Month: May 2011

Health Care Rationing for Beginners

By James Kwak

“Obama-care kills Medicare as we know it. Obama-care raids $500 billion from Medicare to spend on Obama-care, puts in place a 15-panel board to ration Medicare by unelected bureaucrats.

“Our budget, repeals the raiding, gets rid of the rationing board, preserves this program, makes no changes for a person 55 years of age or older and saves Medicare, by reforming it for our generation, so it’s solvent. The president’s plan does not save Medicare, it allows it to go bankrupt, rations the program and raids the program. We get rid of the rationing, we stop the raiding and we save the program from bankruptcy.”

That was Paul Ryan on Fox News recently.

Ordinarily this wouldn’t be worth responding to, except to point out, as Sam Stein did, that Ryan’s proposed budget also “raids $500 billion from Medicare,” so the statement that “we stop the raiding” is, um, a lie. But it isn’t news that Paul Ryan has an issue with honesty, except perhaps for David Brooks.

But there’s a theme that is surfacing that goes something like this: OK, Ryan’s plan is extreme and has no chance. But we all know we spend too much on health care, and we have to spend less, which means that we have to ration care one way or another. Ryan does it by scrapping Medicare in favor of indexed vouchers; Obama does it by reducing Medicare payment rates and, more ominously, with “a 15-panel board to ration Medicare by unelected bureaucrats.”

Continue reading “Health Care Rationing for Beginners” →

The Problem With Christine Lagarde

By Simon Johnson

Ms. Christine Lagarde, French finance minister, is the nominee of the European Union for the recently vacant position of managing director at the International Monetary Fund.  The EU has just over 30 percent of the votes in this quasi-election; the US has another 16.8 percent and seems willing to keep a European at the fund if an American can remain head of the World Bank.  It should be easy for Ms. Lagarde to now travel round the world engaging in some old-fashioned horse trading, along the lines of: Support me now, and I or the French government will get you something suitable in return, either at the IMF or elsewhere.

The contest to run the IMF seems over before it has even really begun.  But Ms. Lagarde has a serious problem that may still derail her candidacy, if there is ever any substantive, open, or transparent discussion of her merits.  There is major design flaw in the eurozone and Ms. Lagarde is the last person that non-European governments should want to put in charge of helping sort that out. Continue reading “The Problem With Christine Lagarde” →

What’s Left of the Ryan Plan?

By James Kwak

Jennifer Steinhauer in the Times reports that some Republicans are running away from the Ryan Plan (you know, the one that changes Medicare from a health insurance plan to an underfunded subsidy), while others are trying to figure out if they should support in order to gain Tea Party votes. As policy, of course, it never had a chance to pass the Senate or of being signed by President Obama (and every Republican staffer Politico could find agrees), so it was pure political theater from the start. As Paul Krugman points out, the goal may have been to win over the pundits — a group that is vastly more concerned with the deficit than ordinary voters — but even that failed. (They got Jacob Weisberg, but he backpedaled furiously, and they got David Brooks, which was mainly amusing because then we got to watch Krugman trying to observe intra-Times decorum by not going after Brooks by name). Now Republicans are wondering if the loss of a Congressional seat in a conservative New York district was Ryan’s fault.

But while I’d like to think that the nation is recovering its senses, at least on what Republicans mean for Medicare, I’m not optimistic. Brad DeLong put it well:

“the political lesson of the past two years is now that you win elections by denouncing the other party’s plans to control Medicare spending in the long run — whether those plans are smart like the Affordable Care Act or profoundly stupid like the replacement of Medicare by RyanCare for the aged — sitting back, and waiting for the voters to reward you.”

Continue reading “What’s Left of the Ryan Plan?” →

Would Another European Managing Director At The IMF Be The Answer For Greece?

By Simon Johnson; for more on related issues, see my new Bloomberg column on the IMF succession.  For more background on the IMF, see Tuesday’s Planet Money Podcast.

Greece has no good options. Without question, Greece brought debt problems on itself – this is the consequence of politicians using irresponsible fiscal policy to win elections.

As the International Monetary Fund put it when Greece became the first eurozone country to borrow from the fund in May 2010, “Even with the lower deficits envisaged under the program, the debt as share of GDP will continue to peak at almost 150 percent of GDP in 2013 before declining thereafter.” The situation has not improved in recent months – even under the most optimistic scenario, the debt-GDP ratio will peak above this number.

The problem is that loose talk among European leadership of potentially “restructuring” or “reprofiling” Greek debt creates more problems than it solves. Financial markets fear another Lehman moment, in which authorities decide to let a significant borrower fail – without fully understanding the consequences. Continue reading “Would Another European Managing Director At The IMF Be The Answer For Greece?” →

The Problem with Biomass, Part 2

By James Kwak

I’ve already introduced you to the Springfield biomass plant proposed by Palmer Renewable Energy (PRE). The issue in that post was PRE’s witnesses’ apparent unfamiliarity with the voluminous evidence that ambient air pollution increases both the incidence and the severity of asthma, along with other diseases.

In addition, PRE is claiming that their biomass plant won’t increase air pollution, anyway. In this press release gracefully repackaged as a news story by the Springfield Republican, we read, “The average annual impact on emissions such as nitrogen dioxide, sulfur dioxide, and particulate matter would be minuscule, Valberg and Raczynski [PRE’s environmental consultants] said.”

Continue reading “The Problem with Biomass, Part 2” →

O.C.C. Spells Trouble, Again

By Simon Johnson

The Office of the Comptroller of the Currency (OCC) is one the most important bank regulators in the United States – an independent agency within the Treasury Department that is responsible for “national banks” (for more on who regulates whom in the US, see this primer).  Over the past decade the OCC repeatedly demonstrated that it was very much on the side of banks, for example with regard to fending off attempts to impose more consumer protection – James Kwak and I covered the history in our book, 13 Bankers; these details have not been disputed by the agency or anyone taking its side. 

After suffering some serious and well-deserved loss of prestige during the financial crisis of 2008-09, the OCC survived the Dodd-Frank reform legislation and is now back to pushing the same agenda as before.  In the view of this organization and its senior staff – including key people who remain from before the crisis – the “safety and soundness” of banks requires, above all, not a lot of protection for consumers.  This is a mistaken, anachronistic, and dangerous belief. Continue reading “O.C.C. Spells Trouble, Again” →

The Problem with Biomass, Part 1

By James Kwak

Did you know that my wife is a “high-paid consultant” for the shadowy anti-biomass movement? Neither did I — and I’m the one who handles all of our finances, so I should know.

Last night she testified at a hearing held by the Springfield City Council, which is considering revoking the permit of Palmer Renewable Energy (PRE) to build a biomass plant in Springfield. PRE was granted a special zoning permit to build the plant in 2008. Since then, PRE has increased the amount of fuel it intends to burn (meaning, among other things, that more diesel trucks will have to drive in and out to deliver the material) and changed the type of fuel from construction and demolition debris to “green wood chips” (which matters because the plant was initially permitted as a recycling facility).*

My wife, a professor of environmental economics and econometrics, testified about the link between emissions (from power plants and diesel trucks) and illness, particularly asthma. At the hearing, one of PRE’s witnesses claimed not to know where my wife was “getting” the idea that air pollution can cause asthma. (In a newspaper article, PRE had this to say about asthma: “Valberg said there are many theories on the causes of asthma, and that indoor air quality in homes and schools is actually more of concern than outdoor air. For opponents to state that the project will worsen asthma rates ‘is just not scientifically accurate,’ Valberg said.”)

Continue reading “The Problem with Biomass, Part 1” →

The Race For The IMF

By Simon Johnson (this post comprises the first two paragraphs of a column now running on Bloomberg)

Even before the shocking events of the past few days, the international policy community had been contemplating a successor to Dominique Strauss-Kahn at the International Monetary Fund.

Strauss-Kahn, the IMF managing director, was expected to begin campaigning soon for the presidency of France. Now, whatever happens in the New York legal system as he defends himself against attempted rape allegations, it seems likely that the IMF will be searching for a new head sooner rather than later.

To read the rest of this column, please follow this link: http://www.bloomberg.com/news/2011-05-17/emerging-markets-might-name-strauss-kahn-heir-simon-johnson.html

The Silliness of Spending Caps

By James Kwak

One of the new old ideas floating around Washington these days is an aggregate spending cap for the federal government. For example, both the House Republicans’ budget and one of those “moderate bipartisan” Senate proposals calls for limiting total government spending at around 21 percent of GDP. This is silly for at least two reasons.

First, and less controversially, the number of dollars that flow from the federal government to entities that are not the federal government is not an economically significant number*. The most obvious example of this is tax expenditures: subsidies that are implemented through the tax code, usually as deductions or credits. For example, let’s say the government wants to promote renewable energy. It can increase taxes and write checks to companies that produce solar panels; or it can keep taxes the same and enact tax breaks for companies that produce solar panels. Same difference — except that the former “counts” as government spending and the latter doesn’t. So a spending cap simply motivates Congress to spend money through tax credits rather than by writing checks, which is bad for all sorts of reasons. (It is harder to target, it reduces the tax base, etc.).

Continue reading “The Silliness of Spending Caps” →

Renting and Buying Compared

By James Kwak

Loyal readers already know what I think of housing as an investment. The main issue, in my mind, is that it’s extremely risky as an investment: not only are most middle-class families putting more than their total net worth in a single asset class (and one with low average real returns compared to the stock market), but they are putting it into a single asset, which violates the most fundamental principle of investing.

That said, on a pure expectation basis (not considering risk), buying is probably better than renting. It’s not as simple as saying that “renting is throwing money away while paying a mortgage is building equity” because (a) homeowners usually pay more cash than renters on an ongoing basis (mortgage, homeowner’s insurance, maintenance, etc.) and (b) you have to consider the returns you could get by investing your capital (down payment and principal payments) in another asset class. But the tax deduction for mortgage interest probably tilts the scale toward buying.

So if you’re thinking about buying or renting, I recommend that you read “The Effectiveness of Homeownership in Building Household Wealth” by Jordan Rappaport, an economist at the Kansas City Fed (hat tip David Leonhardt). The most valuable part of the paper is that it clearly outlines the financial tradeoffs between owning and renting. Rappaport creates a model that estimates the cash flows from buying a house and selling it ten years later and renting for ten years, assuming that you invest all the money you save by renting. He then looks at historical ten-year periods beginning from the 1970s through the 1990s to see which strategy would have been preferable.

Continue reading “Renting and Buying Compared” →

Why Does The Independent Community Bankers of America (ICBA) Oppose Debit Card Reform?

By Simon Johnson

It’s not hard to understand why large banks oppose any attempt to reform the financial arrangements currently surrounding credit cards and debit cards – in the duopoly run through Visa and MasterCard, big banks earn fees that far exceed their costs.  This excess profit gap for debit cards would be substantially reduced by a Federal Reserve proposed regulation now on the table, which would implement the Durbin Amendment from the Dodd-Frank 2010 financial reform act.  Senator Jon Tester (D., Montana) has proposed legislation that would delay and effectively derail implementation of the Durbin Amendment; the big banks are very much in his camp.

It’s much harder to understand why Independent Community Bankers of America (ICBA), the lobby group for small banks, is also working so hard for the Tester bill – because community banks are explicitly exempted from having to lower their fees and individual executives from at least some small banks publicly support the Durbin Amendment (e.g., see Senator Durbin’s letter to the ICBA last year). 

The most plausible explanation is that ICBA is also one of the country’s largest issuers of credit cards and debit cards – so the representative of small banks actually has, in this regard, the incentives of a big bank.  This is a major conflict of interest that is undermining the interests of community bankers and distorting the political process.  The ICBA needs to declare this conflict in a transparent manner and step back from its involvement in the Durbin-Tester debate.   (UPDATE: The ICBA says that it derives no revenue from debit interchange, despite the fact that the leading industry sources list it as #20 for “Signature Debit Card Interchange” and #13 for “PIN Debit Card Interchange”; for a full explanation, see the note from Cam Fine that appears with the NYT.com version of this column.)  It also needs to publish the full details of a “survey” that it uses to claim that most community bankers are against the Durbin Amendment.

Continue reading “Why Does The Independent Community Bankers of America (ICBA) Oppose Debit Card Reform?” →

What’s a Big Government?

By James Kwak

One thing that all parties seem to be able to agree on is that big government is bad. It was President Clinton, after all, who said, “The era of big government is over.” And the current Republican budget-slashing wave seems motivated by the idea that our government is too big.

But what is the size of government, anyway?* When a typical anti-government person thinks of government, she probably has in mind the EPA, the Consumer Financial Protection Bureau, the “jack-booted government thugs” at the the Bureau of Alcohol, Tobacco, and Firearms, OSHA, and all those government agencies that prevent businesses and individuals from getting on with their lives. The idea here is that government intervention in the free market makes the economy less efficient and therefore reduces aggregate societal welfare.

Continue reading “What’s a Big Government?” →

Blog Archive Updated

By James Kwak

At the suggestion of an anonymous commenter, I decided to use Vienna, an open-source OS X RSS reader, to download monthly feeds and “print” them to PDFs, so the blog archive is now up to date. It wasn’t quite what I was looking for, since I wanted an online solution, but I don’t mind installing new software on my Mac as much as I minded it on a PC.

The Myth of the Natural Economy

By James Kwak

“The general equilibirum view tends to lend support to those who want to make the economy more efficient in the sense of having fewer ‘distortions’—you know, all of these neutral economic words—from taxes, from labor unions, from minimum wages, and so on. Now, what has happened in the last thirty years—and this is what Hacker and Pearson note in their book [Winner-Take-All Politics]—is we have gotten ourselves into a feedback situation. As people have gotten richer, conservative people have funded organizations which generate economic research promoting their political views.”

That’s from an excellent interview with economic historian Peter Temin in The Straddler. Temin’s main point is that what he calls general equilibrium approaches to macroeconomics have a political agenda, but they hide that agenda behind an ideology of naturalness. The “natural,” perfectly clearing, perfectly efficient economy, of course, has never existed and can never exist, but it is used to justify certain political prescriptions.

Continue reading “The Myth of the Natural Economy” →