Wednesday, January 8, 2014

A Rational Basis

I apologize for the long absence--I had the unfortunate circumstance of having to navigate through my own personal unemployment and healthcare crisis.  Talk about the perfect storm!  Luckily I was covered by my wife's health insurance so our family's economics weren't destroyed.  After major surgery and a lot of recovery time, it's time to get back to work!

With a new lease on life, I've decided that I need to brighten things up a bit.  That being the case, I've created a new blog, A Rational Basis (arationalbasis.blogspot.com), which has a new look but will still focus on analyzing and discussing current--primarily economic and political--issues. I hope you will subscribe to A Rational Basis and that you will suggest it to your friends.

Tuesday, September 18, 2012

My Take on Public Sector Unions


I have no problem with unions per se.  Unions may have killed American manufacturing, but they really only hurt themselves, not consumers, since, in this country, consumers can still choose non-union made goods.  As long as there exists non-unionized competition, whether foreign or domestic, that will always be the case.  It's when unions have no competition, when they are actually the monopolists, that I have a problem, a big problem.  Nowhere in our country does that happen except in the public sector, where we hand over our most vital services--police, fire, education, sanitation--to unions.  Somehow the notion of public service has been turned inside out to instead become public blackmail: "pay us whatever we want or we will let fires burn, let thieves roam, let your children suffer, let garbage pile up on your streets."  Any city or state that is foolish enough to try and cross a public employees' union finds itself terrorized.

Witness the ongoing Chicago teachers' strike, where teachers have rejected raises averaging 16% over the next four years--teachers, who on average, have done a miserable job, Chicago having one of the lowest performing school systems in the country.  This, at a time when millions are unemployed, many with little chance of ever finding a job that even matches their previous salary.  The only reason for this travesty is that the Chicago teachers' union has a monopoly on the provision of public education in the city of Chicago. In a time where just about everyone is struggling, the underperforming Chicago teachers' union has the audacity to demand even more than the generous amount its been offered.  If the rest of us did our jobs as poorly as the teachers, we would be on the street.  And they want more. 

What is the most vital public service of all?  In my mind there is no doubt that it's the military, without which none of the other services would even be possible.  Now imagine a unionized military.  Do you think that would work?  We would never let that happen, yet really, is there any difference conceptually between a unionized military and a unionized police?  Unionized firefighters?  Unionized teachers?  Unionized sanitation workers?  All are vital.  All are handled by the public sector.  Picture the country's safety held hostage to union leaders demanding higher wages--which is what every city, state and town of the country already faces at the hands of its public sector unions.  And that needs to change.

Unions in the private sector eventually have to be reasonable.  Otherwise they kill their golden goose. Public service sector unions have no such limitations. Left unchecked they will and do kill their golden geese.  The financial situation of our our cities, towns and states attests that the process is well under way.  And that is why public sector employees' unions should never have been and should most definitely no longer be permitted. 

Sunday, September 16, 2012

Tax Cuts Are Not The Issue


Yesterday's (September 15, 2012) New York Times contained an article titled "Do Tax Cuts Lead to Economic Growth?" that goes through the monotonous exercise of examining the various tax cuts and increases enacted by Presidential administrations since G.H.W. Bush and how, in the author's opinion, tax cuts have actually depressed growth, increases having had the opposite affect.  While it could be argued that tax increases and reductions have a lagged effect on the economy and maybe the author is just missing that point, in my opinion the whole tax increase/decrease debate is just a giant red herring. And that's because what really matters is the level of government spending. 

In a nutshell, this is how it works:  if government spending increases, the money is taken from the private economy either through taxes or borrowing, both of which reduce the money available to be spent or invested by individuals or corporations. Reducing taxes wIthout reducing spending just means that more has to be borrowed--any increase in private activity will just be offset by the increased cost to service the debt.  Increasing taxes will have the opposite effect. 

So, getting back to the NYT article, has the author considered how much G.W. Bush increased government spending and how, maybe, that has had something to do with lack of growth in the private sector?  As discussed in a previous post (Spending is THE Problem), Ronald Reagan, the patron saint of tax-cutters, believed that, by limiting its sustenance, tax cuts would actually reduce the amount of government spending.  What Reagan failed to understand was that Congress's penchant to live beyond its means could not be controlled so simply.  Today's tax-cutters don't even pretend that cutting the size of government is their goal, being instead content to redistribute the pie based on their own personal beliefs.

Is it any wonder that Republican tax cut proposals are met with so much skepticism?  Without corresponding spending cuts, they will most definitely increase the deficit. It's just math.  Any benefit that goes to one group will be equally offset by the increased liability of the rest. The sum of the two will always be zero.  And that goes for Democratic tax increases as well.  Both actions--without spending cuts--are zero sum games.  What both parties have embraced is simply class warfare.

Which, finally, leads us to the most important question, the one that really lies at the heart of the matter:  Why should we care whether the government promotes the private economy by reducing its own spending or whether it completely manages the economy?  Two words--Soviet Union, where the government planned everything and no one produced anything.

Saturday, September 8, 2012

Healthcare Dreams


I have to admit, for years I've been quite the quixotic dreamer, thinking that if we could only get government out of the way the glorious market would intervene and cure all ills.  Unfortunately, while I do believe this could have been the case, the reality is that its never going to happen.  As long as human beings are able to combine in self-interested mobs to assert themselves over other human beings, they will. And that really is the definition of government, isn't it?   

As originally formed, our government was supposed to be different--it was specifically designed to limit the natural inclination of governments to overreach.  Unfortunately, by finely parsing the words, not the intent of the Constitution, the Supreme Court unshackled the mob that is Congress and the result is what we have now--self-interested factions continuously banding together band to force their beliefs or economic interests on others.  Think of unions or corporate special interest groups.  That being the case, what's a dreamer to do?  Besides drink, I mean. 

This year's Presidential election clearly illustrates the problem. On one side you have a sitting President who wants to expand government into just about every facet of our lives.  On the other you have a candidate that wants to do the same thing--only from a different perspective. We are left to choose between two sides of the same coin.  Why, after decades, is Roe v. Wade even an issue?  Why do Democrats insist that those whose religious beliefs oppose contraception and abortion must fund them with their tax dollars?  Why does the Republicans' right-wing insist that everyone must follow its religious beliefs? Wasnt freedom from religious persecution the primary reason the Pilgrims came here in the first place?  Both parties act like abortion is the most vital issue facing the country when, in reality, those of us in the middle think its just a huge distraction.  

With our aging baby boomers, healthcare should be front and center to the debate.  And yet the best the Democrats and Republicans can come up with is shifting the deck chairs on the insurance Titanic. I'll let you in on something--when everyone is insured its not really insurance anymore.  The underlying premise of insurance--risk of something occurring--is pretty much eliminated when coverage is universal because the larger the pool the easier it is to predict occurrences.  This should mean lower costs to customers, but it just results in higher profits for insurance companies under both parties' current proposals--for insurors, Obamacare and the Republican alternatives are simply "heads I win, tails you lose".  [Hedge funds seem to agree, having poured billions of dollars into the stocks of insurers following the Supreme Courts decision on Obamacare.]

We don't have insurance that covers police, fire or education, the three rails of public service. If healthcare is truly the fourth rail--and its healthcare, not insurance that's the issue--then we need to suck it up and nationalize the whole system. And if that means death panels and delays so be it.  At least everyone would have access to a basic level of care and if they chose to spend more on better treatment and less on something else that would be their choice (and if they didn't or couldn't that would just be too bad, which is how it works in every other country that already has national healthcare).  As it is, we've become slaves to our insurance companies (and to our employers who usually pay the bill), who are more than happy to take our premiums but come up with every excuse to deny or reduce benefits when we submit a claim. Handing these criminals more of our money in the name of universal health insurance is a travesty. And yet that's the best both parties can propose?

If our government is going to be involved in healthcare, and it clearly will be, then the answer to America's healthcare situation is painfully simple--if we want everyone to have access to healthcare then it needs to be a public good, i.e., healthcare should be nationalized. The public has been misled by the insurance industry into believing that government control would lower its level of care.  That may be true in some instances, but what we get right now isn't exactly wonderful.  Has your insurance company ever disallowed a claim you were previously told would be permitted, sticking you with the bill?  Have you ever gone to a doctor who won't even take your insurance?  Get hurt in Canada and--even if you're an American--the cost for emergency care will be a fraction of what it is here, in large part because there is no insurance bureaucracy to navigate.

For once, this is a political issue that defies religious boundaries.  Is there a religion that wouldn't want everyone to have access to some basic level of care--at least for its members)?  That being the case, maybe government control is actually warranted in the case of healthcare.  Clearly, there has to be limits, especially with an aging population.  But creating an incomprehensible (I've got degrees in finance, accounting and law and I have no clue how Obamacare or the Republican alternatives are supposed to work) system that has the primary result of putting more money in the pockets of insurance companies, whose main priority has never been to provide the best healthcare, strikes me as the wrong way to go. I guess I'm still a dreamer.  

Friday, November 11, 2011

When It Makes Sense to Print Money

This post may seem incompatible with previous items but there are times when the data is just so startling that it changes the math.  Recently I learned that M4, a broad measure of the country's money supply which is no longer published by the Federal Reserve but is still tabulated by private sources, may have fallen by as much as 4% during the latest 12 months.  Such a number implies that not only is the American economy not on the verge of recovery but it is actually most certain to double-dip into recession next year.

That being the case, I will suggest the following:  one of the few times that printing money makes sense is when the overall money supply is actually declining.  In such an instance, the inflationary effect of printing would simply offset the deflationary effects of the decline.

Years ago, believe it or not, I used to correspond with Milton Friedman.  What I enjoyed most about Dr. Friedman was his openness to discussion with a non-academic like myself.  One of the major topics we discussed was which measure of the money supply was appropriate to follow insofar as monetary policy is concerned.  He felt that M2, which is the broadest measure the government now discloses and is directly influenced by government policy, was appropriate.  I felt that M3 or M4, which the government disclosed until 2005 and includes monetary measures that are less influenced by the government--primarily credit related--should be used.  He liked to use M2 as a shorthand way to look at monetary policy because the relationship between M2 and broader measures like M4 had always been fairly stable.  

While that may have been true, the relationship has clearly been broken.  Recent M2 growth figures show a nearly 10% year-over-year increase and M4. as stated earlier, may have fallen by 4% in the same period.  To have such a dislocation implies that the components that make up the difference between the two measures--primarily credit--must have fallen precipitously.  Since housing demand--the major source of credit expansion--has collapsed, this makes perfect sense.

The Fed has tried to increase the money supply through "quantitative easing" but the so-called "multiplier" that would be expected to result in expanded credit has failed to function.  The Fed has literally been pushing on a string because credit is contracting faster than money has been printed!  This is the recipe for deflation, i.e., prices actually falling, which we may not have seen at the gas pump, but we sure as well have seen in the prices of our homes.

Which gets us back to the point of this post.  Home prices are in a death spiral that needs to be reversed if people are to regain confidence in their future.  And the way to do that now is to increase M2 by an amount large enough to offset the decline in M4.  How does the Fed actually do this?  Deficit funded stimulus--taking money from one person and giving it to another--won't work because it yields no net increase.  That leaves more--significantly more--of the dreaded quantitative easing, which in the current situation would act to stabilize M4 rather than expand it.  And until the money supply--the broad M4 money supply--stabilizes, the economy can't restart.  Expanding M2 is easily accomplished--the Fed buys and buys and buys U.S. government treasury bills until M4 stops declining and begins to expand.  [This would yield a secondary benefit of reducing  the country's total debt, helping to reduce the annual deficit as well.]

The problem with addressing the M4 decline in this manner, however, is that the Fed has never shown an ability to do so without going too far in the other direction, i.e., increasing past the point of stability into the realm of inflation.  It's likely that long bond yields will begin to rise once M4 has stabilized and that credit will expand as well.  At that point, to counteract increasing inflationary forces, the Fed would have to act quickly in the other direction.  That is when its independence would truly be tested.

Alan Greenspan kept the punch bowl on the table far too long and helped contribute to our current economic and fiscal malaise.  Ben Bernanke needs to put an even bigger bowl on the table--and then pull it away just as the party gets started.  Whether he can do that will be the real test.      



 

Friday, November 4, 2011

Government Support Leads to Dangerous Economic Distortions

By now one consistent theme should have become clear to readers of this blog:  if you want to increase something like employment, you make it less costly.  The country is struggling because the President doesn't understand that simple concept.

But this post is not once again about the negative effects of increasing the cost of doing business above those imposed by the market--it is about the perils of reducing them.  For while many industries, like manufacturing and energy, have been hamstrung by government imposed (or sanctioned) costs others, like banking, healthcare and education, have grown much too large because the government has removed costs that would otherwise have been imposed on them in a true market-based economy.  

Let's look at banking.  From 1933 to 1991 commercial banks were restricted from investment banking activities by the Glass-Steagall Act.  The rationale for this was that since banks were insured by the FDIC it was appropriate that the federal government restrict their activities.  In 1999, the Republican-controlled Congress and President Bill Clinton repealed Glass-Steagall, having been convinced by the banking industry's arguments (and campaign contributions) that it would otherwise be unable to compete against investment banks and foreign banks.  The banks were supposed to keep their new activities separate from their older, stodgier commercial banking businesses so that depositors' funds remained safe.  What happened instead nearly blew up the world.

What happened was the banks took more risk than they could or would have otherwise in their new businesses because the depositors' funds in their traditional businesses were insured by the federal government!  Insurance essentially eliminated the banks' risk so they took much more of it!  Heads I win, tails you lose.  Who wouldn't play that game?  So bankers, with little to lose and much to gain, rolled the dice.  And when they finally--and quite predictably--lost, Uncle Sam had no choice but to bail them out; they had bet so much that not only would they have killed themselves, but quite possible the world's financial system, as well.  

Glass-Steagall kept the banks under control by prohibiting them from jeopardizing insured deposits on high-risk activities.  It was only after its repeal that the banking industry's share of our economy became so large.  Permitting commercial banks to undertake investment banking activities essentially extended deposit insurance to those activities as well.  Investment banks, at that point themselves not able to compete with the commercial banks--since they weren't insured!--took on far too much risk.  Lehman, Bear Stearns and Merrill Lynch blew up.  Goldman Sachs and Morgan Stanley are still stumbling along.  But the big banks, JPMorgan, Citibank and Bank of America are too big to fail?  They're the ones that caused the crisis in the first place!

Insurance helps decision makers limit risk when they undertake an activity.  However, insurance does not function unless there are restrictions on the activities of the insured.  By repealing Glass-Steagall, a Republican Congress and a Democratic President did just the opposite--and in so doing encouraged an increase in risky activity that would never have occurred otherwise.  Health insurance that doesn't restrict health choices has the same effect and so do below market student loans.  Each of these increases the demand for the underlying service by reducing the cost to the individual of using them.  Of course, the costs don't disappear--they're just transferred to society.  

Trying to pick winners, the government never fails to do the opposite.  In doing so it has distorted our economy to the point where certain industries--like banking--have become so large that they are either too big to fail or--in the case of education and healthcare--too expensive too succeed.  Without government actions favoring them, this would never have been the case.  

Friday, October 28, 2011

Insuring Predictable Events Predictably Increases Cost of Healthcare

There's a very simple reason why America's healthcare costs continue to soar:  TOO MUCH INSURANCE.

Insurance is meant to protect us from the cost of UNEXPECTED occurrences like getting cancer, breaking an arm or getting hit by a car.  Society insures things that don't happen to everyone--unexpected occurrences--so that their cost is reduced for the person who is actually affected.  But is death from old age unexpected?  Of course not, yet an extraordinarily large portion of the nation's healthcare expense occurs in the very short time period immediately before that point.  Why?  Because insurance enables us to use other people's money to pay for it!  The trouble is, those other people are doing the same thing!  My question to you is, how much would you spend of your own money for an extra week of Grandma's time?  Or better yet, how much would Grandma want you to spend?  I'm guessing that you would spend more than Grandma but that you wouldn't spend your family's last cent.  Insurance throws that question out the window:  you spend all of my money and I spend all of yours, and together we go bankrupt while insurance company executives buy vacation homes.

Similarly, imagine how much an oil change for your car would cost if it were covered by insurance.   Seven layers of bureaucrats (exaggeration) would have to be hired to manage the paperwork!  The same analysis applies when we pay for our annual physical or dental cleaning--which are entirely predictable--with insurance.  Why would we do something so stupid?  Because most of us get our insurance from our employers, who are able to deduct the cost from their tax bill while we as individuals cannot.  What this does is encourage us to get as all-encompassing a policy from our employer--like one that covers annual checkups--as possible.  Of course that distorts the cost of a doctor's visit since half the people they employ are in collections!

Both death from old age and annual checkups are entirely PREDICTABLE events and insuring them PREDICTABLY results in higher medical costs and insurance company profits.  The answer to rising medical costs is not to insure MORE events--it's to insure LESS!  Doing so also might encourage a little more personal responsibility--like better eating, more exercise and weight loss.  Of course, why do those things when--as things are currently--someone else picks up the tab?