If you are wavering on health care reform

First, read the story of Edith.  (Via Agto.)

Second, keep up with your Krugman– both columns and blog.  Some key facts about health care:

• If you have employer-provided health care and are happy with it, thank the government– both for the tax break, and for requiring that employers who get that break offer insurance to all employees, and can’t screen out pre-existing conditions.
• We already have a more-than-half-nationalized health care system: governments pay 47% of health care expenditures, private insurers 35%. 
• Medicare costs rise slower than those of private companies (since 1970, 8.8% vs. 9.9%).
• Whatever the free market is good for, it’s not health care.  Health doesn’t work like buying bread or computers– it’s a huge unpredictable expense, and the decisions involved are beyond consumers.  We need insurance to handle this sort of problem.  But if you let the market handle it, insurers will work hard to pay as little as possible.  This is socially destructive, adds to the health bill, and is eliminated in government programs.
• The system of getting insurance through employers is slowly crumbling.  The percentage of employers who offer insurance is declining, and for some industries it’s a global competitive disadvantage.

(I assume you already know that US health care costs are far higher than most other industrialized countries while our actual health care is worse, and that Britain or Canada is not the only option out there.)

Insurers are scared to death of the “public option”, not because it’s “socialism”, but because it would reveal how much better the government could do at insuring people.  (If they thought they could do better, it wouldn’t worry them.)  Thus you see strange things like demands that the government not be able to negotiate price breaks… often you hear this from the same people who claim to be concerned about runaway health care costs or the deficit.

 

Technocrats vs. teabaggers

I see I haven’t written about politics since January.  This isn’t because there hasn’t been any, but because the main issues are technocratic.  We’re in a huge economic meltdown and only blowhards are sure that they know how to get out of it.  There are debates among the grown-ups on how much stimulus we need, how to deal with the failing banks and insurers and auto makers, whether to nationalize or just buy up toxic assets, but I’m certainly in no position to offer good advice.  Solving the Israel-Palestine problem, sure, any pundit can do that, but ending this kind of recession, where major industries have tanked and monetary policy has run out of juice, is tricky.

Meanwhile, the Republicans are trying to see what new lows of hypocrisy and irrelevance they can plumb.  The party that trashed Clinton’s surpluses, that increased the size and scope of government, that spent a trillion dollars on war and another trillion on bailouts, that told us deficits don’t matter, now wants to be seen as the voice of fiscal responsibility?  That would be hard  to swallow in ordinary times, but it’s completely out of touch in a deep recession.  Republicans aren’t participating in the debate because they’re not even able to face the problem.  They want to blame government and taxes because that’s the only problem they know (well, that and culture wars, but even they know that that’s not going to fly right now).

Possibly not everyone reads Krugman obsessively, so I should clarify.  An ordinary recession can be fought by lowering interest rates: that makes it easier for businesses to get loans and invest (and for the rest of us to buy houses and go on credit spending sprees).  That doesn’t work in the present situation, because the federal funds rate is about as low as it can go.

A recession isn’t a moral problem; it’s a technical one: businesses and consumers have both cut back, and underconfidence becomes a vicious circle: firms don’t invest or hire because sales are low; this leads to layoffs which reduce consumer spending, so sales get lower, etc., etc. Consie talking points like letting industries go bankrupt and increasing savings and lessening government spending are precisely what we don’t need: we need to increase production, not lower it.   The GDP gap looms: the difference between what the economy is providing and what it can provide; currently it’s about 8% of GDP.  The stimulus bill is about 3% of GDP, which is why Krugman worries that it’s too small.

So, is there any hope for the GOP?  Not right now; as party chairman Michael Steele discovered, the loonies are in charge and they’re not budging despite losing two elections in a row and facing a president with a 63% approval rating.  The name-calling seems more desperate than ever (Obama is no more a “socialist” than he is a Muslim) and as for talk of secession— please, go ahead.  Now there’s a winning strategy for the GOP: throw away Texas’s 34 electoral votes!

 

A pleasant oops

I used to read Daniel Davies’ blog every once in a while, by which I mean I’d check it and note that the lazy wanker (he’s British, you see) wasn’t updating. Today I realized that my bookmark pointed to an archive page, so I was able to catch up with several months of random acerbicity.

He’s an economist, but he has the sparkling careless wit that our more earnest nation can never quite manage. In the archives are some fascinating dissections of Freakonomics, quite a lot about Africa, and odd digressions… did you know that a significant source of income for the Ku Klux Klan was selling and dry cleaning those robes?

 

Progressivism that works

I haven’t been in a posting mood lately; sorry about that.  Worse yet, the most interesting book I’ve read lately, James Galbraith’s The Predator State, had to go back to the library.  Man, and I thought I disliked the Republicans.  There’s a lot in it I’d like to talk about, but I’d really like to re-read the book and review the arguments first.

His basic thesis is that the pet economic policies of the right— monetarism, lowering taxes as an incitement to raise savings, small government, deregulation, free trade— were long ago abandoned by Republicans in power and by economists; the only people who still believe in them, defensively, are liberals.

He’s most interesting when he gets down to specifics— e.g. he says that obscene CEO pay was largely the norm in two industries, Wall Street and the tech sector, and that its unintended effect was to create a new aristocratic class: the CEO has no loyalty even to the firm that pays him, but only to his fellow CEOs.

Perhaps the best take-away idea, however, is that deregulation is not (as progressives might suspect) a sop to the business class.  It’s a sop to the worst of the business class.  Regulation is an alliance between progressives and the top companies. Take gas mileage: can reformers decree that cars get 100 mpg?  Certainly not; we have to set goals that can actually be met.  Regulation thus benefits the companies that can meet the goals and still make a profit; and the companies that resist are those that can’t.  These are the ‘predators’ of the title; it’s their interest that the Republicans serve.

Galbraith’s critique goes well beyond this; he chastises liberals for swallowing the worship of the free market, merely hoping to tweak it toward justice.  He thinks that the market fails badly in many ways, and frankly argues for government intervention, social controls on wages, and deficit spending.  His presentation can be a bit breezy, so I’m not sure I follow all his arguments nor agree with them all, but I think he’s quite right that “the market” has become an ideology designed to restrict policy options, which needs to be challenged.

 

Ask Zompist: Monopolies

I’ve come across a claim by libertarians, ranging from Ayn Rand and Ron Paul to a slew of personal acquaintances, that monopolies and oligopolies are unsustainable without economic aid from the government.  Is there any truth to this claim?  What are the counter-examples?

—Ian

Whenever someone makes a claim like that, the burden of proof is on them.  Ask for three examples. (You can’t do this with an author, of course; but if they don’t provide examples, you don’t have to take their claim very seriously.)

See this old rant (and Josephson’s book) for some examples of Robber Baron monopolies.  What government aid benefitted the steel trust or Rockefeller’s oil refinery monopoly?  Is Microsoft’s near-monopoly on operating systems, or Google’s on search engines, subsidized by government?

The railroads are a special case, both supporting and undermining the libertarian position.  Many were frank giveaways of federal land.  But the railroad companies also blackmailed local governments and simply took over state governments.  Predatory tycoons will simply do as they please and bilk consumers and lesser companies in the absence of a strong government.

 

The Long Tail

I just read Chris Anderson’s The Long Tail.  I can save you about 250 pages and $15.95 by explaining the main point: the Web removes the constraints of physical stores and narrow distribution channels (like movie theaters and CDs).  Sales and production don’t need to be tied any longer to a small number of hits.  There’s money to be made in the ‘long tail’ of the demand curve.  45% of the music sales of Rhapsody come from tracks not available in the largest physical stores.

Where the product is virtual, like music, sellers in effect have no storage and distribution costs, and can therefore offer everything.  Industries based on creating hits will just have to adapt.  And as eBay shows, physical products can approach this ideal surprisingly closely. 

There’s some exciting aspects to this… I’m fascinated by the democratization of production, for instance.  Conlanging, for instance, is nearly irrelevant to the publishing industry.  (Klingon was a freak hit, but it’s 23 years old now and no one’s done as well since.)  But I think there’s a market there, albeit tiny.  Traditional publishing didn’t serve it, but print-on-demand sell-via-Amazon publishing can.

So Anderson’s idea is interesting; but what do you do with it?  If you’re a minor musician or writer, you produce things, maybe with a slightly larger possibility of minor success– but you knew that already.   But for business people, the problem would seem to be that the obvious applications are already taken.  You’re not going to start a new iTunes, Amazon, or eBay. 

One side effect that will probably be a big battleground: copyright and trademark protection.  The big media companies effectively want permanent copyrights– Disney never wants Mickey Mouse cartoons in the public domain.  For Long Tail producers the benefits run the other way: e.g. a prolific YouTuber would like to be able to adapt other people’s videos, and doesn’t make money anyway so isn’t losing sales through piracy.  I’d expect the legal balance to swing more toward the interests of the aggregators rather than the hit-makers.  (Useful comparison: Viacom, which includes Paramount and Dreamworks, has revenues of $13 billion.  Google, which includes YouTube, has revenues of $22 billion.)

 

Do we need an auto industry?

Interesting article from Daniel Gross at Slate on the auto industry crisis:

http://www.slate.com/id/2206525/

Bottom line: it’s not just cantankerousness that makes some Southern Republicans eager to see the American auto industry disappear, with its three million jobs.  They’ve become familiar with their own non-union, foreign-owned auto plants, and they don’t see why we should keep propping up a declining system.

They have a point– though it’s undercut by the fact that those states attracted foreign investment with hefty state-level tax breaks and subsidies.

I don’t know that there’s any great answer to Detroit’s problem.  But I worry about losing an entire industry.  Transplants are not the same thing.  What does the US do better than anyone else?  According to Neal Stephenson, music, movies, programming, and high-speed pizza delivery.  (I wonder what the real answer is, and what if anything it’ll be in 30 years.)

 

Ask Zompist: Salting the economists

What do you think— with how much, or how little, salt should we take things said by Paul Krugman (and other economists)? On the one hand, he seems to be smart and insightful; on the other hand, he seems to assume certain things (like the IMF model of development, Ricardo’s trade prescriptions, and the seesaw model of inflation and unemployment) as self-evidently true and right even though there are various reasons (some of them covered by you) to have doubts about them. So, where do you agree with him and where do you disagree with him, and why? And what do you think how economics, as a field, is likely to develop in the near future (keeping in mind that this might well be different from how you might think it should develop)?

—Raphael

I don’t think Krugman in particular supports the neoliberal IMF model.  He’s an unrepentant Keynesian, after all— at the moment, for instance, he’s advocating a huge stimulus plan and actually worried that Obama won’t make it big enough.  That’s the opposite approach to the ‘austerity programs’ that the IMF imposes on developing nations.  Similarly, I remember him advocating currency controls during the 1990s troubles in southeast Asia.

A layman should be cautious, but not over-cautious, when disagreeing with experts.  Mere ignorance isn’t very attractive, and to be sure where the experts are not is a sign of quackery.

Where we can criticize the economists is in the assumptions they make about the world, intended to be simplifying, and arguably distorting instead.  An obvious one (now questioned by many economists) is the rationality of economic actors.  In many areas people simply don’t behave with a cold-blooded eye to their financial advantage.  Sometimes they’re simply valuing things other than money (e.g. prestige or conformism or fair play); sometimes they’re just dumb (e.g. the persistence of racism, which shrinks the market and discards good workers).

Thinking about money and incentives can produce a healthy cynicism— I like Tim Harford’s The Undercover Economist for this.  Harford obviously spends too much time in coffeeshops, and he answers interesting questions like “Why do cafés cluster together?” and “Why are consumers willing to spend so much on coffee these days?”  On the other hand, there’s Joel Spolsky’s observation that incentives are counter-productive in management: you get more of what you measure, but rarely in a way that benefits the business.  The workers always learn to game the system, and more direly, their intrinsic motivation (doing a good job) is eroded by the extrinsic one (bonuses and incentives).  Economists helped produce highly inflated compensation for executives; in theory this was supposed to motivate them better, but with the failure of two major industries (investment banking and automobiles), it’s hard to see it as anything but dangerous looting.

Another issue, again recognized by good economists, is externalities.  The market doesn’t properly value non-production costs (e.g. pollution, or the despotism of oil-producing regimes) or long-term ones (e.g. mine cleanup or resource exhaustion or bubbles bursting).

The expert to really distrust is the one who never says “I don’t know.”  In retrospect, Greenspan’s air of authority, which so cowed even Democratic legislators, proved to cover an out-of-touch ideology more than any actual sagacity.

 

Econoblogs

Alert reader Raghav Krishnapriyan provides a useful list of links for understanding the financial crisis:

Anyway, one great thing about this crisis is that for the first time, we have an excellent economic blogosphere (featuring Nobel laureates and former Clinton and Bush administration officials, among others) to cover it. In addition to [Paul] Krugman, these are some of my favorites:

Megan McArdle: http://meganmcardle.theatlantic.com/

Tyler Cowen and Alex Tabarrok: http://www.marginalrevolution.com/

Brad DeLong: http://delong.typepad.com/

The anonymous contributors at Calculated Risk: http://calculatedrisk.blogspot.com/

Gary Becker and Richard Posner: http://www.becker-posner-blog.com/

Yves Smith at Naked Capitalism: http://www.nakedcapitalism.com/

Greg Mankiw: http://gregmankiw.blogspot.com/

 

Blame Greenspan. Or Ayn Rand

A good article in the NYT about Alan Greenspan and his role in the present mess:

http://www.nytimes.com/2008/10/09/business/economy/09greenspan.html

The derivatives market is $531 trillion, up from $106 trillion in 2002 and a relative pittance just two decades ago. Theoretically intended to limit risk and ward off financial problems, the contracts instead have stoked uncertainty and actually spread risk amid doubts about how companies value them.

(Pause to boggle at that amount.  By contrast, the GDP of every nation in the world is $54.3 trillion.)

Greenspan, as a good disciple of Ayn Rand, consistently opposed regulating the derivatives market, refused to recognize the housing bubble, worked to repeal existing oversight laws.  There were opposing voices, but they were ignored; attempts to regulate were pushed down.  Greenspan assured Congress:

I believe that the general growth in large institutions have occurred in the context of an underlying structure of markets in which many of the larger risks are dramatically — I should say, fully — hedged.

The article has another villain, by the way: Robert Rubin, Clinton’s Treasury secretary, who fully endorsed Greenspan’s policies.

This sort of thing, by the way, is part of my response to the people who occasionally write to me suggesting, in effect, that stupid people shouldn’t vote.  Smart people have their own ways of being stupid, and when they’re wrong, they fail much more spectacularly than the merely ignorant.  Greenspan wasn’t dumb; neither were the investment bankers and mortgage aggregators and derivative hawkers who created the financial crisis; for that matter neither were the neocons who worked up the Iraq war.  Technocrats can be very wrong.  Treating Greenspan as “The Oracle” was a huge mistake.