Author: James Kwak

No, Wait! This Is What I Really Want!

I try not to comment on purely political issues, but sometimes they are just too infuriating.

Over the last few days, Max Baucus has been leaking “his” health care proposal, which should be made public. Regular readers will know I’m no fan of Max Baucus, whose main goals seem to be killing the public option (I know, it’s not as big deal as it’s made out to be, but it isn’t irrelevant) and cutting subsidies to poor people. But supposedly, the whole point of the Baucus/Group of Six approach was that it would result in a bipartisan bill that could clear the Senate. The tradeoff was very simple; a plan that isn’t as good as it could be, but one that could pass.

Yesterday, The New York Times reported two of the three Republicans in the Group of Six, Charles Grassley and Michael Enzi, are against the Baucus proposal, and even Olympia Snowe wants changes.

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Kindle Comments?

As a few of you have figured out, you can read our blog on the Kindle. I know a few of you know this because I have received a very small amount of money from Amazon – a good deal less than the annual expenses of maintaining this blog, and those expenses are probably only in two figures anyway.

Simon pointed out that not being able to read comments on the Kindle is a problem. The reason for this is that WordPress.com separates posts and comments into two separate feeds. So I was just over at the Kindle Publishing site, about to publish the comments feed as a separate Kindle blog, when I realized I had no idea what the copyright status of comments is. In particular, if I do publish the comments feed on Kindle, I will make (a paltry amount of) money from other people’s work.

Now, I am guessing I am probably on firm legal ground doing that, since there are lots of blogs that make money (though few that make a lot of money), and they are all to some degree making money off of their comments. I think I’m on firm ethical ground as well, since the amount of money is so small that there is just no way to distribute it to the commenters that would not cost more to implement than the revenue I would receive. But I wanted to know: (a) if anyone knows of a good discussion of this topic (I can’t be the first person to think of it) and (b) if any of our regular commenters cares one way or the other.

Thanks.

By James Kwak

Obama, the Light Touch?

Edmund L. Andrews and David E. Sanger have an article in The New York Times today that is sure to infuriate some people, including me. Here’s one excerpt:

“Far from eagerly micromanaging the companies the government owns, Mr. Obama and his economic team have often labored mightily to avoid exercising control even when government money was the only thing keeping some companies afloat.

“A few weeks ago, there were anguished grimaces inside the Treasury Department as the new chief executive of A.I.G., Robert H. Benmosche, whose roughly $9 million pay package is 22 times greater than Mr. Obama’s, ridiculed officials in Washington — his majority shareholders — as ‘crazies.’

“Causing even more unease to policymakers, Mr. Benmosche insisted that A.I.G. — one of the worst offenders in the risk-taking that sent the nation over the edge last year — would not rush to sell its businesses at fire-sale prices, despite pressure from Fed and Treasury officials, who are desperate to have the insurer repay its $180 billion government bailout.

“But in the end, according to one senior official, ‘no one called him and told him to shut up,’ and no one has pulled rank and told him to sell assets as soon as possible to repay the loans.

“A similar hands-off decision was made about the auto companies. Shortly after General Motors and Chrysler emerged from bankruptcy, some members of the administration’s auto task force argued that the group should not go out of business until it was confident that a new management team in Detroit had a handle on what needed to be done.

“But Mr. Summers strongly rejected that approach, and the Treasury secretary, Timothy F. Geithner, agreed.

“‘The argument was that if the president said he wasn’t elected to run G.M., then we couldn’t hire a new board and then try to run any aspect of it,’ one participant in the discussions said. The auto task force took off for summer vacation in July, and it never returned.”

The political argument for this position makes sense. Basically, Obama and his administration are afraid of being charged with “socialism” or “big government,” so they are doing what they can to defuse this charge. (Not that that will help given the way political rhetoric is thrown around these days.)

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The Importance of Outcomes

Last week, Bill Moyers interviewed Jim Yong Kim, a distinguished medical professor and leader of nonprofit organizations and the new president of Dartmouth College. A lot of Kim’s work is dedicated to improving health in the developing world, so you might think he is some sort of soft-hearted lefty. But one of his main points about our health care problems was that our health care delivery system is not sufficiently tough-minded and calculating, and that health care providers can learn a lot from the business world. For example:

“JIM YONG KIM: So a patient comes into the hospital. There’s a judgment made the minute that patient walks into the emergency room about how sick that person is. And then there are relays of information from the triage nurse to the physician, from the physician to the other physician, who comes on the shift.

“From them to the ward team, that takes over that patient. There’s so many just transfers of information. You know, we haven’t looked at that transfer of information the way that, for example, Southwest Airlines has. Apparently they do it better than any other company in the world.

“BILL MOYERS: Computers?

“DR. JIM YONG KIM: No, they have taken seriously the human science of how you transfer simple information from one person to the next. And in medical school, and in the hospitals that I’ve worked in, we’ve done it ad hoc. Sometimes we do it well. Sometimes we don’t do it well. But what we know is that transfer of information is critical. Now to me, again, that’s the rocket science. That’s the human rocket science of how you make health care systems work well.”

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Another Year, Another Decline in Employer-Based Coverage

Ezra Klein shows the new Census figures on the uninsured. The long-term trend is absolutely clear: employer-based coverage is declining and public coverage is increasing, but not enough to make up the gap. Looking at the underlying data, we can see that 2008 was the eighth consecutive year in which the proportion of people covered by employer-based health insurance declined.

This is a point I’ve also tried to make before. Not only is employer-based coverage deteriorating, but the reasons for that deterioration imply that it is likely to only accelerate. As health care costs continue to increase, even if the rate of increase stays the same, the rate of deterioration will increase, because each year health care costs become a larger proportion of total costs and therefore harder to absorb. (Put another way, if health care cost inflation remains around 7% per year, each year it will be 7% of a larger proportion of employers’ costs.) Deterioration will take three forms – some employers will drop health coverage altogether, some will increase the share paid by employees, and some will shift toward less-generous plans.

Klein’s point is that it may be dangerous to premise health care reform on the idea that the employer-based system will remain what it is, because it won’t. My point was that because the employer-based system is slowly dying, people with employer-based coverage should not be thinking, “I don’t need health care reform, I’ve got my employer-based plan;” they should be thinking, “I’m afraid of what will happen when my employer drops its plan, so I need health care reform.” Unfortunately, I think both of us are right.

By James Kwak

Can Openers for Beginners

We haven’t had a Beginners post in a long time, but David Kestenbaum’s Planet Money post about traffic court got that part of my brain going again.

Kestenbaum’s story is that he went to traffic court and the judge was a friendly populist, but not an economist:

“The judge went on to say that this was the “people’s court” and explained that if she gave probation on a ticket, no points would appear and the insurance companies wouldn’t find out. ‘This court is not in the business of enriching the insurance companies,’ she said.”

Aha! Kestenbaum, who after a year on Planet Money is an economist, even if his Ph.D. is in physics, points out that whether or not people get points on their licenses doesn’t affect insurance company profits. They need to charge bad drivers more because their loss payments for those drivers will be higher; if they can’t find out who the bad drivers are, they will just raise premiums on everyone.

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Recovery – or Not – in Words and Pictures

First, the pictures. Paul Swartz of the Council on Foreign Relations has a new version of his charts on the current recession in historical perspective, which I first linked to in June. The overall impression? We are still considerably worse off today than in other postwar recessions at this point (21 months in), although some indicators appear to be bottoming out.

Now the words. Edward Harrison of Credit Writedowns has a guest post at naked capitalism presenting the arguments for a robust recovery and for no recovery at all. He cites Joseph Stiglitz for the proposition that statistical GDP growth isn’t everything, and extends the point to argue that  you can have “low-quality” GDP growth if that growth is financed by debt without corresponding investment. When you happen to control the world’s reserve currency you can do this for quite some time, and there’s no saying we can’t do it for a while longer. So one possibility Harrison foresees is a reasonable growth fueled by cheap money, yet no change to some of our underlying economic problems, including a financial sector with a put option from the federal government.

By James Kwak

The Perfect Product

I wasn’t planning to write about this weekend’s New York Times article about the securitization of life settlements after reading Felix Salmon’s post saying there was no new news there. But I was thinking about it some more and thought it was an interesting concept, whether or not it gets off the ground.

Life settlements already exist. The idea is that someone has a whole life insurance policy with a death benefit of, say, $1 million. The insured bought it when he was 35 and had two kids; now he’s 70, the kids are working on Wall Street and don’t need the death benefit, but they’ve cut him off and he needs some cash to fill the prescription drug donut hole and pay his Medicare co-pays. The insurance company will give him a cash settlement value of, say, $100,000. I don’t know what this actual number is, but the key point is that it is less than $1 million at the insured’s expected date of death, discounted back to the present (let’s call that the current actuarial value of the policy). In a life settlement, an investor pays the insured a lump sum that is greater than $100,000 – say, $200,000 – and makes the premium payments (if any are left to be made) on his behalf; in return, the investor becomes the beneficiary on the policy. Again, this already happens, although there are concerns about churning, misrepresentation, the whole deal.

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Boring and Exciting Finance

Taunter has a comprehensive proposal about how to regulate financial services, dividing them into Boring and Exciting.  Boring services are the following:

  • retail deposits
  • loans to retail customers, including mortgages
  • retail insurance, including annuity products
  • any custodial service beyond traditional settlement (i.e., if you hold something after T+3, you’re a custodian)

If you do any of those, then you are a Boring institution, you can do all Boring services, you face some significant regulations, and you get bailed out when necessary. If you do none of those, then you are an Exciting institution, you can do almost anything you want, and there is an ironclad rule preventing the government from bailing you out. Boring institutions cannot offer Exciting services (I think) and Exciting institutions cannot offer Boring services (that’s certain).

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Capital Is Good. Now What?

This week in the WaPo column we are switching from health care back to financial regulatory reform. Our column summarizes and comments on Tim Geithner’s recent white paper on capital requirements. The paper makes a lot of points that are good – more capital is better, higher quality capital is better, risk weighting of assets should reflect risks accurately, and so on. But in this form the principles, while we agree with them, are too uncontroversial to have much in the way of teeth.  Ultimately what will matter are the numbers – how much more capital will Tier 1 systemically important financial institutions have to hold – and how hard the administration will fight for real reform. One rule of thumb: if the banking lobby isn’t bitterly against it, it’s probably not enough.

By James Kwak

I Have a Big Head

That, at least, is the first thing you might conclude from my Bloggingheads debut, in which my half of the screen is almost completely filled by my head. I was on with Felix Salmon, who was gracious and charming as usual. If you read this blog and Felix’s blog, a lot of the ground we covered might seem familiar.

At the end, however, I did press Felix on the subject of wine, which is one of his favorites. Felix has written that who wins a blind taste test is essentially random, even with reputed wine experts doing the tasting, and he has verified this independently through his own blind tasting parties. Yet he says nevertheless that in an ordinary context, it is perfectly rational to enjoy an expensive wine more than a cheap wine, since you are not tasting blind; you are tasting with full knowledge of what you are drinking. I asked him why his knowledge of the empirical studies didn’t undermine the pleasure he got from drinking “good” wine. You can listen to his answer. The line I didn’t think of in time to use is that’s it’s like getting a placebo effect from a drug when you know it’s a placebo.

By James Kwak

CFPA and Non-Banks

Elizabeth Warren has a new op-ed at New Deal 2.0 arguing for, surprise, the Consumer Financial Protection Agency, but this time with a different emphasis – non-bank lenders.

The opponents of the CFPA – not only banks, but the head of just about every current financial regulatory agency – argue that consumer protection should be combined with prudential regulation, so that one agency should be both making sure that a bank doesn’t collapse and that it isn’t abusing its customers. Many people have pointed out the flaws with this argument: first, consumer protection invariably slips down on the priority list; second, regulators become hesitant to crack down on abusive practices because those abusive practices generate the profits that make the bank “healthy” to begin with.

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Consumer Protection Redux: The Lessons of History

For your Labor Day reading enjoyment, we bring you this guest post by Lawrence B. Glickman, who teaches history at the University of South Carolina and is the author of Buying Power: A History of Consumer Activism in America.

“We’re proposing a new and powerful agency charged with just one job: looking out for ordinary consumers,” said the president on June 17th.  The centerpiece of his proposed overhaul of the nation’s financial system, the Consumer Financial Protection Agency (CFPA), is designed to end what the president called “failure of…government to provide adequate oversight” by monitoring banking transactions, including mortgages, credit cards and checking and savings accounts. It did not take long for the predictable critics to denounce the agency with predictable rhetoric.  “It’s bad for the consumers,” said Steve Bartlett, president of the Financial Services Roundtable, a lobbying group for banks.  The institution will add “yet another regulatory layer” while advancing “the agenda of activist special interests,” according to the U.S. Chamber of Commerce.  The new agency represents “an unprecedented grant of power to mandate business practices” claims the American Bankers Association.

This is the language of conservative populism, a mainstay of the Republican party from Ronald Reagan to Newt Gingrich to Karl Rove. Conservative populism, wrote Jonathan Chait in the New Republic last year, “dismisses any inference that the rich and the non-rich might have opposing interests” and defines elites in cultural rather than economic terms as  “intellectuals and other snobs who fancy themselves better than average Americans.” Several decades of repetition have made this rhetoric familiar: federal efforts to help ordinary people–consumers–will inevitably hurt them; government is the problem rather than the solution; bureaucracy is “bumbling” (to use the words of a Crain’s New York Business poll about the proposed Agency); federal agencies designed to serve the public good actually serve narrow special interests.  It has been, in no small measure, through the ready deployment of this language that the Republicans have positioned themselves as simultaneously the party of big business and working Americans while denouncing Democrats as representing both intrusive government and elitism. This meme has been devastating for liberals since any expansion of government services can be dismissed with a quip–Bureaucrat!, Red Tape!, Nanny State!– rather than an argument. Recently, for example, Senator Lindsay Graham said that the American people would never tolerate the public choice option in health insurance because “you’ve got a bureaucrat standing in between the patient and the doctor.” For similar reasons, Senator Kit Bond dismissed the CFPA proposal as a “bad idea.”

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The Myth of Consumer Choice

I’m such a public radio groupie that David Kestenbaum and Chana Joffe-Walt are minor idols of mine. I get excited on the very occasional occasions when David calls to ask me a question, and Chana . . . well, if I were in my twenties and single, I would probably have a crush on her. So I was disappointed to listen through their recent Planet Money episode on health care, waiting for them to tell the other side of the story, but finally being left to yell at my radio. (No, I don’t actually yell at inanimate objects, but you know what I mean.)

David and Chana use the metaphor of an all-you-can-eat buffet to illustrate the well-known problem in health care that end consumers don’t bear anything near the full costs of their choices, which ordinarily leads to overconsumption. One problem with our health care system is high costs, so it’s common to blame high costs on the all-you-can-eat buffet.

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