet even so, their own work shows medical bankruptcies falling in the years between 2001 and 2007, which would seem to invalidate, not support, the claim that half of all bankruptcies in 2001 were driven by medical events beyond the household's control.

Elementary googling reveals that the two doctors who co-authored this study are prominent spokespeople for Physicians for a National Health Program, and thus have an obvious agenda, one that Elizabeth Warren has not been shy about sharing.  The American Journal of Medicine, which published this study, seems to have flunked Peer Review 101--I sure hope they're more careful about controlling for background conditions when they're talking about cures for cancer  Also wearing duncecaps are the journalists who are already uncritically parroting it.

There is, of course, a large amount of terrible advocacy masquerading of social science out there, and too many journals and journalists abet it.  But this is particularly troubling because Elizabeth Warren is now in charge of overseeing the TARP program for Congress.  What other inconvenient facts is she shielding us from?

Lunch Break

The wardrobe of the future! . . . as seen from the 1930s.  I'm pretty sure my mother owned one of those pantsuits in the early 1980s.

Is It Evidence? Is it Medicine?

Daniel Davies voices some of my own reservations about "evidence based medicine":

And so, NICE has decided, on the basis of "the evidence", that acupuncture and chiropractic are a good way to spend the NHS's money. Except when you look at it, "the evidence" isn't really all that great. As Edzard Ernst points out, the Cochrane Institute (the other great temple of evidence-based medicine) actually found chiropractic to be more or less useless, while the evidence for acupuncture is that all of the ancient wisdom and theory of the meridians and qi doesn't actually confer any great benefit over and above that which can be gained from simply lying on a table and being poked with sticks.

Part of the problem is that in the specific case of lower back pain, it's a notoriously difficult condition to understand or treat, and a lot of the art is simply to find a nice and professional-sounding way of saying "live with it, there's nothing we can do" that doesn't make the patient give up hope and suffer even more. But another part of the problem is that the overall assessment of what "the evidence" was, was made by a committee that had a bunch of spinal manipulation enthusiasts on it.

Which brings me to the problem; this is exactly what we should have expected, and it's the reason why I've been putting the phrase "the evidence" in great big scare-quotes. Because the actual medical evidence on lower back pain isn't something that can be nicely summarised in a slim paper guideline; it's spread out across millions of individual lower backs, some fraction of the experiences of which are summarised into hundreds of research papers, which were then distilled down into the Cochrane review, which was itself processed through the NICE committee. Basically what evidence-based medicine is about, at this level, is somebody making a decision about what the facts are going to be.

And if that decision about "what the facts are" is one that is going to determine the handing out of large chunks of government cash, then you bet that the enthusiasts of every theory there is are going to move hell and high water to get themselves on that committee. Not out of any venial motive, but because they believe in their theory, and a contrary NICE guideline has the potential to kill it stone dead. So what happens is that the process of finding out the underlying truth, which is of necessity slow, unclear and often completely open-ended, gets accelerated and politicised. It's what you might call "government science".

It's a phenomenon that's very familiar to economists under the name "Goodhart's Law". Basically, Goodhart's Law says that "any economic relationship which is used for policy purposes, ceases to be valid". In other words, you can have an economic model which works tolerably well as an understanding of how, say, the relationship between money, prices and output works. But when you try to use that model to set interest rates, then suddenly the model itself is part of the recursion - part of the system that you're trying to control - and this changes the nature of the relationship that you were trying to use.

Similarly, in the early days of the evidence-based medicine movement, when they were the Young Turks or punk rockers, shaking up a complacent medical establishment that had got out of touch with the cutting edge of medical research, they had the potential to do a lot of good. But now they are the establishment, and as a result of that, the very evidence that they rely on, is shaped by the fact that it needs to appeal to them. The fact that a movement which begun by trying to bring science back into medicine, has now ended up putting its imprimateur on some obvious pseudoscience, ought to worry us more than it does, because this is only the most obvious manifestation of the general problem.

This is part of a broader problem with medicine and other sciences with physics envy.  Medicine, like economics, is really messy.  You can't do the same kind of controlled experiments that you can do on rats or quarks, and as a result, the results are often hard to interpret.  But this doesn't stop doctors, or policymakers, from acting as if the studies or metastudies can deliver vastly more certainty than is possible from such inherently sloppy science.  This is why, for example, I am broadly sympathetic to Paul Campos' claim that medical guidelines on obesity tell you much more about the attitudes towards fat in the upper middle class social stratum that doctors occupy, than about reliable scientific evidence on same.

But policy demands certainty.  And so you get obesity guidelines advising everyone to diet and excercise to shed their excess pounds, even though it's as close to a scientific certainty as anything is that most people simply regain any weight they manage to diet off.  And you get absurdly precise economic forecasting, even though in many cases, the better answer would be "who knows?"

In both cases, I don't see a better alternative.  But we should be more skeptical of both the institutions, and their claims.

Is 3D the Future of Film?

We saw "Up", Pixar's new animated picture yesterday.  It was the first time we'd seen a movie together, because Peter goes to critics screenings at times that I usually can't come.

My feelings mirror Peter's about the movie: it was by far the best thing I've seen all year.  Pixar movies are usually brilliant, and this was no exception--indeed, it may be my favorite of their films.

Unlike Roger Ebert, we saw it in 3D.  And this triggered something of a disagreement as to whether 3D is the future of movies.  Peter sort of endorsed Ebert's indictment of 3D:

I'll have to see "Up"in 3D to experience their effectiveness. I'm afraid the brightness and delicate shadings of the color palate will become slightly dingy, slightly flattened out, like looking through a window that needs Windex. With standard 3D movies, take off the glasses and see how much brighter the "real" screen is. I predict the Cannes screening will look better than almost every U.S. screening.

There is also the annoyance of 3D itself. It is a marketing gimmick designed (1) to justify higher ticket prices, and (2) make piracy harder. Yet as most of the world will continue to use 2D, pirated prints will remain a reality. The effect of 3D adds nothing to the viewing experience, and I have never once heard an audience member complain that a movie is not in 3D. Kids say they "like" it, but kids are inclined to say they "like" anything that is animated and that they get to see in a movie theater. It is the responsibility of parents to explain this useful truth: If it ain't broke. don't fix it. Every single frame of a 3D movie gives you something to look at that is not necessary.

I have to disagree.  Yes, the standard goggles they hand out slightly dim the movie.  On the other hand, there were moments in the movie when I crossed whatever the inanimate version of the uncanny valley is:  I forgot I was looking at a movie.  This despite the fact that I was watching a cartoon.

As we discussed this over dinner afterwards, it came out that Peter doesn't have good stereo vision.  And though the plural of anecdote is not data, I wonder if this isn't likely to be a problem many film critics have.  After all, the worse your stereo vision, the more compellingly life-like a movie is.

I don't think that 3D will prove much of a barrier to piracy--as far as I can tell, you could just as easily do it on a large home screen, and ever-larger home screens are clearly coming.  But it is a format that is especially well-suited to a big screen, and in that sense, if it becomes a dominant format, it really might help save Hollywood from what has happened to the record industry.

And I think it might.  For me, even with slight color-dimming, 3D added quite a lo, even though directors are clearly still learning how to use it.  It still feels slightly awkward and underused, like the first talkies, when actors had to deliver their lines into the plants.  But when it works, it's an improvement on par with the switch to color.

But I seem to be in a minority, at least among film critics.  What do y'all think?

The Rich Really Are Different

Harry at Crooked Timber has a fascinating post on the differences between high-performing schools in affluent districts, and those in high-poverty districts.  The schools in affluent districts view differences between student performance as a sign of differing ability, and rely on parents and students to fix problems through outside work and services.  The schools in poor districts, on the other hand, are intensively focused on bringing up the work of the bottom kids through team efforts and systematic analyses of how the teaching is working.

Harry identifies two reasons this should worry us:

I think it is more worthy of attention than Laura says, for two reasons. First, these schools are typically lavished with public money, relative to other schools which could make much better use of that money. States should be shifting money from such schools to schools with high-need students, and using at least part of that money to fund reform and improvement efforts. Second, these schools typically have some, and sometimes have a good number, of students from low-income families; and these students are typically seen just as problems, and are in the lousy situation of being in a school where their achievement doesn't matter much. KTM points to this excellent paper by Paul Attewell arguing that in affluent "star" schools attention is lavished on those most likely to attend Ivy League colleges, at the expense of all lower-achieving students. (Attewell's paper was written prior to implementation of NCLB, and it would be interesting to see whether the dynamics he identifies have changed at all).

I'd add a third reason:  those schools are often the model for schools in poor districts.  The affluent assume that what works in their school district, for their children, must be what works, and vote, and donate, accordingly.

Time To Shorten Patent Terms

Meanwhile, Matthew Yglesias is also criticizing our nation's patent system:

Nominally, copyrights in the United States are for a limited duration. But the corporations that own valuable, decades-old copyrights--think Mickey Mouse and Batman--don't want to see those copyrights expire. So they've gotten good at lobbying congress to retroactively lengthen copyright terms in order to ensure that Mickey and Bruce Wayne will continue to be valuable commodities forever.

This is bad on its own terms, but it also has some really perverse consequences. After all, most decades-old works aren't valuable. And most aren't owned by large ongoing business enterprises. But even though this vast back catalog consists of works with little monetary value, they could still each individually be of interest to some people and collectively they're of enormous use. But right now, if you stumble across something old and forgotten, it's often not clear how you would even go about getting the rights to it. Oftentimes a person may not even know that he or she is the heir to an obscure copyright owned by a great-uncle or some such.

I'm a pretty hard-core IP absolutist, a subject upon which I've had many . . . er . . . spirited discussions with libertarians.  On the other hand, while I think that copyright infringement should be vigorously discouraged, I also think that the term of copyrights has gotten completely out of hand, and moreover, encourages infringement. 

The economic rationale for the recent copyright extensions was, in my opinion, utterly moronic--in the absence of multi-century oligarchic family dynasties, I don't see how tacking on a few more years of copyright protection decades after the death of the author could possibly encourage more work.  Neither human beings nor coporations work on that time scale.

But even if you bought this piece of self-serving corporate balderdash, there was no rationale at all for making the copyright extension retroactive.  No matter how many years of extra profits we tacked on for the Walt Disney Company, we weren't going to entice even one more animated short out of its founder's silent corpse.

Meanwhile, as Matt notes, the copyright extension is putting other old works off limits to generations that could be discovering them through Project Gutenberg.

But it seems to me that what can be given retroactively can also be taken away, retroactively.  How about some hope and change on copyright law?  Shorter the term back to the author's life plus thirty years--enough to care for needy spouses, but not for greedy corporations.

Is Obama Roosevelt, or Reagan? Neither.

Matt Yglesias says that Niall Ferguson is getting his knickers in a twist about nothing--or rather, that he's trying to fool us into twisting up our knickers through the nefarious power of framing:

Nial Ferguson's indignant observation that "a deficit this size has not been seen in the US since the second world war" is an interesting exercise in rhetoric. Conveniently, it's completely accurate! But what's missing here is that the deficit projected for next year is way smaller than WWII deficits:

To say something like "Obama is going to run a deficit slightly bigger than what we saw in the Reagan years" is a lot less terrifying than "a deficit this size has not been seen in the US since the second world war." But we're looking at a debt level that's much more comparable to what was wracked up in the 1980s and early 90s than to what we saw in the late-1940s.

His readers have already pointed out that the chart he puts up confuses debt-to-GDP ratios with deficits.  More to the point, however, neither metric makes his case.

• According to the CBO, which is usually preferred for projections because it does not share the White House Office of Management and Budget's fervent desire to please the boss, the debt-to-GDP ratio will end up north of 80% early in the next decade.  It peaked around 110% at the end of World War II.  It peaked at about 47% under Reagan.  In both percentage and absolute terms, the Obama debt-to-GDP ratio will be closer to World War II than to Reagan.  More worryingly, unlike the World War II debt-to-GDP ratio, ours is expected to keep growing in the years beyond the graph's end, because the projected deficits are higher than projected inflation.
  
• The Obama deficits are projected to peak at 13%.  This is not "somewhat larger" than Reagan's; it is more than twice as large as Reagan's 6% peak.  In absolute terms, it's just about halfway between Reagan and World War II.

Matt goes on to note that this seems like a good time to run the biggest deficits since World War II.  I agree.  But the World War II deficits were distinctly different from the current run. 

First of all, everyone expected that they would be paid off after the war ended by keeping tax revenue high and spending low.  This is, in fact, what happened.  No one expects this to happen now--not even the administration, which has promised to "cut the deficit in half" from the current unsustainable levels.

Second of all, the era of "total war" brought access to a large pool of essentially forced savings.  People plowed their money into war bonds and war stamps because it was their patriotic duty, and because there wasn't really much else to buy--goods either weren't available, or were rationed.

The Obama administration doesn't have this luxury.  Our domestic savings rate is much smaller than our budget deficit, and no one's going to rush to buy a "Liberty Bond" to bail out GM.  Yields on longer-term debt have been rising over the last month, and credit ratings agencies have stepped up the pace of their warnings about America's AAA credit rating.  If interest rates get too high, the current deficits are going to crowd out more and more actual spending.

Democrats have largely been treating debt and spending as if they were largely a political problem.  What will the taxpayers tolerate?  Quite a lot, it turns out, in time of crisis.  And so Democrats seem to have settled on a strategy of passing as much spending as they can now, while the American public is still reeling from debt sticker shock, and figuring out how to actually pay for it later.

Roosevelt could do this because people felt that America faced an actual existential threat.  But that urgency rarely, maybe never, exists outside of total war.    Obama needs to please the bond market, as well as the taxpayers.  And the bond market is more educated and attentive than the average voter.  You can't just tell them that you're going to achieve fabulous cost savings through health care IT.  You have to prove it.  The administration hasn't been super-convincing about specifics.  So there's a real worry that the bond-holders won't buy it.

A Tiny Slice of Credit History

A visual history of the credit card.  A written history of the credit card.  Now we need a written history of the articles worrying that all the credit cards were going to push us into economic extinction.

Good News/Bad News on Housing

First, the good news:  the latest pending home sales figures for were much, much higher than anyone expected, up a practically healthy looking 3.2% from last year.

Now the bad news:  pending home sales are not done deals.  The buyers often still have to secure a mortgage.  And the mortgage market kind of blew up last week. 

Even if the current sales go through, a 500 basis point increase in the interest rate is going to put a meaningful crimp in buyer demand.  But it's probable that not all of the sales will go through:  some buyers won't have locked in a rate, and if the Field Check Blog is correct, others may not be able to get their loan processed in time to close.  Joe Weisenthal has more.

On Political Access

A commenter writes:

Let's put the shoe on the other foot - let's say that the USSC ruled instead that abortion is illegal everywhere, all the time, and that no state or local or federal law could overrule it. You would need to pass a constitutional amendment to override this, but let's say you couldn't quite get the 3/4 majority of states necessary to pass the amendment - not an unlikely scenario. OK, really think about this. Would you then feel that the pro-choice movement now has access to the political system, they just can't get the votes? Even if you passed laws making abortion legal in Massachusetts, New York and California with 70% majorities, that we immediately struck down in the courts? How would you feel then? Seriously, thing about it.

If the Supreme Court had found that fetuses were full persons, and therefore subject to the full protection of homicide laws, etc, and the balance on the court were such that no conservative justice would retire unless guaranteed replacement by an equally vehemently pro-life justice, would pro-choicers think that they had legitimate access to the political process because they could, in theory, persuade 38 state legislatures and a congressional supermajority to pass an amendment?

We're content to leave many areas of law that remote.  But human rights and personhood cannot thus be walled off with good results.

And that will be my last post on the subject for a while, I hope.

Poverty and the Problem of Scale

At Crooked Timber, Ingrid Robeyns reports on an experiment with Basic Income Grants in Namibia that seems to have been extremely successful:

The BIG Coalition raised money which allows them to give a BIG of 100 Namibian Dollars to each individual which was registered in July 2007 as living in the Otjivero-Omitara area, about 100 kilometres east of Windhoek (pensioners were excluded as they get an unconditional state pension). The amount is small, since the food poverty line stands at 152 Namibian dollars per capita, whereas the poverty line counting "the severely poor" stands at 220, and the official poor are all those living on less than 316 Namibian dollars per month.

As the study of the effects of the BIG after one year clearly demonstrate, the effects are strikingly positive. The percentage of those falling below the food poverty line has dropped from 76% to 37%. The percentage of those being able to get a job or become successfully self-employed has increased from 44 to 55%, and the amount of non-BIG income per capita rose from N$ 118 to N$ 152 (indicating a virtuous economic growth cycle). The number of underweight children has dropped from 42 to 10%. School attendance has gone up, and teachers report that the children are better able to concentrate. The health clinic receives many more patients (for illnesses that would otherwise not have been treated). Average household debt fell from N$ 1,215 to N$ 772. Crime rates fell by 42%, and there is no evidence that alcohol-abuse (which is a serious problem in many poor areas) has worsened. (Further details are in the report, together with interviews documenting the experiences of the people who have been given the BIG).

Like Robeyns, this is the sort of poverty policy I favor, although perhaps for different reasons:  I resent the paternalism of in-kind grants, and the central planning failures of so many massive government development projects.  So I'm heartened to hear that something so simple works so well.

On the other hand, like Robeyns, I'm worried that I'm missing something.  A commenter suggests what that might be:

a Georgist analysis suggests that if this was implemented on a larger scale, it would tend to drive up rents. This would in turn suck the BIG out of the pockets of the poor and into those of landowners.

This doesn't happen in the small scale experiment because the poor individuals in the rest of Namibia not receiving the BIG don't have any more money for the landlords, so the general market can't rise. As a first approximation, the Otjivero-Omitara area prices won't rise because (a) to get the BIG you had to register in July 2007, so nobody can start getting the BIG just by moving into the area; and (b) if you are getting the BIG, you keep it even if you move away, so nobody loses the BIG by moving out. Therefore the extra income is not creating extra demand for local land.

(More accurately, there will be some extra demand arising from the economic growth in the area, probably enough to soak up a reasonable fraction of the N$34 non-BIG per capita income.)

Distribute the BIG to the whole country, and general market rents will soak up essentially all of it. Non-BIG income per capita will not change much at all - no virtuous cycle effects expected.

The Georgist analysis is too simplistic, but applied more broadly, it's worrying.  A basic income grant doesn't actually increase the productive capacity of the citizens.  There are real resource constraints--the amount of land, housing, doctors, teachers, etc.  On a small scale, there's enough slack that individuals really are simply better off by being handed money (although we should be aware that this experiment may have shifted fixed resources like doctors towards the BIG area, and away from other areas that consequently suffered shortages).  On a larger scale, though, what you get is general price inflation.  Think of it this way:  if Timothy Geithner ordered the Treasury to print $500,000 and hand it to a randomly selected poor person, that poor person would be lifted out of poverty with no noticeable impact on anyone else.  But if Timothy Geithner printed $150,000,000,000,000 so that each of us could have half a million dollars, we wouldn't be any better off, because we wouldn't have $150 trillion worth of new stuff.  So the prices of the old stuff would just rise until inflation had eaten up all the new money.

But while I think this would eat some of the gains from a BIG in a developing country, I doubt it would absorb all of them.  Namibia would, after all, be getting a real resource:  foreign currency, which represents a claim on American or European production.  The real productivity of their economy would rise, just as trade expands the real productivity of our country.  There are countervailing factors, of course, like the loathesome effect foreign aid can exert on the domestic government. But it's not obvious to me that it wouldn't work.

At any rate, it's an experiment that could be done pretty cheaply.  Namibia's population is less than two million, and $100 Namibian dollars is about $12.50 US.  So for less than $25 million (a month? a year?  I'm guessing a month), we could run a controlled development experiment.  For $1 per American per year--the price of just one Buffalo Life Sciences Complex or other similar dismally failed local development projects--we could find out whether or not this works.  Give everyone in Namibia a $12.50 basic income for 5-10 years, and see what happens.  Does Namibia shoot up the economic and human development tables, or does the money get claimed by local power-brokers?

It's politically tricky, of course.  But if we can just get Namibia to change its name to something like "Oakton", I'm pretty sure we can slip it into the next highway bill.

One More Post on Abortion

Hilzoy responds:

(a) We have a system for resolving political disputes in this country. We elect people, and those people make laws. When those laws are within the limits set by the Constitution, they are binding. When not, a court can strike them down. When we want to, we can change the Constitution, though it is (rightly) rather difficult.

(b) One inconvenient thing about democracies is that it is very, very unlikely that your own side will prevail all the time. You get a voice, but so does everyone else, and barring stupendous coincidences, this means that things won't always turn out the way you think they should.

(c) It would be naive to think that you will lose only on unimportant questions. Governments make hugely consequential decisions all the time. Sometimes, these decisions lead to the killing of innocent people, in ways that you think are deeply wrong.

(d) If anyone who believes the government had adopted a policy that would lead to the killing of innocent people is justified in killing people to stop this, then we might as well just decide not to have a government at all. During the Bush administration, half the country would have been justified in trying to assassinate the President and members of his administration. Any corporate executive who works for a company that does not adequately protect its workforce from poisoning or injury would have to watch her back. Etc., etc., etc.

(e) If you are committed to our form of government, you must leave some room between (1) the claim that some policy it adopts is wrong, even very wrong, and (2) the claim that you can kill people to prevent this wrong thing from happening.

A Really Long Post About Abortion and Reasoning By Historical Analogy That is Going to Make Virtually All of My Readers Very Angry At Me

I tried to respond to Publius and Hilzoy at their place, but the comments system wouldn't let me.  So I'll have to carry the debate on here.

Why the analogy to slavery, or Hitler?  It's inflammatory, and rarely advances the debate.  Such analogies too often degenerate into "Hitler was a vegetarian too, you tofu-eating Nazi!!!*"

But in this case, I think the analogy to slavery is important, for two reasons.  First of all, it was the last time we had an extended, society-wide debate about personhood.  And second of all, as now, there were structural political reasons that it was much harder--nearly impossible--to change slavery through the existing political process.

Listening to the debates about abortion, it seems to me that really broad swathes of the pro-choice movement seem to genuinely not understand that this is a debate about personhood, which is why you get moronic statements like "If you think abortions are wrong, don't have one!"  If you think a fetus is a person, it is not useful to be told that you, personally, are not required to commit murder, as long as you leave the neighbors alone while they do it.

Conversely, if Africans are not people, then slavery is not wrong.  Or at least it's arguably not wrong--if Africans occupy some intermediate status between persons and animals**, then there is at least a legitimate argument for treating them like animals, rather than people.

The difference between our reaction to the two is that now we know Africans are people.  It seems ridiculous to think that anyone ever thought they might not be people.  They meet all the relevant criteria for personhood in twenty-first century America.

But of course, those criteria are socially constructed.  The definition of personhood (and, related, of citizenship) changes over time.  It generally expands--as we get richer, we can, or at least do, grant full personhood to wider categories.  Except in the case of fetuses.  We expanded "persons" to include fetuses in the 19th century, as we learned more about gestation.  Then in the late 1960s, for the first time I can think of, western civilization started to contract the group "persons" in order to exclude fetuses.

But that conception was not universally shared.  And rather than leave it to the political process, the Supreme Court essentially put it beyond that process.  Congress, the President, the justices themselves, have been fighting a thirty-five year guerilla war over court seats.  Presidents try to appoint candidates who will support their theory of Roe, Congress strategically blocks change, and the justices refuse to retire until they know they will be replaced by someone who supports their side.  To change the outcome, a pro-life political coalition would have to gain a supermajority in Congress for twenty years--long enough for a few liberal justices to die in office.

It is theoretically possible that this could happen, just as it was theoretically possible to come to some political accomodation over slavery.  But a combination of supreme court rulings and the peculiar federalist structure of American meant that the only way for either side to gain decisive results was violence.  At every turn, the pro-slavery forces no doubt slyly congratulated themselves on their political acumen, while also solemnly and sincerely believing that they preserved an important right.  But they made war inevitable.

If you interpret this murder as a political act, rather than that of a lone whacko, than this should be a troubling sign that the political system has failed.  So why do so many people think that the obvious answer is simply to more firmly entrench laws that are rightly intolerable to someone who thinks that a late term fetus is a person?

I am accused, in the comments of Hilzoy's post, of loving violence and terror.  Well, call me a terrorist sympathizer, but I believe that most terrorists do what they do because they, at least, genuinely believe that there is no other way to seek justice.  Indeed, they are usually right, for all that I radically dissent from both their idea of justice, and their right to seek it through violence.  But I am also humble enough to recognize that my own morality on a topic like abortion is constructed in context of two important facts: virtually all my friends are pro-choice, as is the social milieu in which I was raised, and a lack of access to abortion would significantly restrict women's autonomy.

These are not bad arguments in favor of abortion--I think modern America is more right than not about most moral questions, and the right to bodily integrity is important.  On the other hand, in the face of fetal personhood, they are not very good arguments either.  My parents significantly restrict my autonomy by continuing to be alive--if they died, I would inherit some money, which would increase my choices.  But I still shouldn't be allowed to kill them in order to collect my inheritance--a moral insight which seems to be much more obvious and fundamental, I might add, than the wrongness of slavery or the rightness of abortion.  Every society I know of forbids slaughtering your parents.

(Not that I want to, I hasten to point out.  Hi, Dad!  We're pricing out a nice GPS for father's day!)

I am aware that I have constructed my beliefs about personhood in the face of these things--like any good undergrad, I know the answer I need to reason to in order to ensure both social comfort and maximum personal freedom.  I like to think that I am too rigorous a thinker to be seduced by such ephemera.  But I am also aware that a lot of very fine thinkers were seduced into reasoning that Africans weren't people.  Whatever evidence they thought they had, we're pretty sure how they arrived at their conclusions:   African personhood would have caused enormous personal and social upheaval.  Thousands of their friends and family would have personally suffered enormously without their slave wealth.  Ergo, slaves weren't people!

And if I look at my own reasoning, well, frankly, it's not even reasoning.  I've never sat down and thought, "how do I know that Africans are human beings?"  I know.  And I'm enough of a Chestertonian to be okay with that way of knowing.  But presumably if I'd been raised in 1840 Alabama, I'd know just as certainly that they weren't.

Perhaps I find the certainty of the pro-choice side so disturbing because it feels a lot like the certainty of the warbloggers in the run up to the Iraq invasion.  As some of Hilzoy's commenters point out, I was myself too caught up in it, which makes me cautious of getting caught up again.  The pro-choicers seem to be acting as if people who shoot abortion doctors are some weird species of moral alien, whose actions can only be understood in Satantic terms, and who cannot and should not be negotiated with, because they only understand raw displays of power.  Yet it seems to me that if I were in a society that believed fervently in the personhood of a fetus, I would very possibly agree, and view Tiller's murderer the way I'd view someone who, say, assassinated Mengele.

I realize that this opens many other questions, like "What does it mean to have access to the political process?" and what constitutes personhood.  But I remain stuck with a fundemantal problem:  I can understand their moral logic.  When someone whose moral logic I can understand, even endorse  (without endorsing the underlying judgement about the personhood of the fetus) is driven by that moral logic to kill, I think there may be a problem that society needs to solve.  When more than one kills for the same cause, I assume that there's a structural problem in the political process that needs to be fixed.  I'm not saying the violence is okay--I think Tiller's murderer needs to go to jail.  But like many contributors to Obsidian Wings, I can understand the structural forces that contribute to Palestinian terrorism without believing the terrorism is legitimate.  Unlike them, apparently, I don't find it all that hard to transfer that understanding to the fringes of our own democratic system.

*  Sadly, I'm not even joking--see my old vegan threads
** Go ahead.  I triple-dog-dare you to quote me out of context

Playboy, We Hardly Knew Ye

I could forgive the dripping misogyny, but this isn't even a little bit funny.  And I don't mean that in the feminist, "You shouldn't laugh at dumb blonde jokes!" way.  I mean, it's not funny like listening to your Great Uncle Fred do his Milton Berle impression isn't funny.  Guy Cimbalo doesn't seem to realize that just saying "fuck" a lot is no longer comedy gold.  Yet historical records indicate that it lost its shock value sometime around 1966--eighth grade graduation at the very latest.

My ex-boyfriend and I had a collection of vintage Playboys picked up at a garage sale, which we used to, yes, read for the articles.  (The centerfolds had long since been scissored out, presumably by the chap who sold them to us.)  Those were good articles, written by good writers, about interesting topics--Bill Cosby on race, William F. Buckley on religion and society, Gore Vidal on . . . Gore Vidal.    Now we have Guy Cimbalo and his Frantabulous Late-Nite Borscht Belt Shockeroos. 

Srsly?

The War on The War on Abortion

Let me start off, in the obligatory way, by announcing that I am pro-choice.  I don't think abortions before, say, eight months weeks are even arguably murder.  Moreover, I don't think many other people believe it's murder, either, for all that they profess to.  They mostly don't, for example, want fourteen year old girls who have abortions hauled off to lengthy juvie terms, which is what we'd do if they'd committed infanticide.  They wouldn't turn their own daughters, sisters, or friends in if they found out they'd had an abortion, as I hope they would if said dear ones had murdered their own baby.

I don't think that this is an obviously crazy belief--I can see the argument for life beginning at conception.  But ultimately I don't think it works, even for most people who profess it.

So.  Now I can move onto the observation that if you actually think late-term abortion is murder, then the murder of Dr. Tiller makes total sense.  Putting up touching anecdotes about people he's helped find adoptions, etc, doesn't change the fact that if you think late-term abortions are murder, the man was systematically butchering hundreds of human beings a year--indeed, not merely butchering them, but vivisecting them without anaesthetic.   I'm sure many mass murderers have done any number of kind things over the course of their lives, to which the correct response, if you're trying to stop the murders, is "so?"

Imagine a future in which the moral consensus has changed, and our grandchildren regard abortion the way we regard slavery.  Who will the hero of history be:  Tiller, or his murderer?  At the very least, they'll be conflicted, the way we are about John Brown. 

I do not say such an outcome is particularly likely, although the more we know about fetal development, the more support for abortion seems to drop.  But I don't think that it's particularly novel to note that our "instinctive" reaction to these things is partly, even largely, socially conditioned, not the product of deep rational thought.

We accept that when the law is powerless, people are entitled to kill in order to prevent other murders--had Tiller whipped out a gun at an elementary school, we would now be applauding his murderer's actions.  In this case, the law was powerless because the law supported late-term abortions.  Moreover, that law had been ruled outside the normal political process by the Supreme Court.  If you think that someone is committing hundreds of gruesome murders a year, and that the law cannot touch him, what is the moral action?  To shrug?  Is that what you think of ordinary Germans who ignored Nazi crimes?  Is it really much of an excuse to say that, well, most of your neighbors didn't seem to mind, so you concluded it must be all right?  We are not morally required to obey an unjust law.  In fact, when the death of innocents is involved, we are required to defy it.

As I say, I think their moral intuition is incorrect.  The fact that conception and birth are the easiest bright lines to draw does not make either of them the correct one.  Tiller's killer is a murderer, and whether or not he deserves the lengthy jail sentence he will get, society needs him in jail for its own protection. 

Still, I am shocked to see so many liberals today saying that the correct response is, essentially, doubling down.  Make the law more friendly to abortion!  Show the fundies who's boss!  You know what fixes terrorism?  Bitch slap those bastards until they understand that we'll never compromise!

Well, it sure worked in Iraq.  I think Afghanistan's going pretty well, too, right?

Using the political system to stomp on radicalized fringes does not seem to be very effective in getting them to eschew violence.  In fact, it seems to be a very good way of getting more violence.  Possibly because those fringes have often turned to violence precisely because they feel that the political process has been closed off to them. 

We do not punish murderers by changing large sections of American law.  We certainly don't punish them by, in essence, shouting "nya, nya, nya, we're killing more babies!!!!"*  We punish murderers by sending them to jail, where they belong.  If any of these changes to current law are justified, they're justified on their own merits, not because they'll piss off Tiller's nemesis.

*  I understand that those advocating such changes do not perceive themselves to be saying this.  But if you're trying to punish the gunman, and deter others, it's their perception that matters.  And what bothers them is that they think you're killing more babies.

Is America's Incarceration Rate a Labor Market Outcome?

John Quiggin has been arguing it is.  That's why he wants to add America's higher incarceration rate to its unemployment statistics when comparing us to Europe. 

To my surprise, when I proposed this theory to Mark Kleiman a while back, he disagreed.  Crime is only very weakly correlated with changes in the labor market.  It spiked during the golden age of unskilled employment in the 1950s and 1960s, and then fell for no particular reason during the poor labor market of the early 1990s.  Crime is a labor market outcome in the sense that people with poor impulse control gravitate towards a "job" that requires little in the way of gratification delay, not in the sense that people who end up in jail literally had no alternatives, or even no better alternatives.  In the normal operation of the American economy, most people who want a job can find something.  Given the low probability-weighted returns to crime, often even something better than sticking up 7-11s. 

There are other problems with the theory.  Even if crime were a labor market outcome, incarceration is a policy outcome, not a labor market outcome, because incarceration has increased even as crime has fallen.  Furthermore, what correlation there is between crime and the economy is to property crimes--burglary, etc.  Violent crime, which accounts for more than half of America's incarceration rate, and virtually all of the change in our incarceration rate since 1980, isn't clearly related to the economy.  In theory, being laid off might make you more prone to bar fights or beating on your girlfriend.  In practice, it doesn't seem to show up in the numbers.

Now, one could argue that high incarceration rates are supressing the unemployment figures.  But America's employment-to-population ratio is still higher than Europe's, though a number of individual European countries do better than we do. 

That is not to defend American incarceration policies, which are lunatic, as is the drug war which contributes to them.  Mark Kleiman has some very good ideas on how we might lower those rates by using targeted intensive surveillance of those on probation and parole.  I'd like to lower it even more by legalizing drugs and eliminating the black market profits that fund today's gangs.  But a preference for fewer prisons doesn't require me to believe that someone who rapes a stranger is just a victim of a weak job market.

What's Good for GM isn't What's Good For America

So.  Alea iacta est, as Julius Caesar might have said, if there had been a major Roman chariot manufacturer in putative need of nationalization.  The nation's largest automaker, our most iconic firm, is bankrupt,  GM and Citigroup exit the Dow in favor of Travelers and Cisco. 

The first obvious thing to say is that the only alternative the US government probably had to this massively expensive reorganization was probably liquidation.  I take seriously the claims that there was no DIP financing available for the automakers.

However.  The reason there was no DIP financing available is, at least in part, that there's no obvious upside here.  The government is acting as if GM's main problem is that it stubbornly refused to enter the lucrative market for small, fuel-efficient cars.  But the market for small, fuel efficient cars is not lucrative--they're the cars with the thinnest margins.  And no one's making it up on volume, either:  at the height of last year's oil spike, when barrels of Brent Crude were being quoted in first-born sons, small cars soared to . . . 20% of the American market.  Yes, there was a glut of SUVs, but that's because American companies were making a lot of SUVs.  Foreign companies make money on small cars because they develop them for lucrative home markets before modifying them for American production.

GM's main problem is not that the market is unreasonably unwilling to finance a potentially profitable company.  Nor that it can't produce an awesome small car that shockingly few people want to buy.  (Believe me, as the owner of a tiny, ultra-efficient car, I would that there were higher demand for my rapidly depreciating asset).  GM's main problems are

1)  A terrible, bloated cost structure
2)  A terrible, bloated bureaucracy
3)  A bunch of meh car lines

Which of these is the government going to solve?  That terrible, bloated cost structure supports a bloated union whose jobs are the entire rationale for the government intervention.  Leaning on the parts suppliers just risks UAW jobs further down the supply chain.  Maybe we can take it out of the budget for copy paper and pencils.

Forgive me if I am skeptical that the government is going to show GM how to streamline its bureaucracy.  Nor do governments historically have a good record as cutting-edge auto designers.

All the government can give GM is money.  Our money.  Perhaps we should change the name to American Leyland.