From Jim Kwak at Baseline Scenario:
"...a post about the quickest way to get through a security line at an airport. (Tip #1: Don’t unload your bags into the plastic trays until shortly before you reach the X-ray scanner. Your bags were designed to help you carry a lot of stuff with two hands; if you unpack them early, you have to move your unpacked stuff with the same two hands. Tip #2: Put your bags through the scanner before your computer and toiletries bag; that way you can have your bags ready and waiting on the other end so you can pick up the computer and slide it into your bag in one motion.) One of my pet peeves is businesspeople who fly frequently, make faces when standing behind families in the security line, and then slow down the line themselves because they haven’t figured out how to get their stuff onto the conveyor belt immediately after the person in front of them..."
http://baselinescenario.com/2010/02/11/the-myth-of-efficiency/
Showing posts with label Baseline Scenario. Show all posts
Showing posts with label Baseline Scenario. Show all posts
Saturday, February 13, 2010
Thursday, December 3, 2009
Let Them Eat Cake
TW: But for the occasional Larry Kudlovian adherent (i.e. James Pethokoukis) few explicitly make the let them eat cake argument even if supply side economics ("cutting taxes on capital" is a dog whistle for cutting capital gains, corporate taxes and taxes on the wealthy) is essentially just such an argument. Yet why not make the let them eat cake arguments?
From Simon Johnson at Baseline Scenario:
"In some influential circles, these questions are now asked: What’s wrong with high levels of inequality in general, and with having very rich bankers in particular. After all, human societies have survived the presence of extremely wealthy individuals in the past – in fact, some now argue, the presence of such a “new aristocracy” can finance growth and spur innovation.
This argument is deeply flawed along three dimensions.
1.Such super-elites care very little for anyone other than themselves. Certainly, there will be some charity – but remember that John D. Rockefeller’s greatest donations came after he had been dragged through the mud by some very persuasive rakers (Ida Tarbell).
2.It is a mistake to assume that any country’s institutions (the laws, rules and norms that govern behavior) are fixed for all time. In reality, institutions change all the time – partly in reaction to who has wealth and power, and what they are trying to do. What are the odds that our financial super-rich will want to build democracy and strengthen the middle class?
3.Can the rich and powerful really be counted on to save the system, or just themselves? Go back carefully through the early history of the Great Depression (see Lords of Finance). Certainly the big New York players saved banks and securities firms that were seen to be part of their club (e.g., Kidder Peabody), but they – and the New York Fed – were not so inclined to save financial institutions they regarded as less than central (e.g., Bank of the United States), even if this meant thousands of people lost their life savings.
When the Bank of England’s Andrew Haldane speaks of a “doom loop,” he is describing the declining future for our middle class. Powerful financiers, by and large, did just fine during the Great Depression."
http://baselinescenario.com/2009/12/01/feudal-lords-of-finance/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+BaselineScenario+%28The+Baseline+Scenario%29
From Simon Johnson at Baseline Scenario:
"In some influential circles, these questions are now asked: What’s wrong with high levels of inequality in general, and with having very rich bankers in particular. After all, human societies have survived the presence of extremely wealthy individuals in the past – in fact, some now argue, the presence of such a “new aristocracy” can finance growth and spur innovation.
This argument is deeply flawed along three dimensions.
1.Such super-elites care very little for anyone other than themselves. Certainly, there will be some charity – but remember that John D. Rockefeller’s greatest donations came after he had been dragged through the mud by some very persuasive rakers (Ida Tarbell).
2.It is a mistake to assume that any country’s institutions (the laws, rules and norms that govern behavior) are fixed for all time. In reality, institutions change all the time – partly in reaction to who has wealth and power, and what they are trying to do. What are the odds that our financial super-rich will want to build democracy and strengthen the middle class?
3.Can the rich and powerful really be counted on to save the system, or just themselves? Go back carefully through the early history of the Great Depression (see Lords of Finance). Certainly the big New York players saved banks and securities firms that were seen to be part of their club (e.g., Kidder Peabody), but they – and the New York Fed – were not so inclined to save financial institutions they regarded as less than central (e.g., Bank of the United States), even if this meant thousands of people lost their life savings.
When the Bank of England’s Andrew Haldane speaks of a “doom loop,” he is describing the declining future for our middle class. Powerful financiers, by and large, did just fine during the Great Depression."
http://baselinescenario.com/2009/12/01/feudal-lords-of-finance/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+BaselineScenario+%28The+Baseline+Scenario%29
Tuesday, October 27, 2009
The Financial Crisis Devolution Into PR
TW: This piece follows on the Smith piece I cited a couple of days ago about the media's inability to deal with the financial crisis in a substantive way and in fact it has become a PR flack for Wall Street and the government. I agree. I struggle to post much on the financial crisis here because it is very detailed and quickly exceeds my own technical comfort and interest level. It is also boring unless you are very into financial arcana. It is, however, crucial.
Into this void flows PR and marketing and lobbyists. Both Wall Street and the government have become increasingly sophisticated in PR and branding. And when I say PR I mean someone taking reality and bending it towards their own benefit (i.e. the Bush push to invade Iraq as a prime example). PR folks are not necessarily bad people but they are most definitely not looking out for the greater good only the good of their own or their clients.
Folks sense we have (to date) avoided another Great Depression just barely and things like executive compensation are out of whack yet the impetus for financial reform appears to dim by the day.
From Jim Kwak at Baseline Scenario:
"...Pew Research Center to show that media coverage of the financial crisis and recession has focused primarily on political battles – stimulus, bailouts, etc. – rather than on problems in the real economy. What’s more, economic coverage in general has fallen off since the stock market rebound earlier this year and the Obama administration’s “all clear” signal. She also discusses psychological research that shows that people can be easily influenced to believe things that are not true, simply because people around them seem to believe those things.
Smith traces this phenomenon to two main sources: the steady evolution of journalism into a traditional profit-oriented business than can no longer afford to invest heavily in investigative journalism; and the increased ability of political leaders, following the lead of private corporations, to control the message that is transmitted via the media...
I had my first experience with modern PR during the Internet boom, when I was in marketing at Ariba. (Remember us? Market value of $40 billion at a time when our revenues were less than $100 million per quarter.) We would be planning an acquisition, and I would meet with these nice people from our PR firm who understood nothing about our technology, or our products, or our markets, or the company we were buying. And they would decide that our top-level messages needed to be X, Y, and Z, which were so devoid of content that they couldn’t even be accused of being false. And that’s what we would use in our press release and our analyst call, and a few hours later we would see it echoed in the news stories and the analyst comments.
Now, if you’re a company of only middling interest (even when we were the hottest thing in Silicon Valley, we were not one of America’s major companies), this is easy. You don’t have the New York Times or Wall Street Journal trying to bust you, and, it’s true, most of the people covering you tend to be nice — in part because they don’t want to lose their access, but probably more because, at the time, they wanted to be a part of our success. Calling a spade a spade would not only have been impolite, but it would have exposed the lie that all these Internet-era financial journalists and research analysts were living just as much as we were.
However, it should be a little harder for the government. But the fear of alienating sources no doubt plays a big role. And then there is the fact that the financial crisis and the recession are just complicated...it enables the government to avoid tackling the flaws in our financial and political systems that caused the crisis in the first place, and so, in a real sense, nothing has changed; it also minimizes an extremely severe recession and implies that there is little more to be done at this point to help the millions of people who are hurting from it. But that’s the message the government is putting out, and there’s not a lot that a few people who are crazy enough to spend their free time writing blogs can do about it.
...Out on Main Street, people may be out of work, unhappy, and confused, but there’s no political momentum for change, at least not on the real issues that affect their economic well-being.
http://baselinescenario.com/2009/10/16/move-along/
Into this void flows PR and marketing and lobbyists. Both Wall Street and the government have become increasingly sophisticated in PR and branding. And when I say PR I mean someone taking reality and bending it towards their own benefit (i.e. the Bush push to invade Iraq as a prime example). PR folks are not necessarily bad people but they are most definitely not looking out for the greater good only the good of their own or their clients.
Folks sense we have (to date) avoided another Great Depression just barely and things like executive compensation are out of whack yet the impetus for financial reform appears to dim by the day.
From Jim Kwak at Baseline Scenario:
"...Pew Research Center to show that media coverage of the financial crisis and recession has focused primarily on political battles – stimulus, bailouts, etc. – rather than on problems in the real economy. What’s more, economic coverage in general has fallen off since the stock market rebound earlier this year and the Obama administration’s “all clear” signal. She also discusses psychological research that shows that people can be easily influenced to believe things that are not true, simply because people around them seem to believe those things.
Smith traces this phenomenon to two main sources: the steady evolution of journalism into a traditional profit-oriented business than can no longer afford to invest heavily in investigative journalism; and the increased ability of political leaders, following the lead of private corporations, to control the message that is transmitted via the media...
I had my first experience with modern PR during the Internet boom, when I was in marketing at Ariba. (Remember us? Market value of $40 billion at a time when our revenues were less than $100 million per quarter.) We would be planning an acquisition, and I would meet with these nice people from our PR firm who understood nothing about our technology, or our products, or our markets, or the company we were buying. And they would decide that our top-level messages needed to be X, Y, and Z, which were so devoid of content that they couldn’t even be accused of being false. And that’s what we would use in our press release and our analyst call, and a few hours later we would see it echoed in the news stories and the analyst comments.
Now, if you’re a company of only middling interest (even when we were the hottest thing in Silicon Valley, we were not one of America’s major companies), this is easy. You don’t have the New York Times or Wall Street Journal trying to bust you, and, it’s true, most of the people covering you tend to be nice — in part because they don’t want to lose their access, but probably more because, at the time, they wanted to be a part of our success. Calling a spade a spade would not only have been impolite, but it would have exposed the lie that all these Internet-era financial journalists and research analysts were living just as much as we were.
However, it should be a little harder for the government. But the fear of alienating sources no doubt plays a big role. And then there is the fact that the financial crisis and the recession are just complicated...it enables the government to avoid tackling the flaws in our financial and political systems that caused the crisis in the first place, and so, in a real sense, nothing has changed; it also minimizes an extremely severe recession and implies that there is little more to be done at this point to help the millions of people who are hurting from it. But that’s the message the government is putting out, and there’s not a lot that a few people who are crazy enough to spend their free time writing blogs can do about it.
...Out on Main Street, people may be out of work, unhappy, and confused, but there’s no political momentum for change, at least not on the real issues that affect their economic well-being.
http://baselinescenario.com/2009/10/16/move-along/
Saturday, September 12, 2009
Health Care Status Quo Is Not an Option
TW: The charts and Jim Kwak make a point about which we have been pounding the table: the status quo in private insurance is deteriorating. A key rationing mechanism in American health care is to push working class and middle class folks out of private insurance. The push results from escalating premiums and declining employer coverage options. Poor folks and the elderly are covered with Medicaid and Medicare, those either too young or not poor enough end up with less or no coverage.From Jim Kwak at Baseline Scenario:
"...The long-term trend is absolutely clear: employer-based coverage is declining and public coverage is increasing, but not enough to make up the gap. Looking at the underlying data, we can see that 2008 was the eighth consecutive year in which the proportion of people covered by employer-based health insurance declined.
...Not only is employer-based coverage deteriorating, but the reasons for that deterioration imply that it is likely to only accelerate. As health care costs continue to increase, even if the rate of increase stays the same, the rate of deterioration will increase, because each year health care costs become a larger proportion of total costs and therefore harder to absorb. (Put another way, if health care cost inflation remains around 7% per year, each year it will be 7% of a larger proportion of employers’ costs.) Deterioration will take three forms – some employers will drop health coverage altogether, some will increase the share paid by employees, and some will shift toward less-generous plans.
...because the employer-based system is slowly dying, people with employer-based coverage should not be thinking, “I don’t need health care reform, I’ve got my employer-based plan;” they should be thinking, “I’m afraid of what will happen when my employer drops its plan, so I need health care reform...”
Sunday, September 6, 2009
Why Not Use All Four Downs?
TW: In honor of the kick-off of football season (college at least), I post on something about which I have always wondered. Why not use all four downs all the time instead merely at the end a half in a crunch situation. Any football fan knows the dread of facing a "4 down" offense situation as they seem to work very well.
These pieces (a practical one followed by the professor's) frame that statistically almost any time and anywhere during a game it makes sense for an offense to run four plays forsaking punts. Why do folks not do it? Largely tradition which drives sanctions (of the unofficial sort) against those who would innovate. This dynamic permeates society. One can follow the irrational course as long as that course is the traditional means by which to act. Another consideration is such approaches will not overcome significant talent, effort gaps. If your teams sucks, your team will lose regardless.
From Rivals High:
"Kevin Kelley decided to flip football convention on its head after Pulaski (Ark.) Academy's second game of the 2007 season...his 2008 team did not punt during 14 games. Such an unorthodox strategy may seem like lunacy, but it was successful: Pulaski won the 5A state title on Dec. 6.
...Keeping the offense on the field on fourth down allows for more creative play-calling. Third-and-long does not have to be a passing down. The Little Rock school can run the ball, throw a screen pass or use any number of formations. Defenses do not know whether to use a nickel or dime defense. And Pulaski's offense has less pressure on third down.
If Pulaski converts on fourth down, it creates a momentum change similar to a turnover. Other high school coaches have told Kelley they would rather see his team punt.
The Bruins even avoid punting when the defense has stopped them inside their own 10-yard line..."
http://highschool.rivals.com/content.asp?CID=892888
From Jim Kwak at Baseline Scenario:
" 'In honor of the changing seasons, imagine it’s the first quarter of a football game and you have fourth-and-one at the other team’s 40-yard line. Anyone who studies football statistics will say you should go for it; it’s not even close. (Some people have run the numbers and said that a football team should never – that’s right, never – kick a punt.) If the offense fails to make it, the announcer, and the commentators the next day, will all say that it was a bad decision. That’s completely wrong. It was a good decision; it just didn’t work out.'
....The conclusion is that over most of the field you should go for it if you have four or fewer yards to go; there is a big spike around the opponent’s 33-yard line where you should go for it even on fourth and nine, because the net field position benefit of punting is low and the expected point value of attempting a field goal is low.
The implication, of course, is that football teams don’t maximize. Romer concedes that making the right decision on fourth down would lead to about one more win every three years, and this is probably outweighed by the asymmetric returns: you are more likely to be penalized (as a coach) if you go against convention and are wrong than if you follow convention, since the fans (and the owners) are more likely to notice departures from convention. So the incentives of football coaches are not simply to maximize points, but also to maintain their reputations"
http://baselinescenario.com/2009/09/03/football-statistics-and-agency-problems/.
These pieces (a practical one followed by the professor's) frame that statistically almost any time and anywhere during a game it makes sense for an offense to run four plays forsaking punts. Why do folks not do it? Largely tradition which drives sanctions (of the unofficial sort) against those who would innovate. This dynamic permeates society. One can follow the irrational course as long as that course is the traditional means by which to act. Another consideration is such approaches will not overcome significant talent, effort gaps. If your teams sucks, your team will lose regardless.
From Rivals High:
"Kevin Kelley decided to flip football convention on its head after Pulaski (Ark.) Academy's second game of the 2007 season...his 2008 team did not punt during 14 games. Such an unorthodox strategy may seem like lunacy, but it was successful: Pulaski won the 5A state title on Dec. 6.
...Keeping the offense on the field on fourth down allows for more creative play-calling. Third-and-long does not have to be a passing down. The Little Rock school can run the ball, throw a screen pass or use any number of formations. Defenses do not know whether to use a nickel or dime defense. And Pulaski's offense has less pressure on third down.
If Pulaski converts on fourth down, it creates a momentum change similar to a turnover. Other high school coaches have told Kelley they would rather see his team punt.
The Bruins even avoid punting when the defense has stopped them inside their own 10-yard line..."
http://highschool.rivals.com/content.asp?CID=892888
From Jim Kwak at Baseline Scenario:
" 'In honor of the changing seasons, imagine it’s the first quarter of a football game and you have fourth-and-one at the other team’s 40-yard line. Anyone who studies football statistics will say you should go for it; it’s not even close. (Some people have run the numbers and said that a football team should never – that’s right, never – kick a punt.) If the offense fails to make it, the announcer, and the commentators the next day, will all say that it was a bad decision. That’s completely wrong. It was a good decision; it just didn’t work out.'
....The conclusion is that over most of the field you should go for it if you have four or fewer yards to go; there is a big spike around the opponent’s 33-yard line where you should go for it even on fourth and nine, because the net field position benefit of punting is low and the expected point value of attempting a field goal is low.
The implication, of course, is that football teams don’t maximize. Romer concedes that making the right decision on fourth down would lead to about one more win every three years, and this is probably outweighed by the asymmetric returns: you are more likely to be penalized (as a coach) if you go against convention and are wrong than if you follow convention, since the fans (and the owners) are more likely to notice departures from convention. So the incentives of football coaches are not simply to maximize points, but also to maintain their reputations"
http://baselinescenario.com/2009/09/03/football-statistics-and-agency-problems/.
Wednesday, September 2, 2009
Do Not Forget Genomics' Impact On Health Care
TW: We posted on this in July here, but it bears repetition and supplement. When folks speak of free market solutions, I listen as free markets are crucial to our economy. But when discussing free markets and individuals relative to health care, one must understand the individual has very poor negotiating leverage unless of course they happen to have great genes. That leverage will become even less as genomics permit folks to further reduce the variability of their projected health.
Folks tend to get edgy about "mandates". Either mandates to force employers or insurers to provide coverage or mandates for individuals to purchase coverage. Without mandates though in a world with decreasing variability in health care risks due to genomics testing, the mandates become crucial.
I keep coming back to health care IS different. Unless one is comfortable creating huge disparities in cost and health outcomes depending upon factors many of which are utterly uncontrollable by the individual.
From Jim Kwak at Baseline Scenario:
"...If insurers know what your projected long-term health care costs are, because they can read your genetic code, then they are going to price accordingly – and that’s exactly what insurers should do in an unregulated market. This produces the dystopian world where not only are some people unlucky because their genes make them more likely to suffer in various ways, but on top of that they can’t get health insurance and therefore health care.
The first-order solution is obvious, and it’s a part of every health care reform proposal: prohibit insurers from engaging in medical underwriting. As is also generally understood, this means that insurers will have to overcharge healthy people, which creates an adverse selection slippery slope – especially when healthy people have scientific evidence that they are, in fact, healthy – that ends when insurance is very expensive, and only rich sick people have it – that is, today’s individual market. So it has to be accompanied by a mandate, to force healthy people to buy insurance and thereby subsidize the sick.
Wheelan points out that there’s a second-order problem, which is that if insurers have to charge everyone the same price, they will compete by marketing to the healthy and trying to hide from the sick. The insurance exchange(s) should limit this problem, but may not be able to eliminate it, since people will have choice on the exchange, and are free to choose the plan that successfully markets itself as the plan for healthy people. Eventually you get to a point where insurers cannot compete on price, and they cannot compete on risk selection, and they start to look a lot like regulated utilities. That’s not terrible – they can still compete on cost – but it’s what happens when you harness the private sector to do something that is essentially redistribution.
In any case, the other lesson is that widespread genetic testing will only make the unfairness of unrestrained competition in the health insurance sector even more glaringly obvious, since it will increase the divergence between rates for sick people and healthy people. And no one will be able to blame the difference in rates on anyone’s “lifestyle.” Which is another reason why we need to reform our health care system, and establish the principle that everyone deserves a basic minimum of care regardless of their genes, before things get much worse."
http://baselinescenario.com/2009/09/01/the-march-of-science-and-health-care-reform/
Folks tend to get edgy about "mandates". Either mandates to force employers or insurers to provide coverage or mandates for individuals to purchase coverage. Without mandates though in a world with decreasing variability in health care risks due to genomics testing, the mandates become crucial.
I keep coming back to health care IS different. Unless one is comfortable creating huge disparities in cost and health outcomes depending upon factors many of which are utterly uncontrollable by the individual.
From Jim Kwak at Baseline Scenario:
"...If insurers know what your projected long-term health care costs are, because they can read your genetic code, then they are going to price accordingly – and that’s exactly what insurers should do in an unregulated market. This produces the dystopian world where not only are some people unlucky because their genes make them more likely to suffer in various ways, but on top of that they can’t get health insurance and therefore health care.
The first-order solution is obvious, and it’s a part of every health care reform proposal: prohibit insurers from engaging in medical underwriting. As is also generally understood, this means that insurers will have to overcharge healthy people, which creates an adverse selection slippery slope – especially when healthy people have scientific evidence that they are, in fact, healthy – that ends when insurance is very expensive, and only rich sick people have it – that is, today’s individual market. So it has to be accompanied by a mandate, to force healthy people to buy insurance and thereby subsidize the sick.
Wheelan points out that there’s a second-order problem, which is that if insurers have to charge everyone the same price, they will compete by marketing to the healthy and trying to hide from the sick. The insurance exchange(s) should limit this problem, but may not be able to eliminate it, since people will have choice on the exchange, and are free to choose the plan that successfully markets itself as the plan for healthy people. Eventually you get to a point where insurers cannot compete on price, and they cannot compete on risk selection, and they start to look a lot like regulated utilities. That’s not terrible – they can still compete on cost – but it’s what happens when you harness the private sector to do something that is essentially redistribution.
In any case, the other lesson is that widespread genetic testing will only make the unfairness of unrestrained competition in the health insurance sector even more glaringly obvious, since it will increase the divergence between rates for sick people and healthy people. And no one will be able to blame the difference in rates on anyone’s “lifestyle.” Which is another reason why we need to reform our health care system, and establish the principle that everyone deserves a basic minimum of care regardless of their genes, before things get much worse."
http://baselinescenario.com/2009/09/01/the-march-of-science-and-health-care-reform/
Tuesday, July 21, 2009
Why Ideology Fails?
From Jim Kwak at Baseline Scenario:
"After the wholesale discrediting of the strong form of the efficient markets hypothesis, Robert Shiller may be the most respected financial economist in the world at the moment:
'Finance is a huge net positive for the economy. The countries that have better-developed financial markets really do better. . . . I think that we’re less than halfway through the development of financial markets. Maybe there’s no end to it.'
I think Shiller’s first and second sentences are almost certainly true. There is a strong correlation between having a high material standard of living and having a relatively sophisticated financial system; think of the United States, Japan, and Germany as opposed to Zimbabwe, for example. But you can’t infer that more financial market “development” is always better. (I’m not saying that Shiller necessarily believes that, but most of the defenders of financial innovation take it for granted.)
Just because something is good, it doesn’t necessarily follow that more of it is better. Take food, for example. It’s pretty obvious that over a wide range – say from 0 to 1500 calories per day – more food is better for you. For most people that range probably extends up to 2000 calories or a little more. After that, not so much.
I and others have made this point about financial innovation. You could make a similar argument about health care technology. To a point, using more technology – scans, implants, drugs, etc. – does correlate with better outcomes. Beyond that point, if the technology is being used instead of preventative medicine and old-fashioned doctoring, it doesn’t provide much incremental value, and may actually hurt. (If, in addition, the high use of technology is pushing up the cost of health care and making it unaffordable for millions of people, then it may really hurt.) Really all we’re talking about is the fact that marginal returns tend to diminish, and they can diminish to zero.
I’m not saying that we should put a lid on financial (or medical) innovation once and for all. As the economy changes over the next decades and centuries, the financial system we need will change as well. But this fallacy that more of a good thing must always be better is so simple and so deep-seated that it’s worth being aware of it."
TW: The above is why, amongst other reasons, ideology fails. Those who blindly follow ideology almost always believe more of something is better and when the ideology leads to bad results they claim the ideology executed better or more forcefully will ultimately triumph.
Ideology should provide a framework for use in combination with practical solutions. Not a mindless basis for one size fits all.
"After the wholesale discrediting of the strong form of the efficient markets hypothesis, Robert Shiller may be the most respected financial economist in the world at the moment:
'Finance is a huge net positive for the economy. The countries that have better-developed financial markets really do better. . . . I think that we’re less than halfway through the development of financial markets. Maybe there’s no end to it.'
I think Shiller’s first and second sentences are almost certainly true. There is a strong correlation between having a high material standard of living and having a relatively sophisticated financial system; think of the United States, Japan, and Germany as opposed to Zimbabwe, for example. But you can’t infer that more financial market “development” is always better. (I’m not saying that Shiller necessarily believes that, but most of the defenders of financial innovation take it for granted.)
Just because something is good, it doesn’t necessarily follow that more of it is better. Take food, for example. It’s pretty obvious that over a wide range – say from 0 to 1500 calories per day – more food is better for you. For most people that range probably extends up to 2000 calories or a little more. After that, not so much.
I and others have made this point about financial innovation. You could make a similar argument about health care technology. To a point, using more technology – scans, implants, drugs, etc. – does correlate with better outcomes. Beyond that point, if the technology is being used instead of preventative medicine and old-fashioned doctoring, it doesn’t provide much incremental value, and may actually hurt. (If, in addition, the high use of technology is pushing up the cost of health care and making it unaffordable for millions of people, then it may really hurt.) Really all we’re talking about is the fact that marginal returns tend to diminish, and they can diminish to zero.
I’m not saying that we should put a lid on financial (or medical) innovation once and for all. As the economy changes over the next decades and centuries, the financial system we need will change as well. But this fallacy that more of a good thing must always be better is so simple and so deep-seated that it’s worth being aware of it."
TW: The above is why, amongst other reasons, ideology fails. Those who blindly follow ideology almost always believe more of something is better and when the ideology leads to bad results they claim the ideology executed better or more forcefully will ultimately triumph.
Ideology should provide a framework for use in combination with practical solutions. Not a mindless basis for one size fits all.
Friday, June 26, 2009
Why Healthcare Economics ARE Different
TW: Conservatives wave many bloody shirts ("free market!!!", don't socialize medicine!!!) in the health care debates but propose few if any actual solutions. Understanding the dynamics of health care economics is crucial to defining what programs and policies to support. What most everyone appears to agree on is that health care costs are threatening to grow so fast as to crowd out other needed spending (have you noticed most new construction in the burbs appears to be medically related?).
Okay so costs are exploding. What do you want to do about it? Continue the status quo that is failing?
From Jim Kwak at Baseline Scenario:
"In a capitalist economy, the thing that is supposed to keep prices in check is the buyers. If someone offers me a product that costs more than it is worth to me, then I won’t buy it. But we can’t count on patients to play this role in health care, because there is no way to make patients internalize all of the costs of their care; they simply don’t have the money.
Furthermore, most people don’t understand the health production function (the relationship between treatments and outcomes), so they don’t have the ability to select treatments that provide benefits that are worth their costs. (And, in many cases, it’s not obvious even to professionals that a treatment isn’t worth the cost; it’s only obvious when you look at the data in aggregate.)
What about payers (health insurers?) A “market” solution would be to change the reimbursement rates for different procedures – increase payment for things that doctors should do more of and reduce payment for things that doctors should do less of. Theoretically, payers should be doing this already. However, in the current situation, a private payer who tried to reduce the rates for popular, expensive procedures would find itself unable to attract providers. The only payer with any real negotiating power is Medicare. The private payers have little ability to control costs. Or, if they have the ability, they aren’t exercising it.
In short, prices will only go up. As a result, the cost of health insurance goes up, and the market finally kicks in in the crudest possible form: people who can’t afford it become uninsured. At some point, if we have enough uninsured people, the health care industry will hit a point where it cannot increase revenues anymore, because it has fewer and fewer paying customers.
The proposed public health insurance plan would have the power to negotiate lower rates with providers. That’s why some providers don’t like it. That’s also why private payers don’t like it; they would be at a cost disadvantage to the public plan. (They can live with Medicare because Medicare leaves them the entire under-65 market.) Maybe that’s unfair. But the current situation isn’t working."
Okay so costs are exploding. What do you want to do about it? Continue the status quo that is failing?
From Jim Kwak at Baseline Scenario:
"In a capitalist economy, the thing that is supposed to keep prices in check is the buyers. If someone offers me a product that costs more than it is worth to me, then I won’t buy it. But we can’t count on patients to play this role in health care, because there is no way to make patients internalize all of the costs of their care; they simply don’t have the money.
Furthermore, most people don’t understand the health production function (the relationship between treatments and outcomes), so they don’t have the ability to select treatments that provide benefits that are worth their costs. (And, in many cases, it’s not obvious even to professionals that a treatment isn’t worth the cost; it’s only obvious when you look at the data in aggregate.)
What about payers (health insurers?) A “market” solution would be to change the reimbursement rates for different procedures – increase payment for things that doctors should do more of and reduce payment for things that doctors should do less of. Theoretically, payers should be doing this already. However, in the current situation, a private payer who tried to reduce the rates for popular, expensive procedures would find itself unable to attract providers. The only payer with any real negotiating power is Medicare. The private payers have little ability to control costs. Or, if they have the ability, they aren’t exercising it.
In short, prices will only go up. As a result, the cost of health insurance goes up, and the market finally kicks in in the crudest possible form: people who can’t afford it become uninsured. At some point, if we have enough uninsured people, the health care industry will hit a point where it cannot increase revenues anymore, because it has fewer and fewer paying customers.
The proposed public health insurance plan would have the power to negotiate lower rates with providers. That’s why some providers don’t like it. That’s also why private payers don’t like it; they would be at a cost disadvantage to the public plan. (They can live with Medicare because Medicare leaves them the entire under-65 market.) Maybe that’s unfair. But the current situation isn’t working."
Tuesday, June 23, 2009
If Health Care Providers Act Rationally Costs Will Infinitely Increase
TW: Kwak makes one of those somewhat obvious yet crucial points. If doctors behave like rational suppliers, medical costs will continue to escalate and at probably increasing rates. He references the now ubiquitous Awal Gawande New Yorker piece in which Gawande compared a high-cost locality- McAllen, TX to a lower cost TX locality. Kwak's points out that the McAllen doctors were merely behaving as rational suppliers, the exception were the lower cost suppliers in the other locale.
As we have mentioned before, health care providers make their living providing/selling health care. They are not saints, they are not irrational and they are at the end of the day suppliers. To expect hospitals, doctors, pharma companies etc. to optimize your health care costs is to expect irrational behavior.
To a certain degree as technology and systems improve, the health care folks not pushing higher, more expensive treatments may be the ones ferreted out and pushed out.
From Jim Kwak at Baseline Scenario:
"...our health care system has high-cost and low-cost areas; the high-cost areas have no better outcomes than the low-cost areas. So theoretically we can solve our health care cost problem by making the high-cost areas behave like the low-cost areas.
However, the market incentives go in the other direction; the economically rational thing for providers (doctors, hospitals, etc.) to do is to run up procedures and thereby costs. It would be better if providers focused more on patient outcomes or organized themselves into accountable care organizations, as Gawande prefers; but there is no economic reason for them to do so. People are not magically going to become more altruistic overnight.
...In some ways McAllen isn’t the aberration; according to the old Chicago economics department, everywhere should be like McAllen.
Remember all the people who said that you can’t blame mortgage brokers and investment bankers for being greedy, because that’s how a capitalist economy works? Well, you could make the same defense for the McAllen doctors. We long ago stopped expecting lawyers and accountants to behave contrary to their economic interests; now we simply expect them to conform to the law and to certain professional codes of conduct, and otherwise make as much money as possible. Why should we expect anything different from doctors?..."
http://baselinescenario.com/2009/06/21/the-health-care-problem/
As we have mentioned before, health care providers make their living providing/selling health care. They are not saints, they are not irrational and they are at the end of the day suppliers. To expect hospitals, doctors, pharma companies etc. to optimize your health care costs is to expect irrational behavior.
To a certain degree as technology and systems improve, the health care folks not pushing higher, more expensive treatments may be the ones ferreted out and pushed out.
From Jim Kwak at Baseline Scenario:
"...our health care system has high-cost and low-cost areas; the high-cost areas have no better outcomes than the low-cost areas. So theoretically we can solve our health care cost problem by making the high-cost areas behave like the low-cost areas.
However, the market incentives go in the other direction; the economically rational thing for providers (doctors, hospitals, etc.) to do is to run up procedures and thereby costs. It would be better if providers focused more on patient outcomes or organized themselves into accountable care organizations, as Gawande prefers; but there is no economic reason for them to do so. People are not magically going to become more altruistic overnight.
...In some ways McAllen isn’t the aberration; according to the old Chicago economics department, everywhere should be like McAllen.
Remember all the people who said that you can’t blame mortgage brokers and investment bankers for being greedy, because that’s how a capitalist economy works? Well, you could make the same defense for the McAllen doctors. We long ago stopped expecting lawyers and accountants to behave contrary to their economic interests; now we simply expect them to conform to the law and to certain professional codes of conduct, and otherwise make as much money as possible. Why should we expect anything different from doctors?..."
http://baselinescenario.com/2009/06/21/the-health-care-problem/
Sunday, June 14, 2009
Where Is the Economy Now?
TW: Simon Johnson is former chief economist at the IMF, he generally is pretty sober minded, tries to stay above the Keynesian/Monetarist fray (unlike say Paul Krugman). His assessments seem on target to me. They are troubling.
Many feel the crisis is abating, but is that true? Many are more than willing to avoid reform (UGH!!). We are in an increasingly strident inflation v. deflation battle. It is hard to fight one without encouraging the other and if one does not know which is the real foe, paralysis usually results.
From Simon Johnson's blog:
1. Financial markets have stabilized – largely because people believe that the government will not allow Citigroup to fail. We have effectively nationalized any banking system losses, but we’ll let bank executives enjoy the full benefits of the upside. How much shareholders participate remains to be seen; there will be no effective reining in of insider compensation...
2. The real economy begins to bottom out, although unemployment will not peak for a while and could stay high for several years. Longer term growth prospects remain uncertain – has consumer behavior really changed; if finance doesn’t drive growth, what will; is the budget deficit under control or not (note: most of the guarantees extended to banks and other financial institutions are not scored in the budget)?
3. More broadly, there is sophisticated window dressing in the pipeline but no real reform on any issue central to (a) how the banking system operates, or (b) more broadly, how hubris in finance led us into this crisis. The financial sector lobbies appear stronger than ever. The administration ducked the early fights that set the tone (credit cards, bankruptcy, even cap and trade); it’s hard to see them making much progress on anything – with the possible exception of healthcare.
4. The consensus from conventional macroeconomics is that there can’t be significant inflation with unemployment so high, and the Fed will not tighten before late 2010. The financial markets beg to differ – presumably worrying, in part, about easy credit leading to dollar depreciation, higher import prices, and potential commodity price inflation worldwide. In all recent showdowns with standard macro models recently, the markets’ view of reality has prevailed. My advice: pay close attention to oil prices.
5. Emerging markets are increasingly viewed as having “decoupled” from the US/European malaise. This idea was wrong in early 2008, when it gained consensus status; this time around, it is probably setting us up for a new bubble – based on a “carry trade” that now runs out of the US. The ”appetite for risk” among investors is up sharply. The G7/G8/G20 is back to being irrelevant or merely cheerleaders for the financial sector."
Many feel the crisis is abating, but is that true? Many are more than willing to avoid reform (UGH!!). We are in an increasingly strident inflation v. deflation battle. It is hard to fight one without encouraging the other and if one does not know which is the real foe, paralysis usually results.
From Simon Johnson's blog:
1. Financial markets have stabilized – largely because people believe that the government will not allow Citigroup to fail. We have effectively nationalized any banking system losses, but we’ll let bank executives enjoy the full benefits of the upside. How much shareholders participate remains to be seen; there will be no effective reining in of insider compensation...
2. The real economy begins to bottom out, although unemployment will not peak for a while and could stay high for several years. Longer term growth prospects remain uncertain – has consumer behavior really changed; if finance doesn’t drive growth, what will; is the budget deficit under control or not (note: most of the guarantees extended to banks and other financial institutions are not scored in the budget)?
3. More broadly, there is sophisticated window dressing in the pipeline but no real reform on any issue central to (a) how the banking system operates, or (b) more broadly, how hubris in finance led us into this crisis. The financial sector lobbies appear stronger than ever. The administration ducked the early fights that set the tone (credit cards, bankruptcy, even cap and trade); it’s hard to see them making much progress on anything – with the possible exception of healthcare.
4. The consensus from conventional macroeconomics is that there can’t be significant inflation with unemployment so high, and the Fed will not tighten before late 2010. The financial markets beg to differ – presumably worrying, in part, about easy credit leading to dollar depreciation, higher import prices, and potential commodity price inflation worldwide. In all recent showdowns with standard macro models recently, the markets’ view of reality has prevailed. My advice: pay close attention to oil prices.
5. Emerging markets are increasingly viewed as having “decoupled” from the US/European malaise. This idea was wrong in early 2008, when it gained consensus status; this time around, it is probably setting us up for a new bubble – based on a “carry trade” that now runs out of the US. The ”appetite for risk” among investors is up sharply. The G7/G8/G20 is back to being irrelevant or merely cheerleaders for the financial sector."
Saturday, May 16, 2009
Enough With This Green Shoots B.S.
TW: Larry Kudlow's inane "mustard seeds" have given away to another tiring meme, "green shoots", which have attained a tedious level of ubiquity. Jim Kwak comes through with his usual insight on the topic. Things are going down less fast, perhaps they will flatten, but then what? An export driven recovery amidst a worldwide slowdown? A housing binge?
From Jim Kwak at Baseline Scenario:
"...There has been a lot of discussion of “green shoots” scattered around the Internet recently. Most of it, I think is premature. A lot of economic indicators seem to show that things are getting worse at a slower rate than before. One major source of optimism was last week’s jobs report, which showed a net loss of “only” 539,000 jobs.
...“The most intense spate of weakness is probably behind us,” said Michael T. Darda, chief economist at the research and trading firm MKM Partners. “Less bad is always a prelude to good. It’s going to take some time for this economy to get back on its feet, but we might be closer to the recession ending.”
...As I’m sure other people have noted, these are second derivatives that are improving: the direction of change is still negative, but the change in the rate of change is positive. This is not too surprising, because some levels of economic simply cannot fall beyond a certain point in the short term.
...The four-week average of new unemployment claims is another indicator that the end of the recession (meaning the end of economic contraction) might not be too far off;
...What happens next, however, is another question. Will the economy return to long-term trend growth of about 2.5-3.0% per year? Or will we muddle along with a “jobless recovery” where economic growth is barely sufficient to keep pace with population growth? The important thing to remember is that trend growth is just a long-term statistical average; there’s no magical mechanism that generates growth all by itself. I’ve said before that a lot of 2010 forecasts look like reversion to the mean, which is a valid way of forecasting, say, the expected height of the offspring of two tall people, but not necessarily economic growth.
For one thing, there’s no going back to the economy of 2002-07: a disproportionate share of economic growth then came from finance and real estate, and that isn’t happening again for a while. More fundamentally...we have reason to believe that the usual engines of recovery – personal consumption and residential real estate – are likely to be missing in action, in part because the crisis is likely to have caused a long-term increase in household savings.
So what’s with all the optimism? To some extent, it reflects people’s personal predilections: optimists see a recovery in the same data where pessimists see a long, flat line. In addition, though, I suspect there’s at least a little marketing at work here...The economic stimulus package and, more likely, the monetary stimulus provided by the Fed will also have an effect. But they are fighting against millions of foreclosures to work through and a newfound desire to save on the part of the American consumer, and it will be a long battle."
http://baselinescenario.com/2009/05/15/the-green-shoots-debate/
From Jim Kwak at Baseline Scenario:
"...There has been a lot of discussion of “green shoots” scattered around the Internet recently. Most of it, I think is premature. A lot of economic indicators seem to show that things are getting worse at a slower rate than before. One major source of optimism was last week’s jobs report, which showed a net loss of “only” 539,000 jobs.
...“The most intense spate of weakness is probably behind us,” said Michael T. Darda, chief economist at the research and trading firm MKM Partners. “Less bad is always a prelude to good. It’s going to take some time for this economy to get back on its feet, but we might be closer to the recession ending.”
...As I’m sure other people have noted, these are second derivatives that are improving: the direction of change is still negative, but the change in the rate of change is positive. This is not too surprising, because some levels of economic simply cannot fall beyond a certain point in the short term.
...The four-week average of new unemployment claims is another indicator that the end of the recession (meaning the end of economic contraction) might not be too far off;
...What happens next, however, is another question. Will the economy return to long-term trend growth of about 2.5-3.0% per year? Or will we muddle along with a “jobless recovery” where economic growth is barely sufficient to keep pace with population growth? The important thing to remember is that trend growth is just a long-term statistical average; there’s no magical mechanism that generates growth all by itself. I’ve said before that a lot of 2010 forecasts look like reversion to the mean, which is a valid way of forecasting, say, the expected height of the offspring of two tall people, but not necessarily economic growth.
For one thing, there’s no going back to the economy of 2002-07: a disproportionate share of economic growth then came from finance and real estate, and that isn’t happening again for a while. More fundamentally...we have reason to believe that the usual engines of recovery – personal consumption and residential real estate – are likely to be missing in action, in part because the crisis is likely to have caused a long-term increase in household savings.
So what’s with all the optimism? To some extent, it reflects people’s personal predilections: optimists see a recovery in the same data where pessimists see a long, flat line. In addition, though, I suspect there’s at least a little marketing at work here...The economic stimulus package and, more likely, the monetary stimulus provided by the Fed will also have an effect. But they are fighting against millions of foreclosures to work through and a newfound desire to save on the part of the American consumer, and it will be a long battle."
http://baselinescenario.com/2009/05/15/the-green-shoots-debate/
Monday, April 13, 2009
Estate Taxation: Why Not!!!
TW: Republicans successfully pealed the estate tax back under W. Bush. Their legislation cynically expires next year, however, as to have projected the full impact of the repeal would have ballooned their deficit projections. The issue is yet another ball punted to Obama (but then W. Bush fumbled or punted- and in one case launched a long bomb that failed, Iraq- many issues).
As Kwak articulates, this is all about alternatives, if not an estate tax then what. I understand the double taxation angle and that Americans are tremendously aspirational (a good thing). Yet the tax applies to a very small % of folks (the trigger levels should be indexed so as not to create another AMT situation), all of whom would be able to bequeath significant net assets despite the tax. The heirs of the estates impacted by the tax will likely have enjoyed considerable economic advantages versus their less wealthy peers for decades prior to the passing of the benefactors.
From Jim Kwak at Baseline Scenario:
"...The basic question is whether the exemption will be raised from $1 million - where it was in 2002-03 and where it is scheduled to return after the Bush tax cuts expire - to $3.5 million (Obama) or $5 million (Lincoln-Kyl) per person; there is also disagreement over whether the marginal rate should be 35% or 45%. (Note that even with Obama’s proposed 45% tax rate, the average effective tax rate on estate would be 19%, because of the $3.5 million exemption.)
There is plenty of debate over this already, so I will confine myself to three points.
1. It’s not a question of whether the estate tax is good or bad; it’s a question of whether it’s better than the alternative. If you take away $100 billion of tax revenue (that’s the Times’s figure - not sure how many years that is over), you have to add it to the debt or raise it some other way. Compared to raising marginal tax rates on income, the estate tax almost certainly has less impact on incentives to work, for a few reasons: (a) most people with that much wealth make most of their money from investments, not working; (b) most people - even high earners who pay the top marginal income tax rates - are unlikely to ever pay the estate tax, and even if they do, it will be decades after the current period; and (c) to the extent that that people plan to consume or donate their marginal income (like Bill Gates), the estate tax doesn’t affect incentives to work at all. The estate tax has more impact on what people do with their money once they’ve made it: it encourages contributions to charity, but arguably it encourages consumption instead of saving.
2. The estate tax has the unusual property that even though it only affects the super-rich (and thereby benefits everyone else), many people who are completely unaffected by it are against it. Part of this is undoubtedly due to the fact that far more Americans believe they will someday become rich than actually will become rich. (There was a famous poll cited in The Economist a long time ago according to which some large proportion of Americans believed that they were already or would someday be in the top 1% of the population by wealth.) If this economic crisis has any salutary effects, perhaps one of them will be to convince many people that they are not rich enough to pay the estate tax and that, even in this land of opportunity, they are statistically unlikely ever to be rich enough to pay the estate tax - and therefore they should start voting in their own interests and not the interests of celebrities. (And even if you think you will be rich someday, shouldn’t you hedge against that not happening, rather than the opposite?) Put another way, the movement to repeal the estate tax should have crested along with the stock market.
3. Like most Silicon Valley entrepreneurs, when I started my company, one of the motivations was the small chance of someday making a lot of money. Back in 2001, none of us looked around the table and said, “You know, I would work really hard at this startup, but since I’m going to have to pay the estate tax if we’re successful, I’m just going to phone it in.”
http://baselinescenario.com/2009/04/11/estate-tax-exemption-debate/
As Kwak articulates, this is all about alternatives, if not an estate tax then what. I understand the double taxation angle and that Americans are tremendously aspirational (a good thing). Yet the tax applies to a very small % of folks (the trigger levels should be indexed so as not to create another AMT situation), all of whom would be able to bequeath significant net assets despite the tax. The heirs of the estates impacted by the tax will likely have enjoyed considerable economic advantages versus their less wealthy peers for decades prior to the passing of the benefactors.
From Jim Kwak at Baseline Scenario:
"...The basic question is whether the exemption will be raised from $1 million - where it was in 2002-03 and where it is scheduled to return after the Bush tax cuts expire - to $3.5 million (Obama) or $5 million (Lincoln-Kyl) per person; there is also disagreement over whether the marginal rate should be 35% or 45%. (Note that even with Obama’s proposed 45% tax rate, the average effective tax rate on estate would be 19%, because of the $3.5 million exemption.)
There is plenty of debate over this already, so I will confine myself to three points.
1. It’s not a question of whether the estate tax is good or bad; it’s a question of whether it’s better than the alternative. If you take away $100 billion of tax revenue (that’s the Times’s figure - not sure how many years that is over), you have to add it to the debt or raise it some other way. Compared to raising marginal tax rates on income, the estate tax almost certainly has less impact on incentives to work, for a few reasons: (a) most people with that much wealth make most of their money from investments, not working; (b) most people - even high earners who pay the top marginal income tax rates - are unlikely to ever pay the estate tax, and even if they do, it will be decades after the current period; and (c) to the extent that that people plan to consume or donate their marginal income (like Bill Gates), the estate tax doesn’t affect incentives to work at all. The estate tax has more impact on what people do with their money once they’ve made it: it encourages contributions to charity, but arguably it encourages consumption instead of saving.
2. The estate tax has the unusual property that even though it only affects the super-rich (and thereby benefits everyone else), many people who are completely unaffected by it are against it. Part of this is undoubtedly due to the fact that far more Americans believe they will someday become rich than actually will become rich. (There was a famous poll cited in The Economist a long time ago according to which some large proportion of Americans believed that they were already or would someday be in the top 1% of the population by wealth.) If this economic crisis has any salutary effects, perhaps one of them will be to convince many people that they are not rich enough to pay the estate tax and that, even in this land of opportunity, they are statistically unlikely ever to be rich enough to pay the estate tax - and therefore they should start voting in their own interests and not the interests of celebrities. (And even if you think you will be rich someday, shouldn’t you hedge against that not happening, rather than the opposite?) Put another way, the movement to repeal the estate tax should have crested along with the stock market.
3. Like most Silicon Valley entrepreneurs, when I started my company, one of the motivations was the small chance of someday making a lot of money. Back in 2001, none of us looked around the table and said, “You know, I would work really hard at this startup, but since I’m going to have to pay the estate tax if we’re successful, I’m just going to phone it in.”
http://baselinescenario.com/2009/04/11/estate-tax-exemption-debate/
Friday, March 27, 2009
International Cooperation...Maybe
TW: Have been banging the table on the biggest risks to this economic crisis being international relations deteriorating into a self-centered free-for-all. We are not there yet by any means but the signs are there. The G20 summit next week will be a big tell (and possible inflection point for the equity markets). The Czech prime minister who happens to be the rotating head of the EU is not a big player merely symbolic. This all about the Germans and French.
From Jim Kwak at Baseline Scenario:
"Once upon a time there was a president named George. He liked to do things his own way, which annoyed some of his “friends” in Europe. But then a new president named Barack was elected, who not only promised to be nicer to his friends, but was actually very popular in most parts of the world. And the people of the world thought we would see a new era of international cooperation, at least between the U.S. and Europe. Not so much.
On this side of the Atlantic, the Obama administration and the Fed have been working night and day in an attempt to turn around the economy: Fed funds rate reduced to zero, $800 billion stimulus package, new plan to aid struggling homeowners, new plan for buying toxic assets, new budget, decision by the Fed to buy long-term Treasury bonds, new domestic regulatory framework outlined this week, etc. We’ve been plenty critical of various aspects of the U.S. response, but at least they’re trying.
(Continental) Europe, by contrast, has decided they’ve done enough and it’s time to sit back and watch.
First,...Jean-Claude Trichet, head of the European Central Bank, said that no new measures are needed to combat the global economic crisis. Then Mirek Topolanek, the prime minister of the Czech Republic and the president (in this rotation) of the European Union called the U.S. emphasis on fiscal stimulus “the way to hell.” And all of this is coming in the week leading up to the next G20 summit. What happened to diplomacy?
While it is relatively easy to write off a prime minister whose government collapsed on Tuesday night, there is a very real divide between the United States and, in particular, Germany, the heavyweight in the European economy. And it’s very clear that the Germans (and the French) do not want to spend more money, increase their budget deficits, or do anything except talk about international financial regulation.
I think there are three possible reasons for this attitude.
1) The Germans believe that the economy will recover on its own from this point. Given that not even the optimists in the Treasury Department believe this, I don’t see how this could be the case.
2) They are so afraid of any risk of inflation that they would rather suffer through an extended recession and high unemployment. This could be possible, although misguided, especially since Germany is already in worse shape than the U.S., with its economy expected to shrink by 3.8% this year (vs. 2.5% for the U.S.).
3) They realize that their economy is driven by exports, and therefore they are planning to free ride off of the U.S. stimulus package. In this scenario, Germany gets to contain its national debt and minimize the risk of inflation, while letting other countries turn the global economy around.
Now, we’re not blameless here, what with our “Buy American” provision in the fiscal stimulus. But at least our government isn’t closing its eyes and assuming the problem will go away.
From Jim Kwak at Baseline Scenario:
"Once upon a time there was a president named George. He liked to do things his own way, which annoyed some of his “friends” in Europe. But then a new president named Barack was elected, who not only promised to be nicer to his friends, but was actually very popular in most parts of the world. And the people of the world thought we would see a new era of international cooperation, at least between the U.S. and Europe. Not so much.
On this side of the Atlantic, the Obama administration and the Fed have been working night and day in an attempt to turn around the economy: Fed funds rate reduced to zero, $800 billion stimulus package, new plan to aid struggling homeowners, new plan for buying toxic assets, new budget, decision by the Fed to buy long-term Treasury bonds, new domestic regulatory framework outlined this week, etc. We’ve been plenty critical of various aspects of the U.S. response, but at least they’re trying.
(Continental) Europe, by contrast, has decided they’ve done enough and it’s time to sit back and watch.
First,...Jean-Claude Trichet, head of the European Central Bank, said that no new measures are needed to combat the global economic crisis. Then Mirek Topolanek, the prime minister of the Czech Republic and the president (in this rotation) of the European Union called the U.S. emphasis on fiscal stimulus “the way to hell.” And all of this is coming in the week leading up to the next G20 summit. What happened to diplomacy?
While it is relatively easy to write off a prime minister whose government collapsed on Tuesday night, there is a very real divide between the United States and, in particular, Germany, the heavyweight in the European economy. And it’s very clear that the Germans (and the French) do not want to spend more money, increase their budget deficits, or do anything except talk about international financial regulation.
I think there are three possible reasons for this attitude.
1) The Germans believe that the economy will recover on its own from this point. Given that not even the optimists in the Treasury Department believe this, I don’t see how this could be the case.
2) They are so afraid of any risk of inflation that they would rather suffer through an extended recession and high unemployment. This could be possible, although misguided, especially since Germany is already in worse shape than the U.S., with its economy expected to shrink by 3.8% this year (vs. 2.5% for the U.S.).
3) They realize that their economy is driven by exports, and therefore they are planning to free ride off of the U.S. stimulus package. In this scenario, Germany gets to contain its national debt and minimize the risk of inflation, while letting other countries turn the global economy around.
Now, we’re not blameless here, what with our “Buy American” provision in the fiscal stimulus. But at least our government isn’t closing its eyes and assuming the problem will go away.
Thursday, March 19, 2009
We Are In Economic La-La Land
TW: This piece partially frames the economic la-la land into which we continue to wander, while pointing out how economic populism and the hubris of the "elites" pushes all of us deeper and deeper into an economic abyss of uncertain destination. Anyone who claims to know where this thing is headed is BSing. The only thing that is clear to me is that we keep throwing sh..tufff against the wall hoping it will stick, perhaps it will at some point.
From Simon Johnson at Baseline Scenario:
"Here is Ben Bernanke’s problem.
1. The financial sector is busy setting up arrangements in which employees are guaranteed high levels of compensation if they stay on through the difficult days ahead. These retention-type payments allow firms to survive in their existing form, pursue business-as-usual, and gamble for resurrection, i.e., make further risky investments.
2. But these same payment schemes, e.g., Goldman Sachs’ loans-for-employees deal, are a form of poison pill with regard to further bailouts - the Administration may want to help these firms down the road, but this kind of tunneling means Congress will put its foot down. Do you think that President Obama’s $750bn for bailouts (scored as $250bn) will survive the budget process? No New Bailout Money is a slogan reaching from here to the midterm congressional elections.
3. And the financial system is in big trouble. Unless the economy turns around, somewhat miraculously, we are in for a big slump. Or even for a Great Depression - watch closely the words and body language in Bernanke’s interview on 60 Minutes.
The big banks are essentially making themselves Too Politically Toxic To Rescue, and this has potentially bad macroeconomic consequences. So what will Bernanke do?
As he sees the world, there is only one course of action remaining: print money and hope for a moderate degree of inflation. The money part was, of course, the announcement yesterday from the Fed.
The inflation part is a leap of faith. If inflation is driven by the so-called “output gap,” i.e., how far the US economy is below potential output, then prices will not increase much, the yield curve steepens moderately, and banks make out like bandits (it’s just an expression).
But if the whole world is moving more into an emerging market-type situation then (a) inflation expectations become deanchored (central bank jargon for “really scary”), (b) potential output falls as we massively deleverage, and (b) people move increasingly into alternative assets - storable commodities spring to mind - and we get some serious inflation.
If oil prices jump, then we have an even bigger inflation problem. Oil is not storable, supposedly. But if you can explain to me exactly why oil prices rose as they did during the first part of 2008, despite the slowing global economy, I might be greatly reassured that we are not heading immediately into a runaway inflation spiral."
http://baselinescenario.com/2009/03/19/causes-of-a-great-inflation-tunneling-for-resurrection/
From Simon Johnson at Baseline Scenario:
"Here is Ben Bernanke’s problem.
1. The financial sector is busy setting up arrangements in which employees are guaranteed high levels of compensation if they stay on through the difficult days ahead. These retention-type payments allow firms to survive in their existing form, pursue business-as-usual, and gamble for resurrection, i.e., make further risky investments.
2. But these same payment schemes, e.g., Goldman Sachs’ loans-for-employees deal, are a form of poison pill with regard to further bailouts - the Administration may want to help these firms down the road, but this kind of tunneling means Congress will put its foot down. Do you think that President Obama’s $750bn for bailouts (scored as $250bn) will survive the budget process? No New Bailout Money is a slogan reaching from here to the midterm congressional elections.
3. And the financial system is in big trouble. Unless the economy turns around, somewhat miraculously, we are in for a big slump. Or even for a Great Depression - watch closely the words and body language in Bernanke’s interview on 60 Minutes.
The big banks are essentially making themselves Too Politically Toxic To Rescue, and this has potentially bad macroeconomic consequences. So what will Bernanke do?
As he sees the world, there is only one course of action remaining: print money and hope for a moderate degree of inflation. The money part was, of course, the announcement yesterday from the Fed.
The inflation part is a leap of faith. If inflation is driven by the so-called “output gap,” i.e., how far the US economy is below potential output, then prices will not increase much, the yield curve steepens moderately, and banks make out like bandits (it’s just an expression).
But if the whole world is moving more into an emerging market-type situation then (a) inflation expectations become deanchored (central bank jargon for “really scary”), (b) potential output falls as we massively deleverage, and (b) people move increasingly into alternative assets - storable commodities spring to mind - and we get some serious inflation.
If oil prices jump, then we have an even bigger inflation problem. Oil is not storable, supposedly. But if you can explain to me exactly why oil prices rose as they did during the first part of 2008, despite the slowing global economy, I might be greatly reassured that we are not heading immediately into a runaway inflation spiral."
http://baselinescenario.com/2009/03/19/causes-of-a-great-inflation-tunneling-for-resurrection/
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