Thursday, October 29, 2009

Busy media alerts 

I will be on Ed Morrissey's show at 3pm CT (bonus time!) to discuss the current GDP figures. Wish I had written a post about it, and I will, but I'm getting ready to stand in the rain to watch Littlest's cross-country sectionals.

Also been too busy to write a nice reply to Dane Smith. I like him, I really do. I just wish he would be right more often. I'll try to get one off tonight.

I'll be speaking tomorrow on a panel on U.S. fiscal policy at the Minnesota Economics Association. Follow the link for details. My focus is on international aspects, with special reference to China and Armenia. All in about the length of one segment I do on radio. That will be a challenge.

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Both demand AND supply 

John Palmer, coauthor of the Canadian edition of my favorite intro text, puts this much more simply than I have:

While some politicians talk about programmes designed to bring more people under the health-care umbrella, others talk about making health care more affordable. The former (combined with an aging population) will shift the demand curve outward; the latter will cause a movement downward along that shifted demand curve (a lower price increases the quantity demanded).

But if the supply curve doesn't shift outward, the above two policies will create more shortages and longer waiting periods (and committees of death, due to the shortages, no matter what they are called).

The only way to shift the demand curve outward, lower the prices to the users AND avoid shortages is to increase the supply.

So how to do it? Stop controlling the supply of medical professionals, says John. I'm not as sure of this, though, unless somehow you address the question of which professions they enter. The incentives for specialty doctors vs family/general practitioners are still skewed. Is there a way to change the price signal there without upsetting the provision of all those high-quality specialized services we enjoy? I am not sure how.

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Best paragraph I read last night 

An experienced team of pickpockets can have some of its members use a little street theater to distract passersby, whose wallets are then stolen by the other members of the team. The pay czar serves a similar purpose. Instead of looking at whether government-subsidized mortgage credit is a good idea, or whether the Fed is focusing on banks profitability with the overall economy as an afterthought, the pay czar gets the news media to focus on pay and bonuses.

Street theater.
Arnold Kling. I don't have as much faith as Kling that you can knock down all the bad banks and expect a new crop to come out of the ashes like a fire burns an overgrown forest and spawns healthier trees -- I wish someone would show me examples of where that's worked in banking -- but there are times I wonder what the Fed is worrying about.


Wednesday, October 28, 2009

Quick media alert 

Forgot to tell you: I'm sitting in for Don Lyons on the KNSI Morning Show tomorrow, 6-8 am.

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Not very stimulating 

That 2008 tax rebate that the government sent you? How many of you spent it? 30%, says BLS. 49% used it to pay off debt and 18% saved it. Business Insider has a nice graphic showing the breakdown between different types of households. I wrote in March about consumption smoothing. I actually called 2/3 save, 1/3 spend back in January 2008 just from watching a video (no longer available).

As that link shows, most economists expected just what happened, across the political spectrum. You should listen to us once in awhile.


I did not know ... 

...that Ally Bank, those people with the really annoying commercials using kids to discuss bait-and-switch tactics, is the online bank of GMAC, the financing arm of General Motors. So in essence those ads come from the government, which currently owns a third of GMAC.

I say let's make a deal: Your parent wants $2.8-5.6 billion more money in stimulus dollars? Stop the damn ads.

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Whose hypocrisy is this, anyway? 

Let me see if I understand Mike Kaszuba. A man pays his taxes. His children are placed in debt at a clip of about $900 billion per year. In return some small amount of that money is made available to people if they buy a product that man sells, for the purpose of "making the planet greener". But because that man opposes higher debt and higher taxes, he is to refuse their money? He is not to offer something of value to them -- a new furnace for their homes -- in return for that money, part of which is given to the consumer by those who loot him and his children? So they are robbed twice, once by the state, second by the morals of the robber?

That is Mike Kaszuba's world. If a man robs you and then offers you cab fare home, you should refuse it because it was gotten immorally. You should sacrifice yourself to the thief. As Ayn Rand once said, evil requires the sanction of the victim.

And if your world is not Kazzuba's, and if you need a furnace, you know where to go.


Tuesday, October 27, 2009

A short note to Growth and Justice 

Dear Dane,

Just read your note on less government not helping Minnesota. You use a ratio of government spending to personal income. Two things: One, we know state tax receipts are highly cyclical. That's what those tax commissions were telling you last year, if you had paid attention to it. Here's the Legislative panel:
While short-term cyclical volatility in Minnesota�s general fund tax base appears to increase during periods of economic downturn and typically parallels a significant disturbance or shock, long-term trend volatility in the tax base is roughly 30 percent greater today than it was during the 1970s. Most of this increase has noticeably occurred since the late 1990s.
So when the national economy turns downward, that ratio is going to fall. You can't blame that on policy. Where has G&J been in the debate to reduce cyclicality of tax receipts? I doubt you would support putting a sales tax on food; I know I wouldn't, even if it did reduce cyclicality.

There have not been chronic budget crises. There have been two shortfalls due to our reliance heavily on tax bases that are volatile.

Second, what was the growth of personal income in Minnesota 2006-08? 9.2% How about for the U.S.? 8.6%. Wisconsin? 7.0%. South Dakota? 16.6%. Where is this underperformance you were speaking of? Which state would you like me to emulate?

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Can FDIC solve "too big to fail" for non-banks? 

One of the stickiest points in debating how to regulate financial markets after the panic of 2008 has been what to do with investment banks and financial firms. There has been a desire for a "super-regulator" to deal with these non-banks as well as the banks, and most of the betting has been on the Federal Reserve taking on this role (at the request of the Obama Administration.) But most of Capitol Hill opposed this, and today Barney Frank has rolled out a trial balloon of giving that authority to FDIC.

Under this authority, jokingly referred to as "Death Panels for Banks," the Federal Deposit Insurance Corp. would oversee the dismantling of large financial firms much as it does now when it intervenes in commercial banks that are at risk of insolvency.

Decisions about which institutions are so large that they pose a system-wide risk and must be monitored would be made by a Council of Regulators, comprised of leaders from the Fed, the Treasury Department, the FDIC, and other bank-oversight agencies.

...Some independent analysts also have warned that handing the Fed new, expansive powers as the systemic risk regulator could distract it from its principal role of setting monetary policy to sustain growth and contain inflation.

"I didn't want the Fed to have that role because I think monetary policy is too important," said Vincent Reinhart, a former top Fed economist who's also wary of the emerging legislation. "If all you do is a college of regulators, that's just inviting a debating society."

I agree with this -- in fact, did last month -- but it has been clear for awhile that the Fed didn't want this role. In fact, the college of regulators is a Bernanke idea from a few weeks ago. You might argue Bernanke was just seeing the handwriting on the wall, but I doubt many in the Fed disagree with Vincent Reinhart's appraisal.

Reinhart and Fed governor Dan Tarullo have both argued in the last week that the problem is too-big-to-fail and that the issue is how to deal with non-bank financial giants like Lehman and AIG, for which regulators had to improvise. (See the McKinley and Gegenheimer timeline FMI.) If these companies are going to be placed under some government protection in a too-big-to-fail environment, I have to disagree with Ed that they don't get some kind of regulation. You may own a skyscraper as your private property, but when you tear it down you're responsible for any damage done to nearby buildings. If a private non-bank fails and in the process takes down healthy financial institutions that were counterparties, you may have a reason for using the law to limit collateral damage. (That doesn't mean you always get it right, as John Carney points out in the AIG case.)

So what can be done, if we're not going to use the Fed or FDIC? Before you say "we have to do something", consider the benefits of large banks, says Charles Calomiris. Diversification, economies of scope and extended reach to developing markets are some of these benefits. Are we at risk of losing those gains as we try to solve too big to fail?

UPDATE: John Taylor summarizes the testimony around Frank's FDIC proposal.

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The economics of spam measures 

While writing our book, my co-editor and I would refer to various international rankings as Spam. Not because they were noise, but because the stuff inside these measures were 'mystery meat'. So when I find today a new ranking under the pretentious title "The Legatum Prosperity Index", I cried out "Spam!" and went to see what was inside. From their executive summary:
Following a turbulent year marked by a global economic crisis, the Legatum Prosperity Index seeks to answer these two fundamental questions. It defines prosperity as both wealth and wellbeing, and finds that the most prosperous nations in the world are not necessarily those that have only a high GDP, but are those that also have happy, healthy, and free citizens.

The Prosperity Index accounts for 90% of the world�s population and is based on years of statistical analysis and research of objective data and subjective responses to surveys. The data comprises 79 different variables organised into nine sub indexes � each identified as a foundation of long-term prosperity. A country�s performance in each sub-index is given a score, and the overall Prosperity Index rankings are produced by averaging the scores of the nine sub-indexes for each country. Those countries that perform well across each sub-index do best in the overall rankings.
79 different variables? Combined into sub-indexes? Mystery meat indeed! The sub-indices are:
When written this way it's almost predictable that all Scandinavian countries will rank ahead of the U.S., which comes in ninth. Of course the U.S. gets dinged for health -- it always does, even though we know those comparative measures are fraught with error -- and education will not look as good ... which I'd accept as accurate. But the one that shocked me is that 13 countries rank ahead of the U.S. in economic fundamentals.
America has a large domestic market but a large trade deficit, and attracts relatively little foreign direct investment

America�s household spending is the highest in the world as a proportion of GDP, although domestic savings rates are only 14% of income, ranking the country 82nd in the world. Levels of capital stock per worker are in the top 10, and inflation was 3% in 2007. The US economy focuses on high value added goods and services, and is not dependent on exports of raw materials. However, its ratio of export prices relative to the cost of imported goods is weaker, ranking the country 78th in the world. The US also attracts relatively little foreign direct investment, which accounts for just 2% of GDP, ranking the country 83rd on this variable. Net interest margins are near the global average, while the amount of non-performing loans is low, ranking the country 26th on this variable and suggesting that the banking sector is moderately competitive and efficient.

I cannot tell from the information on the website how all this data is combined. (The methodology paper is apparently not ready for posting yet.) If the country is ranked lower because of the domestic savings rate I would ask why. If one can lead a full and happy life with low level of savings why wouldn't it do so? I don't understand the mention of export to import price ratios. A country that has a great amount of domestic capital does not necessarily need FDI. And many of these variables are interrelated. As I wrote (in a paper with Bill Luksetich), the independent effect of many variables is muted once one includes fundamental variables like the presence of private property rights. (The only mention of property in the Legatum measure I found was for intellectual property.)

Averaging 79 measures may be weighted or unweighted. Reading the 2008 report suggests to me some kind of weighting, but I can't tell again how it's done. Until and when we see something on the methodology, you can't rely on measures like this. GIGO.


Monday, October 26, 2009

Ya sure we got an airline 

An oldie is going around Minnesota after the announcement of Delta leaving us in St. Cloud without local airport service, and as an alternative to lost souls flying for Northwest:

Did anyone notice how the story changes? They initially said they were in a heated discussion over airline policy, but now it appears they have recanted that story. 78 minutes of radio silence? This story will have enough legs to get to next Saturday's potluck.

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Linking productivity 

I have meetings in the Twin Cities most of the day today, so a few links will have to do (maybe I grab a coffee this afternoon and post another time.) I'll at least try to relate them.

John Taylor explains to his first-year econ students the source of rising wages. Note that the measure is compensation per hour, which includes benefits. Most people bargain for the benefits they receive. Individual mandates for health insurance, Tyler Cowen explains, means that some people will be forced to buy something they don't want, so that their take-home pay will be pushed down. (Think about this -- we argue that the tax system biases health insurance to be provided by employers, and our answer to that is ... to make everyone buy it?) Ed Morrissey shows us that, when first considered in 1993, people knew this requirement that a citizen of the U.S. must buy any good was considered unprecedented. It still is.

Paul Kasriel reminds us of an important Milton Friedman lesson
If the increased government spending on retiree health care comes at the expense of business spending on capital equipment and R & D, then the productivity of the current labor force will be adversely affected and so, too, will the long-run growth rate of the economy.
(h/t: Caroline Baum, whose article should be read on its own merits.) The Wall Street Journal sounds the crowding out bell, noting non-defense discretionary spending rises 12.1% next year. Investors Business Daily cites an 8% payroll tax, a 5.4% income surtax and the fines in the mandates. Is it "stealth socialism" as they say? No, but it's certainly an expanded role of the state. Finding states that have increased productivity while expanding the public sector is about as easy as finding anything good to say about the NY Giants loss last night.


Friday, October 23, 2009

Tomorrow on the King Banaian Show 

The newly-constituted King Banaian Show (this still feels awkward and unnatural) continues tomorrow on KYCR, AM 1570, 9-11am with a replay Sunday 5-7pm. Please note that from the station's main page you can stream the show by clicking on the "Business1570 Listen Live" link on the right hand side of the page. I know a couple of people are saying they can't stream -- I know I can. (We're working on the podcasting part.)

This week we will visit with Ken Doyle, communications professor at the University of Minnesota, about his new book To Tax or To Ration: Medicare, Medicaid, and Our Long-Term Healthcare Crisis. The book's focus is on long-term care, and in particular its impact on senior citizens. While I've known Ken for awhile, I note his new bio refers to his profession as a financial psychologist. I am fascinated by what that could mean. He'll be on in the 10 o'clock hour.

We will also discuss the current economic and financial news from last week, what's coming up next week, and the impact of losing one's airline connection on a local community (following up on yesterday's Delta news, which was the headline in the St. Cloud Times this AM.)

Missed this last week: the new show gets some speculation from Saint Paul at Nihilist in Golf Pants. Regarding reason #1 for the real reasons I'm now on Business1570 -- the station expects to be at the State Fair with its own separate studio. Nothing keeps me from the State Fair. Not even buffalo.

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Separating the real, the financial, and the sentimental 

A friend asked me a great question today, which I'll paraphrase: If economists think the recession is over but consumer sentiment continues to be pessimistic, who's right? What is most likely to happen next?

As usual, let's look at the graphs, because calling consumer sentiment comes in different flavors. First we have the Michigan survey:
At least on that measure, we see the measure is coming up off its lows earlier this year. But rallying? Hard to say. (BTW, I don't know why the gray band is cut off at August -- that would be the St. Louis Fed's judgment not mine or the NBER's if they do.)

The Conference Board series is also not good or not bad:
This measure views the 50 line as neutral, so since May the Conference Board series has had consumer confidence as "not bad", rather than good.

Let me try to tie those together looking at the latest Leading Economic Indicators (LEI) report, which posted its sixth straight gain in September. I heard Chip Hanlon mention this on Hugh's show on Monday and it got me very curious, so I pulled this data up this morning. LEI is a composite of ten indicators. Hanlon said that (as I heard it) 60% of LEI are things that the Federal Reserve controls. I thought I knew that series and it didn't sound right, but the composition of LEI is a weighted average, and I assumed Hanlon was reading the weights. I'm a geek, but not so geeky that I memorize them, so I looked them up. What I see are standardization factors.

Leading Economic Index, Factor
  1. Average weekly hours, manufacturing 0.2549
  2. Average weekly initial claims for unemployment insurance 0.0307
  3. Manufacturers' new orders, consumer goods and materials 0.0774
  4. Index of supplier deliveries � vendor performance 0.0677
  5. Manufacturers' new orders, nondefense capital goods 0.0180
  6. Building permits, new private housing units 0.0270
  7. Stock prices, 500 common stocks 0.0390
  8. Money supply, M2 0.3580
  9. Interest rate spread, 10-year Treasury bonds less federal funds 0.0991
  10. Index of consumer expectations 0.0282
You can see the most weighted value in there is movement of (real or inflation adjusted) M2. But that weighting is meant to adjust the volatility of each measure. Because M2 doesn't have that great a volatility, it gets a higher weight. You can see, it's not a highly volatile graph. M2 growth has slowed but, because CPI turned negative real M2 is rising.(see alternative measures from ShadowStats for some caution on this figure.)

And with yesterday's report we can add up the impact of the ten. Here is the September reading for contributions of each component to LEI, which grew 1%:

Average work week, production workers
Average weekly initial claims unemployment insurance
Manufacturers' new orders, consumer goods
Index of supplier deliveries (vendor performance)
Manufacturers new orders, nondefense capital goods
Building permits
Stock prices, S&P 500
Real M2 money supply
Interest rate spread (10-year T-bond minus fed funds)
Index of consumer expectations
TOTAL +1.0

I divide that in my mind as six items from the real economy, three financial measures, and a consumer sentiment item. Those first six items contributed only 0.22% of the 1.00% gain came from the real economy, 0.24% came from sentiment using the more favorable Michigan survey, and the other 0.54% came from the three financial indicators. But one of those three are the interest rate spread, which is kept large in part because of the Fed's hitting of the zero interest bound on Fed funds. (Note Allan Meltzer's discussion of profit from the carry trade this morning.) I don't know if that's what Hanlon is referring to, but it makes the argument for some artificiality of the models economists use.

I haven't done a national model forecast for a few years now (I had a model at one time for a classroom exercise but it's old and dusty) but if I did it would make me very nervous right now. The data we are currently plugging into those models are of a different character than before; forecasters using those models without much consideration of the data are extrapolating far away from their models' experiences. Assuming forecasters are not that foolish, we can only assume that they are including a great deal of judgment and autonomous decisions to their extrapolations. Some of that relies on relationships between different economic phenomena, but again that has to look different in this current world. (See the still-useful classic Mincer and Zarnowitz [1969] for thoughts on extrapolation and judgment.)

What worries me here is that the usual relationships would be hard to rely on. Much of that LEI gain is due to the unusual behavior of the interest rate spread -- how reliable is that signal? More data undoubtedly helps, and next week's GDP number on Thursday will tell us whether the financial signal we're getting now is useful.


Two definitions 

Corporatism is a system of economic, political, and social organization where corporate groups such as business, ethnic, farmer, labour, military, patronage, or religious groups are joined together into a single governing body in which the different groups are mandated to negotiate with each other to establish policies in the interest of the multiple groups within the body.
That's governance, Chicago style. The head of government is friends with the heads of every big business, lobby and union, and together they make decisions on how everyone else will live. Those on the inside get what they want. Those on the outside -- well, they get what the big guys want them to have. That's life in the big city. ...

[I]t appears to be the way that Barack Obama, who once aspired to be mayor of Chicago, has decided to run his administration.
My previous observations on corporatist Obama here, here and here. The bashing of businessmen is just a discipline to get them back to the bargaining table. Deciding pay is part of it. (Union leaders beware, because yours isn't far behind. Obama will need your hides for his re-election campaign.)

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Thursday, October 22, 2009

It takes some doing to make me miss Northwest 

But Delta, congratulations! You've done it.
Delta Air Lines announced today that it is ending air service between St. Cloud and Minneapolis at the end of the year.

The company cited weak customer demand that has seen flights between the Twin Cities and St. Cloud at about 33 percent capacity during the past year.

Travelers who have Delta flights booked after Dec. 31 will get alternative transportation options or refunds, the company said in a news release. Delta will contact customers who provided full contact information with their reservation to arrange alternative transportation, the company said in the news release.
So investments made by the area to improve and expand this airport will now have to bring someone else to use this airport. C'mon Sun Country! I've always wanted to be a fan, and I even follow you on Twitter.

In a related story, Rep. Jim Oberstar promises stimulus dollars to extend the Lake Wobegon bike trail to Eagan. /sarc

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Lord make me virtuous, but not just yet 

Here are three statements from Christina Romer, head of the Obama Council of Economic Advisors, regarding the stimulus and its effects. First,
The estimates indicate that as of August, the ARRA had raised employment relative to the baseline by between 600,000 and 1.5 million jobs. (p. 7)
Since the recession began in December 2007, payroll employment has fallen by 7.2 million. Given that employment growth of nearly 100,000 per month is necessary to keep up with normal labor force growth, employment is currently about nine million below its normal trend level. (p. 11)
A second challenge that we face is clearly the budget deficit. The final numbers just released show that the fiscal 2009 deficit reached $1.4 trillion, or about 10 percent of GDP. Excessive moves toward fiscal policy tightening could lead to a return to output decline and a reacceleration of job losses. The current policies that have generated a dramatic turnaround of the economy need to be seen through to their completion. The Mid-Session review released in August predicted a similarly large deficit in 2010, and substantial structural deficits even once the recession is over and the economy is fully recovered. Such long-term deficits are unacceptable and need to be dealt with. Over the long run, sustained deficits crowd out private investment and reduce long-run growth.

Given the current precarious state of the economy, substantial near-term spending cuts or tax increases to reduce the deficit would threaten the recovery. (p. 18)
They say they are nine million jobs below trend for full employment. Regarding my post yesterday, to get back there you have to get GDP growth (at least in real terms) to be faster than trend growth (around 2.5-3%), which is why I question whether the shock to nominal GDP is permanent. But think about what this says -- the stimulus is working, but not nearly sufficient such that we can avoide the crowding out and private investment decline and decrease in real GDP. If we reduce investment you will get a permanent shock. So if they continue to keep the stimulus going they could create a permanent loss, but that would be OK in return for buying 600,000 to 1,500,000 jobs "saved or created" now. How much of a price does Prof. Romer believe we should pay for those jobs?

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If you drive up costs, some gets passed on 

I can't give myself a high grade for a prediction I made last summer. When news of credit card legislation came in June I said:
For many young people, this will mean less credit.
I did not expect that the cost would be put onto small, judicious users of credit cards.

I was wrong:
Starting next year, Bank of America will charge a small number of customers an annual fee, ranging from $29 to $99. The bank has characterized the fee as experimental. But card holders who have never carried a balance or paid late fees could be among those affected.

Citigroup, meanwhile, has started charging annual fees to card holders who don't put more than a specific amount on their cards, typically $2,400 a year. Other banks are charging inactivity fees if customers don't use their credit cards during a specific period of time. You heard that right: You could be spanked for staying out of debt.
h/t: Don Boudreaux. The suggestion is that if you have good credit you have options. Perhaps, but the legislation is undoubtedly an increase in the cost of credit provision and we should not be surprised that all consumers of credit are asked to pay for this. Thanks, Congress!

No doubt my current leftist infestation in the comments section will tie this to executive compensation for a certain health insurance professional, "left", Tommy?


How recessions spread 

A cool graph, illustrating the regional spread of recession by using a graphic kind of like Gapminder to show employment gains and losses in 100 U.S. and 20 Canadian cities. h/t: Craig Newmark. What's interesting is to pull the slider to December 2007. Where were the job losses at that time? Broadly three places: Detroit and nearby; Florida; California. Even when you pull it over to July 2008 all you really notice is the filling in of the states between Illinois/Indiana and Florida. 380,000 jobs lost between July 2007 and July 2008 nationwide. Go to July 2009 (last month coded) and now you have 5.7 million more jobs lost and a sea of red across the states.

If I was teaching macro this term, I'd use this one in a classroom.


Whose costs are these? 

Ed Morrissey has a fabulous post on price fixing as a remedy to something costing you too much.
Fixing prices does not lower costs. ... �Costs� are borne by providers, who get reimbursed by either consumers (in a rational market) or by third parties (American health care) for their goods and/or services. In a competitive market, providers have to set their prices at an attractive level in order to get business without missing out on profit opportunities, but their prices have to cover their costs � or they go out of business.
Prices provide many services to a market economy. One is information on the value of something. When you offer more for a pair of World Series tickets you are informing everyone who owns them what the opportunity cost of their use is. Those who don't sell are in essence saying "these tickets are worth more to me than what I can sell them for on the street/on StubHub/etc."

Costs, though, are much more subjective than prices. As I've blogged before, costs are always costs to someone. Actions have costs, not things. Heyne, Boettke and Prychytko put it best: "All costs are costs of action or decisions, all are attached to particular person, and all lie in the future." So when someone asks "what does health care cost", you have to ask "cost to whom?" To use an extreme example, suppose government says to anyone holding an M.D. "You are now required to work one day every week -- we'll pick the day -- at a public free clinic, and we will pay you $0 for your day." To the taxpayer and to the government's budget, that costs nothing. But to the doctor this is tremendously expensive. She loses the income she would have earned had she been permitted to go to her clinic or hospital instead. Maybe this is more or less than what would have been paid if the patients who attended the "free" clinic, but for sure it is not free. It's only a question of who bears the burden.

This is the simple explanation, by the way, of why the Congress tried unsuccessfully to pass the Medicare fix for doctors. No costs would be changed by the act: The decision was whether or not to shift those costs from doctors to future taxpayers.

Likewise, the use of the public option is to, in short, provide pressure on the insurance companies to negotiate lower reimbursement rates for doctors or else lose customers to the government insurance plan. But at best this only changes the distribution of health spending between doctors, patients and insurance firms. What increases the supply of health care is a reduction in the opportunity cost of providing health care.

A misunderstanding of costs applies as well to patients. Alan Krueger wrote last February about the cost of patients' time waiting for health care. Question: Will the wait for health care rise or fall under Baucuscare? Does anyone know? Does anyone care? Not Congress, because it's not their costs.

This is also why the question "is the bill deficit neutral" hides the cost question. All this asks is whether the cost arises through the tax system and through government expenditures. Many costs can be hidden in mandates and "cost controls" that in fact increase costs, just not on the government's budget. Theirs are not the only costs that matter.

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Wednesday, October 21, 2009

A temporary shock, a permanent bias 

Courtesy reader sf, I find that the Tom and Tom show has made another appearance before a legislative panel.
State Economist Tom Stinson told the Subcommittee on a Balanced Budget � part of the Legislative Commission on Planning and Fiscal Policy � that tax collections for the first quarter of Fiscal Year 2010 (the state�s fiscal year begins July 1) came in below the original forecast by $52 million, or approximately 1.7 percent. ...

Stinson said Minnesota will likely begin the 2012-13 biennium with a budget deficit of at least $4.4 billion; however, House Chief Fiscal Analyst Bill Marx said the true number could be as high as $7.2 billion, once inflation and the impacts of Gov. Tim Pawlenty�s 2009 unallotments and vetoes are factored in.

Beyond 2013, Stinson said long-term demographic trends will reduce the state�s tax revenue base. In particular, he said the state�s aging population will create a situation where revenue growth will decrease just as demand for government services is going up.

�The demographics are going to make tax increases more difficult,� Stinson added, explaining that Baby Boomers trying to save money for retirement will likely resist proposals to raise taxes.

State Demographer Tom Gillaspy said the Baby Boomers will also require more state health care spending as they get older, making it more difficult to fund education and other government services. He suggested the key to getting out of this �fiscal trap� would be to increase the productivity of the state�s workforce. Stinson noted that this in turn requires new public investments, like infrastructure and education, creating what he called a �fiscal Catch-22.�
The latest edition of the Tom and Tom presentation is here. It has been a staple on the St. Paul fiscal policy circuit for about three years now. But the recession has changed how they present this, and I'd like to suggest it's lead them to one positive statement or forecast that is contentious and one normative statement that I think we should question.

To see the positive, let's look at a graph in the presentation (at page 9.)

This is a representation of the Global Insights forecast for nominal GDP at two different points in time. Nominal GDP is a driver of the revenue model Department of Finance uses to project tax receipts. If you forecast nominal GDP to be lower, your tax revenues will go down, and your budget deficit looks higher, all other things equal. Dept. of Finance uses Global Insights' forecast.

They project a permanent decline from the recession. A textbook description of recessions, however, would not normally show a permanent shock to GDP from its trend values. This would normally be the result of a negative productivity shock. But has that happened? Multifactor productivity in the US rose 1.2% in 2008. Why would we not get a period of above-average growth? Real earnings are up. Casey Mulligan has sounded this theme for awhile, and it's plausible -- not that it's beyond debate, just that it's a real possibility that there has been no permanent shock, and that nominal GDP can return to its previous path. That would imply that the Minnesota budget deficit for 2012-13 is possibly not nearly as bad as predicted by Tom & Tom.

Their final slide includes this statement, emphasis added:
If we don�t make the necessary public investments in human capital, research and infrastructure, then we won�t have the productivity gains needed to provide the resources to make those investments.
I would hope that's a misprint, or a hasty slide. (Given it's the last one, quite possible.) Human capital formation does not require public investment. I buy my child a private education. A private university raises funds to permit faculty time to create new basic research. Infrastructure has both private and public components -- and more of it could be private if we made that choice. There is nothing necessary about "public investments" other than a lack of imagination of what the private market could do if permitted.

The decision to invest "other people's money on other people" is a normative decision with disastrous consequences.
Nobody spends somebody else's money as carefully as he spends his own. Nobody has the same dedication to achieving somebody else's objectives that he displays when he pursues his own.

Beyond this, the programs have a insidious effect on the moral fiber of both the people who administer the programs and the people who are supposedly benefiting from it. For the people who administer it, it instills in them a feeling of almost Godlike power. For the people who are supposedly benefiting it instills a feeling of childlike dependence. Their capacity for personal decision making atrophies. The result is that the programs involved are misuse of money, they do not achieve the objectives which it was their intention to achieve. But far more important than this, they tend to rot away the very fabric that holds a decent society together.

"a feeling of childlike dependence" -- from your trash service to your college to your health care.

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Mandates and the information problem 

I was rummaging around (my term for following a Google search through several places looking for something) in my quest to comment on this excellent post by Gary Gross on government mandates. It relates to the post just below -- mandates create rents for some people and deadweight costs born by society. I came upon this from Art Carden:
I came across a great quote from C.S. Lewis yesterday that summarizes my views on the modern state: "Aristotle said that some people were only fit to be slaves. I do not contradict him. But I reject slavery because I see no men fit to be masters." I would rephrase this as follows: "Many people say that some people are so irresponsible or evil that they require the state's regulation, oversight, and direction, but I reject statism because I see no men (or women) fit to be their masters."
Gary (by email) points me to a report from the Council on Affordable Health Insurance that shows 50 states having 2133 different mandated benefits and providers. In Minnesota that comes out to 38 benefits every health insurance plan must provide, 21 types of providers that must be covered, and nine separate categories of individuals that must be provided for in a plan. Multiply this by 50 and you have an astronomical number of combinations possible. Who will decide which of these will be the mandate that goes in to a federal plan? Leave out my genuine concerns over coercion, and there's still a huge problem, Carden argues:
...any proposal for intervention has to overcome the knowledge problem. Hayek showed that even under the best of circumstances, the absence of profits, losses, and prices means that no government official can know whether they are creating value or wasting resources.
Hayek wrote that no central planner can get access to the information that is needed, and that the price system gets you information from the "man on the spot". To date nobody has found a system that can duplicate that feat. Maybe Congress will discover it this time, but are you willing to bet your health on it?

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Redistributing revenues 

Many friends tell me of setting up for conventions, where they experience the requirement that workers do the set-up of their displays for them. This is not a free service; union rules in convention facilities can in some cases govern minimum hours and number of workers hired, who can be hired, etc.

All this is in the way of redistributing income between those who provide content for an event and those who provide a service to the content-providers.

A story in Bloomberg yesterday
illustrates this very well.
After you practice for years and get to Carnegie Hall, it�s almost better to move music stands than actually play the piano.

Depending on wattage, a star pianist can receive $20,000 a night at the 118-year-old hall, meaning he or she would have to perform at least 27 times to match the income of Dennis O�Connell, who oversees props at the New York concert hall.

O�Connell made $530,044 in salary and benefits during the fiscal year that ended in June 2008. The four other members of the full-time stage crew -- two carpenters and two electricians -- had an average income of $430,543 during the same period, according to Carnegie Hall�s tax return.

They can make a "credible threat" of withdrawing their labor, but so what? The pianist can get friends to roll a piano on stage for much less than this. Performances at our university rely on students to provide this labor for free -- surely there's some midpoint between free and a half-mil?

So how is it that the union acquires this power? They will tell you that it comes from "collective bargaining negotiated fairly with management, signed by management and ratified by the membership of the union.� Why does management sign such agreements? As seen at the bottom of this article, and like most other concert venues, Carnegie makes a loss based solely on concert revenues. They earn a profit when you include "funds from donors, investment income and government grants." But driving up that price has the consequence of making it harder for someone other than the high-wattage star pianist from getting to perform. They are pushed to smaller, out-of-the-way venues and earn a lower income. So a question: Does the union help someone running a Carnegie Hall get grants and donations, to "cover costs" that are actually monopoly revenues for union workers?

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Tuesday, October 20, 2009

Who gets benefits from their employer? 

Here's an interesting statistic: 78% of workers in Minneapolis-St. Paul-St. Cloud metro area have access to a medical care benefit through their employer. The national average is 74%. The survey is experimental, covering 15 large metro areas. Atlanta and Seattle checked in with highs of 84%, Los Angeles at 70%. 70% of Twin Cities (plus St. Cloud) area workers have access to life insurance benefits. The data does not reflect how many participate; that data is judged less reliable.

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Monday, October 19, 2009

Supersize me 

You knew this would be true. The Senate's version of the health care bill, in legislative form and still without an official bill number, checks in at 1502 pages. How long will it be before Senators are asked to vote on this monstrosity? How long will it take to read this sucker?


The technology we don't see 

David Henderson points out a passage in a June report on health care reform by the Council of Economic Advisers:
In medicine, however, technological progress in recent decades has been almost exclusively cost-increasing, without generating a commensurate increase in value. Undoubtedly, provider incentives, which largely reward finding an expensive way of treating a previously untreated condition rather than finding a less costly alternative to an existing treatment, contribute to this trend. (p.20)
Henderson writes that surely they don't mean no value. A disease that was untreated previously but now is, must provide value. Perhaps they're not valuable enough using a benefit-cost principle. But how would you know?

The conversation on this post last week ended up being an argument over this very same question: How do you put values on lives? The point is public policy has to. A statistical value of a life is part of any decision on regulation that goes towards someone's safety or health. To get at that question requires one to observe human choice and infer value on the basis of those choices, assuming those choices are rational. Since there are finite resources and potentially infinite demand for safety some measures simply aren't done. Which ones? How do you choose? Public policy relies on a marginal approach. At the margin, the cost of saving one more life is higher than the benefit received. As Viscusi [1993] posited, there is a 6,000-to-1 chance of someone dying from an asteroid, so why do we not have a "doomsday rock defense" if not for the prohibitive costs of building the gun? Both costs and benefits matter in the decision: There are many things that have a statistical chance of fatality less than 1/6000th, but we do them because the cost of avoiding the hazard is quite low.

The CEA quote I began with misses one other point, though. The first attempts to solve a problem will likely be rather expensive. There is a learning-by-doing aspect at play (in the sense of Stokey [1988]) -- new goods enter and those that provide value at lower cost push the higher cost ones out. But one cannot know what provides value without the entry of some good first, be they higher- or lower-priced. Creating higher cost goods allows one to learn how to produce at lower cost. The CEA seems to support short-circuiting that discovery process. That would be technology we don't see, Bastiat-style.

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Vertical integration, cell phone edition 

Some people are saying a great Droid would mean more competition amongst handsets. But you can�t really choose a handset � you choose a handset-carrier pair. The real innovation inhibitor in the cellular world has been the power of the carriers to dictate what devices you can use and what apps go on those devices. Just ask an entrepreneur who tried to create handsets or cellular apps. They are completely beholden to the whims of the carriers.

Chris Dixon this morning. I grabbed the HTC Hero last week when it came out -- those of us in Sprint-land have been shut out of iPhone, and long ago I picked Palm/Handspring over Blackberry. But the Pre was just too much of a bother -- hated the keyboard, and I need something with memory I can set to 4 GB min, 8 GB preferred, so that I don't have to carry my Touch along with a phone. The Hero does that.

But it is odd that we allow this pairing to happen. Why? Dell tried to sell an iPhone killer but the idea was stillborn because the carriers panned it. I would love to have Skype on my phone so I could make it useful in places I couldn't get a carrier ... but carriers hate that. There was some thinking about this last week with Oliver Williamson's Nobel win (see Alex Tabarrok for example.) Since it appears each carrier gets its own flavor of phone that the arrangement reduces some scale economies for phone manufacturers. Why? I don't have a good answer here.

Now if someone could just figure out how to power the Hero for 24 hours on a single charge, I'd be the happiest guy on a mobile in America.


From there all things look right 

I love having a seven-year-old blog, because I find some useful things on it. After reading yet another description of the Obama Administration's attack on Fox News I recalled the Groseclose and Milyo work on how liberal Fox News is. Of course that's a bit of a joke, but the study cited there found that Fox was about as conservative as Charles Stenholm, a Texas Democrat who lost to a Tom DeLay-picked candidate after serving 26 years.

Of course there was some complaining about the technique that paper used, but it was published in the peer-reviewed Quarterly Journal of Economics in 2005. A second paper was published in Critical Review the following year; their editorial policy allows for peer review at the editor's discretion, so we don't know if that one was or not, but potentially their work was vetted twice. Fox' Special Report comes off in these papers as being ideologically in the same space as Olympia Snowe, the only Republican so far to vote for the Democrats' health care plan

And let's not forget that the current president, at least on ADA scores, ranks as the most liberal. While the average Democrat legislator pulls about an 85, Obama was a cool 100. From that vantage point, even the New York Times looks a little right.

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Saturday, October 17, 2009

Robert's Rules of Order 

Today I attended the statewide meeting of MN Republican Women and again was reminded of something we really take for granted - a structure to run meetings. Robert's Rules of Order (RRO) has provided guidelines for meetings since 1876. Most of us grew up with its procedures and just assume that meetings will be run following them.

This is a rarity. I'm reminded of a Russian immigrant at a statewide Republican Convention a few years ago. He stood up at one point in the meeting and said (I paraphrase): "Do you realize how wonderful this is? People can debate, disagree, but they are heard. And no one gets mad. This is beautiful! This is America."

We hold debates in a civil manner and there is a procedure. It seems cumbersome at times but it works. If we lose our freedoms, RRO will also be lost. As frustrated as I used to get having to follow the RRO parliamentary process, I now appreciate it for its thoroughness and yes, beauty.

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Friday, October 16, 2009

Not the first to forget history; let's remember 

True, much of Mao's brutality has already emerged over the years, but this biography supplies substantial new information and presents it all in a stylish way that will put it on bedside tables around the world. No wonder the Chinese government has banned not only this book but issues of magazines with reviews of it, for Mao emerges from these pages as another Hitler or Stalin.

In that regard, I have reservations about the book's judgments, for my own sense is that Mao, however monstrous, also brought useful changes to China. And at times the authors seem so eager to destroy him that I wonder if they exclude exculpatory evidence.

...Perhaps the best comparison is with Qinshihuang, the first Qin emperor, who 2,200 years ago unified China, built much of the Great Wall, standardized weights and measures and created a common currency and legal system - but burned books and buried scholars alive. The Qin emperor was as savage and at times as insane as Mao - but his success in integrating and strengthening China laid the groundwork for the next dynasty, the Han, one of the golden eras of Chinese civilization. In the same way, I think, Mao's ruthlessness was a catastrophe at the time, brilliantly captured in this extraordinary book - and yet there's more to the story...

Out of the tens of millions of alleged "counterrevolutionaries" and dissidents who spent long periods of their lives in Mao's system of prison-factories and corrective labor gulags, it's estimated that 20 million died during their "re-education" into collectivism, obedience and communal selflessness.

Additionally, the human cost of Mao's ill-planned and ill-named Great Leap Forward of 1959-1961 might well have reached 40 million deaths from starvation, the result of the largest and most deadly famine in world history.

In 1968, Wei Jingsheng, 18, a Red Guard member, provided a firsthand account of how the Great Leap Forward had driven parents mad with hunger:

"Before my eyes, among the weeds, rose up one of the scenes I had been told about, one of the banquets at which families had swapped children in order to eat them. I could see the worried faces of the families as they chewed the flesh of other people's children."

What's so unusual about Emperor Shih Huang of the Chin Dynasty? He had buried alive 460 scholars only, but we have buried alive 46,000 scholars. In the course of our repression of counter-revolutionary elements, haven't we put to death a number of the counter-revolutionary scholars? I had an argument with the democratic personages. They say we are behaving worse than Emperor Shih Huang of the Chin Dynasty. That's definitely not correct. We are 100 times ahead of Emperor Shih of the Chin Dynasty in repression of counter-revolutionary scholars.
When 900 million are left out of 2.9 billion, several five-year plans can be developed for the total elimination of capitalism and for permanent peace. It is not a bad thing.

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Pepper, Pets 

Many of us are cat and/or dog lovers. Sometimes, our pets become part of our families. Why? They comfort us, we comfort them. The passing of a loved pet, one that has been with us, can be a sad event.

King, Pepper entered your family's life unexpectedly and just knew when his time was up. You enjoyed him and I'm sure, he enjoyed a family that welcomed him, no questions asked.

Thank you for sharing.

KING ADDS: Thank you, Janet. Every pet I've owned as an adult has been a family member, but Pepper was the first one to "volunteer" at our door. When they put out a box for him with a blanket he hopped right in, laid down and waited for what would be next. Because we were a little slow to realize he had chosen us he had to give us more hints. Barbara reminds me that he had actually come to the window of her home office and pawed the screen. He was right; it was a great match.

Thursday, October 15, 2009

New radio adventure 

For those of you still wondering what's going on with the radio program, your wait is about over. As I just mentioned on KKMS Live with Jeff and Lee last hour, I will be on KYCR this Saturday, 9-11am, as we begin to roll out the new Business 1570 Talk Radio Saturday. As I'll discuss on Saturday, do NOT expect that this is just Final Word on another station. We're going to create something different, more focused on economics and finance than anything I've ever done on NARN. But you will still hear policy talk, as I've always done, with an eye towards what's happening in St. Paul and Washington that affects business leaders and entrepreneurs.

We don't have everything in place just yet to make this work, but part of my philosophy is to get out there quickly, find the problems with any new venture and work them out. So join in an audio beta-testing on Saturday, 9am, on Business 1570, Twin Cities Business Radio.

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In little over 10 years, debt held by the public as a percent of GDP under our Alternative simulation is projected to exceed the historical high reached in the aftermath of World War II and grow at a steady rate thereafter.

These fiscal challenges are driven by health care cost growth and demographic trends. Absent reform, Social Security, Medicare, and Medicaid will account for a growing share of the economy in coming years. The longer action to deal with the nation�s long-term fiscal outlook is delayed, the larger the changes will need to be, increasing the likelihood that they will be disruptive and destabilizing.

...While this is similar to the results of previous simulations, the sense of urgency has increased. Beginning in 2009, our Alternative simulation shows persistent annual budget deficits in excess of 7 percent of GDP�levels not seen since the aftermath of World War II.
From a new report by the Government Accounting Office. Using the baseline numbers extending out for 75 years, you would need to raise an additional $37 trillion (5% of GDP) to have the debt/GDP ratio equal what it is today. Using the alternative scenario, that would be $62 trillion. In the baseline model revenues as a share of GDP are 20.2% from 2019 forward; the alternative sets that figure at its 40-year historical norm of 18.3%. Unless you get serious control of spending now, you are looking at much higher taxes going forward, or much higher inflation in the long run.

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Forecasting luxuries I can't afford 

Over my office door is a horseshoe nailed to the wall. When asked why I show them a sign on my door. It reads: An economic forecaster was known to have an horseshoe prominently displayed above the door frame of his office. Asked what it was for, he replied that it was a good luck charm that helped his forecasts. But do you believe in that superstition? he was asked, and he said, "Of course not!" But then why do you keep it? "Well," he said, "it works whether you believe in it or not." (Reportedly, this is supposed to be a quote from Neils Bohr the physicist.)

Like Scott Beaulier, I have been asked whether the latest NABE survey that 80% of its respondents think the recession is over is true. And like Beaulier, my first answer is that "it's a survey" which is asking in effect the question "when the NBER business cycle dating committee dates the trough of the Great Recession, what date do you think they'll put on it." Since the survey was done in September, the respondents are saying "we think they'll set it sometime in July or August" (I doubt anyone would say it ended in the second quarter.) We looked at that data last week and you'll know I concluded that "we need a certain move in GDP AND in employment" before we should put a date on it. So I'm in the 20% on that one, but maybe I'm just a lagging indicator :) As I noted, the second derivative issue (or, if you will, the inflection point issue) is a real problem for any forecaster, as Beaulier acknowledges in his third point. We agree there.

What I would resist, however, is some of the lampooning of forecasters that Beaulier engages in:
...many of the "economists" they're surveying are business economists applying flawed forecasting models. Generally speaking, they are not academic economists, who have a stronger sense of unintended consequences and theoretical nuance.
I view this kind of economics as hackonomics at its worst, and I don't put much stock in the predictions they make.
The job of a forecaster is to forecast, to try to get the next number right. Whether I have a "stronger sense of unintended consequences and theoretical nuance" is useful insofar as I get closer to the right number. Beyond that it's only for smug faculty club conversation. I live in a fairly small city; my life gets spent in both the academic world and in Central Minnesota's business community. (I'm not the only forecaster who works in academia, of course.) I educate while I forecast and some "theoretical nuance" hopefully comes out of that. But because I also meet and sometimes share panels with "business economists", I have a view of them that would consider this "hackonomics" smear to just that. It's damn unbecoming.

If the horseshoe works, I use it. I'd like a model that predicted better that didn't use the horseshoe. It'd be swell; I could be confident in both the faculty lounge and the rubber chicken business luncheons I speak at. But there is no tradeoff between theoretical purity and forecast accuracy. Whatever it takes to get an accurate forecast, I'll use.

(BTW, I don't make national forecasts, at least not publicly. I did it as a training exercise for graduate students when I taught forecasting for them. But I retired that model and turned that class over to my younger colleagues a few years ago. So I don't participate any more in any of the national surveys. I don't use any national indicators in forecasting St. Cloud. And I don't have the luxury of "following the herd" because there is no herd forecasting Central MN.)

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Pepper, our cat of the last nine years, age unknown because he was a stray that insisted on coming into our lives (he was a senior when he got here, we're quite sure), left this world for better last night. He has suffered kidney failure for the last year. Got off our bed, went to a corner of the house, laid down and didn't get up.

Thanks for stopping in, boy.

Pepper is on the left in this picture. Sparkler and, of course, Buttercup remain with us.

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Wednesday, October 14, 2009

"HI Mom! Send health insurance!" 

A couple of items in this Huffington Post piece are astonishing. One, an astonishing admission. See if you see it without my italics.
A new provision being rolled into the unified House health care bill would allow young adults to stay on their parents' health care plans until they turn 27, House Speaker Nancy Pelosi told reporters Tuesday.

Flanked by young adults from 30 states, Pelosi and Rep. Chris Van Hollen (D-Md.) joined the bill's sponsor, first-term Rep. Kathy Dahlkemper (D-Penn.), to support extending eligibility for a parent's insurance plan well past graduation from high school or college. Given that nearly one-third of America's uninsured are aged 19 to 29, Pelosi said the bill would both expand coverage and reduce the amount of subsidies the government would need to provide for coverage.

"Young adults are the most uninsured group in the country. They often lose coverage at age 19 when they graduate from high school or a few years later when they graduate from college. Once they enter the workforce, they face new obstacles to getting insurance," Pelosi said. "Now with this legislation that takes them to their 27th birthday, we take them a long way down the path of some independence, some liberation to follow their aspirations right out of school.
I'll wait: Did you see it?


OK, here it is with the italics:
A new provision being rolled into the unified House health care bill would allow young adults to stay on their parents' health care plans until they turn 27, House Speaker Nancy Pelosi told reporters Tuesday.

Flanked by young adults from 30 states, Pelosi and Rep. Chris Van Hollen (D-Md.) joined the bill's sponsor, first-term Rep. Kathy Dahlkemper (D-Penn.), to support extending eligibility for a parent's insurance plan well past graduation from high school or college. Given that nearly one-third of America's uninsured are aged 19 to 29, Pelosi said the bill would both expand coverage and reduce the amount of subsidies the government would need to provide for coverage.

"Young adults are the most uninsured group in the country. They often lose coverage at age 19 when they graduate from high school or a few years later when they graduate from college. Once they enter the workforce, they face new obstacles to getting insurance," Pelosi said. "Now with this legislation that takes them to their 27th birthday, we take them a long way down the path of some independence, some liberation to follow their aspirations right out of school.
So one third of the uninsured (I assume that means a third of the 30 million out of the 307 million) are between 19 and 29, youth that don't really need much insurance. As Robert Reich said in his talk at Stanford in 2007, an honest president would say
we have the only health-care system in the world that is designed to avoid sick people. [laughter] That's true, and what I'm going to do is I am going to try to reorganize it to be more amenable to treating sick people. But that means you--particularly you young people, particularly you young, healthy people--you're going to have to pay more.
But of course the young both don't have much money, and they voted overwhelmingly for Obama. So we make the cool kids' parents pay, or even better we make their parents' employers pay more. It's not clear whether covering one's child would be under the individual mandate or not. My son is 25 and works two 30-hour-a-week jobs in the restaurant industry, neither of which provide health insurance. If he remains uncovered under the individual mandate, who gets fined -- him or me? (As the HuffPo article states, we don't know if the coverage will have price caps on it, so I won't go into that additional problem.)

Second, since most health care has restrictions at the state border, what does this do to labor mobility? Pelosi acknowledges that health insurance for the young is more difficult, because the per person cost of health insurance creates a bigger wedge for lower-productivity workers. (See Wikipedia on tax wedges -- a mandate for health insurance is in essence a wedge.) So these 20-somethings are now put on their parents' plans, which are designed for families in the state where Mom and/or Dad work. Suppose Missy wants to work in New York and leave her parents in Missouri. Her NY job doesn't have health coverage. How do Mom and Dad cover her?

This really is nonsense.

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Why health care reform takes a thousand pages 

I drove last night to a local grocery store to get my wife and daughter some NyQuil D. Because of government regulation (to control manufacturing of meth) there is a law in MN that requires me to ask the pharmacist, have them swipe my drivers license and sign for the bottle. While waiting I see a sign for a walk-in clinic next to the pharmacy. There is a menu of prices for a variety of tests and services. And I wondered, "Here's a cash market that works. Requires, as best I can tell, no insurance card. The prices don't look absurd (I don't think I saw any three-digit prices.) What will happen to this when the Congress and Administration are done with their reform?"

Eric Falkenstein suggests the clinic's future is dark by analogy to Henry Manne's story of the parking lots.
The story describes what happens to a college town when parking lot owners decide to get together and squelch competition. Specifically, this was targeted towards those Saturdays when football games generated an abnormal number of cars, and many people and businesses sold space on their private driveways. The parking lot owners noted horror stories about 15-year olds parking cars, or the inability to fully insure the cars! They had a meeting where they said parking cars 'wasn't a business, it was a profession', and set up a slush fund for political action. The 'unfair and dangerous competition' was made illegal, by basically mandating fixed costs that made it uneconomic for small providers of parking spaces to operate. The new law allowed the parking lot owners to increases prices under the pretext of quality, yet the result was more congestion because the parking lot owners were not equipped, or incented, to deal with the new volume efficiently. Quality was merely redefined to mean fully licensed and bonded parking lots. Creative people got around the prohibitions by offering people $5 'car washes' on their driveways that lasted several hours, which then provoked new regulation. Each new regulation created a new problem, which then motivated more regulation.

The parable supports the principle that 'quality oriented' guild monopolies conspire with legislators under the banner of 'the public interest'. They then can raise their prices by outlawing all sorts of competition. The unanticipated inefficiencies created simply raise the cry for more regulation. The net result is worse for everyone except a few parking lot owners and the legislators they support.
The analogy to health care is then made, with a prediction:
The US health care system involves a myriad of regulations, rights, and tort liabilities, that conspire to make this market highly perverse. Any current health care provider is already playing the game, thus, doctors in the US average a salary of $150k/year, almost double that in other developed countries. Unions are growing in health care, with the common result of inflexible rules, high salaries, and an inability to fire workers. As with our education monopoly, expect the health care professionals to make out best in any solution (Michelle Obama, after all, was a $317k/year 'diversity outreach coordinator' for the University of Chicago Hospitals once her husband became a senator--we need more of those!).

The current modifications are just like the parking lot parable: more patches for problems created by prior patches. One law government obeys is the The Second Law of Thermodynamics, so the new system will certainly be more complex. Spending more money will not make it better, just create new inalienable rights and patronage jobs paid for via the magic of deficit spending.
One thing I learned in observing the tea party movement was that people are generally suspicious of laws they can't read and understand. Perhaps it's because we instinctively know that within complex laws come favors and sinecures for the connected (of whom we are not a part.) It is impossible to provide all the favors needed to satisfy the selectorate (definition) if you don't have laws that are dense. It is in the interest of this entrenched lobby in health care to conceal those gains, and Sen. Baucus and Rep. Waxman and the other legislators are simply serving those whose support they require.

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A president is not a member of my family 

I expect Russ Roberts to make a comment like this, since I found this link off his Twitter stream, but I'm going to venture a comment first. David Harsanyi notices the sharp increase in regulation under the Obama Administration (which is saying a fair deal, because President Bush was not exactly reticent in regulation himself). Bill O'Reilly had a segment last night in which both he and a liberal talk show host agreed that there is regulatory overreach.

Russ will, no doubt, bring up the two worlds, the micro-cosmos and the macro-cosmos, that Hayek said we live in simultaneously. See Steven Horwitz, for example. In my home I do try to control everything. Last night our very old cat, who is dying of kidney failure, appeared to my wife to be dead. She woke me, I checked: not dead yet, fooled her. (Insert Python joke here.) Now awake, I lay in bed, and every sound in my house is subject to my inspection. Where's Pepper (the cat) going? My daughter is coughing, should I get her something? That doesnI believe myself in control of every act in that house. The order of my home is intentional, it is the subject of my imagination, my design, and I believe it's in my control (as long as my wife agrees :)

But the world outside is not. It continues to function without my design and control. To borrow the quote of Hayek that begins Horwitz's article:
Moreover, the structures of the extended order are made up not only of individuals but also of many, often overlapping, sub-orders within which old instinctual responses, such as solidarity and altruism, continue to retain some importance by assisting voluntary collaboration, even though they are incapable, by themselves, of creating a basis for the more extended order. Part of our present difficulty is that we must constantly adjust our lives, our thoughts and our emotions, in order to live simultaneously within different kinds of orders according to different rules. If we were to apply the unmodified, uncurbed, rules of the micro-cosmos (i.e., of the small band or troop, or of, say, our families) to the macro-cosmos (our wider civilisation), as our instincts and sentimental yearnings often make us wish to do, we would destroy it. Yet if we were always to apply the rules of the extended order to our more intimate groupings, we would crush them. So we must learn to live in two sorts of worlds at once.
Remember when we thought of the liberals as the Mommy Party? The Mommy Party can be seen that tries to apply the microcosmos to the macro-environment. As I heard Dennis Miller say on his radio program yesterday (or maybe it was his guest), the Republican Party is the one that wants to regulate your bedroom and the Democratic Party wants the rest of the house. Maybe so.

"Our world is interconnected": it's a phrase we often hear and it sometimes is used as a reason for us to "work together". But that's not the extended order Hayek defines. It's the world of the famous I, Pencil story; it's the world that appreciates the division of labor being limited by the extent of the market, as Adam Smith observed. Read that link and you'll see that those who became more advanced had the ability to deal with others they did not know thanks to geographical advantages (particularly by being on or near waterways.) They were interconnected only in certain areas, and not others.

I'm fine when my wife tells me I'm being silly thinking Cheerios will reduce my cholesterol and that she will no longer buy them when shopping for groceries, putting Special K in the cupboard instead because it's good for me. I'm unhappy because I like Cheerios, but I recognize that my wife has made a commitment to me and me to her, and that we make investments in our home and family because of that commitment. In Ephesians 5:28-29 the apostle Paul wrote "He who loves his wife loves himself. After all, no one ever hated his own body, but he feeds and cares for it."

But at no point does that extend to the state. And it is from this that our distrust of government instruction of the right cereals or drains, etc. A president is not a member of my family, no matter who the president is.

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Global Warming??? Come Tonight, Learn the Real Facts 

A reminder, a terrific opportunity to learn facts (those nasty aspects of real science, mathematics, language, human behavior, etc.) about the "global warming" aka "climate change" (doesn't climate always change?), the latest attempt to take our hard-earned income via the "cap and tax monstrosity" moving its way through Congress is available tonight.

The MN Free Market Institute brings Lord Christopher Monckton to Bethel College at 7:00 PM. Session is FREE. Location is Benson Great Hall, (map here). Bring you kids - they may actually learn some real science.


Tuesday, October 13, 2009

Mugged by reality, health care edition 

Growing up is hard to do, but Wendy Button does it well:
In the past, I paid attention to the health care debate as a speechwriter who prepared speeches, talking points, op-eds, and debate prep material on the topic at different times for John Edwards, Barack Obama, Hillary Clinton and others. Now, I'm paying attention because I'm a citizen up the creek without a paddle.

Throughout my life, I have been very lucky because my insurance has always been there whenever I had a crisis. When my 10-speed hit a patch of leftover winter sand, and I went flying into a telephone pole, it covered the x-rays and stitches and concussion diagnosis. When a half a ton of sheet rock fell on me, my insurance paid for the cast on my foot. When my depression kicked in and I was hospitalized and painting ceramic pieces in art therapy to boost my self-esteem (sheesh), it made sure that when I got home my medical bills didn't make me reach for a razor. And when there were growths in my uterus, it covered that medical procedure and every regular check-up, lab test, broken bone, sports injury, and antibiotic prescription in between.

Since I care more about my country than my personal pride, here's how I lost my insurance: I moved. That's right, I moved from Washington, D.C., back to Massachusetts, a state with universal health care.

In D.C., I had a policy with a national company, an HMO, and surprisingly I was very happy with it. I had a fantastic primary care doctor at Georgetown University Hospital. As a self-employed writer, my premium was $225 a month, plus $10 for a dental discount.

In Massachusetts, the cost for a similar plan is around $550, give or take a few dollars. My risk factors haven't changed. I didn't stop writing and become a stunt double. I don't smoke. I drink a little and every once in a while a little more than I should. I have a Newfoundland dog. I am only 41. There has been no change in the way I live my life except my zip code -- to a state with universal health care.

Massachusetts has enacted many of the necessary reforms being talked about in Washington. There is a mandate for all residents to get insurance, a law to prevent insurance companies from denying coverage because of a pre-existing condition, an automatic enrollment requirement, and insurance companies are no longer allowed to cap coverage or drop people when they get sick because they forgot to include a sprained ankle back in 1989 on their application.

...What makes this a double blow is that my experience contradicts so much of what I wrote for political leaders over the last decade. That's a terrible feeling, too. I typed line after line that said everything Massachusetts did would make health insurance more affordable. If I had a dollar for every time I typed, "universal coverage will lower premiums," I could pay for my own health care at Massachusetts's rates.
My hat's off to you, young lady. I hope you have a good employer, because you just painted a target on yourself.

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A request 

A faculty member and a student group on our campus has acquired a domain name for the purpose of advertising a film series attacking Israel. This behavior is common on campuses around the country; this is but the latest example. My request is for two things: Any links to items that provide balance to this series that one could circulate; and a program that could be run here to provide balance that might be run by other groups on campus besides the one running this one. I see John Palmer suggested an Israeli Democracy Week.

No discussion of the new Days of Rage appears on the schedule. Hmmm.

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The rest of that "jobs saved by stimulus story" 

The headline of the story is "State jobs saved by stimulus" which tells us:

State finance officials reported Monday that the stimulus created or saved 11,800 jobs through the end of September. The state has spent $1.6 billion, or about a third of the $4.7 billion it stands to get from the American Recovery and Reinvestment Act.

Minnesota�s unemployment rate stood at 8 percent in August, with more than 120,000 jobs lost this year.
Reading the actual press release from the Minnesota Dept. of Finance includes some interesting detail:
MMB�s estimate of jobs is the result of 17 state agencies that have filed more than 200 reports detailing spending and jobs data on all ARRA grants awarded to date. The data submitted on Saturday, October 10 is preliminary and will be reviewed to ensure accuracy and consistency prior to being finalized on October 30.

Preliminary data suggest broad impact from stimulus funding. The biggest effect is from state fiscal stabilization funds, where an estimated 5,900 education jobs and another 1,200 public safety jobs were preserved. Since some schools are drawing most of the funds early in the year, annual numbers may be lower. Initial reports submitted by the Minnesota Department of Transportation show nearly 900 transportation jobs created or saved.
So are these all public sector jobs? Looking at the current employment statistics indicates that while employment fell 4.3% in the 12 months to August 2009, private employment fell 5.1%. Total government employment rose 0.2% over the period. Note that the figures above will include a few private sector jobs, particularly in transportation. But most of these jobs are public sector.

The AP report indicates that rather than 66,000 jobs in Minnesota 'saved or created' we're likely to see only 35,000 (if one extrapolates the current figure to the total amount of dollars to be spent.) This comes out to more than $135,000 per job. The remaining jobs may come from "awards made to cities and counties or tax incentives provided to individuals" and "higher Medicaid matching funds" according to the Dept. of Finance. But wouldn't that mean that the tax cuts were quite stimulative, and wouldn't that be an argument for using tax cuts -- which is always "shovel ready" -- instead of this spending? But that would not lead to an increase in public sector employment, and that appears to be a goal of the stimulus.

And all the numbers being reported should be taken with a grain of salt:
�These jobs figures are the result of a federal reporting process that is completely new and untested,� said Commissioner [Tom] Hanson. �Although there have been plenty of challenges, reporting government activity so broadly and so quickly is an important result of the Recovery Act. All citizens are better served by this commitment to increased transparency.� (emphasis added)

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The EU's Anschluss 

The European Union is keen to get its treaty ratified, so much so that it's willing to uncover its contempt for national sovereignty in the Czech Republic.
The Czech Cabinet meets in emergency session today to consider how to persuade their stubborn President to sign the Lisbon treaty � under intense pressure from Paris and Berlin to complete the ratification as soon as possible.

With President Klaus demanding a last-minute amendment as the price of his signature � the final approval required in the 27-nation European Union � the Government is locked in a trial of strength with its head of state and on the brink of a constitutional crisis. If it supports his demands the treaty might have to be reopened amid lengthy delays, possibly allowing time for David Cameron�s Conservatives to win the next British election and hold a referendum on the treaty as they have promised.

If the the Czech Government opposes President Klaus then it may have to resort to a form of impeachment or strip him of his treaty-signing powers so as to complete ratification.

Barely disguising the anger felt in European capitals, Fredrik Reinfeldt, the Prime Minister of Sweden, which holds the EU�s rotating presidency, told a signing ceremony by Poland that Czech assent was eagerly awaited. He added: �We do not need more delays.�
Jeremy Rabkin, author of the Case for Sovereignty, described it a few years ago:
All members of the EU have now bound themselves to a scheme in which the European Court of Justice treats mere treaties as superior to national constitutions � and national courts give priority to the rulings of this European Court, even against their own parliaments and their own national constitutions. This is way, way, way, beyond anything we could accept in America. To find an analogy, you must imagine that NAFTA officials in Montreal claim the authority to override the U.S. Congress and the U.S. Supreme Court � and federal judges in America agree that the NAFTA policy must take priority.

What makes the European scheme particularly bizarre � at least from our point of view � is that Europeans aren't really prepared to pursue their "Union" to its logical conclusion. They don't trust the EU to have an army or police or even criminal courts of its own. So Europeans are entrusting supremacy to a government they don't really trust � at least not enough to entrust with traditional attributes of sovereignty.
In the long run, the American scheme is bound to be more respectful of individual rights and personal liberty, because we start from the recognition that people can disagree whereas the EU is always presuming some consensus that will � supposedly � be discovered by bureaucrats and judges.
Daniel Hannan warned months ago that "in order to preserve the anti-democratic order in Brussels, the national leaders must sacrifice a measure of their domestic democracy, too." It is now on full display in Prague.

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Monday, October 12, 2009

Providing nuance 

We were happy Friday to have our alumnus, St. Louis Federal Reserve president Jim Bullard '84 on campus to receive the Herberger College of Business Leadership Award during our homecoming. He gave a most interesting talk to our students and faculty (and a few community members). He said to me in the car as we drove to campus that he considered himself one of the most hawkish presidents regarding inflation, and indeed during his talk seemed to advocate an inflation target of zero percent. (This anonymous poster on a bulletin board seems to have heard the same thing. The news reports suggested he favored an inflation target of 1.5-2%, which is more consistent with the views of Chairman Bernanke.) You can hear a minute the talk on this campus report on his visit where he differentiates between "too big to fail" and "too big to fail quickly."

Bullard is now in the middle, it appears, of a rift over when to turn off the deluge of liquidity in the marketplace, that has aligned presidents on both sides of the issue. Yesterday at the NABE symposium he gave a pretty sharp message on his hawkishness, both noting that the Fed was too slow last time to raise rates which may have fueled a bubble in housing and saying "gap-based theories of inflation were badly discredited in the 1970s." The latter, says Arnold Kling, is evidence that they may be differentiating between this as a supply or a demand shock. (It's worth remember that Larry Summers was co-author of a paper on hysteresis of unemployment rates, which if true is evidence in favor of Bullard's statement. See also Stanley Fischer [1996].) If he accepts that the unemployment rate doesn't tell you anything about slack demand, Bullard is much more likely to be an inflation hawk. The two concepts are interrelated, as Bullard points out: "If part or most of the fall in output was a collapsed [housing] bubble, then today�s output gap would be smaller than it appears."

However this report from Bloomberg a couple of hours ago may indicate his comments were more hawkish than he wanted them to be.
�You want some jobs growth and unemployment coming down. That is a prerequisite� for an increase in interest rates, Bullard said. �It doesn�t mean you need unemployment all the way down to more normal levels.�
I think that's known as 'providing nuance'.


Congratulations on Nobel 

Speaking of Krugman, I liked his post on the Nobel Prize winners today.

There was an old tradition of economics that focused on the origins and nature of economic institutions. This tradition was very influential before World War II.

But it proved not at all helpful during the Great Depression. My caricature version is that when the Depression hit, institutional economics, asked for advice about what to do, replied that well, it�s all very complicated, and has deep historical roots, and � Meanwhile, Keynesian economists, using very simple mathematical models, basically said �Push this button � we need more G�.

And this had a somewhat perverse effect. The rise of Keynesian economics also meant the rise of the equations guys (Samuelson in particular), and in the end the equations crowded out institutional economics even as Keynes fell into disfavor.

But the questions didn�t go away. And institutional economics has been making a quiet comeback for the past several decades.
I note a comment on my Facebook page from Margaret Martin (the brains behind the David Strom Show) who says "Every liberal intention from the smallest to the most grandiose that doesn't make it into reality is due to tragedy of the commons." That is probably true for those who don't understand the transactions costs problem that Williamson researched. Bryan Caplan wrote that
Faced with externalities, modern analysts almost immediately inquire about transactions costs. For example, in the early 1950s, J. E. Meade advocated subsidizing apple orchards to correct for the positive externalities they provide to beekeepers. Inspired by Coase, however, Steven Cheung (1973) wrote a careful case study of the bee-apple nexus. In the real world, beekeepers and apple orchard owners do not wait for government to solve their problem. They can and do negotiate detailed contracts to deal with externalities.
So my answer to Margaret is simple -- hang around with economists more. We balance Ostrom, whose work nevertheless spawned the very useful field work that many development economists do today, as Alex Tabarrok notes. Since my comparative systems class has been reading Douglass North (whose work is also akin to Williamson's and Ostrom's) I will be working up a new lecture for tomorrow.

Humorously, MarketWatch notes the losers of this Nobel prize.

UPDATE: Scott Beaulier somewhat shares Margaret's worry:
In her case studies, Ostrom is ultimately saying that context matters and we must exercise humility when attempting to reform or improve the efficiency of the commons. She is saying "Do No Harm!" She is definitely not saying individual, private solutions fail. In the media's rush to simplify, however, it's easy to imagine them saying things like, "Ostrom tells us that individual, private solutions are inferior to community solutions..." Again, that's not the message to be taken from her work.
A new cry: Save Ostrom from the Ostromians!


Hands off the food, MN doctors! 

I saw this picture yesterday on Business Insider and wondered, what is it that Minnesota does differently that forces a drug manufacturer to write a sign saying "hands off the food, Minnesota doctors!" Here's your answer:

Two years after Minnesota officials forbade drug makers to give doctors more than $50 worth of food or other gifts per year, drug company sales representatives there are having a far harder time marketing to doctors. The rule change was small and almost accidental � a state official decided to interpret a 1993 law differently from his predecessor. But the effect on drug makers has been profound.

The year after the change, the number of visits that Minnesota primary care doctors accepted from drug sales representatives decreased at about twice the rate of the decline reported by primary care doctors nationwide, according to a survey by ImpactRx, a New Jersey firm that tracks pharmaceutical marketing. A growing number of Minnesota hospitals and clinics have banned routine visits from them.

�We have an extended hallway, and the sales reps sit there now without anything except maybe Styrofoam cups filled with M&Ms. The 30 pizzas are gone,� said Dr. Michael Severson, a pediatrician in Brainerd, Minn. �It�s made the doctors think about whether to ban them.�

A 1997 study found that medical students saw gift-bearing drug sales representatives as helpful while viewing with suspicion those without gifts. This experiment is now being played out statewide in Minnesota.

Leslie Pott, a spokeswoman for AstraZeneca, said the company provided �modest meals� to doctors because �given a physician�s demanding clinical schedule, the most efficient time for doctors and medical staff to meet with representatives is often during lunch hour.�

... Minnesota also requires drug makers to report all consulting payments made to doctors. Maine, Vermont and West Virginia have passed similar registry requirements, at least a dozen other states are considering them and Congress is considering a national one.
It's that last paragraph that tells the tale. If a MN doctor picked up a food item they'd have to report it. Rather than screen who eats what, they post this sign. It's a transactions cost story that inter alia Oliver Williamson might have told. Most remarkable -- this isn't an explicit law, it's just a state official's interpretation of the law. But we're "vile and stupid" to worry about increasing regulation of health care, right Prof. Krugman?

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Global Warming - NOT 

More on global warming. As you can see by my post here, the topic is HOT. But we in MN woke up this morning to 1"+ of snow on the ground. It continues to snow and shows no sign of stopping.

According to this article by the BBC (of all media), CO2 is up but temperatures are down. Just maybe, something bigger than humans is causing this problem???? Like oceans, sunspots, sun in general, etc. Why do some humans think they are so smart as to be able to predict much of anything? (Stock market anyone?)

I'm reminded of an old TV commercial when oleo was competing with real butter - the line made famous by a woman standing in a forest was, "Don't fool with Mother Nature."

Humans would prove themselves much more wise if they stopped trying to control and learned to adapt.


NFL = Not for Limbaugh? 

This is just plain stupid.
NFL Players executive director DeMaurice Smith on Saturday made a move to solidify the union against a bid by conservative talk show radio host Rush Limbaugh as part of a group that aims to purchase the St. Louis Rams.

In an e-mail to the union's executive committee on Saturday specifically addressing Limbaugh's bid, Smith said, "I've spoken to the Commissioner [Roger Goodell] and I understand that this ownership consideration is in the early stages. But sport in America is at its best when it unifies, gives all of us reason to cheer, and when it transcends. Our sport does exactly that when it overcomes division and rejects discrimination and hatred."
So what on earth are they talking about? ESPN comes up with a list of 'examples'. To wit,
Limbaugh has expressed a number of controversial racial ideas in the past. For example, he suggested that Gen. Colin Powell supported Barack Obama's presidential candidacy simply because he was black, and he also stated that the media wants black quarterbacks to do well and that Donovan McNabb doesn't deserve much of the credit he has received for the Eagles' success.
I don't see how it is hateful to suggest that a black man is rooting for another black man to become president. Yes, I know Powell said that wasn't the reason, but as Limbaugh replied, please name the white liberals Powell has endorsed.

As to McNabb, one is entitled to an opinion. At the time Limbaugh said it, no less than the sports statistician Allan Barra agreed with him. He would go on that season to lose the NFC Championship game for the third year in a row before finally getting to the Super Bowl the following season. He three three interceptions against the Patriots, losing 24-21. Does he deserve credit for that?

As Barra says, Limbaugh didn't say McNabb was a bad QB, just that sportswriters may overrate him because they want a black quarterback in a league that is 60% black to succeed. I find that to be understandable in a world that insists the only way to not be a racist is to see race in everything.

(h/t: John Hinderaker)


Negotiating bloody history 

I have watched the signing of the protocols between the governments of Armenia and Turkey with very mixed emotions. Part of it is fascination. I note that I co-authored a paper at an early conference on opening the border between the two countries, a paper that got more attention in policy circles than academic ones. The issue, as I said when I gave the paper, is that the issue is political. So what I've written (and many of my Armenian economist friends have written) -- that there are economic benefits to border opening is really quite irrelevant. I've been fascinated therefore by what appears to be the decision by the Armenian government to embrace the economic benefits. That strikes me as both rational and naive -- rational insofar as I think it will help, naive insofar as it ignores the political.

And what a political event it has been! Even the signing turned out to be a political nightmare, with challenges from each side over what the other would say in the signing ceremony. I can imagine "don't mention the Genocide!" being said with the same humorous panic that John Cleese instructs the staff at Fawlty Towers not to mention the war to the German guests. And for the others, don't mention the piece of land and conflict that closed the border in the first place, because they're not to be tied together (as many in the Armenian diaspora fear.) Of course the Turkish Prime Minister Recep Erdogan has now proven those folks right.

So I see that part as the other emotion, one of complete dread. I have wanted to respect the rights of Armenians in Armenia to live their own lives, and if they want to trade with Turkey it's none of my business (just as my desire to trade with anyone else is none of theirs.) Yet the decision to create a joint panel to decide what happened in 1915 is inappropriate. There is no decision; the history has been written by those who saw it. It's already been heard by a jury once. What I dread is that history is about to be written by an intergovernmental committee. As Prof. Deborah Lipstadt, a Holocaust scholar, wrote in 1996
Those who deny genocide always dismiss the abundance of documents and testimony as contrived or coerced, or as forgeries and falsehoods. Free speech does not guarantee the deniers the right to be treated as the 'other' side of a legitimate debate when there is no credible 'other side'; nor does it guarantee the deniers space in the classroom or curriculum, or in any other forum. Genocide denial is an insidious form of intellectual and moral degradation...
I dread that the international community would decide that, to remove impediments to bringing Turkey into the European Union, the history of the first ethnic cleansing of the 20th Century would become a pawn. (My own reflection on being a pawn here.)


Saturday, October 10, 2009

Global Warming - NOT 

Most Minnesotans awoke this morning and noticed snow on the ground - it's October 10! We are 19 days into autumn as stated by Ed Morrissey of The global warming fanatics, though, don't quit - now they want $1,000,000,000,000 to be spent over the next 20 years to prevent the future global warming. Does this mean they are FINALLY awaking to the fact that we've been in a cooling cycle for the last 10-11 years? I doubt it.

Want to learn more? Here's a terrific opportunity. Wednesday, October 14, at 7:00 PM, MN's Free Market Inst will feature Lord Christopher Monckton (of the British Parliament) to discuss the fallacies behind the global warming (not) hype. Location is Bethel Univ., Benson Hall and admission is free. Go here for more information.

Friday, October 09, 2009


Sorry to have been so busy today. Still working on details for radio tomorrow -- looks iffy at this point, but we will know more shortly. Meanwhile, please see my first post at the new National Association of Scholars blog. Bookmark that blog for commentary on higher education from at least 22 academics.

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"Gee, guys, you really shouldn't have" 

The DNC is saying that Republicans in criticizing the Nobel committee selection of President Obama has "sided with the terrorists" and criticizing Obama for "an award he didn't seek." He was nominated in February. If he's at all uncomfortable with the selection -- perhaps because it would be better to have an accomplishment recognized than a promise highlighted -- he certainly could have discouraged the committee from selecting him.


Thursday, October 08, 2009

Media alerts 

  1. Due to a technical glitch, I am covering for Don again on the KNSI Morning Show, 6-8am tomorrow.
  2. If you are in St. Cloud, you have a great opportunity to hear an alumnus of my department who has made quite a name for himself. Jim Bullard, president of the St. Louis Federal Reserve Bank, will be speaking at Atwood Little Theater tomorrow at 1pm on the economy. There will be a brief Q&A at the end of the hour. Admission is free. Here are directions to Atwood.
  3. As to the status of Final Word, please check back tomorrow for news. I'm 98% sure of what happens next and need time to get the details. But it's going to be a different and I think an exciting opportunity.

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The whole Baucus debate in one question 

Everybody knows that the US spends much more on health care than anyone else, without getting better results. Everyone also knows that health spending has outpaced GDP growth everywhere, thanks to medical progress. What I didn�t realize was just how clearly the evidence shows that the rising trend is steepest in the US. We have the biggest increase as well as the highest level. We�re #1!
Paul Krugman, 3/28/08.

So here's the question: If we pass Baucuscare, what would happen to the share of GDP devoted to health care? I thought the whole idea was to "bend the curve downward." You won't find that in the CBO report -- that's not their job. How else can we get the unfunded mandates included in the conversation?

Martin Feldstein thinks that the share of health care in income should be no more than 15%; I don't know why that's the right number, but if what we want is a cap on spending that is a more direct way to do it.

Megan McArdle shows that's not the case for Massachusetts. John Lott could add the question "what will this proposal do to cancer survival rates"?

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45% of job losses from small firms 

Since I seem to be on this kick today, let's also look at this graph, from John Rutledge:

Doesn't that scream "credit crunch" to you? See this from Greg Udell. And see the latest Fed Senior Loan Officer Survey.


A JOLT of gross 

Even though we are still experiencing a daily net loss of jobs it's important to remember that there are about 200,000 hires every working day Lots of firms are hiring. In order to increase employment a payroll tax cut need not shift firms "from firing to hiring" it need only increase the hiring rate of those firms already hiring or on the margin of hiring.
Alex Tabarrok discussing data from the JOLTS report from BLS. In May I discussed the context of saying the stimulus had saved or created jobs. Vice President Joe Biden has now upped the 150,000 claim to a million, which has earned him some derision from conservative quarters.But the proper context for the number is that 29 million hires have happened since January, and he's claiming that the stimulus made one of those 29. Or he could say 32 million jobs were lost in the first seven months, and it would have been 33 without the stimulus. Or something in between. Fine, but in that context the number isn't so large. And, of course, many of those jobs may be temporary: Last week's job report showed that 1.4 million workers completed temporary jobs in September, up almost 500,000 from a year ago.

You can click the JOLTS report tomorrow and update my figures for August.

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Obama's Foreign Policy ABCs: Apologize, Betray, Cave 

We have had the epitome of a baby boomer president in office for less than nine months. During this period, we have watched the supposed leader of the free world apologize to anyone who will listen for just about anything and ignoring the good we do.

We have watched him betray freedom loving people across the planet
- Israel is the only truly functioning democracy in the Middle East, yet Obama and his naive sycophants totally ignore the atrocities committed by the Palestinians and demand that Israel stop protecting itself and refrain from providing housing for its people.
- Honduras legally elects a new president but Obama and his State Department do everything they can to protect a thug who was determined by Honduras Courts to be out of office.
- Turns out Obama knew about the release of the so-called "on death's row" perpetrator of the Lockerbie plane crash. 270 people murdered by a thug, who gets released to go home to honor and glory under another dictator, Omar Khadafi? What about all that leftist sympathy for victims? Or, don't they matter - the victims of the Lockerbie murderer are gone so the feelings of their relatives don't count?
- Iran has its freedom fighters dying in prison, women getting raped, the population taking to the street and the supposed leader of the free world simply ignores them.
We have watched him cave to special interest groups, thugs and dictators so quickly it is mind boggling. See betrayals listed above and add the following:
- Korea
- Russia demands the USA not install its missile shield in Poland or Czechoslo- vakia and Obama says, "OK" and by the way, we don't want anything in return.
- United Auto Workers union doesn't want tires manufactured in China to be sold in the US so Obama and his cronies impose a tariff.
The result will be a world without a strong, decent leader and a world that, if Obama continues, will become rapidly unsafe for billions of people. Either he is the most naive president we've ever had or his narcissism knows no bounds.


A little damper on your positive third-quarter GDP forecast 

Seen this yet?
Consumer credit decreased at an annual rate of 5-3/4 percent in August 2009. Revolving credit decreased at an annual rate of 13 percent, and nonrevolving credit decreased at an annual rate of 1-1/2 percent.

Note that "nonrevolving credit" includes auto loans. With all the Cash for Clunkers deals done in August, would you not have thought this would be positive? And cutting credit card balances at an annual rate of 13% makes it hard to imagine back-to-school sales did very well. But Labor Day was late, and the story goes that retailers had a better September.
The International Council of Shopping Centers-Goldman Sachs preliminary tally registered an increase of 0.1 percent for September, compared with a 1 percent drop a year ago. While still tepid, the results mark the first gain since July 2008, when the index rose 1.3 percent.

As stores announced their results Thursday, J.C. Penney Co., Macy's Inc., and Target Corp. all reported smaller-than-expected declines in sales at stores open at least a year.
Not good, not positive, just "smaller-than-expected declines". I know the WSJ forecast for Q3 is for 3% growth; I'm trying to figure out where that growth will come from.



Looking at the odds on the Nobel prize in economics, I am surprised to see so many people betting on Eugene Fama. He's certainly worthy, but in a year where equity prices have fallen in part due to (mis)use of the analysis he helped create it seems an odd time to award him. If you want to make a timely award, I would think Robert Shiller is your choice for his work on housing.

I think Paul Romer is a good bet; my personal favorite to receive one would be Bhagwati. We'll find out on Monday.


Wednesday, October 07, 2009

Perhaps a natural experiment 

After reading about John Key in National Review I have an idea. The size of the stimulus packages passed in Australia and New Zealand (as shares of GDP) are about even (Australia at 4.5% is a little larger.) But Australia's is even more inclined towards government spending than the US package, while New Zealand has adopted a very Reaganite program of tax cuts. If the Obama Administration's program is correct in not providing more immediate relief through lower taxes, we should see the recovery more vigorously in Oz. If the conservative/libertarian position is more correct, the Kiwis should do better. Here's the GDP and labor data from OECD. New Zealand has declined more sharply than Australia thus far, but it's early in the game I would say. Readers are invited to create a scorecard.



Good grief, the man who gave us Sen. Obama to become Pres. Obama might be even more annoying than his student.

Maybe God got it right with the Ten Commandments and their brevity.� -- Sen. Dick Durbin.

What does he mean by this? That "people who are too bitter to read 1000 pages cling to their guns and Bibles?" Because seriously, I didn't understand what he meant by that.

I'm thinking I need to write the chairman's mark of Leviticus. "Leave some of your field for the poor. I'm God, also known as Senator."


Cheap cereal and dear overdrafts 

Can someone tell me why this is relevant?
"Banks and credit unions have become so sophisticated in driving up overdrafts that Americans now pay more in overdraft fees every year than they do for books, cereal, or fresh vegetables," said [Center for Responsible Lending, a liberal advocacy group] senior researcher Leslie Parrish. "These billions of dollars drained from consumers each year represent lost opportunities for families to save for a rainy day or buy necessary goods and services that could help spark the economy."
What is an overdraft? It's an attempt to have the bank offer you an unsecured loan, for which you would have to pay interest. The borrower sets the amount and the time. How much should one pay for this service? It's of value to the borrower; should not the lender get compensated for providing a valuable service?

As to the comparison, we live in a world that produces goods cheaply, particularly agricultural goods. I would think it's a great thing that cereal, vegetables and books are made as cheaply as they are; I don't see a theory that says they should not cost less than the right to put a loan on a bank's books.

Now if it turns out that banks are putting these overdraft protection arrangements in place (at high prices) without consumers' knowledge, you'd have a real point here. But if this is again a case of consumers signing checking account agreements without reading the clause of overdraft protection, is this just an attempt to legislate bad behavior? Nobody HAS to overdraw their bank account.


Convex and concave 

Check out the slightly different slopes of the three line segments indicated by arrows. The purple arrow shows a segment that slopes downward slightly less than the yellow arrow. A mathematician would say the shift from yellow to purple was an inflection point, shifting the curve from convex to concave.

This is what led the President in early August to say the economy was �pointed in the right direction.� The red arrow shows the worse news of last Friday�s jobs report, with a line that slopes downward slightly more sharply. The curve shifted back to a convex shape, in which the slope was more sharply downward than in the prior month.

If you�re saying to yourself, �That�s ridiculous! They�re all going down, and the differences in slopes are almost too hard to see!� then you�ve got my point.

The line that represents how many people are working continues to decline. That�s what matters.
Keith Hennessey yesterday on how the Obama Administration is changing its rhetoric about the recession on the basis of the second derivative rather than the first.

I thought we should look at the other three series of coincident indicators to see if any of them show an upturn that would fit Hennessey's point. Let's try first industrial production:

There are two up-months for July and August -- is that a trend or not? We should wait a little, but there's hope there. How about real retail sales?

There's a sharp spike in August, which might be Cash for Clunkers, but that series has wandered around for most of 2009. How about personal income?

I don't have a graph of this that pulls out the effect of transfer payments (like tax rebates), so this may not tell us as much, but I don't see much of a turnaround here either.

The NBER Business Cycle Dating Committee says that "domestic production and employment are the primary conceptual measures of economic activity' and that the payroll employment measure is the most reliable measure. Monthly GDP numbers are not yet available for August from Macro Advisers, but the July data (Excel) appear to be flat. I'm in agreement with Jim Hamilton that if this is a 'V' shape recovery, it's "tepid and potentially fragile" (though I don't put much on the possibility of a 'W' shaped recession at this time, in no small part because of Jim's blog partner Menzie Chinn's note on the latter periods of the Obama stimulus.) We even have noted bull Brian Wesbury saying "even a V-shaped recovery is not a smooth, perfect line." The sun will come out tomorrow, but first we have to get past the convex AND the concave, and start seeing a change in the first derivative; we need a certain move in GDP AND in employment before someone starts to think this economy is heading out of the woods.


Media alerts 

I will be on WJON at 10:40 or so Central discussing the local economy.

Comments about the real estate market in the local paper here. (My real estate friends will be mad at me again.)

I am sitting in for Don Lyons tomorrow, 6-8am on KNSI.

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Tuesday, October 06, 2009

We're #43! 

From here. The only place where Minnesota ranks above average for business climate is the property tax, and who knows where that's going this year.

UPDATE (10/7): I'm often amused by the criticism of the index, when people don't take the time to read what's in it. One can compute an effective tax rate that's much lower than the statutory rate, yet the higher rate is still an impediment on unfavored economic activity. Tax Foundation's Natasha Altamirano explains:
The State Business Tax Climate Index does not, as Rousseau claims, simply add up tax collections and favor the states that collect the least. Instead, we reward states for having neutral tax codes that don't distort economic decisions - whether it's through high rates on the wealthy or tax credits for new businesses or sales tax exemptions for certain goods or services.

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A quick note on HDI 

I hope I get to visit with John Hinderaker soon about his post on the UN's Human Development Index (HDI). People who have seen our book on measuring development know my co-author Bryan Roberts has written a wonderful, scathing review of HDI. There are problems in terms of the boundedness of some of the variables -- you can't have a literacy rate over 100%, for example. Additional income is converted to utility by taking the logarithm of per capita GDP. Bryan argues for a measure that combines longevity of life with (logged) per capita income and with proper discounting to get a measure of welfare. But getting education in the mix is difficult. Higher education increases income directly, but higher education of my neighbors supposedly makes my life better too. The best way to get a high "educational attainment score" is to make all your citizens into students. That may provide us lots of waiters and waitresses, but not much food.

Bryan Caplan also wrote against HDI, making several of the same points. These are widely known problems within the economics profession (and particularly to development economists, few of whom use HDI in empirical analysis.) But Bryan Roberts notes, I think correctly:
It seems strange that the HDI has been so strongly criticized in the academic profession and yet continues to enjoy such a high degrees of public prominence. One reason that helps explain this is that many intuitively believe that GDP is an incomplete measure of welfare, and the HDI attempts to construct a better measure of welfare that incorporates highly plausible non-income variables.
And Bryan Caplan notes that the way this is done is to use a measure that tells us how Scandinavian a country is; this seems to be the motivation that John finds in HDI. Let's put it this way: If Denmark (or Finland, Norway or Sweden) is so much happier than we are, why is their suicide rate higher?


Income inequality overstated? 

How often do you hear about rising income inequality in the US? What explains it? Prof. Robert Gordon of Northwestern finds that it's overstated. He accounts for three misperceptions:
  1. If you use household income and compare to productivity, changes in household size will matter. Income and productivity are also deflated using two different deflators, and household income assumes all households consume the same bundle of goods. Correcting for these distinctions, Gordon finds that gap increase between rich and poor is only one-tenth what one finds using conceptually inconsistent measures as most do.
  2. "Second, the increase of inequality is not a steady ongoing process; after widening most rapidly between 1981 and 1993, the growth of inequality reversed itself and became negative during 2000?2007. For instance, a new study that integrates CPS and IRS data and corrects for top?coding using internal Census data, shows that there was no increase of inequality after 1993 in the bottom 99 percent of the population, and the remaining increase of inequality can be entirely explained by the behavior of incomes in the top 1 percent. This paper shows that by several measures, the increase of inequality had already ceased by the early 1990s and by others around 2000, even before the current major recession that has cut incomes at the top more than at the bottom." This puts a big dent in the story that increased use of IT has made the gap between rich and poor higher. This part of the paper was most surprising.
  3. "Third, an emerging literature documents an exaggeration of the rise of inequality due to the use of common price indexes across income groups. Several important recent articles document that prices paid by the rich have been increasing more rapidly than prices paid by the poor." See for example Broda and Romalis [2008] (referred here) to see that trade has helped the poor by making goods cheaper. Because rich people consume services in higher proportion than poor people, and because trade doesn't happen as much for services, the CPI of the two groups has diverged as trade has blossomed around the world.
Diana Furchtgott-Roth believes that some of the acceleration of income inequality in the Reagan period (that Gordon finds) is due to a shift in reporting of income as personal rather than corporate income after the 1986 tax reforms. She also concludes that "the American economy is far more robust and resilient than often viewed. Over long periods of time, it survives the ebb and flow of growth and recession-and governmental policies, the good and the bad-largely intact."


Monday, October 05, 2009

Pricing waiting 

Gary Gross sends me a link to a chart showing how long wait times are in Canada for a variety of procedures, and how much you'd have to pay for a private-market alternative, which I've placed to your right. This chart seems very interesting as an economic study -- if this is the supply curve of private services and there's a public "free" option, what does this chart say about the demand for health care services? You have the time saved, and there is information on how many more QALYs each of these presents. Wouldn't you like to have information like this on demand for QALYs rather than just supply?

Unfortunately, if you live in many parts of Canada, you don't get to make those choices. So you use a broker.
Enter Rick Baker, a Canadian determined to improve health care in his country. Baker joined Gilbert Monday at a Vancouver hotel to speak with American reporters as part of a health care dialogue organized by the Colorado-based Independence Institute, a free market think tank where I am a public policy analyst.

Baker began by offering a blunt disclosure. �I make my living sending patients to the U.S.,� he said. �This is medical tourism, but instead of sending someone to Thailand, we�re sending them to Delaware.�

Through an innovative partnership with 22 independent American surgery centers and doctors in 13 states, Baker and his American counterparts transport Canadians to the U.S. for timely care at cost savings up to 80 percent. The partnership operates largely outside the traditional health insurance system. And this isn�t just about helping Canadians. Baker now also provides a similar state-to-state service for Americans seeking more affordable or timely care.

Under Canada�s controversial federal health legislation, surgeons are prohibited from charging patients to provide �medically necessary� treatment. In addition, they are limited to performing surgeries to six hours a week. Gilbert recalled one surgeon telling her, �I spend six hours in surgery each week, less time than I spend explaining to sick patients why I can�t perform theirs.�
Had I waited 3 years for my gall bladder removal, there's a pretty good chance I would not be typing this now. A friend of mine's wife became ill on Friday and they were planning a long trip outside the country in a few weeks. If they did not get the surgery for her quickly, their plans would have been canceled. No doctor in St. Cloud was available to do it this week, so they are driving up the road to get this done. Were they in Canada, they probably do not have the option.

Baker notes that his country's system treats certain things very well. Routine care for pregnancy or for a broken leg is fine. The question is how a system deals with the not-routine. And in those cases, wouldn't you want a system allows consumers to incentivize production versus a system of command and control?

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Test-driving health care legislation 

Many years ago I was in a debate with some other (then-young) economists over the concept of rational expectations. The discussion was about whether market participants would have enough information to make expectations about inflation, for example, that reflected all the relevant information available. The answer, I argued, was that it wasn't necessary for everyone to have the same information. James Tobin's disparagement of "yeoman farmer econometricians" (a model of firms used, for example, in Ball and Mankiw [1994]) was that the average person didn't have the information or analytical skill to enforce rational expectations over the price of corn. But what matters is not the average but the marginal farmer. As I had understood Hayek then and now, a world with dispersed knowledge requires only that the farmer with the relevant information has the capacity to act in the marketplace; her actions influence the price, which communicates that knowledge to the others in the market without that information.

I have always thought this applies much more broadly than the price of corn. Thus I think the argument we see today about plain language versus legislative language in the health care debate ignores the very real fact that what rules us is legislation and we only need the marginal analyst to tell us what really matters.
Sen. Thomas Carper (D.-Del.), a member of the Senate Finance Committee, told that he does not �expect� to read the actual legislative language of the committee�s health care bill because it is �confusing� and that anyone who claims they are going to read it and understand it is fooling people.

�I don�t expect to actually read the legislative language because reading the legislative language is among the more confusing things I�ve ever read in my life,� Carper told

Carper described the type of language the actual text of the bill would finally be drafted in as "arcane," "confusing," "hard stuff to understand," and "incomprehensible." He likened it to the "gibberish" used in credit card disclosure forms.
If it's gibberish in the credit card disclosure, why does Congress insist on them? We know why, because the newspapers have consumer affairs reporters who find experts that help us understand that gibberish. This takes a little time. So too would the legislative language. When Congress says it cannot provide time to us because we wouldn't understand it anyway, this misses the point. I don't want to see it myself -- Carper and the other Democrats are probably right that I can't get through it in three days. But I want someone who is expert in reading health care legislation who is not a member of the majority to read it. Such people exist at think tanks up and down Washington, from a Keith Hennessey to a Bob Moffitt. Their input is vital to those of us who believe in checks and balances, and I believe it to be antithetical to good policy for either party to jam through legislation as consequential as this without time for review. At the margin, it's the analysis of the experts from the other side that provides the most information.

UPDATE: At least we will get a CBO scoring thanks to Senator Snowe, says MKHammer. Sort of like having the home team hire the referees, but at least the referees seem to have some integrity.

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The Minnesota dollar 

Can a bank create money to fund public works?

Leslie Davis, a candidate for governor (who received 1% of the votes of delegates in a straw poll last weekend at the state GOP convention) proposes that we
...pass a law requiring Minnesota state--chartered-banks to create debt-free checkbook-money and use it to build a state-of-the-art transportation system of roads, rails, bridges and ports. And maintain them. This will create thousands of jobs, begin paying the debt out of the system, This is not a loan, it is simply a new legally required service of state-chartered banks.
But this made no sense to me, because for the bank to create money it must create a liability on its balance sheet. What is the offsetting asset you put on the books to keep your balance sheet in balance, or what do you reduce in your liabilities or net worth?

So I had to rummage around a bit but apparently this idea was in a bill last year proposed by a bipartisan set of sponsors (including local GOP representative Dan Severson.) SF 705 proposes just what Mr. Davis wants. In relevant part,
Subd. 3. Origination and movement of project money. (a) The commissioner of management and budget shall notify all state-chartered banks of the project number and its total bid value. The bid value must be divided among all state-chartered banks in proportion to their capital and surplus as of the due date of their financial reports submitted to the commissioner of commerce under section 48.48, for the most recent reporting period that ended at least 90 days before the date of notification to the state-chartered banks regarding that project. Using the accepted ability of banks to create money, each state-chartered bank shall create money equal to its share of the bid value of each project.
(b) Each state-chartered bank shall then electronically transfer this money to the commissioner of management and budget.
(c) The commissioner of management and budget shall then electronically transfer this money as payment under the terms of the project contract into a checking account maintained by the contractor in a state-chartered bank. The commissioner shall make the payments only at the direction of the governmental agency for which the project is performed.

Subd. 4. Direction to bank examiners. The state-chartered banks are free of any
reserve requirements affected by the creation of money required under this section; this money is deemed to be an asset to the state-chartered bank, to the state, and to the people of this state, and not as a liability to anyone.
So this means that the amount of reserves a bank holds to keep your deposits safe would be drawn down by the state.

Ellen Hodgson Brown wrote about SF705 last year, but it argues that the deposits must go on the books as an asset. This is wrong, however. A bank cannot create an asset without creating a liability -- balance sheets must balance. A comparable scheme was invented in Guernsey in the 19th Century, but the bank received a note from the state to hold as the asset. Perhaps this is meant by the bill when the Commissioner of Management and Budget divides up the bid values of projects. But that would be an unsecured debt; how would FDIC treat this?

Guernsey is a well-known haven for offshore banking, and site of some of the Icelandic banking crisis' collateral damage. And we should note that Guernsey uses its own currency. I am unclear how this is to work if the banks of Minnesota are still to use a unified U.S. dollar. Brown suggests that this act may be unconstitutional. There was private money between the end of the Second Bank of the United States in 1836 and the National Bank Act of 1863. (I own several examples of that private money.) But short of creating a Minnesota dollar, I do not see how this could work other than placing on the asset side of state-run bank a non-interest-bearing promissory note from the state government. To me that looks like a tax on bank earnings, and would quickly encourage most state-chartered banks to seek a national charter.

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Sunday, October 04, 2009

What We Take for Granted 

This story always brings tears to my eyes because we take so much for granted, including our education system that offers a chance for students to be what they can or dream to be with work and dedication. Yet, I've wondered if it were true. It is as indicated here.
Classroom No Desks

A lesson that should be taught in all schools and colleges. Back in September of 2005, on the first day of school, Martha Cothren, a social studies school teacher at Robinson High School in Little Rock , did something not to be forgotten. On the first day of school, with the permission of the school superintendent, the principal and the building supervisor, she removed all of the desks from her classroom. When the first period kids entered the room they discovered that there were no desks.

'Ms. Cothren, where're our desks?'

She replied, 'You can't have a desk until you tell me how you earn the right to sit at a desk.'
They thought and said, 'Well, maybe it's our grades.'

'No,' she said.

'Maybe it's our behavior.'

She told them, 'No, it's not even your behavior.'

And so, they came and went, the first period, second period, third period. Still no desks in the classroom. By early afternoon television news crews had started gathering in Ms.Cothren's classroom to report about this crazy teacher who had taken all the desks out of her room.

The final period of the day came and as the puzzled students found seats on the floor of the deskless classroom, Martha Cothren said, 'Throughout the day no one has been able to tell me just what he/she has done to earn the right to sit at the desks that are ordinarily found in this classroom. Now I am going to tell you.'

At this point, Martha Cothren went over to the door of her classroom and opened it. Twenty-seven (27) U.S. Veterans, all in uniforms, walked into that classroom, each one carrying a school desk. The Vets began placing the school desks in rows, and then they would walk over and stand a longside the wall. By the time the last soldier had set the final desk in place those kids started to understand, perhaps for the first time in their lives, just how the right to sit at those desks had been earned..

Martha said, 'You didn't earn the right to sit at these desks. These heroes did it for you. They placed the desks here for you. Now, it's up to you to sit in them. It is your responsibility to learn, to be good students, to be good citizens. They paid the price so that you could have the freedom to get an education. Don't ever forget it.'

The freedoms we have in this great country were earned by U.S. Veterans. We must cherish our soldiers and remember, it is they who keep our press and country free. To ignore or tarnish their efforts and reputations will lead to losses very few of us can imagine.

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Friday, October 02, 2009

No radio tomorrow (UPDATED) 

We are in the middle of making some changes to the radio show, which will include the time of its broadcast. Suffice to say, my travel gave us little time to get all the changes made for this Saturday, so the best thing to do is to take another week off. I hope that in a week I can offer you a full update of where Final Word will be going next. The first four hours of NARN will be on the air as always and we don't anticipate changes to that part of the schedule.

I apologize for how sketchy this note is, but there are many details that are TBD at this point and probably will be for another five days or so.

If you're really desperate to hear me, besides needing to get your head examined you could hear me on KNSI next Thursday 6-8am on its Morning Show, filling in for Don Lyons.

UPDATE: Forgot it was first Saturday, so I'll take my usual turn on the David Strom Show at 10am.

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Too clever by half 

Reader jw sends along a post that claims that cap-and-trade legislation is actually good for our economy.
To counter the argument that the energy economy would grind to a halt if the president were to sign a climate bill, Steffen points to an economic principle called Harberger�s Triangle, named after an economist of the same name. In terms that the noneconomists among us can understand, Harberger accounts for the economic growth that is surrendered when the government imposes limits that weren�t there before, like in the case of carbon legislation. But this surrendered growth is not a loss. Instead, it�s actually a transfer of economic activity from the emitters to those who monitor the system and grant the permits to emit. The only real loss is what Harberger�s theory calls dead weight, which accounts for the inefficiencies in the system. And if we�re really in pursuit of economic efficiency, the inefficiencies should be abandoned anyway.

Yes, it�s a convoluted and immensely theoretical argument. But here�s what you need to know: the loss that many critics suspect would come from such a bill appears objectively minimal. The nonpartisan Congressional Budget Office characterized the economic loss of the House climate bill as being between 0.2 and 0.7 percent of GDP in 2020.
This measurement is also cited by Paul Krugman, who links to this CBO report. The report states that measurement a little more clearly:
Reducing the risk of climate change would come at some cost to the economy. For example, the Congressional Budget Office (CBO) concludes that the cap-and trade
provisions of H.R. 2454, the American Clean Energy and Security Act of 2009 (ACESA), if implemented, would reduce gross domestic product (GDP) below what it would otherwise have been�by roughly � percent to � percent in 2020 and by between 1 percent and 3� percent in 2050. By way of comparison, CBO projects that real (inflation-adjusted) GDP will be roughly two and a half times as large in 2050 as it is today, so those changes would be comparatively modest. In the models that CBO reviewed, the long-run cost to households would be smaller than the changes in GDP. Projected GDP impacts include declines in investment, which only gradually translate into reduced household consumption. Also, the effect on households� well-being of the reduction in output as measured by GDP (which reflects the market value of goods and services) would be offset in part by the effect of more time spent in nonmarket activities, such as childrearing, caring for the home, and leisure. Moreover, these measures of potential costs imposed by the policy do not include any benefits of averting climate change.
Let me make the following points about this line of "reasoning":
  1. The emphasis on deadweight cost (i.e., ignoring the transfer of resources from emitters to monitors, to use the first link's language) ignores the lobbying and other rent-seeking activity around manipulation of climate-change legislation to favor certain types of emissions over others. Safety valves in cap-and-trade legislation just invite this kind of lobbying; money spent on lobbyists doesn't get spent on consumption or investment goods and services. Thus using the Harberger Triangle understates the true loss of cap-and-trade.
  2. It is important to compare apples to apples. Citing the cost of climate change as "0.2% of GDP in 2020" makes it sound like the total cost of the legislation is 0.2% of that year's GDP (which would come up to $50 billion.) That would the the cost for that year. The total cost rises over time and would lead to a permanent loss of jobs due to lower investment in capital goods.
  3. The laugher part of the CBO paragraph is "the effect on households� well-being of the reduction in output as measured by GDP ... would be offset in part by the effect of more time spent in nonmarket activities, such as childrearing, caring for the home, and leisure." This is also known as "what you do when you're unemployed." If that was supposed to be factored in, we would say fewer bad things about unemployment.
The Harberger story in this case is simply too clever by half. It washes away the rent-seeking, dodges the cumulative costs of the flow of Harberger triangles and (if I may) Tullock rectangles, and then tries to make a virtue of unemployment.

UPDATE: Kimberly Strassel uses the rent-seeking line too.

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Mrs. S writes 

She describes the local TEA party in St. Cloud.
During the past 20 years it has seemed harder to get bipartisan agreements. When you lose an election, you feel like you lost everything. There may be something dangerous in that.

There is concern that voters are becoming more polarized � coastal elites versus heartland conservatives (TEA Parties) � and there is more homogeneity in both parties. Both parties are losing their �INOs� (Republicans/Democrat in name only) yet, as Gross observed, �common sense isn�t a partisan issue.�
The piece features my fellow St. Cloud bloggers Gary Gross and Leo Pusateri, without whose work the local gathering would not have been possible.

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The governor made me do it! 

For many years my parents paid for my meals. By the time I was 30, they decided they didn't have to do this anymore. I could afford to buy my own dinners.

While I was holding up a pedestrian on the street, the victim asked me why I was doing this. "Well, it's my parents' fault. They stopped buying my dinner. They had always done it, and now just because one of them is out of work and I turned 30, they stopped. What ingrates."

Of course the above story is farce, unless you're the Hennepin County Board of Commissioners.

County Administrator Richard Johnson presented a $1.6 billion budget Tuesday to the county board for next year, down about 6 percent from this year's $1.71 billion.

But even after cutting 163 jobs and reducing capital improvements, the county still needs to raise property taxes by 3 percent solely to pay increased costs at Hennepin County Medical Center, Johnson said.

Those higher costs were caused by the state's cancellation of General Medical Assistance for poor adults, he said.

Hearing that, county commissioners began their budget deliberations by blasting Gov. Tim Pawlenty again for shifting the state's budget problems to them. The county estimates that 40 percent of the state's poor adults who were covered by General Medical Assistance live in Hennepin County.

The tax increase is required "just because the governor cut the legs out'' from under thousands of low-income adults who depended on General Medical Assistance, Commissioner Gail Dorfman said.

So rather than have property owners in Hennepin County pay for the poor in Hennepin County, the people in the entire state of Minnesota should pay for the poor in Hennepin County? The county had already planned to raise taxes. Commissioner Jeff Johnson writes about the negotiations earlier this month.
I�ve heard a lot of talk the past few weeks about the needs of county government, the needs of HCMC and the needs of those who receive government benefits. I�ve heard much less talk about the needs of the taxpayers who fund county government, HCMC and the government programs that provide those benefits. I�m hopeful as we move forward toward a final levy decision in December we place a little more emphasis on the well-being of Hennepin County taxpayers.
But it's not their fault, Jeff! It's the mean parent in the governor's mansion done made them do it! When you decide it's the right of one person to live at the expense of another, it's little surprise that you make a villain of those that do not.

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Thursday, October 01, 2009

I can't improve on... 

...this. So I'm going home.


A kind word for theorists 

The Federal Reserve Bank of Minneapolis yesterday named Narayana Kotcherlakota as its new president, replacing the retired Gary Stern effective next Thursday. The press release cites him as helping lead a Fed that "has a strong history of leadership in economic research." Kotcherlakota is a top academic economist (here's a top 1000 ranking on which he's a top-100, and no, I didn't make that list; here's another) and on some bases ranks ahead of Fed Chair Ben Bernanke. His work has been more theoretical than empirical. In some ways he matches fellow new Fed President (and SCSU grad) Jim Bullard from the St. Louis Fed.

So what does this mean for the Fed? I think in part it's a good sign to have people who work in theory more than empirical macro doing policy. We're in a world that has some fundamental change happening within it. The best you can do with econometrics is to say "we had seven other days that looked like today, and here's what happened the day after in those other seven episodes. Thus, I think this is what will happen tomorrow." (OK, that's an oversimplification, but not too much.) But what if you are in a time where you're pretty sure you have no comparable previous episodes? Then you have to think and imagine. Theorists spend more time imagining than applied econometricians do (or historians.) We might make good use of a few of those guys right now.

Not to say this is all Kotcherlakota does -- he wrote a fair bit of econometric analysis earlier in his career. But his later work seems to enjoy the theoretic; either way, his writings at the Minneapolis Fed as an economist are quite accessible.

In case someone was wondering because our universities are 72 miles apart, I've not met Prof. Kotcherlakota.