Premiums Up, or Premiums Down? It Kind of Depends

In the comments to my earlier post on the CBO's premium estimates, reader Janice Doe asks:

Vegans 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 Market

The 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 Insurance

Health 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 Retailers

If 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 a positive sign that we had an increase in sales, but the numbers certainly don't indicate that those will be sustained," said Britt Beemer, chairman of consumer behavior firm America's Research Group.

Nationwide, 195 million shoppers visited stores and websites over the four-day weekend, up from 172 million last year, the National Retail Federation said Sunday.

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 Up

As 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?

Rumbles in the Desert

While 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:

First, there's the view that this is the beginning of many sovereign defaults, and that we're now seeing the end of the ability of governments to use deficit spending to fight the slump. That's the view being suggested, if I understand correctly, by the Roubini people and in a softer version by Gillian Tett.

Alternatively, you can see this as basically just another commercial real estate bust. Either you view Dubai World as nothing special, despite sovereign ownership, as Willem Buiter does; or you think of the emirate as a whole as, in effect, a highly leveraged CRE investor facing the same problems as many others in the same situation.

Finally, you can see Dubai as sui generis. And really, there has been nothing else quite like it.

At the moment, I'm leaning to a combination of two and three. For what it's worth (not much), US bond prices are up right now, suggesting that the Dubai thing hasn't raised expectations of default.

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 ClimateGate

Reader 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?

Let Us Give Thanks

By the President of the United States of America.

A Proclamation.

The year that is drawing towards its close, has been filled with the blessings of fruitful fields and healthful skies. To these bounties, which are so constantly enjoyed that we are prone to forget the source from which they come, others have been added, which are of so extraordinary a nature, that they cannot fail to penetrate and soften even the heart which is habitually insensible to the ever watchful providence of Almighty God. In the midst of a civil war of unequaled magnitude and severity, which has sometimes seemed to foreign States to invite and to provoke their aggression, peace has been preserved with all nations, order has been maintained, the laws have been respected and obeyed, and harmony has prevailed everywhere except in the theatre of military conflict; while that theatre has been greatly contracted by the advancing armies and navies of the Union. Needful diversions of wealth and of strength from the fields of peaceful industry to the national defence, have not arrested the plough, the shuttle or the ship; the axe has enlarged the borders of our settlements, and the mines, as well of iron and coal as of the precious metals, have yielded even more abundantly than heretofore. Population has steadily increased, notwithstanding the waste that has been made in the camp, the siege and the battle-field; and the country, rejoicing in the consiousness of augmented strength and vigor, is permitted to expect continuance of years with large increase of freedom. No human counsel hath devised nor hath any mortal hand worked out these great things. They are the gracious gifts of the Most High God, who, while dealing with us in anger for our sins, hath nevertheless remembered mercy. It has seemed to me fit and proper that they should be solemnly, reverently and gratefully acknowledged as with one heart and one voice by the whole American People. I do therefore invite my fellow citizens in every part of the United States, and also those who are at sea and those who are sojourning in foreign lands, to set apart and observe the last Thursday of November next, as a day of Thanksgiving and Praise to our beneficent Father who dwelleth in the Heavens. And I recommend to them that while offering up the ascriptions justly due to Him for such singular deliverances and blessings, they do also, with humble penitence for our national perverseness and disobedience, commend to His tender care all those who have become widows, orphans, mourners or sufferers in the lamentable civil strife in which we are unavoidably engaged, and fervently implore the interposition of the Almighty Hand to heal the wounds of the nation and to restore it as soon as may be consistent with the Divine purposes to the full enjoyment of peace, harmony, tranquillity and Union.

In testimony whereof, I have hereunto set my hand and caused the Seal of the United States to be affixed.

Done at the City of Washington, this Third day of October, in the year of our Lord one thousand eight hundred and sixty-three, and of the Independence of the Unites States the Eighty-eighth.

By the President: Abraham Lincoln

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.

When the Public Coffers Run Dry

Michael 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 Friday

Thanksgiving 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 Moderation

Ezra 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 Emails

With 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 huge flying roaches Palmetto bugs that live in our nation's more southern climes). So that doesn't mean I don't worry quite a lot.

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.

One programmer highlighted the error of relying on computer code that, if it generates an error message, continues as if nothing untoward ever occurred. Another debugged the code by pointing out why the output of a calculation that should always generate a positive number was incorrectly generating a negative one. A third concluded: "I feel for this guy. He's obviously spent years trying to get data from undocumented and completely messy sources."

Programmer-written comments inserted into CRU's Fortran code have drawn fire as well. The file briffa_sep98_d.pro says: "Apply a VERY ARTIFICAL correction for decline!!" and "APPLY ARTIFICIAL CORRECTION." Another, quantify_tsdcal.pro, says: "Low pass filtering at century and longer time scales never gets rid of the trend - so eventually I start to scale down the 120-yr low pass time series to mimic the effect of removing/adding longer time scales!"

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 All

Remember 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

I'll just add that the paranoid center thesis didn't rest on whether or not this was a murder. There's a certain number of politically motivated crimes each year, and my position isn't affected by whether one single death is or isn't one of them.

What's important was the leap to judgment. A large number of commentators assumed, apparently inaccurately, that the death was a murder, that the murder was political, and that the motive was linked to one congresswoman's crusade. They made those assumptions because it fit a narrative to which they were committed.

When people on the far left or the far right do that, they're accused of paranoia -- of being so eager to connect the dots that they run ahead of what the evidence actually says. Let this sad story from Kentucky be a reminder that the establishment is just as capable of making this mistake as the fringe.

Blaming Bush for the Budget Deficits

There 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 Statistics

Kevin Drum:

ABC News reports that in the past 16 months the number of people who believe in global warming has dropped 8 percentage points.  But the drop is skewed almost completely by ideology: among liberals and moderates there's been a change of only a couple of points, which might just be statistical noise.  Among conservatives, belief in global warming has dropped a whopping 13 points.

Note that this isn't a drop in conservatives who think that global warming is manmade.  It's not a drop in the number who think it will continue in the future.  It's not a drop in the number who think it's too expensive to do anything about it.  The question ABC asked was whether or not temperatures had increased over the past hundred years.  It's a simple factual question like asking if the Allies won World War I.  But only a bare majority of conservatives believe it.

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: "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:"

And this bizarre observation: our structural deficits can be blamed on LBJ and FDR??? I assume that's because they created Social Security and Medicare.  That's a bold statement to make, given that the cause of our structural deficit is complex. Even before breaking the surface, one must recognize that deficits are not caused by spending alone, they are caused by revenues that are lower than spending.  Hence, one could just as easily blame Ronal Reagan for the structural deficit because he reduced revenues (while substantially increasing defense spending).

Megan has written some insightful posts before. Unfortunately, this is not one of them.  My advice: steer clear of the political hackery and focus on the data.

First, 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 Filibuster

I 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-Sequiturs

Posting about our coming entitlement problem generates some non-sequiturs masquerading as incisive political commentary.

• Conservatives have "no credibility" on budget deficits because George W. Bush and Ronald Reagan ran big deficits  You are missing a Republican president in the middle:  George H. W. Bush, who bravely enacted a whopping tax hike in order to close the deficit, helping to ensure that he would not be re-elected in 1992; by most metrics, Bush I deserves about as much credit for closing the deficit as Clinton does.  But even if this weren't a highly selective misreading of history, so what?  Are we going to drive our government over a fiscal cliff because George Bush and the Republicans who enabled them were grossly irresponsible, and some of the commentators were hypocrites?  That'll show 'em!!!
• You can't talk about deficits in regard to health care spending because the Iraq and Afghanistan wars were really expensive.  Item:  wars, and stimulus spending, are the kind of thing that are traditionally done on deficit spending, all the way back to the American revolution.  That's because they're temporary, and it often makes sense to amortize the cost over a number of years.  Item #2: Lumping in Afghanistan, when almost everyone in the country supported that, is pretty silly.  Item #3:  Entitlements are not supposed to be funded on deficit spending, because they're not temporary.  It's the same reason that it's okay to take out some student loans to pay for medical school, and not okay to take out a home equity loan to pay your mortgage.  You can say that we should never have gone into Iraq, and I'll agree; it's entirely possible that we should stop spending money there, and in Afghanistan, ASAP.  But the problem with our entitlements is not their ten year cost; it's that their costs keep growing and growing.
• The deficit can't be that big, because Iraq and Afghanistan are costing $600 billion and counting  Umm . . . what?  You're comparing a ten year cost to a one year deficit of $700+ billion.
  
• Every other industrialized country has a national health care system  Which will fix our structural budget deficit how, exactly?
  

Structural Versus Cyclical Deficits

As 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 graph argument¹ is not a reason to stop spending money now -- it doesn't really tell us whether or not we need a second stimulus.  But it is a very good argument for being careful about what future obligations we take on, as well as for thinking seriously about how we're going to start bringing those deficits down when unemployment starts dropping and robust growth resumes.

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 Directors

The 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 Filibuster

Matt 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 Obligations

The 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:

• Cost doesn't equal risk  One of my commenters complained that I was using costs and risk interchangeably, and that they are not the same thing.  Indeed, they aren't always.  But new obligations always add more risk to your balance sheet, even if you think you're also adding the revenue to cover them, because if the revenue doesn't materialize, you're in a dreadful hole.  And the greater the existing deficit between revenues and obligations, the more risk any new obligations add.  If our deficit were in rough balance, the new obligations would add only trivial risk.  But we're running a roughly $700 billion structural deficit over the next ten years, which is greater than or equal to 6% of GDP. 
  
• The US won't actually go bankrupt, because we can always inflate away the value of our debt  This won't work.  We have an independent central bank, and any concerted effort to appoint a Fed chair willing to inflate away our debt would be made difficult by both the dirth of pro-hyperinflation economists/bankers, and the fact that markets would freak out and jam up our interest rates sky high.  Moreover, inflating your debt only works if your structural deficit is small relative to the outstanding amount of debt.  As things now stand, by 2019 our structural deficit is scheduled to be about 6% of GDP, while our debt will be around 65% of GDP.  That may not sound like much, but over a few years, rising interest rates could rapidly confound any attempt at inflating away our debt.
• The US won't actually go bankrupt, because sovereign nations don't go bankrupt  This is sort of true.  But sovereign nations can and do become insolvent when the size of their obligations gets too out-of-proportion to the size of the revenues they take in. That's when it becomes hard to borrow money, and states have to start making bankruptcy-like choices--picking which of their obligations they're going to renege upon.  With our entitlement system, that probably means cutting benefits too people who did long-term planning around them.
• The US won't actually go bankrupt, because the government will act long before then  This is quite possibly true.  But what does "acting" look like?  It looks like the things we're frightened of doing now:  making deep cuts to entitlements, including the new entitlement we're so busy enacting.  And it probably won't be done until things are pretty dire, which means it will be done hamfistedly.  California is what a sovereign almost-bankruptcy looks like.  New York is the slightly more respectable version.  Both are ugly, and getting uglier.
  
• Everything's okay because the TIPS spread looks fine  The spread between standard and inflation-indexed treasuries is a good measure of our fiscal health if you think the biggest risk is inflation.  If you don't--for the reasons I outline above--then it's not very helpful.  Long term US debt isn't particularly cheap when you factor in things like our low rates of inflation and projected economic growth. 
  
• Everything's okay because Treasury yields are low  This is a decent argument, but only decent.  Short term treasury yields are low; long term treasury yields are not, as I just pointed out, all that fabulous.  We've been borrowing a lot of money at the short end of the curve, and we may get a nasty surprise when we try to convert that into longer maturities.  Moreover, since the financial crisis, we've been in an odd spot:  demand for treasury debt is high, because demand for riskier securities--equity, emerging market debt, and so forth--has fallen abnormally.  (The same thing happened in the wake of the Great Crash).  Over the next five years, treasury yields may stay low, in which case I'm wrong.  Or they may start to rise, in which case we have problems, because we've got to roll over a whole bunch of short term debt.

Are 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.

HOWEVER, the insurer-backed CDS trades (AIG-style trades) tend to be based on very large portfolios of assets, and are diligence intensive. They also contain atypical terms which means that even if you're a market expert, you have to pay close attention to the swap documents and the underlying portfolio of assets in order to understand the deal. So, in defense of AIG, it's not as if they can simply hire new people and bring them up to speed overnight. Also, at this stage of the game, there are probably various workouts in place for a lot of trades that have long stories attached to them.

In short, getting a new team in place could actually be a problem simply from a logistical perspective, even if we ignore the forced lower pay alla Uncle Sam and potential lynching by tax payers.

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 boat health care plan may have unexpected maintenance costs, as health care plans, and boats, are wont to do.  Since we've already spent our spare source of cash, and our budget has no margin for error,  our new purchase obviously places us at much greater risk of fiscal disaster.

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!"

ClimateGate

A 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, Again

New 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.

The company is scheduled to pay another $198 million in retention payments to some 240 remaining FP employees in March 2010. Right now, according to AIG executives and Treasury sources close to the talks, the issue is that Feinberg wants FP's traders to return the rest of the retention money that was pledged to be returned in March of this year under pressure from Cuomo. FP executives say the contracts are outside Feinberg's jurisdiction. Feinberg counters that he could use the contracts as a factor when determining a trader's base salary for next year as indicated in the statute set by Congress. In theory, if an FP employee is due to receive $1 million on March 15, 2010, Feinberg has the authority to compensate by cutting their salary to $1. Of course then, the employee could simply quit.

Senior AIG executives contend that an exodus of traders over punitively reduced contracts risks blowing up the $1.1 trillion derivatives portfolio still left to be unwound, destroying the taxpayers' $180 billion investment in the company and potentially dragging the fragile economic recovery back into the abyss. "I'm trying desperately to prevent an uncontrolled collapse of that business," then-CEO Ed Liddy testified last March. "The financial downside for taxpayers is potentially very large and it's very real." The AIG executives see Feinberg's efforts to save a few million in retention payments, given the billions at stake, as a terrible business decision. "I just don't understand why you would treat people this way," one AIG executive says. "It's economic and financial terrorism on the government's own investment, by the government."

Feinberg, along with everyone in the Obama White House, recognizes the risks. "I'm concerned about that. I don't want to see that happen," Feinberg said as we pulled up to Lincoln Center. But privately, Feinberg has indicated to Treasury officials that he's not sure the FP employees are as crucial as they say. When the crisis erupted last fall, AIG hired McKinsey and Blackstone to study the portfolio and devise a strategy to wind down the trades. If a mass of FP traders leave, advisers might be able to stabilize the positions in time to bring in new traders. "You could triage it," a former senior FP trader told me. Essentially, as long as someone managed risks to interest-rate and foreign- exchange moves, traders could be hired to continue the unwind.

The Heart of the Health Care Debate

If 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 Break

Saturday Night Live sums up our relationship with China:

Parsing the Senate Debate on Health Care

I 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:

1. This bill uses accounting gimmicks to front load the taxes and back load the spending, which is the only reason it's deficit neutral over the ten year window.
   
2. The Democrats are refusing to let cuts to doctor payments stand, and also, doctors don't get paid enough.
   
3. Millions of people are going to be added to Medicaid, which is a terrible program because providers don't get paid enough.  Also, it would be too expensive to add people to Medicaid.
4. Medicare costs too much, and also, shouldn't be cut.
5. The Republicans favor "real reform" which mostly seems to consist of liability caps.

Somewhat to my surprise, John McCain was on fire, in full on "flaming sword of righteousness" mode.  He was practically shaking with anger as he called out the government for negotiating with the pharma companies, and yelled at the pharmas for raising their prices this year.  Pharma seems to have followed a standard "Memorial Day Sale" strategy--they've raised prices by about 10% this year, in preparation for the deep discounts they'll have to offer in the future.  John McCain thought that this was terrible, and said so, to awkward silence from his colleagues.  They brightened up considerably when he said "Shame on the AARP" for endorsing this plan that does its members no good, accused them of getting paid off, and told people to tear up their AARP cards.  He and Bob Corker were pretty much the high points.  The rest was mostly boilerplate.

Luckily for the Republicans, they weren't exactly playing against the varsity.  The Democrats had their own set of uncompelling talking points:

1. Insurance companies are evil institutions which deny everyone any care that costs more than a pack of Freedent gum.  Also, they cannot control health care costs without substantial government intervention, because they spend far too much on expensive procedures.
2. Ted Kennedy sure was a swell guy, wasn't he?  He'd be proud of every dang one of us today.  (It is impossible to exaggerate how great a role this point played.  There was a five minute stretch which consisted largely of people telling Ted Kennedy's replacement that Teddy would be awfully proud of him, and him saying, "No, really, Ted would be proud of you.")
3. Small- and medium-sized businesses are groaning under the weight of their health care costs.  Also, starting next year, we're going to force them to give you much more generous coverage from your employer, such as coverage for non-dependent "children" up to the age of 26.
4. This problem is incredibly urgent, which is why we have to pass this bill, which now takes effect in 2014, RIGHT NOW.
   

The best talking points on both sides were, sadly, anecdotes.  Democrats had the predictable parade of people who were denied coverage for various treatments.  Republicans had doctors who cannot afford to take Medicaid, hospitals which can't survive on Medicare and Medicaid reimbursement levels, and Senator John Barasso, whose wife was diagnosed with breast cancer by a mammogram in her early forties.

Oprah Winfrey Ending the Most Successful Television Show Ever

Oprah 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 Apply

Allegedly, 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 Break

The Real Problem with vampires.

The Other CBO Health Care Report

Shortly 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. 

• The provisions of the bills interact; passing them in parallel skews the cost estimates
• Passing the physician reimbursement is the price of AMA support for the bill, which is why they were originally bundled together.  The bills have to be passed in parallel--if they don't do the one, they probably can't pass the other.  That argues for making them into one bill.
• Failing to pass the cuts would devastate Medicare's GP provider network as physicians pulled out, making it hard to do the cost cuts in other areas.
• Splitting them leaves the physician fix with no financing mechanism.
 

It would be one thing if they'd found some alternative financing mechanism to pay for the physician fix.  But as I see it, they're passing a bill that increases the deficit by $200 billion in order to pass another bill that hopefully reduces it, but by substantially less than $200 billion.  That means that passage of this bill is going to increase the deficit.

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?    

Wal-Mart Releases its Black Friday Deals

The 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 Trouble

Here 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 Day

There 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 Break

Weird error messages.

Preliminary Thoughts on the CBO Report

I 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.

Palinoia

Y'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 Loans

Felix 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:

McArdle is far too generous to the lenders here. For one thing, I made it clear in my post that credit cards are very good for transactional credit: if you need to pay the car-repair shop today, using a credit card is a great way of doing so. But you should also have a good enough relationship with your bank that by the time the credit-card bill comes due, you can pay it with the proceeds from a personal loan or line of credit.

Secondly, I don't think for a minute that we should deny the poor credit; in fact I'm on the board of a non-profit institution which exists to provide credit to the poor, and I'm all in favor of that. It's credit cards I don't like, with their high fees and interest rates (and there are even exceptions to that rule, such as the ones provided by many credit unions). And I really dislike payday loans, which are pretty much universally predatory, especially when compared to similar products from community development credit unions.

Megan's conceptual mistake here is clear when she says that "credit extended to the poor carries high interest rates to cover the default risk". But in fact the interest rates on credit cards are really not a function of default risk at all. Mike Konczal had a great post on this back in May, where he showed pretty conclusively that credit-card interest rates were all about maximizing profit for the issuer, rather than compensating for default rates. And payday loans are even worse.

What earthly grounds does Megan have for saying that the number of people made worse off by payday loans is smaller than the number of people made better off by them? I suspect she considers the alternative to be no-credit-at-all-nohow-noway. But that's not what anybody is proposing. I, for one, think that credit should be available to the poor, very much so. But not in the quantities and at the rates that it's been available until now. There is such a thing as too much credit, and we crossed that line long, long ago.

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:

• Check cashing places give you the money immediately
• Poor people are disproportionately subject to judgments and garnishments that make it preferable to operate in cash
• People working off the books don't want a trail for the IRS to follow
• For people with low incomes, the costs associated with a mistake--bounced check fees, for example--can be devastating.  But if you don't have the fees, people will overdraw their accounts.
• Check cashers keep longer attractive hours and have better service
  

As Felix could no doubt attest at great length, this problem has proven hella stubborn.

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 Wire

While 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 Debts

I'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:

• Cut up all your credit cards and promise never to use them again
• Do not borrow money for any purpose whatsoever, with two exceptions:
• You may take out a 15-year fixed rate mortgage where the payment is no more than 25% of your take home pay
• You may take out a bridge loan to cover the underwater portion of a car, boat, or other asset loan, if you are selling the asset in order to get out from under the payment
• Sit down at the beginning of every month and do a written budget in which you allocate every dollar you expect to earn
• Take cash out of the bank and use it to pay for your non-automatic purchases:  eating out, groceries, gas, parking, clothing, etc.
• Pay off all of your debt as quickly as possible
  
• Give ten percent of your income to charity
• Save fifteen percent of your income
• Don't declare bankruptcy unless they bailiffs are actually on their way to your house to evict you, seize your furniture, and put your family on the street
  

There are various wrinkles for people with irregular income and so forth; there is investment advice, some of it good and some of it not--but that's the core of it.  And Peter and I tried the program in preparation for writing the article.

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:

Ezra Klein, on what he considers a vicious cycle in credit cards:

The problem is that the people who migrate toward debit cards are the people who have enough money not to need much credit and are responsible enough to not want it. The good risks, in other words. The people left in the credit card market will be disproportionately bad risks, which means rates will go up and standards will tighten, which will in turn drive more people out of the market, starting the cycle over again.

I'm not convinced that this is a bad thing. Credit cards are useful payment devices, but atrocious borrowing devices. (Steve Waldman has a great post explaining the distinction further.) We want to move to a world where people use charge cards for transactional purposes, and personal loans for credit purposes. The way we're going to get there is, essentially, by taxing the stuff we want less of -- and that means increasing the interest rates and annual fees on credit cards.

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.

Department of Awful Ideas

Maybe this makes more sense in Danish.  But I doubt it.

Question of the Day

I 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 Says

There 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:

• Ending "overpayments" to Medicare Advantage providers
• Adjusting (downwards) provider payments based on productivity growth in the broader economy
• Demanding a 50% discount from pharmaceutical companies for seniors who are in Medicare Part D's "donut hole".

Medicare Advantage "overpayments" are, in fact, payments for extra benefits. They almost have to be, because of the way that the payment mechanism is set up.  The CMS report makes it very clear that cutting out the overpayments will result in a substantial loss of benefits by current enrollees.  Now, maybe we shouldn't be providing those benefits--but cutting them is not going to be popular. It's not clear how long the benefit reduction will survive the political process.

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.⁸

Over time, a sustained reduction in payment updates, based on productivity expectations that are difficult to attain, would cause Medicare payment rates to grow more slowly than, and in a way that was unrelated to, the providers' costs of furnishing services to beneficiaries. Thus, providers for whom Medicare constitutes a substantive portion of their business could find it difficult to remain profitable and might end their participation in the program (possibly jeopardizing access to care for beneficiaries). While this policy could be monitored over time to avoid such an outcome, so doing would likely result in significantly smaller actual savings than shown here for these provisions.

Footnote 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.

The latter possibility is especially likely in the case of the higher volume of Medicaid services. Despite a provision to increase payment rates for primary care to Medicare levels, most Medicaid payments would still be well below average. Therefore, it is reasonable to expect that a significant portion of the increased demand for Medicaid would not be realized.

We have not attempted to model that impact or other plausible supply and price effects, such as supplier entry and exit or cost-shifting towards private payers. A specific estimate of these potential outcomes is impracticable at this time, given the uncertainty associated with both the magnitude of these effects and the interrelationships among these market dynamics. We may incorporate such factors in future estimates, should we determine that they can be estimated with a reasonable degree of confidence. For now, we believe that consideration should be given to the potential consequences of a significant increase in demand for health care meeting a relatively fixed supply of health care providers and services.

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 Communications

Slate 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:

Even if future trespassers could understand what keep and out mean when placed side by side, there's no reason to assume they'd follow directions. In "Expert Judgment," the panelists observe that "[m]useums and private collections abound with [keep out signs] removed from burial sites." The tomb of the ancient Egyptian vizier Khentika (also known as Ikhekhi), for example, contains the inscription: "As for all men who shall enter this my tomb ... impure ... there will be judgment ... an end shall be made for him. ... I shall seize his neck like a bird. ... I shall cast the fear of myself into him." It's possible that the vizier's contemporaries took Khentika at his word. But 20^th-century archaeologists with wildly different religious beliefs had no reason to take the neck-cracking threat seriously. Likewise, a scavenger on the Carlsbad site in the year 12,000 C.E. may dismiss the menace of radiation poisoning as mere superstition. ("So I'm supposed to think that if I dig here, invisible energy beams will kill me?") Hence the crux of the problem: Not only must intruders understand the message that nuclear waste is near and dangerous; they must also believe it.

The report's proposed solution is a layered message--one that conveys not only that the site is dangerous but that there's a legitimate (nonsuperstitious) reason to think so. It should also emphasize that there's no buried treasure, just toxic trash. Here's how the authors phrase the essential talking points: "[T]his place is not a place of honor ... no highly esteemed deed is commemorated here." Finally, the marker system should communicate that the danger--an emanation of energy--is unleashed only if you disturb the place physically, so it's best left uninhabited.

As for the problem of actually getting these essentials across, the report proposes a system of redundancy--a fancy way of saying throw everything at the wall and hope that something sticks. Giant, jagged earthwork berms should surround the area. Dozens of granite message walls or kiosks, each 25 feet high, might present graphic images of human faces contorted with horror, terror, or pain (the inspiration here is Edvard Munch's Scream) as well as text in English, Spanish, Russian, French, Chinese, Arabic, and Navajo explaining what's buried. This variety of languages, as Charles Piller remarked in a 2006 Los Angeles Times story, turns the monoliths into quasi-Rosetta stones. Three rooms--one off-site but nearby, one centrally located, and one underground--would serve as information centers with more detailed explanations of nuclear waste and its hazards, maps showing the location of similar sites around the world, and star charts to help intruders calculate the year the site was sealed. According to 1994 estimates, the whole shebang would cost about $68 million, but that's just a ballpark figure based on very incomplete data.

Proposals for the "earthworks" component demonstrate that the whole project of communicating with the future is really a creative assignment, more dependent on the imagination than on expertise. What'll really scare off 210^th-century tomb raiders? The report proposes a "Landscape of Thorns" with giant obelisklike stones sticking out of the earth at odd angles. "Menacing Earthworks" has lightning-shaped mounds radiating out of a square. In "Forbidding Blocks," a Lego city gone terribly wrong, black, irregular stones "are set in a grid, defining a square, with 5-foot wide 'streets' running both ways. You can even get 'in' it, but the streets lead nowhere, and they are too narrow to live in, farm in, or even meet in."

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 Counterparties

One 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.

So what are Tavakoli's arguments? One is the Immaculate Negotiation argument:

The government could have stepped in and renegotiated its contracts. ... Goldman Sachs would have been out billions of dollars in collateral had a bankruptcy‐like settlement been negotiated with AIG, and that is material.

Saying that Goldman would've taken a material loss if "a bankruptcy‐like settlement been negotiated with AIG" is the equivalent of saying that Goldman would've taken a material loss if they'd agreed to take a material loss. It's true, but there's no way Goldman would ever have agreed to a "bankruptcy-like settlement" -- why would they? As someone who has actually been involved in these kinds of negotiations, let me explain how the AIG/Goldman negotiations would have played out:

AIG: Would you be willing to accept, say, 70 cents on the dollar?
Goldman: No.

THE END

Seriously, what could AIG have threatened Goldman with? If they didn't accept a haircut, AIG would file for bankruptcy? Fine, Goldman would've just seized the $7.5 billion in cash collateral, and collected the remaining $2.5 billion from its counterparties on the now-triggered CDS on AIG (on which more below), covering Goldman's full bilateral exposure to AIG. That's what it means to be "hedged."

(This is also why the Fed paid Goldman and the other counterparties 100 cents on the dollar to terminate their CDS contracts with AIG, which this Bloomberg article portrays as some sort of gift to the banks. But the Bloomberg article also relies on the Immaculate Negotiation argument -- how, exactly, was the Fed supposed to get the counterparties to agree to take a haircut? The Fed had just demonstrated to the entire world that it wasn't willing to let AIG file for Chapter 11. How do you suppose those negotiations would have gone? The Fed couldn't say, "You can either take a haircut to 70 cents or AIG will file for bankruptcy and you'll only get 50 cents," because everyone knew the Fed wasn't willing to put AIG in bankruptcy.)

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:

1. First, AIG tried to negotiate haircuts on its CDS contracts, but counterpar
ties refused (as was their right):

AIG was attempting to resolve its liquidity crisis caused by the collateral posting requirements by negotiating a cash payment to the counterparties in return for terminating the credit default swaps. ... While FRBNY was conducting analysis on alternative solutions, AIG's attempts to negotiate the termination of its multi-sector credit default swap book with its counterparties were failing. AIG requested FRBNY's assistance in securing these terminations.

2. Contrary to the constant claims of ill-informed pundits, the NY Fed did try to negotiate haircuts with AIG's counterparties:

On November 6 and 7, 2008, FRBNY assistant vice presidents, vice presidents, senior vice presidents, and executive vice presidents contacted eight of AIGFP's largest counterparties (Société Générale, Goldman Sachs, Merrill Lynch, Deutsche Bank, UBS, Calyon, Barclays and Bank of America) by telephone. They described a proposal under which each counterparty was asked to accept a haircut from par. Seven of the eight counterparties told FRBNY officials that they would not voluntarily agree to a haircut. The eighth counterparty, UBS, said that it would accept a haircut of 2 percent as long as the other counterparties also granted a similar concession to FRBNY. FRBNY officials told SIGTARP that their concerns about credit rating downgrades limited the time available for negotiation about reductions in payments.

3. The NY Fed tried to get the French bank regulators to help them negotiate haircuts with SocGen and Calyon--two of AIG's biggest counterparties--but not only did the French regulators refuse to help, they specifically instructed SocGen and Calyon not to agree to any haircuts (rendering UBS's conditional acceptance of a 2% haircut moot). From the report:

During these negotiations, an FRBNY executive vice president and senior vice president contacted the Commission Bancaire to inform them that the FRBNY was conducting negotiations with Société Générale and Calyon, two of the counterparties with the largest credit default swap contracts with AIG, and was requesting their support. The Commission Bancaire then contacted the firms. The Commission Bancaire spoke again with FRBNY and forcefully asserted that, under French law, absent an AIG bankruptcy, the banks could not voluntarily agree to less than par value for the underlying securities in exchange for terminating the swap contracts. Thus, the French banks claimed they were precluded by law from making concessions and could face potential criminal liability for failing to comply with their duties to shareholders.

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 Power

The challenges of translating Beowulf.  There are five pages, and I recommend clicking through.  It's fascinating reading.

Squandering Severance

The 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:

After working for more than a decade in New York ad shops, Chuck Hipsher moved to Detroit in 2005. He took a position at the Campbell-Ewald agency, where he helped launch the Chevrolet Silverado campaign. Raised riding in the back of his grandfather's Chevy pickup in Iowa, Mr. Hipsher, 50, says he was "elated" at the opportunity.

He met his wife at the ad agency, and the two had a $40,000 wedding. Kelly Hipsher, 32, was laid off in October 2007 and found out she was pregnant in February 2008. A week later, Mr. Hipsher's pink slip followed. Two months after that, the out-of-work couple moved to Greenville, S.C., to be closer to family and get a fresh start. Together, they had received about $60,000 in severance. "Now we have $600 to our name," says Mr. Hipsher.

Although their rent was cheaper, Mr. Hipsher says the family continued to spend like before. They moved with three cars -- two BMWs and a Chevy Silverado. They continued to buy cases of $36-a-bottle wine. They spent $250 a month on a cleaning lady, and Mr. Hipsher dropped $50 a week on flowers for his wife. The couple still dined out regularly.

"We were stupid," he says. "You become accustomed to a certain lifestyle. When your world changes and things dictate that you change, you're pretty stubborn to give things up."

He sold the BMWs and voluntarily turned in his beloved Silverado to avoid the repo man. "It was heartbreaking," he says. He replaced the fancy wheels with a Chrysler minivan.

Before the layoffs, the Hipshers had no debt. Today, they owe about $70,000 -- including money borrowed from family members and $31,000 in credit-card debt. To hold off the collection companies that call daily, Mr. Hipsher says he is doing his best but is also considering filing for personal bankruptcy.

After a stint selling new and used BMWs on a lot in Greenville, Mr. Hipsher recently began consulting for free for a small marketing firm, "to stay busy."

In September, a Web solutions company hired him as a marketing director. Between salary and commission, he thought he could match half his old income. But so far, he says he's only received about $1,220. Tight for cash recently, he pawned his wife's $12,000 wedding ring for a $2,000 loan. He has until Dec. 28 to pay back the principal, plus $500 in interest -- or else he forfeits the ring.

Looking back, he kicks himself for failing to enforce financial discipline right after losing his job in Detroit. "That precious nest egg is gone," he says.

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 Day

Apparently 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.

Continue reading "Quote of the Day" »

War and Crimes

Matt Yglesias makes a smart point about Khalid Sheikh Mohamed:

Alongside the various nonsensical efforts to convince people that KSM is too scary to be put in trial, the right objects to bringing him to justice on the grounds that this represents a problematic "law enforcement" approach to terrorism. I think it's pretty clear that international terrorism has some dimensions that go well-beyond ordinary law enforcement, but if you have to put the whole thing in either the "crime" box or the "war" box, there's a pretty strong case for erring on the side of crime.

In political terms, the right likes the war idea because it involves taking terrorism more "seriously." But in doing so, you partake of way too much of the terrorists' narrative about themselves. It's their conceit, after all, that blowing up a bomb in a train station and killing a few hundred random commuters is an act of war. And war is a socially sanctioned form of activity, generally held to be a legally and morally acceptable framework in which to kill people. What we want to say, however, is that this sporadic commuter-killing isn't a kind of war, it's an act of murder. To be sure, not an ordinary murder--a mass murder--but nonetheless murder. It's true that if al-Qaeda were something like the "blowing up train stations" arm of a major country with which we were otherwise at war, it might make the most sense to think of al-Qaeda as fitting in with spies and saboteurs; criminal adjuncts to a warrior enterprise.

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 Income

From commenter Dave Walser, a tax professional:

That's not perfectly true, but it's close enough. We tax professionals are able to legitimately help taxpayers reduce their exposure to income taxes, but we cannot eliminate income taxes (unless the taxpayer decides to quit making money). However, the tax code is so complex and enforcement is so lax a lot of tax myths are able to flourish. For example, a few years ago my brother-in-law asked if he could "hire" his wife and kids and funnel most of their wages into a 401(k) plan. (This would allow whatever he paid them to escape current income taxation while giving his business a tax deduction.) I said, "Sure. What are they going to do to earn their wages?" He was shocked that there might be some requirement his wife and kids had to actually do something to earn the money that would be salted away into a 401(k) account. He was even more shocked to learn the money, once in the 401(k) plan, could not be used by him for his own business and investment purposes. Why was he shocked by these rather obvious (to a tax professional at least) requirements? He has friends who claim they were hiring family in their businesses and doing precisely what he'd described to me. So far, his friends have gotten away with it (not surprising given the low audit rate). Eventually, those friends will be audited and the IRS hammer will fall -- hard! In the mean time, a tax myth has been created that this kind of thing is appropriate tax planning.

The same thing was true, only on a much larger scale, with the tax shelters of the late 1990s and early 2000s. Lots of individuals and businesses participated in the shelters because they'd heard that everyone else was and the IRS had blessed the transactions. It was an easy thing to believe. If you'd heard of dozens of people selling their business who'd avoided tax on several million dollars of gains and none of those people had gotten in trouble with the IRS, why shouldn't you believe that you, too, could avoid the tax on your large transaction? In this case, silence from the IRS was not the same as permission. It just took the government a decade to catch up with what was going on. Much grief and anguish followed.

Flu

I 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 Taxman

Suggest 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:

Every time I suggest eliminating the corporate income tax, I am beset by horrified people saying "But . . . what's to stop me from becoming a corporation and evading taxes that way?"

Well, what's stopping you now? Your rent is money thrown to the winds; a corporation's rent is an expense deductible from income. Your car payment is a millstone around your neck; for a corporation, it's another deduction. Your travel is an expensive pleasure; corporate travel just further ratchets the amount Uncle Sam collects at the end of the year. Even at a 35% corporate income tax rate, this would be a big net win for most people. So why don't you become a corporation and take advantage of this fact?

Because the IRS won't let you, that's why. When the "corporation" buys things that are clearly for your consumption, that's taxable income to you. People who have thriving businesses and report very little income get a long, hard look from the audit department, and usually walk away with a hefty penalty for tax evasion.

There's no reason that it would be any harder to keep people from evading taxes this way if we eliminated the corporate income tax. The IRS would catch you the way they catch most tax evaders: comparing your alleged income to your bank accounts and zip code. This is why you occasionally see bewildered live-in housekeepers on television surrounded by a squad of auditors.

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 Break

Google 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:

The weird thing for me is that when I start banging this particular drum, I always get exactly the same answer: "yes, great idea, not gonna happen". But is there any intellectual justification whatsoever for making corporate interest payments tax-deductible? I can see an argument for a carve-out for highly-regulated banks, since their entire business is based on making profits from the spread between the rate at which they lend and the rate at which they borrow. But banks aside, why should companies pay lots of tax on dividends, and no tax at all on bond coupons?

In a way it's depressing: if this were a real debate and Paul Volcker had a remote chance of making interest taxation happen, then surely there would be no shortage of academics and corporate lobbyists making the case for keeping the status quo. The fact that they're not even bothering is all the evidence we need that this isn't even going to reach trial-balloon status, let alone get signed into law.

But still, the question remains: if they were to start taking this seriously, what arguments would they use? After all, as Surowiecki notes, the likes of Brazil and Belgium seem to do perfectly well without giving debt this artificial advantage

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.

Chart of the Day

It seems that the more we talk about health care reform, the less popular it gets:

Scam of the Day

I'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 Charged

The 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 Tragedy

Unless 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 Announcement

Amazon has the new seasons of Dr Who on deep discount for today only.  If you're a Who fan, I also suggest trying out the vintage Dr. Who from their Video On Demand service.  The first season is one of the funniest things I've seen in years, since the BBC was on a tight budget back then.  If you enjoyed Tom Baker using a tire pressure gauge as a "sonic screwdriver", you'll love the Aztec warriors inexplicably dressed in quilted jerkins that were presumably left over from some production of Robin Hood.  The Aztecs are also masters of my favorite signature Star Trek fighting move:  clasping your hands over your head and arcing them down onto someone's backs, which is apparently devastatingly effective in both the past and the future.

Afghanistan: Go Big and Go Home

If 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 Animals

Nursing sows:  to crate, or not to crate? 

Chavez's Economic Problems Turn Nasty

For 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:

President Hugo Chávez has been facing a public outcry in recent weeks over power failures that, after six nationwide blackouts in the last two years, are cutting electricity for hours each day in rural areas and in industrial cities like Valencia and Ciudad Guayana. Now, water rationing has been introduced here in the capital.

The deterioration of services is perplexing to many here, especially because the country had grown used to cheap, plentiful electricity and water in recent decades. But even as the oil boom was enriching his government and Mr. Chávez asserted greater control over utilities and other industries in this decade, public services seemed only to decay, adding to residents' frustrations.

With oil revenues declining and the economy slowing, the shortages may have no quick fixes in sight. The government announced some emergency measures this week, including limits on imports of air-conditioning systems, rate increases for consumers of large amounts of power and the building of new gas-fired power plants, which would not be completed until the middle of the next decade.

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:

So few were terribly surprised Sunday when Mr. Chávez sidestepped those subjects on his weekly television show -- and instead appeared to declare war on neighboring Colombia. "Let's not waste a day on our main aim: to prepare for war and to help the people prepare for war," the strongman told his military leaders.

The bluster was taken in stride by most Venezuelans, who according to a recent poll oppose conflict with Colombia by a margin of 4 to 1. Venezuela's largest newspapers played the story below other news. Even the Colombian government's response was relatively low-key, though it talked about appealing to the United Nations and the Organization of American States. The State Department blandly suggested "dialogue" between the two countries.

We'll accept that this is just another instance of Mr. Chávez's buffoonery. Still, it's worth noting: This is the second time in less than 18 months that Mr. Chávez has ordered troops to the Colombian border and suggested that hostilities were imminent. In the past few years he has spent more than $4 billion on arms purchases from Russia alone. He claims to be worried that a recent U.S. agreement with Colombia, under which U.S. Air Force and Navy units will have expanded access to military bases, is meant to facilitate a U.S. invasion of Venezuela. In fact, he has something to worry about: The bases will be used for U.S. drug surveillance flights, and Mr. Chávez is known to be cooperating with terrorist organizations that are trafficking drugs from Colombia through Venezuela.

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 Free

Every 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:

The two men, Ralph Cioffi and Matthew Tannin, were accused of lying to investors -- telling them they were optimistic about their funds, while privately worrying they were all but dead. The funds collapsed in 2007, in a prelude to the mortgage crisis that eventually felled Bear Stearns itself less than a year later and heralded the arrival of a full-blown credit crisis. (Bear Stearns was bought by J.P. Morgan Chase & Co.)

The acquittals are a setback for the U.S. attorney's office in Brooklyn, N.Y., which along with several other offices is investigating Wall Street for possible criminal wrongdoing stemming from the credit crisis, including at Lehman Brothers Holdings Inc. and American International Group Inc. In Tuesday's case, the question boiled down to this: Were the two men misleading investors, or simply putting a positive spin on sagging returns?

Jurors in Brooklyn found there was no evidence beyond a reasonable doubt that the defendants had criminal intent and conspired to mislead their investors. There "was nothing that was clear and convincing," said juror Tabasam Bhatti, a 31-year-old civil servant. The prosecution didn't provide "enough information," he said.

Messrs. Cioffi and Tannin were the first and so far only Wall Street executives to face criminal securities-fraud charges stemming from the crisis, underscoring the difficulty of assigning criminal liability for Wall Street's mistakes.

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 government put on display what appeared to be incriminating emails by Mr. Tannin in which he expressed his fear about the markets in 2007. In an email he wrote to Mr. Cioffi in April, Mr. Tannin said there was "simply no way for us to make money -- ever," and that they should consider closing the funds. Then, several days later, he told investors in a conference call that he was "comfortable" with the funds' performance.

Defense lawyers said the prosecutors were taking the emails out of context. What the April email showed, when read in its entirety, is that Mr. Tannin also said the men could choose to make aggressive bets rather than close the funds, the lawyers argued.

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 All

Malcolm Gladwell elucidates the secrets of Christmas:

Why baby Jesus? Research confirms there were upwards of 157 hotel-cum-stables in Bethlehem that night, with estimated 97 percent occupancy levels. So why did that star shine so brightly over his?

Imagine that I were to ask you to dress up as a baby and lie in a manger. Would you attract a comparable crowd of shepherds plus livestock and anything upwards of three kings from the East?

In a hugely influential 2004 experiment at the University of Colorado at Bollocks Falls, Professor Sanjiv Sanjive and his team asked 323 volunteers to wrap themselves in swaddling clothes and spend the night in a stable, lying in a manger.

Logic would dictate that at least one of them would be visited by shepherds, wise men, or kings from the East, right?

Wrong. The results--codified and analyzed on a specially devised and integrated grid system known as blsht--were astonishing. All 323 volunteers experienced a quiet night in. In other words, they waited up all night, but no one--specifically, 0.0000 percent of a total world population of 6,783,940,189 human beings--bothered to come by.

So what does this blsht metric tell you about your appeal, compared with the appeal of the baby Jesus?

It tells you this: he was special.

And--here's another thing--you are not.

More at the link, including why Santa Claus is so beloved.

In Search Of Lost Time

Vanished Persian Army may have been found in desert (H/T Laura at 11D):

According to Herodotus (484-425 B.C.), Cambyses, the son of Cyrus the Great, sent 50,000 soldiers from Thebes to attack the Oasis of Siwa and destroy the oracle at the Temple of Amun after the priests there refused to legitimize his claim to Egypt.

After walking for seven days in the desert, the army got to an "oasis," which historians believe was El-Kharga. After they left, they were never seen again.

"A wind arose from the south, strong and deadly, bringing with it vast columns of whirling sand, which entirely covered up the troops and caused them wholly to disappear," wrote Herodotus.

A century after Herodotus wrote his account, Alexander the Great made his own pilgrimage to the oracle of Amun, and in 332 B.C. he won the oracle's confirmation that he was the divine son of Zeus, the Greek god equated with Amun.

The tale of Cambyses' lost army, however, faded into antiquity. As no trace of the hapless warriors was ever found, scholars began to dismiss the story as a fanciful tale.

Now, two top Italian archaeologists claim to have found striking evidence that the Persian army was indeed swallowed in a sandstorm. Twin brothers Angelo and Alfredo Castiglioni are already famous for their discovery 20 years ago of the ancient Egyptian "city of gold" Berenike Panchrysos.

Presented recently at the archaeological film festival of Rovereto, the discovery is the result of 13 years of research and five expeditions to the desert.

"It all started in 1996, during an expedition aimed at investigating the presence of iron meteorites near Bahrin, one small oasis not far from Siwa," Alfredo Castiglioni, director of the Eastern Desert Research Center (CeRDO)in Varese, told Discovery News.

While working in the area, the researchers noticed a half-buried pot and some human remains. Then the brothers spotted something really intriguing -- what could have been a natural shelter.

It was a rock about 35 meters (114.8 feet) long, 1.8 meters (5.9 feet) in height and 3 meters (9.8 feet) deep. Such natural formations occur in the desert, but this large rock was the only one in a large area.

"Its size and shape made it the perfect refuge in a sandstorm," Castiglioni said.

Right there, the metal detector of Egyptian geologist Aly Barakat of Cairo University located relics of ancient warfare: a bronze dagger and several arrow tips.

"We are talking of small items, but they are extremely important as they are the first Achaemenid objects, thus dating to Cambyses' time, which have emerged from the desert sands in a location quite close to Siwa," Castiglioni said.

About a quarter mile from the natural shelter, the Castiglioni team found a silver bracelet, an earring and few spheres which were likely part of a necklace.

"An analysis of the earring, based on photographs, indicate that it certainly dates to the Achaemenid period. Both the earring and the spheres appear to be made of silver. Indeed a very similar earring, dating to the fifth century B.C., has been found in a dig in Turkey," Andrea Cagnetti, a leading expert of ancient jewelry, told Discovery News.

In the following years, the Castiglioni brothers studied ancient maps and came to the conclusion that Cambyses' army did not take the widely believed caravan route via the Dakhla Oasis and Farafra Oasis.

"Since the 19th century, many archaeologists and explorers have searched for the lost army along that route. They found nothing. We hypothesized a different itinerary, coming from south. Indeed we found that such a route already existed in the 18th Dynasty," Castiglioni said.

According to Castiglioni, from El Kargha the army took a westerly route to Gilf El Kebir, passing through the Wadi Abd el Melik, then headed north toward Siwa.

"This route had the advantage of taking the enemy aback. Moreover, the army could march undisturbed. On the contrary, since the oasis on the other route were controlled by the Egyptians, the army would have had to fight at each oasis," Castiglioni said.

To test their hypothesis, the Castiglioni brothers did geological surveys along that alternative route. They found desiccated water sources and artificial wells made of hundreds of water pots buried in the sand. Such water sources could have made a march in the desert possible.

"Termoluminescence has dated the pottery to 2,500 years ago, which is in line with Cambyses' time," Castiglioni said.

In their last expedition in 2002, the Castiglioni brothers returned to the location of their initial discovery. Right there, some 100 km (62 miles) south of Siwa, ancient maps had erroneously located the temple of Amun.

The soldiers believed they had reached their destination, but instead they found the khamsin -- the hot, strong, unpredictable southeasterly wind that blows from the Sahara desert over Egypt.

"Some soldiers found refuge under that natural shelter, other dispersed in various directions. Some might have reached the lake of Sitra, thus surviving," Castiglioni said.

At the end of their expedition, the team decided to investigate Bedouin stories about thousands of white bones that would have emerged decades ago during particular wind conditions in a nearby area.

Indeed, they found a mass grave with hundreds of bleached bones and skulls.

Real Choices

When 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:

But once that number entered the process, it began guiding the process. Sources on the Hill aren't really clear how the sum transformed from an estimate of the president's plan to a hard limit for their plan. Few recall that the original language included the qualifier "around." Even so, the number stuck. It strengthened the hand of moderates in both chambers and allowed them to create a ceiling. It also seemed clear that if the White House was comfortable with $900 billion, then it wasn't going to fight to protect the spending in any bill that exceeded that cap, so there was no point in the liberals bothering to push the issue.

The problem is that the number, which was chosen at a point of political weakness for health-care reform and the Obama administration, is too low. Most experts think you need closer to $1.1 trillion for a truly affordable plan. Limiting yourself to $900 billion ensures that the subsidies won't be quite where you need them to be, and means that virtually every spare dollar has to be spent strengthening them. If you want to add $30 billion to the bill creating coordinated care teams across the country -- a project that could transform chronic care in this country and eventually save many times its start-up cost -- there's little budgetary flexibility even if you could find the revenue, because each dollar is in a zero-sum competition with each other dollar so the entire plan comes in under the limit.

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 Plug

Remember 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 Discrimination

This 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:

Are potential asset-price bubbles always dangerous? Asset-price bubbles can be separated into two categories. The first and dangerous category is one I call "a credit boom bubble", in which exuberant expectations about economic prospects or structural changes in financial markets lead to a credit boom. The resulting increased demand for some assets raises their price and, in turn, encourages further lending against these assets, increasing demand, and hence their prices, even more, creating a positive feedback loop. This feedback loop involves increasing leverage, further easing of credit standards, then even higher leverage, and the cycle continues.

Eventually, the bubble bursts and asset prices collapse, leading to a reversal of the feedback loop. Loans go sour, the deleveraging begins, demand for the assets declines further and prices drop even more. The resulting loan losses and declines in asset prices erode the balance sheets at financial institutions, further diminishing credit and investment across a broad range of assets. The resulting deleveraging depresses business and household spending, which weakens economic activity and increases macroeconomic risk in credit markets. Indeed, this is what the recent crisis has been all about.

The second category of bubble, what I call the "pure irrational exuberance bubble", is far less dangerous because it does not involve the cycle of leveraging against higher asset values. Without a credit boom, the bursting of the bubble does not cause the financial system to seize up and so does much less damage. For example, the bubble in technology stocks in the late 1990s was not fuelled by a feedback loop between bank lending and rising equity values; indeed, the bursting of the tech-stock bubble was not accompanied by a marked deterioration in bank balance sheets. This is one of the key reasons that the bursting of the bubble was followed by a relatively mild recession. Similarly, the bubble that burst in the stock market in 1987 did not put the financial system under great stress and the economy fared well in its aftermath.

Sounds convincing . . . but I can't help wondering why credit and stock market prices were rising at the same time.

Knowledge is Power

Where did the Japanese come from?

Reading the Dodd Proposals

Bruce 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?

I have noticed three things from a first look . . . :

1)  The bill would create a separate "Agency for Financial Stability" rather than vesting everything in the Fed  (no word on whether it will be brought to you by the same people who brought us the DHS...)

2) On the regulation of hedge fund advisers, I note that they have clarified something that was less clear in prior draft bills, which had caused some agita--namely, this bill would clarify and beef up the confidential nature of the sensitive information that hedge fund advisers would be required to file with the SEC on a regular basis

3) Those same hedge-fund regulation provisions include an exemption for venture capital advisers. The consensus is that such an exemption will be enacted, for one reason: "Nancy Pelosi's district."

You may want to focus on this as the most important part. Isn't the FDIC's current role in resolving failing banks the best-performing part of our current financial regulatory system?

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.

Dodd, chairman of the Senate Banking Committee, would eliminate the Office of the Comptroller of the Currency and the Office of Thrift Supervision and fold the Treasury Department units into the Financial Institutions Regulatory Administration, according to draft legislation released today in Washington.

"Our proposal will replace the myriad government agencies that failed to rein in risky schemes with a single, accountable federal banking regulator," the Connecticut Democrat said at a news conference.

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, Cleared

Well, 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.

The members of two Joint Terrorism Task Forces, including one in the nation's capital, went so far as to contact Army Maj. Nidal Malik Hasan's superiors and review his academic and military records for evidence of suspicious activity late last year and early this year, according to three senior U.S. law enforcement and intelligence officials.

But the investigators from the multi-agency teams concluded that Hasan's activities weren't suspicious enough to warrant a more formal investigation, even though the militant imam, Anwar al-Awlaki, had ties to al-Qaida and was the author of a popular Web site espousing jihadist activity, according to the officials.

Tu Quoque

Did 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.

Blaming the President for Unemployment

I 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.

Fast forward. On Friday, the Bureau of Labor Statistics released unemployment figures for October 2009. The official rate was 10.2 percent, up more than 50 percent from the time Obama gave that speech. Oops, nevermind.

(By the way, the underemployment rate, which includes part-time workers who want to work full time and those who've given up searching, is a staggering 17.5 percent.)

Job creation has dropped from top priority to one of many, and President Obama has been remanded to pandering for patience and offering excuses. On the one hand, he argues the tortured rationale that there is good news in the awful numbers: Things are still getting worse but at a slower pace. On the other, he incessantly reminds us that he inherited the crisis. The implication: Don't blame me, blame Bush.

But this president can't keep deflecting to the last one. Pain is presently felt. The crisis that took form on Bush's watch is being experienced on Obama's. Fair or not, finger-pointing is not effective policy.

This is now Obama's crisis, and it carries political consequences. During Tuesday's gubernatorial races in New Jersey and Virginia, nearly 9 in 10 voters said that they were worried about the direction of the nation's economy in the next year. And the majority of those who held that view voted for the Republican candidates. This could portend a flashback to 1994.

It isn't President Obama's fault that he inherited this mess, but it is his to fix, and he must make haste.

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 Nation

So 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 Hood

Apologies 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."

It seems, though, that when an American military officer who is a practicing Muslim allegedly shoots forty of his fellow soldiers who are about to deploy to the two wars the United States is currently fighting in Muslim countries, some broader meaning might, over time, be discerned, especially if the officer did, in fact, yell "Allahu Akbar" while murdering his fellow soldiers, as some soldiers say he did. This is the second time this year American soldiers on American soil have been gunned down by a Muslim who was reportedly unhappy with America's wars in the Middle East (the first took place in Arkansas, to modest levels of notice). And, of course, this would not be the first instance of an American Muslim soldier killing fellow soldiers over his disagreements with American foreign policy; in 2003, Army Sgt. Hasan Akbar killed two officers and wounded fourteen others when he rolled a grenade into a tent in a homicidal protest against American policy.
 
I am not arguing, of course, that American Muslims, as a whole, are violently unhappy with America (I've argued the opposite, in fact). But I do think that elite makers of opinion in this country try very hard to ignore the larger meaning of violent acts when they happen to be perpetrated by Muslims

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.

Worst. Talking Point. Ever.

If this is the best the Democrats can come up with, they are in deep, deep trouble:

Republicans argue that an unemployment rate higher than it has been in more than a quarter of a century is evidence that the Democratic agenda isn't putting Americans back to work. They say the situation will be made worse if Congress and President Obama enact a health care overhaul that will require $1 trillion in tax hikes and entitlement cuts to expand insurance coverage.

"Ten-point-two now makes it hard for the majority to sell their agenda," said Rep. Dave Camp of Michigan, the top Republican on the tax-writing Ways and Means Committee.

"All I know is that Speaker Pelosi is trying to force her members to vote for a bill that the American people have soundly rejected," added House Minority Leader John Boehner (R-Ohio).

Democrats counter that their agenda has kick-started a recovery on Wall Street, even if it hasn't trickled down to the job market yet, and that Republicans are putting what they've begun at risk.

Whoever said that achieved the spectacular feat of making Michael Steele look like a master political strategist.

The Evil That Men Do

Kevin Drum has a powerful letter from someone who witnessed the carnage at Fort Hood:

This was premeditated.  This wasn't VBC again.  That guy snapped, not this one.  He was so damn calm when he was shooting.  Methodical.  And he was moving tactically.  The Army really is diverse and we really do love all our own.  We signed up to be shot at but not at home.  Not unarmed.  No one should ever see what the inside of that medical SRP building looked like.  I suppose that's what VA Tech looked like.  Except they didn't have soldiers coming from everywhere to tourniquet and compress and talk to the wounded while rounds are still coming out.

No one touched him...the shooter that is...other than to treat him.  Though I told the medic (and I'm not proud of this) that was giving him plasma that there better not be anyone else who needed it because he should be the last one to be treated.  But I had just finished holding a soldier who was critical (I counted three entry wounds) and talking to him about his children....  If the shooter had a grievance he should have taken it out on those responsible; he wasn't shooting people he knew (media reports to the contrary).  He was just shooting anybody who happened to be present for SRP medical processing, mainly lower enlisted.

But please, no one use this politically!   The Army is not "broken", PTSD doesn't turn people into killers, most Muslims aren't evil, and whether we should stay or go in Afghanistan has nothing to do with this.  I'm babbling...sorry.

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.

In a statement, the Washington-based Council on American-Islamic Relations (CAIR) said:

"We condemn this cowardly attack in the strongest terms possible and ask that the perpetrators be punished to the full extent of the law. No religious or political ideology could ever justify or excuse such wanton and indiscriminate violence. The attack was particularly heinous in that it targeted the all-volunteer army that protects our nation. American Muslims stand with our fellow citizens in offering both prayers for the victims and sincere condolences to the families of those killed or injured."

Along with innumerable condemnations of terror, CAIR has in the past launched an online anti-terror petition drive called "Not in the Name of Islam," initiated a television public service announcement (PSA) campaign against religious extremism and coordinated a "fatwa," or Islamic religious ruling, against terrorism and extremism.

America and the Terrible, Horrible, No Good, Very Bad Jobs Numbers

So 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.

Department of Awful Statistics

Incidentally, 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 Administration

Back 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:

1. The VHA provides better care because it has centralized records (VistA) to coordinate treatment and reduce errors
2. The VHA provides better care because it will care for a patient their entire life, and therefore has incentives to manage diseases rather than mindlessly do procedures
3. The VHA can reduce costs through administrative efficiency, central procurement, integrated care, and salaried doctors

For example, Longman says:

So what's left? Consider why, ultimately, the veterans health system is such an outlier in its commitment to quality. Partly it's because of timely, charismatic leadership. A quasi-military culture may also facilitate acceptance of new technologies and protocols. But there are also other important, underlying factors.

First, unlike virtually all other health-care systems in the United States, VHA has a near lifetime relationship with its patients. Its customers don't jump from one health plan to the next every few years. They start a relationship with the VHA as early as their teens, and it endures. That means that the VHA actually has an incentive to invest in prevention and more effective disease management. When it does so, it isn't just saving money for somebody else. It's maximizing its own resources.

The system's doctors are salaried, which also makes a difference. Most could make more money doing something else, so their commitment to their profession most often derives from a higher-than-usual dose of idealism. Moreover, because they are not profit maximizers, they have no need to be fearful of new technologies or new protocols that keep people well. Nor do they have an incentive to clamor for high-tech devices that don't improve the system's quality or effectiveness of care.

And, because it is a well-defined system, the VHA can act like one. It can systematically attack patient safety issues. It can systematically manage information using standard platforms and interfaces. It can systematically develop and implement evidence-based standards of care. It can systematically discover where its care needs improvement and take corrective measures. In short, it can do what the rest of the health-care sector can't seem to, which is to pursue quality systematically without threatening its own financial viability.

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:

Veterans in priority group 6 served in World War I or the Mexican Border War, are seeking care solely for disorders associated with exposure in the line of duty to chemical, nuclear, or biological agents (including, for example, Agent Orange), have compensable SCDs [Service Connected Disabilities] rated zero percent disabling¹, or are within a five-year period of special eligibility for recent combat veterans.

The footnote goes on to explain that 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):

if the veteran, as the result of service-connected disability, has suffered the anatomical loss or loss of use of one or more creative organs, or one foot, or one hand, or both buttocks, or blindness of one eye, having only light perception, has suffered complete organic aphonia with constant inability to communicate by speech, or deafness of both ears, having absence of air and bone conduction, or, in the case of a woman veteran, has suffered the anatomical loss of 25 percent or more of tissue from a single breast or both breasts in combination (including loss by mastectomy or partial mastectomy) or has received radiation treatment of breast tissue, the rate of compensation therefor shall be $89 per month for each such loss or loss of use independent of any other compensation provided in subsections (a) through (j) or subsection (s) of this section but in no event to exceed $3,075 per month; and in the event the veteran has suffered one or more of the disabilities heretofore specified in this subsection, in addition to the requirement for any of the rates specified in subsections (l) through (n) of this section, the rate of compensation shall be increased by $89 per month for each such loss or loss of use, but in no event to exceed $4,313 per month;

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:

This makes any sort of statements about its relative quality deeply problematic.  If your patients are only coming to you for the things that you happen to be better at than their alternative sources of healthcare (private insurance, Medicare, Medicaid, etc), then your results will be deeply skewed.  Comparisons were already made difficult enough by the fact that veterans are probably substantially different from the population at large--no matter how relaxed the recruiting standards were in the 1970s, the very fact of making it into the military rules out a number of serious underlying health problems.  And their prospective patient population got a great deal more educated and healthy since then.

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 Borough

Matt 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 Twain

Brazilian man shows up at his own funeral.

The Best in the World

What is best in life?

To crush your enemies, to see them driven before you, and to hear the lamentations of their women.

Ben Bernanke Looks Past the Crisis

Ben 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 Break

I'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 Welfare

A 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 Party

One 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).

And few things get them angrier than how the Republican party has been taken over by "the Texans." This is shorthand for the southern-oriented, Protestant-oriented religious right. They hate that crowd more than any Democrat could. Betrayal by your own side always hurts the worst.

Some of them have even started voting for Democrats as a protest. I don't think they like doing it, but it's the only thing they can think of to smack their party back to its senses. And to its historical roots.

So the question for me is, can the Republicans accomodate a northern wing that is middling conservative, but very different in outlook from its southern wing? Or will they abandon that part of the political spectrum to conservative Democrats? Of course, one could ask the same about the Democrats and their conservative wing as well.

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 Power

Why baseball players chew tobacco.

Lessons Learned from Last Night

What 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:

I think there are four obvious lessons to draw from tonight's election returns:

1. For Conservative Republicans: The America people reject Barack Obama and obviously want true conservative leadership. The Governorships of two states have switched to the "R" category, showing a grassroots conservative movement that is alive and well.

2. For Moderate Republicans: The American people obviously want old-fashioned economic conservatives who are moderate on social issues. McDonnell in Virginia and Christie in New Jersey won by downplaying social issues; Hoffman in New York-23 lost because he was too extreme.

3. For Moderate Democrats: The party out of power usually does well in off-year elections like this, and this year was no exception. But obviously there is no sign of any substantial shift in public opinion from the election of 2008.

4. For Liberal Democrats: NY-23 was the race to watch this year, given that right-wing extremists like Palin and Beck threw all their support behind Hoffman. But the district voters rejected the right-wing candidate, sending a Democrat to Congress for the first time in one hundred years. Obviously this shows that the American people reject right-wing extremism.

Obviously.

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.

Link Farm: Special Election Edition

• New Jersey results in interactive map format
• Best place to follow the Maine outcome
• Outstanding liveblog from Pollster.com (takes a minute to load)
  
• Ambinder's twitter feed

Will put up a link on NY-23 if I find a good one.

The Focus of the Race

Andrew 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:

It's really maddening that at the same time preposterous idea like strong forms of the Efficient Markets Hypothesis continue to be respectable that people seem unwilling to trust financial markets to accurately convey the beliefs of participants in financial markets. I would add to Krugman's observations the fact that we have Cato's Chris Edwards blaming anticipating inflation for the lack of private investment when the TIPS spread shows that markets aren't anticipating inflation.

Right now economic conditions are bad. And the budget deficit is high. So I find it understandable if the man on the street chooses to conclude that the budget deficit is causing or contributing to the bad economic situation. But people writing about these matters ought to know better--interest rates are low and markets are assessing both default risk and inflation risk as low. So what about the deficit is supposed to be causing the problem?

I join with Messrs Yglesias and Krugman in a number of points:

1.  The current budget deficit is not causing our economic problems.  There may be other administration policies that are contributing, but this is not one of them.
2. Demand for government bonds is robust
3. There are good and powerful reasons to run a deficit in the current recession
   

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 Label

As I read this editorial, I couldn't help but look fondly back on this ad from my childhood:

Knowledge is Power

What causes bitter cucumbers.

The Decline and Fall of the GOP

That'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.

Link Farm

• Wal-Mart gets into the casket business
• Doug Holtz-Eakin about to lose health insurance, still opposes the Democrats' reform plans.
• Louisa May Alcott's private sorrows.
  

The Power of Prices

Ezra 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.

Imagine that my family makes $45,000 a year. That puts us at about 250 percent of the poverty line. In the Senate finance bill, our premium contribution is capped at $4,349. Surveying our options, I see a plan from Aetna that costs $10,000, a plan from Kaiser that costs $9,000 and a plan from Cigna that costs $11,000. All seem pretty similar, but then, I'm not an expert in these things. Which do I choose?

You might say I should choose the Kaiser plan. But why? It's cheaper, but it's not cheaper to me. After all, my contribution is capped at $4,349. Moreover, it's generally true that things that cost more are better. It stands to reason that Cigna is giving me something for the extra $2,000. Indeed, I'm being subsidized to the tune of $7,000, as opposed to $5,000. It's clearly a better deal.

Maybe there are elements in the plan that somehow protect against this, and I've just missed them. But I don't think so. And though this dynamic isn't terribly important in a world where the exchanges are large and lots of unsubsidized customers are creating competitive pressures, they might be very significant in a world where the exchanges are limited to people who need to be subsidized, and so are facing a different cost calculus.

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 GM

The 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 automaker is drawing the money from its own pension fund, according to a person familiar with the arrangement. In a sense, the G.M. pension fund is being weakened to help the Delphi union members.

Mr. Gump and others suspect the Treasury Department told G.M. to pay the supplements. The federal government is both the company's largest shareholder and the financier of its restructuring, through the Troubled Asset Relief Program. Obama administration officials confirmed that they brought the parties together to negotiate a resolution of Delphi's pension failure but said they did not dictate the outcome.

The difference between the haves and have-nots at Delphi is not between the highly paid and lower-wage earners. As a senior engineer, Mr. Gump simply did not belong to a union. Neither did Delphi's thousands of other engineers, bookkeepers, clerks, quality controllers, purchasing agents and other white-collar employees. They may have earned more in some cases, but they did not have the chance to earn paid overtime as union members did in good years. Records show the average pay for a nonunion worker just shy of 50 years old, with 20 to 24 years' service, was about $96,000.

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 Games

California 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 Break

Jeopardy asks about economists:

The True Cost of the House Health Care Bill

The 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.

But a closer look at the budget office report suggests that the number everyone should have reported was $1.055 trillion, which is the gross cost of the insurance coverage provisions in the bill before taking account of certain new revenues, including penalties by individuals and employers who fail to meet new insurance requirements in the bill.

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:

In other words, even if everything in this "deficit neutral" bill happens the way that the CBO expects it too, we still end up with a $600 billion deficit.  We need to pay for that, somehow.

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.