Month: July 2009

Telecom “Innovation”

NewYork Times technology columnist David Pogue is mounting a campaign against those canned messages that cellular carriers play after the greeting on your mobile phone voicemail (hat tip Mark Thoma’s son) – you know, the ones that say “to leave a voice message, wait for the beep,” only they take 30 seconds doing so, for th sole purpose of chewing up the mobile phone minutes of the person calling you. (According to Pogue, multiple carrier executives have admitted that the sole purpose of these value-destroying messages is to maximize airtime and hence revenue.)

This is exactly the same kind of “innovation” that we’ve seen in financial services and in health insurance. In each case, it’s what you get when you have too much concentration, so that a small group of oligopolists can effectively agree on the same business practice that generates profits at the consumer’s expense.

Continue reading “Telecom “Innovation”” →

The Value of (Not Having) the Public Plan

This guest post was written by Arindrajit Dube, an economist at UC Berkeley Institute for Research on Labor and Employment who is joining the Department of Economics at the University of Massachusetts, Amherst. His work focuses on labor and health economics topics, as well as political economy.

Why have pivotal members of the Congress been reluctant to allow individuals the choice to buy into a public health insurance option? A political-economic reason is that the “bipartisan” group of six senators responds more to the interests of health insurance companies than public opinion, including the median voter. While this is hard to assess directly (although we do know they receive substantial campaign finance from insurance companies), we can however observe the effects of (a somewhat unanticipated) decision they made on those who stand to privately benefit from that decision.

Here is how the share prices of three major insurance companies (Cigna, United Healthcare Group, Aetna) responded on Tuesday, July 28 to the Monday night announcement that the group of six senators is going to eliminate the public option from their version of the health care reform legislation [graph produced using Yahoo Finance]. We have basically an 8-10 percent gain for these companies from the Senate announcement. And as the graph below shows, the S&P 500 index (yellow) was essentially flat. The market caps of these three companies together are around $53 billion, which suggests a $4-5 billion value from the announcement by the group of 6.

publicplan

Continue reading “The Value of (Not Having) the Public Plan” →

What Is Josef Ackermann’s Point?

Writing in the Financial Times yesterday, Josef Ackermann – CEO of Deutsche Bank – argued that larger banks are not more dangerous to the health of financial system (and thus to taxpayers) than smaller banks.  According to him, system danger arises primarily from the degree to which banks are “interconnected”.

Inadvertently, Mr. Ackermann makes a strong case for banking system reform.  You can break this down into five parts. Continue reading “What Is Josef Ackermann’s Point?” →

The Problem with Profits

Stephen Carter, one of my best professors at law school and also an accomplished novelist, has an op-ed in today’s Washington Post arguing that high corporate profits are a good thing, and as a consequence we need to have a strong and profitable for-profit health insurance sector. Here’s the essence of his argument:

High profits are excellent news. When corporate earnings reach record levels, we should be celebrating. The only way a firm can make money is to sell people what they want at a price they are willing to pay. If a firm makes lots of money, lots of people are getting what they want.

I agree that the pursuit of high profits is a good thing. That is what makes a free-market capitalist system work, and it’s what made me start a company eight years ago. But basic microeconomics says that high profits themselves are generally not a good thing.

Continue reading “The Problem with Profits” →

The Case for Capital Controls, Again

If you are in charge of monetary policy in an up-and-coming Asian economy (say India, China, or Korea), you have a problem.

The world’s financial markets have decided that Asia is rebounding more quickly than most other parts of the world, and capital is rushing to get into those countries before asset prices rise too much.

The monetary policy authorities know this and – given what we have all seen over the past few years (or is that two decades?) – they are rightly worried about new “bubbles” of various kinds that can destabilize their financial systems and undermine their economies.

What should these central banks do?  If you fear that your economy is growing too fast, and thus inflation is on the rise, responsible central bank mantra dictates that you should raise interest rates.  The same mantra was, in the era of Alan Greenspan, less clear on whether interest rates should be increased to forestall unsustainable financial bubbles.  With the puncturing of the Great American Bubble, including the fall of Greenspan as an icon, most central bankers are quietly quite willing to tighten monetary policy if they see real estate prices take off like a rocket.

But this is exactly where the problem lies. Continue reading “The Case for Capital Controls, Again” →

Traditional Chicago Economics Under Pressure: Beyond The Thaler-Posner Debate

Richard Posner is against the proposed new Consumer Financial Protection Agency (CFPA).  This is, of course, not a surprise.  Posner has always been an articulate advocate of the view most often associated with economics at the University of Chicago: market-based outcomes are invariably better than the alternatives, and anything that interferes with consumer choice is a bad idea. 

Posner wraps this opposition to the CFPA into an odd attack (near the end of his WSJ op ed) on the personal decision-making abilities of Richard Thaler – a leading economist on consumer choice, misperceptions, and mistakes. (More on Thaler here.)

Thaler, also of the University of Chicago, hit back hard yesterday.  He is right that Posner mischaracterizes the CFPA proposal, and points out that his agenda – and that of Cass Sunstein, formerly of Chicago and now a czar in the adminstration – is simply to provide consumers with a framework for better decisions.  He implies that Posner defends defective baby cribs and their equivalent.

I would go further. Continue reading “Traditional Chicago Economics Under Pressure: Beyond The Thaler-Posner Debate” →

More on Rescissions

For those interested in the issue of health insurance policy rescissions, Slate also had a story yesterday, only with a lot more detail and links than mine (but without the clever comparison to financial services “innovation”).

Also, Taunter wrote an insightful post about rescission, expanding on a comment he left on this blog. He drives home a point I thought I made in my original post, but maybe wasn’t very clear: if 0.5% of policies get rescinded, that means that far more than 0.5% of insureds who really need insurance get their policies rescinded, because the insurers are targeting those policyholders who develop expensive illnesses. I said, “insurers only try to rescind policies if you turn out to need them; so the percentage of people who lose their policies when they need them is even higher.” Taunter puts numbers behind that, and they turn out to be potentially scary.

Continue reading “More on Rescissions” →

Jeb Hensarling, George Orwell

The debate over re-regulation of the financial sector has finally, and irreversibly, turned partisan.  This helps define issues in ways that may be more familiar and thus easier to understand.

In the blue corner we have Treasury Secretary Tim Geithner.  Secretary Geithner’s overall banking policy continues to be problematic, and his broader re-regulation effort is hampered by all the free passes he gave to bank CEOs earlier this year.  But on consumer protection he has the right message and he delivered it forcefully to Congress last week: we need a Consumer Financial Protection Agency (CFPA) and we need it now.

In the red corner, Representative Jeb Hensarling is rapidly emerging as a leader.  A member of the Congressional Oversight Panel and the senior republican on the House Financial Services subcommittee on Financial Institutions and Consumer Credit, he wrote last week in the Washington Timesthat the CFPA is “Orwellian”, because it would strip consumers of their rightful choices.

Mr. Hensarling seems dangerously close to slipping into double think. Continue reading “Jeb Hensarling, George Orwell” →

Secretary Geithner’s China Strategy: A Viewer’s Guide

On Monday and Tuesday of this week, Treasury Secretary Geithner – and Secretary of State Clinton – meet with a high-level Chinese delegation.  (Could someone please update the Treasury’s schedule of events? At 7am on Monday it still shows last week’s agenda; update, 9am, this is now fixed – thanks).

According to official previews (i.e., the apparent contents of background briefings given to wire services), the economic topics are China’s concerns about the value of the dollar (i.e., their investments in the U.S.) and the amount of debt that the U.S. will issue this year.

This is absurd. Continue reading “Secretary Geithner’s China Strategy: A Viewer’s Guide” →

Health Insurance “Innovation”

The This American Life crew, once again proving that they can cover any topic they want better than anyone else in the media,* has a segment in this weekend’s episode on rescission of health insurance policies – insurers’ established practice of looking for ways to invalidate policies once it turns out that the insured actually needs significant medical care. (The segment is around the 30-minute mark; audio should be available on that page sometime on Monday.) The story describes a couple of particularly egregious cases, such as a woman who was denied breast cancer surgery because she had been treated for acne in the past, and a person whose policy was rescinded because his insurance agent had incorrectly entered his weight on the application form.

Continue reading “Health Insurance “Innovation”” →

Obfuscating Inequality

Will Wilkinson has gotten a lot of Internet love for his article “Thinking Clearly About Economic Inequality” (Free Exchange, Real Time Economics, Yglesias, Klein, Cowen, Rortybomb), which argues that increasing inequality is not as bad as people like Paul Krugman make it out to be. I thought it was a rhetorically clever but deeply misleading attempt to blur the obvious issue – economic inequality is increasing – by looking at it through a dizzying array of qualifying lenses.

Wilkinson marshals an impressive number of arguments to try to make the point that increasing income inequality is not the metric that we should focus on. I’ll try to take them one at a time. (Wilkinson’s arguments are summarized in the numbered paragraphs; the others are my responses.)

Continue reading “Obfuscating Inequality” →

Soaking Customers as a Form of Prudential Regulation

Good for Deputy Treasury Secretary (and YLS alumnus) Neal Wolin for wading into the American Bankers Association to defend the Consumer Financial Protection Agency. According to FinReg21’s article:

Wolin firmly rejected the argument made by American Bankers Association chief executive Ed Yingling in recent congressional testimony that responsibility for consumer protection should not be separated from the responsibility for safety and soundness. . . .

The industry has argued that prudential regulators are careful to preserve a profit margin on financial products, to keep financial institutions sound.

Continue reading “Soaking Customers as a Form of Prudential Regulation” →

After Peak Finance: Larry Summers’ Bubble

There are three kinds of “bubbles” –  a term often used loosely when asset prices rise a great deal and then fall sharply, without an obvious corresponding shift in “fundamentals“.

  1. A short-run bubble.  Think about 17th century Dutch Tulip Mania: spectacular, probably disruptive, but not a major reason for the decline of the Netherlands as a global power. 
  2. A distorting bubble.  In this case, the increase in asset prices contributes to a reallocation of resources across sectors.  Think of the Dot-com Bubble: fortunes were made and lost, the collapse was scary to many, and – at the end of the day – you’ve built the Internet and some good companies.
  3. A political bubble.  Here rising asset prices generate resources that can be fed into the political process, through bribes, building politicians’ careers, and lobbying of all kinds.  Bubbles in Emerging Markets often generate resources that impact the political process, sometimes in good ways – but most often in bad ways, which eventually contribute to a collapse.

Larry Summers seems to think we are dealing with the consequences of bubble type #1.  In his speech last week, “the bubble” is a modern deus ex machina – it explains why we have a crisis, but there is no explanation of where this bubble came from, what exactly was bubbling, and what changes this bubble brought to the real economy or to our politics. Continue reading “After Peak Finance: Larry Summers’ Bubble” →

Mixed Messages

David Wessel seems to be doing the impossible: his book, In Fed We Trust, is getting mentions from all over the Internet, even before its publication, despite competition from what seem like dozens of other crisis books. That’s what a good PR campaign (and a good review from Michiko Kakutani) will do for you.

I obviously haven’t read the book yet, but I was interested in this description in Bloomberg:

None of the senior government policy makers anticipated the credit-market collapse that followed Lehman’s bankruptcy filing in the early hours of Sept. 15, according to Wessel’s book. . . .

On a conference call the previous week, Paulson, Bernanke, Securities and Exchange Commission Chairman Christopher Cox, and senior staff members from those agencies had agreed that companies and investors who did business with Lehman had learned from Bear Stearns and would have acted to protect themselves from a Lehman failure, Wessel wrote.

What were they supposed to learn from Bear Stearns? That they should be very, very afraid of a major bank failure and take steps to protect themselves? Or that the government would step in, so that even if shareholders were largely wiped out, counterparties would be protected? It seems like more of them drew the latter conclusion, even though Paulson, Bernanke, et al. wanted them to draw the former conclusion.

This seems to me an illustration of the fact that you can never be sure what message you are sending. Perversely, even letting Lehman fail ultimately convinced market participants that the government would step in the next time – because the damage done by Lehman’s collapse was so great. One-off intervention are a crude and risky way of communicating policy and creating incentives.

By James Kwak