In defense of National Health Insurance

1. We need more healthcare

Every person, economically, is part consumer, part producer, and part capital. Most economic activities such as watching a movie requires an individual to produce the good and and an individual to consume the good and that is all. The only reason we produce goods is so that we can consume them and the reason we consume good is because it's awesome.

Healthcare is in a different class of goods, such as food, which also contribute to the maintainence or development of human capital. We spend a lot of resouces educating and training our youth. To allow them to die of preventable childhood diseases is a waste of our educational investment. All capital depreciates and requires maintainance. Healthcare is the maintainance of our human capital.

For most goods, the benefit of the good accrues directly to the individual with little benefit or harm to others. In this case, government intervention is usually unnecessary (perhaps only to maintain property rights, information symmetry, and the King's peace). In the case of healthcare (as for food), we have the problem that if an individual's income falls temporarily, even though the individual may be extremely productive again later, the individual may die due to lack of healthcare. Or alternatively, if society is given the choice of letting the individual die or to sustain him at our expense, it may be worth our time and money to sustain him if he will be productive (and tax paying) later. More broadly, this issue applies to all children who will be far more productive as adults than as children, but need preventative healthcare now.

So we need more health care for individuals with temporarily low incomes and for children. Since it is difficult or perhaps impossible for us to determine who will have a temporarily low income and who will always have a low income, practically, we need more health care to cover everyone with a low income. (Additionally, we would only be able to avoid covering individuals with low income if we also booted them from ERs if they tried to get medical assistance.)

We have to decide as a society whether we are willing to countenance government intervention in the economy to encourage greater growth (in production and therefore consumption). If we don't, then fine. If we do, then we should intervene in healthcare as below. (Let me explicitly state that any such "intervention" would have to be paid for "progressively" where the rich pay for the poor.)

2. The private sector is unable to provide effective health insurance

There are two significant problems that make private insurance impractical. First, adverse selection. Individuals who are more likely to get or be sick are more likely to get insurance. The second, principal/agent. The doctor is the agent of the insurance company (as a payer) and of the patient (as a consumer/investor) and a principal for him or herself.

Adverse Selection: Any insurer (including health) is deeply afraid of adverse selection. Accordingly, they will undertake to determine the expected costs of insuring a particular individual and then charge them that cost. Drivers with poor records pay higher premiums, as do teenagers based on age alone. Health insurance companies prefer to provide healthcare through employers for the sole reason because it makes adverse selection less likely. Any reason to price discriminate is an advantage to the insurer. In a truly unregulated private insurance market, the fear of adverse selection will drive everyone to pay their own expected health costs. In the case of the chronically ill, this essentially means that individuals pay for their own healthcare (which is ok, but it means that you don't need insurance, just a credit card.)

Principal/Agent: Doctors under a fee for service plan have an economic incentive to authorize as many procedures as possible, no matter how effective or how necessary. Patients, lacking information on whether the treatements or tests are effective or necessary and not suffering economic cost of the procedures, have no incentive to refuse. Nobly self-interested insurance companies, fearing this waste, develop all sorts of methods to refuse paying for treatment, which necessarily bleed into denial of coverage.

(Not listed here because I am diminishing its importance, but another problem in all insurance is Moral Hazard. You drink and smoke because you know someone else will foot the bill for your heart disease and liver cancer.)

Another important aspect of this problem is the word "insurance". Insurance is supposed to be something you pay for to protect you against an event that will probably not happen. Life insurance is an big exception to this rule as death is very likely to happen and the question is only one of timing. For acute care, health insurance is like fire or property insurance. Aside from the moral hazard, generally individuals try to avoid injuring themselves. For chronic care, health insurance is really a payment plan. There is no more uncertainty. A diabetic is going to need insulin. A heart patient is going to need aspirin and Lipitor. By combining both into a single policy, those who need only acute insurance are subsidizing those who need chronic care. Accordingly, those who only need acute insurance will flee to cheaper plans (that through hook or crook dissuade chronic patients) or will choose be uninsured.

Since health insurance is provided through employers, the decision to cut benefits is made by employers rather than patients (yet another principal/agent problem). Patients lose benefits, employers blame costs, and now everyone wants to cut healthcare costs. The truth is costs are going up not down. We must not flee from this truth. Health care spending is going to increase even if we increase efficiencies because we want more of it.

We have to decide as a society whether we want health "insurance" where the healthy pay for the sick or not. If we don't, then we can continue as we are. If we do, we must confront the fact that the self-interested consumer and the self-interested insurer will pursue plans that deny coverage (at equal cost) for those who have chronic conditions. Regulation will only retard this path. A change in incentives is the only way to stop it.

3. National Basic Health Insurance is the answer

A framework for National Health Insurance

Who: All individuals under 70. All individuals over 70 who are still working.
What: All diseases, conditions, vaccines that meet certain efficacy criteria.
How: With the cheapest "effective" treatment
Where: The USA
Why: For the greater economic good of the nation.
When: Now!

This plan is paid for with from the general fund of the Treasury, ie by my Tax Plan.

The hardest part of the above is what is "effective". The answer, I think is, whatever is "likely" to return you to work or school. "Likely" should be determined by a need to treat target, which we can set based on how much the plan costs.

Price fixing will not be necessary, required, or even suggested. The government will offer prices. Doctors and other healthcare providers have the option to accept these prices or only provide health to individuals of other means.

If you want homeopathy or other unscientific medicine, pay for it yourself. If you want 10 bikini clad women to treat your back pain, pay for it yourself. If you want that experimental medicine which costs $10,000 per dose that may not work, then pay for it yourself (or get the pharmaceutical company to pay for it). If you want chemotherapy to extend your miserable old age semi-vegitative existance by another year, pay for it yourself.

If you're a low income child, we'll pay for your vaccinations and your wrist injuries.

Will this cost a lot, yes. But I hold that the wealthy will benefit more from this than the taxes they will have to pay to support it.

And Obama needed 1000 pages for his plan, when to think you could do it in a single blog post.

The Competitive Market and Survival Economics

"Hunger can be a positive motivator" - MO State Representative Cynthia Davis

http://www.colbertnation.com/the-colbert-report-videos/232637/july-01-2009/tip-wag---cynthia-davis---fox-news

The First Welfare Theorem and most of economic theory relies on a presumption of property rights. Property rights however must be protected and enforced, and this protection and enforcement has a cost.


When an individual makes a decision whether or not to steal and violate property rights, the individual weighs his or her perception of the expected value of the attempt against the expected value of declining.


Since the expected value of an attempt includes consideration of the probability of success, a property owner can protect his or her property by manipulating these odds or the perception thereof. The property owner can build a safe or a fence or get a guard dog or hang a credible sign that such a dog may exist.


A civil society typically deters theft in a combination of three ways:

1. Patrol - reducing the odds of success

2. Investigation and prosecution - increasing the odds of capture and punishment

3. Punish - increase the negative incentive to steal


Considering that most attempts at theivery are often more "expensive" in the dangers involved than obeying the law, these methods are generally successful.


In the case of survival crime, for example, stealing to eat, these methods do not work effectively if at all.


An individual who believes that he or she must steal in order to survive will pursue theft against all but the most extreme odds and dangers. The cost of detering such an individual is extremely high as the resources spent on enforcement and punishment must be such that an individual will risk starvation rather than challenge the law.


A much more cost-effective solution (in a rich country) to prevent survival crimes is to feed the hungry. If individuals no longer believe that they will die if they do not steal, then the opportunity cost of crime is much greater.



In the case of school lunches and other school nutrition, there are further benefits from increased reception to education (which further increases the opportunity costs of crime).

What happens when you print money

Continuing:
http://competitivemarket.blogspot.com/2009/06/inflation-as-boogeyman.html


If you were seriously concerned about inflation caused by the printing of money, you should be more concerned about this:

http://www.federalreserve.gov/releases/h3/hist/h3hist5.htm

In this report the Federal Reserve records the "Monetary Base", ie total money outstanding. In June 2008, this figure stood at about $.8 trillion. In June 2009, this number is approaching 1.8 trillion.

The Federal Reserve has more than doubled the money outstanding over the last year. It already happened. Stop worrying about what Obama's budget might do to the money supply 10 years from now.

Did you see the inflation?

http://www20.wolframalpha.com/input/?i=cpi

Health Insurance - Private or Public

Should health insurance remain in the private sector or be provided publically (or something in between)?

Healthcare (or even Health itself) is a scarce resource. How do we distribute the costs and the benefits in such a way that we maximize utility within the constraints of property rights?

Generally, if the conditions of perfect competition are met or when market imperfections are slight, it is better to relegate the production and consumption of a product to the private market with only the general laws against murder, theft, and fraud.

Health insurance, that is the means of paying for healthcare, however suffers several significant imperfections. Any plan to address health insurance policy in the private sector must address these imperfections:

1. Information assymetry: Producers of healthcare, doctors and corporations that develop medicines and medical devices, are at a significant information advantage over consumers of healthcare, the patients. A patient may not be able to decide appropriately whether a particular treatment is worth the cost.

2. Principal/Agent: Patient/Doctor: Worse, most patients don't decide their own treatments. Their doctors do. A doctor may consciously or subconsciously have different incentives than the patient's. (http://roomfordebate.blogs.nytimes.com/2009/06/18/better-medical-care-for-less/?ref=health)

3. Principal/Agent: Patient/Insurer: If the patient seeks excess treatment, the costs are borne by the insurance company. If the insurance company denies treatment, the costs are born by the patient.

4. Sickness Subsidy: The requirement that health insurance premiums should be the same for everyone regardless of health is effectively a subsidy for the sick paid for by the healthy. Those who are chronically ill will enjoy cheaper premiums because those who are generally healthy are paying higher ones. This will lead healthy individuals to seek cheaper and cheaper plans with less coverage so that they can avod paying this subsidy. Ultimately, healthy individuals will eventually choose to remain uninsured or self-insure while the sick end up paying for their own health care anyway.

So far it seems that surmounting these obstacles is impossible for the private health insurnce market to accomplish, and so I would advocate moving towards a minimum basic national insurance. Individuals would still be able to purchase supplemental insurance plans from private providers to enjoy care beyond that which is contracted to the lowest bidder.

National health insurance does not in itself solve all the problems above, but it has the potential to. We must carefuly craft the national health insurance program to solve these issues or else we will do no better than the private market today.

Money in Education

Public Education is the single most important government program to promote economic prosperity and fight poverty.

That said, what is the best way to support public education?

A New York City charter school is trying something new:
http://www.nytimes.com/2009/06/05/education/05charter.html?ref=education

When school vouchers and charter schools were proposed, I too reacted as most liberals do and opposed any changes to standard pubic education. Now, I must confess I am excited to see what the results of paying teachers higher salaries will be.

Even if the school itself is a failure, we will learn more about what it takes to establish the premier public education system in the world.

Nor is it clear to me that every child will be best suited by the same education methodology.

I now stand firmly in favor of the charter school movement. If schools who accept school vouchers are also required to meet similar standards, then I would be in favor of school vouchers too.

The economic analysis:

Education is an investment in human capital. The student gains skills and knowledge that will make him or her a more productive worker or investor. The returns on elementary, secondary, and undergraduate education are immense and if it were possible, a student would borrow to pay for schooling.

The capital markets however are not well suited to finance general education since there is insufficient visibility to the earning power of a student. Further, most grade school students are minors and are generally unable to make their own economic decisions. Nor are parents generally able to authorize borrowings on behalf of their children.

An educated populace additionally provides the state with many positive externalities. Educated citizens are more likely to obey the law and in voting, more likely to make wise laws. The reduction in crime due to the increased earning power of education reduces costs of enforcement and property insurance.

Mandatory free public education attempts to correct many of these inefficiencies in the competitive market for education:

1. Free public education provides a subsidy for the poor. Poor parents and families are most likely to be unable to afford to pay for their own education (through savings or borrowings) and are most likely to commit crimes of desparation if legal earning power is insufficient. A subsidy in kind can restore efficient consumption decisions by compensating for externalities. (Compensation for externalities is an exception to the general preference for subsidies in cash over subsidis in kind.)

2. Mandatory public education provides protection for children. As parents stand as agent to a child's principal, there may be an incentive for a parent to remove his or her child from school in order to force the child to work or otherwise fail to be educated. Mandatory education requirements (including for those children who are home schooled) protects children from unwise parental decisions.

Neither of these objectives however require that the government itself provide the education facilities.

In the early history of public education, when education was such a significant expenditure it may be impossible for the competitive markets to provide a sufficient amount, it may have been justified for the government to provide education. As the economy has grown significantly over the last century, we can transition to a competitive market education system. In suburban or rural areas with lower population density, there may still be a need for publically provided education.

This economy of scale, in that its more cost effective to teach many students together than each one individually, may create a trend towards a natural monopoly in areas of lower population. For example if an area only has 30 students per grade level, then a single teach per grade level is necessary and so a single monopoly school is necessary. If an area has 300 students per grade level, then perhaps 10 schools can operate and create competition.

It's not obvious whether a natural monopoly school should be run by the state or be contracted to the private sector.



The general observation here is that it is not a "free market" that is superior but a "competitive market". The market is generally able to provide higher quality goods and services at lower cost than a government monopoly provided that the conditions of perfect competition are met.

In the case of education, the government needs to compensate for financing and externalities, the principal/agent problem, and for the possibility of a natural monopoly. With these corrections, it becomes possible for the competitive market to assume the remaining tasks.

Economics and death

An interesting article from W. Saletan:
http://www.slate.com/id/2219537/

If you grant that the life and welfare of a fetus has equal value to that of any other human, is there still a case to be made for the legality of some or all forms of abortion?

Moralists will argue that all murders should be illegal, and we do our best to investigate and prosecute criminal homicides.

Economically, the law against murder and its enforcement reduces the costs that individuals would experience in protecting themselves against murderers. Additionally, it reduces the deadweight costs of economic decisions made under the threat of murder. Conversely, we have to pay taxes to support the police and legal infrastructure that enforces this law.

Laws protecting children from murder by their parents have additional costs, namely social services and foster care for the child. A child, aside from being a consumer, is also an eventual producer. Damaging a child in whom society is investing schooling and medicine and other resources is extremely expensive (and morally abhorrent) and so the additional costs of protecting children may be justified. Most fetuses on the other hand do not yet contain any investment in human capital that others may yet benefit from.

If it is decided that protecting lives in excess of obvious economic benefits is an appropriate policy goal, then resources spent in this effort should be spent in the most cost effective way. Should we spend the marginal tax dollar prohibiting abortion, thereby imposing a special tax on the pregnant woman, and then subsequently in foster care for the unwanted child or should we spend the marginal tax dollar on healthcare for the disabled or elderly? What about feeding the hungry, sheltering the homeless, and clothing the naked? Every resource used to solve one problem is a resource denied another.

Further resources spent saving lives today must be balanced against the possibility of investing in economic growth and saving more lives in the future. Spending a marginal tax dollar on improved public education could generate greater economic growth and opportunity, reducing future numbers of abortions (by reducing unwanted pregnancies and increasing the ability to afford children) as well as greater future tax dollars to save more lives in the future.

The prohibition of abortion contains one additional economic cost that the prohibition of infanticide does not: the forced labor and delivery of the pregnant woman. Unlike children's services which can be performed by government professionals, only one person can care for any given implanted fetus.

This cost cannot be minimized by alluding to the woman's choice to engage in sex (except in the case of rape or coercion) as it is still a cost that must be borne. In no other situation do the laws of the United States require forced labor in this way. Even in cases of conscription or jury duty, we not only offer monetary compensation or service but also an individual can escape the requirement by showing cause. Do we plan to pay women to stay pregnant? Do we plan to permit an exception for conscientious objection or economic hardship?

Should the government have the power to legislate absolutely what occurs beneath your skin? In order for the postulates of Perfect Competition and the First Welfare Theorem to hold, the answer is generally no. The costs to all citizens, male or female, of granting the government this type of power must also be considered when prohibiting abortion.

It's not obvious to me that the life and welfare of a fetus is equal to that of any other living human, but even if it were true, it's not obvious to me that the prohibition of abortion would lead to the greatest realization of a "culture of life".

Inflation as a boogeyman

Krugman returns to his roots as an economist and finally writes something sensible again.

http://www.nytimes.com/2009/05/29/opinion/29krugman.html

The myth: Inflation is bad, so the conventional wisdom says, and since excessive government debt "causes" inflation, Obama is going to ruin the country.

Krugman's review of this myth is sound, but I highlight the following: If you are genuinely concerned about inflation, then concern yourself with the activities of the Federal Reserve that has in the last few months pumped trillions of dollars of new money into the economy, far more than Obama ever will even if he maintains deficits at this level for 8 years.

Any claim that Obama's policies are bad because of the inflation they may one day cause is disingenuous because it misses the far more inflationary actions of the "non-partisan" Federal Reserve.

(Nor am I concerned that the Federal Reserve is going to cause inflation. While I stand opposed to an unelected Federal Reserve with a free mandate to control the economy, Fed Chairman Bernanke is far more competant than his predecessor.)

In the news

Brooks writes a funny article:
http://www.nytimes.com/2009/05/26/opinion/26brooks.html

Gay marriage may not lead to men consorting with animals, but it has led to Republicans laying down with Democrats:
http://www.nytimes.com/2009/05/28/us/28marriage.html?_r=1&ref=politics

How taxes are suppose to work:

A Progressive Flat Tax by Justeconomics

All income you receive will be taxed at a single rate (~25%?) subject to the following two adjustments only:
1. Deduct $10,000 from your household's income for every living breathing human being
2. Deduct/Add your net deposits/withdrawals to/from any saving or investment account.

Repeal:
Corporate taxes
Capital gains taxes
Payroll taxes
Property taxes
Estate taxes
Sales taxes (except when applied to control externalities such as cigarette taxes or gas taxes)

If you support a family of 4 with a $40k income, you will pay no taxes. If you have an income of lots and lots of money, you will pay about 25% in taxes.

If you want to raise more revenue, increase the tax rate (on everyone). If you want to make the tax more progressive, increase the personal deduction.

Would you lend money to Chrysler?

President Obama's interference in the Chrysler bankruptcy is disgusting.

1. Disregard for bankruptcy law

When investors invest their money in a company, the agree beforehand who gets what and when if something goes wrong. In the Chrysler capital structure, everyone, including the Unions, agreed that the 1st Lien Lenders would get paid first and so long as they did not get everything back, no one would get anything else.

President Obama has now decided to build an economy based on politics and popularity rather than on property rights and contracts.

The restructuring plan gives the Unions far more recovered value than the 1st Lien Lenders or other creditors in the same position as the Unions would be getting.

Why? There is no question of fairness. The Unions agreed to their subordinate position beforehand. Daimler, the previous German owner of Chrysler, even offered $1 billion to get them to agree and the Unions accepted. Suddenly, the Unions are allowed "backsies" and take that money out of the hands of the 1st Lien Lenders and the US taxpayer.

If President Obama wants to use taxpayer money to subsidize the Unions that's one thing. A waste of taxmoney, but within the bounds of democracy. If President Obama wants use investor money to subsidize the Unions, that's kleptocracy.

2. The use of death threats to enforce his will

President Obama used the bully pulpit without regard to the safety of human life. Investors who disagreed with him became targets of a lynch mob that he stirred. Safety and security were the reasons that these dissenting investors dropped their court case.

The courts of the United States exist to protected us from the tyranny of the majority. When the President himself is at the head of the mob and is directing its anger to prevent the court case from even being heard, then we are losing our individual freedom.

This is mobster behavior, not Presidential behavior.

Obama Budget 2009

The full budget:

http://www.whitehouse.gov/omb/assets/fy2010_new_era/A_New_Era_of_Responsibility2.pdf


Very Readable, though heavily padded. Lots of repetition and cut and paste of the same rhetoric. I wonder if anyone read the whole thing (besides me).

The difference between the Obama budget proposal and the Bush budgets is wonderous. There are actually charts and graphs that show economic data to support the proposals rather than propaganda pictures of Bush and Cheney and other high party officials.

The budget demonstrates increased transparency and realism. It shows dramatically high deficits but only because it does not assume it will be saved by the AMT or by sunset provisions as was the practice under previous administrations. Further, it creates many allocations for emergency spending based on the likelihood that they will occur rather than pretending that nothing will ever happen. Included in this budget is war funding which the Bush administration routinely financed in a separate "emergency" bill.

The highlights below come from the first 42 pages of the budget request, which contain the President's message and summary. In future weeks, time permitting, I'll review the individual department budgets.


The Good


1. Investment in education and research:


Some studies show that for every dollar invested, there is a $4 to $9 return to society in higher earnings, higher graduation and employment rates, less crime, and decreased need for special education services, less use of the public welfare system, and better health.


Unfortunately the "studies" are not cited, but the sentiment is true. Education is one area where it is difficult to spend too much money (but like all areas important to spend the money properly). Education is the single most important factor in ensuring American liberty and prosperity in the decades to come.


The budget rightly does not intend to take action to "cut costs" in education. While college education expense has risen dramatically over the last 20 years (figure 8 on page 10), so have the rewards (figure 9 on page 11). We do have the best education system in the world, despite its faults and costs. We now merely have to ensure that our children have access.


The budget statement specifically encourages stem-cell research.


1a. $5 billion for key science program such as the DoE Office of Science and DoC National Institute of Standards and Technology

1b. Increased funding for Head Start and double enrollment in Early Head Start

1c. Encouragement of individual performace by teachers... more details?

1d. Double support for Charter Schools. I have been ambivalent on charter schools in the past. A large portion of the superior performance of these schools can be attributed to the selection of students and parents. Parenting is the first and most important contibuter to a child's successful education. If we can't make all parents good, then let's at least give the good parents a chance.

1e. Stable funding for Pell Grants. Now indexed to inflation + 1% and automatically funded.

1f. Huzzah! An end to government-guaranteed student loans, which served only as handouts to financial institutions, and a switch to direct lending.

1g. $2.5 billion to support low income students through college with the Access and Completion Incentive Fund

1h. Triple the number of graduate fellowships in science. This is how we grow the economy.


2. Culture of Life - more health care for children and workers

2a. Nurse-Home Visitation program to provide pre and post natal care for at-risk children and families

2b. Authorization of the Childrens' Health Insurance Program (CHIP) with a jab at Pres. Bush for vetoing it twice. It is retarded that we have free and subsidized healthcare for retirees who will never again be productive members of society while allowing our children to be hobbled preventable conditions through inadequate healthcare.

2c. More money for medical research on comparative effectiveness so that decisions can be made based on cost-effectiveness rather than simply cost.

2d. Pre-funding health care reform. He doesn't know what he's doing yet, but he's responsibly setting aide $630 billion because he knows it will be expensive.

2e. The budget strikes a balance between innovation and access. Inventors of new drugs retain their exclusivity period, but the process for access to generics is streamlined. (Not clear if the exclusivity period remains the same as before.)

2f. "Pay for Performance" Medicare will link a portion of the medical fee to quality standards. This is a step in the right direction. Should this "quality" be measured be impartial bureaucrats or untrained patients?


2g. 8 principles of the new health care system! (Page 27)


3. Tax increases for rich people

3a. Itemized deductions for families earning more than $250k/year will be deducted at 28% rather than 33-35% (and eventually 36-39.6%). Why should we be subsidizing mortgages and charities for the rich?

4. Tax cuts / subsidies for poor people

4a. Making Work Pay tax credit. This tax credit refunds 6.2% of income taxes for 95% of American workers so that they can use the refund to pay for the 6.2% employee-share of payroll taxes. Good idea, but poor implementation. We should just eliminate payroll taxes altogether.

4b. Extended and expanded unemployment benefits. This is especially important so that skilled workers are not forced to enter unskilled jobs by necessity of eating and can instead focus on finding a job that is right for them. America benefits by making sure the resources we've spent training our workforce are employed as effectively as possible.

5. Increased financing for our efforts to change the world, ie Defense and State

6. Reduction of stupid spending

6a. Specifically cuts in farm producer subsidies

The Bad


1. Continuing subsidies based on geography rather than income or population

1a. $1.3 billion in USDA loans and grants for "expanded broadband ... in rural areas". What does broadband have to do with Agriculture?

1b. Susidies for commerical flights to rural areas. People can live where they want to live, but they have no right to tax the rest of us to provide them more convenient transportation.

2. $15 billion in additional cash payments to retirees and the disabled. "These vulnerable populations are the first ones to feel an economic downturn." Why? They're not working so they can't lose their jobs.

3. Continuing subsidies for producers of "renewable energy", defined based on politics rather than sciene. This policy should be implemented as a tax on pollution rather than a subsidy for specific kinds of non-pollution. The effect is similar but does not limit creativity in finding new methods of non-pollution.

3a. $6.3 billion in subsidies for states to become more energy efficient. If energy efficiency were cost-effective, states already have an incentive to do this. If it's not cost effective, then why are we doing it?


4. Bury it! "The Energy Department will also scale up its demonstration projects for
geologic storage for carbon dioxide." Are you kidding?


5. Continuing subsidies for the low income nanny state. Wherever possible, subsidies should be in cash, not kind.

5a. Continued funding for the DoE "home weatherization" program. If people cannot afford to own and maintain their own homes, they should consider renting. We need to stop subsidizing homeownership in favor of other poverty-fighting priorities.

The Ugly - Ideological Errors

1. The budget correctly identifies that the illiquidity in the financial markets caused by a burst of the credit bubble is the proximal cause of the current economic turbulence. No provisions are made however to prevent such bubbles from occuring the in the future. Rather by endorising actions by the Federal Reserve and the TARP, the administration effectively "solves" this problem by encouraging a new bubble.

2. The budget focuses too much on job losses as a problem. The macro problem is a loss of economic production. If the economy can produce more without higher employment, that means we can consume more without working as hard. The micro problem is greater inequality due to loss of jobs and therefore income at the lower strata of our economy, but if growth is achieved, this can be solved by additional efforts at wealth redistribution. The budget addresses this issue in part with a more progressive tax code. (Figure 9 on page 11 is interesting.)


3. Health care. The budget notes that healthcare costs are rising faster than wages, as illustrated by Figure 11 on page 13, but this is a misleading statistic. As incomes rise and medical technology advances, individual choose to spend more money on healthcare because they like it better than spending their money on other things.


That there are more uninsured now than there were previously is a consequence of this choice not to spend on healthcare and the requirement that premiums remain the same regardless of health. If premiums are set by the average cost of care, healthy individuals will self-insure while individuals with chronic illnesses will seek insurance. This is exactly what is happening. We cannot fault the healthy for choosing not to pay for the healthcare of the sick when given that choice. What we can do is use the power of the state to tax and provide a minimum level of health insurance for all.


4. "... still preserving the important principle of a dedicated revenue source for Social Security." Why does Social Security need a "dedicated revenue source"? Does that make it any more or less important or stable? The Social Security Tax is regressive. The extra 12.4% places a highe marginal tax rate on those making less than $106k per year than those in the top tax bracket! The cost of this dedicated revenue source is the prevention of any meaningful reform. As inequality increases in society, the tax code must become more progressive, but the separate Social Security tax remains a special burden for lower income families. The "Making Work Pay" refundable tax credit that applies against payroll taxes further illustrates that this is stupid.


I hope you enjoyed it as much as I did!

How would you invest? An interesting microeconomic scenario

http://www.knowingandmaking.com/2009/02/confiscated-savings-and-bank-runs.html


The problem is much deeper than that. The loss averse individual you describe makes two mistakes not one. The second, as you describe might be to withdraw his or her money, but the first was to invest the money in the first place.

Most people do not have the market knowledge to invest their money properly. If this individual was looking for principal protection, then he or she should not have invested the money in an account where it could be lost.

In the United States, many retirees or other investors with no risk appetite invested their money in bonds of Enron or other highly rated companies without understanding that highly rated does not mean risk-free, and that the rating agencies are not actually good at their jobs. Then these same investors were upset that they lost money that they thought was risk free.
As recently as 2004, President Bush advocating the conversion of Social Security into personal accounts where workers could invest in "a conservative mix of stocks and bonds". All of these people would be in a great deal of trouble today if this change had taken place.

Lastly, the individual you describe could have been cheated. Perhaps he was told that this was a deposit in a bank. The word "bank" for common people means "safe". In truth, the practice of fractional reserve banking means that the bank is not safe and depends on a Ponzi scheme for its liquidity. Fractional reserve banking is what makes a bank vulnerable to bank runs. Fractional reserve banking is what causes dramatic swings in liquidity during recession (and not individuals collectively saving).

I hate the stimulus

Full Text

CBO Summary

1. Increased deficit spending hurts long-term wages and GDP

An interesting observation by the CBO:


To the extent that people hold their wealth as government bonds rather than in a form that can be used to finance private investment, the increased debt would tend to reduce the stock of productive private capital....
The reduction in GDP is therefore estimated to be reflected in lower wages rather than lower employment, as workers will be less productive because the capital stock is smaller.


http://www.cbo.gov/ftpdocs/99xx/doc9987/Gregg_Year-by-Year_Stimulus.pdf

2. Buy American

If two contractors make the same quality government product or service, but one can do it at a lower price, the government should chose the lower price. By restricting competition to only American contractors, the legislation allows contractor to charge higher prices for the same service. We will pay higher taxes all to promote greater inefficiency and lower productivity.

If the goal is to spread some cash around the US economy, we'd do better hiring the cheaper foreign contractor and dumping the savings out of a helicopter.

3. Wage restrictions

Further, the legislation requires that all workers on a project must be paid the same as any other worker in the same locality. We will pay higher taxes to pay for less productive workers.

Again, if the goal is to spread some cash, give it away and be honest about it.

4. A whole lot of dumb tax credits $200B +

For the most part, many of the tax credits serve simply to make the tax code more progressive. Specially stupid ones include increased "home-buyer" tax credits as if a new housing bubble would save us.

Then there are several tax credits awarding good behavior. Generally, policy should not be made in the tax code.

Lastly, taxes are cut on new automobile purchases. What happened to energy policy? Subsidizing the purchase of new cars won't save the US auto industry. This is clearly an example of a provision that was made for the benefit of the manufacturers (few) rather than the consumers (many).

5. Limits on Executive Compensation

This is stupid. Companies took or were pressured to take TARP funds and now find themselves under strong restrictions. The law includes an exception for employment contracts written before February 11, 2009. This type of legislation will only further encourage future employees to demand longer contracts in case further limits are placed in the future.

(This paragraph previously incorrectly stated that "It's probably unconstitutional, both in terms of its infringement on the freedom of contracts and its ex post facto nature." Corrected thanks to an observation by a devoted reader.)

The only good that can come out of this is that companies will seek to exit the TARP as fast as possible that that previous error can be corrected.

Excessive executive compensation is a principal/agent problem. Those that are best suited to correct this version of the problem are not seated in the Capitol but are in fact the shareholders of these Corporations. Already steps are being taken to form independent compensation committees or to require formal shareholder votes on CEO compensation. The government should not be involved either as a shareholder through the TARP or through random wage ceilings.

6. Quibbles on Education Spending

The legislation pours new money into Education, including $13B for the Elementary and Secondary Education Act of 1965, currently reauthorized as the No Child Left Behind Act of 2001, $11.3B for the Individuals with Disabilities Education Act, and $15.8B for the Higher Education Act of 1965.

I have no objection to the last and little objection to the first. The US economy, as a developed economy, grows primarily by increases in productivity technology and not by increases in capital stock per capita. In order to promote that growth the US needs as many highly educated individuals devising new ways to be productive as possible. We should invest heavily in ensuring that our best minds receive the best education possible.

Financing education at the elementary and secondary level provides a lower return for the national economy than financing graduate school, but it is also an effective way to break the cycle of poverty, and to reduce crime, both equally important economic targets. Families in poverty cannot afford to increase their human capital with further school or training, and property rights are fundamental to the competitive market model.

Spending on disabled children helps to soothe a bleeding heart, but does it do any more than that? Each dollar used to train a genius generates far more wealth for society than a dollar used to train a dullard. Families with disabled children deserve our sympathy, but can they be said to be a national priority?

7. A stupid way to build national infrastructure

The legislation appropriates $27.5B for highways, rails, and ports. Rather than spending the money on the most important roads and bridges, the law requires the money to be spent as fast as possible without regard to the usefulness of the infrastructure. Rather, it is to be spent only in "economically distressed" areas. The DoT only has 21 days to parcel out the cash and the States have only 120 to start using it. So much for time to think and do the right thing! A state failing to meet this timeline will have its funding redistributed to other states.

8. The end of state government

The legislation awards $53.6B to be distributed among the several states for the primary purpose (81.8%) of education. At $11k per kid (tied for highest among developed countries), that would fund the education of just under 4 million children, but so what?

As any economist knows, all this means is that states can cut education budgets and spend the money elsewhere. All that is happening is that we're saving incompetant state governments from having to raise taxes or borrow because the federals are doing it for them.

This is ok if you don't care for federalism at all. If states get into this habit, then the federal government will start attaching strings to the money it passes down.

One good thing though is that this money is apportioned based mostly on population (overall and schoolage) rather than political power.

9. Liberal Wish list

Much of the rest of the legislation, $1B here and another there, reads like a wish list of government programs that were starved during Republican rule and now are being funded.

It isn't big money, so it's not worth going through the details. I'm sure some of them, at least, are worth funding, but please, let's not pretend we're funding the projects to "create jobs" or revive the national economy.

10. It's not a stimulus

Government cannot bring the economy out of recession. It never has, and it never will.

And really, perhaps it shouldn't.

Obama's pitch

http://my.barackobama.com/page/invite/recoveryvid

I agree with much of the spirit of what he says. There is much to be done increasing our educational and transportation infrastructure. Unemployment benefits and health insurance should be expanded.

Handing out $500-$1000 to people who are already employed would be a waste. Rather, as income inequality increases, we should enact permanant changes to the tax code that make it more progressive.

As our economy increases is its technological complexity, unskilled workers are the first to exerience a lower relativel livelihood. We should use government power to make sure our children, tomorrow's workers, are as skilled as possible.

Obama receives full points for increased transparency. Whether you construe his messages and his website as public service or propaganda, at least he is engaging with the People and encouraging continued interaction of the governed with the government.

Effect of taxes on work and leisure

We previously discussed the effect of changes in income on spending habits. Let's now consider how taxes affect the decision to work.

Given a particular income constraint, there is a maximum level of achievable utility that each individual will pursue (by definition).

That is, U = U(I), where I = income.

I = earnings + wealth - net taxes

Rather than including "return on savings" as a portion of income, we are considering lifetime income and consumption. At any consumption decision, the individual will redetermine whether to reallocate savings to consumption.

Wages are limited by time. An individual only has so many hours a week, so many weeks per year, and has an expecation of so many years per lifetime. Depending the relative value of leisure and consumption, an individual will determine how much to work:

U = U (I, L) = U (E(1-L) + W - T, L) where E is maximum future earnings, L is the fraction of available time spent on leisure, W is wealth, and T is net taxes.

A lump sum increase or decrease in T has the same effect as increasing or decreasing W. An individual becomes less likely to work. (Exception: If an individual can use W to increase E, for example by going to school, then increasing W may increase time spent working.)

If T = tE(1 - L), where t is an income tax rate, then decreasing t has the same effect as increasing E. An individual becomes more likely to work.

So which is better in a time of recession? When demand for labor is down, should we increase supply or decrease it? It seems to me that increasing the supply of labor will offset the apparent increase in earnings by decreasing equilibrium wages through tax cuts or subsidy. A one-time subsidy will increase wages but be offset by required tax increases whether now or later.

I conclude then that in the exception is the rule. Our government action should be centered around enabling individuals to increase or maintain E by avoiding starvation, exposure, disease and death and pursuing educational opportunities and job training. Unemployment benefits, national health insurance, and subsidized tuition serve this purpose and should be pursued.

Daniel Gross knows nothing

Daniel Gross' recent post carries with it the same nonsense spouted by politicians and members of the popular press who are not economists.
http://www.slate.com/id/2210570/

Speaking as an authority, he begins with:

There are three options government can pursue when the economy goes south.

He assumes without discussion that the government should do something to boost economic growth. This is the same guy who wrote that bubbles are great for the economy.
http://www.slate.com/id/2165929

Does he not realize that every bubble is followed by a burst? Gross credits bubbles for implementing new technology, but he's only right so far as the bubble increases awareness. It's the recession that destroys companies who cannot or do not implement the new technology correctly, and it's recession that enables those who do to expand into the voids left by their bankrupt competitors. Without recession to sweep away the old, there can be no recovery to implement the new.

Government should not try to stop recessions. It should treat the symptoms with unemployment benefits and subsidized education and healthcare, and let the disease run its course. Excess government action will only endanger the patient. No drastic action is necessary because this disease is not anywhere close to devastating or terminal. Even Gross admits that in his next column: http://www.slate.com/id/2210619/

Next he writes:

They have forgotten Richard Nixon's famous line that "we're all Keynesians now."

Suddenly, a statement from a compromised fallen President is now a statement of economic truth. Yes, it's true that politicians have a penchant for economic theories that prescribe greater government action, such as mercantilism or Keynesianism but that doesn't make those theories true or just.

Even Keynesian economists don't think that fiscal policy can be swift or efficient enough to react to recessions.

Contra DeMint, borrowing and spending are pretty much how the government has pulled itself out of every modern recession.

Stated without proof. It's true that the government has borrowed and spent during every modern recession, but there's hardly any reason to believe cause and effect. In fact, our government has been borrowing and spending forever whether recession or expansion. How are the two even related? We borrow more during recessions because tax revenues are lower. We spend more during recessions because the politics allow for it. There is no prescription here.

There's plenty of legitimate argument over the stimulus—too much, too little, not fast enough, too fast, the proper mix of tax cuts and spending.

Except the one that matters: Whether there should be a stimulus at all.

Tax cuts don't work

A description of the cost of the Senate version of the stimulus:
http://cboblog.cbo.gov/?p=204

Approximately $96 billion is spent on a $500 tax credit for workers. In Neoclassical economic theory, a lump sum tax (and likewise a lump sum subsidy) has no effect on the proportion of income spent on one activity or another. An individual is no more likely to work more or less. An individual is no more likely to save more or less. This follows under the parsimonious assumption that all goods have utility functions similar to U(x, y) = -1/a(x-h)^2 - 1/b(y-k)^2 where x and y are much less than the optimal spending h and k respectively. X and y are measured in dollars as are the costs of those goods, a and b. The sign is negative to reflect optimal consumption as one reaches (h, k).

With an income constraint I = x + y or y = I - x, we can solve for the optimal consumption:
U(x, I - x) = -1/a(x - h)^2 - 1/b((I - x) - k)^2. Set marginal utility = 0 to find max.
Ux = -2/a(x - h) +2/b((I - x) - k) = 0. Multiply through by a and b. Divide by 2.
x = (h/a - k/b+I/b) (a+b)

dx/dI = (a+b)/b. Increases in Income do not affect the relative spending. (This is based on relative costs only.)


In reality, there are certain goods for which a minimum amount of consumption is necessary, and consumption in greater quantities may not be utile. That is, for example, h is on the order of magnitude of x. In a developed country like the United States, this could be "Calories". Rather than a smooth utiliy function like U(x) = -1/a(x-h)^2, a stepwise function such as U(x) = -infinity if x/a < 1000 Calories/day and the usual otherwise where h/a = 1600 Calories/day. (1 "Calorie" is 1,000 "calories".)

In this type of good, decreases in income beyond a certain point will start to affect other goods more than calories once the minimum 1000 Calories/day is reached.

"Saving" for an individual merely constitutes consumption in the future. The above model can be readily adopted by x current consumption and y future consumption with the factor b including the discount for the difference in time.

This suggests that welfare should be provided to ensure that everyone can eat. This also suggests that paying every worker $500 or cutting taxes for those already employee will have little effect on their relative spending or on saving habits. Though more will be spent/saved after the minimum consumption levels have been reached.

There is something to be said for the argument that welfare affects an individual's decision to work more or less. But we'll say it next time:


Also:

Featured on the NY Times Freakanomics Blog:
http://freakonomics.blogs.nytimes.com/2009/02/03/chicago-economists-on-the-stimulus-package/#more-3887

More once I've had a chance to watch it.

No such thing as stimulus

Republicans are right on most of this stuff. Even if it's justifiable spending it isn't stimulus. (Admittedly, I have a bias that there is no such thing as stimulus.)

That said, they're complaining about less than $20 billion out of $900 billion.
http://www.cnn.com/2009/POLITICS/02/02/gop.stimulus.worries/index.html

Let's just say I'm in the 22%

http://www.theonion.com/content/statshot/why_arent_we_on_facebook

New Banking

The Seeker writes:
Also, I just want to understand how a bank can make a profit on lending money (or even cover costs) without fractional reserve banking. The entire banking system collapses without the ability to make money on borrowing and lending, because without that liquidity will dry up, and you have yet to suggest a means for a traditional "bank" to make money under this new system.

The government (via the Federal Reserve) will pay interest to banks. The banks will subtract an amount to cover their costs and profits and pay the rest to depositors. Fractional reserve banking got its start when "money" was a commodity currency (ie gold) and so this method wasn't available. Now with fiat currency, it's possible.

Followup: Won't that cause inflation? Yes, but no more than it does currently. We're already doing this.

The second part of your question is the availability of lending. It's true that there will be a lot fewer loans available. At the same time, there will be new investing institutions that will take the place of banks. Savers who seek yield and can afford risk can dabble in that new market without jeopardizing the new safe banking system.

Followup: In the transition to this new paradigm, won't there be a lot of draining of liquidity?
Yes, but in the transition, the government will be able to retire large amounts of its debt forcing the market that currently invests in the Treasury to invest elsewhere. Essentially, we are bringing those who cannot afford risk to safety and encouragint hose who can afford risk to invest.

Winning Economies Don't Do Drugs

First!!!!


Has anyone noticed that the only difference between the majority and minority political agendas before and after the announcement of recession is any conception of fiscal constraint?

That the government can somehow "stimulate" the economy in the short term with legislation has become the conventional wisdom. Democrats and Republicans now argue about which "stimulus" is better, coke or speed, without stopping to realize maybe it's ok if the economy takes a nap in the middle of the day every one in a while.

The government has a chance to realign the financial infrastructure of the national economy, a chance not seen since Hoover, but instead they have somehow convinced themselves that spending and taxcuts can magically solve the problem.

The US economy produces over $13 trillion in goods and services each year. Even if the government could do something, why does the political establishment believe that spending less than 3% of that amount can somehow make everything better?(Http://www.cbo.gov/ftpdocs/99xx/doc9968/hr1.pdf)

Instead they should:
1. Eliminate Fractional Reserve Banking
2. Rationalize Taxation of Capital
3. Provide unemployment benefits, job training, education subsidies, and national health insurance


The problem is and always has been fractional reserve banking. It caused the stock market crash in 1929 to become the Great Depression and it as been an accelerant in every recession ever since.

Fractional Reserve Banking is the idea that a bank can take a deposit from you and lend it to someone else while telling you that they still have it and it's safe. (http://en.wikipedia.org/wiki/Fractional_reserve_banking)

When that someone else can't pay back, whether due to a stock market crash or a housing bubble pop, the bank can't pay you back. If you try to get your money out early before the crash, then you cause a bank run since the bank doesn't have enough money for everyone.

FDR and company tried to fix this with various measures to increase confidence in banks, including the FDIC. (http://en.wikipedia.org/wiki/Fdic) While these measures "worked" in that that the public (including me) was fooled into believing that banks were now safe, all they did was perpetuate the fraud, now with the backing of the United States government.

With the mortgage "crisis" the fraud is laid bare. Will our leaders fix the problem or punt it to the next generation?