Megan McArdle

The War of the CBO Directors

Tue,24 Nov 2009 19:02:09 GMT

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

Tue,24 Nov 2009 18:32:36 GMT

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

Tue,24 Nov 2009 17:34:03 GMT

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?

Mon,23 Nov 2009 22:44:55 GMT

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?

Mon,23 Nov 2009 22:36:40 GMT

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?

Mon,23 Nov 2009 20:57:32 GMT

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

Mon,23 Nov 2009 20:02:10 GMT

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

Mon,23 Nov 2009 19:29:14 GMT

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.

"Might" is not really a word I want to hear when I contemplate the $180 billion of which I own a 1/300000000 share.

The question that neither I, nor (as far as I can tell) the regulators, have a good handle on, is how good a trader you need to unwind these positions. If it can be done by any kid out of business school, then Ken Feinberg is right, and the government should pressure them to give the money back. If it needs some expertise, then we're kind of in trouble, because no one with any qualifications beyond a pulse would want these jobs. Going to work for AIG means, apparently, that you cannot write a valid employment contract, since the government feels free to rip it up any time their polls dip. I wouldn't take this job, and I make considerably less than $500,000 a year, plus I'm manifestly unqualified.

Any attempt to decipher the truth of the case is further complicated by the fact that, at this point, the government is not trying to maximize the amount of money we recover from AIG; it's trying to minimize the political fallout from the various banker scandals. It might be less politically costly to spend billions on an AIG collapse than to allow the fine folks in Financial Products to take home $100 million.

The Heart of the Health Care Debate

Mon,23 Nov 2009 19:21:20 GMT

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

Mon,23 Nov 2009 17:44:24 GMT

Saturday Night Live sums up our relationship with China:

Parsing the Senate Debate on Health Care

Mon,23 Nov 2009 16:29:53 GMT

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:

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.
The Democrats are refusing to let cuts to doctor payments stand, and also, doctors don't get paid enough.
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.
Medicare costs too much, and also, shouldn't be cut.
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:

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.
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.")
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.
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

Fri,20 Nov 2009 19:04:58 GMT

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

Fri,20 Nov 2009 18:48:41 GMT

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?

Fri,20 Nov 2009 17:16:21 GMT

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

Fri,20 Nov 2009 16:56:27 GMT

The Real Problem with vampires.