On the National Education Foundation's web site it lays out a numbered list of priorities on its Federal Policy Guide, presumably an ordered list of educational legislation priorities for Representatives and Senators to refer to in judging whether their votes will be supported by the powerful union. One would think, though, that this represents, too, an ordered list of what the NEA sees as the most pressing issues in education reform are, with the general public also part of the intended audience in improving America's public education system.

Given that, one is not surprised to see that ideas like improving pre-K and early education, revitalizing elementary and high schools and increasing graduation rates top the list. Of the thirteen core issues only 3 or 4 could be characterized as tangentially being even indirectly related to teacher salary or collective bargaining for better contracts for teachers. Only issue #7 on a list of 13, "Support All School Staff, Vital Members of the Team" seems to be dedicated to the issue of compensation for education personnel directly, and does so in the context of discussing how the need is to make sure that not just teachers are compensated as well as they should be.

To be fair, on their main site's "Issues and Actions" page, "Professional Pay" does rate as one of five issues in the NEA's "Current Focus," alongside overall Education funding. However, if asked on the record, one assumes the NEA's position is that improving educational outcomes for children trump ancillary goals like increasing the Union's power to extract favorable treatment from legislators, and that goals like increasing teacher pay are meant to make sure that teacher's are compensated fairly so that competent individuals are attracted and retained as teachers. Basically, teacher pay matters because these are the people teaching your kids, not because how good a union contract is matters in and of itself.

Bizarre, then, that you can find in a story about the NEA playing political hardball with a Chicago pol that this local tactic is reflected by national leadership. The story references a speech given by retiring NEA exec Bob Chanin to the 2008 NEA annual conference where he explicitly places all goals related to educating children as subordinate to increasing the amount of money and bargaining power that the NEA can accumulate:

Despite what some among us would like to believe it is not because of our creative ideas. It is not because of the merit of our positions. It is not because we care about children and it is not because we have a vision of a great public school for every child. NEA and its affiliates are effective advocates because we have power.

And we have power because there are more than 3.2 million people who are willing to pay us hundreds of millions of dollars in dues each year, because they believe that we are the unions that can most effectively represent them, the unions that can protect their rights and advance their interests as education employees.

This is not to say that the concern of NEA and its affiliates with closing achievement gaps, reducing dropout rates, improving teacher quality and the like are unimportant or inappropriate. To the contrary. These are the goals that guide the work we do. But they need not and must not be achieved at the expense of due process, employee rights and collective bargaining. That simply is too high a price to pay.

That's a somewhat shocking admission for the NEA to make; these guys aren't mining coal or playing Major League Baseball. While every union's goal (as a sort of labor cartel) is to manipulate the market by coordinating the price at which labor will be supplied and thereby get more money for the same work by its members, the teachers union sells itself as nice. If your representatives craft a piece of education "reform" legislation in such a way that the NEA loves it the NEA would have you believe that this bill will do good at improving education in America: the NEA is concerned about teacher's pay, but it is also a group that advocates for improving educational outcome.

Strange, though, that a group that claims to care about educational outcomes would say that while those goals guide their efforts that reform "must not be achieved at the expense of due process, employee rights and collective bargaining." And of course, that the NEA's advocacy is effective not because of something as inane as having good ideas and a soapbox, but rather it stems from power, which stems directly from hundreds of millions of dollars in union dues.

So when education reformers not affiliated with the NEA suggest things like allowing competition between schools, giving parents the choice between their local public school or a voucher to be used to pay for tuition at a charter school or private school that does not employ Union members, or when a disinterested social scientist questions just how effective reducing class size from 25 to 15 is at improving outcomes, or when some other reformer suggests incentivizing teacher pay based on performance as measured by standardized tests, you have to question whether the NEA is following the creed that is embodied by its website or by a speech at their annual meeting that got a round of enthusiastic applause. If an effective education reform threatens to decrease the number of unionized teachers and therefore the amount of dues the NEA collects and therefore its power, does the NEA oppose that policy because it would decrease its collective bargaining power? If they do, do they say so openly or do they try to come up with confusing, bogus studies that come to opposite conclusions to muddy the waters and seem like they still care about the children.

If it is the latter, then it wouldn't really matter whether allowing parents who live in an area where their children would be forced to attend a failing public school to get a voucher to pay for private, non-union-supporting education was a great idea with the potential to drastically improve educational outcomes, the NEA would oppose it. The NEA's policy page on charter schools, which are publicly funded schools that are run without all the regulations of traditional public schools and sometimes outside the scope of traditional regulators, is instructive. While the NEA does not come out and demonize charter schools, it says that charter schools can only be supported if they fulfill a number of criteria:

• A charter should be granted only if the proposed school intends to offer an educational experience that is qualitatively different from what is available in traditional public schools. [In other words, a mere quantitative improvement in perforamance using non-union administrators and teachers would not be acceptable]


• Charter school funding should not disproportionately divert resources from traditional public schools. [Charter schools can't come to receive more than a small portion of public education dollars even if they do a better job at teaching children than traditional (NEA dominated) public schools]


• Local school boards should have the authority to grant or deny charter applications; the process should be open to the public, and applicants should have the right to appeal to a state agency decisions to deny or revoke a charter.[We should be able to apply political pressure against charter schools at either the local level or the state level, wherever we have more power]


• Charter schools should be subject to the same public sector labor relations statutes as traditional public schools, and charter school employees should have the same collective bargaining rights as their counterparts in traditional public schools.[Charter schools are really only good if they give more money to the NEA and function exactly like our failing public schools]

So while the NEA's position on Charter Schools seems superficially nuanced and appears to be guided only by a primary mission of improving outcomes--we tentatively support the idea of Charter Schools if they are implemented in a diligent fashion-- if you look at the fine print their support for Charter Schools hinges on their teachers and administrators being unionized. Increased power trumps even the ideological goals of the organization. Imagine if a large longitudinal study came out that showed that a key feature of successful charter schools was that teachers and administrators could be hired and fired much more easily than in a school with a collective bargaining agreement the NEA signed off on; the NEA's instinctive reaction would be vehement opposition to the validity of the data and if it came to it to legislation based on its conclusions. Such data and conclusions threaten its very rationale for existence--that well-paid and content teachers are needed to get good results and that collective bargaining and unionized teachers are required to attract and keep those teachers--and therefore the NEA, as it admits when the target audience is not the public, cares about improving education, but improving education must be prioritized below increasing the bargaining power and legislative influence of the union.

The NEA's political allies are mostly Democrats, but Republicans are far from being innocent when it comes to taking money from this union in exchange for compromising on key aspects of educational reform that would demand that, like in every private sector industry, that teacher's jobs and pay are related to their competence and performance, not how long they've been in the same classroom. Both parties bow to this powerful lobby: the Bush Administration's No Child Left Behind Act was full of concessions to the NEA and while the Union did not support many of the parts of the original bill that would attempt to add competitive pressure to public education outcomes in practice the NEA successfully watered down the changes it sought to implement in teacher incentives and objective measurement of performance of teaching basic skills. When you think about education reforms in the future think about who you're talking to and if their information you have or that you hear came from a source that was ultimately parroting the conventional wisdom of the NEA-- for instance the dogma that small class size is crucial certainly creates demand for more teachers but it's not clear it improves outcomes universally. If so consider that they support educational reforms that help educate America's children... so long as that policy happens to involve an increase in the number or salary of unionized teachers.

Labels: ballyhoo, economics, politics

When the popular narrative of our 44th President coalesces, it will no doubt start with the following: President Obama "inherited" the worst financial crisis since the Great Depression from President Bush and that much of the increase in Federal spending that ensued was an attempt to inject capital into the economy to jump-start economic growth. What even happens in reality has yet to unfold, let alone how it will be remembered in the public consciousness, and issues like whether the stimulus was a Keynesian policy (let alone whether it was a good decision or if the stimulus funds were spent wisely) or whether it was justified by newer theories of economics, like those that emphasize the importance of irrational behavior of market participants, emphasizing how our "Animal Spirits" can function to impel us foolishly towards the cliff, en masse. While I quibble with the idea that anyone who undertakes the arduous, lifelong project of becoming a successful politician and then knowingly seeks and wins every phase of an arduous, nearly two year process to become President can "inherit" anything, and I would argue that no single person or even a single President was responsible for the economic crisis, one thing that seems certain is that Obama will be judged largely for how he fixes the economy, both in terms of spurring it to recovery and in preventing such "bubbles" from rocking the foundations of our economy ever again.

Americans are a fickle bunch, as evidenced by the fact that they seem to blame or credit Presidents for macroeconomic events that often had little or nothing to do with their fiscal policies (did Herbert Hoover cause the Depression in his 10 months in office before the market crashed? Did Bill Clinton cause the internet to cause a massive expansion in productivity and wealth? Did George W. Bush cause investors to overestimate just how productive and wealthy the internet would make us?) They also give answers to pollsters that at best would be described as confused, if not indicative of societal cognitive dissonance: 63% of Americans like the idea of expanding health-care to those who can't afford it, but only 28% are willing to pay higher taxes to achieve that goal. It may be what the polls say is wanted, but it is not a very brave or prudent policy stance to say that you favor free lunches, unfortunately.

That seems to be what we are being promised, however. Engaging in fraudulent "creative accounting" to deceive the public into thinking your organization is fiscally solvent when it's not or running an elaborate, long-term billion dollar Ponzi scheme are infuriating crimes when done by corporate types like the guys at Enron or Bernie Madoff, but apparently they are an acceptable way to attempt to buy votes when they are done by elected officials in Washington. Giving the very high quality medical care received by most Americans who have health insurance to the millions of people who currently only get health-care when they are so sick they have to go the emergency room will be very, very costly. The numbers given to the public about what that cost will be are huge, but even still are almost certainly underestimates of the actual cost, both because if an accurate, objective assessment of the cost was given the bill would die but also if you look historically at Medicare and Medicaid, long-term estimates of those costs were off by nearly an order of magnitude. As I mentioned, the government has created several Ponzi schemes, namely Medicare and Social Security: a relatively small payroll tax on the relatively small number of workers under 65 cannot pay for even a fraction of the costly health benefits and direct cash payments to all of the elderly now, let alone as the demographics change so that the ratio of elderly to working age people shrinks and the elderly live longer and collect more and more in benefits. This is absurd, and anyone who knows the key variables--the amount we owe, what we take in, the number of projected workers and retirees-- would recognize that it's a Ponzi scheme and the only question is when did people who continue to participate in the system turn from the winners who got in on the Ponzi scheme early to the pigeons who don't get back anything they pay. I certainly have no expectation that the money that comes out of my paycheck for Social Security or Medicare is money that is being set aside for me somewhere that I will someday see again and anyone my age who believes that is a fool.

And "creative accounting," I mean, jeez, we're told this is "deficit neutral" even though a key feature of the first ten years of the programs is that the taxes run for all 10 years but the benefits only start after 4 years. Despite having all of the general qualities of these other massively indebted social programs that are huge, failing Ponzi schemes we're supposed to believe this thing won't add a dime to the debt. So much of what the Government does now that has been developed as the Federal Government grew exponentially in the 20th Century is to function as a sort of the world's most massive charity that gives out cash to promote specific social goals and the interests of small but politically influential groups, except its "donors" don't give by choice, they can't choose how much they give and they can go to jail if they don't pay what they're told.

And for some time we got away with it. Aside from a one year respite in the Clinton Administration we've accumulated debt continuously since the Roosevelt Administration due to bipartisan,non-stop government social engineering and vote buying. This "charity" likes policies that are politically popular in their results (Social Security recipients like getting checks) but doesn't like paying for the stuff it gives away (those recipients would dislike cuts in the size of their checks and workers would dislike a payroll tax hike.) It was a looming problem, but economic growth kept pace, give or take, with entitlement spending and debt growth and meant that while our debt was getting bigger our creditworthiness was never really becoming more questionable. Things have changed, quickly.

Debt as a fraction of annual GDP stayed under 2/3, and generally was much lower, from when we were still paying down all those WWII war bonds in the early 1950s until last year. Now we're on pace to go to over 100% before Obama leaves office. It's unprecedented and staggering to comprehend the magnitude of the change. At the start of the 90s the debt was a little more than $3 trillion, total. A dozen years later in 2002 debt had doubled to $6 trillion. By the time Obama took office, in the midst of the financial crisis, at the start of 2009 another doubling had taken place this time in less than 7 years as debt had climbed to about $12 trillion. By the end of Obama's first term we'll hit 100% of GDP at $16.5 trillion and by the end of the Obama's second term or the first term of the next President debt is projected to be somewhere at or above $20 trillion.

A lot of the deficit spending that took place during and immediately after the period of chaotic financial instability when huge Wall Street firms were flaming out, being bailed out or having shotgun weddings to keep from going under was meant to prevent an economic meltdown (Bush's TARP) and to inject capital into the broader economy to try to insulate main street from the massive beating Wall street had just taken (Obama's stimulus). As time has gone on, despite an unprecedented, very destabilizing amount of debt, a good enough reason for deficit spending has been watered down from making sure the economy doesn't implode to making sure Americans don't have to deal with the consequences of the bad fundamentals in the economy to just generally pursuing liberal social and political goals. The consequences of the recession would be painful: the big three auto makers and other inefficient companies would go out of business and those people would have to try to find new jobs, just like the people who are being laid off from companies that are downsizing to try to cut costs. The government seems intent on not allowing permanent reallocation of capital to more productive uses (in other words to let the market figure out if renewable energy is actually a profitable thing for Americans to spend their time working on in the 21st century, and if not, what is) since it will be painful for those who lose their jobs and more importantly it would be politically unpopular.

We've essentially nationalized two unprofitable buggy-whip auto manufacturers, we provided a subsidy to those companies and consumers by hastening people's decision to buy cars with "Cash for Clunkers", and now we're trying to offer palliative care to make sure nobody suffers adverse consequences from a disaster with seemingly interminable unemployment benefits, Obamacare and changing the rules so Big Labor can make unions bigger. And we also want to pay for "green jobs" the market didn't demand and increase the cost of energy for environmental reasons. The plan to terraform Mars will be unveiled any day.

There's a problem or two, though. (Surprising.) A seemingly completely political obedient Federal Reserve, as opposed to acting independent of political goals and serving as a guardian of the strength of the U.S.'s currency, is irresponsibly both printing huge sums of money and keeping its lending rates rates very, very low, seemingly at a level that will keep market interest rates artificially low, apparently thinking it will know exactly when to flip off the switch on the printing press when there's just enough dollars chasing just enough goods. What are we doing? A few very shallow economic indicators look positive, with the Dow now back over 10,000 and GDP growth having gone positive in the 3rd quarter. But virtually all that GDP growth was due to increased productivity of people who were already employed, as businesses trimmed the fat and got more output from less labor as they fired presumably the least cost-effective portion of their work-force, capital investment was not particularly robust--nobody's out there building factories or buying huge new equipment to expand their business--and clearly employers weren't keen on taking on new workers as unemployment has now gone over 10%. This when at the beginning of the year unemployment was around 6% and Obama laid out 8% as a benchmark for success of the stimulus. Perhaps he should put himself in a business owner's shoes for a second: the government might raise my personal income taxes and take away more of the profits I make, I may be forced to either provide health-insurance that will cost a lot more than it does now for any and all employees I have or pay a penalty (or both) and I don't know what my energy costs will be, but oil will likely not be cheap and electricity could go up by a little or a lot. If you were facing all those uncertainties do you think your mindset would be "I see an opportunity here" or "It's time to hunker down and try to keep what I have?" Do you think you'd be expanding and creating jobs?

A few tax hikes will hit: the Bush tax cuts will "expire" (as if only tax increases count as permanent changes to tax rate) and the capital gains tax on the wealthy will go up significantly (up a third from 15 to 20%) but with the weak economy a set of tax hikes that make our tax system ever more progressive and seek to raise revenues from capital gains will likely do little to raise revenues to a level that makes a big dent in future deficits. This fiscal policy will also likely end up working completely at cross purposes to the goal of our expansionary (and inflationary) monetary policy as tax hikes discourage both labor and investment at the margins, and if the wealthy are given an additional 5.4% surtax on both income and capital gains to fund Obamacare if it passes, this effect could be significant. One might say well that surtax will effect only a very small minority of the public, which is true, but generally it is the wealthy who have the ability to give people jobs. Is anybody thinking about it like this: if that tax passes and the rate of capital gains tax on those who have lots of money to invest increases from 15% to 25.4% then risky investments like decisions to throw money behind an idea for a new small business or to invest in a small business that seems poised to grow will need need to be something like 10% more profitable per unit of risk to make worthwhile the kind of capital investment that you know, creates jobs.

So, what could be the worst outcome here? Stagflation and implementation of a more European panel of social policies, meaning permanently higher rates of taxation, lower rates of GDP growth and a higher "natural" rate of unemployment? That would seem to be the best case scenario. However, if real economic recovery does start to come, or even if it does not, the combination of drastically increasing the money supply along with increasing the amount of government borrowing, which could crowd out whatever amount of private demand for loans there is, could mean that inflationary pressure and aggregate demand for loans could cause interest rates to rise dramatically. A frightening set of possibilities appear to be taking shape: if you're feeling conspiratorial perhaps the Obama Administration has figured out that the most realistic way for the Federal government to ever get out from under its tremendous debt (which is mostly held by foreigners and which will not involve a very politically unpopular policy combination of increased taxes and massive cuts in entitlement spending) is to simply devalue the dollar so much that our $15 trillion dollar debt that was worth $10 trillion euros in 2009 can go to 20 trillion nominal dollars in 2015 at which point it's worth $8 trillion euros, and similarly devalued against all other major currencies; in real terms the debt has gone down! So too, of course, has the net worth of everyone who has a bank account with dollars in it or owns dollar denominated assets. Buy gold. Hell, buy real estate.

More realistically and less out on the fringe is the idea that Obama and Congressional Democrats simply are ignoring or prioritizing as less important than systemic reforms that can only be enacted during some sort of societal crisis the fact that a few positive economic indicators may mask a reality that is far more dire than they believe. They may also fail to believe some of the following, which of course, I might be wrong about: that the costs of their social policies are far greater than they believe, that the "bold, persistent experimentation" that their agenda embodies has put a large amount of uncertainty into the business community at large which will hurt GDP growth and delay a sustained recovery, and that the combined effect of trying to put ever more goodies on the national credit card, proposing new taxes which may or may not come to be and doing so while the government's cash flow dries up means that the the figurative repo man is coming for the car.

The irony here is that the Obama Administration's attempts to provide stability in the life of the individual where you're guaranteed ever more just for being alive (at the cost of ever more personal and economic freedom) are so expensive to the national treasury and have unbalanced our books to such an extent that we could wind up doing severe damage to the creditworthiness of the country, the dollar could mirror the fate of the Yen in the 80s and 90s or worse suffering damage that would destroy vast amounts of American wealth and could end the reign of the dollar as the de facto global currency, and consequently could knock the United States off its pedestal as by far the most important economy in the world. Ours may be a fate like that of the British Empire at the end of World War II, except that unlike the decline in their economic and military supremacy, ours will not come from having made very important and noble decisions: to borrow exorbitant sums of money to destroy Nazi Germany and abandoning its policy of colonizing and exploiting the resources of foreign lands. Our debt will not be from having killed Hitler's empire, it will be from decades of being unwilling to be responsible and pay for the things we want in our domestic policy, and the end of American exceptionalism, unlike the end of British exceptionalism, will have been both deliberate and avoidable.

That's a hell of a double dip. Are you willing to risk the (already shrinking) value of your savings account, the #1 spot in global geopolitics and economics, the solvency of our government, and another sustained period of economic contraction so that we can have Obamacare and Cap and Trade?

Labels: ballyhoo, economics, obama, philosophy, politics

Populists left and right are supporting "Pay Czar" Kenneth Feinberg's slashing of the pay of top executives at 7 companies that have been propped up by a ton of taxpayer bailout money by about 90% as well as rules for those firms that are designed to incentivize long-term success by making sure that, for instance, stock-linked compensation is pegged to long-term stock performance, presumably to avoid short-term risks that promise a quick buck by piling on long-term systemic risk. That left-leaning folks would support any move to slash CEO pay is unsurprising, but that folks who are generally in favor of a free market are on board with this is a bit more surprising, although not particularly hard to understand.

Bill O'Reilly gave the typical conservative populist justification for this move in a discussion with Neil Cavuto, whose concerns about a slippery slope were dismissed by O'Reilly as paranoid and misplaced. The conservative explanation generally goes something like this: these executives' companies were saved by the government and therefore the taxpayers are essentially the ultimate shareholders and the government is sort of a super-board of directors that looks out for those ultimate shareholders. By making sure that money isn't wasted by paying these executives the gaudy sums of their non-government-money owing counterparts at other firms the government is ensuring that these firms run lean and mean and get paid back more quickly. The reason a conservative like O'Reilly supports the move is that he doesn't want to see taxpayer dollars squandered by lining the pockets of fat cat executives, who by inference, when they work for other firms that are not subject to government regulation, are compensated to a degree that is essentially 10-fold greater than what their performance justifies.

Goldman Sachs's notable success, its many powerful alumni in positions of public service, often regulating both their friends and former competitors (e.g. John Corzine being a Senator and Governor and Hank Paulson being the head of Treasury) and its receipt of public money (both as one of the 9 banks forced to take government capital to shore up public confidence during the crisis last fall and as a very large creditor of AIG) all mean that it is the poster child for the greedy, corrupt, firm whose executives are paid too much because of a friendly system whose rules they control. Despite being held up as one of the worst offenders against any form of social conscience, but having paid back its government obligations, Goldman is more or less back to business as usual both in terms of its business operations and more pertinently to why they're being vilified, in terms of compensation for top employees of the firm. After 2008 when they paid out very little (relative to other years) in base comp and no executive bonuses (they were holding TARP cash at the time) they will be back to paying out millions upon millions in comp for top execs this year with big bonuses too after a boom year for the firm where their stock gained ground amid a bull market. One can see why this situation pisses people off: who decides how much Goldman execs get paid? Goldman execs. The fox doesn't just guard the henhouse... he runs it.

The thing is that Goldman Sachs has been a publicly traded company for a decade now, and it while its top execs are still called "partners" the name is purely symbolic: the company is publicly traded and ultimately the "partners" are not a small group of owners who can act without oversight, but rather they act with the oversight of a board of directors and ultimately the votes of their shareholders. The situation is complicated by the fact that Goldman's IPO was so recent that some larger than normal fraction of shares are held by current or former Goldman execs, but in general at other large companies like Morgan Stanley and dozens of other huge corporations that have been publicly traded companies for a long time, the number of shares that are in the hands of people who don't work for the company is generally the large majority. If the route to profitability were to slash executive pay it seems like that plan would have been pushed for by shareholders at one of the hundreds of institutions set up in this fashion, doesn't it?

And yet there has never been a successful shareholder push at a major publicly held company, even on Wall Street, in the wake of this most recent financial crisis, which in the popular narrative was caused by the incompetence of these well paid plutocrats, where a company's shareholders to voted to slash executive compensation in a manner even remotely similar to the government plan. If it made sense though, you'd think shareholders would be all for this; money not paid out in compensation, especially at a firm without any significant capital costs like a financial firm, would be essentially pure profit and could be distributed to the shareholders as dividends. Yet even as income inequality has risen, the income of the very top portion of earners has exploded, examples arose of extremely dire consequences being the result of decisions made by well-paid, strongly recruited chief executives, still no company took this route. Many of the firms that were run by these very well paid individuals either took a big hit in earnings and market capitalization, had to be saved by government intervention, or went completely belly up, and yet shareholders at GS, Morgan Stanley or any of the hundreds of other corporations in other sectors fail to see the wisdom of demanding that their employees be paid 10% of what they have previously been paid.

Having known many Yankees fans who were generally left leaning, I find it somewhat surprising that for some reason most people I've met who oppose the discrepancy between the pay of say, a chief executive at a large manufacturing corporation and the pay of a blue collar worker at that same company have ever complained to me about the discrepancy of the pay between the players on the Yankees and say, the food vendors at Yankees Stadium. Now I have no problem with this discrepancy; I recognize that the ability to play baseball at the level of a Major Leaguer is an incredibly rare skill. Ironically, of course, their skill is at playing a trivial game, but since millions of people enjoy watching that game and will pay for the privilege, their skills generate wealth and improve the quality of the lives of people who happily exchange hard earned money for game tickets, Yankees caps, etc. But perhaps it is merely because people intuitively understand that Alex Rodriguez's ability to hit a baseball is exceedingly rare it is the reason that they do not complain that he is paid tens of thousands of dollars per hour of game time. They understand that the idea that the Yankees would try to slash costs to improve their team is ludicrous. As in real life, in Major League Baseball, human capital is mobile; an inability to pay people well will lead to a lack of talent (see the consistent failure of teams like the Pittsburgh Pirates that chronically cannot pay as well as the Yankees) and people interested in seeing the Yankees be successful on the field and at making money obviously think that their massive payroll to get and keep top talent is justified.

In the realm of finance, it seems, people are under the impression that CEOs are replaceable, a dime a dozen, interchangeable, and that systems of evaluating and pricing talent in positions of crucial importance for the success of the organization are disconnected from incentives like seeing the firm succeed or control risks. But just as sometimes the Yankees misallocate large amounts of payroll (see Carl Pavano) and such examples and tales of golden parachutes on Wall Street show that such systems are obviously imperfect and sometimes absolutely wrong, and just as the Yankees don't always win the World Series just because they pay their players several fold more than most other ball-clubs, that doesn't mean that the entire premise of incentivizing performance with pay is flawed.

For now, the fate of these 7 firms will be interesting to watch; as financial wards of the state the mobility of their top executives and the autonomy of decision-making of the firms' employees both in staying or leaving and in day to day operations is unclear; it would seem to me that the best executives, who suddenly find themselves being compensated for the foreseeable future at a level that a competitor could easily double, triple, or increase nearly 10-fold, would jump ship if they could. If they can't, their incentive to try to rise up within the organization and put forth the extraordinary effort of the stereotypical workaholic businessman glued to his blackberry seems like it would only be to maintain their reputation so that their pay will increase relative to past levels once they can either be paid in the old way by their firm once they're out from under government regulation or once they can leave their current firm.

So at best there are reasons for the best workers to try to leave the firm, for other firms to poach talent at bargain basement prices, and only weak incentives to continue putting forth full effort that would increase profits and get the taxpayers their money back that are contingent on the idea that their pay will someday be back to near what it would have been. The automakers regulated under this plan can be discounted; they will never be profitable for reasons unrelated to executive compensation. But the performance going forward of Bank of America will set a bad precedent no matter what happens; if the pay cuts decrease the quality of employees or the quality of their work then capital will flow out of the firm, the firm will be less profitable, and taxpayers will wait longer to get their money back. Further, if there is a massive flight of talent from these firms then the incentive for the government will be to somehow level the playing field and limit executive pay more broadly. If the firms exceed expectations then the government will be emboldened to curb CEO pay more broadly and more worrisome, the model of a firm "too big to fail" seems like it will be proved viable and government will inextricably become more intertwined with business.

The latter scenario seems very hard to fathom, however, and I doubt that this experiment will do anything but prove that while imperfect and probably permeated by a significant fraction of misses, the system of rewarding outstanding performance abilities held by a limited number of highly talented individuals with a a very rare skill with outstanding compensation will be vindicated. While no one questions that Alex Rodriguez has a very rare skill that is therefore worth very high compensation in a free market, seeing why some white guy in a suit is so special is less easy to accept; if it weren't him it would be somebody else, it seems, but the number of individuals with the intelligence, experience, leadership and interpersonal skills to successfully create business strategies for an extremely complex business like an investment bank that deals with billions of dollars daily is few, and those who do so successfully must be compensated well to maintain competitiveness in a global marketplace. While there will be unsuccessful individuals and they should be sacked, while it's no more fair than the gaudy sums that Alex Rodriguez is paid for playing a children's game very very well, you should be paid a competitive rate if you possess the ability to successfully helm a company that facilitates trillions of dollars of global capital flows in a given year and creates massive amounts of wealth for those who work for the firm and, in the case of say, a successful investment bank or fund management firm, for the businesses who are their clients or the investors who trust them with their money, often including large institutional investors such as state or union pension funds.

Is it justified? It depends. But while money talks, it also walks these days. If the U.S., for instance, were, hypothetically, I stress, to cap CEO pay, it seems likely that foreign firms like UBS and Deutsche Bank would feel that the skills of the executives at competing firms like Morgan Stanley and Goldman would be valuable enough that they would pay them a large amount of money to jump ship. It's like the Yankees and Red Sox, now, but we could make it like the Yankees and Pirates. Why we would think that would be the way back to competitiveness, I have no idea.

One final comment, to paraphrase a quote from the man behind this decision to cut CEO pay at these government indebted firms, Special Master for compensation Kenneth Feinberg, he says he doesn't want to be called the Pay Czar because that suggests imperial powers whereas his job has involved months upon months of negotiations and meetings and haggling and this number and plan were reached in a process that resembled a negotiation. There's only one problem. The final decision rested in the hands of one Kenneth Feinberg, and while the companies can appeal this decision, the appeal goes to... Kenneth Feinberg. That sounds like an imperial power to me, no?

Who is John Galt?

Labels: ballyhoo, baseball, economics, government, politics

Two hundred twenty-five individuals possess half of the privately held wealth in the world, at least that's what two protesters on TV said as a reason why capitalism is bad. The two young women were protesters of the G20 summit and the system of mixed markets and government regulated global capitalism that has, through historical trial and error, proved to be the worst system of capital distribution other than any other one that's ever been tried. Sadly, while I didn't catch the vocation of one of the two ladies one identified herself as a graduate student (subject left unspecified) at the University of Pittsburgh.

It seemed hard to believe that there are people who are in line to earn post-graduate degrees who say things as banal with regards to capitalism as a system as "why does anyone need to make more than $500,00 a year?" and when asked what their alternative system of wealth distribution would be they would be for not centralized government based control of the economy but "people-based distribution of wealth." It's one thing to distrust that corporations will not use power they accumulate for nefarious purposes, or to think that our country doesn't do enough to provide enough social welfare programs by taxing the rich further. But how can someone who graduated from high school and then college not make basic observations like: living standards for people generally are highest in countries that, while they have greater or lesser amounts of government redistribution of wealth, are fundamentally market capitalist systems (with regulation) and that furthermore this economic system is compatible with representative forms of democracy that generally promote the greatest amounts of personal freedom of any historical political entity? Did they not pick up the independent thinking skills to follow their thought process of "people-based distribution of wealth" and "why should anybody make more than $500,000 a year?" and get to the conclusions that people work based on incentives, that in a "people-based wealth distribution system," the incentive will be to get non-monetary perks in the form of political power, that history has shown that this inevitably leads to a powerful elite and an enslaved population and finally that if you don't let people make (and keep) more than $500,000 they won't go out and do the work that creates the wealth that make all of our lives so much better than they would be if we didn't have this society.

Sadly, too, the grad student at the end launched into a maudlin story at end of her interview about how she came from working class stock and cared about the poor and that if all America's wealth were split up evenly that a family of 4 would have nearly $200,000. Sigh. Of course, after that year where you confiscated all the peoples' money the massive disincentive on wealth creation would cause the amount of money available to a family of four next year to be a much, much smaller number. Further, she didn't seem to understand the beauty of a system that allowed her, the descendant of poor people who had struggled through life with much more difficult conditions of living and no time to ponder the evils of capitalism, to have in a few short generations to have, based on her own intelligence (such as it is) to have a life in academia where, due to capitalism, she will live in relative comfort and that her capitalist stooge grand parents would be very pleased that their toil within the capitalist system allowed her to live in comfort.

With fundamental tenets of capitalism under threat in less inane and more reasonable ways, though, the general anti-capitalist mood of the country is depressing. Barack Obama pledged today to end the cycle of boom and bust and to regulate executive pay. Why? To what end? The ability to pay large sums of money for extremely rare, high wealth generating talent is a fundamental aspect of capitalism. Is it a surprise that the Yankees and Red Sox, the two highest paid baseball teams in the Major Leagues, are going into the playoffs as the favorites... again. If CEOs are ineffective then that is a failure of the market and the answer is to empower competitors of the company who is squandering money on an overpriced CEO. In baseball it seems to work well enough; sometimes baseball players have flukish prior performance and they get lucrative contracts that are too rich for their talents, in general quite a bit of research is dedicated to allocating salary so that the competitive value added to the team is worth the outlay.

Booms and busts are another feature of the capitalist system; the worst system except for all the other ones. For all the complaint about stagnation of median wage growth--which is a valid concern, and is a symptom, I believe, of the U.S. not embracing the knowledge economy in deeds actively enough, as the financial difference between the intellectual/educational "haves" and "have nots" ever starker--the U.S. still has a higher median income (not mean, median) of any major industrialized country (I believe Luxembourg beats us.) So are there problems with the system? Of course; they're just much, much more manageable than those of any other system of economic arrangement. Financial regulation is fine, but as I've written before, it's naive to think that you can have only the boom part of capitalism. You can ratchet down the amount of risk people can take... and of course thereby ratchet down their ability to make a strong return on investment. This is a question we should have frankly; in Europe they all already had slightly less, were more equal to each other in wealth, but were still often wiped out by the global crash; Iceland--the whole country--had to declare bankruptcy. We can go to a more European, regulated, less income inequality, less free market system, but we do so by sacrificing GDP growth, innovation, speed of increase in quality of living conditions, and ability to provide fuller employment. France has been at about 10% unemployment for years. Are we so short sighted that having, for most of us in society, not lived through the Great Depression, not having felt the down-side of a system that gives people an essential quality to be free economic actors who can take risks (which--I guess people forgot this--can end badly) once they taste that dark side that manifests itself cyclically, they're ready to give up on the whole thing. They're ready to throw away the booms in order to throw away the busts. Like the girl who asks why we anyone should have more than $500,000 a year and wishes that everyone just had an equal share of the $200,000 we generate per 4 people in this country, there's very little understanding that the convictions that those who went before us and created the greatest wealth creation engine in the history of the world are being cast aside for a vision of benefits without costs that will never materialize.

Labels: ballyhoo, economics, government

In the debate over health-care, many other countries are held up as models of systems that, while not perfect, don't let anyone fall through the cracks and do a better job at avoiding preventable deaths than the U.S. The implication: keep your massive insurance premiums and plastic surgery and give me an effective, government regulated program.

The other industrialized nations seem to get more bang for their buck; across the entire 25 nations of the EU, according to an EU analysis of health-care spending and effectiveness, a mere 8% of GDP is spent on health as opposed to the US where we spend nearly double that at 15%. They don't give a tabular form of health-care spending as a percentage of GDP but it seems that in the EU15 (i.e., the Western European countries with whom our economies are most comparable) they spend more than the EU average; the text mentions that France and Germany both spend approximately 10% of GDP on health-care. However, one questions their metric on the rate of avoidable deaths when they note that

Spain and Greece, which spend much less on health care than Germany (approximately 8% of GDP), do a much better job of avoiding mortality. Similarly, levels of avoidable mortality do not always refl ect levels of spending in the newer Member States either (Newey et al. 2004).

Whoa. So the German model of state-regulated organization of people into what are essentially health-care co-ops that get treatment from for-profit providers, is inferior to the public option model of Spain, a public insurance scheme in which most Spaniards take part? Or that the newer members (i.e. countries in Southern and Eastern Europe) are better too? Not to slander places like Spain and Greece and Slovakia (from where some of my ancestors trace their roots) but would you rather have the health-care accessible in Spain and Greece and the newer members of the E.U. than that, not of the U.S., but of Germany or France? Greece and Slovakia and Spain simply don't have the GDP and general level of technological advancement that make me confident that this metric is accurate.

But let's take the into account some other issues. One issue conservatives in opposition to the current legislation proposals bring up over and over is tort reform. One they do not is intellectual property. I have not heard once mentioned that one of the few sectors of the global economy where free trade has not been on the march as we've globalized the economy is pharmaceuticals. I heard some people ask at the health-care town halls why the U.S. government doesn't use its considerable bargaining power to get us the cheap drugs they have access to in Canada. The short answer is that if we paid the same as Canada for drugs there would be a lot less money for drug R&D. As a research scientist I'll tell you the way that funding is doled out by the Federal government via the NIH, sometimes the National Endowment for the Sciences and private foundations while meritocratic and not bad attempt at reaching an optimal distribution of limited public and charitable resources looks, in scale, like absolutely small potatoes next to what even a pilot program co-development contract with a big Pharma company looks like. Furthermore, even though an academic who, say, discovers a drug does not actually own the intellectual property rights to his discovery (generally the University or other research institution that employs him does) but if that drug goes on to be profitable, even though the revenue for the institution is only a royalty paid to license the drug, and then somewhere generally around 50-75% of the net revenue to the institution goes to the department, further research funding, etc, so a small fraction of a small fraction ends up with the inventor, that can still be enough to make that guy a millionaire many times over. (Note: this is an exceedingly rare consequence of becoming an academic scientist.)

At any rate, Big Pharma has that money to offer scientists with potential drugs to develop and the money to pay for licensing of basic science (they do their own proprietary, non-published R&D too) and also do things like have some of the most impressive biomedical journal libraries I've ever seen because they make a lot of money, it's true. They make most of their money in the United States market because a) it's a huge market and b) consumers or their insurers pay a lot more than people in other countries. In other countries, first of all, patent law differs and any disclosure of things like the molecular formula of a drug before an international patent is filed renders it public domain, whereas in the U.S. a placeholder can give drugs that were not developed in house at big Pharma R&D labs about a year of protection between say, publication or presentation at a conference and patenting. This is a small part of the problem, but it puts some drugs into the public domain in other countries that are profitable in the U.S. More importantly, other countries with nationalized health systems can basically make the pharmaceutical companies a pretty difficult to refuse offer (although not impossible; sometimes the most modern drugs for treating, say, a relatively rare cancer are not available in places like the UK because reasons of cost dictate that the national health-care system doesn't buy the drug) But generally, the offer is something like this: give us your drug at a price that is far below what it is in the U.S. but is still going to make you a profit in the sense that now that you've got the ability to mass produce the drug, the cost to make a pill is far less than the price on offer, or don't sell your drug in our country and reap no money at all. Let's see... the choice, after you've already done the R&D and built the factories is between: large volume of sales that generate far more revenue than they do expenditures on things like labor and materials, or have invested all that money in R&D and manufacturing and don't sell it to a huge swath of the world... Of course, that "profit" that the companies make when you look solely at the cost of making a pill versus how much the pill is sold for is not enough to both fund R&D and actually create real, net profits for the company which has to do lots of expensive R&D before it has a pill to offer,. Generally the difference is made up when companies recoup their less profitable sales with higher prices on U.S. consumers, who fortunately for big Pharma and foreigners but sadly for Americans, live in a country that does not engage in government price controls of pharmaceuticals (yet, anyways.)

We hear often asked "Why can't Americans pay what Canadians do for prescription drugs?" I think a better question is: Why can't the Canadians, the British, the Germans, the French, etc., pay as much in the future as Americans, which would be less than we pay now, but more than they do. Am I being unfair? Am I claiming that the Europeans are basically cherry-picking of expenditures made by the U.S. to sustain health care programs for a lower cost than they could if the U.S. didn't do what it does? Basically, yes. Let's take a look at, say, military expenditures. They slice a full fifth of the pie (20%) of the U.S. government's expenditures and the U.S. military frankly provides protection (sometimes literally, as in Germany and Japan and South Korea) and figuratively by providing a military option to deal with any rogue states who engage in aggressive acts for many countries whose health-care systems we can attempt to emulate like Germany, the UK, Canada and Taiwan. Taiwan is an exception to the following statement, but it certainly spends less on defense than it would if the U.S. didn't keep carrier groups in the western Pacific. With that exception, expenditures in the European and other industrialized countries by the government must be topped by the UK, which at 6.6%, spends almost exactly one third as much of its government expenditures as the U.S. spends about 4.5% of its GDP on its military; Germany spends a good bit less than a third of that at 1.3%. If we were in the opposite position and the EU spent so much on keeping the peace via military spending that we could go from 4.5% of GDP on defense to 1.3% and shifted that peace dividend to paying for health-care we'd basically have the disposable income of a country that spent a shade under 12% of its GDP on health-care, comparable to the 10% Germany spends.

The military situation is a non-sequitur, you might argue, we chose to be the global policeman or at the very least chose to invade Iraq, and at any rate we were the ones who demilitarized Germany and Japan and attempted to avoid military build-ups in other industrialized countries in the first place. True enough. A more direct issue of cherry-picking is the fact that as alluded to before in terms of prescription pharmaceuticals, all sorts of biomedical innovation takes place disproportionately in the U.S., where we spend more money per capita on R&D, driven by our more profit-driven health-care system, and the rest of the world reaps the benefits as medical devices, techniques, and basic knowledge generated in the U.S. become available for use in countries that have eliminated a powerful incentive to innovate from their health-care systems.

First of all, looking at research across a wide panel of biomedical research categories, using a metric of average impact of the research done in a field in a country (specifically "transferred Normalized Mean Citation Rate"--the world mean is 0 as will become obvious), the U.S. out competes every country in the world, with a mean of .155, versus a respectable .118 in the UK, but of the 6 large, industrialized countries in the study (the US, UK, Germany, France, Italy and Japan) the next highest value is Germany at .026, followed by France at .012, Italy at -0.052 and Japan at -0.111. That America's research would generally have an impact that much greater than Germany, original home of Merck (now an American company, natch) and once the land whose language was the lingua franca of science says quite a bit about their innovation. This measure in the field of Clinical Medicine is even more striking, with only the UK being competitive with the U.S., with the U.S. 0.165 and the UK at 0.093; Germany, France and Japan, all considered model health systems? They respectively come in at -0.029, -0.07, -0.10. Worse than the global average of scientific papers written.

OK, well, that's a metric about how good countries are at writing papers. What about the whole kit and caboodle of biomedical research. Glad you asked. Two countries in Europe outspend us on R&D as a percentage of GDP: Sweden and Finland. They spend 4% and 3%, admirably, compared to the U.S.'s 2.7%. The only model system frequently mentioned that comes close the U.S. is Germany at 2.4%, but as shown above, their bang for their buck is questionable. The study from which I'm quoting these new figures found something similar to Hu and Russeau, which is that per billion dollars of R&D dollars spent Germany generates 1200 and change citiations, compared to over 2600 for the U.S. Research spending in the original 15 EU countries (essentially Western Europe plus Greece) is 1.9% of GDP throughout the region compared to America's 2.7%, with generally less productive research, with 2665 citations per billion dollars spent in the U.S. versus 1723 for the EU-15.

This doesn't explain all the discrepancies but it points to the sources of some of them. We spend more on R&D because the market demands it as opposed to the state mandating how much we get. We get more bang for the buck because, heavily regulated though it is, U.S. research Universities and hospitals still are under more consumer pressure than their European counterparts to innovate. We pay more than we should because of a trade status quo where Pharmaceutical companies make up for nationalized price controls in the rest of the world by making up the difference by tapping the U.S. consumer. In other countries more regulated economic systems provide for less disincentive to becoming a doctor relative to the drop in pay (doctors in Germany and Japan make about half of what their counterparts in the U.S. do) because there is less income inequality. Regardless of how you feel about income inequality, it seems axiomatic that in a country with greater income inequality implementing cost controls to reduce the percentage of GDP spent on health-care by lowering doctors salaries will, ceteris parabis, mean more people dissuaded from becoming a doctor than in a country where more lucrative options are less plentiful and less profitable.

Health-care must be reformed. No one disputes this. But I question whether it's fair to argue, by implication alone, that the reason the U.S. spends so much more on health-care as a percentage of GDP is merely that we are lining insurance company CEO's wallets with profits. A number of structural factors mean that we spend more on research, are more productive in that research and therefore drive medical innovation in the rest of the world, and the cost of that innovation is therefore born disproportionately by the U.S. Similarly with prescription drugs, a trade regime that allows for price controls around the world leaves the U.S. consumer in a position where they pick up the slack for the a world of patients who are free riders. Simple structural differences in the countries like what a young person looking to make a career's options are, and the financial reward they will receive in relation to the amount of work they will do if they enter a health-care profession versus another profession all make U.S. health-care more expensive. We could nationalize health-care and control costs; in this country, though, doctor shortages of the type seen in Canada and Germany and Japan where their economic structures and socioeconomic and demographic pictures are more egalitarian and homogeneous than ours, would probably arise, and probably be worse than in those countries. In other words, before you say that big, industrialized countries aren't in financial ruin because they have more highly regulated health-care structures (and they spend less money, too) jumping to the conclusion that if we adopted the same structure that we could afford it (and the corollary that we'd actually save money) is far from obvious to me. I'd like to see these questions addressed before analogies to systems in other countries that differ in so many ways from our own are tossed about.

Labels: ballyhoo, economics, health-care

Today in a speech that was basically a stern lambasting of Wall Street that described similar regulatory structures to those he's proposed before, Obama claimed that Wall Street would retain robust "choice and competition," a phrase we've heard quite a bit recently in the health-care debate. The irony, to me, when the phrase is used in that political context is that some new government run system of providing health insurance to those who either are unemployed and don't qualify for a government subsidized program like Medicare or Medicaid, or don't get insurance through their job and can't afford or choose not to buy health-insurance, often have few choices in private plans to buy and have to "pay retail" for an individual plan precisely because Federal and State governments restrict competition between insurers to sometimes a very large extent. At the very least, plans must be provided by an in-state provider, the provider must cover a minimum list of procedures, the composition of which is subject to the manipulation of special interests (should your health insurance be forced to cover your Chiropractic appointment?) and in some states like New York, "community rating" in addition forces a maximum price differential for the most and least risky insurance buyers in order to pool the risk.

Now the community rating laws work to increase access to insurance--the net income on a young healthy person who pays a minimum premium helps subsidize the premium of an older, sicker person who the insurance company knows would be a net loss at almost any premium rate. Competition in the general sense when talking about economics is the idea that when a market has a level playing field and there are low barriers to entry, the more players in a market there are the more pressure there is to drive down prices to win market share. The idea that this would be the effect of a public option is hard to fathom, and the result seems to be to redefine the meaning of "competition" as that the existence of a public option that could in theory run at a loss and even if it didn't exist, if it could be "triggered" if insurance companies don't mean targets, is that "competition" means providing monopoly pressure to get all insurance companies to provide uniform coverage that satisfies political objectives of expanding coverage, etc.

Similarly, Obama wants to maintain competition and choice in the financial sector. Unfortunately, recent financial history seems to show a problem with robust competition in financial markets and the kind of sensible regulation that Obama wants to prevent this type of crisis from occurring again. Again unfortunately, if anything seems to be apparent from the history of bubbles, from speculators driving the price of some tulip bulbs above that of a house in 17th century Holland, to a rogue Scotch murderer bankrupting the French Monarchy by selling colonial estates on Louisiana swamp land to having two real-estate speculation driven crisis in about 20 years the ingenuity of greedy people to avoid the gaze of financial regulators seems boundless. And of course, greed is a part of human nature that will not go away after this economic crisis.

More than a year ago, before Lehman was allowed to collapse, Hank Paulson, then Treasury Secretary and former CEO of Goldman Sachs (a rival of Bear Stearns) had two conflicting problems that would define the initial phase of the crisis. First, he didn't seem to understand both the scope of the interconnectedness of the various "shadow banks," that is, financial institutions that held deposits and loaned out money to make a return on investment that were not commercial banks, and also failed to perceive the degree to which their mortgage-backed securities were vastly overvalued. His second problem was that he wanted to avoid a problem that has been and remains a fundamental tenet of management of risk management in a system of interconnected entities: moral hazard. As Americans learned in a visceral manner, moral hazard is the risk that if an entity that takes an overly large risk is about to go bust but is saved by intervention from overseers--in the case of Bear the Federal regulators at Treasury--in other words, if regulators act on the belief that some group of entities are "too big to fail," that action sends a strong message to similar entities that they will not be allowed to fail either. This creates perverse incentives for, in this case, the firms in the shadow banking sector not to perform sufficiently rigorous and conservative internal risk management. While ratings agencies had given nearly worthless paper grades of A, AA and AAA, truly prudent firms would not have relied on a few outside opinions and examined the fundamentals of these securities, especially before betting on them in such a highly leveraged manner (i.e. with borrowed money, meaning that if the investment goes completely belly up then the loss can exceed the amount of money that was put in by a large multiple.)

When Bear was stuttering Hank Paulson tried to split the difference by basically trying to create what he thought was a bailout that no other business would want to undergo; a company whose share price was about $60 a month before its crisis was told it was not going to be allowed to go bankrupt by Treasury, but instead of being bought out at the taxpayer's expense at what people were predicting would be something like $20 a share, the grim news was that the buyout would be $2 a share. People with large positions in Bear had significant fractions of their portfolio wiped out. If Bear had been a single rogue company that had been betting on these treasury backed securities and other companies had been more responsible, perhaps this bailout nobody else would want would have circled the square of avoiding moral hazard and allowing Bear to survive and eventually recover.

Of course that didn't happen. Many other firms were staring oblivion in the face. A year ago today, due to the lack of understanding of the interconnectedness of the banks, Paulson did not repeat the action with Lehman. Merrill Lynch had to have a hastily financed sale to Bank of America to avoid completely evaporating. At this point Treasury realized its colossal error and prevented one of the largest insurers in the world, AIG, from collapsing, and forced a number of other firms to take government money to back up confidence that the firms were solvent. In further actions the Obama government would attempt a Keynsian injection of a similar but slightly smaller scale to the original emergency backstop of TARP and diverse firms in other sectors of the economy were further deemed too big to fail for political reasons: some banks but most notably GM, which has essentially been nationalized.

Meanwhile, in the year since the crash, a vague sense of normalcy (and salaries) have return as Wall Street has rebounded and markets have recovered. Obama's scolding of the businessmen who he addressed today, unfortunately, is perhaps the best he can do in terms of trying to circle the square that Paulson could not. Overly burdensome regulation could stifle one of the most productive sectors of the U.S. economy; while liberals might glee in the idea of the downfall of Wall Street, without the income taxes on the high incomes of individuals in a sector of the economy that in the boom years of the early 2000s was 20-30% of the economy financing government programs seems even more problematic. The idea that we can eliminate systematic risk by limiting executive compensation or with more moderate reforms (like the type Obama has proposed) like increased transparency in hedge funds or limits on the degree to which investments can be levered might be true; the idea that these reforms would both have a benign effect on the financial sectors' profitability and perhaps more importantly prevent systematic risk in the future are overoptimistic.

In this global economy capital can easily flow out of the country in order to seek a greater return if American funds are limited in their suite of investment tools, and if a new regulatory structure is backward looking and regulates the sectors of the economy where high-risk, high-reward strategies were tried in the past allows the same high-risk, high-reward strategies to simply flow somewhere else, then you've simply shut the barn door after the horses left. One more problem is that a contributing factor to the crisis was that the mortgage was far from free--two of the biggest nominally private firms that were government creations, Fannie Mae and Freddie Mac, combined held over 50% of U.S. mortgages and contributed to the sense that the whole panoply of financial institutions could not be allowed to fail. A year in retrospect, some argue that this might not have been entirely true. While the depth and severity of the crisis probably would have been significantly worse if the government had simply sat and watched as huge firms holding a large fraction of U.S. mortgages went broke, the fact that massive spending, monetization of debt, and domestic reforms have trumped reform of Wall Street's rule in the wake of the crisis signal that for all the talk of getting tough with Wall Street that the end result of this once in a lifetime crisis might be little more than talk.

I'll be honest: it's talking out of both sides of your mouth to oppose regulations that meaningfully eliminate systemic risk and to outright oppose any further government intervention into the financial sector: if the government hadn't provided a backstop for the financial sector then much of it wouldn't exist anymore to have gotten back to generating large revenues again. This is a case where bi-partisan efforts can truly be useful, if we come at the problem from the perspective that capitalism is generally a good thing, but like any system that allows actors significant freedom, is prone to those actors either intentionally breaking the rules or making stupid decisions. If the government can recognize that the point is not to punish Wall Street for its perceived sins but to try to fix problems where they exist and to try to allow Wall Street firms to thrive while decoupling their actions from a system where risk is so intertwined and massive that a speculative bubble in one firm can trigger a systematic collapse, change, of the good kind, could result.

Labels: economics, government

It's often accused that us anti-big-government, little-L libertarian, classical liberal, currently anti-Democratic types are little more than stubborn, contrarian obstructionists with no new ideas to bring to the table regarding how to solve the nation's problems. And to some extent that's true; personally I would rather not see any new spending on health-care until the ratio of debt to GDP stops being in unprecedented territory. According to the CBO's most recent projection of what will happen as Fiscal Year 2009 draws to a close on October 1 and the President's 2010 budget goes into effect, we will have a public holdings of government debts equal to 56.7 percent; to understand why this is in uncharted waters in post-Depression, post-WWII history, the last time public debt as a percentage of GDP was this high was as the country paid off its massive war-time debts (buy T-bills, remember?) during the prosperous 1950s, in 1955, if you believe the data in historical table 7.1.

Some frightening things to notice here... I don't know precisely when the aforementioned compilation of historical economic statistics was compiled, and the different tables could have been made at different times, but you'll notice it wasn't released, in total, until some time in 2008, and that the table for public debt only includes more or less status-quo-ante projected data for 2008 as well 2009 which indicates to me that before this table was compiled before the crash. Of course, the folly of projecting only the middle of road estimate becomes obvious here--projected public debt holdings as a percentage of GDP were estimated to top out in fiscal year 2009 (i.e. 10/1/2008 - 9/30/2009) at 39% and then start dropping next year. The real data as shown in table 1.1 of the newest CBO projections are 56.7% for 2009 and 64.9% for 2010, which are probably underestimates since while revised downward from the last budget projection the CBO is still using rosy GDP projections, such as a gain of 2.4% for next year.

See why us obstructionist, "Dr. No" types worry about completely overhauling, in toto, 16% of GDP and making much of it liable to be paid for by the government, before even hearing about the specific plan? Public debt to GDP is a proxy of debt to income, equivalent to something like your the ratio between your after-tax income versus your total debt, and I don't know many folks earning $50k a year who'd be comfortable holding roughly $30k in debt, which is where we're heading, and beyond, as a country, without even accounting for the cost of whole-cloth health-care reform. It's scary that the last time the percentage of GDP accounted for by public debt, in 1955, it was during a time of sustained economic expansion, with that number shrinking dramatically each year after we had financed, on credit, a very expensive and necessary endeavor, World War II. The number had topped out at 120% and yet a decade after the war was over we had paid down that debt and grown our economy at such a rate that we wouldn't hit the same level of debt again until the worst recession since the Great Depression combined with the most spendthrift peacetime Administration since--well, ever. Technically, we are at war, but if you look at a breakdown of the budget and what has added to the debt, the total costs thus far of both the wars in Iraq and Afghanistan are roughly the size of the stimulus allocation, and it is costly domestic programs to both try to jump-start the economy--defensible in principle--and to for some reason enact costly new reform programs at a time of fiscal crisis that has caused this budgetary instability.

Perhaps it's time to rein in the spending when the Congressional Budget Office notes, buried in a footnote which belies the the insane warning-bell, blinking red light, the submarine hull is about to be breached alarm blaring that should be set off in every citizen's mind when they read things like this (see note 4):

Increased deficits and the attendant increases in interest payments must be offset by policy changes at some point or interest costs would compound relative to output over time, driving the debt-to-output ratio ever higher (under the assumption, which CBO’s findings incorporate, that the rate of interest on government debt is higher than the rate of economic growth).

So before we even get to health-care, think about that: increased deficits must be offset by policy changes at some point or the debt-to-output ratio will grow ever higher, which is essentially walking off into certain economic and national annihilation: if we are no longer a serious creditor, not only will the value of the dollar and all dollar-denominated savings plummet, but the very country itself could find itself without the money to operate; if at some point there's no interest rate at which someone with enough cash to finance our annual deficit will take a risk on us as a debtor since we've proven so fiscally irresponsible--and just imagine how fun watching interest rates rocket up in a matters of weeks would be--then what's the Administration's plan for paying for essential government services? Do you stop paying soldiers or do you stop paying out Medicare and Social Security pensioners? In other words, we've got to make sure that we don't buy something we can't afford and thereby lose what we've got.

But beyond the fact that adding to deficit spending at the moment seems absolutely insane and reckless beyond belief, let's talk about health-care reform. Obama talks about how the system is "broken," but most people are happy with their current care, and those who aren't are not denied care, even for a sore throat, if they walk into an Emergency Department at a hospital and not their GP's office. Is that a good thing? No, it is not; it is a problem. Is there any country in the world that does not have problems with it's health-care systems? No, there is not. Canada and Britain, the two most fully socialized, single-payer systems with which Americans seem to be remotely familiar, have long waiting lists for "elective" procedures like knee replacement or drug treatment, which as at least one woman in a video I saw needed both after gradually getting addicted to painkillers while spending 16 months waiting for them to replace her bum knee with essentially no padding left in the joint. In other countries, other problems exist; in Germany doctors unions--in a country already much more used to income equality and unionization--are complaining that their wages are too low, which they almost certainly are, since a main feature that makes Germany's public health-care system more financially sustainable is capping doctors' pay. In an increasingly globalized economy where many brilliant people are currently drawn to America, would you like to shut off that flow and have your quadruple bypass done by somebody who wouldn't be a doctor except he got into med school because his more competent peers decided either not to come to this country in the first place or not to go to med school and instead went to work at Goldman Sachs? In Japan doctors don't get paid as much as here, but there's less anger about it than in Germany; they are, after all, almost all in private practice. However, since the government mandates how much they can charge for any procedure--based on patients' ability to pay, not how much it costs the doctor to discharge the service--almost all of these clinics are in the red. Government bailout, anyone? And then my favorite foreign health-care problem comes from Taiwan, where a rapidly industrializing Asian Tiger economy developed its health-care system essentially from scratch in the mid 1980s under the guidance of the leftist-academic public health scholars who probably believe the same things and in some cases are probably the same people who had a role in crafting the ideas behind the goals embodied in the current Obamacare plan(s): in Taiwan, health-care is "free," doctors are government-paid, but instead of rationing care (directly limiting the supply of health-care) or capping procedure prices or doctor compensation (indirectly limiting the supply of health-care) they have gone after the demand side of the equation. How can you make people demand less health-care, you ask? Well, if you go to see the doctor an inordinate amount of times in Taiwan you, no joke, get summoned to talk to a government bureaucrat about why you're consuming so many limited resources and to tell you not to go to the doctor unless it's absolutely necessary. Of course when it is absolutely necessary, and if there aren't enough surgeons, say, then things like elective surgeries are rationed.

So here the problem is, in contrast to the rest of the industrialized world, not that there's not enough health-care, but that its quality is unevenly distributed. The wealthiest can get every life-prolonging preventive measure they can afford, paying for full body scans to look for cancer, just in case. People with good jobs that provide either very good or not-so-good health-care plans at least can get things like colonoscopies. The young often don't have insurance, but many of these people either are poor enough to qualify for Medicaid, or have enough discretionary income to afford private insurance (which for a young, healthy person is relatively dirt-cheap, at least if they live in a state without community-rating.) Those with pre-existing conditions often can't find an insurer who will take them at anything less than an astronomical cost, since the likelihood of having to pay for expensive doctors visits is essentially 100% for the insurer. And of course, those who are both poor and unable to navigate the bureaucracy and sign up for Medicaid wind up using the Emergency Room as their GP, a situation that is bad for everyone, as Emergency nurses shouldn't be wasting time on triage of non-emergent patients and ER docs shouldn't have to treat strep throat.

But the American people have lived with this system for years, decades, even. Why is it essential to overhaul it--other than for political reasons--in one fell swoop? Why can't we attack the problems incrementally? There are several main problems that could be addressed one by one, and we could see the results of the fixes as we try to navigate towards a health-care landscape where a country as wealthy as the U.S. is able to provide a minimum level of care for those who cannot afford it themselves. First, a huge cost-cutting measure we could try would be tort reform; malpractice awards could be capped, the incentive structure for attorneys to win massive settlements could be changed, or the burden of proof in malpractice cases could be made higher; any of these reforms seems like it would be likely to cause the number of successful, massively expensive lawsuits to drop. This would be a double-win, since it would directly lower the rates that doctors pay for malpractice insurance--which gets passed along to the consumer, which of course gets passed along to his insurer-- but it would also limit the practicing of "defensive medicine," where expensive tests are ordered not because they are really necessary, but because they provide cover if something goes wrong and a malpractice suit gets filed.

Second, we could go about reforming insurance so that it acts more like other forms of insurance. Think about how absurd it would be if car insurance or homeowner's insurance worked like health "insurance." If you had to get a new tire because you hit a pothole, instead of just paying for the tire, you'd pay a $10 copay and file a claim with your insurance company. Also consider if you could sue the mechanic if your car had a problem regarding its wheels or tires later. Think about the incentives that would create; the mechanic would not only replace the tires, but check your alignment; if he found that your wheels were misaligned and needed to be re-aligned, would you have had any incentive to question whether his price for checking your alignment and then aligning the wheels was competitive with other mechanics, let alone a reasonable price relative to the time and materials he needed to use to perform the service?

The majority of Americans are healthy. Think about what would happen if Americans, instead of having their health-insurance paid for by their boss and getting a smaller take-home paycheck, if--like for car insurance or homeowners' insurance--they simply paid for it with the money that businesses could add to their salaries if they didn't have to buy insurance packages. Like car drivers, it might be necessary to compel people to buy insurance both to pool risks and to avoid free riders, but that would cost much less than providing a government umbrella over the whole system. Imagine, too, if, unless you got some very expensive illness or injury that required many, expensive treatments or hospital stays or surgeries, you paid out of pocket for your annual physical or appointment with the dermatologist to check out and cut off a mole. You'd be much more cognizant of what services you were consuming, what they cost, and would have a vested interest in getting efficient, quality medical care that wasn't full of charges consisting of needless tests and outrageously high overhead due to things like exorbitant malpractice awards and outright medical insurance fraud. This would serve to drive prices down, as doctors who could provide a checkup for less money and still turn a profit would see more patients come through their doors, and there would be a political constituency to fight the trial-lawyers persistent ability to lobby congress to prevent any sort of tort reform.

Health-care insurance would therefore become dis-attached from one's employer, would cost less as prices were driven down and claims for all but catastrophic care were eliminated. Once you let the free market bring some more sense to the incentive structure for determining which services are provided and how much they cost, you could then use government subsidies in a much more targeted fashion to help equalize access to coverage; if you could successfully drive down costs, subsidizing the purchase of an insurance plan or reimbursing people for primary care, especially preventive care, for the lower class and lower middle class would both require much less money, it'd be much simpler. Consider food-stamps or now EBT cards; neither are free of problems; both are vulnerable to fraud. But what do you think is the more cost effective way of subsidizing food for the poor? Giving someone a card that they can give as payment to privately run supermarkets and trying police fraud in that system or creating an entire government bureaucracy to set up "free" supermarkets where the poor could "shop" and then have the government look at how much they bought, how much of their subsidy is left, etc.? Think about the overhead that it would take to create an entire shadow system of government run supermarkets that only serviced the poor and weren't open to other individuals to come in and try to pay for things with cash. With health insurance there's no prominent public building like a bizarro supermarket where everything's free but only the poor can shop there, but the institutions of Medicaid and Medicare, and possibly the "public option," all are real analogues to the imaginary bizarro supermarket. There's nothing wrong with the wealthiest country in the world subsidizing the health-care of its poorest citizens; it's down-right noble and a good idea. But I quarrel with the idea both that this is some fundamental human right--just exactly, how much money does your "right to health-care" entitle you to have spent on your behalf--or more importantly that massive, whole-cloth government reform is the only way to attack the problem of unequal access to care.

Those who are lobbying for the defeat of Obamacare do not necessarily hate the idea of reform, but the idea of attacking this with a one-off, whole-shooting-match reform of our entire health-care system is both not a good way to get better results for Americans regarding health-care, and it's not something we can in any way, shape or form afford to pay for right now.




Unless you're willing to go the route which Canada went and pass a law--until it was recently struck down as Unconstitutional--which bans people from buying health-care outside of the government system (thus thriving clinics in places like Buffalo and Seattle, which are close to wealthy Canadian population centers) then you're always going to have a problem of disparate care between the haves and have-nots.

Labels: economics, health-care, politics

President Bush expanded entitlements (Medicare Part D, No Child Left Behind) and also increased "discretionary" (i.e. not annually included in the budget) by more than any President since LBJ.

Obama avoided that relatively meaningless buzzword by getting the stimulus included in a legitimately passed appropriations bill. No matter.

If you enjoy things that make you feel like gouging your eyes out both out of boredom and a dawning sense of horror that we are in the midst of what is, if this table is correct, a two decade, bi-partisan plan to screw over ambitious, hard-working individuals in my generation, then you'll just love the Congressional Budget Office's projections of national debt for the next 10 years considering only the merely massive fiscal irresponsibility of George Bush as well as the new projections after the truly epic display of fiscal irresponsibility by the Obama Administration, which has generated something like $100 billion dollars in excess debt 10 years down the road for every day they've been in office. Forget the Administration setting up control over financial executive pay, by 2019 if the projections on this chart come to pass then notice that just to stay solvent the government will need to generate a few trillion dollars in revenue a year to avoid a positive feedback loop where debt grows in a non-linear fashion and drives the country bankrupt. Good old massive tax hikes on those who are either new to the work force, or who will enter the work force in the next few years when they are their peak earning potential will be necessary.

So, this is bully for you if you dislike unequal income distributions, since even people making lots of money in 2019 will not be taking very much of it home; no one will be jealous since we'll all be poor, having financed the Baby Boomer's twenty year program of fiscal irresponsibility.

Also note that there is only one GDP projection, and that in the table the CBO projects that GDP will recover relatively quickly and robustly, and that running up utterly massive debts (over 80% by 2019 under Obama's new spending plans) will no have any causal effect on the size of national GDP. This seems like a valid assumption, but I'm no economist; I know that there doesn't trend to be a correlation between an individual's income and their credit score.

Finally, I'd like to comment that since I desire to be an academic scientist, the source of my salary will ultimately be the government, which reminds me of the old maxim "If the solution is virtually impossible, you're better off being part of the problem."

Labels: economics

Henry Ford, in 1938, after the Anschluss between Nazi Germany and Austria sealed the fate of Europe, was awarded the Grand Cross of the German Eagle by Adolf Hitler, who modeled Volkswagen on Ford's company and considered Ford a personal hero.

I perhaps, am as bad as Hitler since, half-Jew by blood that I am, Henry Ford is perhaps the historical figure whose intellectual output I most admire. Ford was not the most intelligent man in history; I'm sure on an IQ test, he'd probably lose to Karl Marx. Hell, Marxists throughout history have often been highly intelligent.

He was not a particularly "good person" in any sense, either. While he did promote some social welfare programs, he mainly abandoned them. I don't think, in general, he personally cared for the personal welfare of individual strangers, and from reading his 1922 memoir, My Life and Work (more on that in a minute) the tone suggests, to me anyways, that he was probably not very personable. He was on record as an anti-Semite and he was often simply wrong about politics, and he published a newspaper that contained within its pages not just forged material impugning Jews, but material that Ford should have been smart enough to deduce was clearly forged. I fault him more for his lack of skepticism and empiricism in printing the Protocols of the Learned Elders of Zion more than for his anti-Semitism. Every man has a right to hold beliefs which are abhorrent to me. But why would I admire a man who specifically held an irrational hatred for my own ethnic kin?

Because if you take the time to read My Life and Work, which is not really an autobiography or memoir, you will understand (in my opinion) fundamental truths about the goodness of America's economic and governmental systems. You will see who is really exploiting whom in this world. And most importantly, you will be given the tools to use reason to make razor like slices of induction and deduction to slay any unjustified policy proposal, any fallacious argument and of course most easily stupid and morally awful ideas that Ford himself held plenty of (I didn't say the man was immune to cognitive dissonance.)

Reason is the mental tool that makes us better than the other animals, and learning how to reason, and to reason correctly, as I contend this book teaches implicitly (and sometimes explicitly) provides much more wisdom than often times comes from very intelligent people who have had spent decades learning the intricacies of a very complex, but completely erroneous, theory. For example, I don't doubt that in a debate of Marxist dialectics or the schools of foreign policy thought that have ebbed and flowed into and out of favor with American Presidents that Noam Chomsky would trounce me. Yet without all of his intelligence about foreign policy and marxism and neo-marxism, I feel confident that standing on the shoulders of giants, the conclusions about the world around us I come to are more wise and of more utility than the intellectual detritus that Chomsky swills and regurgitates with porcine intensity. I think Chomsky provides an interesting intellectual counterpoint to Ford; his output is, in its volume and intellectual depth and breadth, totally in another zip code from Ford's. Ford simply wrote what he presumed to be a simple memoir justifying all of the work he had done with his life. Chomsky's "work" was to traffic in all manner of complex ideas. Both men are blatant anti-Semites and I think are about equally reprehensible as individuals. Ford, however, contributed much more to the well-being of his fellow man than Chomsky ever could conceive of in all his utopian fantasies by actually getting out there and doing things he knew were wise, if not justified by someone with a Ph.D. in whatever useless subject Chomsky's Ph.D. is in.

He outlines how, and more explicitly and in more plain language than another one of my heroes, Adam Smith, not simply why capitalism is the best economic system but also in plain words how that works. Understanding how capitalism works is perhaps more important than understanding why it works.

I will try to put as succinctly as possible why I think this book is perhaps the most important book I have ever read: You can learn from an economics text book, that supply and demand determine an equilibrium price that the market will eventually reach (and freer and more liquid markets will reach equilibrium more quickly.) You can be told that this is a good thing, that there are no other economic systems that work better, and even be shown why government mandating supply and demand is less efficient. But Ford never really dwells on theory; his words are almost always firmly rooted in either facts or simple to understand principles. Despite this form of expression, you come away from reading his book understanding how the free market works, why the ingenuity of a anti-semite crank who had a mutual man-crush with Hitler who simply strove to build cars is what makes Americans unique, in their entrepreneurial spirit, why America has been more prosperous than all the other industrialized nations, what the nature of American exceptionalism really is (I'm not sure that American Exceptionalism and the German concept of "Fordism" to which Hitler subscribed are not identical) and finally why something as mundane as figuring out how to optimize supply chains leads to man constantly gaining more and more of that most precious resource, time not spent providing for ones' means to exist, but time spent enjoying existence.

Consider that a book that is often times about how supply chains logistics work, some esoteric discussions of small pieces of economics that are occasionally wrong, and is, formally, a description of an automobile company correctly predicts and explains why global free trade will eventually lead to improved quality of life everywhere, and which starts off with two paragraphs so grandiose that you can almost not believe that they are the preface to a book with chapter titles like "The Tractor and Power Farming."

INTRODUCTION

WHAT IS THE IDEA?


We have only started on our development of our country--we have not as
yet, with all our talk of wonderful progress, done more than scratch the
surface. The progress has been wonderful enough--but when we compare
what we have done with what there is to do, then our past
accomplishments are as nothing. When we consider that more power is used
merely in ploughing the soil than is used in all the industrial
establishments of the country put together, an inkling comes of how much
opportunity there is ahead. And now, with so many countries of the world
in ferment and with so much unrest every where, is an excellent time to
suggest something of the things that may be done in the light of what
has been done.

When one speaks of increasing power, machinery, and industry there comes
up a picture of a cold, metallic sort of world in which great factories
will drive away the trees, the flowers, the birds, and the green fields.
And that then we shall have a world composed of metal machines and human
machines. With all of that I do not agree. I think that unless we know
more about machines and their use, unless we better understand the
mechanical portion of life, we cannot have the time to enjoy the trees,
and the birds, and the flowers, and the green fields.

If I were allowed to make one change to generic American curricula, I would have students who always and everywhere read a rather lame attempt at both literary craft and political correctness, To Kill a Mockingbird, and force them to simply read this entire book. There need be no book report, but simply a quiz that asks questions about the content of the book that anyone who carefully read the book would easily pass. I think this would do more than any other single book possibly could to instill in them at least the concept of why we should have the political and economic systems that we have (or I guess I should say had, prior to say 2007) but also the more intelligent a student is and the more they think about the book, Ford's own life, and think about what the book says, they will take away fundamental concepts about philosophy, reasoning, empiricism, logic, and all sorts of other great precepts.

Basically, to really put it succinctly, I think this one tome by Ford, and a freethinking mind, are enough to at least suggest the ideas that are handed down as dogma from everyone from Socrates to Hobbes to Milton Friedman. And it can be appreciated (on some level) by every single 9th grader. To me that's quite a book, and quite a man who could write such a book without even intending to.

Labels: economics, philosophy, usa