Category: Commentary

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

Lessons Learned and Soon Forgotten

One year after the collapse of Lehman, the controversial “rescue” of AIG, and the ensuing collapse of world financial markets there are two questions: what have we learned, and what good will it do us?

The second question is essential, because we have learned so much about the functioning of our financial system – and the three main lessons are all rather scary.

First, our financial system has become dangerous on a massive scale.  We knew that the banks were playing games, e.g., with their so-called off-balance sheet activities, but we previously had no idea that these huge corporations were so badly run or so close to potential collapse.

Continue reading “Lessons Learned and Soon Forgotten” →

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.

Continue reading “The Perfect Product” →

The Crisis Next Time: Role Of The Fed

The Federal Reserve is taking a victory lap (e.g., Ben Bernanke at Brookings, next Tuesday morning; no weblink yet available), and the emerging consensus is that its leadership has done a great job over the past 12 months.  But we should also take this opportunity to reflect on the longer run role of the Fed, both in the past decade or two and since its founding. 

Over on The New Republic website (and in the lastest hard copy), Peter Boone and I suggest that in the absence of effective financial regulation – i.e., both during the 1920s and again since 1990 – the Fed has operated in a manner that encourages the formation of sequential bubbles.  This destabilization of our financial system is not a minor matter; the damage caused – human, financial, social – is already enormous. 

And we are very far from being done. 

Don’t take my word for it. Lou Jiwei, the chairman of China’s sovereign wealth fund said recently, “It will not be too bad this year. Both China and America are addressing bubbles by creating more bubbles and we’re just taking advantage of that. So we can’t lose.”

By Simon Johnson

G20 Summit, IMF Meeting: What To Expect?

As we wade through a long line of international economic meetings – G20 ministers of finance last week, G20 heads of government in Pittsburgh coming up, IMF-World Bank governors meeting in Istanbul early October (and all the associated “deputies” meetings, where the real work goes on) – it seems fair to ask: where is regulatory reform of our financial system heading?

Long documents have been produced and official websites have become more organized.  Statements of principle have been made.  And the melodrama of rival reform proposals has reared its head: continental Europeans for controlling pay vs. the US for raising capital vs. the UK not really wanting to do anything.  But what does all of this add up to, and what should we expect from the forthcoming summit sequence?

Nothing meaningful. Continue reading “G20 Summit, IMF Meeting: What To Expect?” →

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.

Continue reading “CFPA and Non-Banks” →

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.

Continue reading “The Myth of Consumer Choice” →

Good Finance Gone Bad

As the Lehman anniversary approaches, defenders of the financial sector struggle into position – partly in response to your comments (also here).  They offer three main points:

  1. We need finance to make the economy work.
  2. Financial innovation delivers value, although it’s not perfect (but what is?)
  3. Don’t kill the goose that laid the golden egg.

Point #1 is correct, but this does not necessarily mean we need finance as currently organized.  The financial sector worked fine in the past, with regard to supporting innovation and sustaining growth.  Show me the evidence that changes in our financial structure over the past 30 years have helped anyone outside the financial sector. Continue reading “Good Finance Gone Bad” →

Expert Panels and Bipartisan Consensus

Last week, Planet Money aired an interview by Adam Davidson with Barney Frank, the blunt and colorful chairman of the House Financial Services Committee. Davidson and Frank had a pitched disagreement over the question of whether it made sense to appoint a bipartisan, expert panel to take some time – figures between one and three years were thrown around – to study the causes of the financial crisis and, on that basis, recommend regulatory changes. Davidson thought it was a good idea; Frank thought it was nonsense.

I’m with Frank on this one, and the argument applies to the Financial Crisis Inquiry Commission, also known hopefully as the “New Pecora Commission,” appointed by Congress to study the causes of the crisis.

Continue reading “Expert Panels and Bipartisan Consensus” →

Football, Statistics, and Agency Problems

The most interesting part of Monday’s post on TARP may have been this little football example:

In honor of the changing seasons, imagine it’s the first quarter of a football game and you have fourth-and-one at the other team’s 40-yard line. Anyone who studies football statistics will say you should go for it; it’s not even close. (Some people have run the numbers and said that a football team should never – that’s right, never – kick a punt.) If the offense fails to make it, the announcer, and the commentators the next day, will all say that it was a bad decision. That’s completely wrong. It was a good decision; it just didn’t work out.

One of my friends was particularly intrigued by the theory that a football team should never punt. I recall reading this somewhere, but I couldn’t find it actually demonstrated anywhere, although this high school football team implemented the strategy – and won the state championship. That article cites “Do Firms Maximize? Evidence from Professional Football” by David Romer, who analyzes the punting question in detail.

Continue reading “Football, Statistics, and Agency Problems” →

What Is Finance, Really?

At one level and in most economics textbooks, this is an easy question with a rather encouraging answer.  The financial sector connects savers and borrowers – providing “intermediation services”.  You want to save for retirement and would obviously like your savings to earn a respectable rate of return.  I have a business idea but not enough money to make it happen by myself.  So you put your money in the bank and the bank makes me a loan.  Or I issue securities – stocks and bonds – which you or your pension fund can buy. 

In this view, finance is win-win for everyone involved.  And financial flows of some kind are essential to any modern economy – at least since 1800, finance has played an important role in US economic development.

Unfortunately, two hundred years of experience with real world finance reveal that it also has at least three serious pathologies – features that can go seriously wrong and derail an economy. Continue reading “What Is Finance, Really?” →

Revisionist History

Probably most of you have already read David Cho’s Washington Post article on how the Big Four banks (a) have gotten bigger through the crisis, (b) have increased market share (“now issue one of every two mortgages and about two of every three credit cards”), (c) are using their market clout to increase fees (while small banks are lowering fees), and (d) enjoy lower funding costs because of the nearly-explicit government guarantee.

I just want to comment on this statement by Tim Geithner: “The dominant public policy imperative motivating reform is to address the moral hazard risk created by what we did, what we had to do in the crisis to save the economy.” (Emphasis added.)

Um, no.

Continue reading “Revisionist History” →

The March of Science and Health Care Reform

On a Planet Money podcast two weeks ago, economist Charlie Wheelan weighed in on the significance of genetic testing – the advancing ability of science to determine your genetic makeup, including your propensity to develop various serious or costly illnesses. This really crystallizes one dimension of the health care debate.

If insurers know what your projected long-term health care costs are, because they can read your genetic code, then they are going to price accordingly – and that’s exactly what insurers should do in an unregulated market. This produces the dystopian world where not only are some people unlucky because their genes make them more likely to suffer in various ways, but on top of that they can’t get health insurance and therefore health care.

Continue reading “The March of Science and Health Care Reform” →

The Nature of Modern Finance

Is modern finance more like electricity or junk food?  This is, of course, the big question of the day.

If most of finance as currently organized is a form of electricity, then we obviously cannot run our globalized economy without it.  We may worry about adverse consequences and potential network disruptions from operating this technology, but this is the cost of living in the modern world.

On the other hand, there is growing evidence that the vast majority of what happens in and around modern financial markets is much more like junk food – little nutritional value, bad for your health, and a hard habit to kick. Continue reading “The Nature of Modern Finance” →