« October 2009 | Main | December 2009 » November 2009 ArchivesNovember 30, 2009Vegans of the World Rejoice!Scientists create meat in a vat.There are a bunch of caveats. The meat is not currently edible--they need to figure out how to "excercise" it to give it muscle tone. And it still seems to use some sort of meat brother for nutrients, which kind of defeats the purpose. But it looks like vat meat may eventually be a reality, allowing vegans to indulge in juicy steaks and delicious chicken breasts without any intervening cruelty to animals. And if the environmental impact was lower than farming--as the article implies--it's an even bigger win. PETA may someday be a staid old lobbying group that spends most of its time carping about how people treat their housepets. CBO: Average Premiums Will Not Fall Much in the Large Group Health Insurance MarketThe overwhelming majority of people who have private insurance are covered by their employers. That will still be true under any of the proposed reforms. So it's worth looking at what happens to premiums in the employer-based market after a given plan takes effect.If the plan is the Senate plan, then according to the CBO, not much changes. Average premiums might be as much as 3% lower than they otherwise would be. On the other hand, they might not change at all. That's actually rather surprising. We've been hearing a lot over the last few weeks about the transformative power of the excise tax on high cost plans, which is supposed to really incentivize the kind of delivery services reform that could hold down medical cost inflation. Indeed, the effect is supposed to be so powerful that almost all the revenue estimated from the excise tax actually comes from employers buying cheaper health insurance than they otherwise would and passing those savings onto employees in the form of wages, which the employees then pay taxes on. By 2019, that excise tax is supposed to be generating $34 billion a year for the treasury. But according to the CBO, while the excise tax will exert downward pressure on large group health insurance premiums, other factors--like the requirement that children be eligible for dependent coverage up to the age of 26--will push them upward. The result is a maximum savings of 3%, a minimum of 0%. The CBO notes that because so many people are affected, even small changes can produce significant revenue. That zero does make me sort of wonder what might happen to all that revenue. The excise tax is basically the entire revenue side (there are a bunch of provisions that also effect revenues, but they roughly balance out; if the excise tax doesn't raise as much as anticipated, there will be no extra revenue to cover new spending, unless something else also changes). The logical chain that leads to the excise tax raising this extra revenue indirectly is economically pretty sound, if complicated. But it also works the other way. If other employees are getting more expensive coverage, presumably their wages go down, and they pay less in taxes. If the total average change in employer premiums is 0%, then I would assume that the total revenue raised by the excise tax will be very close to zero. Of course, it may be that the people who will be affected by the excise tax are wealthier than those who will not. Indeed, I assume many of them are. But the differences would have to be huge for the effects of the excise tax to grossly outweigh the loss of taxable income on the other side of the ledger. And a lot of people getting Cadillac insurance seem to be public employees and union members who have exchanged higher wages for plusher benefits; they're not paying a 40% marginal rate on any extra wages they'll get out of this. Update: I got a little clarity on this from a source in the know, and the reason it's close to zero is not offsetting upward pressure. That's because those tables cover the per-person cost, so even though adding dependents raises the per-policy cost, it pushes down the per-person. (Note: the excise tax is leveled per-policy). The explanation for the zero is simply that all of the effects are small, possibly approaching zero, and so zero is included as the upper bound of the range. As the report says, this market is so large--a trillion or more--that even small percentages can raise significant tax revenue. But my source confirmed that the closer the eventual number approaches to zero, the less revenue that excise tax will be raising. CBO: We Are Going to Be Spending A Lot More On Health InsuranceHealth care bloggers have been waiting with bated breath for the CBO's report on health insurance premiums, which came out today. The upshot: premiums in the large and small group markets, which account for the lion's share of non-government health insurance, will not be significantly affected. Premiums in the individual market, however, will rise 10-13%.The CBO estimates that this effect will come from three things: 1. A large boost in the generosity of coverage 2. Improved administrative efficiency (individual plans are the most expensive to administer) 3. More healthy people in the pool. You can claim this as a victory for the pro-reform side, because people are getting more coverage at somewhat better prices, or a victory for the anti- side, because, well, we're going to be spending a lot more on health insurance. We're expecting to increase the size of the individual insurance market by something like 50%, and premiums in the market are going to go up. Talking about the averages necessarily disguises the fact that the costs and benefits will be distributed unevenly. People without employer-based insurance who have an expensive condition are the big winners. People who are currently in the private market are probably net losers, because many of them could buy the extra coverage they will be getting, and have chosen not to. Relatively affluent-but-uninsured people, meanwhile, we see their premiums rise by somewhere between $5800 and $15,200, according to the CBO. Of course, many people will not face the full costs of their treatment--slightly more than half of the people in the individual market are expected to receive subsidies. But that just means that someone else will have to give up those thousands of dollars. It looks to me like health care spending as a percentage of GDP is going to be higher, not lower, when all the changes are phased in. Update: So was Obama's campaign right when it said that health care reform would cut costs for the average family by $2,500 a year? Well, first we have to define what we mean by average: mean, modal, or median? The modal (most common) family will see their insurance premiums rise, if the CBO is right. The mean family is more complicated. Way more complicated, because the pool is changing. But assume away those problems, and imagine uniform policies costing $1000, that rise to $1,115 under Obamacare. 43% of people are now seeing their premiums go up by $100. But the CBO says 57% get an average subsidy of 2/3 of the premium. So their costs fall by almost $600. So I think he's probably right. Of course, if you factor out the subsidies, it is definitionally not true. But to the people buying the insurance, it is. The median? Trickiest of all. It basically depends on what happens to the next eight percent--the richest people being subsidized. Do they see premium drops of as much as $2500? Maybe. The subsidy for families between 300-400% of the poverty level, which is where that 8% probably falls, range between 33% and 44%. So if premiums are 13% higher than otherwise, but they get a 40% subsidy, the median family probably sees a savings--but I don't know whether it's more than $2500. It depends on the distribution of families among the uninsured. If families cluster at the higher end of the income spectrum--not an unreasonable assumption, since they tend to be older---then the median family will see an increase in their premiums. If they cluster lower, or at the lower end of the 300-400% FPL scale, then they'll see a big drop. All of which goes to tell us what we already knew: legislation produces winners and losers. Black Friday Points to a Grim Holiday Season for RetailersIf you were counting on what Glenn Reynolds calls "the retail support brigade" to come riding over the hills, you might want to rethink. After last year turned in one of the worst holiday shopping seasons in decades, people were hoping that things might perk up this year, but Black Friday's results don't look too good for retailers. Sales were up a paltry 0.5% from last year, and that only because a lot more people came out bargain-hunting.Sales on the day after Thanksgiving rose just 0.5% to $10.66 billion, according to ShopperTrak RCT Corp., a research firm that monitors sales at more than 50,000 stores. That compared with a 3% year-over-year Black Friday increase in 2008 and an 8.3% surge in 2007. It's too early to be certain, of course, but to me this points to a brutal trend: everyone is looking for bargains, and refusing to buy anything else. That means that profit margins are likely to be thin, and even with aggressive discounting, retailers may not be able to drive much volume. What's bad for retailers may be good for us, of course. The amount of consumer credit outstanding has fallen pretty dramatically, but because of the buying binge we were on, it's still kinda high, as is the ratio of debt service payments to income. On the other hand, many of us are retailers, or work for them, or for companies that sell all the things that Americans aren't buying. The contraction is probably necessary. But it is not going to be pleasant. The Abortion Wars Heat UpAs the Senate moves to debate the Senate health care bill, we're seeing another stream of opinion pieces that fall into the broad category of "Oh my God! Who would have thought that a government run health care plan would make coverage decisions based on political considerations?"Most of them seem to come from feminists who blithely assume away concerns about the personhood of the fetus, and the staunch political opposition to subsidized abortion from those who lean towards the "person" side. This allows them to spend 1,000 words or so having a completely irrelevant discussion of the disparate effects of the Stupak amendment on poor women, arguing that women's reproductive health care is too real health care, and similarly unrelated side points. Memo to authors: you could prove beyond a shadow of a doubt that women's health care is important, that this has a hugely disparate impact on women, that it will result in more women carrying unplanned pregnancies to term, etc . . . and that still wouldn't make a majority of the country want to pay for other peoples' abortions out of their tax dollars. Moreover, there is near-perfect overlap between the group of people who most fervently desires a national health care system, and the group of people who are "strong" supporters of abortion rights (don't want them to be illegal at any time for any reason). This group thus has zero bargaining power, because at the end of the day, they are not going to walk away from this bill. The pro-lifers can and will. (And no, you cannot get around this by arguing that the Catholic Church/evangelical liberals should care as much about the people who die from lack of health care as the fetuses killed by abortions. Last time I looked, there were over 1 million abortions a year in the United States. The most methodologically shoddy, activist-induced statistics on the number who die from lack of health insurance is 44,000, and the real number is much lower. The abortion statistics, on the other hand, are carefully collected numbers from a pro-choice group. Even if you only value a fetus as 1/20th of a person, the fetuses win.) Moreover, abortion rights aren't really a good reason to walk away from this bill. The women who genuinely can't afford $500 bucks for an abortion are the women closest to the poverty line. Those women will be covered by Medicare, and they won't get abortion coverage anyway in most states. The women who will be buying insurance on the exchanges presumably mostly do not have health insurance now, and thus are losing nothing if their new insurance doesn't cover abortions. The Joint Committee on Taxation does estimate that approximately 3 million people will exit employer-based health insurance for the exchanges, but almost certainly the majority of them will be people who are unlikely to be in need of abortion services, which are overwhelmingly consumed by a minority of women in a pretty narrow age band. Right now only 13% of abortions are currently paid for by private insurance. If insurers do take abortion services out of their coverage, then according to the model used by the CBO and the JCT, that will reduce the price of insurance, and that money will flow back into paychecks. Obviously, I am not saying that feminists shouldn't worry whether women will be denied access to abortion if this passes. But the number of people who are going to lose access that they currently have, and therefore be forced to carry a pregnancy to term, is not likely to be all that large. We're mostly talking about a modest number of women who will have to hand over several hundred dollars that they would really rather spend elsewhere. The very small number of women who currently have access to abortion services, and will lose them, and cannot get together a few hundred dollars for an abortion in time--those women can easily be taken care of if everyone who is outraged by this makes a small donation to Planned Parenthood. So I don't get the outsized reaction to all this--I mean, outside the professional interest groups, who of course are contractually obligated to get outraged about everything. Fears that women will lose their current access to abortion often seem to be muddled together with frustration at not being able to expand access to abortion. But anyone who was not seriously entangled in an opaque ideological cocoon could see that using government funds to help expand access to abortion was never. going. to. happen. More people are against it than for it, and they're in a stronger bargaining position. I wouldn't mind the complaining so much except for one thing; it's actually absorbing the energy, and media attention, that should be used to debate a real setback for women's reproductive health: the current Senate bill apparently does not include routine gynecological care in its basic package of required services. Regular pap smears are the reason that cervical cancer is no longer a leading killer of women, and the exams can also help detect other problems that menace women's health and fertility. Most of the women who leave their employer plans for the exchanges won't be getting abortions--but most of them should be getting annual exams. Why not focus the movement's energy on something with a prayer of actually changing these bills for the better? November 27, 2009Rumbles in the DesertWhile you were all stuffing yourself with turkey and gorging on sweet potato souffle, Dubai World, the Dubai government's investment arm, asked investors for some extra time to make its debt payments. In normal times, this would be a big problem for Dubai. But these are not normal times, and the world is suffering from the mother of all debt hangovers. A big sovereign default--for this is essentially what this is--raises questions about who might be next.Paul Krugman sums up the possibilities: I agree with Professor Krugman--it's hard to see this presaging a sovereign debt default by, say, the United States. On the other hand, emerging markets are subjects to runs on their currencies, and debt, and I'm not so sanguine that we won't see effects there. We might get a split in sovereign debt prices, with developing world debt being shunned by investors who have suddenly remembered what a risk premium is, while US debt and that of other developed countries becomes more valuable. A positive movement in US bond prices agrees with that theory. Which is not to say that this won't hurt us. The global economy is not really robust enough to stand up to repeated blows. Presumably that's why stock indices are off on worries about what follows. More on ClimateGateReader Nimed sends along this short video on peer review in the climate change community:On a more serious note, this interview with the head of the UN's climate experts is ridiculous. He responds to concerns about the peer review process being stacked by saying . . . all the work was peer reviewed. I am open to being convinced that I should not care about hacked information, and I am a confirmed believer in AGW. So why can't, or won't, the climate change community mount a more compelling defense? November 26, 2009Let Us Give Thanks
That's the proclamation which gave rise to modern thanksgiving. At one of our nation's worst moments, he found something to be thankful for. America is having some bad times now. But I hope that all of you can find a few things for which to be grateful. Happy Thanksgiving. November 25, 2009When the Public Coffers Run DryMichael O'Hare will probably be surprised to find that I agree with him (one hopes pleasantly), but I think that his post on higher education is extremely well done. He makes two important points. First, the American model of education really is superior to the notion of making it free, and not merely because this usually represents a net transfer to the affluent:One of the less useful tropes of the current California uproar is that "Education should be free!" Exactly what could this mean, if taken seriously? The best I can make of it is either a silly plea that facts be turned upside down by magic, like "Brussels sprouts should taste good!" or a proposition that it should be offered at a price of zero. Carry all the signs you wish, but education consumes real economic resources, hence has a real cost no matter what its price. So we're talking about who should pay for whose, and how. European experiments with zero-price education have not gone so well; many European students are as well-trained and capable and interesting company as our best, but a lot more are flailing around for years, getting very bad educations in overcrowded and shabby facilities, from profs whose main concern is their second and third jobs. Even highly subsidized state schools here have significant prices that help students stay focused on finishing up and getting on with it, and minimum unit requirements to stay registered along with grading in which it is possible to fail. The problem is that subconsciously we understand price to be an important signal of value, and to some degree "what you get for nothing you value at nothing." Giving it away at the college level seems to signal for many students that it's an entitlement, and delivered to them, rather than an opportunity to invest their own effort productively. The other is that shutting down prior entitlements suddenly is a very bad thing, even if you're the kind of heartless conservative who hates entitlements: In sum, if we were setting up the system from scratch, there's no reason it couldn't be based on full-cost tuition, discounted by some estimate of the external benefits the educated provide to all of us (but no fair loading unreasonable amounts of research cost into it), lots of loans, and salaries that better reflect the public benefits of employment choices of people like poets, schoolteachers, and luthiers. However, we go to reform our schooling with the social and economic structures we have, not the one we wish to have, and especially in California, that structure has several iterations of a deal whereby generation t receives a big endowment of personal, social, and physical capital from generation (t-1) that enables it to consume lots of resources and have a happy life, while still adding to (and maintaining) that kind of capital to bequeath to generation (t+1). The current generation of California voters has broken that deal, realizing it would be even nicer for them to just consume everything they earn and leave my students to fend for themselves educationally and in lots of other ways. They are making the transition to full-price education quickly, ignorantly, and heartlessly under the malign influence of leadership, especially Republican Party leadership, that has made an ignorant and idiotic worship of markets and private wealth into an ideology, and abetted by catastrophic constitutional decisions through an initiative process that was the solution to a problem Californians had at the beginning of the last century. I'll leave the calumny about Republicans, and brussels sprouts, aside, and focus on the core, which is important. People plan their lives around public programs. Allowing an unsustainable program to run until it comes to a screeching halt is often worse than having no program. The UC system is very good, and I am in no way suggesting that we would be better off if it didn't exist. But many, many California students, and their parents, planned their lives around a reasonable expectation of what in-state tuition would be. The protests are childish, but the rage underneath them is understandable: if you suddenly have to leave school because legislators have broken your implied social contract, you're probably going to be pretty mad. California could have dealt with its budget problems gradually--it's not like you couldn't see this mismatch coming, unless you thought that asset prices would always rise at 10% a year. But legislators wanted to give voters goodies now, and voters rewarded them for it. Now everyone's getting what they asked for: disaster. Looking Ahead to Black FridayThanksgiving is here, which for some people means the start of a month of overeating. For others, of course, it marks the start of a month of overspending, kicked off by Black Friday.This year, the competition is particularly fierce, and all eyes will be on the results. For many retailers, Black Friday marks the point where the year's ledger moves from red to black; hence (some stories have it) the name. Last year, of course, that didn't happen for a lot of retailers, as panicked consumers hunkered down. Even at places where spending was up, profits were often down, because they had to discount so deeply in order to get customers through the door. With consumer economic indicators improving slightly, this year is expected to be a little better. But for retailers, the price environment remains ferocious. Competitors are frantically trying to counter Wal-Mart's deep discounts to lure the elusive consumer into their doors: Target is giving away $10 gift cards to those who spend more than $100, while JC Penney is offering recorded wake-up calls from celebrities to help you get out of bed for their 4 am open. One of the most noticeable effects of this competition is that Black Friday seems to be creeping back towards Thanksgiving itself. Amazon started its Black Friday deals on Monday, staggering them so that there's something new to shop for every few hours. And Wal-Mart is staying open on Thanksgiving, ostensibly in order to prevent the traditional crushing deaths that regularly occur when they open their doors. There's a good chance that I will take a nap and then head out to our nearest Wal-Mart to blog it for you, and also (she mumbled) to maybe buy a Cricut Expression for all the wedding stuff we have to make over the next six months. The real test, though, will not be when the Black Friday numbers come out in a few days. Rather, it will be whether retailers can sustain a decent sales level without phenomenal discounts (that Cricut Expression is more than $100, or 30%, off). We won't know that for several weeks, at least, and probably not until after the New Year. Holiday ModerationEzra Klein has a nice column on how you might keep yourself from overeating this Thanksgiving. I cannot actually recommend my current strategy, which is to get bilateral un-crowned root canals1, so that you have to spend the next three weeks eating only foods which are squishy. But it does seem to be working.1 Before you start in with the inevitable aspersions on my oral hygeine, they resulted from two prior fillings which shrank away from the tooth, letting bacteria underneath. After all my teeth are repaired, I am going to track down the dentist who did both fillings and give him a sound lashing with my portable waterpik. Will Passing a "Signature Achievement" Help Democrats in the Polls?With Obama's job approval ratings trending below 50%, and health care looking like it may settle into the 30's, Democrats are rallying moderates to health care reform with the following narrative: sure, passing this may be unpopular, but failing to pass it will be even more unpopular! The only problem is, Brendan Nyhan suggests that this isn't, like, true.The Real Problem With the Climate Science EmailsWith Obama heading to Copenhagen, where he's expected to pledge some pretty big cuts in US carbon emissions, the ClimateGate story is an economic story as well as a political one. I said before that I don't think the emails refuted the notion that AGW is real, and happening. I still don't--the fact is, everything we know about carbon dioxide indicates that it has a greenhouse effect, because it is more efficient at passing sunlight through to the earth, than at allowing that energy to reradiate back into space as heat.What's at stake is the degree of warming associated with our carbon dioxide emissions. In particular, to what extent the earth's many complex and not necessarily well understood feedback systems may mitigate (or exacerbate) temperature increases. I've long been skeptical of the more catastrophic scenarios, because all this carbon used to be in the atmosphere, which probably defines a ceiling on how bad it will get--a ceiling well below "WE'RE ALL GOING TO DIEEEEEEEE!!!" That said, I wouldn't really want to live in the Jurassic, and not just because I'm afraid of hundred-foot lizards. (for example, I am also afraid of the Bearing this in mind, I think most people--including me--missed the biggest part of the climate emails story. Sexing up a graph is at best a misdemeanor. But a Declan McCullough story suggests a more disturbing possibility: the CRU's main computer model may be, to put it bluntly, complete rubbish. As the leaked messages, and especially the HARRY_READ_ME.txt file, found their way around technical circles, two things happened: first, programmers unaffiliated with East Anglia started taking a close look at the quality of the CRU's code, and second, they began to feel sympathetic for anyone who had to spend three years (including working weekends) trying to make sense of code that appeared to be undocumented and buggy, while representing the core of CRU's climate model. The emails seem to describe a model which frequently breaks, and being constantly "tweaked" with manual interventions of dubious quality in order to make them fit the historical data. These stories suggest that the model, and the past manual interventions, are so poorly documented that CRU cannot now replicate its own past findings. That is a big problem. The IPCC report, which is the most widely relied upon in policy circles, uses this model to estimate the costs of global warming. If those costs are unreliable, then any cost-benefit analysis is totally worthless. Obviously, this also casts their reluctance to conform with FOI requests in a slightly different light. That's not reason to abandon efforts to control our carbon emissions--as I say, they're still very likely to be problematic. But if the model turns out to be as bad as initial reports seem to imply, we should probably hold off on policy recommendations until we have a slightly better handle on the likely outcomes. Hanged Census Worker Not A Victim of Right-Wing Terror After AllRemember the wave of right wing violence, like the murder of the census worker? How Michelle Bachmann and Glenn Beck were muderers, and anyone who said that we should wait to see what the investigation revealed was a lunatic apologist for reactionary terror?Now it turns out the thing was probably a suicide. The whole thing is a symptom of just how poisonous our politics have become. Virtually no one gives their opponents the benefit of the doubt. No matter how absolutely sure you are that there is only one possible explanation, you can be wrong, and it would be nice if we all remembered that before we launched into the accusations of bad faith. Update: Jesse Walker on the paranoid center
November 24, 2009Blaming Bush for the Budget DeficitsThere is a right way and a wrong way to blame George Bush for future budget deficits. The wrong way is to get mad about his tax cuts and the Iraq war. By 2019--the end of the budget window, and the period with which us structural deficit hawks are concerned--the Bush tax cuts will have long since expired. We are also scheduled to have withdrawn from Iraq. You cannot explain any portion of the 2019 budget deficit with these two factors.Better is to point to the increase in net interest on the debt under Bush, which is, indisputably his fault. (Well--him and the Republican Congress.) That's about $100 billion a year, although since Bush shrank the average maturity of US debt from 60-70 months down to 48, if our unusually low interest-rate environment persists much longer, we'll have refinanced most of that debt at very attractive rates. Call it $75-90 billion, anyway. The other major contribution that Bush made was the atrocious Medicare Part D, which sucks about 75% of its revenue from the general fund. This is a hard criticism for Democrats to mount, since they wanted the damn thing to be even bigger, but luckily I hated it from the beginning, and am thus bound by no such qualms. By 2018, Medicare Part D will, barring legislative change, rake $100 billion off the annual budget. Other than that, Bush left no significant structural budget deficit--by the end of his term (before the financial crisis), the deficit was down to 1% of GDP. Of course, spending spiked at the end, but if I'm willing to give Obama a pass on financial crisis spending--and I am--I have to extend the same courtesy to Bush. But roughly $200 billion is not small change. It is a very large sum, and the Bush administration was behind every extra dollar we'll be spending. That's making Obama's job harder, and Democrats have every right to be mad about it. Indeed, the rest of us should enthusiastically join them. Department of Awful StatisticsKevin Drum:
All I can think is, it's some sort of symbolic belief. Otherwise, I'm stumped. Even if you thought they were right, how to explain a thirteen point change? Tu Quoque?In the entry on structural and cyclical deficits on the Business site, a commenter says:Megan opens with "Liberals are focusing on the cyclical deficit, which is not a big problem. Conservatives are talking about the structural deficit, which is a huge problem." She then contradicts herself when she cites Paul Krugman while discussing the structural deficit: "itFirst, I take Paul Krugman to be mostly writing about the cyclical deficit; he is worried that we will not do enough, now, to stimulate employment. On the broader point, several things: First, Medicare and Social Security are, simply unquestionably, the runaway problems with our budget. You could zero out the defense budget, and it wouldn't pay for a year of Social Security by 2014. Second, Medicare and Social Security nominally come attached to a source of revenue, which starting this decade will be insufficient to cover their outflow. As to who is "at fault", I agree that at some level this is a silly exercise; every past president since at least FDR has a hand in the current budget picture. But on the specific charge, I don't think you can blame Reagan, since the marginal rate cuts were undone by the end of the Clinton Administration. The simplifying and base-broadening measures, and the lower capital taxes, remained, but on net these are good for the budget. You'd have a better case against Bush II, but the deficit projections actually assume that all of his tax cuts expire next year, at which point they revert to Clinton levels. If the Democrats vote to extend them, I think you have to hold the Democrats responsible for the result. You can blame Bush for an increase in net interest on the debt, but this is a small factor in the overall budget picture. On the spending side, I wasn't trying to single out FDR and LBJ for blame; rather, I was trying to point out that the deficit is not Obama's "fault"--at least not in the way that most Republican and conservative critics are using the term. The growth in these two programs would be driving the structural deficit wider even if Obama hadn't done any new spending, and so far at least, they are the primary problem, not any spending Obama has done. The idea that entitlements, particularly Medicare, are the major culprit behind some major fiscal issues coming down the pike is hardly a partisan one. Should we raise taxes to cover the shortfall? I think we're going to have to; there is no political consensus for the kind of deep cuts we would have to make in order to manage things by cutting spending. I've angered a number of conservatives by arguing that the era of tax cuts is over, and Republicans need a new message. But by 2019, the problems are not due to a change in the revenue side; they're due to a change in the spending side. That doesn't tell you anything about what the solution should be, of course. More on Abortion and the FilibusterI should clarify my earlier post on abortion, which I think I wrote too hastily. First of all, on how Democrats used the filibuster: they didn't use it to filibuster Supreme Court nominees, but conservative judges who would have been successful supreme court nominees had they ended up on the Court of Appeals. My take is that this meant a less conservative court than would have existed by the end of the Bush years; your mileage may vary. It also means there are fewer lower circuits on which abortion opponents are likely to successfully press their quest.Second, Kevin questions whether keeping Roe intact is really a minority view. It depends on how you define it. Roe polls well. But the things that Roe has prevented legislatures from doing--like making abortion illegal in the second trimester--don't. Even polls that show fairly strong support for Roe also show that most people think abortion should be illegal except in cases of rape or incest, when the mother's physical health is in danger, and when the fetus is severely deformed. So if the challenge were a South Dakota style flat ban for all reasons, then yes, that would be unpopular. But if the challenge were a law that outlawed second trimester abortions except in the abovementioned four cases, it would be fairly popular. But whether or not the Democrats actually succeeded in keeping the court on their side this time around, that certainly seems to be what they thought they were doing. That was the text or subtext of all the tedious damn arguments about the filibuster, in which most sides were neatly flipped. They didn't know how long a Republican administration would last, and so they found the filibuster a very valuable method of preventing the court from moving further to the right, by manipulating the makeup of the lower courts from whom justices are often selected. Now, in hindsight, it seems that this wasn't maybe so necessary. But the next time a Republican is in the Oval Office, you also won't know whether he'll be around long enough to finish stacking the court for a serious restriction of abortion rights, as well as other causes near and dear to liberal hearts. As I say, over time I've come to think this is basically okay--and though I'm sure I'll be accused of hypocrisy, I don't see how it's hypocritical, since the filibuster is certainly not now helping Republicans block legislation of which I disapprove. In government, I mostly prefer incremental change to radical change, and supermajorities to the tyranny of the 51% over the 49%. Others feel differently. It's one more way you have to ask whether you want to live in a country that's more like Western Europe, or not. Our way has its problems--but I'm not sure the problems are greater than they would be if incoming majorities could force sweeping change on substantial minorities. Update: I should also say, I'm not accusing either Drum or Yglesias of hypocrisy; Yglesias has been consistently against the filibuster, and I have no idea what Drum's position is. I just think it's a mistake to focus on legislation, and ignore court appointments, which have increasingly been shaped by the filibuster. Budget Non-SequitursPosting about our coming entitlement problem generates some non-sequiturs masquerading as incisive political commentary.
Structural Versus Cyclical DeficitsAs I've been writing about the deficits, one of the things that occurs to me is that conservative and liberal policy analysts are really talking past each other on this issue, because they're talking about different sorts of deficits. Liberals are focusing on the cyclical deficit, which is not a big problem. Conservatives are talking about the structural deficit, which is a huge problem. And so one side says, "the deficit is a problem," and the other side says, "the deficit is manageable," and both sides are both right and wrong.Cyclical deficits are the kind of deficit you run when you lose your job: you've had a temporary income shock, and so you're going to be spending more than you take in. In the case of government this is actually a good thing -- "automatic fiscal stabilizers" like welfare, unemployment insurance, and food stamps keep recessions from being as bad as they used to get. (I know you think this recession is bad, but trust me, in neither absolute misery, nor the size of the relative decline, does it even approach the convulsions of the Great Depression, or several of the 19th century "panics".) Even if you think the government shouldn't be doing stimulus spending, cyclical deficits just aren't that much of a problem. We have a recession on the order of this one about once every thirty years, which turns even a $1.3 trillion dollar deficit into a manageable $43 billion per year, or less than $200 per person. Given the misery that would obtain if we slashed outlays to meet intake, or raised taxes, that's not a terribly bad sum for what you might think of as Great Depression insurance. Plus the debt's going to be eaten away by inflation, so it will cost even less than that in real terms. The problem is our structural deficit: the mismatch between our spending and tax revenues that remains even when the economy is just plugging along. That mismatch was manageable in the pre-Obama era; as long as your debt is growing at roughly the rate of your GDP, or less, even persistent structural deficits can be tolerated. (I don't think they should be--but they will not drive either your economy, or your government, into serious trouble.) But as the structural deficit begins to exceed the rate at which the economy is growing, you rapidly start to run into trouble. Interest payments start to grow as a proportion of your budget, and as they get bigger, the size of the tax increase or spending cuts needed to close the budget deficit starts to grow. Naturally, the bigger the tax hike or spending cut required, the less likely it is to happen. Now, the future structural deficit cannot simply be blamed on Obama. The biggest problems are the fault of FDR and LBJ. Up until now, Social Security and Medicare have been net contributors to the "General Fund", aka The Rest of the Budget. Starting this decade, the programs go into deficit, meaning they start taking money out of the general fund, instead of putting money in. That leaves a big hole which has to be filled. This is a big problem. If I had to guess, I'd venture that the reason that bond traders are not yet more bearish on Treasury debt is, first, that most of our borrowing is short term, and second that they're giving Congress and the president the benefit of the doubt -- waiting to see whether they come across with some combination of tax increases and spending cuts to get the deficit down to manageable levels. This is a possibility, one I hope we embrace. But it isn't true that the structural deficit is not a problem if we just leave it alone. Paul Krugman and others have been posting graphs like this one: ![]() I don't find the comparison to Belgium, Japan and Italy exactly comforting, particularly not when I contemplate this graph of per-capita GDP: Moreover, it's not as if we get to 2019 and just stop growing our national debt. In 2020, absent some radical action, we'll still have a structural deficit of roughly 6% of GDP if current projections are to be believed. That means that the debt will be growing at an alarming rate every year, with no end in sight. Now, I don't want to exaggerate the dangers. As we saw during the Bush administration, these projections are inherently unreliable. But that's only middling comforting, because of course, they can be too optimistic as well as too pessimistic, and also, so much of the structural deficit is driven by demographic change, which is one of the more predictable forces in modern life. The above 1 I am apparently developing early-onset alzheimer's. I plead my continuing adventures in the exciting world of root canals. The War of the CBO DirectorsThe debate over healthcare has pitted Democrat against Republican, Conservative Against Liberal, Young against Old . . . and CBO Director against CBO Director. Obviously Peter Orszag, who is now the head of Obama's Office of Management and Budget, is a big supporter of the proposed reforms. Doug Elmendorf seems worried about the cost-cutting side, but his job is to be cryptic. Doug Holtz-Eakin, who recently did a star turn as McCain's chief economic advisor, has been pretty vocally outspoken against it. And now June O'Neill, who was CBO director during the middle of the Clinton administration, has made an ad saying we need a rethink:I'm trying, and failing, to think of any issue in which so many CBO directors have gotten so vocally involved. Perhaps because there are few issues outside of healthcare that so directly implicate an already frightening fiscal picture. There is no A in FilibusterMatt Yglesias and Kevin Drum are defending the elimination of the filibuster on the grounds that unpopular legislation will fail even if a majority of legislators are behind it. (From their lips to God's ear . . . ) I find it interesting that a major word is missing from the discussion: abortion. The most successful Democratic use of the filibuster has, of course, been against judges who might overturn Roe v. Wade. If it weren't for the filibuster, it's pretty likely that a play to overturn Roe would even now be wending its way through the courts, to a probably-successful conclusion. Other treasured liberal programs like affirmative action, and certain kinds of environmental regulations, would probably also be in serious danger.Why is abortion missing from this discussion, especially when it is currently more central to our main public policy debate than the filibuster? The filibuster has allowed Democrats to impose a minority view of abortion rights on the country; saying that unpopular legislation tends to fail is true, but not complete, because that is not the most powerful effect to which Democrats have used it. Now, maybe it's worth sacrificing some abortion rights in order to secure legislation. Me, I'm comfortable with the filibuster, because I think that in a democracy as pluralistic as ours, the government needs a way for sizable minorities to influence policy. But I think you have to be more explicit about the tradeoffs when you discuss eliminating it. Risk, Cost, and ObligationsThe responses to yesterday's post about America's fiscal future reveal what I think are a lot of misconceptions about the way financial symptoms work:
November 23, 2009Are AIG FP Traders Worth Their Pay Packets?Someone who works in OTC derivatives sends this note in answer to my wondering whether the AIG Financial Products Division traders were really so good at their jobs that we ought to pay them huge sums of money to keep them on the job:Most CDS are straight forward and are summed up in a 2 page trade ticket that typically contains all the info you need get a grasp on the trade. Why is the AARP Running This Ad?I spent a quiet day yesterday, cleaning my closet with the television on. As a result, I got to see this ad, over and over:Now this is an odd little ad. It's not in favor of anything in particular. Nor does it solicit membership in its group. Its purpose seems to be to defend the AARP's decision to endorse this health care bill, which John McCain blasted on Saturday. Why does the AARP need to do this? I infer that despite their happy-face public comments, they're having a lot of troubles with the membership over this endorsement, but they can't really come out and enumerate the goodies that they scored in exchange for their two-thumbs-up, because that would simply reinforce the notion that the AARP is a gigantic money-sucking cancer on the American body politic. So instead . . . soft focus blandishments. I'm a little skeptical that this is going to improve matters for them, but at least it probably doesn't make them any worse. We're Going Broke Anyway, So Why Not Spend Like Drunken Sailors?I have to say, I'm woefully underimpressed with the argument that I am now hearing to the effect that "Medicare will bankrupt America anyway if we can't cut health care costs, so we might as well do health care reform."Anyone who has dated a manic-depressive has heard some version of this argument. "I can barely make ends meet now, so I might as well use my tax refund check to buy a boat! After all, if I can't figure out a way to fix my budget, I'm going to go bankrupt anyway." And anyone who has dated a manic-depressive knows where this ends. I have no idea why anyone would think that there is no difference between going bankrupt now, and going bankrupt later, which is assuredly untrue. Bankruptcy is a really quite traumatic event with very far-reaching consequences, and you should always try to maximize the distance between it, and you. I also have no idea why anyone would think that there is no difference between going bankrupt for a huge sum, and going bankrupt for a smaller amount. I mean, there's sometimes no difference for the debtor, but of course, there are a whole bunch of creditors who are also people, and who are not going to be paid back, some of whom may end up in bankruptcy themselves if you default. Since in this case, many of the creditors are the American people, I would think that even the most corporation-hating, bank-despising, littleguyophilic liberal would sort of worry about this. If we pass this health care reform bill, a bunch of people are going to leave their employer health insurance under this plan for some subsidized plan--millions of them, according to the CBO. If the government goes bankrupt, millions of people will lose that subsidized coverage and be much worse off than if we'd done nothing. And as any competent bankruptcy attorney could tell you, adding a powerful new creditor also makes it harder to "resolve" the bankruptcy--i.e., to figure out who isn't getting what they're promised. Which is to say, each new entitlement means that you have more interest groups to negotiate with, and also that our prior unsecured creditors--Social Security and Medicare recipients--will have to have their entitlements cut even deeper when the crisis comes. Since those people have structured their lives around the promises of the US government, this is no small thing. Naturally this all assumes that the premise is actually true--that without deep cuts, bankruptcy is 100% inevitable, so that buying something new with our "refund check" (the tax increases and Medicare cuts) cannot make it any more likely that we declare bankruptcy. This is wrong in several ways. First, bankruptcy is not inevitable; it is theoretically possible to raise taxes to cope with Medicare growth, though it would be extraordinarily painful to do so. In the face of fiscal crisis, it might also be possible to make Medicare cuts that we have otherwise been unable to stick with. But as any competent development economist will be happy to tell you, every dollar you add, or interest group you create, makes it less likely that this sort of resolution will happen. Assuming that it is not actually 100% certain, this statement is obviously nonsense on stilts. Bankruptcy becomes much more likely, and more rapid, once we have used up the easiest source of funds we had to cope with our existing obligations. This is true whether those funds are refund checks, or politically difficult spending cuts. Too, our new Just as a possible bankrupt would be better off putting the cash in the bank than spending it on some new desire, we would be fiscally better off doing nothing, than we would in taking on a gargantuan new entitlement. Yet, most of the responses to those of us who worry about the fiscal effects have so far been about the same as you get from your favorite manic depressive: "But think how great it would be to have a BOAT!" ClimateGateA few of you have asked what I think about ClimateGate. Mostly I concur with Tyler Cowen and Robin Hanson: I have so far seen no evidence of the kind of grand conspiracy that some critics have charged. Rather, to my mind this is about how real science (unfortunately) does sometimes get done.Scientists are human beings. They react to pressure to "clean up" their graphs and data for publication, and they gang up on other people who they dislike. Sometimes they're right--there's a "conspiracy" to keep people who believe in N-rays from publishing in physics journals, but that's a good thing. But sometimes they're wrong, and a powerful figure or group of people can block progress in science. I'd say that the charge that climate skeptics "are not published in peer reviewed journals" just lost most of its power as an argument against the skeptics. But I don't see any reason to think that the AGW scientists have actually falsified data to create a consensus reality which is known to be false-to-fact. What I see is that the people who are the custodians of the currently dominant paradigm have an unhealthy ability to exclude people who might challenge that paradigm from expressing those views in important forums. Powerful scientists using their power to marginalize anyone who might challenge the authority of them, or their views, is sadly not uncommon in the history of science. That doesn't mean their paradigm is wrong; rather, it means we need to be less romantic about the practice of science. No scientific consensus is ever as powerful as its proponents claim, because no scientists are ever as perfect as we'd like to imagine. The more ardent defenders of the emailers are glossing over the fact that in some cases, they really seem to have behaved quite badly, and with less-than-stellar scientific integrity. But I have yet to see the makings of a grand conspiracy, rather than the petty bullying of the powerful over the weak, the insider of the outsider. I'll take the statements of this particular group of scientists with a little more salt in the future. But as far as I can tell, the weight of the evidence--and what we know about the history of the planet, and carbon dioxide--still seems to be on their side. AIG Pay, AgainNew York magazine has a piece on the pay disputes at AIG which sums up, I think, the core of our dilemma with the financial bailouts. To wit: the traders at AIG are threatening to walk if Ken Feinberg pays them what he says he's going to pay them, particularly if the company tries too hard to withhold the retention bonuses they were promised in order to stay on board and clean up the mess. Ken Feinberg is holding firm.
"Might" is not really a word I want to hear when I contemplate the $180 billion of which I own a 1/300000000 share. The question that neither I, nor (as far as I can tell) the regulators, have a good handle on, is how good a trader you need to unwind these positions. If it can be done by any kid out of business school, then Ken Feinberg is right, and the government should pressure them to give the money back. If it needs some expertise, then we're kind of in trouble, because no one with any qualifications beyond a pulse would want these jobs. Going to work for AIG means, apparently, that you cannot write a valid employment contract, since the government feels free to rip it up any time their polls dip. I wouldn't take this job, and I make considerably less than $500,000 a year, plus I'm manifestly unqualified. Any attempt to decipher the truth of the case is further complicated by the fact that, at this point, the government is not trying to maximize the amount of money we recover from AIG; it's trying to minimize the political fallout from the various banker scandals. It might be less politically costly to spend billions on an AIG collapse than to allow the fine folks in Financial Products to take home $100 million. The Heart of the Health Care DebateIf the favorables stay above 40%, I think we stand a very good chance of getting a bill before next March. If they go much lower, the procedural hurdles are basically a sideshow. Democrats can tell themselves that if they don't pass a bill, they'll look like fools, and their demoralized base will stay home, and if the numbers are close enough, maybe that's true. But favorables in the 35% range will mean they've got everyone except their base against them. They really can't win an election on that, especially not in the Senate. I don't see them ramming through huge bill on a party line vote when significantly more than half the country hates it. But who knows? Maybe Obama has another speech up his sleeve. Mental Health BreakSaturday Night Live sums up our relationship with China:Parsing the Senate Debate on Health CareI spent eight hours this weekend watching the Senate debate on whether to proceed with debating on whether to pass a health care bill. This was largely a sort of kabuki ritual, since Senate Majority Leader Harry Reid already knew that he had the sixty votes needed to stop a Republican filibuster. But it tells you what the talking points are on each side, which is going to matter as the debate actually plays out.The Republican position is fairly incoherent. The major talking points are these:
Luckily for the Republicans, they weren't exactly playing against the varsity. The Democrats had their own set of uncompelling talking points:
November 20, 2009Oprah Winfrey Ending the Most Successful Television Show EverOprah Winfrey has announced that she is ending her show after its 25th season. You can see why she's doing it: one of the wealthiest people in America, with $2.6 billion to her name, Ms. Winfrey hardly needs to keep showing up for a job that must be getting a little repetitive by now. Moreover, she still has a massive media empire with properties like O Magazine to keep the money rolling in. And with the termination of her show, she'll be launching her very own cable network, OWN.Of course, it remains to be seen whether her empire will remain intact after she leaves broadcast television. For all the complaints about the declining viewership of the Big Four, they have many times the audience of the Discovery Channel, which is helping Ms. Winfrey launch her new property. Memories are short in the media business. Will women continue to buy her magazine if they aren't spending their weekday afternoons watching her show? AppleCare: No Smokers Need ApplyAllegedly, Apple is declining to repair Macs owned by smokers on the ground that secondhand smoke is dangerous. This a gross misunderstanding of the science--theoretically, tobacco tar could be hazardous if applied to your skin, but you'd have to really slather it on, leave it there for an extended period, and reapply fairly frequently. But it also seems like a gross misunderstanding of who makes up their customer base on the East Coast.Is Fox a Real News Operation?Fox News seems to have a real problem with cutting old footage into new stories. The liberal theory is that this is some sort of concerted conspiracy to imply that 80 million Americans turn out for every Tea Party or Sarah Palin appearance. The conservative line is that they were simply trying to punch up an otherwise dull segment, and/or somehow ran out of footage of the actual event. The latter story makes marginally more sense to me, but only because I cannot imagine that anyone at Fox News--indeed, anyone with a pulse--is stupid enough to imagine that a few shots of excess protesters are enough to marginally improve the chances of Republican victories in 2010 or 2012.I'm not sure it really matters. Fox News was, I think, justifiably angry when the Obama administration declared that they were not a real news organization. But if you wanted to be treated like a real news organization, you have to abide by the rules that real news organizations follow. One of those rules is that you do not imply that images of one event actually come from an entirely different event. You don't do this for any reason. It's entirely true that other news organizations have been caught in sleazy tactics, like the infamous habit of wiring cars to explode during auto safety stories. But they were righteously yelled at, and since the advent of the right-wing blogosphere, they seem to do a lot less of it. Now the left-wing blogosphere is fact-checking Fox with the same ferocity, and that's a good thing. We all have a vested interest in better news organizations. Mental Health BreakThe Real Problem with vampires.The Other CBO Health Care ReportShortly after it posted its analysis of the Senate health care bill, the CBO put up a letter to Congressman Paul Ryan (R-WI) analyzing the House's other health care bill: the $200+ billion dollar "fix" (aka repeal) of the Sustainable Growth Rate.For those of you who haven't been following along at home, the Sustainable Growth Rate was a cost-cutting measure enacted as part of the Balanced Budget Act of 1997. Not to bore you with unnecessary details, it tied the growth in physician reimbursement payments to GDP growth. This worked for a few years, because we had unusually low cost inflation, and unusually high GDP growth. Then those trends reversed, and physicians screamed bloody murder. Starting early this decade, Congress has annually enacted a temporary fix that either holds physician reimbursements steady, or raises them slightly, rather than cutting them as the law demands. Over the years, compound growth means that getting back to the SGR mandated trendline would require massive cuts in reimbursement rates: 21% this year, and according to the CBO, approximately 2% every year thereafter. Permanent fixes were originally part of the House bill. The problem is, those fixes are, as you can imagine, very, very expensive. They made the bill cost more than $900 billion, and also, not be so deficit neutral. So they took it out and enacted it separately, without any financing measures. Paul Ryan asked the CBO the natural question: "So what would these bills look like if they were enacted together?" The answer, according to the CBO, is that together they'd increase the deficit by $89 billion over ten years. And those increases would be back loaded: by 2019, they'd be pushing the deficit upward by $23 billion a year. The House health care bill makes the physician reimbursement fix somewhat cheaper. But the physician reimbursement bill makes the house health care bill cost slightly more--which is to say, if it were already law, the estimate of deficit reduction would be about $3 billion lower over the next ten years. Defenders of the decision to split the bills argue that there's no particular reason that the Medicare physician fix should be tied to the health care bill. I see what they're saying, but I think that's wrong, for a few reasons.
I suppose you could argue that there's no chance that we're ever going to reduce those reimbursements, so passing the new healthcare bill doesn't actually increase the deficit from what it otherwise would be. Only then you have to explain why we should believe that similarly structured payment cuts will work with all the other providers. Because if Congress cannot, in fact, stick to its guns and allow mandated cost cuts to stand, then the health care bill isn't deficit neutral, is it? November 19, 2009Wal-Mart Releases its Black Friday DealsThe list is here. The Christian Science Monitor has the back story, a dark tale of intrigue featuring a bunch of websites you've never heard of unless you're, well, obsessed with Black Friday deals. Me, I sleep late the Friday after Thanksgiving.Update: Amazon has a special website for their Black Friday deals. These two are now the Mothra and Godzilla of Black Friday; should be fun to watch them go head-to-head. Health Care Reform: What Happens to Multiemployer Plans?My father is a trustee of one of the New York State Laborer's union funds, and he pointed out something about multiemployer funds that I hadn't known--they're uniquely vulnerable to the proposed excise tax on health plans that cost more than $8,000 for an individual, or $13,000 for a family.I don't know what percentage of the population is covered by multiemployer plans, but it's significant; they're quite common in the construction and manufacturing sectors. They enable union workers, in particular, to shift between employers while keeping their benefits intact. The way they work, at least in the construction unions, is that you earn benefits every hour you work. The interesting wrinkle is that--at least in some cases--you earn those benefits whether you're single or married. You're giving up the same portion of your wages as a young single man as you would if you were 45 and had six kids. Say everyone in your MEP is paying $20,000 a year in foregone wages. The single guys will all get hit by the excise tax, while the married guys won't. This is important if you expect the excise tax to "bend the curve", because in this case, there's not much incentive to try to control costs--at least, as long as you have enough single workers to drag your average down below $21,000 a year, where the family plan excise tax kicks in. Only a minority of your workers will be paying the tax, after all, and there's no realistic hope of getting your plan's average cost down below $8,000 a year, unless you either fire all the guys with families, or cut the policy to the barest bones. And the difference between $8,000 and the average cost of a family plan in your region is likely to be much greater than the difference between the average cost of a family plan in your region, and the cost of the benefits package you'd like to offer. That is, you would save some money by reducing your cost from say, $16,000 to $13,500. But that pisses off a lot of your membership, and it still leaves you paying a sizeable excise tax on every member who is single. You can see a lot of ways to "fix" this problem, including dissolving the multi-employer plan, changing the way benefits are accrued, or telling your single members to buy their insurance on the open market. Or maybe the single members are helping you keep the average cost of the married folks down below $21,000, and so you're perfectly happy to get away with just paying the excise tax on their benefits. At any rate, few of these solutions involve bending the cost curve. One in Seven American Mortgages in TroubleHere in DC, the housing market seems to be seriously heating up again. If houses sat on shelves, they'd be flying off of them--in the "transitional" neighborhoods that I keep my eye on, an easy majority of the new listings for homes under $500,000 last fewer than ten days.It's hard to square this with the new report from the Mortgage Bankers Association, which indicates that fully one in seven mortgages in the United States is now delinquent. That's almost 15% of all mortgages, for those who flunked fraction. It's now conventional wisdom that the causes of foreclosure have shifted dramatically over the last twelve months. The early foreclosures were usually due to some form of bad faith on the part of the borrower (or their lying, thieving mortgage broker): either they lied on their documents, and simply didn't have the kind of income they'd need to support their house; or they were investors who were speculating on the house, not planning to live in it, and they stopped paying the mortgage as soon as it became clear that they were simply throwing good money after bad. In other words, it was fundamentally a problem of excessive home values which have now fallen. Mortgage modifications were aimed at easing that problem. Now, that wisdom says, "it's an income problem". One in ten workers does not have a job, and which for many means that their household cannot support any sort of mortgage payments. This is true, so far as it goes. But the kicker is that income problems are price problems. In ordinary times, in most markets, you might see delinquencies . . . but someone who actually simply could not make their mortgage payments would have been able to sell the house rather than go into foreclosure, shred their FICO score, and possibly end up with a deficiency judgement. A strengthening market should be preventing further foreclosures. But that's not even true in DC, where you see new short sales and bank-owneds coming on the market every day. Whatever the first-time homeowner's tax credit did, it didn't save the American homeowner from pretty deep devastation. Weird Fact of the DayThere is a brand-name frozen waffle shortage. No, seriously. Personally, I hate frozen waffles, at least for use as foodstuffs--they are very good for soothing teething babies. But apparently, this is causing pain and anguish across America.Mental Health BreakWeird error messages.Preliminary Thoughts on the CBO ReportI think it's pretty clear at this point that no bill from our Congress is going to meaningfully "bend the cost curve". Every time I argue that cost control seems unlikely, I hear that no, the Senate bill is going to make some serious inroads into delivery system reform. Well, according to the CBO, the savings achieved by Subtitle A, the main delivery system reform part of the bill, are trivial--not really distinguishable from zero, when you consider the uncertainties inherent in the estimates.What passes for delivery reform consists mostly of slashing reimbursement rates to providers, and then putting Medicare Advantage on the same plan. There are two problems with this. The first is that there's no reason to believe that providers will find ways to efficiently provide care at the new, lower rates, rather than just stop serving Medicare patients. That was the core point of the recent report from the Centers for Medicare and Medicaid Services--and though a lot of bloggers developed sudden suspicions about the integrity of government reports, in fact, this pretty much jibes with the warnings that Doug Elmendorf has been issuing, and also, reality. There are already shortages of geriatricians which can be substantially attributed to the fact that Medicare has ensured it is one of the lowest-paid specialties. When the guy who oversees your provider payments says that your new payment scheme is probably going to lead to providers dropping out of your program, you need to take that seriously. The second is that the treatment cuts--and any further cuts recommended by the cost effectiveness commission--can be undone by Congress. Not only can, but almost certainly will. There's some attempt to get around this by forcing Congress to do only an up or down vote on the recommendations. By bundling the really unpopular stuff with other reforms, the hope is that they'll be able to push them through. Unfortunately, the commission's recommendations do not save much in any one year, which means it's not actually going to be all that difficult to vote "no" in any one year--and by the time it actually is hard to vote "no", we'll face the same problem we have with the Sustainable Growth Rate cuts for physicians--the cuts needed are so big that it has become impossible to vote "yes", because the providers can't deliver those kinds of cost savings. So while the bundling might ease the passage of controversial cost-control measures, it might also ensure that no-brainers fail. There's also, as far as I can tell, nothing to stop Congress from passing the whole package--and then amending the health care bill in order to guarantee coverage of anything that gets voters excited. The current brouhaha about the new mammogram treatment guidelines is very instructive. There are good reasons for doing as few mammograms as possible: they're uncomfortable; radiation causes cancer; and false positives take a huge toll on the patient with invasive procedures and emotional anguish. I follow this issue pretty closely, because I have a family history of breast cancer, and the new guidelines don't seem unreasonable to me. But some of the criticisms of the guidelines are valid, particularly the fact that they don't take digital mammography into account. And they've activated a very real fear that people will die because they put off having a mammogram until they're fifty. It seems virtually certain either that the task force will revisit this decision, or that any agency or insurer actually acting upon their recommendation will be overridden by legislative action. I expect that if we do get guidelines with teeth, we'll see this play out over and over. I don't think it's any good to say, well, we have to hold down Medicare costs eventually, so we might as well hope. That's as fuzzy and dangerous as some of the thinking that got us into the Iraq war. If the mechanism for holding down costs is not realistic--and neither the head of CMS, nor the head of the CBO, seem to think that it is--then in all likelihood, you're planning to increase the budget deficit, whether you want to or not. Aside from the panel recommendations, the only other substantial attempt at real delivery system reform is the excise tax on high cost plans, which the CBO and the Joint Committee on Taxation are projecting will reduce health care spending. In fact, it's projected to reduce health care spending so much that companies will save a bunch of money, pass that money onto their workers in the form of higher wages, and thereby generate a bunch of new tax revenue to help pay for reform. Maybe. Of course, if they're wrong, and it ends up just being a heavy tax on a random group of people who happen to have expensive health insurance, then it won't cut health care costs, and also, will probably end up being repealed. Ultimately, the excise tax is just another version of the provider payment reductions: take some money out of the private sector, and hope that they figure out how to make do with less. If they can't, Congress probably decides to give them their money back. None of these make any real changes to the incentives of either the providers of health care services, or the people who consume them. All they do is tinker with the level of the third party payments. That's not reform. It's wishful thinking. November 18, 2009PalinoiaY'all well know that I really don't like Sarah Palin. In fact, more than one of you has yelled at me about this. And I find the whole schtick about how the media is just a bunch of elitist hooligans who are out to get her really grating.That's why I really wish the media wouldn't act like, well, a bunch of elitist hooligans who are out to get her. I've coined a new phrase to cover the situation: Palinoia. It's when you think people are out to get you, and then they do their best to justify your erroneous belief. The Newsweek cover was a sexist embarrassment. Hell, they wouldn't have highlighted an article about Hillary Clinton with that stupid nutcracker, yet there's apparently a photo of "Sarah Palin doll as slutty schoolgirl". This is enormously disrespectful to someone who, like it or not, was a vice presidential candidate, and deserves to be treated the same way that her predecessors were. If you wouldn't put a photo of Joe Biden in his running shorts on the cover, you should damn well extend the same courtesy to Palin, however much you dislike her. Then there's the Associated Press, putting 11 reporters on the task of "fact checking" her book. I put the words in quotes because the CJR notes that much of this herculean feat is not checking facts, but quibbling with interpretations or sentimental boilerplate about the hearts and minds of Alaskans. But the deeper question is how come Palin's book gets a team of fact checkers, when books by other politicians get the standard gloss? There seems to be an unhealthy obsession with tearing her down. And really, guys, if you'll just back off a little, she'll do the job for you. Have you seen that resignation speech? How about we all act like she's a former governor and vice presidential candidate, rather than Public Enemy #1? Did the Homebuyer Tax Credit Work?It depends on how you define "work". Apparently only 6% of first-time homebuyers cited the tax credit as the driver behind their purchasing decision. I suppose that's plausible, given low, low interest rates--which are a far greater contributor to affordability. But I'd be surprised if a majority didn't factor the tax credit into the price they paid . . . which itself could have helped the market clear in a lot of places. If your goal was to inject purchasing power into the economy, and help unlock the housing market, I suppose it worked, at least somewhat. If your goal was to help people afford houses, less so.On Poverty, Interest Rates, and Payday LoansFelix Salmon responds rather pungently to my post on debt. I certainly didn't mean to imply that Felix's position is unreasonable--it's not, and a lot of people hold it. I just think it's tricky.I'll cover some of our disagreements in a minute, but I think this is really interesting:
It's an odd fact that poor people shun bank accounts at an astonishingly high rate. Rather than pay $10.00 a month for a checking account, they'll pay more than that to a check cashing place. Of course, it's not like banks are going after those clients, because they're not very profitable--small accounts still have almost all the transaction costs and overhead of large ones. But why don't the customers go after the banks? The plausible reasons I've heard:
The problem of payday lenders and credit cards, however, is not a problem of the unbanked. If you don't have a relationship with a bank, you almost certainly do not have a credit card, and you definitely aren't using a payday lender. So why are people using credit cards and payday lenders? Credit cards have low transaction costs, which is why, as Felix argues, people use them for sudden emergencies. Many of them would be better off if they did go to their credit union for a personal loan to pay off the balance. On the other hand, if you're planning to pay off the balance in a couple of months, that's overkill--and the loan inquiry will ding your credit. Payday loans are a different question. There's a lot of literature on them, but most of it agrees on a few points. For our purposes, the salient characteristics of payday borrowers are a) they have little-to-no money in the bank b) they have moderate incomes and c) they are fairly severely credit constrained. Virtually all payday borrowers use some other sort of credit (Stegman and Faris, 2003). At least 60% of them have access to a credit card (Lawrence and Elliehausen, 2008). 73% of them have been turned down for a loan in the past five years, or received less credit than they asked for. If they're turning to payday loans, it's because they have maxed out those other forms of credit, and they have some pressing cash flow need. Payday borrowers do not necessarily turn to payday lending out of ignorance; a majority of them seem to be aware that this is a very, very expensive form of financing. They just have no better options. The biggest problem with payday loans is not the one-time fee, though that is steep; it's that people can get trapped in a cycle of rolling them over. Paying $15 to borrow a few hundred bucks in an emergency is bad, but it's probably manageable for most people. Unfortunately, since payday borrowers are credit constrained, have little savings, and are low-to-moderate income, they often have difficulty coming up with the principal when the loan is due to pay off. The finance charges add up, making it difficult to repay the loan. According to Lawrence and Ellihausen, about 40% of payday borrowers fall into that problem category: they have rolled over a loan five or more times in the past year. A hard core of about 20% had rolled over 9 or more advances. Judging who is worse off is a pretty tricky task. Would payday borrowers be better off if they had no other debt, and could go to their credit union for a tidy personal loan? That's unquestionable. By the time they're at the payday loan stage, however, that doesn't seem as if it's usually an option. I'd say that the people who are rolling over 9 or more loans are definitely worse off, the people rolling over 5-9 loans are probably worse off, and the majority who are rolling their loans over no, or a few times are probably better off, given the circumstances they were in when the time came to get the loan. People who roll over loans only a few times are not trapped in a debt cycle, and (I'd guess) are unlikely to have been using the loans for ordinary expenses. There's some experimental and empirical evidence to support this. Wilson, et al (2008) built an experimental model of credit-and-cash constrained households, and found that adding payday loans contributed significantly to household financial survival in the lab. Which seems to also be true in real life, according to their paper: Georgia banned payday loans in May 2004 while North Carolina banned them in December 2005. These two events provide the authors with an opportunity to empirically investigate several effects of the removal of payday loans on household behavior. Morgan and Strain find that relative to households in other states, households in Georgia bounced more checks, complained more frequently to the Federal Trade Commission about lenders and debt collectors, and were more likely to file for bankruptcy under Chapter 7 after the ban of payday loans . . . The results for North Carolina, which the authors regard as preliminary, given the shorter period in which payday loans have been banned, are similar to those for Georgia. But as Bart Wilson told me the last time I saw him, they also found a minority were made much worse off by the loans. Those were the people who took out ten or more--and just as Lawrence and Elliehausen found in the real world, those extreme borrowers made up about 20% of the group. There is, of course, the question of what happens to people between the time when they had no debt, and the time when they need the payday loan. If we could constrain them during that period from maxing out their available credit, they'd never need a payday loan. People who have maxed out their credit and are getting turned down for loans could probably have used an intervention that would force them to match income to outflow. But I'm not sure how you do that. Say we slap on a usury law that makes credit card lending to poor people unprofitable, so people use personal finance loans instead. Well, the people who are getting payday loans now would, in this alternative universe, have already maxed out this line of credit. How do we know that? Because they seem to have done it in this universe. I don't know whether that's because they're irresponsible, or because they had a string of really crappy bad luck. I'm not sure it matters. The core problems we would actually need to solve to get rid of payday loans are first, that some people have marginal incomes and no capital, and second, that when credit is available, some of those people do not exercise the incredibly tight spending discipline which is required to achieve financial stability on such an income. Because their incomes are marginal, and the lives of the working poor are fraught with all sorts of extra problems, like cheap cars that break down constantly and landlords who turn the heat off, the people who do not keep very tight control of their money are fairly likely to end up in a place where they have exhausted all other credit lines, and are forced to pawn something, hock their car title, or take out a payday loan. And those loans are jaw-droppingly expensive. Even non-profit payday lenders apparently charge about a 250% APR, because the loans have a 10-20% default rate, and the transaction costs on lending small amounts are very high. Of course, the profits are usually quite substantial, with APRs often double the non-profit rate . . . and even I have to wonder how a guy who made his fortune lending money at 600% o society's most financially unstable people, smiles at himself in the mirror every morning. In principle, I agree that many poor people would be better off if they were able to borrow a lot less money at better rates (though even then, I always wonder if I'm not just imposing my monetary time preference on others). Only when I look at any given rule aimed at accomplishing this, it always hurts a lot of people, even as it helps others--I think the last twelve months have proven fairly conclusively that the supply and price of credit are not entirely unrelated to default risk. While it is absolutely true that credit card issuers maximize their returns through hefty stealth charges, and payday lenders charge absolutely rapacious interest rates, it is also apparently true that these awful loans often help avoid even worse fates. And I don't see any way to cut off the credit to people who are ignorantly or irresponsibly getting into trouble, without also cutting it off to a bunch of people who need it. So I think focusing on the lender side is usually a mistake, though I can't say I'd be sorry to see caps on what payday lenders can charge. The lender side makes us indignant, because hey, they're getting rich by charging outrageous rates to those least able to pay them! But if we want to actually improve the lives of the borrowers, we need to intervene before they get to the payday loan point, rather than try to stop them from getting one once they're there. Felix is doing God's work on just that problem, as are many other people in many other ways. I think we'll be better off when payday lenders go out of business due to lack of demand, not prohibited supply. Mental Health Break: Remembering The WireWhile I was sick, I watched four seasons of Lost in five days. It's really quite good, and I'm looking forward to watching Season Five with Peter.But then I saw this compilation of quotes from The Wire that everyone is linking: (WARNING: Not even a little bit safe for work.) And I'm reminded that while I've definitely enjoyed shows like Mad Men and Lost, there has not been a single show that approaches The Wire in quality. Most of the most intriguing elements of Lost in Season One are solved in ways that are much less interesting than the premise--if they're solved at all. But the Wire delivered consistently for four seasons, and even Season Five was better than most of what's on television. Will we ever see its like again? Forgive Us Our DebtsI've gotten more personal email about my article on Dave Ramsey than any other piece I've written for the magazine, and several of you have asked me to blog about it here. I chose to write about him for a few reasons. First, I find him totally fascinating. Second, I got to go to Detroit. And third, we're in the middle of a vast national conversation about debt, and Dave Ramsey represents one of the most extreme views on the subject.For those of you who don't know of Dave Ramsey (though I'm fairly sure a number of my readers are followers), he's an evangelical personal finance guru who has a syndicated radio show and a television program on Fox Business. Ramsey's program has a few basic pillars:
What did we think? Well, that's in the article. But the upshot is, we're sticking with the program, though the part where we pay off all our outstanding debt is on hold while we save for our wedding. I'd never done a detailed budget before, much less written it down, and forced myself to stick to it by doling out all the payments in cash. It sounds unbearably tedious. But it's actually incredibly freeing. I have never before felt like I had total control over my money. And given all the economic gyrations, it would be awfully nice to know that I was on the road to a paid off house, and could cut my expenses to the bare bones if needed. But it's odd. And it's really hard to do in a society where lots of people are willing to take on lots of debt, because their debt-laden lifestyle sets the standards for yours. It's hard enough when everyone has nicer stuff. But as I note in the article, in the case of housing, it actually makes it hard for people to, say, secure a home in a decent school district, if other people with similar incomes are willing to leverage themselves to the hilt in order to bid on that home. A society run by Ramseyites would be a very different society. It would have very high savings rates--in excess of 15% of national income. Some goods, like cars, might be more expensive, because financing substantially smooths demand and allows larger manufacturing runs. People would probably live in smaller homes. Younger people would live poorer, and probably stay at home longer. Would it be a better world? I thought about this recently, reading this Felix Salmon post:
This is a pretty common sentiment. In fact, I don't think personal loans are a very good substitute for the kinds of emergencies that frequently beset the people who this would most effect--if your car breaks down and you can't get to work, you don't really want to wait until the bank approves your personal loan to get the car fixed. But there are a lot of people who think we could make the poor better off by essentially denying them access to credit, because credit extended to the poor carries high interest rates to cover the default risk, and many people get themselves into big trouble with it. The problem is, there are two sets of outcomes. There are people who are made better off by payday loans or credit cards, because they get the car fixed and don't lose their job. Then there's a group, which seems to be smaller but significant, who end up much worse off. Personally, I look forward to the day when I have no debt. Would we all be better off if we decided to go that way? Probably. But would we be better off if we legislated that outcome? I'm skeptical. November 17, 2009Department of Awful IdeasMaybe this makes more sense in Danish. But I doubt it.Question of the DayI didn't realize Czechoslovakia's Velvet Revolution was literally started by a noble lie. A journalist and dissident leader who helped spread the lie calls it a "professional lapse" but says he's glad he did it.This is the sort of thing for which you are supposed to be drummed out of journalism, but Urban's still working. Should he get a free pass just because he helped bring down an odious regime? The CMS Report: What it SaysThere was a lot of buzz yesterday about the report from the Centers for Medicare and Medicaid Services on the impact of health care reform. Conservative spin: the bill is an utter failure! Liberal spin: It shows that the bill is great, except for the cost control part, which we can totally fix later. Tim Noah, in a category by himself, spins a conspiracy theory about a dark plot by CMS to protect its budget from cuts. None of these is quite right.First, the conspiracy theory: it's true that CMS would have a smaller budget under the House and Senate bills. And it is true that government bureaucrats will fight vicious turf wars to prevent their budgets from being slashed. But the part of CMS's budget that is being cut is the part that doesn't give it much power; the biggest savings come from automatic cuts to provider payments. As far as I can tell, HR 3962 actually increases the part of the budget that bureaucrats care about, which is the money to hire staff and expand their empire. CMS doesn't lose power, influence, or important capabilities under health care reform. It gains them. Second, what does the CMS report tell us about health care reform, and specifically HR 3962, the bill it analyzed? For one thing, it tells us that the exchanges, the mandates, and the subsidies are mostly a complicated sideshow. The real action is in Medicaid. Expanding Medicaid to 133% of the poverty line accounts for most of the decrease in the number of uninsured. The exchanges are expected to cover only 13 million new people, or less than 5% of the population. We're not so much restructuring the health system as making one of its sectors much bigger. Which accounts for another important finding: the bill is not going to control national health care expenditures. In fact, it's going to slightly increase them. Under current law, the CMS has a projection of 20.8% of GDP going to health care in 2019. The new bill will bring that up to 21.1%. That's not particularly surprising, since they think the bill will cover 34 million new people. Unless those new people weren't planning on actually consuming any health care--in which case, why are we bothering?--spending was bound to go up. But the underlying message of the analysis was neither "We need to do a little better on cost control in the future" nor "The Democratic bill sucks". It was that we don't have any very good way of controlling costs--at least not within the parameters of the current US political and economic system. The only way we know to cut our health care spending is to stop consuming so much health care. And no one seems to want to do that. For a while, politicians have been promising that the Fantastic Four of health care reform would save us: comparative effectiveness research, waste and fraud, prevention and wellness, and administrative streamlining. The CMS report indicates that those savings are pretty much utterly trivial, $2.1 billion out of a trillion dollar bill. When savings are the size of rounding errors, there's not much point in discussing them. Substantial savings might be generated with a version of Britain's NICE, which could use CER to set global policies on coverage. But merely making the information available has virtually no effect. If we can't expect heartless private insurers to deploy CER in the name of cost control, how can we hope that our government will do so in the face of the inevitable backlash from angry voters who swear that their toe surgery changed their life? That leaves either cutting benefits, or cutting payments to providers. Except there's really no "or". The CMS, which is the agency in charge of implementing those cost savings, pretty much says that cutting provider payments means cutting benefits Virtually all of the Medicare cost savings that Democrats are using to pay for their plan come from one of three things:
And the productivity adjustments are even worse, says the CMS: It is important to note that the estimated savings shown in this memorandum for one category of Medicare proposals may be unrealistic. H.R. 3962 would introduce permanent annual productivity adjustments to price updates for institutional providers (such as acute care hospitals, skilled nursing facilities, and home health agencies), using a 10-year moving average of economy-wide productivity gains. While such payment update reductions would provide a strong incentive for institutional providers to maximize efficiency, it is doubtful that many could improve their own productivity to the degree achieved by the economy at large.8Footnote 8 goes onto note that because of a phenomenon known to economists as Baumol's Cost Disease, medical productivity doesn't improve as fast as most of the rest of the economy--basically, activities that are very labor intensive don't tend to have massive productivity gains. That's why it still takes just about as many teachers to teach 50,000 sixth graders as it did fifty years ago. Similarly, it still takes one person to give you a sponge bath and administer your pills. Since productivity growth in the health care sector will presumably continue to grow more slowly than the rest of the economy, we will end up in the uncomfortable position of letting Medicare go the way of Medicaid (which many providers refuse to take because the reimbursements are so stingy) or losing the cost savings, and ripping an even bigger hole in the budget than we've already got. Perhaps the most worrying item is tucked into the CMS's "caveats and limitations of estimates" section, which is well worth reading. They point out that they, like most other agencies, are assuming a sort of frictionless universe in which 34 million new people demanding more health services increases the supply of health services in order to meet that demand. That is not, notes the CMS, a very realistic assumption: In estimating the financial impacts of H.R. 3962, we assumed that the increased demand for health care services could be met without market disruptions. In practice, supply constraints might interfere with providing the services desired by the additional 34 million insured persons. Price reactions--that is, providers successfully negotiating higher fees in response to the greater demand--could result in higher total expenditures or in some of this demand being unsatisfied. Alternatively, providers might tend to accept more patients who have private insurance (with relatively attractive payment rates) and fewer Medicaid patients, exacerbating existing access problems for the latter group. Either outcome (or a combination of both) should be considered plausible and even probable. In other words, while we are nominally increasing the number of "the insured", it's not clear we're increasing their access to health care very much. The supply of health care services is actually pretty inelastic, because it depends on relatively scarce labor. There's already a nursing shortage, and doctors already don't want to become GPs because the pay is mediocre, the work is routine, and the hours aren't particularly compelling. To some extent they can be replaced by nurse practitioners--but they are neither particularly cheap, nor in endless supply. And there's a limit to how much of our healthcare costs we can fix by replacing current workers with less skilled labor. When you increase the demand for something without increasing the supply, you either get price increases, or shortages. Neither is what the authors are promising for their bills. (Yes, yes, I know what you're about to say . . . end the AMA cartel's artificial restrictions on entry into the medical profession! That's a different post, but here's the short version: the constraint on the supply of doctors isn't the medical school slots, but the residency slots. And we're already importing a substantial number of doctors to fill our family practice slots, because about a third of them go unfilled during the "match". This does not suggest that there are hordes of eager potential doctors clamoring for a crack at family practice. There's a lot of demand for specialist slots. But creating more cardiac surgeons will not put much downward pressure on healthcare costs.) But this is not an indictment of the bill's ability to control costs, as of the ability of any bill to control costs. Controlling costs means consuming less health care. There is no magic pot of money waiting to be painlessly seized from some undeserving wretch, preferably one that voters already hate. The only way we are going to cut costs is by cutting someone's benefits. Perhaps we'd be better off, in some metaphysical sense, if we did. But no one wants to. That's why politicians are speaking euphemistically about Medicare Advantage "overpayments" and frantically promising that no way, no how, will they damage anyone's Medicare benefits. The CMS report says what Doug Elmendorf, the head of the CBO, hinted at in his letters to Congress: cost control will be painful, and Congress will almost certainly undo it. That means that whatever bill we pass will undoubtedly blast a giant hole in the budget; conservatives are right that this bill is effectively grossly fiscally irresponsible, no matter how "deficit neutral" its stated intentions are. (But I would say that, wouldn't I?) On the other hand, it also means that Medicare is probably going to blow a giant hole in the deficit anyway, with the able help of political figures like Michael Steele. That's hardly reason to crow. A Permanent Breakdown in CommunicationsSlate ponders how to communicate the danger of radioactive waste to the far future. The problem is, if they can't read English, or recognize the radiation trefoil, anything you do sounds more likely to intrigue future anthropologists than to warn them off:
I know I'd want to get to the heart of the mystery if I came across any of those setups. Watchdog: Geithner Tried to Negotiate With AIG CounterpartiesOne of the most frequent complaints leveled against Timothy Geithner is that he let Goldman get away with murder when he allowed AIG to pay off its CDS counterparties at 100 cents on the dollar. Economics of Contempt, one of my favorite bloggers, had a great post on this a while back, dubbing this the "Immaculate Negotiation" theory of the crisis:Let's go over this again. (The numbers are from a conference call that Goldman held in March to discuss this very issue.) The total notional amount of CDS protection that Goldman bought from AIG was roughly $20 billion. But "exposure" in credit derivatives is equal to the cost of replacing a credit derivative in the market, not the notional amount of the transaction. Think about it this way: if you buy a $300,000 homeowners' insurance policy on your house, and your insurer goes bust, you're not out $300,000. The cost to you is simply the cost of buying another insurance policy to replace the first one. In Goldman's case, the cost of replacing its trades with AIG was about $10 billion. Against that $10 billion, Goldman held $7.5 billion in cash collateral. It then hedged the remaining $2.5 billion of exposure with CDS on AIG. This is why Viniar said that Goldman's direct exposure to AIG was immaterial. Today he reads the TARP watchdog report and pronounces himself vindicated: Despite the overtly political "conclusions" and "lessons learned" sections (sadly, the only sections journalists read), the SIGTARP report (finally) gets a lot of the real facts out in the public domain, so we can finally talk about them now. The SIGTARP report confirms that:What could the Fed have done? It could have abused its regulatory authority: threatened the banks that wouldn't play ball with some sort of retaliation. But this would probablyhave created deep problems with the French. It would also have further devastated a shaken banking sector. Leaving aside the morality of using regulatory authority for unauthorized purposes, countries where the regulator arbitrarily uses its authority to secure sweetheart deals for the government do not have robust, thriving financial sectors. Yes, yes, I know--ours isn't so hot either. It's pretty galling how little pain the remaining banks have suffered as a result of the crisis. But really, you'd like living with a third world banking system, and the slow economic growth it tends to generate, even less. Banking, more than any other industry, is built on trust in the future. If people think their savings can at any time be diverted into government coffers by the will of the regulator, they move them elsewhere, or stop saving entirely. Knowledge is PowerThe challenges of translating Beowulf. There are five pages, and I recommend clicking through. It's fascinating reading.November 16, 2009Squandering SeveranceThe day after Culture11 went under, Peter and I had a budget meeting where we agreed to slash our expenses fairly radically. If there's one thing I learned from living through the 2001 recession, it's that I'd rather have missed out on a few vacations or dinners out that I didn't need to give up, then have to give up eating because I didn't cut expenses fast enough. Our initial plans cut our grocery bill, eating out, and so forth. But we also set drop-dead dates for further cuts if his unemployment span stretched out--when we would cut out the cable he was using to write reviews, when we would sell the car, when we would move to a cheaper place, and so forth.This was maybe a little extreme, but something like it strikes me as the only logical reaction to a job loss in the middle of a recession. There's no telling how quickly you'll be able to find a job, so you want to err on the conservative side. I'm totally mystified by people like this:
I get a panic attack just reading it. What psychological quirk makes you maintain three expensive cars, flowers, and fine wine when you're both out of work? Quote of the DayApparently Rush Limbaugh has called Sarah Palin's book "truly one of the most substantive policy books I've read". Personally, I thought it was the finest spy novel since Tinker, Tailor, Soldier, Spy.War and CrimesMatt Yglesias makes a smart point about Khalid Sheikh Mohamed:
In terms of the risk they pose to Americans, people like Khalid Sheikh Muhammed are closer to a drug lord than an enemy general, and treating him like a criminal rather than a terrifying military genius denies him a valuable propaganda tool. We have tools for dealing with organized crime. Perhaps that's a more useful model than the Nuremburg Trials. On the other hand, it seems like there are a lot of problems the civilian model just isn't set up to handle. Was KSM Mirandized? Did the people who captured him have a warrant for any evidence they secured at the time? How do we subpoena witnesses from other countries? Were any wiretaps obtained in accordance with the US rules of evidence? Do we grant him the right to confront his accuser if doing so would compromise other US operations, or intelligence methods? His right to a speedy trial has already been badly compromised--do we let him go? What's the statute of limitations on being a terrorist kingpin? More on Sheltering Business IncomeFrom commenter Dave Walser, a tax professional:
FluI don't know what to make of the "pneumonic plague" that is supposedly evolving in Ukraine--I suspect it's just H1N1, but then, I don't know what the hell I'm talking about, so all I have is a sort of folk belief that three different viruses probably didn't just happen to somehow glom themselves together into one superbug.On the other hand, having just survived what looks like a case of swine flu, well, H1N1 is really bad enough. I have been sicker with the flu, a couple of times--during a memorable infection in college, my temp spiked briefly to 106, hallucination territory, before my nursing student roommate brought it down with baths and tylenol. But I've rarely had an infection with such staying power. If you've been wondering why blogging has been so desultory, it's because since last Saturday night, I've been pinned to my couch, alternately coughing, sniffling, and sleeping. Even now that the respiratory symptoms have abated somewhat, I'm having trouble standing up for longer than it takes to do a few of the backlogged dishes and make a sandwich. Whatever it was also delightfully comes with persistent nightmares that wake me up a 4:30 am. I'm back to a full workload today, but I confess I'm spending a lot of time looking forward to 7 pm, when I can go back to sleep. H1N1 hasn't yet turned out to be the New Spanish Flu, but it's certainly created a memorable flu season. Thankfully, I already got a seasonal flu shot, so at least I don't have to go through this twice. Why Eliminating the Corporate Income Tax Wouldn't Let People Dodge the TaxmanSuggest eliminating the corporate income tax, and you are immediately beset by people claiming that this would just let people dodge all their tax obligations by becoming corporations. Not a few of them intimate that this is, in fact, my goal. Let me reprise my answer from a couple of years ago:If you are not a tax professional, and you think that you have discovered some novel way to avoid paying taxes, you haven't. Any obvious dodge you can think up has already been tried by some clever chap fifty years ago, and frustrated by the IRS and the tax courts long since. As I understand it there is often minor chiseling at family businesses, but if it goes beyond giving your daughter a summer job she doesn't show up for (and has to pay income tax on), you are near-certain to be caught. When you are, you will pay for your tomfoolery many, many times over. This is, incidentally, why your employer pays you in cash and not in kind. Corporations can take all sorts of things as expenses that people can't: housing, cars, power boats, etc. If the IRS allowed this sort of thing to go on, you and your company could work out very lucrative deals where they paid your rent, bought your car, refinished your dining room table, and so forth. But since those things are also taxable to you as income except in narrow circumstances (cars used mostly for work, corporate housing near distant consulting sites), there would be no net benefit. So you usually only get benefits that have specific tax exclusions: retirement accounts, insurance, educational assistance. Mental Health BreakGoogle interview questions.Should Debt Payments Be Deductible?The American government loves debt. It offers special tax breaks to interest payments-mortgage interest, if you're a person; all interest, if you're a firm. This has a number of pernicious effects. On the personal level, it's a gift to home sellers--as we've seen with the homeowner's tax credit, any special break you give to home buyers tends to end up in the pockets of home sellers, as the buyers bid up the price to their maximum affordable net monthly cost. On the corporate side, it privileges debt over equity financing. In both cases, it adds considerable risk, since the fixed debt payment schedule may not match up with the flow of income.Virtually all economists, aside from David Lereah and his successors, think that the mortgage interest tax deduction should be eliminated, using some sort of sunset combined with a grandfather clause so that we don't suddenly push millions of more American homeowners into foreclosure. Equalizing the treatment of dividends and interest payments is also popular. But I don't usually hear people advocating, as Felix Salmon does, eliminating the deduction for corporate interest payments. In a post titled "What are the arguments for privileging debt?" he says:
Maybe I was brainwashed by the infamous Chicago School, but I can think of a lot of reasons for the tax treatment of debt. After all, let's think about why corporate debt is deductible, while personal interest largely isn't. Personal income is defined for tax purposes, broadly, as what you were paid this year. But corporate income is defined as what you were paid (revenue) minus what you had to pay others. That's because government generally assumes that the operating expense and capital requirements for an individual are roughly the same from person to person--you may think you need a 5,000 square foot McMansion and a power boat, but Uncle Sam disagrees. On the other hand, companies differ greatly. Firms like Apple or Kelly Services really do have very different operating and capital structures from Alcoa or Caterpillar for good reason. Heavy industrial companies need more capital to make new investments, and it can make good sense to match the duration of the financing to the expected life of the asset. That's accomplished by borrowing money, not floating a new stock issue or trying to accumulate enough retained earnings to keep up with your competitors. On the other hand, service and software companies basically need some computers and an office lease--their assets are mostly brands, patents or copyrights, and what economists call "firm-specific human capital", which is to say, processes and know-how. There are two core problems with simply eliminating the tax deduction on interest. The first is conceptual: the corporate income tax is supposed to tax, well, corporate income, which is to say, profits. I doubt Felix would advocate treating debt payments on the financial statements as something other than an expense--replacing net income with EBIT, say. Money that has gone to lenders or the taxman is actually gone; shareholders don't get it. It would be grossly misleading to tell shareholders, "We made $100 million this year" if you've left out the $120 million in debt and tax payments you had to make. The second is that this would make companies that do use debt finance much more risky. Companies with big capital requirements could find that in a downturn, they suddenly had large debt payments, negative cash flow, and a sizeable tax bill. As a first principle, the tax code should aim to avoid unnecessarily pushing vulnerable firms into bankruptcy. There's actually a third problem: it's possible to create debt-like instruments that are deductible--complicated lease arrangements, for example. We really don't need any more rules for companies to game. This seems to me like a better argument for making dividends deductible, or capping the amount of debt that's deductible. But to drag out my regular hobby-horse, it's an even better reason for getting rid of the corporate income tax entirely, along with the special tax rates for capital gains and dividends. Tax income once, when it's distributed to the owners, and then tax that income just like any other kind of income, regardless of source, so that Paris Hilton pays a higher rate on her corporate-derived income than your middle-class grandmother. Then let companies decide which mode of financing makes the most sense for their capital structure, rather than their tax bill. It's true that this would discourage dodgy LBOs and other temptations to inappropriately load up your company on debt. The problem is, it would also discourage appropriate debt. I think there are better ways to skin this cat. November 13, 2009Scam of the DayI've never heard of gold parties, but apparently they're a huge scam. If you want to sell jewelry, find a jeweler--preferably more than one--and get a price for it intact. The workmanship has to be pretty shoddy for the gold to be worth less as jewelry than melted down.Which is pretty much common sense, as is the notion that you should check the price online before you sell. So why does this work? Because people trust friends and acquaintances more than some stranger in a shop; if you're in a home, you feel more trusting. The parties often involve alcohol, which is not a good negotiating tool. As the poor labor market drags on, I expect that this sort of thing will only get more common. Maddoff's Computer Accomplices ChargedThe two computer programmers who allegedly rigged Madoff's systems to fool investors and regulators have been charged by the US Attorney. According to the complaints, they finally got cold feet in 2006 after more than a decade of complicity, told Madoff they wouldn't lie for him any more, and pulled hundreds of thousands of dollars out of the funds. But it's hard to applaud them for their fine moral sensibility, since they accepted hush money to keep quiet, making their change of heart look more like fear than the belated pangs of conscience.If they're found guilty, as far as I'm concerned, they should get what Madoff got. He couldn't have perpetrated this massive fraud without this sort of assistance, and if the complaint is correct, they quite clearly knew that swhat they were doing was helping to destroy the life savings of all their investors. White collar crime needs to feel a little more dangerous. Landmark Eminent Domain Case Ends In TragedyUnless you're a libertarian, or a lawyer, you probably didn't pay too much attention to Kelo v. New London, an eminent domain case that worked its way all up to the Supreme Court. New London wanted to hand over its ability to seize private homes to a private entity, the New London Development Corp, in order to "develop" the area for Pfizer, which had a plant in the area. Libertarians objected strenuously, and helped Susette Kelo push her claim to the highest court of the land . . . which then ruled against her.Now Pfizer is pulling out, following their merger with Wyeth. Incoming mayor Robert M. Pero wanly says: "Basically, our economy lost a thousand jobs, but we still have a building". Alex Tabarrok coins an aphorism: "Those who would sacrifice property rights to development end up with neither." Too true--it's worth noting that the other landmark eminent domain case, Poletown, was in Detroit. But it's not really that tempting to gloat, because this is a pretty tragic disaster for New London. Public Service AnnouncementAmazon has the new seasons of Dr WhoNovember 12, 2009Afghanistan: Go Big and Go HomeIf the rumors are correct, Barack Obama is refusing to simply double down in Afghanistan, instead demanding that timelines address concrete plans for withdrawal. This seems to signal that he's planning to get out of there sooner rather than later.I don't know whether this is the correct decision, either strategically or morally. After running military operations in their country for eight years, I think we have an obligation to help the Afghanis build a functioning and relatively secure state, as long as such a thing is possible. But I don't know whether it is possible. I'll leave that commentary to the experts. However, I do think that Barack Obama has to be congratulated on two things: courage, and a willingness to accept that there are sunk costs. Assuming that this war isn't winnable, the easiest thing politically would have been to send more troops into Afghanistan, some to be killed, some to kill innocent Afghan civilians. Just let the thing drag on at the edge of the national consciousness, and hope for a miracle, or leave a mess for your successor. It might have cost him in the future, as the death toll mounted, but the death toll in Afghanistan has been relatively low, and he needs political capital now, when he's trying to push through the most ambitious parts of his platform. The other thing he's done is avoid the sunk costs fallacy. This is the economist's term for "throwing good money after bad", and as anyone who's ever worked at a big corporation knows, it's a really common way to do yourself, and others, a lot of damage. The bigger the initial investment, the more tempting it is to double down in an attempt to "salvage" the money you've already put in. The problem is, whatever you've already sunk into the project is gone. Whether that project is a war or a new drug you're researching, you should be looking forward, not back. If the project's returns justify what you'd need to address, it makes sense; otherwise, you should drop it, no matter how much you've already lost. That's very hard for most people to do, so I respect the fact that Barack Obama seems to be willing go there. He may be wrong about the war's winnability. But he's thinking about the problem the right way. Gray Areas in Humane Treatment of AnimalsNursing sows: to crate, or not to crate?Chavez's Economic Problems Turn NastyFor a long time I have been saying (along with a lot of other people), that Hugo Chavez was running his country into the ground. He diverted investment funds from PDVSA, Venezuela's state-run oil company, into social programs. As long as the price of oil kept rising, he could do that. Unfortunately, Venezuela's sour, heavy crude is particularly hard to get at and refine, and requires a high rate of investment in order to keep production up. As a result, the number of barrels per day (bpd) that Venezuela produces has declined pretty sharply since he took office in 1999.As a consequence, the money that Chavez used to paper over the cracks in his socialist paradise has vanished, and the cracks are deepening:
This comes on top of the sporadic food shortages that result from price controls combined with high inflation. Chavez's solution to these problem has been to go militaristic on neighboring Columbia. Apparently, he's stepping up the rhetoric:
No one thinks war is imminent; they think it's just bluster to stir up patriotism and channel it through the figure of one Hugo Chavez. But then, as the article points out, no one really thought Argentina would invade the Falklands, either. Desperate times make desperate men. And while he's still popular now, his polls are slipping rapidly, showing him close to, or under, the critical 50%. Bear Stearns Bankers Walk FreeEvery time there's a financial crash, the trials inevitably follow. Some of them are entirely deserved--I commend to you Once in Golconda, which details the fabulous rise and fall of Richard Whitney. Others have a distinct flavor of hindsight bias about them--we just can't believe that so much money could disappear without outright criminality. Especially in these days of endless emails permanently preserved, chances are you can find a few incriminating phrases to build a prosecution. But even valid cases are hard to prove. When Eliot Spitzer went to trial, he lost; his fabulous wins were settlements, and it's not clear that the biggest settlements came from the guiltiest parties. Meanwhile, quite a few unethical practices went unpunished.The first of the big trials this go around just ended in a bust:
From what I understand, this seems like the right result. The evidence against them seems to have been pretty thin--a few passages from emails that didn't sound nearly so bad when the entire email was read, and the simple fact of the fund's decline.
The public wants big criminals to take the fall. But the bankers, while stupid--in many cases irresponsibly so--didn't necessarily break any laws. The clear-cut fraud was at the mortgage broker level, but those are regulated by the individual states, and also, pulling some guy out of his office in a strip mall and putting him on the dock isn't nearly as impressive as sticking the princes of Wall Street at the defense table. Malcolm Gladwell Explains It AllMalcolm Gladwell elucidates the secrets of Christmas:
More at the link, including why Santa Claus is so beloved. In Search Of Lost TimeVanished Persian Army may have been found in desert (H/T Laura at 11D):
November 11, 2009Real ChoicesWhen Ann Friedman argued that the Stupak amendment throws 50% of the population under the bus, Conor Friedersdorf responded:There are many women in the United States who oppose abortion, and if asked would agree that federal money shouldn't fund it, so the assertion that the amendment throws 50 percent of the population under the bus isn't accurate, unless one takes the position that these anti-abortion women are suffering from false consciousness. To which Ann Friedman rejoindered: Actually, no matter what their beliefs about abortion, every woman in this country is indeed screwed over by this amendment. Many, many women who are opposed abortion rights have exercised those rights themselves -- whether for health reasons or because, when it came right down to it, they simply found themselves making a different choice than they thought they would in that situation. They might not think they're under the bus, but they probably don't think they'll ever need an abortion, either. Doesn't mean either statement is true. Actually, no, at this point a majority of women in this country are old enough that it would either be impossible, or extraordinarily unlikely, for them to conceive. Some of the women of reproductive age are either infertile, or have had themselves sterilized. Others are lesbians, or long-term virgins. So in fact, at best you can argue that we've thrown a small minority of the population "under the bus". And as a response, this seems to trivialize the preferences of pro-life women in a way that I find pretty disturbing from feminists. In what other area of life is it okay to pat the little lady on the head and tell her that she doesn't really want what she says she wants, because she might regret it later? Feminists get righteously angry when pro-lifers attack abortion rights on the grounds that a significant minority of women later regret having one--or when doctors won't tie our tubes, or give us IUDs, or otherwise allow us to make permanent choices about sexuality. We don't regard virtually everyone's preferences for laws against murder, rape, burglary, embezzlement, etc as somehow inauthentic because some minority of us will violate those laws. And as it happens, the rate of abortion seems to be pretty strongly inversely correlated with having pro-life views, at least at the state-by-state level. Obviously, since I'm pro-choice, I think you can argue against abortion control in many effective ways. But this is not one of them--at least not if you hew to the feminist notion that women are entitled to their own choices and preferences as individuals, not lumped in with some vast undifferentiated mass of women who all want the same thing. Was It a Mistake for Obama to Set Limits on the Cost of Health Care Reform?Ezra Klein considers the $900 billion price tag Obama put on health care reform, and calls it "the $900 billion mistake". It is not enough, he says, to put together a good bill, and as a limit, it seems pretty arbitrary:
One hates to be a concern troll, and far be it from me to tell progressives how to run their programs. But it seems to me quite obvious how the number got picked and why it became a hard limit: it would be very difficult to sell a bill that's any bigger. A health care bill much bigger could be plausibly rounded up to a trillion dollars by the opposition, and though the American public is still somewhat blinded by sticker shock from the last eight years of deficits, $1 trillion still sounds like a lot of money. It also sounds like the highly unpopular bailouts. Maybe Democrats could have passed a bill that cost $1.1 trillion, or more--cobbling together coalitions by spending freely on goodies is a time honored tradition. The problem is, the Democrats already spent a trillion dollars on goodies. That adds constraints from both voters and the bond markets. So I think a $1.1 trillion dollar bill, while making it easier in some ways to build a coalition, would have risked a voter backlash that would have rendered passage impossible. Health care can't lose too many percentage points off its approval rating before it becomes too radioactive to pass no matter how many wonks, lobbies, or narrow demographic segments like it. Pulling the PlugRemember how we had to bail out Chrysler and give the company to Fiat because they were going to save American jobs and the environment with their awesome new electric cars? The electric cars that were going to start hitting the streets in 2010? Apparently, now that they've gotten the money, it's festina lente; Fiat has apparently disbanded the team that was trying to rush these cars to market.The only comfort is, I'm not sure if anyone ever bought the top-notch twaddle about electric cars; I assume the administration, and voters, mostly made the decision based on how many angry interest groups a collapse would produce. Still. It's worth keeping in mind every time we hear companies demanding money from the government based on their outstanding future contributions to society. Which you hear an awful lot, these days. The Roots of DiscriminationThis is interesting:A few years back, a friend who teaches in a graduate political science department at a prominent university told me that the women who applied to his school's program were so much more qualified than the male applicants that if all applicants were selected solely on the basis of academic merit, no men would be admitted to the program. That would be fine with my friend except for the fact that highly qualified women will not attend a program that is all female. Thus this program actually engaged in what amounts to affirmative action for males in order to attract and keep highly qualified female students. Do you get more qualified male students by adding females? Does Excess Debt Lead to Bubbles?About a week ago, I was having drinks with a friend and discussing John Kenneth Galbraith's dictum that "all financial innovation involves ... the creation of debt secured in greater or lesser adequacy by real assets," wrote the economist John Kenneth Galbraith in 1993. And "all crises have involved debt that, in one fashion or another, has become dangerously out of scale in relation to the underlying means of payment."I have espoused this theory at various points, and he agreed with it. But we came to a sticking point: what about the stock market bubble? Debt certainly rose dramatically starting around the same time, but VCs were long money, not superleveraged hedge funds. Households were obviously tapping quite a bit of credit, but that was unsecured credit or mortgages more than margin loans, so the feedback loop is considerably attenuated. And the bubbliest companies weren't using debt, because they didn't have any cash flow. In the Financial Times (registration required), Frederick Mishkin argues that not all bubbles are created equal:
Sounds convincing . . . but I can't help wondering why credit and stock market prices were rising at the same time. Knowledge is PowerWhere did the Japanese come from?November 10, 2009Reading the Dodd ProposalsBruce Bartlett argues that reading the health care bill is a waste of time. Not only is it all written in legalese, but also, many of the provisions simply alter sections of other bills, so unless you have some sort of hyperlinked database, much of the language is meaningless.The same could be said of the draft financial services bill that has started circulating. I have it, but haven't looked at it yet because a friend who has--and is a security lawyer--says that it's similarly impenetrable. His thoughts: Did I mention it is 1136 pages? This is the passage to which he referred: Senator Christopher Dodd proposed creating a single U.S. bank regulator and stripping supervision from the Federal Reserve and Federal Deposit Insurance Corp. in legislation aimed at preventing a repeat of the credit crisis.This does indeed seem sort of crazy to me, and not just because the FDIC has indeed done a good job. The agency works so well because it can control its risk exposure--banks that want the safety net have to abide by its rules, mostly. Stripping that away introduces moral hazard to both the banking system, and the government--whoever this new central regulatory authority is, another agency will pay for its mistakes. It also seems like this would make the FDIC's tricky job even trickier. Hasan Investigated, ClearedWell, that's a bit of an oopsie:The FBI and the military investigated contacts between an Army psychiatrist accused of last week's deadly shooting rampage at Fort Hood and a Yemen-based militant over the past year but concluded he didn't pose a terrorist threat, senior law enforcement and military officials said Monday. Tu QuoqueDid Obama bring criticism for the state of the job market upon himself? After all, he promised his stimulus package was going to create or save millions of jobs.Eh, I'm underwhelmed. Bush made similar claims about the powers of his tax cuts. That's what presidents do: claim that they have magical powers over the economy. Then when things get better, they take credit, and when they don't, they claim things would have been even worse without them. Perhaps they deserve to take a beating from the voters for the state of the labor market, which is sort of irrelevant, because whether or not they deserve it, they definitely will. But I'm as inclined to believe that presidents claim these magical powers because voters demand them, as that the causality runs the other way. But op-ed columnists should not encourage these beliefs by writing columns demanding that the president exercise his magical powers. That energy would be better spent making fun of the president when he makes those sort of promises, and explaining that after all, the president is not the Labor God. November 9, 2009Blaming the President for UnemploymentI often enjoy Charles Blow's By the Numbers blog at the New York Times, but I think this op-ed from last Friday was a little over the top:Right now," "immediate economic emergency," "requires urgent action," "can't wait." Wow! He gave the impression that job creation would be his top priority, that action would be swift and effective, that his solutions would not only stanch the hemorrhaging, but reverse the trend. What exactly is he supposed to do to create all these jobs? Use the book proceeds to buy a Dairy Queen franchise? The president has very little control over employment in the economy. The stimulus undoubtedly kept the economy from losing even more jobs than he did. But the economy is undergoing a hell of a deep structural adjustment: from debtors to savers, from housing-and-finance led growth to . . . well, if we knew that, the recession would already be over. Those adjustments need to happen, because the previous situation was totally unsustainable. But they definitionally imply higher unemployment and less consumer demand in the short run. A third stimulus might lower the unemployment rate a little, at least from where it would otherwise be. But it would not put us back at 5% unemployment, and it would have a lot of other costs, including further risking our AAA bond rating. Stimulus is at best an incredibly blunt instrument. And it is made blunter by all of the procedural checks we've accumulated over decades of government growth, not to mention very powerful public sector unions. FDR could tell his government to go out and hire people to paint hallways or build dams. The current president needs Environmental Impact Statements, public review periods, and the okay of ACFSME. The fact is, most of the time, the best the president can do is avoid making things much worse. And though I have many disagreements with the specifics of Obama's policies, I'd say that largely, he's kept from making stuff worse, and eased the worst of the damage on hurting families. We could be doing more with more generous unemployment benefits or other income assistance, less with atrocious auto bailouts. But the economics of recession is truly a dismal science, and demanding that the president cure the recession is about as effective as expecting him to cure Hep C. Blow is certainly right that Obama and Democrats will pay a price in 2010 and 2012 if the employment picture doesn't dramatically improve. Life is unfair that way. But op-ed columnists should not pile on with fruitless demands for radically lower unemployment. The Health of the NationSo the House passed a landmark health care bill, and everyone's trying to figure out what it all means. Is passage of a substantial reform now near-inevitable, as the White House seems to be claiming? Or was this the peak, as the Republicans claim?I don't think you can deny that this adds momentum to the campaign (unless health care reform's favorables, now well below the unfavorables, slip still further). It certainly demonstrates that Nancy Pelosi is a hell of a speaker, whatever you may think of her personality or politics. I know that Amy Sullivan thinks that she and the leadership committed something close to malpractice by not getting the pro-lifers involved sooner, and thereby setting up the caucus for a deal which banned the use of federal funds to buy any insurance that covers abortions. But I'm not sure that even that charge really sticks. The fact is, on a pooling basis--and that's the level at which the federal government operates--giving someone money to buy insurance that covers abortions is exactly the same thing as directly paying for their abortions. The original compromise, segregating the funds so that the federal subsidy wouldn't pay for the abortion part, was a transparently ineffective gimmick. How transparently ineffective? If it really was just her money buying the coverage, the rider/segregated funds distinction wouldn't matter. Obviously, the reason it does matter is that funds from some other party--possibly a pro-life party--would be helping to pay for the abortions, either through the fungibility of tax transfers, or premium pooling. I don't see how anyone ever thought this was going to fly; there are (as we just saw) more pro-life members of the House than pro-choice, and they're not actually total idiots. I knew this was coming two years ago, and not because I'm sort of amazing prognosticator. Medicaid in most places covers abortion only in the cases of rape, incest, and the life of the mother because, well, when the government provides your health care, the procedures that are covered will be determined politically. I had thought that Democratic feminists understood the trade off they were making, and believed that it was worth it. But many of them seem to be genuinely surprised that health care rules will be written with respect to the opinions of the National Right to Life Committee. I think Pelosi did about the best she could with what she had--maybe a little better, even. The core question now is what happens in the Senate. Every time this project goes through another iteration, its price tag goes up--the cost of buying support from recalcitrant lawmakers. But the mechanisms used to pay for those costs are pulling father apart: excise tax versus income tax, strong public option or no. Normally the senate just trims down the more extreme House provisions, and the price tag. But at this point, every provision is attached to a dug in and very motivated interest group. Moreover, the reason the House pushed this so fast is that it's getting politically tougher. The favorables on health care are falling, the unfavorables rising, and unless the passage of Saturday's bill reverses this trend, it's just going to get harder to pass anything. I don't know if it's actually true, as I've heard Republicans claiming, that Pelosi scheduled the vote on a Saturday because she didn't want any more Democratic lawmakers going home and talking to upset constituents. But whatever the reason, keeping Congress in town over the weekend to vote on a bill that doesn't take effect until 2013 doesn't signal a really healthy initiative. The one thing I think we can say definitely is that the gross cost of the bill is going to stay on an upward trend. The problems are being papered over with special gifts to whatever interest groups wavering legislators most favor. That's also going to mean the cost control will be underwhelming. The Lessons of Fort HoodApologies for the light blogging this weekend, despite much happening: I've had the exciting double whammy of some sort of horrible respiratory infection which may or may not be swine flu, and what feels like it may be a cracked tooth. As you can imagine, I'm in a sunny mood today.While I was zonked out on Nyquil, I see I've taken a lot of heat for saying that there was no political lesson to be learned from the Fort Hood shootings. Our own Jeffrey Goldberg says: Megan McArdle writes that "there is absolutely no political lesson to be learned from this." James Fallows says: "The shootings never mean anything. Forty years later, what did the Charles Whitman massacre 'mean'? A decade later, do we 'know' anything about Columbine?" And the Atlantic Wire has already investigated the motivation for the shooting, and released its preliminary findings. Of Nidal Malik Hasan, the Wire states: "A 39-year-old Army psychiatrist, he appears to have not been motivated by his Muslim religion, his Palestinian heritage (he is American by nationality), or any related political causes." I'm sorry if I seemed to be denying that Hasan may have thought of this as a political act. I thought that when I said This guy was some form of lunatic or psychopath, and it seems pretty clear to me at this point that he was inspired by terrorists. But there's no evidence that he was a terrorist--that is, that he was hooked into some organized network. Lots of people do terrible things in the name of their religion--just ask George Tiller. Their acts are, as the Catholic Church says, "sins that cry out to heaven for vengeance". But they are no more indictments of a community than the acts of that Korean kid who went crazy at Virginia Tech. I made it clear that I believed Hasan was trying to follow in the footsteps of Al Qaeda, et al--either because he was crazy, or because he was a deeply evil human being with no regard for the lives of others. Even a few hours after the shooting, what we knew of him made it likely that this was somehow connected to his religion, and the war. So why did I say that there were no political lessons to be learned from this? Because it wasn't new information that there are Muslims in the world who object to the wars in Iraq and Afghanistan, and would like to kill a bunch of Americans. It was always possible that one of them, somewhere, was going to find their way to somewhere where they could do damage. I can think of half a dozen easy ways to kill a significant number of people without getting caught, if I wanted to. So could most of you. The terrorist's job is made harder by wanting a certain sort of spectacular crime, not merely a death toll. But not much harder. As of last week, what information did we have that would lead to any useful political response? Were we going to start kicking Muslims out of the government and the armed forces? That's unconstitutional, would brutally wrong the overwhelming majority of the Muslim community that is not involved in terrorism, and would deprive us of a valuable source of translators and other advisers to our military and intelligence efforts. We know that some number of Muslims living in this country hate our government and want to act against it. We also know (by the rarity of attacks, if nothing else) that this number is small, and any loose networks are poorly organized and largely ineffective. Given this, there's not very much you can do with this information, other than what we're already doing, which is have the FBI try to track down terrorist plots. Something that they seem to be doing very well when the attacker is not a lone gunman with no need for a support team. This particular attack would have been very hard to stop for anyone, without doing terrible, terrible things to our Muslim citizens. And if you think that's okay, I invite you to consider whether you would be all right with similar incursions into evangelical churches every time an abortion clinic or doctor gets attacked. After all, the pro-life community does produce these wackos, and its radical fringe may even shelter them. Why shouldn't every Southern Baptist get a little extra scrutiny? Obviously, gun control is a non-issue, since military bases are actually very well locked down, and also, no one was going to prevent a military officer from getting his hands on guns. You could call this a failure of the intelligence community, but there was no evidence that he was in touch with any terrorist network, and the attack was not the sort of thing that would have required any outside assistance. That said, I have since changed my mind. That's because there's growing evidence that the army and the CIA knew he was a crazy fanatic who wanted to get in touch with Al Qaeda. It sort of seems like someone could have done something about that. Maybe they were slow-playing him, trying to get evidence on bigger fish. Maybe. But I'm more inclined to believe that they failed to communicate with each other, and in the case of the army, failed to do the obvious thing and open an investigation into whether this fellow should be separated from the army, and maybe watched pretty carefully. Being a Muslim is not grounds for investigation. Being a Muslim who attends a radical mosque, issues lectures on jihad, and attempts to contact Al Qaeda is definitely grounds for suspicion, and I'm sure even CAIR would admit as much. I don't know what happened here yet, and maybe it's not as bad as it sounds. But I'd certainly like to know how this slipped through the cracks, who is being held responsible, and what is being done to make these sorts of errors less likely in the future. November 6, 2009Worst. Talking Point. Ever.If this is the best the Democrats can come up with, they are in deep, deep trouble:
Whoever said that achieved the spectacular feat of making Michael Steele look like a master political strategist. The Evil That Men DoKevin Drum has a powerful letter from someone who witnessed the carnage at Fort Hood:
This guy was some form of lunatic or psychopath, and it seems pretty clear to me at this point that he was inspired by terrorists. But there's no evidence that he was a terrorist--that is, that he was hooked into some organized network. Lots of people do terrible things in the name of their religion--just ask George Tiller. Their acts are, as the Catholic Church says, "sins that cry out to heaven for vengeance". But they are no more indictments of a community than the acts of that Korean kid who went crazy at Virginia Tech. There is absolutely no political lesson to be learned from this. Gun control would not have stopped a commissioned officer from obtaining guns. Barack Obama had no power to stop this. Infectious PTSD is a lousy theory. And nations certainly do not--and should not--shape their foreign policy around the possibility that a random psychopath will start shooting up a crowd. Evil people do evil things. That's all. Update whatever else you think of them, CAIR has issued an admirably forthright condemnation:
(WASHINGTON, D.C., 11/5/09) - A prominent national Muslim civil rights and advocacy group tonight condemned an attack on Fort Hood military base in Texas that left at least 12 people dead.
America and the Terrible, Horrible, No Good, Very Bad Jobs NumbersSo headline unemployment now stands at 10.2%, higher than forecast. Another 10 million or so workers are working "part time for economic reasons", meaning they want to work more hours, but can't get them. And 2.4 million are "marginally attached to the labor force"--they have looked for work in the past 12 months, and say they want a job, but have stopped looking too hard because there doesn't seem to be anything out there.This figure is likely to get worse before it gets better. Corporations tend to want some evidence of sustainable recovery before they start hiring workers who will have expensive startup costs and will be traumatic to fire if there's another downturn. They're much more likely to add work and hours on for existing employees, so I wouldn't expect to see any substantial improvement in headline unemployment until that "part time for economic reasons" figure has dropped substantially. Right now, the best you can say is that it held steady last month. To me, unemployment is a far more important indicator than GDP. Given how rich America is, the misery from losing a job far outweighs a few percentage points of variation in incomes. The NBER may decide that the recession ends next quarter. But the mental recession will be going on for quite some time. Counterintuitive prediction I heard last night: "If the jobs number is bad, stand by for Barney Frank to start dismantling some big banks." Alternative predictions: this is good for the health care bill, because Democrats want an achievement to take voters' minds off of the employment figures; this is bad for the health care bill, because Democrats know they are already going to be in big trouble next November. My prediction: Democrats are going to be looking very hard for a way to pump some more money into the economy right now. That is going to be very hard to do, between the bailouts, the tax credits, and the health care bill. Also, the 2010 is not going to be about health care, one way or another. It's going to be about the jobs number. November 5, 2009Department of Awful StatisticsIncidentally, while reading the Longman article, I came across this passage:Worse, even when strong scientific consensus emerges about appropriate protocols and treatments, the health-care industry is extremely slow to implement them. For example, there is little controversy over the best way to treat diabetes; it starts with keeping close track of a patient's blood sugar levels. Yet if you have diabetes, your chances are only one-out-four that your health care system will actually monitor your blood sugar levels or teach you how to do it. According to a recent RAND Corp. study, this oversight causes an estimated 2,600 diabetics to go blind every year, and anther 29,000 to experience kidney failure. Now, this seems like a rather extraordinary assertion: 3/4 of all diabetics are not instructed in monitoring their blood sugar? That's certainly a problem in the health care system, but can it really be true that the majority of the nation's primary care physicians regularly commit malpractice? No, in fact, the Rand study he cites doesn't seem to quite say what he says. As far as I can tell, this is the study he references, and here's what it actually says: People with diabetes received only 45 percent of the care they needed. For example, fewer than one-quarter of diabetics had their average blood sugar levels measured regularly. Poor control of blood sugar can lead to kidney failure, blindness, and amputation of limbs.There's no indication whether that's an access problem, a management problem, or a compliance problem. But compliance will be at the very least a big part of it, as compliance is a major problem with all chronic diseases, and diabetes is one of the nastiest diseases to control, between diet, exercise, and drawing blood. I very much doubt that the problem is a failure to "teach" diabetics how to monitor their blood sugar; I'm pretty sure it's going to be a combination of access barriers and low compliance rates. Does this matter? It doesn't much undercut the general thrust of the piece, but yes, a health system that barely bothers to teach people to control their blood sugar is very different from a health system that cannot produce regular records of blood sugar levels. The latter is not ideal. But it's a lot better than the former. Knowing what it's like to go through editing on a technical piece, I know how easy it can be for something to get snarled, so I don't necessarily think Longman garbled the stat, but still: awful statistic. Revisiting the Achievements of the Veterans Health AdministrationBack in 2005, Phillip Longman wrote an article in the Washington Monthly, touting the strides the Veterans Administration had made in improving quality. Since then, it has become the model for a fair number of reformers, who frequently cite its ability to control costs and coordinate care as proof that we should move towards such a system nationwide.I was thus interested to learn that the Congressional Budget Office had issued a report on the VA's quality initiatives. I've been meaning to get around to reading it for weeks, but I've been sidetracked by other things. (To judge by an internet search, I'm not alone; few people seem to have blogged or linked to it.) But I finally have, and I think I can say two things definitively: the report suggests that the VA really has made outstanding improvements in the quality of care they deliver. And the report also suggests that the VA does not represent any sort of workable model for the US health care system. The advocates of a VA-style system usually have three core arguments:
The analysis is theoretically appealing, but there are a couple of problems for it. First, on the theory side: it's not clear what incentives the VA has to become more cost efficient. Finding ways to save money in a government bureaucracy is not generally rewarded. Finding ways to save money usually means you get your budget cut, while cost growth can provide an argument for a bigger appropriation. And when the VA runs out of money, it can reallocate services between priority levels, cutting some of its customers off in order to cover higher priority patients. Which brings me to the empirics: the VA does not, in fact, provide lifetime care for its patients practically from kribbe to grav. The VHA works on Priority Groups, which categorizes who is eligible for what treatments. Some of the categories are rather fun:
The footnote goes on to explain that
Pardon me for a moment while I meditate on the notion that we must have more government involvement in our health care in order to bring some rational, efficient order to our broken system. But I digress. The reason I bring all this up is that none of these groups, according to the CBO, gets as much as 50% of its healthcare through the VA:
So the problem you have to contend with is that if your patient population is different from the general population, and your patients almost all use a mix of your services and other providers, most measurements of your quality may well be picking up the quality of the other helath care they have access to. Or the quality of the patients themselves. In fact the CBO specifically says that this is a problem with Longman's analysis: Advocates have claimed that because VHA is free from concerns about generating profits from medical services and faces at least part of the long-term costs associated with chronic diseases, the agency has an incentive to invest in preventive care, coordination of services, and quality improvement26. However, data on the way in which veterans use the system make it clear that most enrollees also rely on other sources of care for a significant portion of their health care needs. Footnote 26 goes to Longman's book, which was based on the 2005 article. This is also a problem with analysis of cost control. The VHA controls its costs in a number of ways, but one of them is managing its priority lists--making it harder for those who are lower priority to get care. For example, thanks to the influx of war veterans, the VA in 2003 closed its lists to many higher-income people who didn't have service-connected disabilities--AKA Priority Group 8, which as you can see, isn't getting much of its health care from the VHA. So in some sense, you are trivially controlling cost per enrollee, but you're not necessarily doing it by delivering better care at a better price; you may just be providing less care for some enrollees. But that doesnt mean that total national healthcare spending on those people goes down. By contrast, most people with private insurance do most of that spending through their insurance. Furthermore, the changing mix of the priority groups can dramatically effect how much you need to spend. Much has been made of the VA's ability to control costs, but according to the CBO: Some proponents of the veterans' health system have suggested that VistA has helped the Veterans Health Administration hold down cost growth when compared with other federal health programs, such as Medicare. But such comparisons are difficult to make. The substantial changes in the VHA's structure and in eligibility for care make it particularly difficult to interpret usch metrics as cost per enrollee when enrollment was rising dramatically from 1999 through 2002. In this assessment, the Congressional Budget Office (CBO) adjusted enrollment data to account for changes in the mix of enrollees adn found that VHA's spending per enrollee was relatively flat from 1999 through 2002, but since that date it has risen about as rapidly as spending per enrollee in the Medicare program. This cuts both ways, of course--I imagine the influx of new vets is quite expensive. The point is, you can't compare a system that manages its costs by allocating a set budget among a shifting group of people, few of whom actually depend on the VA for all their healthcare, with any other system. We can't do anything like what the VA does on a national scale--not to manage our costs, not to deliver our services. A system in which people got 20-50% of their care from the government, and the rest from some other provider, would not be a good system--especially because while applauding VistA, the CBO also points out that it can make data sharing between systems very difficult. That's not to say there are not lessons we can learn from the VHA. Just for starters, the conversion to electronic medical records is long overdue, and we ought to be using the Medicare payment system to herd doctors and hospitals faster towards adopting systems that are interoperable and meet certain broad standards. But whatever the merits of the system, it simply doesn't tell us much about how to design some sort of comprehensive government health care system. New York, Borough By BoroughMatt Yglesias puts up this graphic about the relative populations of New York boroughs Matt forgot why he was making the graph, but to me the interesting thing it shows is how central the New York City subway system is. Its effects dominate everything else, even the 1970s urban crash. Arguably, by making urban living in many ways more convenient for urban workers than commuting, it's the reason the 1970s crash was relative mild. And if Robert Moses hadn't killed off plans for a Staten Island subway line, the population would probably rival that of the other boroughs. Paging Mark TwainBrazilian man shows up at his own funeral.November 4, 2009The Best in the WorldWhat is best in life?To crush your enemies, to see them driven before you, and to hear the lamentations of their women. ~Conan the Barbarian
The Yankees bring home another World Series. 2009 looks better by the minute. Ben Bernanke Looks Past the CrisisBen Bernanke has a bit of a dilemma. On the one hand, he wants to be a credible inflation hawk, to keep expectations of inflation from doing bad things to the economy. On the other hand, he wants to reassure everyone that he's going to keep the liquidity in as long as necessary, to keep expectations of deflation from doing bad things to the economy.So he did something rather clever. While leaving rates low, he specified under which conditions he'd raise them. The markets apparently didn't like it, because the stock market wants a central banker who never takes away the punchbowl. But it's exactly the sort of tenative quasi-step back towards tightening that we want in these delicate times. If only Obama would do the same thing, I'd be much comforted. Mental Health BreakI'm mostly vegetarian, and would be a vegan if not for my complicated relationship with soy . . . but this still makes me smile every time I see it.Farmers and WelfareA number of my commenters had much hilarity with my statement that farmers hate welfare. This isn't a normative statement, but a positive one: they hate welfare. Is it hypocritical of them to support farm subsidies? In one sense, no: qualifying for most farm subsidies involve quite a lot of hard, dirty labor. In another sense, absolutely, and there's a reason I don't discuss the virtues of milk-price supports with my relatives.The core of the farmer aversion to welfare programs specifically is that old farmer maxim: "If you don't work, you don't eat." But there's a flip side to that: farmers never starve. They have lots and lots of other problems, and my grandparents' generation was very poor. But with land, they eat and keep roofs over their heads. So there's a certain emotional resistance to the notion that it is necessary to provide food and shelter for able-bodied adults. And also a deep emotional resistance to going on assistance. They're much more sympathetic to disability, social security, and other transfers to the less able-bodied. There's also the fact that one of the things that can make it very hard for a farmer to keep a roof over his head--aside from the debt he is prone to acquire during his more exuberant harvest seasons--is property taxes. They make near-subsistence farming nearly impossible. None of this is any particular attempt to justify the rural worldview, or farm subsidies. It just is. You can rail against it, but it's no more stupid, incoherent or self-interested than the worldview of any other coherent demographic group I can identify. North and South in the Republican PartyOne of my commenters has some thoughts on NY-23:I have a lot of relatives in NY-23. They are all Republicans, and that affiliation has been passed down through the generations (along with Catholic church membership and a tendency to dress like the pictures in the LL Bean catalog). This resonates with me, because my mom's from Western New York. I remember once noting that until I was in college, I hadn't known any Republicans, to which my mother blinked, and replied "You knew your grandparents." "But I didn't know they were Republicans." She blinked again. "Well, we didn't try to hide it from you." My grandparents were hard core Republicans. My grandmother still won't let you say mean things about (either) George Bush in her presence. They lived in a hard core Republican district--I think Wayne County is the reddest in New York State. But it's not Republican the way that, say, the Florida panhandle is Republican. If my family had lived in one of the redder areas of the South, I doubt I could have missed it. Social conservatism just isn't the main issue there. Abortion will be legal no matter what happens on the federal level, and a lot of local Republicans are perfectly fine with that. Evolution will be taught in the schools. What animates Republicans in the upstate is a deep economic conservatism. Their social issues are confined to frowning at drug use, excess drinking, and people who won't work to take care of their families. (And in rural Western New York, there's no question about who can't work, and who won't . . . it is not an anonymous sort of place.) Rural areas have a farmer's contempt for welfare, and the entire upstate region knows too well that the taxes and regulations imposed by the rich downstate voters are crippling their economy. No, this is not libertarian cant; it's obvious to basically anyone who spends any time there. New York has onerous business taxes, a deeply problematic workman's comp system, and various rules about public sector unions that are slowly destroying the budgets of the local cities. Combine this with a whole lot of cold weather, and there's no way they can attract new businesses to replace the big industrial plants they've lost. I mean, it's quite possible that the economy wouldn't regenerate anyway--but it's 100% sure that it won't as long as the state's tax and regulation levels are so bloated. But the finance industry throws off enough money that the downstate can afford a costly and often inefficient welfare state (1 in 3 New Yorkers are on Medicaid!). And New York's major industries, which tend to be information based, are less harmed by corporate regulation. Downstate voters are the majority in the state. So nothing changes, and the upstate slowly strangles. As long as social issues dominate the Republican Party, they will continue losing their north--I had a lot of relatives who at least considered voting for Obama. Ironically, I wonder if the tea parties won't help bring the two wings of the Republican party together: guns and lower government spending are the two things all members can agree on. But if the south wants to keep its northern Republicans--and the congressional seats that come with them--it's going to have to back off trying to make the northern party look like a miniature version of itself. Not least because northern Republicans share one more feature with their southern brethren--they hate people from some distant city telling them what to do. If you find that hard to understand, just picture how y'all feel when the ACLU starts its annual Nativity Scene Hunt through the town squares of Alabama and Mississippi. Punditwatch: Who Got Hurt More Last Night?A quick survey of the print and web punditospheres reveals Democrats chin-pulling about the mixed message of last night's events, or wanly saying that this wasn't a referendum on Obama. Meanwhile conservatives are mostly crowing--even, somewhat delusionally, about pushing Scozzafava out in NY-23. From which I mote that progressives took the worst body blow--though if conservatives continue perkily believing that intraparty warfare is the surest route to success . . . well, welcome to Barack Obama's second term.Still, the more I mull the "this wasn't a referendum on Obama" message, the more I wonder why Democrats are celebrating this. It's kind of a problem that this election wasn't a referendum on Obama, or more importantly, on Bush. Obama's coattails are supposed to give them the spine they need to enact sweeping change. The bad news of last night wasn't that they lost the New Jersey governorship. It's that the era of running against George Bush, or for Barack Obama, is over. They just lost the two best campaign planks they've had in decades. Update: Senior Congressional Democrats told ABC News today that there would likely be no health care bill in 2009. I think that might answer the question. Knowledge is PowerWhy baseball players chew tobacco.Lessons Learned from Last NightWhat to say about last night's results? As one commentator in my twitter feed noted, there's enough here for everyone to spin. Or as Orin Kerr put it:The lessons for me? Gay marriage is tough to pass in most states, and both parties should rethink the primary challenges, which don't seem to be working out for anyone. Robocalling polls seem to be disturbingly effective. Even Mike Bloomberg can get spanked (lightly) by anti-incumbent fever. November 3, 2009Link Farm: Special Election Edition
The Focus of the RaceAndrew argues that the races today are not about Obama. Who said they were? They're about Democrats and Republicans. They're about whose base is more energized.If Hoffman wins in NY-23, I assume that makes the squishier Republicans swallow hard and wonder if they might not be vulnerable to a challenge from their party's right wing--not to mention a bunch of Blue Dogs who will be looking at the Republicans and independents in their own districts. If two states with Democratic governors lose them, that signals that the Republicans can move motivated bodies to the polls . . . and while voters may be saying they like Obama as much as ever, they're also saying that they think their taxes are too high and government spending is out of control, issues that polled way higher than "Obama issues" like health care. All of this makes it tempting to tack right. Because here's the thing: 2010 won't be about Obama either. Oh, his performance over the next year will matter--but he's not going to get that surge of voters out to the polls for house and senate races. The Blue Dogs who are up for election in 2010 aren't worried about Obama, or his voters. They're worried about their own political fates. Crazy Rumor of the Day: Does Google Want to Merge With the New York Times?Did someone CNBC really suggest that the New York Times might be a takeover target for Google? That seems entirely crazy. Forget whether such a merger would make sense; the New York Times cannot be sold without the approval of the Sulzberger family, which seems unlikely to emerge unless things get quite a bit more dire.Should I Learn to Stop Worrying and Love the Deficit?For a while now, I (and practically everyone else) has been saying that the deficit is making us nervous. Not the current deficit, but the future ones. I don't think that we should run any deficits outside of national emergencies, and while I think the current economic mess qualifies, I don't think 2019 does.Economically speaking, I think an economy growing as fast as ours can sustain a budget deficit in the neighborhood of 3% of GDP almost indefinitely. To be clear, I don't think we should sustain such a budget deficit--if we want programs, we should pay for them ourselves, not ask our kids to. But it is possible to run such a deficit without fiscal crisis or economic stagnation. But three percent is around the ceiling of sustainable deficits. Six percent is well above that ceiling. At six percent, your debt service burden starts growing much faster than your tax revenues. On the other hand, the markets don't seem to care, as Paul Krugman points out: And right now, deficit-phobia has quickly congealed into the latest CW. You can see it in editorials (not from the Times, I'm happy to say, but almost everywhere else), in what the talking heads say, even in supposedly objective news reporting. Not a day goes by without my reading some assertion that "markets are anxious/jittery/worried about the deficit" -- an assertion based on no evidence whatsoever. (Long-term interest rates on US debt are near historic lows; CDS spreads show no concern about default.) Matt Yglesias adds:
I join with Messrs Yglesias and Krugman in a number of points:
Nonetheless, I'm worried about our future budget deficits. And I think a number of market participants are also worried. Why? For one thing, I don't think the TIPS spread tells us much, for reasons I've gone over before: as long as we have an independent central bank, default risk is greater than inflation risk. And since the market would treat any significant moves to abrogate the independence of the Fed as equivalent to actually inflating the debt away, the government can't regain control of the Fed without triggering the crisis that inflation is supposed to avoid. As for the debt itself, America's debt right now has a number of idiosyncratic factors pressing on its price: dramatically heightened worries about the rest of the world's economies, and lower inflation expectations. So it's hard to say that the markets aren't pricing in default risk (though equally hard to argue that they are). If not, why not? Well, a number of factors make US debt demand pretty sticky. The Chinese central bank, for example, wants to keep its currency from rising against the dollar, for reasons you've all heard a million times. That means it wants to buy a lot of US government debt (and quasi US debt, like--oops!--Fannie and Freddie securities). Regulated entities that need to buy securities which meet strict criteria. Unsophisticated and stodgy investors who pour their money into government bond funds. The economic policy folks at the Bush administration had to spend a bit of time reassuring folks like the Chinese that really, nothing to worry about, we'll keep that deficit under control. I've no doubt the Obama administration is doing the same. And in truth, the prospect of a default is so horrendous that there's some reason to believe that of course we'll do something before it gets out of hand. I'd say, in fact, that this is more likely than not--though I don't know how much more likely. What worries us doomsayers is that when you have that kind of sticky demand, it deludes you into thinking that everything is fine. Sticky demand can, and does, come unstuck eventually. When it does, great big chunks of demand for our debt will flow out of the market all at once. And when you have a lot of debt that you have to roll over every year, that's a bad thing. Maybe I'm just a nattering nabob of negativism. But when I talk to professionals who invest in government bonds, they don't tell me they think everything is fine. They tell me they're worried about the deficit. Lies, Damned Lies, and . . .Statistics are useful things. But too often, they give a false sense of precision. "Counting" the jobs "created or saved" by the stimulus is one of our more ludicrous governmental activities of the moment. For one thing, the administration has made no attempt to net out the jobs that were not created, or destroyed, because the government had diverted the money from other uses. For another, as Bruce Bartlett points out, your count is only as good as your counters. And some of them aren't very good:How did Kentucky shoe store owner Buddy Moore save nine jobs with just $889.60 in federal stimulus money? He didn't, and that's turning into a big headache for him. Moore's store in Campbellsville, Ky., filed one of 156,614 reports from recipients of stimulus dollars designed to show how money from the $787 billion program is being spent, and how many jobs the funds have created or saved. Moore's slice of the stimulus came in an $889.60 order from the Army Corps of Engineers for nine pairs of work boots for a stimulus project. Moore says he's been supplying the Corps with boots for at least two decades. This year, because he provided safety shoes for work funded by the stimulus package, he said he got a call from the Corps telling him he had to fill out a report for Recovery.gov detailing how he'd used the $889.60, and how many jobs it had helped him to create or save. He later got another call, asking him if he'd finished the report. "The paperwork was unreal," said Moore, who added that he tried to figure out how to file the forms online, then gave up and asked his daughter to help. Paula Moore-Kirby, 42 years old, had less trouble with the Web site, but couldn't work out how to answer the question about how many jobs her father had created or saved. She couldn't leave it blank, either, she said. After several calls to a helpline for recipients she came away with the impression that she would hear back if there was a problem with her response, and have a chance to correct it. So with 15 minutes to go before the reporting deadline, she sent in her answer: nine jobs, because her father helped nine members of the Corps to work. To be clear, my assumption is that given the strange behavior of credit markets, especially during the first half of the year, the stimulus probably did create some jobs--I think the government took in money that would otherwise have done nothing. But its figure is both certainly inflated, and absurdly precise.Look for the Union LabelAs I read this editorial, I couldn't help but look fondly back on this ad from my childhood:Knowledge is PowerWhat causes bitter cucumbers.The Decline and Fall of the GOPThat's what a number of commentators are predicting, mostly based on the fact that a bunch of conservative "outsiders" swooped into NY-23 to support Doug Hoffman, thereby forcing pro-choice, pro-gay-marriage, pro-stimulus, liberal Republican Dede Scozzafava to drop out and throw her endorsement to the Democrat. The conservatives have thrown the race to the Democrats, they complain. This, and the Specter primary challenge, will just encourage the few remaining Republicans in the northeast to leave the party entirely.What's interesting is that most of this wailing comes from Obama voters. Socially, Scozzafava is certainly closer to my positions than Hoffman. Fiscally, it's more of a toss up--Scozzafava is too soft on government spending, but what little I've read about Hoffman suggests that his approach to government is at best ham-fisted. Nonetheless. I am not a North Country voter, and I am not deluded into thinking that what I want, is what will make the Republican party electorally viable in the future. Rural Western New York, where my mother is from, is a little different from the northern region of the state, but the politics are similar enough that I can promise you this: Hoffman is not going to lose the party any votes because he betrays the region's historical affinity for gay marriage, of which there is none. The region isn't as socially conservative as the south, but that doesn't mean that they like pro-choice, pro-marriage equality candidates. It means that the issues don't have much electoral salience either way. Gay people growing up in either upstate region are even more likely to do what most people do anyway: leave. Thanks to the downstate influence, and a hefty dose of yankee farmer practicality, abortion will be legal in New York even if Roe gets struck down. It's an issue that's on the radar of urban activists who spend a lot of time worrying about what happens in Alabama, and ardent pro-lifers. Neither group is going to vote in NY-23. As for the alleged pernicious influence on the party at large, I remember hearing--indeed, I think, saying--such things about the Netroots attempts to drive their party left in the earlier part of the decade. And as I contemplate the wreckage of the Democratic party, barely holding on to 37 seats . . . Pardon me, I seem to have become trapped in Karl Rove's fantasy world. Not my finest hour as a political prognosticator. It is true that this turned out badly in the cases of Lieberman and Specter. But they were both popular incumbents, and the senate gives individual legislators quite a bit of power, especially when the numbers hover close to 60. In general, I don't think that you can credibly say that pushing progressive items like health care and climate change to the forefront of their party's policy agenda has turned out badly for the Democrats. Now, that's not to say that the Democrats will succeed in passing these things. Arguably, what they've succeeded in doing is creating more space for ideological purity in the Republican party--the less centrist and reasonable your opponents sound, the less you have to fear becoming the crazy ideologue in the race. Once they get into office, even the most ideologically committed legislators become keenly alive to the dangers of losing their seat . . . unless they're in a safe district that agrees with them. But moving their agenda left has not cost them. And I don't see any empirical reason to believe that it is going to cost the Republicans. Either Hoffman will lose, in which case the strategy of policing the party will lose some of its appeal, or he will win, in which case Blue Dog democrats and Republicans in squishy states will probably tack right--a critical win during the health care debate. In the long term, the Republican party still has big problems. But as devoutly as I would like to believe that their problem is loudmouthed television and radio hosts who just aren't sophisticated about public policy . . . well, I've yet to see any evidence that the American polity is avid for more sophisticated public policy discussion. Frankly, they seem a lot more interested in plausible enemies and improbable free lunches, which is the level on which both parties are mostly campaigning. November 2, 2009Link Farm
The Power of PricesEzra Klein is pessimistic about the exchanges today:it's not clear that they'll be particularly competitive if they're primarily serving a subsidized population. Interestingly, this seems like a variation of my argument about tipping points in markets when governments start to dominate them. I was talking about this in the context of pharmaceuticals and medical devices, where I worried about ham-fisted price controls destroying much of the incentive for efficient innovation. But both cases stem from the same problem: bad price signals. Prices really are pretty great, for all that we resent them when they signal variations in the demand for human labor. When you break the price signal, you get all manner of bad outcomes. Price signals are already pretty bad in the private insurance market, but at least they're set by negotiations between employees and employers, employers and insurers, insurers and providers . . . rather than by lobbying. I'm not sure that Ezra's pessimism will play out the way he outlines: for one thing, there will be a substantial number of currently uninsurable middle class people on the exchanges (though of course, this will skew things in another direction--towards the kind of coverage that people with dangerous conditions want). For another, the prices may simply converge--in Massachussetts, most people take the cheapest "bronze" option, and I'm not sure how much room there will be for variation in providing the basic package. Still, I think it's interesting that both Ezra and I want to preserve the price system (hell, even extend it) in substantial parts of the system. Separate, and Unequal, Pension Treatment at GMThe ostensible defense of making the creditors take a deeper haircut than the workers in the auto bankruptcies was that the workers were needed for continuing operations, and besides, it would be bad for the economy if they lost their pensions, etc.I'm curious to see whether the people advancing that argument can justify this: The Pension Benefit Guaranty Corporation, which insures pension plans, caps the amount of benefits it will pay, using a formula based on age and the type of benefits an employee earned. But in a side arrangement, G.M. is agreeing to pay special supplements, called top-ups, so that Delphi's union retirees get everything they were promised. The average base wage for a UAW worker is supposed to be about $60,000. So the white collar workers average quite a bit more--but the UAW distribution is fairly flat, while the white collar distribution is not, so a fair number of those white collar workers will be making roughly the same as a union member. Yet the UAW has had their gold-plated pensions made whole, while the white collar workers . . . well, the Times reports that one woman saw her pension fall from $3,000 a month to just under $400. What possible logic is there for this, other than the fact that the UAW generously supports the Democratic party? If you prick a white collar worker, does he not bleed? And if their home gets foreclosed on, does it not further destroy Michigan's economy? * I say "supposed" because I can't get a good figure including overtime, which for union workers can double their wages in good years. (Of course, they're not having good years now--but the retirees lived through quite a lot of them.) California's Tax GamesCalifornia has come up with a novel way to close this year's budget gaps: it's increasing withholding from the paychecks of its citizens. No, the government didn't actually increase taxes; it just raised the withholding. They'll give any extra funds back to taxpayers in April, and presumably fewer people will have to write checks to the government on April 15th.This is a terrible idea on many levels. First of all, the government should not be taking forcible loans from its citizens. Second of all, the fix is extraordinarily short term--people can start filing for refunds in four months. What are they going to do for an encore? Maybe, instead of raising taxes, governments can just start ritually raising the withholding regime every year, then mailing a check back at the end of the year, only to withhold even more the next time . . . Mental Health BreakJeopardy asks about economists:The True Cost of the House Health Care BillThe New York Times health care blog has a post about the games that politicians are playing with the cost of their health care bill--in this case, the new House bill that was initially reported as costing less than $900 billion. A more accurate assessment would have been $1.05 trillion:Throughout Thursday, news accounts, including our own, focused on $894 billion, the total cost given out by aides to the House speaker, Nancy Pelosi, before the official cost analysis was released by the Congressional Budget Office. Because Obama set a $900 billion target--probably sensibly, since the politics of a $1 trillion health care bill are tricky--the House wanted to get their proposal under that line. The problem is, they also want to subsidize lots and lots of people, which is expensive. I expect that the reaction of many people, maybe even most, is "Who cares whether we use gross or net cost, as long as it's deficit neutral?" I'm sympathetic, but there really are very good reasons to care: 1. This bill will not actually deficit neutral; it's just scored deficit neutral. This is not the fault of the CBO, which is doing its job. But the bills are loaded down with a bunch of "automatic spending cuts" and similar gimmicks which are very unlikely to happen. We did the same thing with Medicare in the Balanced Budget Act of 1997, and by 2003--i.e., the first year that the cuts really started to cut--Congress had mostly undone them. Doug Elmendorf, the source of that "deficit neutral" score, has made it pretty clear that he does not think the cuts will take place; he's just scoring them because that's what the CBO process requires him to do. After all, the reason that we need these automatic spending cut mechanisms is that Congress can't make a credible committment to cut costs now. And the reason they can't be relied upon to cut costs in the future is that doing so is politically costly. The larger the gross cost, the larger the hole it will rip in the budget if these gimmicks fail. 2. We have a gigantic existing budget deficit, which will require hundreds of billions of dollars worth of spending cuts or tax increases. I call your attention to the chart I posted the other week, showing what the budget deficit would look like with and without the Baucus Bill: But of course, keeping the bill "deficit neutral" also requires some combination of tax increases and spending cuts. These are very politically difficult, and as is generally true, the current bills use the ones that are politically easiest to cover their costs: things like tax increases on the rich, cuts to unpopular provider reimbursements, and rejiggering Medicare Advantage. Yes, these things are not easy--some of them are so hard that they may not happen. But whatever comes after them must, almost definitionally, politically even more difficult to pass. In the case of tax increases on the rich, there is simply an economic limit--the Laffer Curve does not apply at current levels of US taxation, but that doesn't mean it doesn't apply at any level of taxation, and we're already headed to marginal income tax rates of more than 50% in some jurisdictions. So the larger the gross cost, the more of the political "low hanging fruit" it eats up. That means that closing our existing budget deficit becomes more politically costly, and therefore less likely to happen--or, rather, more likely to happen too late, when the crisis is almost upon us. 3. Even if you are not particularly worried about shrinking the existing budget deficit, gross costs are, well, costs. Tax increases reduce the consumption people are able to do, of either goods or leisure. Benefit cuts mean fewer benefits. This has to be considered against the benefits. |



this covers a handful of vets receiving payments for tuberculosis, "special monthly compensation under 38 U.S.C. 1114(k)" or other disabilities. And here is 38 USC. 1114(k):





Krugman and Yglesias are referring to this report from Jonathan Gruber. I am referring to the CBO report. Here is what the CBOsays:
The CBO arrives at this result by assuming that people greatly expand their coverage, but that the cost of delivering that coverage falls due to the efficiencies/rules of the exchange, and the mix of people insured by the exchange gets somewhat healthier.
Jonathan Gruber has a different methodology. He looks at the projected premiums for the "Silver Plan" (70% of actuarial value), and projects them to a plan that covers 60% of actuarial value using simple arithmetic. (The "Gruber Microsimulation Model" cited in his charts seems to be a slight misnomer; I can reproduce it in excel in about a minute flat.) A 70% of actuarial value plan costs $5200, so Gruber assumes that 100% of actuarial value costs $7,425 and that 60% of that would cost $4460. Since the plan that the CBO assumes people will buy under current law covers 60% of actuarial value, he views this as a cost decrease.
That methodology seems a little off to me. Either price of a plan with a higher actuarial value should be lower per percent of actuarial value, since providing insurance has some fixed costs; or that ratio should rise, because lowering cost sharing often increases utilization. Either way, even with a mix of the two effects, it seems unlikely to stay exactly flat. But I will defer to Professor Gruber on this question.
Which is right? As I said in the comments, one way to think about it is to compare it with catalytic converters, airbags, anti-lock brakes, and so forth. If we mandate that everyone get them, the cost of new cars will rise. But because of economies of scale, the price of new cars might rise by less than it would cost to add these things as options on an individual car.
So did the price of new cars go up? I'd say it did. But you can also correctly point out that now everyone has antilock brakes and airbags, which are valuable things; it's not as if the price of the new car just went up with no added benefit. Even so, I'm not sure how much sense it makes to do a straight extrapolation back to the old price of cars pre-mandate, and thereby claim that you have actually made cars cheaper.
Obviously, the question gets further complicated if you subsidize 10% of new cars.
To some extent, I'm not sure how much the distinction matters, because this is all absurdly precise. The CBO is a very valuable institution, but its strength is consistency, not accuracy--it allows you to compare policies, but it does not allow you to see the future. These are rough estimates, and the true numbers could be either higher or lower. This is not to slam the CBO, of which I am inordinately fond--they are the first to state all the uncertainties surrounding their estimates.
I think maybe it's more useful to pull away from the numbers a little bit, and look at the various upward and downward pressures that the CBO discusses.
Expanding coverage doesn't just raise premiums because the insurance company is paying for more services, and/or paying a higher percentage of the cost of those services. It also increases utilization, and not necessarily in ways that increase health. The CBO expects most of the change in coverage to come from lowering copayments and deductibles, not extra services, so this is a real concern.
Is that expectation valid? I am not sure that this was the case in Massachussetts, which is our closest model--but we don't have the same demographic mix as Massachussetts, and our legislation is different in some respects. With no real way to assess this, I'm going to defer to the CBO and assume arguendo that they are right about decreased cost-sharing.
If we do go along with this assumption, that's certainly going to push costs up. I don't know if the CBO estimate of a roughly 30% increase in premiums due to expanded coverage is at all accurate, but I think we can safely say that decreasing cost sharing acts to increase premiums.
The CBO also estimates that there will be substantial savings because of enhanced efficiency in the individual market: about 7-10%. Again, the direction is almost undoubtedly correct, because administrative costs for providing individual policies are high, and in many states the market is rife with inefficiencies. The amount? I think hard to say, but their guess is better than mine.
Finally, the CBO assumes that the mix of people in the individual market will get healthier. There are two effects here, working at cross purposes. First, young adults are more likely to be insured than any other age group, and they rarely have expensive chronic conditions. They make up about 30% of the pool, according to Kaiser. On the other hand, the uninsured are twice as likely to be in poor health as people with private insurance (11% vs. 5%). Given the percentages, the effect of the young adults should dominate, especially if a disproportionate number of the very ill get kicked into Medicaid. Unless the individual mandate fails--as it might, if the penalties are not high enough--this effect should be significant.
Though as a side note, talking about changing the pool mix is somewhat tricky. Many young adults are absolutely right that insurance is a bad deal for them, particularly in states with guaranteed issue and community rating; they are better off with catastrophic or high deductible coverage. Bringing those people into the pool lowers the cost for people who already have insurance, but it raises the expenditure of the newer, healthier people considerably. Measuring the change in the average premium is not the same thing as measuring the change in aggregate expenditure, but people often talk as if they were interchangeable. For a lot of people, this plan means adding a large new expense which delivers less value in benefits than they pay.
In the end, I'm probably predisposed to assume that premiums will go up. But the CBO's logic seems pretty sound. The pool change is significant, but the exchanges will also take on a lot of people who can't currently buy insurance because they have some expensive condition. The administrative efficiencies are undoubtedly real, but there is simply a limit to how much premium reduction even strong reform can deliver on this front. If the CBO is right that people significantly reduce their cost-sharing, I'd expect both price and utilization to rise pretty steeply. In the end, most health care costs are driven by utilization, not administrative costs or outrageous profiteering, so I'd expect that effect to dominate the other two.
But as to the size of the effect, I don't know. The CBO doesn't either. In the end, the only way to find out is by enacting this thing.
The only thing I can say with real confidence is that Paul Krugman's interpretation of the whole affair is very odd:
Republican politicians are saying this because this is, in fact, what the CBO report says: average premiums will be higher. People may be getting more value for their money. But there's still more money leaving their wallet every month. The CBO may be wrong in assuming coverage expansion, but if you go along with their assumption, you end up with higher premiums. And if you don't go along with their assumption, you have to explain why you reject this assumption, but not all the others. Neither Krugman nor Gruber really does so.