Harry Reid announced yesterday that the "Public Option" was back in play in the Senate, but his apparent ace in the hole (pardon the awful Nevada gambling puns) was that states could opt out of the public option if they so chose. What wasn't outlined was how states would opt in or out (would it be an executive branch decision? Would opting out or in be a permanent decision or could it be reversed if the state's government later changed hands to elected officials with a mandate for changing the state's status? Could you opt out after you opted in?) but a much more fundamental problem makes me question how this plan is in anyway practicable. First, to dispatch with the obvious, the "opt out" plan is a clear political triangulation, which might not work anyway, meant to satiate progressives who think the public option is the whole point but to give political cover to blue dogs who, if the opt out plan actually made sense might be able to sell it at home as having gotten health-care but having not forced the most heavy handed government regulation on their constituents.

The problem, though, is this thing called the Constitution. Specifically the very first clause of Article 1, Section 8 which gives the Congress power to levy taxes and excises, but which specifies that "all Duties, Imposts and Excises shall be uniform throughout the United States."

I'm not sure that the details of how the plan will be paid for have been laid out in their final form, but the gist is a penalty for those who can afford insurance but don't get it (which Obama argues is not a tax--hard to follow his logic there) but much more importantly a tax of at least 8% on medium to large employers who provide health-care to all their employees and then an alternative tax that will cost presumably approximately the same as paying for employee's health-care for employers who don't. There will also probably be some sort of tax incentives and penalties for small business owners, too, and there might also be other taxes like something of a luxury tax on "Cadillac" health plans that provide too good of coverage and cost too much.

It's hard to understand how states could allow their citizens to opt out of these taxes; I'm no lawyer but it seems like a pretty clear breach of the aforementioned clause of Article 1 Section 8 to not have these taxes not apply uniformly to all the states, whether they've opted out or not. Given that, if the "opt out" option is that your constituents pay exactly the same amount of taxes to fund federal health care as they would whether you've opted in or out, and the only difference is whether those constituents are eligible for Federal largess which is being paid for out of (in theory) the taxes that they're paying anyways, it seems pretty implausible that even the most live-free-or-die, libertarian polity would support its government hamstringing their state relative to all others by sending tax dollars out of the state to subsidize all the other states' ability to offer "free" health-care, and even the most principled, Federalist state government would be able to justify a policy that would be so costly to state residents.

The opt out plan is basically like an offer from one of your friends who has season tickets for a baseball team to let you and some other friends split the cost and then each get a share of the tickets. Except your friend is forcing you to pay for the tickets anyways and the only thing you can opt out of is accepting the tickets once they're bought and paid for. You might not like baseball, but since you were forced to pay anyways the offer of being able to "opt out" of getting what you paid for is not exactly the same as being able to "opt out" of the whole scheme to share season tickets in the first place.

Until I hear somebody explain how a state would not have to pay for the public option even if they opted out, or if they did, what incentive they would have that would help make up for the shortfall from their decision to opt out it seems like a completely unworkable plan. That's not to say the rest of the plan makes sense, but this feature seems particularly egregious in the way that it has not been thought out, and how a lack of detailed consideration of incentives and understanding of economics seem to make this health-care sage an exercise in political farce bound to turn into legislative nightmare.

Labels: ballyhoo, government, health-care, 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

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

I watched another C-SPAN televised town hall today and they've done the country and those who care to pay attention a huge service by doing so. The narratives that the meetings are either infiltrated by unhinged, astroturf Republican sycophants shouting down Democrats or that ACORN or SEIU or other community organizations or unions have organized a massive, concerted counterattack both overstate the case. There are varying degrees of rancor depending on the position of the member of Congress and the political leanings of their constituents, and while there is anger and there are occasionally small groups of people shouting or a large portion of the audience booing, out of turn and in anger, for the most part these incidents result in brief delay in the proceedings, not any sort of effective "shouting down" of the opposition in the sense that those with opposing viewpoints are allowed to express them--they have the microphone--after a brief outburst. Similarly, while those who support the bills seem to be slightly more organized than those who oppose it--often a number of are carrying multiple copies of the same sign, and others who are in their camp have hand-made signs, all of which are held up when the anti-reform crowd cheers in an (ineffective) attempt to create a confusing visual image. References to Nazism have not been present in several meetings I've seen, and the most outlandish thing a supporter on the right said was to question whether Barack Obama was, in fact, a patriot. Jim Webb--whose town hall this view was expressed at--said this was beyond the pale of civil discussion, although permissible under free speech, but that he disagreed with questioning our President's patriotism. Overall the impression I got was that while there is a lot of anger that the idea that the protesters on either side are political pawns or crazy people was completely wrong.

Most opponents were concerned about the general contradiction of how we can save money by expanding care to millions of new people--the Democratic argument basically seems to be that the $1000 tacked onto most folks' health insurance premiums annually to provide acute, emergency care to people who have no general health coverage is equal to or greater to the cost of both insuring them all and also paying for the subsidies of the insurance premiums for all that seem like they must go up if the whole country basically adopts community rating--health insurance companies must charge people more or less the same rate within some relatively narrow band whether they are healthy or not--and furthermore those companies must accept people with pre-existing conditions. The math doesn't seem to work out; you're going to make insurance a lot more expensive for everyone, promise that the government will pay for the part that people can't afford, and put a lot more people into the program, those of whom are the horror stories that necessitate this reform are those who will cost the most to provide care for and/or are the least able to pay for their insurance.

Jim Webb's answers to the hard questions seemed to make much more sense than the Senior Democratic leadership--although to be frank, the partisan anti-health-care reform crowd didn't seem to buy his arguments--but his arguments provided some serious questions about the role of government. His good ideas, first of all, were that he would oppose specifics about proposed legislation that seem to violate the pledge to make this plan pay for itself. Specifically, he opposed the public option at first and if it were to be implemented later to increase pressure to drive down costs it would have to compete on a level playing field and not run at a loss subsidized by taxpayers; he recognizes that this simply continues the failed premise of entitlements like Medicare and Social Security and would lead to a massive budget shortfall in a short period of time. I wasn't quite sure what to make about his proposal that doctors be compensated differently, with the general idea being that the incentives be changed from procedures performed to overall outcomes of patients--an idea which both in theory and as Webb explicitly pointed out would steer more people into becoming GPs and would reduce the disparity in compensation between hot-shot specialists like brain surgeons and the doctors in the trenches of pediatric medicine and general practice. This seems like a necessary type of reform to do something about runaway costs of medicine, but unfortunately it takes a lot more work and years of schooling and skill and is generally something that in the free market would be compensated more richly to be a brain surgeon than to be a pediatrician. Social engineering to encourage the few people who want to be doctors to be GPs by changing the financial incentives so that even when the objectively measured amount of training and difficulty of performing brain surgery is greater by a fair amount than that to become a GP that the discrepancy in pay will be lessened seems like it will lead to a shortage of brain surgeons and therefore waiting and rationing of brain surgeries. And this would apply to all acute and semi-acute specialties where the U.S. truly leads the world... orthopedic and trauma and cardiac surgery, surgical oncologists cutting out tumors, oncology in general.

At least, though, Webb claims he would not vote for a bill that would increase the deficit and laid out specific ways in which the overall cost of health-care must be cut in order for him to believe that the bill will be paid for. He also proposed some unpopular revenue sources to pay for the inevitable short-fall in savings and the cost of the new program (in addition to the $200-$500 billion in cuts to Medicare in the several bills) such as taxes on those who have really expensive "Rolls Royce" health-care plans that cover virtually everything. As a believer in markets one would think that would create a massive niche market for insurance providers who provide the richest possible coverage that isn't taxed and would therefore generate less revenue than the government will predict, but at least he's thinking about it.

As a sidebar one thing he seemed somewhat less dismissive than most Democrats of including Republican ideas that are largely structural changes that are free to the taxpayer such as serious tort reform, truly pro-competition and anti-defensive medicine provisions in a final bill. He did say that 35 states had caps on malpractice awards, but seemed to fail that this was not the only way to reduce the massive malpractice premiums doctors pay. I've found the absolute demonization of insurance companies understandable, but have found the lack of any noise about trial lawyers or any movement by Democrats to throw them under the bus surprising. Loser pays rules, limits on non-economic damages, more stringent rules for what constitutes malpractice such as necessarily including some deviation from a well-defined standard of care could all drive down the massive cost of malpractice suites which manifest themselves both in insurance costs but also in the defensive medicine that doctors practice--this seems like pure common sense--Webb was not dismissive of it, but on the other hand, he was very, very far from promising that he was going to go back and take the word of the people to Harry Reid and make sure that every member of his party would have to vote up or down on including such reforms.

In general his business experience and experience successfully running Virginia's state government with a heavily Republican legislature was clear, and we would do well to elect more officials in every branch of Congress who have actually run things and understand--apparently contrary to many on both sides of government--that waving a wand and declaring something so by fiat is very different from getting in the trenches and making something work. One thing I wonder about, though, is that as a businessman why he doesn't ask why health-care costs are rising so much faster than inflation: how much of it is it due to waste, fraud, deceitful practices of insurance companies and pharma companies and other economic players in the industry and how much is it due to innovation, increased amounts of expensive care being given, and a general rise in the number of transactions where people willingly get effective, life-extending treatment from doctors? A novel proposal he brought up that I've thought about previously but which I've never heard a serious national politician bring up is to address through trade policy the fact that government-run health-care systems in foreign countries (including in the first world) generally have price controls in place and give U.S. Pharmaceutical companies a choice: sell us the drugs at a deep discount and take a small profit margin or we'll wait til they go generic or (in some cases in some countries) circumvent your intellectual property rights and you'll get no profit. That does not spread the burden of paying for massively disproportionately U.S. based pharmaceutical R&D across the industrialized world and is why drugs cost so much less in Canada than in the U.S.--the current model is to get the U.S. market to support the rest of the world by paying retail while they all get the drugs at just above cost. He deflated the can-do spirit of liberal questioners who asked why we don't do what Canada does and use the U.S.'s massive "bargaining power" to negotiate for better drug prices like every other country. Short answer: if there's no profitable market for big pharma, they'll stop producing new drugs. This is a very good idea, but why we can't institute the trade reforms to make the Europeans pay their fair share for drugs outside the scope of a massive overhaul of the entire U.S. system of how health-care reimbursements are paid is beyond me, though.

I still see serious problems with this much less drastic, much more acceptable plan that Webb outlines the broad strokes of, as opposed to HR 3200, though. First, one of the details he outlines for driving down costs is not only having community rating but FORCING those young people who have the money to buy health insurance but choose not to to do pay for a plan (or part of a plan since the plans they can buy in most states now are much, much cheaper than they would be under the Webb plan.) This seems blatantly Unconstitutional, and in the way that gets overturned by Supreme Courts, especially conservative ones, which unless one of the 5 conservatives dies or retires, we will have for the foreseeable future. I say "in the way that gets overturned" because there are many Unconstitutional laws--say Medicare and Social Security-- for which no Federal government mandate exists in Article 1, Section 8 of the Constitution but which give people free money. People generally don't complain about those. When you go from allowing people to make a choice as a free person in a free country not to buy something (health insurance) and live with the risk, such as it is, that you might go bankrupt and be a burden to society if you got hit by a bus, to forcing them to buy such insurance basically in an indirect and somewhat bizarre form of taxation to decrease the overall risk of an average person in the insurance pool to try to keep the premiums of the new insurance companies who are community-rated, allowing prior-existing-conditions, and denying less procedures, those people are going to be upset and ask where the Constitution allows the government to force them to buy something they don't want. Can you think of another good the government makes you buy? Car insurance, yes, but the whole problem with that analogy is that you don't buy a car and drive it around on your own property... you drive it around public roads. In other words, you're taking advantage of a government maintained road network to get to useful places, your driving affects others safety, you have to be licensed to drive on that network, and therefore increased regulation is permissible. Driving on publicly funded and maintained roads is a privilege, not a right. Living and choosing not to buy insurance, thus far in our country's history, has been.

In response to the specific question of what Article and Section of the Constitution Webb would cite to justify the government's takeover of the health-care choices of virtually all Americans in some sense--even if they don't immediately change the structure of coverage for most Americans--his answer was not only a red herring and a total dodge in a format where the questioner could not respond, it was highly insulting. He responded that since this law clearly cannot be justified by the Constitution and since Medicare and Medicaid and Social Security cannot either that he "assumed that the questioner wants Medicare and Medicaid and Social Security to be repealed." The questioner was not allowed to say if they would repeal those programs if they could or--in a rhetorical stance similar to one Webb used before saying that if we were starting over that he would not link health-care to employment--would do so ideally but in the real world recognize that this is unworkable. In addition to blind-siding this woman who asked a legitimate and fair question with no chance to respond, he demands of the questioner an ideological coherence that he exempts himself from. While the questioner must by virtue of asking what the Constitutional justification is of this law support the immediate repeal of every Unconstitutional social program written into law that is essentially Unconstitutional--the good Unconstitutional laws as mentioned above-- Webb can take the stance that since a previous government passed an Unconstitutional law every future government can do so, as well, and not have to answer to their constituents. By defying her to support the destruction of other programs--by which he presumably meant to say that since these laws that many people like aren't justified by the Constitution that we've come to a consensus that the Constitution can be ignored--he essentially openly defied his oath of office: to protect and defend the Constitution. I guess they should add a codicil "unless people get free money."

Our founders were clever in writing the Constitution and they anticipated the very dangers of Unconstitutional, popular laws like Medicare and Social Security. The power of the many who stand to gain is in theory checked by the fact that the power to create a national system of social insurance or medical coverage is, in fact, not among the powers listed to Congress and therefore is reserved to the states and ultimately the people. Unfortunately, previous generations of lawmakers have taken the easy way out and ignored their oath to defend and protect the Constitution. If we're ever going to get on the road to sustainable financial demands on our citizenry and paying off our debt, sticking to the powers enumerated by law and reforming the massive body of Unconstitutional but popular law--and not passing any new, Unconstitutional entitlement programs--would seem to be a good start.

Labels: ballyhoo, constitution, government, philosophy, politics

The health-care system is this country is far from perfect. That's true of essentially every country's health-care system: in countries with single payer elective procedures that massively affect one's quality of life like joint replacements are rationed--but everyone gets general care from a general practitioner, not a doctor in the Emergency Department who shouldn't have to be a GP. Aging populations in the first world are going to stretch these entitlement schemes to unprecedented levels; some countries face doctor shortages due to price controls altering incentive structures; tax rates in countries with socialized medicine are typically higher than they have been in the U.S. in the last 30 years--and most of those countries essentially have their national defense subsidized by the U.S., which spends more on its military than all of the EU combined ($311 billion in the entire EU, population about 500 million, $713 billion in the US, population about 300 million.)

The U.S. faces other problems that arise from its less government controlled structure (it's far from a free market, and the degree of government intervention varies from state to state.) Some people can't get health insurance coverage despite all their efforts because they don't qualify for Medicare or Medicaid, they don't have the money to pay for private insurance (a problem exacerbated by having a pre-existing condition) and their employer (if they have a job) doesn't provide them coverage. Others are uninsured because they either don't know how to or chose not to take advantage of government programs they qualify for, or choose not to buy private insurance that they could afford (the latter class being mostly young, healthy people who rarely need medical attention and who on average are probably making a rational financial decision not buying insurance.) This lack of universal coverage means that instead of problems like worse cure rates for many types of cancer and long waiting times for scans and surgeries that the problems are more like the some in the middle class and lower class either having to use ED's for primary care or being financially ruined by an illness or injury.

The case for reform is there to be made, but the case for non-incremental, whole-cloth, very expensive reform during a time of unprecedented deficits is hard to make, in my opinion. There's not a crisis in health-care, to be frank; the reality is that the status quo, which was never a perfect system, continues unabated. That said, the vast majority of Americans are happy with their coverage, so the emergency is hard for me to recognize. A national emergency that calls for massive government spending would seem to be a problem that affects more than a small minority of people, puts the people it effects in danger, and not fixing it now could lead to a much greater expense to fix it later. Health-care seems to meet none of those criteria; our nation's crumbling infrastructure, however, does.

This post was inspired by watching a PBS NOW documentary about the way that standard shipping containers (one of the most unsung technological advancements of the 20th century) are moved across the country, by truck or by railroad. Basically everyone interviewed was loathsome for trying to influence the government in order to further their personal interests, but the general tenor of the writing seemed to be (surprise) against trucks, and frankly, highways in general. One prominent interviewee was Bill Graves, former Governor of Kansas and now the head American Trucking Association, who started off the show by noting something that the PBS narrator described as if it happens almost "magically:" technology in the form of tractor trailers, freight trains, shipping containers, container ships and modern port infrastructure lead to a massive flow of goods across America allowing almost anything we want to be accessible at at most a few days' notice. In other words, technology has made the standard of living in America, in real terms, better than almost anywhere in the world, even for those who are relatively poor... Imagine the reaction you'd get if you could go back in time to say, the 1950s and tell a poor American that 60 years later that even most people who society considers poor would have at least one color television (possibly one that is 3 inches deep) and a phone that is portable, fits in their pocket, and works virtually anywhere in the country.

From the narration, however, it seemed like the fact that America is rich enough that it has a problem that it needs to figure out how to deal with distributing TOO MUCH STUFF was not just a logistical problem, but a moral one. Especially when tied into environmentalism, you'd think that our nation's prosperity was at best a necessary evil, not something to celebrate. Trains were favored to move containers since they use about 1/3 as much fuel per container... but there were a few problems they noticed. Government price controls in the 1970s killed most of America's private railroad companies and left behind only a shell of an industry that once embodied private capitalism accomplishing massive feats (the race to build the transcontinental railroad, the gorgeous and iconic Penn Stations in Newark and New York built by the Pennsylvania Railroad company.) Virtually all passenger railroads today are government run either as local public transportation systems (like NJ Transit, which runs along many of the same routes as the old Pennsylvania Railraod) or else old private railroads folded into Amtrak. The lack of investment in railroad infrastructure and in further the deprecation or outright abandonment of much old railroad infrastructure means that that the super-efficient, green solution of putting freight on rails is a pipe-dream with our current infrastructure. Freight rail-lines are just as clogged as the highways--on the tracks down the street from my house freight trains go by at a brisk walking pace, a situation reflected around the nation, and in Chicago containers are taken off of trains and put on trucks to be put back on trains once they pass the bottleneck of the city.

So is the answer the status quo, or just add more trucks to our interstate system? Living in Minneapolis, Northern New Jersey and New York City, I have lived in places where both the inadequate capacity and dangerous levels of depreciation of our highway infrastructure have been driven home very clearly. Driving to New York City from New Jersey or to Queens for a Mets game from NYC both show how the interstates in highly populated areas are hopelessly over-crowded. Rush hour is now a general time of day that starts at about 5 AM and last til about midnight. In Minneapolis while the highways aren't as crowded they're falling apart. The 35W bridge over the Mississippi River literally collapsed, but what many people who don't live around here don't realize is that the collapse triggered an investigation into the stability and safety of all the bridges in the area and that many either required extensive maintenance work to to repair them or, in the case of a bridge just down the road from my house on Lowry Ave, a year and change of initial repair work and inspection led to the conclusion that the bridge simply was so decayed that it could not be repaired and had to be demolished and rebuilt from scratch. The bridge in that picture no longer exists and there's no river crossing at the location currently (the new bridge should be done next fall.)

While Minneapolis is particularly hard on bridges due to the cold winters (meaning many freeze/thaw cycles for concrete, steel, etc.) the idea that the 35W bridge collapse was an isolated incident or that similar initiatives in other cities wouldn't find decaying infrastructure seems hard to believe. This infrastructure needs to be repaired and upgraded no matter how freight is moved since they're used for personal transportation as well as moving freight. Unfortunately for a community organizer in Newark's Ironbound district who blame increased asthma rates on the large number of trucks driving around to get from the Port of Newark to the interstates we're not going to stop having car and truck traffic (and in Newark I'd posit that there are more pressing problems regarding young people's safety than smog... namely bullets.) But the truckers aren't some sort of breed of genuine altruist, either; when a truck school instructor was asked about upgrading infrastructure to accommodate more efficient kinds of trucks--specifically trailers that can carry two containers and increase fuel efficiency per container moved--she opposed it because the brakes would get too hot (a problem which technology certainly could not ever address) and that decrease the need for truck drivers. She's right about that, of course, but it would benefit everyone who's not a truck driver.

Basically, everyone except for an engineer who studied freight transportation logistics (including PBS) had an interest in benefiting a certain class of people at the expense of everyone else. Barack Obama,-shortly after signing the stimulus bill which allocated funds which are largely unspent-- said that some of the money in the bill would go towards the largest overhaul of infrastructure in the U.S. since the interstate highway system was built under Eisenhower. Of course while the interstate was designed both to move people and as a strategic military asset to move missiles and so forth quickly during the Cold War it was an actual investment by the government that yielded a huge benefit to the nation as a whole. In short, it was one of the few occasions when the government spent money in a way that benefited nearly everyone and harmed only a few (the people whose land was bought or seized to create the right of way) which is the exact opposite of most laws written before or since then which benefit the few (sugar farmers in Louisiana and Hawai'i) at the small cost of the many (everyone who doesn't farm sugar.) While one sugar tariff is hardly noticed, the piling up of these awful laws is a massive problem and is coming to a head in the health-care debate, as people finally notice the cumulative debt that these laws generate and the harm to them is not as small as normal.

In spending some of the already allocated money on repairing and expanding the capacity of our nation's infrastructure, both road and rail--since both are currently used and will continue to be used to move freight-- and then letting the free market allocate where and how to move the freight, he'd had have a chance to take something of a government boondoggle and do something truly rare for a politician: spend taxpayers' money in a way that actually benefits more than a tiny fraction of the taxpayers.

Labels: government, politics