Link Farm

• The White House takes on . . . Edmunds.com.  I think they're maybe a little too bloggy and new media.
• Goldman Sachs and AIG, again
• Mark Kleiman and his excellent idea
• Dave Weigel belongs on Wikipedia
• New TSA signs
  

Random Thoughts on Health Care

It's easy to get cynical about the process of the health care bills.  At this point, I'd say that conservative and liberal health care analysts both know the score.  Everyone knows that this bill won't work as advertised:  it will not cover as many people as promised, and it will run into budget shortfalls, if for no other reason than because Congress is not going to enact the cuts as written--they will get lobbied into repealing many of them.  Doug Elmendorf has done everything but hire a skywriter to make it clear that he doesn't think that any of the various bills will actually be deficit neutral--while doing his job, which is to score what's written, not his best guess at what will happen.

Liberals don't care, because they think it's worth it to cover more people.  Conservatives care, but their kabuki complaints about what everyone in the wonkosphere knows go mostly unheeded.  I find it hard to get too outraged about any of it; I'm against the bill, but I think that this part of the process is playing out about as well as you can expect.

But then you have moments like the one I experienced the other night, in which I sat in a room full of journalists from various sectors who are not quite as deep into the policy weeds as I am--they're political reporters, not wonks.  Good political reporters.  Very well informed political reporters.  And some of the questions really frightened me.

In quick succession, they asked a prominent budget wonk questions like:

1)  How come, if so much of the money that's available to be wrung out of the health care system is going to doctors and hospitals, Obama is attacking insurers?

2)  How this could possibly provoke a fiscal crisis if the CBO was scoring the bills as deficit neutral?

 . . . there were more, but I stopped writing in despair.

This stuff isn't even controversial.  I don't think that Ezra Klein or Jon Cohn would have a problem admitting that we'll be in big fiscal trouble if Congress behaves in the future as it has behaved in the past, or that the insurance industry isn't really hoarding big stacks of cash, and other stakeholders will have to take big hits in order to make any reform work.  They just think that it's worth it to cover more people, and also that this may provide a framework for future deliver services reform.  But everyone pretty much understands that whatever bill we get will not work as written.

We're all off in the woods battling over the appropriate discount rate for dynamic tax effects.  And we seem to have left a lot of more politically focused journalists behind.

I get the sense that this happens in administrations too.  The wonks understand that they have to make compromises, so they let bad policies through without a fuss in order to secure some larger agreement. (cough/steeltarrifs/cough).  The problem is, they sometimes forget to tell the political people that it's a compromise--and what the cost of that compromise is.

The Death of Newspapers, Continued

A few days ago, I said that I thought that newspapers were entering a death spiral.  Dan Gross strongly, strongly disagrees:

At some point in the future, newspapers may disappear. But count me in the later rather than sooner camp. And I can't help but think that many newspaper-doomsayers are conflating hope with analysis. According to many of the digerati, newspapers and other printed matter that people pay for through clunky old distribution systems (the mail, kids on bicycles, vans) can never make money and are bound to fail, while publications distributed online for free are destined to rule the world. (Of course, I could be guilty of the same impulse. I have feet in both worlds and could no more choose between print and the Web than I could choose between my two children.) But I also think this might be a case of making too much of a few numbers and ignoring some important ones.

. . .

Many other components of consumer discretionary spending--hotels, restaurants, air travel--have fallen off significantly. Do we draw a line from trends over the last few years and declare that in 15 years there will be only a handful of hotels? I'm not sure why we would expect consumption of a purely discretionary item that costs a few hundred dollars per year not to fall in the type of macroeconomic climate we've had.

Especially when you consider that rather than discounting the product, many newspapers (and magazines) have been jacking up prices aggressively. For the last few years, the most serious problem facing print has been the sharp drop in advertising revenues. (Many chunks of the media world have been initiated into the 40 percent club.) But newspapers aren't continuing to spend money as if it's 2003 and hoping that Craigslist will disappear. No, they're planning for survival by slashing costs sharply, trying to boost online advertising, and, here's the clincher, making people pay more for the product. Print media is now in the process (belated, in my opinion) of finding a second large, potentially more stable, revenue base in addition to ads: subscriptions. The New York Times and many other papers have increased the price of the paper at the newsstand and for home delivery. When you raise the price of a product, you're likely to lose a portion of your customer base. And while no newspaper likes to shed readers, some of the shrinkage in circulation is by design. If raising subscription costs by 11 percent causes 10 percent of customers to flee, a newspaper will find that its circulation revenues are stable while it saves a lot of money by manufacturing a smaller number of newspapers. (The downside: A smaller paper can't charge as much for ads. But in this environment, ads are being heavily discounted anyway.)

Obviously, newspapers losing circulation is not, by itself, cause for panic.  Most businesses lose, well, business during recessions.  The problem is, newspapers were losing business before the recession.  Newspapers have been losing business for decades.  And it's not just a matter of circulation.  Have you picked up a New York Times lately?  It belongs on one of those very special teen drama episodes about anorexia.  No one's buying ads.

Some of that will come back, but a lot won't, because people don't rely on the classifieds to find jobs or apartments, and outside of small towns, they don't rely on the other ads to tell them who's having a sale.

It's true that newspapers are jacking up their subscriber fees.  Dan Gross sees this as a positive sign--what's known in the business as improving your circulation quality.  In the case of USA Today, I grant you it's probably just as well that they're cutting back on their notorious junk circulation, but for the New York Times?  Raising their prices is not a sign of strength; it's a sign that they have no other sources of funds.  They can't borrow it, and they certainly can't get it from ads.  They're doing the only thing they can do, which is sell stuff and charge subscribers more--and cut their newsroom staff, something that the New York Times has tried harder than most to avoid, because staff cuts mean declining quality.

This is not, however, some form of online triumphalism.  Maybe five years ago I'd be crowing about new media.  But over the last five years, the online news business has conspicuously failed to develop a robust online ad model that will support something as extensive and deep as the New York Times newsroom.  I regard the failure of newspapers as something that hurts my future earning potential, not enhances it.

But the universe is not here to please me.  And I just don't think that in ten years, the newspaper business model will be able to support very many newsrooms of any size.

Seriously, Stop Worrying About Hyperinflation

Last night on Kudlow, three out of five of the people talking wanted the Fed to raise interest rates to head off inflation and defend the dollar.  On these very pages, I am regularly castigated for saying any of the following:

1. A "strong dollar" doesn't mean a strong economy
2. The government is going to have to pay for its debt, not inflate it away
3. Some inflation is all right
4. The gold standard won't solve any of the problems people think it will
   

For someone who hangs out with libertarians a lot, announcing that you're okay with a small amount of inflation to relieve the sticky price problem, and that you think the Fed mostly does a good job, is akin to announcing that you've decided to take up human sacrifice to fill those lonely weekend hours.  Nonetheless, I stand by the sentiment:  inflation is not the big worry that our economy faces.

To explain why I think the risks lie in the directions of fiscal crisis rather than hyperinflation, I turn to Tyler Cowen, who elegantly summed up the government's problem at a conference I attended last week:  inflation only works on stocks of debts, not flows.  You can inflate away the value of debt you've already issued, but especially in these modern times, bondholders will rapidly ratchet up the interest rate they charge you.  They will increase it by more than the rate of inflation, to compensate them for future inflation risk.  Losing your credibility is costly.

To this, my excellent former co-blogger Winterspeak responds that since the United States has a monopoly on the currency it issues, it can't default--it can just keep running the printing presses.    There are a couple of problems with this.  In some sense, I think it confuses cause with effect:  the government gets to borrow in a currency over which it has a monopoly, because it has been a fairly credible steward of that currency.  If it inflated away its debts on the scale of, say, a Latin American nation, it would not be able to borrow in dollars any more.  And since it needs real goods and services, not little green pieces of paper, that matters. 

For his point to be right, you need to believe that the government can end up financing the entire debt by seignorage, which is the revenue that the government gets from issuing currency.  In the case of the United States, that revenue is currently pretty considerable, because so many people overseas use dollars as their emergency bank account; essentially, they give us goods and services in exchange for dollars, and then stash those dollars under their mattresses.  But that's because we don't inflate the currency.

In the case of a hyperinflation, essentially, the government gets a slight discount, based on the fact that it knows how much money is in existence, and you don't.  It prints the dollars, and uses them to buy goods, and then the oversupply of dollars pushes up prices still further.  But the discount is actually pretty small, and hyperinflationary seignorage turns out to be a very inefficient way of generating tax revenue, especially in a world where there are modern financial markets monitoring government behavior.  The much maligned Laffer Curve is actually a pretty effective model at describing hyperinflation; it's very easy to get on the wrong side, where inflationary expectations and deadweight loss start killing the revenue you can raise.  It is possible to end up in a place where, as with the Zimbabwean dollar, your monopoly right to print your currency becomes worthless, because the demand for that currency is essentially zero--no one will give you goods and services in exchange for your paper.

If you're talking about a past stock of debt, it makes some sense to talk about it solely in terms of dollars--really, accounting entries.  But of course, the reason the government borrowed the money is that it needed to secure real goods in the economy, and its citizens didn't want to reduce their consumption enough to pay for it all with their taxes.  Sometimes that's a one time event, like a war, in which case inflating away your debt looks quite attractive (immoral, possibly--but then, lots of attractive things are immoral, n'est ce pas?) 

But more often it's an ongoing problem.  In which case, it's hard to aggressively inflate, because within a very short period of time, your ability to borrow in your own currency at attractive rates will fall off.  So if you're going to hyperinflate, you need to be prepared to quickly close the gaps between the real goods and services you want to consume, and the real goods and services you want your citizens to give up in order to pay their taxes.  In other words, you need to be prepared to stop running a budget deficit--or to resort to increasingly desperate tactics like Argentina's nationalization of its private pension regime in order to loot the accounts.

In the US, the problem is even more complicated because so many of its mandatory payouts are inflation-indexed; it doesn't do you any good to inflate your debt away if half the debt is owed to inflation-linked Social Security accounts.

I am the last person to ascribe any towering wisdom to our nation's political class.  But they do (most of them) understand this calculus.  Moreover, the US has an unusual degree of continuity, and power, in our legislature; to do something this drastic, you'd need to secure the assent of a number of congressmen who are planning to be working at the Capitol for several more decades, and thus have an interest in not seeing the fiscal mechanism by which they distribute goodies to their constituents entirely break down.  If interest rates start accelerating on our debt, or treasury auctions fail, I think they're more likely to take some sort of drastic step then to either default, or hyperinflate.

The key word is "drastic"--I expect they will let us get into quite a pickle before they finally reign things in.  But there are really quite a few institutional checks that will prevent things from going the way of Latin America, not least that we have a central bank with a lot of political independence.  For all the complaints about Greenspan and Bernanke's inflationary bias, neither were prepared to countenance even high single-digit inflation, and I doubt Bernanke's successor will be, either.  The first step to hyperinflating would be some sort of radical step to curtail the Fed's power--and that radical step would, as noted above, make it very hard for the government to borrow new money.

I think the much bigger worry is that we are going to drive ourselves into a corner where the bond markets will force us to slash benefits to people who have planned their lives around them, making those people worse off than they would have been if the program had never existed.  And also, of course, that they will raise taxes by enough to produce serious, painful deadweight loss. But until Ben Bernanke starts looking much more inflation-friendly than I've so far seen, any kind of effort to totally inflate away our national debt is pretty low on my list of potential problems.

To Vaccinate or Not To Vaccinate

Does the flu vaccine do any good?  In our November magazine, Shannon Brownlee and Jeane Lenzer suggested that the apparent beneficial effect might be due more to selection bias than to any actual impact of the injection:  people who get a flu shot are probably more conscientious about their health in many areas, which messes up your numbers.  The core problem seems to be that, unlike childhood illnesses, the groups most at risk from dying of flu, and therefore the most likely to be vaccinated, are often also the groups least likely to mount a good immune response to the vaccine--after all, the reason they're at risk is, in most cases, that their immune system can't take care of business. 

A science-loving friend sent the article to his brother, a public health researcher at a major university, and passes the commentary on to me:

I think there is a responsible debate about the benefits of population-wide influenza immunization (as opposed to the kooky fringe opponents to all childhood vaccinations)

Mainly it is a one of magnitude. mostly the debate concerns the ubiquitous phenomenon of more netbenefit accruing when you target higher risk groups. The more broadly a population vaccination program is, the smaller the net benefit. Likewise, the net benefit varies with how well the yearly vaccine matches the actual infecting strains. The latter may dramatically improve with some of the technology developed as part of producing this years H1N1 vaccine allowing them to choose the virus cocktail later.

And like the (especially) breast and prostate screening controversies, part of the debate is over whether one should confuse the public by airing the debate in public lest you scare off the high risk people who almost everyone would agree should get vaccinated/screened.

Some unknowns (or not well defined) things that affect recs about vaccination strategies:

1) the role of "herd immunity" - so broader vaccination in groups that don't directly benefit may, by breaking up transmission, benefit the high risk groups especially given:

2) the uncertain clinical significance of the diminished vaccine response in the high risk groups (older/sicker people don't make as many antibodies after vaccination but may still get substantial benefit) and this year

3) the fact that the current pandemic(with its risk of mutation and dramatic worsening) may overwhelm capacity makes any benefit from vaccination potentially worth going for as each increment in influenza illness burden could represent the straw that breaks the camels back from the point of view of health care capacity or even economic activity.

As you can imagine, lots of good modeling opportunities here to explore the impact of different levels of the unknowns.

I'm supposed to get a flu shot, because I have asthma, and flu usually turns into horrendous bronchitis.  But I may reconsider.

Media Alert

I'll be on Kudlow tonight around 7.

Link Farm

The life of a high-end home stager

GDP Growing Again: Are We Finally Okay?

So GDP grew at 3.5% in the third quarter?  Are we out of the woods yet?

Maybe.  But I wouldn't bet on it.

I think we have bottomed out; I don't foresee the economy starting to contract sharply again.  But I'm not overimpressed by the growth figures, for a couple of reasons.  First, we had a very sharp contraction, and as the traders like to say, even a dead cat will bounce if you drop it from a sufficiently large height.  Second, there's the stimulus.

When we were considering the stimulus, I got asked frequently whether it would work.  That very much depends on what you mean by "work".  If the question is:  "can I increase the size of a measured variable by boosting one of the components of that variable," then the answer is undoubtedly "yes"--but this is trivial.  We borrowed a bunch of money from abroad, and that was going to show up as an increase in GDP.  But as I wrote in our November issue, GDP is at best a proxy for our well-being, not a direct measure of it.  It's often a good proxy.  But it's never perfect, and it's very easy to manipulate with certain sorts of government actions, most notably borrowing a ton of money from the global capital markets.

The things I think we really want to know about the economy are:

1)  Is it robust enough to withstand the large sectoral shifts away from housing and related goods?

2)  Are employment and compensation growing?

3)  Is productive capacity improving?

4)  Are people willing to invest in the future?

The answers to those questions range from "no" to a wan "I sure hope so".  So the third quarter growth numbers bring me only middling cheer.

America's Least Useful Appliance

There are a lot of useless kitchen products out there.  I find it hard, for example, to imagine anyone making quesadillas often enough to justify a quesadilla maker.  The electric egg poacher also seems like it demands an improbably high, and frequent, desire for poached eggs, as well as a worrying inability to heat water in a saucepan.

But this is absolutely the least useful appliance I have ever seen:  the electric martini maker, which can provide them shaken, as well as stirred.  If you are not strong enough to either shake, or stir, your martinis, you probably already require a home health aide who should do it for you.  If you can lift the bottle to the rim of the cocktail shaker to pour in the gin, you can stir it around a little before you guzzle it.

Is Amazon an Oligopolist?

Via Greg Mankiw, I see that the American Booksellers Association is accusing Amazon, Target, and Wal-Mart of predatory pricing.  But when I actually look at what is happening, it seems that they have confused competition with cartelization:

The price war began last week when Wal-Mart announced that it would offer Walmart.com customers who preordered any of 10 of the coming holiday season's biggest potential best sellers the chance to buy the books in hardcover editions for just $10. Typically new hardcovers sell for $25 to $35, although some discounting is common.

Amazon.com quickly matched Wal-Mart's preorder price on the same books, which include "Ford County" by Mr. Grisham, "Under the Dome" by Mr. King and "Going Rogue," Sarah Palin's memoir. Wal-Mart then lowered the price to $9, and Amazon followed suit. By late Friday afternoon Wal-Mart had cut another penny off the price.

On Monday, Target entered the fray by offering six of the preorder titles on Target.com for $8.99. By Tuesday Wal-Mart had lowered the price on those titles to $8.98.

The association's letter, which is signed by the group's nine board members, accused the retailers of "devaluing the very concept of the book" and effectively selling the books at a loss in an "attempt to win control of the market for hardcover best sellers." Retailers typically pay publishers a wholesale price of half the list price of a hardcover book -- so on a $35 hardcover, the retailer pays $17.50, meaning that it loses money on a $9 consumer price.

The American Bookseller's Association represents independent bookstores, whose members cannot afford to sell top bestsellers as loss leaders.  But the interest of antitrust law does not lie in protecting small, inefficient sellers for the tiny minority of Americans who prefer to shop there.  They lie in making sure that there is robust competition in the bookselling market.  What they're trying to do here is stop bigger, more diversified companies from competing with them, because they'll lose.

But as this makes clear, the big players are competing:  with each other.  Which is where the market is going to end up anyway, because outside of a few big cities, independent booksellers can't compete with the convenience of Amazon or Barnes and Nobles' economies of scale.  The only way the American Booksellers Association is going to save its members is by forcing Amazon, et al to sell books at a 10% premium.

Flow of Funds

The Telecoms industry is apparently even more insidious than I thought:

Via some outfit called VoIP News, I'm intrigued to learn that my insidious paymasters at Cato number among the 15 greatest enemies of net neutrality. Scary!  Turns out Cato is a "hired voice of reason" which, along with CEI "seems to draw its funding from a smattering of every major corporation ever to fund lobbyists." Damning stuff!  And these guys are Totally Serious Journalists, so they did some kind of due diligence and fact checking, rather than just pulling this stuff out of their asses, right?

<crickets>

Well, hey, no, I mean, I'm sure Cato is totally shady about its funding sources--how could they possibly check this stuff?

What's that? Annual report? Freely available online, you say? Well, and so we get tons of our budget from... Huh? One percent from corporations? None from telecoms in 2008?

Now, obviously serious reporters wouldn't just utterly fail grade-school level fact checking. Clearly, some devious ISP must have blocked them from reaching this easily accessible information!  Further demonstrating the need for Net Neutrality!

The fact that all free market, small government efforts are entirely funded by a combination of three scary billionaires, and a bunch of big self-interested corporations, is a sort of stylized fact among a certain portion of the progressive media.  Apparently, checking this theory would be like trying to get three separate sourcs to tell you that the sky is blue.

Markets in Everything: Bone Marrow

I'm a big fan of the Institute for Justice, which fights the good fight on issues like economic liberty and eminent domain.  Today they're launching what may be their biggest case ever:  a fight to allow compensation for bone marrow donors.

For reasons that aren't entirely clear, the 1984 National Organ Transplant Act forbids people to sell their bone marrow, as well as their kidneys, lungs, and so forth.  By which I don't mean that the ban is merely stupid; I mean there's apparently some reason to believe that Congress simply did this as a mistake, adding bone marrow into the bill at the last moment without really thinking things through. 

Donating bone marrow is a lot more like donating blood than it is like donating a kidney, because of course, your body just makes more marrow to replace what you give up.  These days, they don't even have to stick a big needle into your pelvic bone, as they used to; instead, they give you a drug to stimulate blood stem cell production and filter the cells from your blood, using the same apheresis machine that they use to harvest plasma cells from (paid) donors.  The risks are extremely minimal, and mostly limited to the side effects from the drug they give you to stimulate cell production.

Nonetheless, it is very, very illegal to compensate donors.  That means that people die for want of a transplant.  The problem is worst in minority communities, because of the peculiar problems of marrow donation. 

In most transplants, you run the risk that your body will decide that the new organ is a foreign object and send white cells to attack it; this is what's called "rejecting the organ", and it's why you have to use immunosuppressant drugs.  In the case of marrow transplants, however, the problem is more serious, because marrow is what produces those white blood cells.  The risk you run is that those white cells will decide that your body is a foreign object, and attack everything in sight.

That means that marrow donors have to be matched very, very carefully to the recipients--much more carefully than we match other kinds of organ donations.  Since there is a strong ethnic component to the matching, minorities who need transplants have the smallest chance of finding a match--just 25%, according to the folks I spoke to at IJ.  That's compared to 75% for whites.

It's true that I don't find any of the arguments about the coercive effects of money on peoples' decisions particularly compelling.  But at least in the case of  kidneys or parts of livers, I can see how you might want to keep people from making  a very permanent sort of mistake.  I just don't see that sort of rationale in the case of bone marrow.  The worst that happens is that you end up with some unobtrusive round scars over the veins in the crook of your arms.  There are dozens of professions that are likely to leave you with more impressive legacies.  Moreover, if it's really so awful and demeaning, then probably we shouldn't pay for plasma, eggs, or sperm, either.

The purpose of this lawsuit is not to set up an actual market.  There are reasons to think that you can't actually build a functioning market in bone marrow, because the number of matches is typically so small, turning every donor into a monopsonist, and every recipient into a potential monopolist.  Instead, the idea is to use market incentives to increase the number of donors.  Ultimately, the plan is to set up a foundation to offer some sort of modest grant for  those who decide to become marrow donors. The process will remain anonymous, and the donor and recipient will never interact.  Nor will the foundation negotiate. 

It's  a great idea. But in order to implement it, they have to get the law to the point where doing so won't get them sent to the pokey.

Of course, just because the law doesn't make any sense, doesn't mean that it will be struck down.  But one can hope . . . and wish the folks at IJ godspeed.

Why Don't Customers Leave Big Banks?

Andrew has been exploring the question.  For us, the answer is simple:  location, location, location.

I bank in two places:  Navy Federal Credit Union, and Citibank.  NFCU is better in all ways except one:  they don't have a branch in DC.  That means that every time I want to make a deposit, I have to drive out to Virginia.  So I tend to go there once every few months and put a bunch of cash in the bank for our regular or big expenses:  car loan, wedding stuff, rent and utilities.  But it is not a convenient place to do my every day banking.

Indeed, the whole reason I'm at Citibank in the first place is that they're all over the country, and I've spent the last ten years moving a bunch of times.  Even now that I've committed to DC, I'm in a rental, and I don't know what neighborhood I'm likely to end up in next, so there's no point in opening a new bank account that might turn out to be inconvenient one move later.

Then there's business travel--most places I go, if I lose my ATM card, there's a Citibank branch that can help e out in the area.

I realize that's not the entire story--most people are much less mobile than young urban professionals.  But America does have high rates of labor mobility, and a lot of people travel for work.  That's going to favor national banks--which in turn, lets them offer less favorable terms to their customers.  I'm paying for convenience.  But frankly, it's worth it.

The Parlous Public Option

Suddenly, the public auction is the Charles de Gaulle of the healthcare debate:  resurgent, victorious, beloved by all.  I'm not sure I get it.

The only way the public option saves money is by using fiat to slash reimbursement rates to some variation on Medicare reimbursements:  Medicare +5%, +10%, or whatever rate they finally settle on.  Otherwise, it's unlikely that the thing will even compete on an even basis with private insurers, who have a lot more experience managing billing, claims experience, and negotiations with providers.

The problem is, Medicare doesn't pay the average cost of providing services in many cases--in some cases, it doesn't even pay the marginal cost of providing services.  Conservatives frame this as Medicare "free riding" on the private sector, but that's not necessarily correct.  The fixed costs of the health care industry are, as the name implies, fixed--they have to be averaged over the entire population of patients.  Now, if you think that without Medicare, seniors would consume a lot less healthcare, the population of patients with private insurance would still have to pay for most of those fixed costs.  So as long as Medicare patients generate more revenue than the marginal cost of treating one additional patient, they're profitable for the hospital--and probably even lower everyone else's bill a little bit, by at least partially defraying some overhead.

Of course, if you think that in a universe without Medicare, many or most seniors would probably have found a way to consume a bunch of health care, then yes, Medicare is free riding.

But moral calumny aside, the thing about patients whose insurance doesn't cover the average cost of treating them is that they cannot be 100% of your patient pool.  Someone has to cover the cost of that MRI machine.  If the public option does manage to crowd out other insurance--as it might well do, with the ability to dictate price controls--then suddenly, the public option won't be cheap any more.  Hello, fiscal crisis.

That's the financial problem.  Here's the political problem:  if you insert a strong public option, the providers will revolt.

You've already lost the insurers.  Try to reimburse hospitals and doctors at Medicare + 5% for any large segment of the market, and you'll lose them too.  Health care reform is likely to survive the defection of the much-hated health insurance industry.  I doubt there is any way at all that it survives negative ads from coalitions of doctors, hospitals, and other assorted healthcare workers.  I don't see Obama having much success getting on the radio one Saturday morning to complain that doctors are all a bunch of lying obstructionists.

The House dealt with the problem by sweetening the deal for physicians:  they "fixed" Medicare's Sustainable Growth Mechanism, which would slash physician reimbursement by more than 20% if it weren't ritually repealed every year.

The problem is, this costs money, almost $250 billion over ten years.  This made the House bill cost more than Obama wanted to spend, and also, not so deficit neutral.  The CBO is not going to find another $200 billion worth of surprise dynamic effects to keep the final bill from adding to the deficit over the ten-year window.  And the tax increases the House wanted to implement have two major problems:  it's unlikely they'll get through the Senate, and if they did, they would pretty much completely exhaust the remaining politically acceptable revenue sources available to help close the existing, gaping budget deficit.

Either way, a bill with a strong public option looks to me like a bill that can't pass.  What am I missing?

A Whole VAT of Stimulus

Over at Atlantic Business, our own Derek Thompson is channeling Bruce Bartlett to suggest that announcing a VAT now, to take effect in a year or so, might serve as a nifty alternative to a stimulus.  After all, if a big tax hike is coming, you'd better stock up on pasta and paperweights.

This is not a crazy idea--I heard an economist who specializes in Japan suggest basically the same thing ten years ago to cure the "lost decade" (though his was actually a straight consumption tax that stepped up every year).  As Bartlett told Ezra Klein:

Suppose you had a 10 percent VAT and we said we weren't going to collect it for the next 10 months. People would buy like crazy. They'd buy toilet paper, they'd buy anything they could get their hands on that they knew they'd need in the future. We're depriving ourselves of a great stimulant tool by ignoring this.

It would also have the happy side effect of solving some of our worst budget problems--and no, conservatives, we're not going to make Social Security and Medicare go away, so we're going to have to explore some means of paying for them.

The biggest problem I see with this is that the VAT is, as Bartlett says elsewhere, too good a tax--it would be very hard for a government facing a massive revenue shortfall to push through a tax holiday, and once the tax was in place, it would be hard for the many links in the compliance chain to temporarily abate it. 

The idea behind a VAT is that every link in the supply chain pays tax on the value it adds to the product--to simplify greatly, the difference between the cost of its inputs, and the sale price of the product.  This is what makes the tax so powerful:  it's hard to dodge, because the next link on down the supply chain does your compliance work for you. Since they only want to pay tax on the value they add, rather than the total sale price of their product, each firm makes sure that the VAT was properly paid on the inputs in earlier stages.

But production takes time, and this complicates your tax holiday.  On day one of the tax holiday, does Home Depot credit you with the full value of the VAT on the new grill you buy?  And if so, where do they get the money?  Remember, they've already paid the accumulated VAT to their supplier (if they haven't, you don't have a VAT; you have a sales tax).  Similarly, after the holiday ends, you'll have a bunch of products that were partially produced during the holiday.  These sorts of compliance problems mean that a VAT holiday is a one-time trick:  you can announce a VAT and then delay the introduction, but once you've implemented a VAT, you can't really take temporary breaks--at least, not with the sort of transparent instant effect you want for a good stimulus.

The other problem is that I'm not sure how well this sort of stimulus works in the times when you most need it:  when consumers are credit constrained.  There are a lot of people right now who can't go out and stock up on 8 months worth of toilet paper (even assuming they have the space) because someone's lost their job, their credit lines are being slashed, and the family is being forced to live paycheck to paycheck.  Cutting their VAT will make their current dollar stretch a little further, but it is not going to encourage them to time-shift consumption.  As household finances improve, the stimulus works better, but also is less needed.  So something like a straight increase to unemployment benefits, which directly targets the most constrained households, may have better stimulative power, while a payroll tax holiday is probably easier to implement and has beneficial side-effects on employment.

That doesn't mean we shouldn't have a VAT (though I'm skeptical, mostly because they often are used to endlessly ratchet up the size of government).  I'm just not sold on the stimulative prospects for changes in the VAT.

Creepiest Words Ever Written

The father of Sarah Palin's grandson will go ahead with his much-hyped Playgirl shoot in mid-November "in order to get the pictures out for the holidays"

In the immortal words of Bauhaus, wipe away my eyes, for I have seen too much . . .

The Media Death Spiral

The circulation figures for the top 25 dailies in the US are out, and they're horrifying.  The median decline is well into the teens; only the Wall Street Journal gained (very slightly). 

I think we're witnessing the end of the newspaper business, full stop, not the end of the newspaper business as we know it.  The economics just aren't there.  At some point, industries enter a death spiral:  too few consumers raises their average costs, meaning they eventually have to pass price increases onto their customers.  That drives more customers away.  Rinse and repeat . . .

For twenty years, newspapers have been trying to slow the process with increasingly desperate cost cutting, but almost all are at the end of that rope; they can't cut their newsroom or production staff any further and still put out a newspaper.  There just aren't enough customers who are willing to pay for their product what it costs to produce it.

The numbers seem to confirm something I've thought for a while:  we're eventually going to end up with a few national papers, a la Britain, rather than local dailies.  The Wall Street Journal, the Washington Post, and the New York Times (sorry, conservatives!) are weathering the downturn better than most, and it's not surprising:  business, politics, and national upper-middlebrow culture.  But in 25 years, will any of them still be printing their product on the pulped up remains of dead trees?  It doesn't seem all that likely.

I met a freelancer this weekend who is doing all the things that most journalists did to get where they are, writing on the margins of the news business in the hopes of getting up enough of a portfolio to worm her way into the center.  I wanted to give her hope . . . but the fact is, at the center there are now more existing journalists than jobs for them, meaning the outsiders have very little chance. 

Maybe there will be jobs, online.  But if so, more web outfits are going to have to get into the habit of paying salaries that will support an adult middle-class life.  Right now, a lot of web outfits tend to churn through twenty-somethings who are also building their resumes . . . but I'm not sure how well this works in a world where a job churning out blog copy for pennies a word is the last stop in a journalistic career, rather than the first.

Rethinking Rent Control

I confess, I'm a little surprised to see someone defending rent control in this day and age.  There is almost no economist consensus so complete--left to right--as that rent control is "the best way to destroy a city's housing stock short of aerial bombardment". 

But commenter Muzzybelly takes the contrarian position:

The Search for Financial Villains Founders

Apparently, the trial of Bear Stearns hedge fund managers Ralph Cioffi and Michael Tannin is not going so well.  These are the fellows with the incriminating email trails, and the apparent habit of taking their money out of the funds as they started to go bad.  Only it turns out that this isn't quite the whole story:

At times, Judge Block has even argued the defense's case. For instance, when the prosecution tried to exclude from evidence an e-mail message from Mr. Cioffi that spoke of having a plan "to save" his limited partners in the fund, Judge Block said: "What's wrong with having a plan that saves his L.P.'s? It shows his state of mind, that he is still trying to actively salvage the day."

. . . So what's gone wrong? As a number of former prosecutors predicted, a case built on provocative e-mail excerpts, bereft of context, can teeter when witnesses appear in court to provide a backdrop, for example, or the surrounding context of a seemingly damning e-mail message excerpt is read before a jury.

Take the infamous "toast" e-mail from Mr. Tannin. On April 22, 2007, Mr. Tannin, in a message sent from his personal Gmail account to the personal account of Mr. Cioffi's wife, wrote that "the whole subprime market is toast."

But in that same e-mail, the entirety of which was read into the trial record this week, a more sympathetic personality emerged. To Mr. Cioffi, his former boss and co-defendant, Mr. Tannin wrote:

Every so often I worry a bit that because you have been so spectacularly successful so far in almost every way, you might be taking this opportunity to second guess yourself. Well, just in case you are, don't. At the end of the day, I think we will both be able to look at all that happened and all that we have done and learn from what has gone well as well as from what hasn't ... What a shame it would be for us to not take all we have learned and apply it going forward.

He continued:

We have lived a full and exciting life in the midst of an increasing [net asset value] and I see no reason why the fullness and positive excitement we experience should be any different if the trajectory of NAV changes. On every level I did not think a mature person or any person who is at peace with themselves would allow NAV to be the determining factor in anything except their W2 calculation, and Turbo Tax seems to do that effortlessly.

The testimony of George Buxton, a former Bear Stearns private client representative, or broker, also underscored how the addition of context can chip away at a case. In a pretrial interview with the government, Mr. Buxton, when told about Mr. Cioffi redeeming $2 million of his own money from one of the ailing funds, compared it to "the captain beating the women and children off the boat."

But on cross-examination by one of Mr. Cioffi's lawyers, it came out that when Mr. Buxton made the remark he had not yet been given an additional piece of information -- that Mr. Cioffi had taken the money out in order to reinvest it in another Bear Stearns fund. Mr. Buxton then testified that had he known about the transfer he would not have made the "boat" comment.

They still come off as arrogant and self-satisfied, in a way that helped get their clients (and us) into big trouble.  But these aren't crimes.

Suing Stuy-Town

Stuyvesant Town was built in the 1940s by MetLife, and for years, it has been one of the great rent-stabilized destinations for New Yorkers.  A few years ago, however, it was bought by a joint venture of balcRock and Tishman Speyer, who planned to renovate the vacant apartments, pushing them above the $2,000 level, and decontrol them.

Which they did.  But a court just ruled that they hadn't ought to have done this, because they (or Met Life) used New York City's J-51 tax credit, a renovation tax credit that was intended to rehabilitate New York's increasingly decrepit housing stock, which is what you tend to get when you set the price of housing at arbitrarily low levels.  The court said that if you take the J-51 tax credit, you can't deregulate any of the apartments in the building; the previous understanding had been that this only applied to rent stabilized units which had been built under special programs that gave tax credits to landlords who kept their apartments stabilized for a period of years.

Now the task moves to deciding damages--do the current tenants get a bunch of back rent, or what?  Except isn't the joint venture is now very likely to end up in bankruptcy?  Even with decontrolling many of the apartments, the JV has been losing money, and has only a couple of months to restructure its debt or go bankrupt.  Had the judgement gone the other way, I would have bet on a restructuring--but now, it needs to shed a $200 million potential liability. 

 

Link Farm

• A unified theory of Superman's powers
• Almost half the BofA executives scheduled for pay restrictions have already left.
  

Polling Mysteries

So Obama's polls are dropping.  A lot.  In fact, he's had the biggest third-quarter drop in fifty years.  Andrew points out that by recent historical standards, his absolute approval rating is still perfectly fine.  Especially since he started out in the stratosphere.

What I don't get is the big recent change.  His Gallup favorables touched 50 briefly in August before they rebounded, but his job disapproval has marched sharply up in the last few weeks.  Which is something of a puzzle, because he hasn't really done anything in the last few weeks.  Yes, yes, Fox News and AHIP.  But while I would like to think that the nation shares my disapproval of the president personally bullying trade associations and cable networks, I'm not really suret hat that's true--and it seems just as likely that the causation runs the other way, that Obama is going on the offensive because his polls are dropping.  No, we seem to just have had a vast national fit of pique.

Also in the WTF category, Pew says there was a fourteen point drop in the number of Americans who believe there is solid evidence that anthropogenic global warming is real.  I mean, maybe 45 million Americans spent the last year reviewing the scientific evidence on Global Warming and changed their minds.  Certainly, a lot of laid-off workers have soem time on their hands.  But this doesn't really seem a spectacularly likely explanation of the phenomenon. 

I can only come up with two explanations for this phenomenon:  one, that many Americans are happy to embrace a symbolic belief in global warming as long as there is no danger that anyone will do anything about it.  The other is that Americans don't know what they want, and also, enjoy messing with pollster's minds.

Not Another Bloody Boycott

This time of left leaning businesses, which is somehow supposed to vindicate Rush Limbaugh.  Where to start . . .

What happened to Rush Limbaugh in the press wasn't fair, but it wasn't the fault of the NFL, or of left-leaning businesses either--you can thank irresponsible reporters for that.  A book titled "Horrible Quotations from Right-Wing People I Hate" or somesuch nonsense is not exactly definitive.  Who single-sources a quote of a public figure praising slavery?

But if Rush Limbaugh had said these things--and it wasn't crazy to believe that he had, given how widely these things were cited--then they would have been perfectly within their rights to block his bid, for the same reason that Marge Schott did not improve the image of MLB.  By the time the errors were corrected, it was too late. 

Moreover, AFAICT, he really did say some things that were creepy--though not as offensive as the fabricated quote--such as that a typical NFL game looks like a match between the Crips and the Bloods without any weapons.  You could sort of understand why some NFL players might not want to play for an owner who had characterized them thusly, and no, I don't find the "context" all that mitigating.

Also, as I think I mentioned before, boycotts don't work.  You may get some small moral satisfaction out of depriving yourself, but unless you think you can muster the angry widespread committment of the Montgomery Bus Boycott, all you're doing is costing yourself a couple of months of consumer surplus.  You're also inviting a counter-boycott by liberals who hate Rush Limbaugh, who may happily buy up all your season tickets.  Do you really want that?

Announcing yet another boycott with the expected active lifespan of one of those rainforest butterflies that breaks out of its cocoon and then spends one happy hour mating and laying eggs before expiring on the soft, mossy floor of the primeval forest . . . well, this does not actually achieve any worthy goals.  It just illustrates how few people care, when no noticeable dent appears in merchandise or ticket sales.

If you want to boycott something, boycott the St. Louis Dispatch.  Being as they are a newspaper, their circulation is guaranteed to go down.  And by happy coincidence, they're actually the ones at fault. 

[Hunkers down.  Prepares for onslaught of people accusing her of being a liberal Rush-hater, rather than, say, someone who really doesn't care for shock jocks of any stripe.  Prays. ]

The Limits of Presidential Power

As some of you know, Chuck Grassley is making a fuss over the link on the Health and Human Services website that allows people to click a button to "state your support for health reform this year".  The White House is arguing that it's legal.  Possibly, just barely.  But it's creepy, and the government shouldn't be doing this. 

There are good reasons that we keep the operations of the permanent civil service out of the legislative arena.  Though it is part of the executive branch, the civil service is not supposed to work to advance the President's agenda; it is there to carry out the laws that have already been passed.  (And no, it's not okay when Republican presidents do it either--though I'm not sure whether he actually did anything wrong*, or just thought about it.) 

It's thus entirely inappropriate for the HHS website to contain a link to this letter:

We strongly support your commitment to comprehensive health reform.

This is not a luxury. The continuing, sharp escalation of health care costs for families, businesses, and government is unsustainable. Reform is imperative.

We believe that health reform must be enacted this year.

Reform is needed to help America's families struggling with rising costs and those who are losing their insurance. At the same time, real health reform is crucial to keeping American businesses competitive in the world economy and for the country's long-term economic viability. As our country faces economic challenges, the time for reform is now.

We support health reform that follows these principles:

• Protect families' financial health
• Assure affordable, quality health coverage for all Americans
• Provide portability of coverage
• Guarantee choice of doctors
• Invest in prevention and wellness
• Improve patient safety and quality of care
• End barriers to coverage for people with pre-existing medical conditions
• Reduce long-term growth of health costs for businesses and government

During these extraordinarily challenging times, we need to put aside past differences and address the health and economic crisis. Our shared interest must come before narrow interests so we can achieve a health system that is affordable and provides high quality for all Americans. We will support your budget with its reserve fund dedicated to achieving health care reform in a fiscally responsible manner. Each of us must be prepared to contribute to achieving this fundamental goal.

By signing this statement we affirm our commitment to work with you and our Congressional leaders to enact legislation this year which provides affordable, high quality coverage for all Americans.

Obviously, there is no corresponding link where you can say "Thanks, but no thanks."

The White House's rather wan defense is that since it doesn't refer to an actual bill, it's okay.  This is ludicrous.  It's not somehow better because you get people to sign a letter saying that they'll support any bill with these characteristics.  They're using government resources to collect political support for the president.  I thought that went out with the spoils system.  Though I'm sure I'll have any number of liberal commenters jumping in to say that this is entirely different, of course agencies are allowed to recruit support for legislative efforts, and anyway Republicans did it and it is just my overwhelming bias to think that there should be quite a few hard restraints on the president's exercise of his soft power.

Increasingly, I feel like Obama and his team are trying to run his office like a community organizing outfit.  But this is the presidency, not a political campaign.  You don't put your message out through every available channel, you don't go to war on news operations, and you don't threaten groups that say things you don't like.  You are now running the whole country, not trying to win a race.

I don't mean this to sound like what I'm sure a lot of my conservative commentators will make it into--some screed to the effect that Obama is a tinpot dictator and a secret communist.  I think Obama's longest life experience is as a campaigner, and so it's natural that this infects his actions as he learns to govern.  And I think that, again like most presidents, he is testing the boundaries of his power.  But I think it behooves the American citizenry to set firm limits, and slap his hand when he overreaches them.

* I mean, this particular thing.  I'm very sure about lots of other things he did wrong.

Link Farm

• How not to succeed in business without really trying
• Texas, national leader in renewable energy
• Obama's election accompanied by decline of belief in AGW
• Stop worrying about the national debt
• Insider trading or legitimate market research?

US Treasuries: "Risk free" for How Long?

At least since the end of World War II, sovereign debt risk has been a very real problem, but one confined mostly to the developing world.  Sure, there was the risk that the government might decide to inflate away the value of your loan, that risk abated in most places.  (Though obviously not all--I'm looking at you, Italy!)  Places where it didn't abate were increasingly forced to borrow in other currencies, leaving default as their main option--inflating away domestic denominated debt tended to make your dollar denominated debt problems worse.

Oh, conservatives made noise about sovereign debt risk and inflation, and then they let the liberals take over for a while under the Bush administration, but this remained very much a fringe issue.  US government debt is still used as the "risk free" rate, and few governments of industrialized countries have much problem borrowing.

But the financial crisis is making developed-world sovereign debt risk a more worrisome problem.  As this article in the New York Times points out, Japan's massive debt is finally starting to become a really worrying problem, especially as they need to borrow more money to stimulate their sodden economy. 

Tokyo's new government, which won a landslide victory on an ambitious (and expensive) social agenda, is set to issue a record amount of debt, borrowing more in government bonds than it will receive in tax receipts for the first time since the years after World War II.

"Public sector finances are spinning out of control -- fast," said Carl Weinberg, chief economist at High Frequency Economics in a recent note to clients. "We believe a fiscal crisis is imminent."

One of the lessons of Japan's experience is that a government saddled with debt can quickly run out of room to maneuver.

"Japan will keep on selling more bonds this year and next, but that won't work in three to five years," said Akito Fukunaga, a Tokyo-based fixed-income strategist at Credit Suisse. "If you ask me what Japan can resort to after that, my answer would be 'not very much.' "

How Japan got into such a deep hole, and kept digging, is a tale of reckless spending.

The country poured hundreds of billions of dollars into civil engineering projects in the postwar era, marbling Japan with highways, dams and ports.

The spending initially fueled Japan's rapid postwar growth and kept the Liberal Democratic Party in power for most of the last half-century. But after a spectacular asset and stock market boom collapsed in 1990, the country fell into a long economic malaise.

The Democratic Party, which swept to victory in August, promises to rein in public works spending. But the party's generous welfare agenda -- like cash support to families with children and free high schools -- could ultimately enlarge budget deficits.

Japanese officials say that okay, it's not great, but at least they're not as bad as . . . us:

Still, officials insist that Japan is better off than the United States by some measures.

One hugely important difference is that Japan is rich in personal savings and assets, and owes less than 10 percent of its debt to foreigners. By comparison, about 46 percent of America's debt is held overseas by countries such as China and Japan.

Moreover, half of Japan's government bonds are held by the public sector, while government regulations encourage long-term investors like banks, pension funds and insurance companies to buy up the rest.

All of this makes a sudden sell-off of government bonds unlikely, officials argue.

Of course, it also means a default will have catastrophic repercussions on their economy and the living standards of their citizens--much worse than a US default would be.  But they're right to say that we're not looking so hot either.  Ratings agencies have been warning for a while that the US AAA bond rating isn't some sort of divine ordinance, and could change if we don't get our fiscal house in order.  Now those warnings are getting a little louder, a little more specific:

The White House has forecast deficits of more than $1 trillion through fiscal 2011.

"The Aaa rating of the U.S. is not guaranteed," said Steven Hess, Moody's lead analyst for the United States said in an interview with Reuters Television. "So if they don't get the deficit down in the next 3-4 years to a sustainable level, then the rating will be in jeopardy."

I totally agree that the White House should be borrowing a lot of money this year.  But we're getting to the point where we need to start hearing about how we're going to close these gaps.  Much has been made of Obama's fiscal responsibility, based on his promise that the health care bill will not add one dime to the deficit.  Well, here are our projected deficits, with and without the health care bill

They get a little lower in the middle, then they go a little higher towards the end, but really, they are all nearly identically gigantic.  What's our plan to pay for them?  Remember, the "current law" deficit already includes the expiration of all the Bush tax cuts, not just the ones on rich people.  Yet we'll still need to find new revenues that will equal somewhere between a fifth and a third of all current Federal tax revenues.

Meanwhile, of course, a lot of people think that the "automatic" spending cuts which balance the Baucus bill will be rescinded, the way they have been in the past.  If that happens, the deficit gets even bigger.  And don't get me started on the $300 billion we're going to need to pay for "fixing" Medicare's doctor reimbursements over the next 10 years; as far as I can tell, the current brilliant plan for this is . . . passing it separately so that the new deficits don't get credited to the health care bill.

Yet Obama is still telling everyone that taxes won't rise on the middle class.

I think we've finally hit the wall on deficit spending.  There is no more room for tax cuts, or new spending, or anything else government wants to do.  Unless the budget picture improves dramatically, there is but one inevitable course, which is whacking great tax hikes to pay, not for any new program, but for the spending we're already doing.  Obama's trying to put off that discussion for as long as possible, because once it starts, there isn't going to be much appetite for $100 billion worth of new annual spending, whether or not it's "paid for".  All "paying for it" means is that we have to raise other taxes even further.

Bondholders are still going along with our apparently reckless spending plans on the assumption that we'll have to do something, eventually.  I'm sure we will.  But that "something" is going to be pretty ugly, and almost certainly done at the worst possible time, as Japan's case may end up illustrating.  It may even be default, if we don't start acting like adults relatively soon.  Sovereign debt risk seems to be back--and the debt is literally bigger than ever.

Tax Collapse

I've talked a lot about the way that making our tax system more progressive has made tax revenues more volatile--they're higher when the economy is booming, and lower when the economy is in depression.  But even I am struck by this image from the Congressional Budget Office:
 Income taxes, especially corporate income taxes, are sharply off. But revenue from the payroll tax, which is our most regressive, basically hasn't dropped at all. 

There are a lot of reasons why we can't pay for all the new spending Obama wants just with taxes on the rich, but this may be one of the most compelling:  if we do, we'll be forced to borrow massively every time there's a slowdown.

Limiting Banker Pay

I'm not sure what to think of Ken Feinberg's restrictions on executive pay at firms that received extraordinary help from the government.  On the one hand, like everyone else, I'm outraged at the sight of bankers paying themselves big bonuses out of profits made on the backs of bailouts and implicit guarantees that they can't "pay back".  On the other hand, this doesn't touch the current worst offenders, who have paid back their TARP funds.  Restricting bonuses only at the companies in which we now have a gigantic stake is emotionally satisfying, but bankers aren't just talking their book when they complain that talent is getting poached from bonus-limited firms.  I know it's fashionable to believe that traders are all a bunch of lucky, arrogant idiots, but there is some skill involved, and firms that lose their top people will probably underperform.

So how much am I willing to pay, in tax dollars, to make this well-deserved gesture?  Some.  But the recession has lowered the amount I'm willing to spend on gestures.

I suppose there's always the hope that this will encourage firms still in hock to the government to work as hard as possible to pay us all back.  But it's not a hope I'm awfully confident in.

Parsing Unemployment

A Big Firm lawyer friend passes on this Thomas Friedman column, and some well-aimed bile:

Friedman writes: "A Washington lawyer friend recently told me about layoffs at his firm. I asked him who was getting axed. He said it was interesting: lawyers who were used to just showing up and having work handed to them were the first to go because with the bursting of the credit bubble, that flow of work just isn't there. But those who have the ability to imagine new services, new opportunities and new ways to recruit work were being retained. They are the new untouchables."

Having had the great good fortune of

(a) being at a firm which did several rounds of layoffs
(b) taking a (very) small part in discussions leading to the designation of some of those who got laid off, and
(c) surviving said rounds of layoffs myself and winding up in a good situation so far

I can vouch for the fact that what Friedman's friend said (and I don't doubt that he said it; as I have heard others say the same) is almost certainly a mixture of truth and SHEER [censored] UNMITIGATED [expletive deleted]. Specifically, the type of SHEER [censored] UNMITIGATED [expletive deleted] that certain senior people who must decide to lay people off - which is a horrible, horrible task - say to make themselves feel better (and not coincidentally, blame the laid-off)

It is SHEER [censored] UNMITIGATED [expletive deleted] on two levels, which you can see from the main categories of those who have been laid off:

1) Most big firms who have had to lay off scads of lawyers have concentrated those layoffs amongst two categories: first, the most junior attorneys - i.e., those who cost a lot of $$ and haven't yet gotten enough experience to make themselves useful (plus, because of the pyramid structure on which big law firms are organized, they are the most numerous group of non-partner attorneys at any one time)

While most firms would of course try to not lay off the better performers at the most junior levels, it is very difficult to distinguish the more junior you get - especially when most have them have had very little work to demonstrate their abilities, and learn enough for the future.  So saying that those attorneys just sat at their desks and waited for work to be handed to them is pretty unfair as a general matter.

(For what it's worth, at the internal deliberations I took part in at [firm name removed], the partners were pretty honest that they were probably going to end up firing plenty of people who would have been just fine if there had been any work for them) Friedman's friend's maxim becomes more true about attorneys who were more senior - plenty of whom have lost their jobs as well -- but this leads to the second level of SFUB . . .

2) Hello, structural changes in the economy? Ever heard of 'em? If you devoted your life to, say, mortgage-backed securitizations (or tech IPOs back in the Internet bubble), you may be the most flexible, creative guy in the world, but your chances just went way down due to circumstances beyond your control (unless you're going to blame the lawyers for crashing the economy - I haven't heard that yet).

Not coincidentally, the second category of lawyers who have been laid off en masse by big firms have been concentrated in those sectors hardest hit by the credit crisis. Sure, plenty of securitization lawyers have been able to retool, but they're swimming against a very strong tide.

Sorry for the rant, but I have heard too much SFUB from BigLaw ever since the credit crisis hit. Though some minority of the people who were laid off undoubtedly deserved it, I don't want to fall into the trap of blaming all the people who had to lose their jobs to justify my own privileged position (not to mention "talking your book" to clients - much of the SFUB comes from firms' reluctance to admit that layoffs are being driven by the parlous state of their own finances ).

Of course, I don't want to deny that there is truth to what Friedman's friend said; that flexibility is more important than ever before in this economy--though you think our schools can impart that? Our schools which have sucked wind for 40+ years? Good luck on that one!

But to posit that as the dividing line between those who have lost their jobs and those who have not? That's serious arrogance. [exhale] As you were

This is worth exploring as a reason for the resistance to making unemployment benefits more generous in time of recession.  When the economy is at full employment, the people who get laid off tend to be either people who have been turfed out of their firm either because they are in a dying firm/industry, or because they were bad fits for their jobs.  (I'm not denying the existence of unjust firings, but they're not a huge proportion of the overall unemployment rate, especially when tight labor markets make it difficult to find replacements.)  So generous unemployment benefits do significantly raise the unemployment rate, because they encourage people in dying sectors to look around for something close to what they used to do, rather than moving on.

But I've heard any number of conservative economic types claiming that this is a problem with Obama's current unemployment benefit boosts, and that strikes me as profoundly unlikely.  When the unemployment rate is up around the 10% line, the problem is not people waiting around for perfection; it's that there aren't any jobs for them to take.  Increasing peoples' incentive to take a job offer will not do anything to increase the number of job offers; at best, you're just shuffling the unemployment around some.  Indeed, at a time when aggregate demand has collapsed, more generous unemployment benefits could plausibly make the unemployment rate lower.

There's something in us that needs to believe that awful things must happen for a reason.  And in some cosmic sense, they do--there are no uncaused causes running around the universe.  But that doesn't mean that the reason they happened is that the person they happened to did something to deserve it.

Down on the Dollar

Dan Drezner points out that resurgent worries about the dollar's decline are mostly ridiculous, which they are.  As long as our trade deficit remains large, the dollar is going to tend to slide in order to match inflows to outgoes.  Moreover, the dollar has been propped up over the last year by a global "flight to quality", aka US treasury debt.  We should be glad that the dollar is declining, not merely because it makes our exports more competitive, but because it represents a restoration of confidence in the global economy.*

Nor, as Dan notes, are we particularly likely to lose our status as the world's reserve currency, because the Euro isn't very good at being a reserve currency for a number of reasons, and most of the other currencies have too small an economic base to sustain those kinds of capital flows.  To which I'd add that the joys of being the reserve currency are somewhat overmagnified in peoples' minds--it's valuable, to be sure, but if the day comes when we lost that status, the sun will continue to shine, the US will continue to be the world's biggest superpower, and consumer electronics will still be available at attractive prices from developing world manufacturers.

But I must depart from Dan's theory of why people are getting obsessed with the dollar:

So, what's really going on here with the dollar obsession?  I suspect that with the Dow Jones going back over 10,000, Republicans are looking for some other Very Simple Metric that shows Obama Stinks.  The dollar looks like it's going to be declining for a while, so why not that?  Never mind that the dollar was even weaker during the George W. Bush era -- they want people to focus on the here and now. 

Believe me, people were obsessed with the dollar during the Bush era, too.  Obsession with the value of the currency seems to be baked into the DNA of the right for some reason.  If it's not the sliding dollar, it's gold buggery or petrodollars. 

A large segment of the right ascribes almost magical properties to fixed currency, like the ability to keep the government from borrowing too much money.  This is belied by the long history of government's on commodity or currency pegs borrowing a great deal of money, and then defaulting and/or revaluing.  It is also belied by the fact that the government cannot actually borrow a ton of money in the expectation of inflating away the debt, because neither the bondholders nor the Fed are particularly likely to go along.  But for a lot of the right, still, what is good for the US dollar is what is good for America--and what is good for the US dollar is simply being worth as much as possible relative to other currencies.

But whatever the reason, the dollar obsessives were in plentiful supply under Bush, and I suspect are coming out of their hidey holes now mostly because the dollar is again dropping dramatically. They may be using it as a club to beat the Obama administration with, though I haven't personally seen much of it, because I don't hang around those websites.  But that's just an opportunistic bonus.

* Those of us who may have been planning to honeymoon in Europe may whine, but only softly, and to ourselves.

Budget Busting

As more than one liberal blogger has noted, there's no particular reason that fixing Medicare's Sustainable Growth Rate--a failed attempt at mandated cost control that congress ritually repeals every year--should be attached to the budget for the health care reform bill.  We will have Medicare whether or not this bill passes, so it doesn't really figure as part of the budget.

On the other hand, it's not quite as crazy as they seem to believe that it has been attached to the bill in peoples' minds.  The House put an SGR fix in their bill for good reason, and not, as many bloggers are implying, because of their committment to budget transparency.  The SGR fix is the price of the support of the American Medical Association.  To the extent that Congressional Democrats are planning to buy this support by separately passing a 10-year fix without paying for it, and nonetheless claiming that the reform bill is deficit neutral, it is a bit of budget flim-flammery, though hardly unique in the history of American political maneuvers, Democratic or Republican. 

Perhaps more importantly, there's very good reason that we should be staring hard at the SGR:  those sorts of automatic provider cuts are one of the major ways that the Democrats are planning to pay for this bill.  If such efforts have historically failed (SPOILER!!!:  They did), then we should be a lot less confident that this bill will actually be affordable.  The CBO has to score these sorts of savings, because they score what's in the law, not what's likely to be in the law in three years.  But even Elmendorf has repeatedly signalled skepticism that the cuts he has scored as reducing the budget deficit will actually take place.

Looking Back at Lehman

I haven't yet opened Andrew Ross Sorkin's new book, but Yves Smith has, and walks us through some of the juicier details of the Lehman collapse:

But three things are striking about the Sorkin-provided details:

First, Fuld (and presumably the underlying business) was desperate as of early July. Sorkin has Fuld arranging for contacts to be made to possible buyers like Bank of America on a Saturday. Huh? He was clearly flailing about, yet not offering a price or deal terms commensurate with his obviously panicked state.

Second, Paulson and Geithner were aware of Fuld's desperation. The Wall Street Journal reported earlier that Fuld was calling Paulson almost daily (and suggested Paulson was somewhat puzzled). The Sorkin excerpt shows Fuld petitioning the Fed via Geithner to become a bank holding company:

Mr. Fuld's outside lawyer, Rodgin Cohen, chairman of Sullivan & Cromwell, had recently suggested an idea to help stabilize the firm: to voluntarily turn itself into a bank holding company. The move, Mr. Cohen had explained, would make it easier for Lehman to borrow money from the Fed "just like Citigroup or JPMorgan."

Mr. Cohen, a 64-year-old, mild-mannered mandarin from West Virginia, was one of the most influential and yet least well-known people on Wall Street. Pacing in his hotel room in Philadelphia before the wedding of his niece that night, he joined the call between Lehman and the New York Fed.

"We're giving serious consideration to becoming a bank holding company," Mr. Fuld started out by saying. "We think it would put us in a much better place." He suggested that Lehman could use a small industrial bank it owned in Utah to take deposits to comply with the regulations.

Mr. Geithner, who was joined on the call by his general counsel, Tom Baxter, was apprehensive. "Have you considered all the implications?" he asked.

Mr. Baxter, who had cut short a trip to Martha's Vineyard to participate, walked through some of the requirements, which would transform Lehman's aggressive culture, minimizing risk and making it a more staid institution, in league with traditional banks.

Regardless of the technical issues, Mr. Geithner said, "I'm a little worried you could be seen as acting in desperation," and the signal that Lehman would send to the markets with such a move.

Mr. Fuld ended his call deflated. Later that evening, Mr. Fuld called Mr. Cohen, finding his lawyer in the waiting room of a hospital, attending to a cousin who had become ill at the wedding.

Yves here. If Geithner and his colleagues didn't get that Fuld was at the end of his rope, they were choosing to ignore an elephant in the room. Now they may have been completely unwilling to consider the petition and this was the easiest way to signal their opposition (taking Fuld through a long list of requirements, some of which presumably would have been pretty painful, was another message).

But this speaks to a question we have raised again and again: why was there no serious assessment of what a Lehman bankruptcy would mean? After Bear went down, everyone knew Lehman was next on the list, with Merrill and UBS also known to be wobbly. Why didn't the Fed, Treasury, and SEC together demand certain types of information from all big US regulated capital markets players (including JP Morgan and Goldman, perceived to be the healthiest, so as not to be singling out the weaker members of the herd?). This is a massive oversight. Relying on luck, which is what assuming all would be well after the Bear debacle, is no substitute for having a strategy. There was clear urgency in July. Even a month of assessment and evaluation of options (it probably would have taken two weeks to orchestrate the information requests among the agencies) would have been better than nothing. But the Freddie/Fannie unwind was moving to front burner, that probably consumed a lot of available bandwidth.

And we have the third, and peculiarly most obvious point to anyone who has had some exposure to deals, but one that Sorkin does not bring forward: what the hell was Fuld doing trying to negotiate his own deals? This is a mistake CEOs make all the time, and it never ceases to amaze me.

Reading between the lines of conversations I've had with Fed and Treasury officials--though they never quite actually say it--both were well aware that Lehman (and Merrill) were on the rocks.   They had also decided that they were not going to take any extraordinary measures to bail them out, because they believed that the banks were in the grip of a serious case of moral hazard.  Indeed, this is possibly the most plausible explanation of Dick Fuld's unwillingness to make the kinds of deals that could have kept his firm from a catastrophic collapse--he thought his BATNA* was a bailout-backed fire sale, not the implosion of the company and his own probable personal bankruptcy as his shareholders filed suit.

So Treasury and the Fed spent the time between Bear and Lehman building contingency plans for the bankruptcy, rather than working as hard as hard could be to ensure that one didn't happen.  Then Lehman's collapse had an effect no one had anticipated:  the Reserve Primary Fund, a money market fund that held a lot of Lehman's commercial paper, broke the buck, triggering a general run on the money markets that only stopped when the government stepped in to backstop the losses.  Most of their contingency plans worked as intended, which is why the Lehman bankruptcy wasn't an even bigger disaster.  But the run in the money markets made it clear (or at least, made them fear) that they just weren't capable of planning their way around the failure of a systemic institution; the markets were too complicated, and trouble forestalled in one sector would just pop up somewhere else.  After Lehman, they stopped trying to orchestrate an orderly transition, and started pumping as much money into the system as they could without much worrying about the effect that this might (did) eventually have on banker psychology.

You can argue about whether this was the right decision, and certainly the current banker attitude towards the resulting profits is pretty galling.  But ultimately, I think they made the right decision in both cases.  In September, moral hazard seemed like a huge problem that was actually making the crisis worse, and would certainly make the likelihood of another one much higher.  After September, we knew better, but there was no way to find that out ahead of time.  Once we did, though, it made sense to try to shepherd the system through the crisis, and reform it later. You can always slap down bankers at some later date (though whether we will, of course, remains an open question).  But the families that lose their homes when unemployment spikes to 15% and the banks collapse take a long time to get back on their feet.

* Best Alternative To Negotiated Agreement

What Does It Mean to Be Too Big to Fail?

Economics of Contempt has an almost undescribably good post up on the problem of "To Big to Fail" resolution proposals.  I was having dinner with a friend from business school last night, and we talked about this quite a bit--and the more we talked, the more complications we found.

The problem is that "too big to fail" isn't about the size of a bank's balance sheet; it's about how tightly coupled that balance sheet is with other institutions.  The FDIC can resolve even a huge conventional commercial bank, because as long as the loans are sold and the depositors paid off, that failure doesn't suddenly and massively impair other peoples' balance sheets.

(It may, down the road, if for example a huge portfolio of real estate loans is written down, which casts doubt on the value of the collateral securing the loan books of other banks.  But that's different from triggering a bank run.)

It is pretty clear to me that the Fed and Treasury decided to let Lehman (or whatever bank tottered next, rather) fail, pour encourager les autres--and that despite months of preparation, they didn't foresee the meltdown in the money markets that this failure touched off.  Hence all the subsequent bailouts: no one could be quite sure what the fallout from further failures might be.

But the degree to which a financial institution is tightly coupled with other parts of the financial markets is a lot harder to measure than its leverage ratio, its balance sheet, or any of the other metrics that we'd like to use to wrap these institutions up into a nice, tidy, too-small-to-fail package.  As Economics of Contempt points out, the weakest part of the administration's plan is its reliance on crude metrics like capital levels:

I think the administration focuses too much on capital levels as the relevant measure of a Tier 1 FHC's health. The biggest problem with the PCA regime applicable to commercial banks is that too often commercial banks can go from "well capitalized" to insolvent without ever triggering the PCA requirements. This problem is even worse for Tier 1 FHCs. Lehman had a Tier 1 capital ratio of 11% as of August 31, 2008 -- just two weeks before it filed for bankruptcy. Had Lehman been a commercial bank, it wouldn't have triggered the PCA requirements until it was far too late. The administration's proposal requires that the PCA triggers (which it calls "capital standards") include a risk-based capital requirement and a leverage ratio.

I would make the PCA triggers less focused on capital levels, and more focused on the conditions that make Tier 1 FHCs susceptible to modern-day bank runs. For example, I would make one of the PCA triggers contingent on the tenor of the Tier 1 FHC's overall liabilities. As of August 31, 2008, over half of Lehman's $211 billion tri-party repo book had a tenor of less than one week, which made it remarkably susceptible to a run in the repo markets -- which, of course, is exactly what happened. Lehman was also relying on roughly $12 billion (at least) of collateral from its prime brokerage clients to fund its day-to-day operating business. These conditions had persisted for several quarters before Lehman's bankruptcy.

The Fed should be required to take prompt corrective action once a Tier 1 FHC allows the tenor of, say, 20% of its overall liabilities, or 50% of its daily funding requirements, to drop below one week. (I just pulled those numbers out of the air; the Fed is in a much better position than I am to set then appropriate tenors and percentage of liabilities.) These are the kinds of PCA triggers that would be the most effective. A PCA regime focused on capital levels is unlikely to make much of an impact.

I'd add that overreliance on any metric is likely to cause problems, as well as solve them--I've heard fairly convincing arguments that the Value at Risk regulatory monoculture helped set the system up for catastrophic collapse.  One is wary of giving regulators too much discretion, of course, but at some level, at least at the margins, making good decisions about which institutions are in trouble is always going to require a degree of art as well as science.

Link Farm: Sort Of Edition

• Ralph Nader's new sort-of-novel:  "If you've ever thought to yourself that the fiction you've been reading doesn't contain enough in-depth accounts of what people said at meetings, then this book will be a revelation."
• The sort-of-death of the marriage proposal
• Kyoto Protocol:  more than sort-of-dead.
  
• People who sort-of-want to open a restaurant
• US trade imbalances:  only sort-of-improved.  

Radical Chic

I thought that this must be some kind of grotesque conservative exaggeration, but no, White House Communications Director Anita Dunn really did tell a graduating high school class to emulate Mao Tse-Tung's bold and imaginative attitude during his takeover of China.  Most of us look at the tens of millions who died and maybe think twice about trying to imitate the late Chairman, but hey, think different!

Special Kinds of Speech

I have to admit, I'm kind of shocked by the number of people willing to advance the theory that political speech done by trade associations is not real political speech, or that it's okay to use the threat of regulatory punishment to shut down political speech just as long as you don't actually seize the printing presses.

This simply doesn't fit within either of the main free speech exemptions we've carved out for corporations:  regulating fraud in commercial speech, and regulating cash in politics.  This is pretty clear-cut political speech, and there is not question of undue financial influence in politics, or the use of the regulated airwaves.  Nonetheless, the Democrats are making a very clear-cut effort to shut this political speech down using the power of the state.  I thought that liberals and libertarians were pretty much on the same page that sanctioning people for their political speech was not okay, but apparently not--or at least, not in all cases.

Is it legitimate for the administration to ask for support in exchange for a good deal on legislation?  It's not something I'm happy about, but not something that tickles my First Amendment alarm either. 

But it is not okay for the administration to say, "If you publish a report saying that our plan will make premiums go up, we will use our regulatory authority in an entirely different matter to punish you."  I don't see how that's much different from saying, "If journalists criticize the administration, we will use our commercial speech authority to undercut your ad revenue".  Enterprises, even commercial enterprises, have a right to put forth political arguments.

Taking Charge of Our Climate

I don't know enough about climate change debate to weigh in on the cage match between Levitt/Dubner, the environmental blogs, and, it seems, most of the liberal environmental blogosphere.  I know enough about journalism to know that asking your sources to feed you a quote you have written is a fairly major no-no, and doesn't make me inclined to trust the rest of the critique that kicked this brouhaha off.  It's bad enough when journalists pull the "would you say" trick, because human cognitive evolution being what it is, too many people will allow you to put words in their mouth.  But no one I know would even consider announcing to their sources what they would like to hear.

That aside, what about geoengineering, for those of us who are convinced that climate change is real and urgent?  I share the general queasiness with the idea of massive attempts to control the climate--it seems to me that a backfired attempt could be awfully bad.  On the other hand, I also share the dismay that, outside of major economic recessions, we don't seem to have a good plan for cutting emissions.  Most of Europe's reductions have been achieved via the collapse of the East German and other post-Soviet industrial economies, Britain's 'dash for gas" after the energy sector was privatised, and purchases of questionable offsets--not from actual reductions as a result of greenhouse policy.

Ryan Avent makes the sensible point that geoengineering would fall hostage to politics, too, if we were actually trying to implement it.  But I'm not sure he makes a compelling case that it would be as hard to do a geoengineering project as it is turning out to be to enact a serious regime to prevent climate change.  It might be, for the same reason that I'm queasy about these sorts of projects.  But carbon reduction is turning out to be really, really hard.

Ryan optimistically says that we may well get a climate change bill. But most people I know think that climate change is dead, for exactly the reasons I've been predicting for some time--no one is willing to amp up their constituents' energy bills, especially during a recession.  (This does not make me happy, so please hold the righteous anger.  The universe is not here to please me, or you.)

The scale of the carbon reductions that will be required in  developed nations are massive.  The political will to achieve them is very weak, even in Europe.  Even if we somehow developed the political will, unless we also make some radical advances in cheap renewable energy technology, China is going to burn all of her coal, plus all of the oil we don't buy from the Saudis, rendering most of our efforts moot.  Yes, yes, I know--China's government is making noises about environmental sustainability.  Let's just say I'd like to see a lot more examples of actual efforts to cut their greenhouse emissions before I base any policy around their committment to carbon reduction.

If it turns out not to be possible to coordinate carbon reduction within an acceptable timeframe, shouldn't we have a plan B?

Update:  Smart point from Kevin Drum

It's also worth noting that even if we eventually resort to geoengineering, our job will be a lot easier if we've already made some progress on reducing greenhouse gases.  Trying to solve a 7°C temperature rise entirely with atmospheric sulfates would require a lot of sulfates and produce a lot of side effects.  But if we manage to solve half the problem with greenhouse gas reductions, we're still way ahead of the game even if we can't manage the other half.  It means that we only have to address a 3°C problem with sulfates, and while this might still be dangerous and unpredictable, it's a lot less dangerous and unpredictable.

Threatening Insurers: Why Worry?

I was at a conference on free speech this weekend, and thus missed the excitement of balloon boy and other assorted tempests in a teapot.  I did, however, catch bits of Obama's speech, in which he joins Congress in threatening to remove the insurance company's anti-trust exemption, as a not-so-hidden payback for their report on insurance premiums.

Why should I worry about this so much?  Isn't this just libertarian hysteria?

I don't think it is.  I think this is fundamentally about freedom of the press.

I know, I know--it's just an industry-funded study!  How can I elevate that to "the press"?

Because the idea we have about journalists being some sacred, special group that has "freedom of the press" is, like the idea that militias=national guard, pretty ahistorical.  Freedom of the press was not a right accorded to the profession of journalism, on the grounds of their sacred and responsible conduct, because there was no profession of journalism.  Presses were owned by individuals, who engaged in all manner of speech, commercial and non. Freedom of the press was not the freedom to own a newspaper or magazine, and say what you wanted therein.  It was the freedom to disseminate written speech.

I know that at least some of my readers are gearing up to point out that we do regulate commercial speech.  But this wasn't commercial speech.  It wasn't even speech by a corporation.  AHIP is a legal trade association. 

Threatening to strip their anti-trust exemption as a quid-pro-quo is the kind of thing that sounds cute until someone thinks up a way to do it to people on your side.  Would it be okay for a Republican administration to threaten Democratic groups that say unpleasing things by promising to pass laws--however sound--that would decimate the fortunes of George Soros and other big backers?  Or openly declare that if unions didn't stop issuing reports in favor of a higher minimum wage, the administration would have to revisit Taft-Hartley?

Though I'm fairly sure that the PWC report is right about the ultimate direction of the change in premiums due to health care reform, the methodology by which they arrive at that conclusion is not sound enough for me to rely on any of their conclusions.  And I don't see much reason to defend the anti-trust exemption as a general matter--though the argument that this helps small insurers set rates correctly doesn't sound entirely crazy, either.  But I am very sure that changes in the laws should never be wielded as weapons to punish speech that politicians don't like.  If publishing reports with questionable assumptions were actually a crime, most of the people complaining about AHIP would be in jail right now.

Link Farm

• The (so far) mistaken prophets of further financial doom
• Pulp Fiction and Google Wave
• Massive Michigan stimulus creates 400 jobs.  (But what about mulitpliers? --ed  In Michigan?  Dividers, maybe.)
• Broadband as a civil right
  

Banker Bonuses in a Time of Crisis

Our own Clive Crook notes:

I think this FT leader is very good. First it says that public money underwrites the bonuses banks are getting ready to hand out. That is a familiar point but one that deserves to be emphasised. Then it puts its finger on something mentioned less often. These huge bonus pools are diverting funds that could be used to build capital, which the industry as a whole urgently needs to do.

I defended the banks paying bonuses that had already been agreed before the crisis.  But this really is ridiculous, and the banks should have known better, if only for PR reasons. If they get an ugly new regulation regime, they'll have only themselves to blame.  Whatever they really think, deep in their hearts, they're certainly doing their best to give the impression that they believe they are entitled to collect huge paychecks no matter what happens, and have the taxpayer pick up the tab for their mistakes.

Further Thoughts on Hospital Cost Shifting

When asking whether hospitals engage in cost-shifting--subsidizing inadequate public reimbursement with private insurer fees--the question is partly one of framing.  One way to look at it is that the private insurers pick up the slack for the public programs.  Another way to look at it is that once private insurers have covered the hospitals' fixed costs for physical plant, and so forth, as long as the government programs cover a little more than the marginal cost of serving the patients, they're actually slightly subsidizing the private patients.  It all depends on whether you assume that people in the government programs would have consumed (and paid for) any healthcare absent the public programs.  In the case of Medicaid, maybe not, but in the case of seniorcare programs, that's probably at best only partly true.

Another question you need to answer, as I noted yesterday, is how much negotiating power hospitals actually have with private insurers.  I'm not sure there's a good answer for that question, but here's a look at what happens when negotiations go nuclear.

"We Will Control Healthcare Costs, Because We Have To"

This is a disturbingly common argument heard when one points out that the costs of the domestic programs we have are so far impervious to cost control.  Apparently, it is safe to enact a program that is going to blow a 10-gauge hole in the Federal budget, because the mere fact that we can't currently afford to pay for it will force us to, um, do something.

This is a terrible, horrible, no good, very bad argument in favor of more healthcare spending.  It is true that as the immortal Herb Stein once said, "If something can't go on forever, it will stop."  But, to belabor the obvious, there is more than one way to stop.  This is sort of like saying, "I know I'm going eighty-five now, but it's perfectly okay for me to press the accelerator here down to the floor, because after all, my current speed is already unsustainable."  One wants to know that one can stop with the brakes, rather than the trees decorating the sharp turn seven miles down the road.

People who aren't worried about setting up a big new entitlement, because after all, we're going to have to fix it eventually, are encouraged to read Paul Blustein's excellent book on the Argentinian crisis, And the Money Kept Rolling In (And Out).  Unsustainable fiscal policies can end when the government tightens its belt and raises taxes and cuts spending--or it can end when the whole thing melts down spectacularly. 

Now, we borrow in our own currency, so I'm not suggesting an actual replay of the Argentinian debacle--only that even when everyone knows that the thing is unsustainable, it can go on for a long time, and then implode in a virtual instant.  With an independent central bank, the US options for dealing with unsustainable debts aren't actually particularly attractive.  At best, when we do start cutting back, we will make various people who planned their lives around current government policy substantially worse off.  That's something that we should be thinking carefully about, not blithely endorsing.

Television Power

California appears poised to ban energy-guzzling big screen televisions.  In response to protests from the usual suspects, energy Commissioner Julia Levin trots out the standard environmentalist boilerplate rhetoric, without noticing that it doesn't, er, apply:

"We would not propose TV efficiency standards if we thought there was any evidence in the record that they will hurt the economy," said Commissioner Julia Levin, who has been in charge of the two-year rule-making procedure. "This will actually save consumers money and help the California economy grow and create new clean, sustainable jobs."

Really?  America hasn't manufactured televisions in a few decades.  How exactly is this going to create new, clean, sustainable jobs?  Will people be so depressed by their terrible picture quality that they'll finally get off the couch and invent that perpetual motion machine?

Update:  Commenter Joe says  "Not true. Sony manufactured HDTVs in Westmoreland County, PA through March 1, 2009. Sony still conducts some operations there and is planning to do so through next spring, when it will shutter its plant completely."

Do Private Insurers Subsidize Public Programs?

Does cost shifting exist?  Do hospitals actually use private insurance to subsidize inadequate reimbursement from Medicare and Medicaid?  Insurers claim it does, but they would, wouldn't they? 

The first thing that you learn when you ask this question is that health care accounting is really, really screwed up.  Either hospital administrators are all unusually skilled dissemblers, or they really do preside over some alternate accounting universe, innocent of marginal costs or indeed clear unit pricing.  Presumably, this is a response to very, very heavy regulation--they design their accounting more to look good for the regulators than to, say, illuminate the actual cost of things.

Keith Hennessy offers the standard economic argument as to why cost shifting is not a problem:

While doctors and hospital administrators swear by it, I have always been skeptical of the cost-shifting argument.  If you believe that a hospital will raise the prices it charges privately insured patients in reaction to cuts in reimbursement rates from government programs, you must believe (1) the hospital has pricing power and (2) it has until now charged less than it could.  (1) is quite plausible in some circumstances.  I find (2) incredible.  If someone has pricing power, I generally believe they will exert it.  Are we to believe that providers of medical care were charging privately insured patients less than they could have before the cuts in government payment rates?  I am happy to hear arguments on the other side.

The PWC study assumes that medical care providers will pass through every dollar of reduced Medicare provider reimbursement rates as a dollar of higher costs to privately insured patients.  That's absurd.

I agree that one-to-one pass through is absurd, but I'm a little more open to the possibility of cost shifting.  Shadowfax outlines one way it might work:

From a theoretical economic point of view, this is accurate.  If health care providers were perfectly rational actors operating in a vacuum where their only goal was to maximize revenue, it would make sense.  You take what you can get.

But I would argue that the cost of providing health care -- especially for a hospital -- is relatively inelastic on a year-to-year basis.  The number of nurses, the payroll costs, the capital expenditures.  All of these are not quite fixed costs, but there is very limited ability to make drastic changes in them.  Yes, you can decide not to build the $300 million cancer center, or to build a less-opulent version of the cancer center for only $200 million -- there is long-range elasticity in the cost of providing care.  But once the buildings are in place, the scanners and equipment are purchased, and the staff is hired, the need to meet this year's operating budget becomes imperative. 

Government-funded revenue is completely fixed.  It's inelastic. There's no negotiation possible -- the rates are set and providers can take them or leave them.  But prices with private payers are negotiable.  When you are looking at a budget shortfall, or in the case of physicians, declining physician compensation, and you need more money, there's only one place to go -- to the insurers.  It's the only variable source of funding.

It's true that the "rational" thing to do would be to maximize the revenue from the private insurers every single year.  But in the real world it turns out that it's not so easy.  Providers have limited leverage, and it is a bilateral negotiation with a very powerful opponent.  You can't fight a scorched-earth battle every year, and with every insurer.  The only real threat we have is to drop out of an insurer's network -- which is the "nuclear option" in the health care contracting world.  You make that threat every year, and soon enough the insurers stop believing it.  You follow through on the threat, and it is a massive war, with media attention and angry patients and the risk of losing money if patients leave and don't come back.  Worse, you could go to war and lose -- you bear the cost of the war in PR and lost revenue and wind up with lower reimbursement anyway.  There are real risks and costs of taking the hardest possible line in negotiating reimbursement rates with the private insurers. The analogy I use is that most insurers and providers live in a state of perpetual détente.  We edge to the brink and back, over and over again.

. . .

So when do we go to the mat?  When do we pull the trigger?  When the budget crisis hits.  That can be caused by a drop in government funding, or the inciting factor could be anything else -- a change in the number of the uninsured, wage escalation, etc.   And I agree with the assertion that the pass-though is not 100%.   If nothing else, the insurers are not willing to give you 100% of your goal in every negotiation.  But the idea that there is no causal relationship is absurd.

Partly the disagreement is just over the time frame.  Over the short term, there probably is cost shifting, for the reasons Shadowfax outlines.  Over the long run, it might well even out.

But there is a reason to suspect that cost-shifting exists, and it has to do with the costs rising basically evenly across regional competitive groups.  If one hospital has a budget problem, say because their staff went on strike, they can't make up the hole by going to the insurer and saying, "We need more money."  On the other hand, when the government sets rates, they do it for everyone.  So if they lower Medicare reimbursements across the board, hospital administrators know that everyone else is in the same hole.  They can demand more money, because everyone else is going to be demanding more money too.  This is why unionized industries, or cartels, really can often pass higher costs onto consumers.

The UAW's New Conflict of Interest

Mickey Kaus raises an issue I hadn't thought of with the structure of the auto bailouts:  the unions now have a conflict of interest.  Thanks to the government-sponsored reorganization, the unions now own a sizeable chunk of GM, and I believe an actual majority stake in Chrysler.  This gives them an incentive to cut those companies special deals, while holding Ford to a tougher contract--which is apparently what they're doing. 

It seem to me that this is a clear and insurmountable conflict of interest.  Should the UAW be compelled to relinquish its stake in the automakers, or stop representing Ford workers?  I'd say they should.  Not that this has a snowball's chance in hell of actually happening.

Three Books to Change Your Mind

Tony Woodlief asks what three books you would recommend if you wanted to change the mind of someone who disagreed with you?  Off the top of my head, I nominate Parliament of Whores, The Elusive Quest for Growth, and Government's End.  Readers, liberal, libertarian, and conservative, are invited to submit their thoughts.

Link Farm

• Should blackmail be illegal?
• Everything you never realized you wanted to know about pasta, and hence didn't ask.
• The White House is worried about the deficits it's running, though not enough to do anything about them yet.
• Pet costumes
  

Scoring the Baucus Bill: Tax Dynamics

So I've been thinking a lot about how the Joint Committee on Taxation projects its excise tax revenue, and the more I think about it, the more I realize just how much of the revenue they're projecting comes from a pretty elaborate dynamic effect on the labor market.

I got some clarity from sources in the know about how the CBO calculated that somewhat cryptic "Other Effects on Tax Revenues and Outlays" that generates $83 billion to defray the costs of the program over ten years.  Basically, the CBO's assumption is that the attractiveness of the subsidies will encourage several million people to drop their employer insurance and buy subsidized insurance on the exchange.  Their employers will pay them more money instead, and this money will be taxed.

Similarly, the Joint Committee on Taxation, which calculated the revenue from the excise tax, assumed that almost three quarters of the benefit would come from employers driving down their insurance costs, passing on the savings to their workers as compensation, and that compensation getting taxed.  And because the pressure to cut costs is expected to gather steam over time, the effect is larger in the out years--by 2019, the JCT predicts $46.3 billlion worth of revenue, but only $7.9 billion of it comes from people actually paying the tax.  The rest is dynamic effects.

The CBO projects $180 billion in "gross cost" of the coverage expansion--i.e., what the government will spend on Medicaid and SCHIP expansions, operating the exchanges, and subsidizing the purchase of standardized policies therein.  It turns out that about $58 billion, or just about one third of that cost, is being paid for by expecting employers to substantially lower their costs and pass through all the savings to their employees, who then pay taxes on them.

As revenue-raising mechanisms go, this is pretty indirect.  And with so many links in the chain, you can see lots of places where this could go wrong.  What if employers just cut their costs and don't raise their employees wages, because they're in a dying unionized industry?  What if they shift workers to other forms of tax-deferred compensation, like 401(k) matching or HSAs?  What if smart lawyers figure out a way to structure health plans to avoid the tax?  What if all the people who leave employer insurance for the exchange, or have their benefits cut, are low wage workers with low marginal tax rates?

Moreover, these effects are modeled against a hypothetical world.  What if insurance costs would have leveled off in high cost states without the excise tax?  We'll never know.  It's going to be hard, ultimately, to know whether this thing was revenue neutral or not.

There's a reason that the CBO has historically been wary of dynamic effects--they're a lot easier to model in a classroom than in real life.  That's presumably why they haven't modeled the dynamic effect of the huge increase in marginal tax rates on low wage workers (more about this later).  I can see the logic here, and it's very compelling as economic theory.  But it's not exactly revenue I want to count on.

Power Players and Financial Crises

I cannot recommend this interview with Kenneth Rogoff and Carmen Reinhart highly enough.  To me, this section on the IMF's bias against worrying about domestic debt levels is the most fascinating part:

Rogoff: To see the universality of serial default, how few exceptions there were to countries defaulting on their debt again and again at some point in their history.

Reinhart: We had been thinking of about defaults in emerging markets without really being attuned to the fact that the advanced economies of today were once serial defaulters in their own right.

Another moment was when we were still at the Fund. We had wanted to look at a more comprehensive measure of debt, including domestic debt. If you talk about he U.S., that's all there is, but when you turn to open economies the data is exclusively is for external debt. Rogoff was chief economist of the Fund and we weighed on departments at the IMF to furnish data on domestic debt - which they simply did not have.

Which is fairly appalling when you consider that one of the key elements of the medium term outlook for the IMF is debt sustainability. Debt sustainability exercises were being done only looking at external debt without taking into domestic debt.

Rogoff: That was surreal, really. Here we are at the IMF and we're being asked if Argentina can pay its debts and can Turkey pay its debts and can Brazil pay its debts. Looking historically to find benchmarks, all we had was external debt. It just doesn't seem possible that governments can obfuscate so effectively.

You think it was obfuscation?

Rogoff: Absolutely. I have to believe somewhere in the history of the IMF the idea [to collect countries' domestic debt data] came up from time to time, and it was just, well, we can't supply that.

There was also this belief [among policymakers] that if there was debt owed to locals, who cares -- they'll just inflate it away, it's not going to affect sustainability because the government can do anything it likes to the locals. But if you step back and think about it, the locals own the government. Often the people holding the debt are very rich, powerful institutions and individuals. If you owe them a lot of money, of course it makes it harder to pay foreigners.

In part because of the regulatory arc our own government has followed during this crisis, the problem of entrenched power networks in the financial system is getting a lot more attention from economists.  Rogoff and Reinhart talk about our government's handling of the crisis at some length, giving us high marks for fiscal and monetary response, but low marks for our restructuring of the financial system.  With banks reporting record profits off their government bailout, this has a special sting.

Democrats Try to Hit the Insurance Industry Where it Hurts

Harry Reid is telling the Senate Judiciary Committee that the real reason health insurance is so expensive is that they're evil monopolists, and we need to repeal their anti-trust exemption:

The law, the McCarran-Ferguson Act, is often cited by Mr. Reid and other critics of the health insurance industry as a reason why coverage can be so expensive for many people. They say the law allows insurers to monopolize markets and fix prices in ways that are usually illegal.

"Since 1945, the insurance industry has enjoyed exemption from federal antitrust laws because of the McCarran-Ferguson Act," Mr. Reid said. "Pat McCarran, who was the senior senator from Nevada at the time, lent his name to this piece of legislation. Although we're both Nevadans, I'm not sure what Pat McCarran had in mind when he pushed this bill. And if Pat were around today, he couldn't be happy with the state of the insurance industry."

"Providing an exemption for insurance companies to antitrust laws has been anticompetitive and damaging to the American economy," Mr. Reid continued. "Health insurance premiums have continued to rise at a rapid rate, forcing businesses to cut back on health insurance coverage and forcing many families to choose between health insurance and basic necessities."

He added: "Insurance companies have become so large they dominate entire regions of the country. They have become so powerful they block start-up businesses from entering the market, and they put smaller companies out of business. They have become so dominant that they dictate business practices. They are so influential that they exert tremendous influence over public policy."

This is supposed to be payback for that report saying that premiums were going up under the Baucus bill.  Good luck with that.  As I understand it, one of the prime causes of excess concentration in the health insurance market is state level regulation, not some sort of price fixing agreement.  When the regulations make compliance too expensive, or make it hard to operate at a profit, the companies with the smaller client bases exit the market, especially if they have sister companies outside the state. 

In principal, I'm in favor of anti-collusion laws, though in practice, anti-trust cases are more often a weapon used to quell competition, rather than an actual benign force in the market, and by the time the case has wrapped up, they're usually moot.  (See, AT&T, IBM, Microsoft).    And I certainly don't see why insurance companies should have an exemption from whatever laws we do have.  But it's hard to escape noticing that this basically amounts to political extortion, which is not the way our laws should be used.

An Innocent Man, or Liberal Bias?

Yesterday, more than one commenter accused me of liberal bias in my suspicion that Rick Perry's actions in the Willingham case smacked of trying to derail the investigation.  The Dallas Morning News, hardly a liberal rag, is also suspicious:

Perry has insisted that this was standard operating procedure, all part of the regular cycle of appointments. But troubling comments from the deposed chairman suggest that the governor's efforts to change the course of this inquiry began months ago.

The commission is examining the arson-murder case of Cameron Todd Willingham, who was sent to his death in 2004. Fire science experts have emphatically rebuked the arson investigation, but the governor has attempted to plug his ears and push aside accumulating evidence that Texas might have executed an innocent man on his watch.

Samuel Bassett, who was replaced as chairman two weeks ago, said the governor's aides pressured him as they expressed displeasure with the investigation, questioned the cost of the inquiry and even hinted that the commission's funding could be in jeopardy.

Dow 10,000!!!

We hit it!  Amidst all the excitement, it's worth remembering that if we had just two more fingers, we'd still be waiting for it to hit 20,736.

Paternalism is Still a Problem

Ilya Somin sums up the core problem with the "new paternalism":

In recent years, advocates of paternalistic policies, such as economist Richard Thaler, argue that government-appointed experts should limit the choices available to consumers in order to prevent them from making poor decisions because of ignorance or cognitive bias. After all, they claim, experts are likely to know better than ordinary consumers which products are too risky for us to use. This kind of "new paternalism" (also known as "libertarian paternalism") has had a lot of influence in the academic world. It has also caught on in the Obama Administration, which has based major policy initiatives on it such as the proposed Consumer Financial Protection Agency.

In this recent essay, New Zealand economist Eric Crampton points out a serious flaw in the logic underlying the new paternalism. Experts may be better than consumers at figuring out the health risks posed by various products. But they usually have no reliable way to estimate the benefits the consumers get from them. Paternalism can only be justified, if at all, in cases where the risks posed by the product outweigh the benefit purchasers derive from it. Experts who have no way of estimating those benefits are in no position to determine which products should be regulated or banned

Saving the Stimulus From its Critics?

I'm a bit flummoxed seeing columnists arguing that critics had better just shut up about the stimulus, because most of it hasn't even been spent yet.  For many of us critics, that's precisely the point.  A stimulus is supposed to counteract a sharp contraction in aggregate demand when that demand is contracting, not wait until the economy is recovering, at which point its effect is much more likely to be distortionary and inflationary.  The porkulus sacrificed stimulative power in order to slide Democratic legislators' pet projects past without ordinary scrutiny.  Now the economy seems to be turning around without it, and we're stuck with the pork.

The Saudis Have a Modest Proposal

Apparently the Saudis want us to pay them for their losses if we cut our petroleum consumption.

As long as they pay us for the movies, bourbon, and bikinis they're not consuming, this seems eminently fair to me.

Update:  Commenter Mike in DC adds "The sad thing is that if it were Midwestern farmers making this argument rather than Saudis, it would be taken seriously."

More On Premium Predictions

Meanwhile, I have obtained some information on the Gruber estimates--sorry for not updating in the post, but we're having some technical difficulties that make it impossible to update cross-posted entries.  Gruber says he started with the CBO's figure of $4700 (he says $5,000 but I assume he used the correct figure in his model) for a single policy, discounted it for inflation, and then multiplied it by 2.7 to get to the family numbers.  I still can't make his numbers work unless I use different inflation rates for different types of policies, but I'm not sure how much that matters.

But I'm not comfortable with the decision to ignore the CBO's family numbers, which are considerably less rosy than his.  The CBO presumably has reasons for picking the multiples it did, including expected changes in the composition of the family market--in fact, their estimate specifically states this:

Compared with family policies that are expected to be purchased in the exchanges, family policies purchased in the current-law nongroup market cover fewer dependents, on average. That difference largely explains why the ratio of single to family premiums differs across those settings.

Of course, covering more family members is presumably valuable for people.  But the fact remains that they're going to have higher premiums, and no choice about paying them.

Update:  I can get something very close to Gruber's numbers if I assume 6% annual inflation for 6 years, rather than the seven I was counting between 2009 and 2016, and that young, healthy workers get virtually no discount in the current system over what Gruber estimates they would receive in a mandated, community rated system.  So mystery solved, except for the part where we have 6% annual inflation.

The problem with ignoring the CBO's family estimates remains, however.

Is Health Care Reform Falling Apart?

Michael Cannon asks whether health care reform is doomed.  Democrats entertained a bunch of vague fantasies about some giant pool of money materializing from somewhere to close the gaps in the budget.  It hasn't, so they're stuck with, as Cannon points out, taxing Democrats:

• Sen. Jay Rockefeller (D-WV) is the biggest opponent of Sen. Max Baucus' (D-MT) tax on expensive health plans because that tax would hit West Virginia coal miners.
• Unions vigorously oppose that tax because it would hit their members.
• Moderate Democrats in the House oppose Rep. Charlie Rangel's (D-NY) supposed "millionaires surtax" because they know it would hit small businesses in their districts.

Cannon says:

Once the shooting starts, industry opposition will sway even Democratic members, because there are physicians and hospitals and employers and insurance-industry employees in every state and congressional district.

Can President Obama and the congressional leadership satisfy both groups?  My guess is, probably not, and this misguided effort at "reform" will therefore die.  Again.

That's a bold prediction.  I'm skeptical.  I think it is more likely is that this thing passes, and fails spectacularly.  There are too many moving parts, and if any of them breaks, the whole thing rapidly starts to spin out of control and eat a gigantic hole in the deficit.  If it does break, I think that Democrats keep control of Congress just long enough to explain why they keep having to enact whopping new tax increases every few years.  Republicans don't need to improve their message.  They just have to wait for Democrats to recover their reputation as tax and spend politicians who woefully underpredict the cost of everything they propose.

Time will tell which one of us is right--if either.  This is one time I'd be happy for my predictions to fail in both directions.

John Cornyn Asks the Question

Not to brag on my fiance or anything, but I'm currently watching the Senate Finance Committee's testimony, and Senator John Cornyn just mentioned Peter's excellent article on the experience of the states with various health care reforms.    He not only entered it in the congressional record, but also asked Elmendorf whether he had considered the Massachusetts health experience--the very question I asked this morning.  Go Team McSuderman!

Sadly, Elmendorf's answer was vague, so I'm still not clear on whether, and how, he considered it.  But at least the question got asked . . .

Saving Money The Excise Tax Way

The New York Times has a more detailed explanation of how the excise tax is supposed to generate revenue:

They also cited projections by the Joint Committee on Taxation that about $142 billion of the 10-year total of $201 billion to be raised by the proposal would come from increased income and payroll taxes -- evidence, they said, that workers would receive increased wages if employers spent less on health benefits.

This makes the complaints about the PWC report make more sense.  On the other hand, companies in New York City, school boards in Connecticut, and so forth are not spending so much on health insurance because they think it's fun.  They already have a considerable incentive to spend less, which is that this is money that they can't spend on other things.  What happens if they keep the health insurance and pass the excise tax onto their employees?  Tax revenues will fall relative to current law, no?

If companies can't get their costs down, either because negotiations with unions are sticky, or because they're just stuck in a high cost area, what you'll see is similar to the AMT and Medicare's sustainable growth rate:  ritual annual repeal. 

Moreover, not getting benefits is, like paying higher premiums, a cost.  It's not immediately obvious that it's welfare enhancing for those workers to have the government step in and decide that they should get higher (taxable) wages rather than more health insurance.  This is, after all, why we're having such trouble repealing the employer benefit exemption.  To be clear, I think it should be repealed.  But the result of doing so would be that most people would end up paying higher taxes, and you have to be honest about that.

Update:  Ezra Klein criticizes me for the error--12 minutes after I retracted it.  Internet time moves like lightning!  He also calls it a defense of the PWC report, which is an odd reading of that post--I specifically said that their estimates were uncomfortably high, that their cost-shifting assumptions were questionable at best, and that it wasn't much use at evaluating policy.  Should I also have called for them to be flogged?

What He Said

Publius on Rick Perry's attempt to short-circuit an investigation of the Willingham case:

By now, you're probably familiar with the New Yorker article showing that Cameron Todd Willingham was almost certainly wrongly executed for arson and murder.   In 2005, after the execution, Texas established a commission to investigate forensic errors, and the commission started reviewing the Willingham case.  In the course of its review, the commission hired a nationally recognized fire expert who ultimately wrote a "scathing report" concluding that the arson investigation was a joke.  

The expert was originally set to testify about his report on Friday, October 2.  On Sept. 30, however, Perry suddenly replaced three members of the panel, including the chair, against their wishes.  The new chair promptly canceled the hearing.  More recently, Perry replaced a fourth member (he can only appoint four -- other state officials appoint the remaining five members).

What's amazing is not so much that Perry replaced the panel members, but that he felt secure enough to be so brazenly corrupt about it.  It's a sad reflection on the state of politics in Texas that a governor could commit such blatant whitewashing two days before the hearing. 

Of course, his motive is fairly clear.  Perry contributed to the execution of an innocent person.  And the formal recognition that Texas executed an innocent man would trigger a massive political earthquake -- one that would clarify to an inattentive public the utter barbarity and immorality of Texas's criminal justice system.

So yes, I can understand Perry's motives.  But it doesn't change the fact that he is acting in a profoundly immoral way. 

Yes, I'm opposed to the death penalty.  But even if you're not, you can't possibly think that it's okay to avoid investigating whether your state's forensic methods risk putting innocent people in jail, or sending them to their death.  No matter how strongly you favor the death penalty, I'm sure that you agree that its purpose is not to execute people; it's to execute justice.  A value which Rick Perry seems determined to butcher.

Projecting Premiums Under the New Health Care Program (Warning! Long, and Pretty Wonky)

The Atlantic takes Columbus Day off, so I am late to the game on the dueling analyses of future health care premiums.  A PWC report commissioned by the health insurance industry says that premiums will skyrocket.  Meanwhile, Jonathan Gruber of MIT says no, they'll plummet!  Ezra Klein says it's hard to say who's right.  I don't find it hard to say that both analyses have serious problems.

The liberal blogosphere has made much of the fact that the PriceWaterhouseCoopers report assumes that the excise tax is applied to plans, rather than estimating the change in behavior.  This is a completely defensible choice, because there is no good way to figure out how much behavior is going to change.  The CBO does the same thing when it refuses to score costs--or savings--it regards as sufficiently difficult to calculate.  Unless you have a good data set on the corporate income elasticity of healthcare benefits, any number that you assign to this change in behavior are simply a wild assed guess. 

But that's going to bias PWC's numbers upward, which they sort of forget to mention.  How much?  By much less than people may think just reading the complaints.  This quote from PWC has been extensively highlighted:

We have estimated the potential impact of the tax on premiums.  Although we expect employers to respond to the tax by restructuring their benefits to avoid it, we demonstrate the impact assuming it is applied.

Reading this, you might think that everyone is going to structure their benefits to get around this tax.  But the CBO expects us to collect quite a bit of money from this tax.  Interestingly, we have some insight into the thoughts of the CBO and Joint Committee on Taxation on the income elasticity, because the Baucus bill changed two things about the excise tax between proposal and final amendment:  it increased the excise tax from 35% to 40%, and it eased the threshold for retirees and workers in high risk professions.  The net change is less than $14 billion over the ten years.  By 2019, the tax is still supposed to be collecting over $45 billion a year. 

Even if you assume that all of the change between the original and the amended bill came from the increase in the excise tax--and it most definitely doesn't--this implies a relatively small change in behavior on the part of companies even for a sizeable increase in the excise tax.  If the change in behavior is big enough to actually invalidate the PWC analysis, then we're screwed, because we just opened up an annual hole in the program of $50 billion or so.  I'm more worried about the fact that they estimated the prevalence of "Cadillac plans" from COBRA data, since I can think of a bunch of ways in which the COBRA sample might not match the general population of people with employer insurance--but then, I don't know how the CBO or the JCT produce their estimates, so it's hard to complain too much.

(As an aside, wouldn't it be great if we made the CBO and the JCT show their work more?  An easily accessible trove of subtables would now be easy to post online, and it would be wonk heaven . . . )

PWC estimates that the Baucus bill will increase large employer health insurance costs by about 11%.   5% of that is supposed to come from the excise tax.  (Other employers also take a 5% hit).  How much should we shave from this to account for the change in employer behavior in response to the excise tax?  That is hard to say.  But here's one possible way you could calculate it.  The National Coalition on Healthcare cites the Robert Woods Johnson foundation as saying that under current law, total employer health care costs could reach $850 billion in 2019.  The $46.3 billion that we are expecting to raise that year from the excise tax is . . . 5.4% of that.

Of course, employers share costs with their employees; on average, they pay about 80% of the total premiums.  So bump that number up to $1.1 trillion, in order to account for the employee share.  It's still 4.3%.  This suggests that calculating dynamic effects for the excise tax would lower PWC's final estimates only slightly.

There are other complaints:  PWC anticipates that Medicare cuts will result in cost-shifting to the private sector, which is questionable, and impossible to estimate accurately.  But that's not the lion's share of the cost increase.  Most of the premium increase they estimate result from things that we pretty much all agree are going to happen:  taxes are going to be levied on insurance companies and various providers, and passed through to the customers; and there is going to be adverse selection in the insurance market without a strong enough mandate.  I think it's pretty hard to argue at this point that the mandate is strong enough--the Massachusetts penalty now is higher than the Baucus penalty will be in 2016.  But I'm sure there are plenty of people willing to tell me why I'm wrong.

So how does Gruber get such a different result?  For one thing, he looks at the cheapest possible plan under the new structure.  This is not unreasonable, because my understanding is that the uptake of the premium (silver and gold) packages in Massachusetts has been pretty limited; most people take the cheapest premiums.  These plans have high deductibles and co-pays and limited doctor networks, so of course they cost less.

This analysis is slightly problematic, because he uses the Baucus bill's target of a Bronze plan worth 65% of the actuarial value of the most expensive plan.  The problem is, there are hard limits on how much cost sharing these plans can engage in; they cannot have out-of-pocket expenditures higher than the HSA limits (plus a health care inflation index), and small employers, who are expected to purchase a number of these plans, cannot offer any plan with a deductible higher than $2,000 for individuals, $4,000 for families.  So these calculations do not necessarily represent the experience that most people will actually have in the health care market.  But I don't know how you model that.  Right now, it's my understanding that the average private policy has a deductible about $3,000 for individuals, so maybe it doesn't matter.  I just don't know.

The other problem is that he makes some strong assumptions.  For example, he assumes that the actuarial value of a "young invincible" plan is .5, versus .65 for the "Bronze" plan.  But as far as I can tell, the "Young Invincible" plan is the bronze plan, minus preventive care.  But catastrophic coverage insurers routinely throw in cheap preventive care visits as a freebie, on the grounds that an annual checkup may save them a pricey hospital visit later.  So it's not clear how much these policies will actually save.

Meanwhile, I simply have no idea where his family numbers come from. The CBO estimate of the cost of a "silver" plan for a family of four (unsubsidized) is $14,400; Gruber's estimate of the premium for a family of four with a head of household aged 45 is $8,340.  The actuarial value of the bronze plan is lower, of course, but changing the actuarial value from .7 to .65 only brings it down to $13,392.  He says he's working in 2009 dollars, which could explain part of it, but to bring the CBO's estimates in line with his, I need an inflation rate of over 7%.  There's something here that I'm not understanding.  I've emailed Jonathan Gruber, and will report back if I hear where my error may lie.

Quibbling about the models aside, I think the real problem with his analysis is that he ignores the employer market.  This is not a small omission.  Employer insurance is the lion's share of the coverage market; the CBO shows that in the nonelderly market of 267 million, 150 million are covered by employer insurance.  The "nongroup" market, aka individual insurance, is 13 million.  Non-employer, non-government health insurance is projected to cover around 30 million by 2019, against about 155 million in employer plans.

As many reform advocates keep telling us, this plan does almost nothing for or to employer plans.  The delivery system reforms are all in the Medicare/Medicaid market, while the subsidies and pooling changes are in the exchanges.  This plan doesn't have any mechanism to keep their premiums down, or control the costs that accrue to their employees; any cost savings there are occur in Medicare or the non-group market.  What it offers them is . . . an excise tax on high cost plans.  Yes, yes . . . healthy workforce!  Preventative care!  All I can say is, these marvelous savings do not seem to be accruing to employers in Massachusetts--or for that matter, people on the exchange, whose premiums are apparently increasing even faster this year than they did before reform.   Since employees pay about 20% of that cost directly, and (most economists agree) 100% indirectly, increasing their premiums by an average rate of 5-10% is a big deal.

For that matter, this health care plan doesn't really have much designed to control costs in the individual market, beyond initial savings in administrative costs.  I'd like to see Jonathan Gruber, and the CBO, explain why their projections for the individual market differ so greatly from what is actually happening in Massachusetts.  Most analyses include big drops in administrative costs to bring costs down--but they don't include, well, whatever is making premiums rise so fast in Massachusetts.

After all, Massachusetts has a plan that is very similar in its core elements, with a stronger mandate.  It doesn't have our 40% excise tax, but as we've seen, the excise tax is more of a revenue mechanism than a cost control mechanism.  I've heard some explanations, like the fact that Massachusetts has a lot of teaching hospitals--but Massachusetts had a lot of teaching hospitals before reform, so why are premiums increasing more rapidly now? Moreover, Masachusetts also had some advantages, like a smaller uninsured population, and a wealthier, more educated citizenry than the national average.

The theory that drawing all the missing low-cost users into the pool through a mandate would help lower the average cost was a fine theory, but I don't see it panning out in practice.  So I don't really understand why Gruber is projecting that it will suddenly start working at the federal level--there may be a reason, but I wish I could have it explained to me.  The countries that have lower health costs do not rely on pooling to get that effect.  They resort to price controls.

At some level, of course, this is all quibbling.  The beauty of projecting into the future is that you can get any result you want with rather small tweaks to the model, any of which are probably defensible--will lab costs rise 0.5% a year, or 1.5% a year?  At the end of ten years, that's the difference between a 5% increase in those costs, and a 16% increase.  It's no surprise that people who support health care reform tend to get absurdly precise numbers claiming costs will go down, and people against it tend to get absurdly precise numbers claiming costs will go up.

Gruber's numbers are well below the CBOin some way that I don't understand, which worries me, and PWC's numbers are well above their estimates of things like the increase in premiums resulting from all the new provider taxes (1% from the CBO; 2.5% from PWC).  I'm not sure there's any good reason to rely very much on either of them.  The fact is, we can outline the various reforms, and which way we think each of them will push insurance prices, but there's no way to get a number that's even moderately accurate.  Would either AHIP or Jonathan Gruber like to wager any sum of money that it would actually hurt them to lose on their estimates coming in within 5% of the actual premiums in 2016?  I wouldn't bet a dime on either projection.

That is not, mind you, because I'm accusing either side of bad faith.  Jonathan Gruber is a very smart economist.  PWC is a pretty good accounting firm.  But the problem is indeterminate.  Premiums for your average individual plan under the exchanges probably won't be $3,000 or $20,000.  Beyond that, who knows?

At least with the CBO, you're (sort of) comparing apples to apples--their estimates may not be especially accurate, but they're done in a fairly consistent way that allows us to benchmark the cost of bills, even though reality may differ substantially because of unanticipated factors.  Whatever the good intentions of the authors, these dueling private estimates just end up being used the way drunks use lampposts--for support, rather than illumination.

Update:  I have more insight into the CBO/JCT calculation of the excise tax that gives the criticisms more bite . . . but also raises some questions about the revenue predictions.

More Nobel Talk

Mark Kleiman argues that Obama does deserve his Nobel, because

The Non-Proliferation Treaty commits its nuclear-power signatories to work toward the abolition of nuclear weapons.  Under Cold War conditions, that goal seemed merely aspirational, with no immediate practical implication.

But after the Cold War, with U.S. conventional forces overwhelmingly superior to those of any potential rival, it became very much in the security interest of the United States to reduce or abolish nuclear weaponry, and Bill Perry, Sam Nunn, Henry Kissinger, and George Shultz proposed exactly that.

Last month at the U.N. Barack Obama committed the United States to that program, which (among other good effects) strengthened our hand against Iranian and North Korean proliferation efforts; it was hard to denounce their violations of the NPT with a straight face when we weren't even pretending to try to live up to ours.

Hmm.  Well.  Call me crazy, but I think that maybe to earn the Nobel prize, a million dollars, and all the associated prestige, you ought to have made efforts somewhat more heroic than chairing a meeting in which you said that you thought we ought to have fewer nuclear arms--even one in which you said that the US also thought we ought to have fewer nuclear arms.  You should, I don't know, deliver a deal or something. 

As for the notion that this strengthens our hand when dealing with Iran and North Korea, I'm really skeptical that this does anything at all.  The leaders of Iran and North Korea do not, to put it mildly, look up to us.  They don't want us to think that they're nice, moral people.  They want us to think that they are terrifying military forces whose desires must be assuaged.  The people of North Korea and Iran don't like us either, but even if you thought that this was likely to have a big impact on their opinion, this would be purely hypothetical, because both countries have very tightly controlled media which will report whatever the leaders want them to think.

If the best you can come up with is that he made some impressive-sounding statements at the UN--well, I think a majority of the world's leaders are equally deserving.  I don't see any actual foreign policy scholars advancing the theory that this was a landmark achievement on par with say, SALT or the Camp David accords.

Obama's Prize

I guess I must hate America, but I actually think it's kind of ludicrous that anyone is even trying to argue that Barack Obama truly deserves this Nobel Peace Prize.  Could he have deserved it, after he'd had more than nine months in office?  Easily.  But he hasn't had time to, y'know, accomplish anything.  Unless they're giving out the Prize these days for stimulus bills and banking sector interventions. The committee claims they awarded it for his "extraordinary efforts to strengthen international diplomacy and cooperation between peoples"?  Can even his most ardent supporters come up with any effort he's made that really qualifies as more extraordinary than those of everyone else in the world?

It's not like I want to take the prize away, and I'm certainly not angry about it . . . but I'd rather have seen Barack Obama honored for something besides not being George W. Bush. 

Why Medicare Costs Are Growing Faster Than Other Healthcare

One of the commenters offered a retort that I've seen in a bunch of places:  "Of course Medicare is growing faster!  It cares for a sicker population!"

It's a common intuition, but it's wrong.  Consider a simple model of a population with two groups:  young and old.  Assume that the old consume five times as much of an undifferentiated good, healthcare, as the young do, and that each unit costs $2,000.  So the oung cost us $2,000 apiece per year, and the old cost us $10K.  Now assume that the cost of healthcare in each group grows at 10% a year.  At the end of five years, each young person will cost us $3,221 and each old person will cost us $16,105--or exactly five times as much as a young person.

In other words, the fact that old people consume more healthcare than young people explains why the absolute difference in dollar amount of spending gets bigger over time.  But it doesn't explain why the rates of growth differ.

Now, obviously "healthcare" is not a homogenous good.  So there are a bunch of different reasons that healthcare spending growth rates might differ.  We might get better at treating things that disproportionately happen to the elderly, causing the amount of healthcare they consume relative to the young to rise.  The cost of treating things that the elderly disproportionately get might rise, causing the cost of their healthcare to rise relative to the young.  They might succeed in using political power to divert more treatment resources to themselves.  You can imagine a bunch of different factors.

What is the truth of the matter?  Hard to say.  Certainly, mitigating against this explanation is the fact that prenatal care and organ transplants are two of the fastest growing medical cost centers.  On the other hand, so are cardiovascular and cancer.  But lots of people under the age of 65 have heart attacks and cancer--I'm not sure there's any good evidence that the relative incidence has changed.  On the other hand, active life expectancy is growing even faster than overall life expectancy, which is also growing pretty fast--and if those things don't reflect our getting better at treating the things that old people get, I'm not sure what does.

Still, I think you have to admit that at best, there's no evidence for the proposition that a big American government program can control costs, and what evidence we have so far tends to tilt in the opposite direction.

Our Lips Are Sealed

A reader asks me to blog about the FTC decision on blogger disclosure.  The problem is, it's so transparently stupid that I don't even know what to say.

The only "free gifts" I get from companies are review copies of books, and the occasional soggy vegetarian sandwich at some corporate lunch.  That's because my employer would fire me if I accepted such things, and rightly so.  I'm in the news business.  We don't mix business and advertising.

I didn't as a private citizen, either, but then, it's not like people were knocking down my door trying to give me free stuff.  (What sort of products would a policy blogger endorse?  Stats software?  The Almanac of American Politics?) 

Is it kind of iffy? Sure.  There's a well known literature showing that once you've given people something, they feel obligated to return the favor, even if they didn't really want the thing you gave them.  The effect is presumably stronger if it's something cool that you did want.  And of course, I imagine it's hard not to blog with the thought of all the other goodies you'll be foregoing by giving a product a bad review . . .

But on the scale of cosmic harms, this ranks somewhere around putting an ill-considered steak back in the chicken case.  How can someone who is writing something for free, that those people may or may not consume at will, have a legal obligation to said people?  I can't believe that anyone thought that this required a law, rather than, say, some common sense.  If this is so pressing, where are the sob stories of consumers who bought PDAs and baby buggies that they don't even like?

This is of a parcel with the ongoing regulatory process, whereby every trivial thing that is wrong with the world requires a rule to correct it.  But then, that's what you'd expect me to say.

Update:  More from Walter Olson. 

Controlling Healthcare Costs The American Way: Not Doing It

In the comments to an earlier post, KennyBoy asks:

And Megan, no one on your side of the argument seems willing to answer two simple questions. If every other country (don't split hairs, you know what I mean) can cover ALL of their citizens for LESS than the US does, with better outcomes, why can't we do that?

This is a favorite question of would-be reformers.  There are two answers, one theoretical, and one empirical.  We'll start with the theory, which won't be new to regular readers; I've gone over the that I think we aren't the same as Europe a bunch of times:

• More wage inequality means doctors need to make more
• The American political system is especially easy to lobby
• American public services culture is, in general, less effective than the Nordic countries, and no, this is not simply an artifact of Republicans criticizing government bureaucrats; the government bureaucrats do a great deal that is worthy of criticism
  
• Path dependence:  it's a lot easier not to give people a new drug or treatment than to take one away. 
  
• Intolerance of tradeoffs:  we do not even do the very obvious things to control costs in the system, like rethinking extraordinary measures at the end of life.  The harder tradeoffs are simply non-starters.
• American attitudes toward government:  when told they can't have something they want, Americans do not say, oh, okay.  They go on the news and call their congressman.
• Federalist and non-parliamentary democracy:  in most other systems, the head of the government tells the government what to do.  In our system, you need 220 congressmen and 50-60 senators.  There's no way to implement the sort of technocratic change that reformers envision; the politicians will keep sticking their fingers in the pie.
• Conservatism:  the American public is considerably to the right of any European electorate, and no, this isn't just an artifact of Republicans lying to them.  They have different attitudes about how much they want the government to do, and how much they are willing to pay to do it.  Many of the reforms that hold costs down in Europe are simply non-starters because they smack too much of socialism.

Now, the empirical part: everyone asking this question is looking longingly abroad while ignoring the evidence much closer to home.  Exhibit A:  we've got a single payer system, called Medicare.  It negotiates huge cost discounts with providers.  It has low administrative costs.  It has a gigantic apparatus to evaluate reimbursements for various treatments.  It has . . . a faster rate of per-capita cost growth than the rest of the health care system, according to a CBO report issued by one Peter Orszag.

Anything you could do to a putative new system, you could do to Medicare.  And the reason we haven't is not that we just thought of comparative effectiveness research, healthcare IT, or strong-arming provider payments last week.  These ideas have all been kicking around for a long time, and in the case of the provider payments, have already been tried more than once.  Providers learn to game the new payment rules, and if they don't, they get Congress to undo them.

But maybe the new system will be different.  So let's look at the closest model we have for this system in the United States:  the state of Massachusetts.  Massachusetts has all the goodies in the Baucus bill:  subsidies, guaranteed issue, community rating, an individual mandate, and employer penalties.  Indeed, the Massachusetts program is probably to the left of where we're going to end up, on things like empowering the exchanges to negotiate with insurance companies and the size of the penalties for failing to procure insurance, two measures which are supposed to be critical for holding costs down.

Instead, costs have exploded.  This excellent powerpoint from the State of Massachusetts has some compelling graphics. 

Baucuscare: Score!

So, the CBO report is out, and my estimate of the contents is totally wrong.   WonkRoom has a pretty good summary:

	Old CBO Score Of Baucus Bill	New CBO Score Of Baucus Bill
Costs	Reduce deficits: $49B/10yrs Net Cost: $500B/10yrs Gross cost: $774B/10yrs Spends on subsidies: $463B/10yrs	Reduce deficits: $81B/10yrs Net Cost: $518B/10yrs Gross cost: $829B/10yrs Spends on subsidies: $461B/10yrs
Insured	Uninsured reduced by: 29M Uninsured in 2019: 25M In Exchanges: 25M In Medicaid: 11M	Uninsured reduced by: 29M Uninsured in 2019: 25M In Exchanges: 25M In Medicaid: 14M
Revenue	Tax high cost plans: $215B/10yrs Mandate penalty: $20B/10yrs Free rider penalty: $27B/10yrs Indirect offsets: $12B/10yrs	Tax high cost plans: $210B/10yrs Mandate penalty: $4B/10yrs Free rider penalty: $23B/10yrs Indirect offsets: $83B/10yrs
Medicare and Medicaid	Total savings: 409B/10yrs Payment updates: $182B/10yrs Medicare Advantage: $123B/10yrs DISH Payments: $48B/10yrs Medicare Commission: $23B/10yrs	Total savings: 404B/10yrs Payment updates: $162B/10yrs Medicare Advantage: $117B/10yrs DISH Payments: $45B/10yrs Medicare Commission: $22B/10yrs

I find the new score deeply puzzling.  You've weakened the individual mandate, yet you're still covering exactly the same number of uninsured people.  You can explain that by saying the subsidies have gotten more generous, but then why is it decreasing the deficit by even more?  Here's the CBO's summary of what they did:

 

On September 16, 2009, CBO transmitted a preliminary analysis of specifications for the Chairman's mark as provided by staff of the Finance Committee. Those earlier estimates differ from the estimates provided here for two primary reasons: 
 
First, the proposal has been changed in a number of significant ways. For example, the subsidies that would be provided through the insurance exchanges were made larger, the penalties for not having insurance were reduced, and more people would be exempt from those penalties. Furthermore, the provisions of the excise tax on high-premium insurance
plans were changed in ways that would reduce the amount of revenues collected. In addition, states would now be required to maintain current coverage levels for children under Medicaid and CHIP through 2019.  Although CBO and JCT were able to provide estimates for many amendments, the agencies are not in a position to assess the impact of individual policy changes now that they have been combined in the amended mark. 
 
Second, CBO and JCT have made some technical refinements in their estimating procedures, including a revised assessment of the impact of the proposed changes on premiums for employer-sponsored health insurance and the resulting effects on tax revenues. 

So most of the major components of the program are scheduled to either cost more, or raise less revenue . . . but overall, it's generating a bigger surplus.  It's the healthcare economist's version of "We're losing money on every unit, but we'll make it up in volume!"

Going by the fairly sketchy description, virtually all of the extra benefit appears to come from estimating that employers will see their health care costs fall, mostly because they put those workers into federally subsidized programs, pass the resulting savings along to their workers in the form of higher wages and salaries, and that the Treasury will thereby gain, at a rough guess, about $12-15 billion a year in tax revenues. 

This is somewhat confusing to me.  The CBO seems to be assuming it will get just about 20% of the amount spent on subsidies back in the form of tax revenues.  But the effective income tax rate on the quintiles covered by the subsidies, according to the CBO, is less than 5%.  Perhaps the savings comes from the payroll tax, but even including the payroll tax, it's less than 15%.  And the tax rates are directly proportional to the size of the income, while the subsidies are inversely proportional.  I'm sure I'm missing something that would make the math work, but I can't figure out what.

But there you are:  Baucus got his favorable score, which means this has a good chance of passing--at least, unless the unions get the House to kill the excise tax, or the various medical lobbies get their payment cuts reversed.  Developing . . .

Healthcare: The CBO Report Cometh

The CBO score of the finance committee final bill seems to be coming out later this afternoon.  Jonathan Cohn says:

The Congressional Budget Office is expected to deliver its final estimates on the Senate Finance Committee's bill sometime in the afternoon. And while most of the chatter so far has been about the measure's cost, pay close attention to the other side of the equation: How many people it covers.

The House and Senate HELP bills reached about 95 percent of Americans (that is, 95 percent of legal residents) and a lesser percentage of total residents. The bill Max Baucus originally put forward didn't reach quite as many people. But after all of the changes made in committee, that number could go even lower.

This is something of an understatement.  The Wall Street Journal notes:

The Congressional Budget Office estimated that an earlier version of the Senate Finance bill would ensure health insurance for 91% of Americans -- leaving about 25 million people without coverage. The CBO's estimates for the latest version of the bill are due out this week; it is expected to cover fewer people. About 85% of Americans currently have health insurance.

But one of the major developments over the past week has been the weakening of penalties for failing to buy health insurance. So as Cohn says, most people expect the number of insured people to drop under whatever the committee passes.

To see why, think of it this way:  people buy health insurance for three reasons. 

1.  Cost insulation--getting the insurance company to cover your pills and preventive care

2.  Accident insurance

3.  Insurance against a serious disease

Problem #1 is not achievable on a national scale; it's just the tax code that gives people the illusion that they can somehow save money by adding third and fourth parties to the transaction.  Problem #2 can for many people be largely abated by purchasing vastly more generous auto insurance--raising your purchase to the maximum insurable limit costs a lot less than health insurance, at least where I shop.   So problem #3 looms largest.

if guaranteed issue and community rating exist, everyone in the country effectively has health insurance for a sudden serious disease.  If they get cancer or something, they can just sign up at any time.  They're also covered for a big portion of the costs of any traumatic injury, because a lot of the cost for follow up and rehab comes with enough lag for people to get themselves insured. Thus, the mandate.

But $750 isn't really a very high cost.  Why would you pay hundreds a month for health insurance, when you could pay $62.50 a month to take a slim chance of some very traumatic accident happening to you without the involvement of an insured driver?

So it's probably going to be significantly lower than that 91%.  Like, under 90% of Americans covered.

To put it another way, we're contemplating spending about a trillion dollars in order to cover a few percent of the population--quite possibly leaving more than 2/3 of those currently uninsured without insurance.  Oh, and also, the provider groups that supported the bill say they'll defect if the coverage rate is this low, because it will cost them a lot of money.

I predict some very interesting debate over the next few days.

On an only tangentially related note, Cohn wins the internet for today with his post's headline.  Mostly because increasingly, that describes my entire life.

New York's Calorie Labeling Program May Be a Bust

A couple of times, I've noted that while I'm at least theoretically in favor of requiring calorie counts on menus, I was pretty skeptical that this was actually going to work.  We've had nutritional labeling on products in the supermarket for decades, and this has not exerted any noticeable downward impact on peoples' waistlines.  A fair number of people responded with, essentially, a "huh?" that implied that I must have access to better drugs than they do.  (Not, alas, true.)

Now the first study of New York's labeling program is out, and the results are . . . nothing.  A very moderate increase in calorie consumption that is probably just a statistical artifact.

There was never any very good evidence that labeling was going to work.  Most of the arguments in support seemed to rely either on self reported data, or a gut check by a handful of already pretty slender bloggers--they were sure they'd pay attention to the calorie counts, and so why wouldn't everyone else?  But personal hypotheticals are at best weak evidence, and self-report is even worse.  This study found that a significant minority of people reported changing their behavior as a result of the calorie information, and ordering a lower-calorie meal.  But when you looked at what they actually ordered, it was no less fattening than either longitudinal or latitudinal controls.

I can think of a number of reasons for this.  People may have mentally credited themselves with a savings on one item, and allowed themselves an indulgence in another:  "I ordered a single instead of a double or triple, so I get large fries and a frosty!"  They might just be bad at math.  Or they might have wanted to look good for the interviewer, which is always a risk in these sorts of surveys. But the receipts don't lie.

There are a bunch of caveats:  the study focused on poor people in fast food restaurants (on the grounds that these are the people we most want to reach.)  It happened when the calorie labeling was very new, and people may have needed time to get adjusted, learning how to read the calorie counts, and remembering to do it.   Public health studies of this sort are notoriously shaky, just because it's basically impossible to do a good double-blind controlled study. 

But while a study like this certainly can't disprove the effectiveness of calorie labeling, what remains is that we don't have much evidence to indicate that it works.  It's not that it was a bad idea.  But lots of good ideas don't pan out in the real world.

Markets in Everything

Really unique wedding cake toppers.

Kindle Goes on a World Tour

Amazon just dropped the price of its Kindle from $299 to $259, and is apparently adding an international version for $279 that will work on GSM networks abroad.  The company plans to sell the new Kindle in 100 countries.

It looks to me as if Kindle is going to win the eReader wars; they have the capital and the distribution network to do it.  And as the prices come down, I think these devices will rapidly start penetrating the mass market.  At $299, you have to be a pretty big reader to make this worthwhile.  But once you bring it under $200, it starts to make sense for more and more people.  It will never be as common as the iPod or cell phone, but the time is pretty quickly coming when it won't attract questions from strangers when I pull it out.

Health Care: What's the Big Rush?

Centrist Democrats are asking Reid for more time:

A group of centrist Democratic senators, who could determine the fate of the major health care legislation, sent a letter Tuesday to the majority leader, Harry Reid, Democrat of Nevada, urging that the public be given at least 72 hours to review the legislation before debate begins on the Senate floor.

The group of centrists, led by Senator Blanche Lincoln of Arkansas, who is a member of the Finance Committee, told Mr. Reid that they were echoing complaints from constituents -- "many are frustrated and lacking accurate information on the emerging proposals in Congress," they wrote.

Jonathan Zasloff's interpretation:

Blanche Lincoln and anti-health reform Dems (and Joe) to Harry Reid:

Please give the insurance and Pharma lobbyists more time to tear down the Senate health care bill.

Because you know what's deeply problematic in a democracy?  Allowing opposing sides time to make their views known to voters.  What a principaled politician would be doing is ramming this bill through before constituents have any time to absorb the contents, since they might find out they don't support it.  Let's keep our eyes on the greater good here. 

At least when Republicans did this, they argued that Saddam Hussein might develop WMD any day.  They were completely and totally wrong, of course.  But military threats actually can be urgent.  We're talking about a bill that doesn't take effect until 2013, the better to game the CBO's scoring rules, and evade any negative electoral consequences for Obama.  There's really no excuse for running it through the congress at breakneck speed--except that you believe that if voters have time to consider it, they maybe won't like it.

The voters will, of course, have plenty of time to act on any dislike of the new program.  So what the advocates of speed at any cost are seem to be trying to do is shield moderate politicians from the possible knowledge that their constituents hate it--to keep them from acting in the best interests of the people who elected them.  The moderate politicians know this, and aren't willing to [betray their constituents/risk their own political necks on this bill].

Deliberation is how democracy is supposed to work.  No matter how pressingly awesome you hope your bill is, there is really no excuse for demanding that the Senate vote on it before the public has a chance to find out what's in it.  No matter how you couch it in complaints about insidious lobbyists, it isn't the lobbyists who are making a naked grab for undemocratic power here.

Fox's Red-Eye Beats Primetime Cable Shows

Via Instapundit, Mediaite reports that Fox's late night show Red-Eye is outperforming CNN's whole primetime lineup.  Sez Mediaite:

The show is looking up year-to-year as well. Compared to September 2008, the program grew 23% in total viewers and 43% in the A25-54 demographic. But let's look at the individual shows. Last week we wrote about the 13 shows at the top of the ratings in September - all on Fox News. Red Eye, naturally, wasn't one of them. Here's where they fell - this is the full chart for September programs.

Red Eye averaged 432,000 total viewers and 202,000 in the demo. Let's deal with the demo first - CNN's 8pmET show, hosted by Campbell Brown, averaged 191,000 in the demo. Let's just let that one sink in - Fox News had more people in the all important A25-54 demographic watching their channel at three in the morning (east coast time) than CNN had for the show that leads off their prime time. This says as much about Fox News as it does about CNN. Wow.

In total viewers (and demo), Red Eye beat the cable news competition three hours later. All three other morning shows, MSNBC's Morning Joe, CNN's American Morning and HLN's Morning Express had less viewers in September.

Part of the credit for this can be attributed to Red Eye, which has been consistently growing since its debut in 2007 and built up a solid following. Host Greg Gutfeld and regulars Bill Schulz and Andy Levy have been effective in connecting with their viewers through new media and other means. Some credit goes to Glenn Beck, whose repeat at 2amET was added a few months ago, providing a nice lead-in for the show. But in general, this shows not only the continued and expanding dominance of Fox News, but a major boost for the program some people thought wouldn't survive.

Mmmm . . . maybe.  But living in a two-insomniac household, I think it might have something to do with the fact that CNN has a lot of competition in primetime, while Red-Eye is lined up against . . .  infomercials for the TurboCookerExpress.

Matt Taibbi Turns Software Critic

I've been following the throwdown between Matt Taibbi and John Carney of Clusterstock with some bemusement.  For those who are not devotees of the financial blogs, Taibbi recently posted this video, which he claimed showed evidence of a very large naked short:




Here's Taibbi's description of what took place:

Caught On Tape: A Naked Swindle

Continuing with the theme of naked short-selling, I have a video that was given to me last week that will allow people to see how naked short-selling can take place.

This video is only 31 seconds long (scroll on down to view it), and what it shows is a day-trader trying to sell short shares in a major NYSE-traded stock. To disguise the identity of the trader, I've had to edit out the name of the company in question -- I'll call it BANK X for short. What I can say is that the stock in question is one of America's largest financial companies and the recipient of an enormous amount of public bailout money, so the fact that its stock can be manipulated is something that should be a concern to everyone.

In the video, which believe me doesn't look all that sexy, the trader is using an online trading platform. His clearing firm is a company called Penson Financial Services, which, though not particularly well known, has in recent years suddenly become (by volume anyway) one of the biggest such firms in the country.

[Omit lengthy description of/rant about Regulation SHO and naked shorting]

This is why Reg SHO doesn't really work. If there was a hard pre-borrow requirement that actually forced traders to physically locate and borrow shares before they sold them, you wouldn't have this problem. But what they have instead is a system that leaves three days of wiggle room. As it stands, shares must be delivered within three days after the sale, or else the clearing firm must buy shares to close out the failed trade.

But for a day trader, none of this matters. You're buying and selling within the space of one day. Who gives a damn about three days?

These big clearing firms know this. They also know that competitive advantage in getting the business of these intra-day traders depends on providing locates and providing them fast. A clearing firm that worries about the rules and whines about not being able to locate this or that stock is not going to keep the business of a lot of these day traders. So you see a lot of cut corners.

This video is an example of a cut corner. A second-by-second explanation:

If you look at the display in the first seconds, you will see that the customer is trying to sell 100 shares of BANK X short. You can tell it's a short sale by the purple box near the top marked "Short." To the left of that, you'll see that "order quantity" is 100.

:01 Now if you look at the bottom of the display, you can see that the trade has been rejected, because BANK X that day is on the hard-to-borrow list. It reads REJ - HARD TO BORROW: SHRT 100. Without getting too technical, you don't need a formal locate when a stock is on something called the "easy to borrow" list. But BANK X shares that day were not easy to find (without digressing too much into other complicated realms, there was something going on with BANK X that day that was inspiring lots of people to snatch up its shares). So the trade was rejected temporarily, and the trader was then forced to ask for a formal locate of BANK X stock.

:07 A prompt comes onscreen. Through this box, the customer is going to ask Penson to locate shares in BANK X. But how many shares? This is where it gets interesting.

:11 At eleven seconds, you can see the customer start to fill in the box in the middle of the prompt where it reads, "Locate quantity." To disguise the identity of the trader, I've blocked out the first number in the sequence. But you can see that the number is in the tens of billions of shares. Now, the float for BANK X that day was only five and a half billion, meaning there were only five and a half billion BANK X shares in circulation. Without disclosing the actual number, I can tell you that the customer asked for a locate of shares in an amount that was at least five times the number of BANK X shares actually in circulation. Such a locate, in other words, could not possibly be filled.

:17 At seventeen seconds, at the bottom, you see that the firm Penson has now approved the trade and" located" the multibillion amount of shares. The trade goes through.

This doesn't sound all that dramatic and as video sequences go, it sure as hell isn't the Paris Hilton sex tape. But this is an example of how naked short-selling can happen. If you don't need to actually find the stock before you sell it, there's no real brake on speculative naked short-selling. If a clearing firm will give you a locate no matter how big your request is, there is no real barrier out there to stop this kind of activity.

This set off some alarm bells with John Carney of Clusterstock:

There are plenty of things wrong with this video, and with the conclusion Taibbi draws. Clearing firms will not execute orders without regard to the size of the order, there are real brakes on speculative naked short selling, and real barriers exist to stop "this kind of activity."

Too Speedy. The first thing that rings false the speed with which the trade is executed. The trader apparently manages to short billions of shares in mere seconds. Penson may be a popular and efficient clearinghouse but there is no way they are that fast. There's just no way to have instant execution of a trade of this size.

"It takes minutes to a half-hour for a request to come back from Penson," a trader who clears through the firm tells us.

Too Big Of A Trade.  You cannot sell tens of billions shares without someone wanting and able to buy those billions of shares. This trade involves placing a sell order for more than the total volume of all US equity markets combined for any single trading day.

Too Much Leverage.  More importantly, almost no trader using Penson as his clearing house would have the buying power to put in an order this large. This should sale would require billions of dollars of buying power. The buying power of any trader is a multiple of the money deposited with Penson. That is, it is determined by the maximum margin account available to the trader.

For ordinary, retail traders--the kind of people likely to be called "day trader"--the maximum intra-day leverage is 4 to 1. This is set by FINRA regulation. In order to short tens of billions of shares on any stock worth more than $1, the trader would have to have billions in his brokerage account.

Small hedge funds

often use a more sophisticated kind of margin account that allows for more leverage. It's calculated by the clearing firm exclusively for each of their clients who get it based on their style of trading and track record. A risk averse day-trading hedge fund

could get leverage as high as 7 to 1 intraday. These typically require a minimum of at least $1 million in the account with the clearinghouse.

Any trader with the billions of dollars necessary to get execution on the trade Taibbi describes would be unlikely to be clearing through Penson. He would be trading through Goldman Sachs or JP Morgan.

It's too risky. There is a good reason for Penson and other clearing houses to limit leverage in this way, even beyond the regulations.  They face counter-party risk when allowing traders to short stocks. If the stock increases in value and the trader cannot pay for the stocks he is short, the clearinghouse will have an obligation to make good with the Depository Trust Company.

This trade would be a disaster. If tens of billions of shares of a stock were sold like this, it would make headlines and single handedly wipe out the stock. Likewise, when the trader bought up the shares to close the trade and deliver the shares to the buyers, he'd face a self-imposed massive short squeeze. Buying shares pushes the price up. He'd get crushed.

Taibbi is reading too much into the video. Although Taibbi concludes his description of the video by writing "The trade goes through," this isn't what happens.  This screen shot is nothing more than the purported "ok" from some trading system that an attempt is made to locate shares.  The quantity is requested and there is no indication that the entire amount was approved.

Many trading systems will accept any amount for the request but only return the approval for the quantity that the firm was actually able to locate. There is no evidence that this trading screen is somehow linked in real time to Penson. Had this order actually been attempted to be entered into the Penson system, multiple risk checks and parameters would rejected the order.

 In short, there's just no way the trade represented in this video is real. It certainly doesn't reflect the reality of short selling.

A later post pointed out that at 0:27 a pop-up notifies the user that his trade failed because the position is too large.  Taibbi retorted that he hadn't been woried about the trade, just the huge locate:

The idiots at Clusterstock, just one week removed from making the uniquely asinine (even for them) claim that there is no difference between short-selling and naked short-selling, have struck again, proving once again that it is always best to actually put down your paper bag full of airplane glue fumes before you make blog posts.

Business Insider writer John Carney here seems to have read my recent post on Penson and taken from that that I was reporting that someone had executed a short sale of tens of billions of shares in a company whose float was only five and a half billion. This would, indeed, be ridiculous. Except that is not at all what I reported.

What I published was a tape of a trader asking for a locate of tens of billions of shares. It is the size of the locate, and the speed with which it is approved  that is the issue, not the trade. The actual trade, if Carney had bothered to read the text, was only for 100 shares.

Carney then goes on to claim in another post that the "system" worked because a second trade was rejected at :27 on the tape. But this is a second trade for a larger amount of shares that was rejected not because of the locate but because the trader in question had insufficient funds in his account to make the short sale. It has nothing to do with the locate and is completely irrelevant to the story.

So now I'm confused:

1.  I've worked with a fair amount of market data/trading software, because I used to do IT for banks.  Now, it's been a decade, and maybe everything's changed--but there aren't that many exciting ways to lay out trading software.  As far as I can tell, whatever this mysterious second trade is, it's in the same stock.  At any rate, I don't know how he can be so confident as to what it refers to, since the video has pretty clearly been edited.  The execution is too quick.

2.  The locate at the bottom at 0:22 is for an odd number of shares.  The alleged locate order was for a round number.  If the software is so crappy that it will accept any locate order, how come it's got a locate for a different number from what was entered?

3.  The headline of the piece is "Caught on Tape:  A Naked Swindle", which would seem to imply that someone is being, I don't know, swindled.  The video is titled "Penson Approves Billion Share Naked Short", not "Penson Sure Has Some Bad GUI Designers".  Why would Taibbi ramp up this level of outrage over . . . a software glitch?  If the trades don't go through, who cares whether the software erroneously tells customers it can find them five times the float?  I mean, I'm sure the customers do.  But that's not a regulatory issue, it's a problem for the customer service reps.

4.  Alternatively, we can say that Taibbi has discovered evidence of hundreds of shares being shorted without proper locates. But a hundred shares is just not a problematic short.  Are even "hard to borrow" stocks so hard to borrow that no one can locate 100 shares in the next three days?  More importantly, unless this guy was trading some OTC penny stock, which Taibbi says he wasn't, 100 shares couldn't possibly move the price by as much as a penny.  Taibbi has called naked shorting "counterfeiting shares", but if one guy goes into his basement and counterfeits 100 perfect dollars, this is not a problem for . . . well, anyone, really. 

Counterfeiting is a problem either because the counterfeits are imperfect, and someone therefore ends up "losing" the money when the fakery is discovered, or because they increase the money supply enough to decrease everyone's purchasing power.  Similarly, a 100 share naked short is a problem for you and your counterparty--if it's fraudulent rather than accidental (which does happen), perhaps one that should be prosecuted. 

But they're irrelevant to the rise and fall of companies, which is what Taibbi's article is allegedly about. Shorts are systemically important only if you can execute naked trades large enough to move the stock price.  Otherwise it's not a swindle--it's just a very stupid idea, because you'll get in trouble if you FTD.    And for a variety of reasons, many outlined by John Carney, it's a lot harder to execute large trades of any description (but particularly short trades) than very small ones. 

5.  Who films themselves doing something illegal?  Sex acts don't count.  No one slips into their silk pajamas, pours themselves a neat Glenlivet, and fires up the laptop to relive every scintillating moment of the time they got some trading software to claim it could locate a bunch of shares that it really couldn't locate at all.  At any rate, if they do, I sure hope they write in to Dan Savage.

This is all sort of academic, because Penson has now written a letter to the SEC pointing out that it is not their trading software, among other problems.  This is the sort of thing that is easy to check, and, whatever you think about the SEC, the kind of thing they do check.  Either Penson is risking gigantic regulatory hassle by lying to the SEC, or Taibbi got punk'd.  But why would anyone bother?

There's now a growing body of spinoff posts attempting to discover what the video does show.  The consensus is that the stock is Citigroup--the price is certainly right, and it matches Taibbi's description.  Kid Dynamite thinks it shows the audit trail--the software asking for a broker against which it can check the locate.  He says this raises possible red flags about compliance--but I'm not sure how.  We don't know that compliance failed, only that the software may not have done it automatically--or it may, because as I said, we know the video has been edited, because pretty much everyone agrees the approvals are happening too fast. 

But failing to automate compliance is not necessarily a bad thing.  I've worked with teams who were automating trading compliance, and what you learn very quickly is that machines are really stupid about compliance.  Humans are less consistent, but also less easy to game.

Wedding Blogging: The Quandary of the Registery

So, at the urging of various wedding magazines, several friends, and FavoriteYuppieStore, which gave us mimosas and a free glass bowl, Peter and I trekked out to Maryland on Sunday morning to have a go at our first wedding registry.

I found the experience curiously disconcerting.  A lot of couples have told me that they just went wild and scanned everything.  We had the opposite experience.  Both Peter and I love this store, and own quite a few of its products.  And I'm a fairly decisive shopper.  Had we been shopping on our own account, we would have found it easy to decide whether we wanted something, or not.

According to Milton Friedman, we should have found it thrilling to spend other peoples' money on ourselves (sort of):




But I actually found it incredibly inhibiting.  There were plenty of nice things we needed, primarily glassware and serving bowls.  If I'd been spending my own money, I might well have bought them.  But instead I found myself wondering if this was really nice enough to justify having other people buy it for me.  More often than not, I put it back.  But whether or not I ended up scanning an item, I was surprised to find that, once I was no longer spending my own money, I didn't really know whether I wanted it or not.

Perhaps that's just a reflection of the fact that frankly, I'm more than a little uncomfortable with the whole concept.  I was raised by a family that views registries with deep skepticism--the look on my mother's face when she found out that wedding websites have a spot to include your registry information would have done any B-movie horror actress proud.  I didn't have the heart to tell her that stores now give out thoughtfully printed cards you can include with your invitations (no, we will not be availing ourselves of either the cards, or the special website section.)

I'm all for making things easier on our friends--but there's something deeply weird about making it easier for people to buy you gifts.  It's one thing if you have a china or a silver pattern--and we probably will register for china, at least.  But I'm really not sure about the rest of it.  There are some desires that just shouldn't be advertised.

By Request: Weak Links in the Food Chain

The New York Times article that ran over the weekend on e coli infections in ground meat is Exhibit A in why I am skeptical about industrial animal husbandry, and indeed, am still kind of dubious about the whole animal products thing. 

Ground beef is usually not simply a chunk of meat run through a grinder. Instead, records and interviews show, a single portion of hamburger meat is often an amalgam of various grades of meat from different parts of cows and even from different slaughterhouses. These cuts of meat are particularly vulnerable to E. coli contamination, food experts and officials say. Despite this, there is no federal requirement for grinders to test their ingredients for the pathogen.

The frozen hamburgers that the Smiths ate, which were made by the food giant Cargill, were labeled "American Chef's Selection Angus Beef Patties." Yet confidential grinding logs and other Cargill records show that the hamburgers were made from a mix of slaughterhouse trimmings and a mash-like product derived from scraps that were ground together at a plant in Wisconsin. The ingredients came from slaughterhouses in Nebraska, Texas and Uruguay, and from a South Dakota company that processes fatty trimmings and treats them with ammonia to kill bacteria.

Using a combination of sources -- a practice followed by most large producers of fresh and packaged hamburger -- allowed Cargill to spend about 25 percent less than it would have for cuts of whole meat.

Those low-grade ingredients are cut from areas of the cow that are more likely to have had contact with feces, which carries E. coli, industry research shows. Yet Cargill, like most meat companies, relies on its suppliers to check for the bacteria and does its own testing only after the ingredients are ground together. The United States Department of Agriculture, which allows grinders to devise their own safety plans, has encouraged them to test ingredients first as a way of increasing the chance of finding contamination.

Unwritten agreements between some companies appear to stand in the way of ingredient testing. Many big slaughterhouses will sell only to grinders who agree not to test their shipments for E. coli, according to officials at two large grinding companies. Slaughterhouses fear that one grinder's discovery of E. coli will set off a recall of ingredients they sold to others.

The libertarian baiters out there want to know what I would do about this, huh, huh? and the answer is that while I'm certainly not against public health inspections of our food supply chain, I think we're probably going about this wrong.

The current approach to food safety is based on the trace-and-trap methods that were pioneered in the great public health campaigns of the nineteenth century.  These were titanic achievements, don't get me wrong--but they're also time consuming, cumbersome, and likely to miss quite a lot of disease.  After all, most cases of food poisoning are not reported. I'm pretty sure that I had food poisoning a month or so back, and I certainly didn't go to the doctor; I just lay under eighteen blankets in shaking misery until the thing passed.

In virtually every case, when we could use blanket protective measures, rather than inspection-and-quarantine, we did.  That's not just because quarantine is pretty intrusive on human liberty.  It's better to build a central reservoir than try to track down the source of every case of typhoid; better to pasteurize milk than trying to test every single cow for multiple diseases; better to vaccinate for infectious diseases than shut the sufferers in with their families for weeks at a time.

We developed the USDA inspection regimes because we didn't have a way to sterilize meat without cooking it.  But now we do:  irradiation.  As Ron Bailey points out, irradiating meat is an excellent way to kill multiple bacteria.  Decades of study have shown that it is very safe, and does not render the food radioactive, but its uptake has been limited by consumer worries:  irradiated food sounds scary.  Consumer groups that should have been pushing a new way to ensure the safety of the food supply have instead whipped up panic against it.

As the second link shows, these worries have attended every major advance in food safety.  Unfortunately, I'm not sure we now have the will to overcome that sort of resistance.  I think it's obviously also true that suppliers should not be forbidden to test ground meat as a condition of buying it--indeed, I think they should probably be required to spot test it.  But testing the food is distinctly second best to treating it.

Meanwhile, I think the McArdle-Suderman household is permanently off ground meat products.  "Slaughterhouse trimmings and mash-like product" . . . eeeeeewwwwww.  I highly recommend investing in a high-quality food processor and bulk chuck roasts from Costco, which is what I'll be doing for any ground beef needs we have in the future.

Calculating Economics

Paul Krugman explores Arnold Kling's recalculation story and says it falls apart "when you ask why, say, a housing boom -- which requires shifting resources into housing -- doesn't produce the same kind of unemployment as a housing bust that shifts resources out of housing."  Kling responds:

Note that the housing boom took place slowly, and it built up over a period of years. Several economists, Krugman included as I recall, were already talking about a housing bubble in 2004, even though in hindsight the biggest price excesses were still to come. So the housing boom must go back even further, to at least the late 1990s. In contrast, the collapse of house prices took less than two years (assuming they have bottomed out, which may be a brave assumption).

I think it is reasonable to generalize this notion that booms are longer and relatively gradual, while busts are sudden. If this generalization holds, then it ought to be harder for the economy to adjust to a bust than to a boom.

I think this is not only right, but definitionally true about booms and busts.  Lots of countries have economic problems.  But sectoral shifts, or credit contractions, are not catastrophic when they are slow enough for people to plan.  We probably have a little residual unemployment left over from the decline of the steel and auto industries.  But as long as the decline happens over a period of year, the economy can absorb it.  When the economy just stops building houses, unemployment is more troublesome.

That's not an endorsement of the recalculation story, which I'm still pondering--but I think that even if you don't by it as a complete explanation of the business cycle, it's very compelling as a complication, especially when you add it to heterogenous job preferences and sticky wages.

 

ACORN Story Gets Curiouser and Curiouser

The "few bad apples" theory of ACORN takes another body blow:

"Current high-ranking members of ACORN have publicly acknowledged that embezzlement did in fact occur, but the exact amount of the embezzlement was unknown until it was recently acknowledged in a board of directors meeting on Oct. 17, 2008, by Bertha Lewis and Liz Wolf that an internal review had determined that the amount embezzled was $5 million, " the new subpoena says.

The subpoena says, "It is still unclear if some of the monies embezzled are from state, federal or private funds."

The subpoena requests documents from Citizens Consulting Inc., a financial arm of ACORN, and from various accounting and legal consultants in New Orleans. Investigators are trying to verify the issues raised in the subpoena.

"We're going to follow the evidence where it leads us and try to do the right thing," said David Caldwell, head of the attorney general's public corruption and special prosecutions divisions. "We are actively investigating the case, whatever the outcome might be. This is something we are devoting our full attention to."

Wade Rathke, who was in Bangkok, Thailand, on Monday, referred questions to ACORN officials. Lewis said she would comment further after she and ACORN attorneys had a chance to review the subpoena.

ACORN board member Vanessa Gueringer, chairwoman of the Lower 9th Ward Chapter, said she had not seen the subpoena but that the accusation about the larger embezzlement was untrue.

"I believe it is another lie, another witch hunt, " Gueringer said.

Debt: The Legacy of Reagan?

I've been meaning to blog this Paul Krugman post from last week, but I got caught up in the First Draft of History, and didn't get around to it.  Now I have some time, I find it still puzzles me:

Andrew Leonard is unhappy with my colleague David Brooks for suggesting that rising debt in America reflects moral decay. Surprisingly, however, Leonard doesn't make what I thought was the most compelling critique.

David points out, correctly, that something changed around 1980 -- that consumers started spending a larger share of national income and that debt began increasing. Although he doesn't point this out, this was also when the federal government first began running substantial deficits even in good years.

David would have you believe that what happened then was a decline in Calvinist virtue. But, um, didn't something else happen around 1980? Can't quite remember .. someone whose name begins with the letter "R"?

Yes, Reagan did it.

The turn to budget deficits was a direct result of the new, Irving-Kristol inspired political strategy of pushing tax cuts without worrying about the "accounting deficiencies of government."

Meanwhile, the surge in household debt can largely be attributed to financial deregulation.

So what happened? Did we lose our economic morality? No, we were the victims of politics.

For starters, of course, deregulation kicked off under Jimmy Carter, with the Depository Institutions and Monetary Control Act of 1980.  More importantly, deregulation wasn't simply the brain child of some Chicago-crazed lunatics at Treasury.  It was the brainchild of Fernand St. Germain, the Democratic representative from Rhode Island, which is not surprising, because of course, Democrats had control of the House of Representatives.  And he wasn't being driven just by ideology, or even bank lobbying; he was being driven by the fact that the previous regulation regime had driven the Savings and Loans into a ditch.  They were stuck with a bunch of fixed rate mortgages paying low interest rates at a time when Paul Volcker was driving short term interest rates up to 20%.  Mortgage deregulation was supposed to be a solution to the problem of banks that borrowed short and lent long bleeding to death.

And why were they borrowing short and lending long so disastrously?  Because Congress had prohibited banks from making anything other than long-term fixed rate loans, and until the deregulation of 1982, sellers could pass their low-interest loans on with the house when they sold it.

There are also other demographic changes that explain the change in American indebtedness, particularly the retirement, and subsequent death, of the generation that lived through the Great Depression.  Their children were the first to have grown up with long term mortgages and credit cards--which were invented in the 1950s, not under Reagan.  There's a lot of evidence that American attitudes toward debt have changed, but very little that this change was caused by changes in the government--rather, the explosion of deficits seems to have followed the mood of the citizenry.

More broadly, it doesn't make a whole lot of sense to deride those who have linked the crisis to the Community Reinvestment Act because 1977 was such a very long time ago . . . and then claim that it can all be linked back to one law passed a few years later.

Mental Health Break

In honor of the 40th anniversary of Monty Python's first broadcast:

On Doctors and the Military

Commenter Wombat Socho says that the military is an extraordinarily inapt example to use in defense of the possibilities for lower doctor pay:

Ever since I was a wee Air Force brat, doctors as a class were the hardest officers to retain since they could usually make a lot more money in the civilian world. This has also been true historically, to the extent that the armed forces have their own med school and have resorted to drafting doctors in wartime. I guess the uniforms and "social status" didn't work for those doctors...particularly because the military is still looked down on by the literary elites, and doctors are also at the bottom of the military social scale, which basically boils down to combat arms officers first, support officers next, and civilian professionals in uniform last.

Conde Nast Destroys a Great Icon

Gourmet magazine, the magazine that virtually created America's food culture, is apparently going to be closed by Conde Nast due to a fall in ad sales.  I'm shocked and horrified.  Instead, Conde is keeping the decidedly mediocre Bon Appetit, which might be described as "things you can make your girlfriend for Valentine's Day without setting the kitchen on fire."  Conde may be making the right commercial choice--maybe America's food culture has slipped so far that there's no real reason to publish a magazine aimed at people who are willing to spend all day making a meal.  All I know is, when I go onto Epicurious, and I have a choice between a recipe from Gourmet and a recipe from Bon Appetit, I choose the former--and the few times I've violated this rule, I've always been disappointed with the results.

On the other hand, I'm happy to see that Conde is trimming down some of the overprofusion of bridal magazines, which all have the same wedding dress ads, and precious little else.

Markets in Everything

Denver alt-weekly seeks the nation's first marijuana critic.

On Doctor Pay, and Swedes

Noam Scheiber reports on our Bloggingheads back and forth, where in response to his argument that we could compensate doctors with prestige rather than money, I said:

We don't have a unified culture. There's no--Sweden can talk about having a Swedish culture, and to some extent a Swedish status hierarchy and Swedish values. That's just not true of America. Everyone's participating in about 97 different subcultures. So you can invent your own status hierarchy, but you can't get everyone to buy into the idea that we should pay our doctors $60,000 a year and then all love them a lot because they're doctors.

Scheiber writes:

I guess Megan's point is that Sweden has a more discernible status hierarchy because it's a much more homogeneous country. And it sorta sounds plausible (though I still think most people are inclined to respect doctors regardless of whether or not they belong to the same subculture--all the more so if they're satisfied with their health care).

But then, a day or two after all this, I stumbled across this item from Matt Yglesias:

An interesting fact about Sweden is that an extremely high proportion of its population is foreign born. It's not the highest in the world--Canada and Australia take the crown--but the foreign-born are a larger proportion of the population than in the United States.

A large number of those immigrants are from other European countries, but apparently Sweden has one of the world's largest Assyrian populations.

Hmmm. It turns out even Sweden doesn't have a Swedish culture.

I could be wrong--I'm certainly no expert on Sweden--but my understanding is that Sweden has a very high immigration rate because of its extraordinarily generous asylum policy.  However, these immigrants are not particularly well assimilated, and are not really the people who become doctors in Sweden.  Indeed, the non-Western immigrants to whom Matt refers seem to have a horrifically high unemployment rate. Second generation immigrants, particularly those who are not from Northern Europe, appear to have severe lagging income gaps with ethnic Swedes.  As Michael Moynihan said a while back:

[T]he plurality of the foreign-born in Sweden are Finns and Finlandsvensk-Swedish-speaking Finns-who are very much a part of the Nordic welfare tradition. This will soon change, with the influx of asylum-seekers from the Middle East, and we'll soon see how much stress this puts on the "Swedish model." That said, and as Geier seems to concede but not comprehend, the remaining 87 percent are native-born Swedes with, for the most part, a common cultural, religious/irreligious, social, and political heritage. This is, obviously, not the case with native-born Americans, a patchwork of ethnicities and religious affiliations. (Incidentally, I am an American-born permanent resident of Sweden.)

My impression is that the ethnic Nordics who have a higher probability of finding jobs as skilled professionals do in fact think of themselves as participating in a common Swedish culture in a way that is just not comprehensible in the United States.  They talk about being Swedish in the way that an individual American might talk about being Jewish, or a Harvard grad.

In America, it's not just that we have a high percentage of immigrants right now; it's that all the previous generations of immigrants also created their own subcultures, as did the regional divides between north/south/west, the endlessly multiplying religious divides, and so forth.  It's generally harder to substitute status for income outside of relatively closed and homogenous cultures, which is why small towns rely on volunteer firemen, and cities don't. 

Matt Yglesias, who totally mangled what I said to interpret it as saying that income confers status on a profession--possibly true, but not what I argued--offers the Officer's Corps as an example of skilled profession that isn't particularly highly paid. 

I'm not sure that it's an accident that the career military is so heavily drawn from hereditary military families, and white southerners, both of which place extraordinarily high status on joining the military.  It's also true that officers have quite a lot of financial opportunities after they leave the military, but of course a lot of them are in it for honor rather than money.  The thing is, being a high-ranking officer is so weird in so many ways that I'm not sure you can generalize it to any other profession--at least not unless you're willing to give successful doctors a few aides de camp, subsidized housing, and maybe a private plane.

But the main thing is that we can't just decide to offer doctors more status in exchange for lower pay.  There's no one to "decide", and even if "we" did, a lot of people wouldn't go along with "we".  Outside of the military, which seems to primarily recruit in a handful of subcultures, I'm not aware of a lot of professions which use status in lieu of pay to reward people who have many other opportunities.  I mean, you can cite journalism or academia, but in fact, someone with a PhD in Comparative Literature is not foregoing scores of other lucrative job offers to take that tenured professorship.  Academic specialties whose graduate students do have such opportunities, such as economics, law, and engineering, pay relatively well.

To expand that point a little bit, I think America's income inequality in general makes it harder to force down doctor pay.  It's easy to deride this as saying that doctors are greedy--but the more relevant frame is opportunity cost.  If people with strong science skills can earn, say, $150,000 in some other profession, you're asking them to sacrifice quite a lot for the privilege of becoming a doctor.  Some of them will do it--just as some MBAs become journalists.  But others will balk.  So either you have to take lower-quality candidates with fewer other opportunities, or you end up with fewer doctors.  In Europe, there aren't so many other lucrative opportunities, and status is arguably more valuable than it is here, since in many cases, only a minority of your fellow Americans will recognize the status you've so painstakingly acquired.  When you're introduced to a pastor at a party in the rural south, you're meeting an important person.  When you meet the same pastor at a dinner party on the Upper West Side, he's a freak who is at best possibly interesting.  Multiply that a few hundred times, and it's little wonder that money is the dominant form of compensation in the US--at least, unless you can get God or professors to handle your recruiting.

What To Do About the Ratings Agencies?

Yesterday, I asked what we should do about the fact that ratings agencies were so drastically underestimating tail risk of the securities they rated.  Today, Joe Wiesenthal at Clusterstock offers a possible solution:

Everyone seems to agree that the ratings agency system needs reforming, but nobody seems to have any idea how to do it, probably because there's so much confusion about the problem.

It's a big misconception that the problem has something to do with the pay-to-play model. The idea that the ratings agencies were compromised because they were paid by the debt issuer makes some logical sense, but in reality, all those AAA ratings were the result of buyers looking for zero-risk products, and a desire to manufacture them.

For clear reasons we can't go to buyer pays, because then all the buyers would have different ratings, and that's problematic since ratings are used for regulatory purposes (i.e. you have to show that you're holding a certain percentage of your assets in AAA-rated securities). Besides, in the age of electronic media, there's no easy way to have a business model just selling research.

Another problem is the cartel aspect -- S&P, Moody's, and Fitch are insulated from competition, but then, you can't just have anyone rate debt, because then you get Tom, Dick, and Harry's Ratings Agency Shop putting AAAs on everything.

So here's the answer.

You create a pool of 10 companies licensed to rate debt. When an issuer wants to bring a security of some sort to market, they tell some central body, and a rater is selected at random from the 10. There's no changing it once a name is selected. Thus the debt issuer can't go ratings-agency shopping if they're worried about what kind of ratings they can get.

Mental Health Break

Austan Goolsbee was known at Chicago for the hilarious semi-impromptu monologues he would deliver at the annual business school follies.  Now he's bringing those talents to DC:

How's That Cash-for-Clunkers Deal Working?

Cash for Clunkers moved a bunch of auto sales forward, causing people who thought they might replace their car in the next year or two to rush into the showrooms.  Now, in the aftermath, sales are plummeting:  47% at GM, 44% at Chrysler, 8.9% at Ford, 16% at Toyota, 23% at Honda, 11% at Nissan.  I hope those car companies used the cash infusion now, because they'll be on lean rations for months, even years.

The huge slide for our bankrupt giants is interesting.  I mean, we expect sales to fall; the companies are hosed.  But why was Cash for Clunkers particularly good for GM and Chrysler?  Or did they simply use up more inventory than their competitors, since they're shutting down production lines?

The Magic of Multipliers

Back when the stimulus was being considered, there was a lot of talk about what the multiplier of stimulus spending is.  Basically, the multiplier is the effect of government spending permutating through the economy:  I buy a wrench for my fighter jet from you, you hire workers, they feel richer and start shopping big screen televisions, and so forth . . .

If the multiplier is greater than one, stimulus spending has a big effect; you cause the economy to grow by more than the amount of the government spending.  Theoretically, if the multiplier is large enough, and the growth occurs in the right places, you can get enough tax revenue to pay for the stimulus spending.  Sadly, empirical estimates are much smaller than the 3x or 4x multiplier you would need for this to be true.

If the multiplier is one, the stimulus basically raises GDP by exactly the amount of government spending.

If the multiplier is less than one, the stimulus raises GDP by less than the amount of government spending.  Since you have to pay back the full amount later, and the stimulative effects are only temporary, this is probably not a good deal.  Not that this ever stops the government from doing other sorts of spending--F22, I'm looking at you . . .

Obviously, the size of the multiplier is a matter of hot political debate, with the estimates roughly breaking down along ideological lines:  conservatives think it is small, liberals believe it is larger.  These beliefs are obviously colored by your other opinions on the general wisdom of having the government take taxpayer dollars and spend it on stuff.

In the Wall Street Journal, Robert Barro and Charles Redlick discuss the findings of their new paper, which suggests that the multiplier for defense spending is about .6 or .7 at trend unemployment, rising towards one around an unemployment rate of 12%.  They think that the multiplier for non-defense spending is smaller--though this is colored by the fact that it's very difficult to extract the stimulative effects of non-defense spending.  As they note in the article, defense spending tends to happen mostly independent of the economy, which makes it relatively easy to see the effect.  Non-defense stimulus tends to occur when the economy is already tanking.

Barro and Redlick also suggest that tax cuts are preferable to spending, a finding broadly consistent with the Romer and Romer paper that found substantial multipliers for tax cuts/increases.  However, they note that this effect is harder to pin down over long time horizons. 

I've discussed the underlying paper with Barro, and it seems pretty compelling; they've got a hell of a time series.  On the other hand, I know that this work fits both his and my political convictions, so there's a good chance we're both missing something.  No doubt liberals will jump on the paper with both feet, and we'll get to here about what that missing something might be.

An Elegant Statement of the Problem With Financial Markets

One of Felix Salmon's commenters offers a succinct summary of recent financial innovations:

The person most willing to take on risk is the one unaware he is doing so. He charges no risk premium...

The resulting market equilibrium is that the guy who is unaware of the risk ends up loaded with it. Then the music stops.

This summation awaits an elegant statement of the solution.  Felix offers one:

Financial complexity and innovation, on this view, are essentially tools of obfuscation. And it's easy to hide risks when risk-averse investors want debt-like products which retain their face value: such instruments tend to have very low volatility, and so look and feel as though they're low-risk, even if they're full to bursting with enormous amounts of tail risk. The answer, as I've said many times in the past, is for risk-averse investors to be willing to take a small amount of explicit market risk, and to move towards safe equities (utilities and the like) and away from debt. Because if they go to an investment bank asking for safety, they're likely to just get hidden risk in return.

But aren't a lot of the most risk averse investors funds or insurance companies with limits on the kinds of assets they can invest in? I'm not sure we can fix this problem without knowing the answer to the question we've been asking for a year now:  why did the ratings agencies underestimate the tail risk, and is that reason fixable?