Sunday, September 12, 2010

Greg Mankiw Points Out A Powerful Evil Force In the World Emanating from New York

Below is from Greg Mankiw's Blog

A Dastardly Clever Scheme

At a faculty lunch yesterday, I heard about an ingenious scheme used by some universities in New York, where much rental housing is rent controlled.  Here are the three key elements, as it was described to me by one of my colleagues:

1. The university buys a rent-controlled building.  The purchase price is low, because the existing landlord cannot make much money renting it.

2. The university then rents the apartments to its own senior faculty, who view this as a great perk.  In essence, the difference between the free-market rent and the controlled rent is a form of compensation for the professor.  As a result, the university can reduce the professor's cash compensation by an equivalent amount.  The university is effectively earning the market rent for the apartment.

3. But it gets even better.  The implicit rental subsidy is a form of non-taxed compensation.  Normally, if an employer gives an employee a perk like this, the subsidy is taxable income (unless the perk is deemed a working condition required to do the job, like a hotel manager living in a hotel).  But here, the university can claim there is no subsidy: It is only charging what the rent-control law requires.  Because of this tax treatment, the implicit subsidy is worth even more to the professor than the equivalent cash compensation.  This fact allows the university to reduce the professor's cash compensation by an even greater amount.  Thus, the university effectively earns even more than the free-market rent on a real estate investment purchased much lower than the free-market price would have been.

In the end, the goal of the rent control laws is thwarted (the low rents are enjoyed by well-paid tenured faculty rather than the needy), the income tax laws are thwarted (a sizable part of compensation is untaxed), and all this is done by a nonprofit institution (the university) whose ostensible purpose is to serve the public interest.

Wednesday, September 08, 2010

"Jim, they're dying." "Let them die."

James T. Kirk and Leonard McCoy were referring to Klingons, but the same conversation applies to housing prices. Here is a link to Tyler Cowen's post on his blog, Marginal Revolution:

Also, the President just proposed that businesses be able to write off all business investment for the next year. Is this a good idea? Will it stimulate the economy? I think it's a fantastic idea, and so does Greg Mankiw:

The question I have is whether the banks who are holding cash will have any extra incentive to loan it out? Has the Federal Reserve stopped paying interest on bank reserves yet? If not, then most banks would probably prefer guaranteed money from the Fed over risky money from loan interest.

Thursday, September 02, 2010

Freshman Econ Reading List

This is Greg Mankiw's freshman class seminar reading list.

I haven't read all of these myself.  But, I would like to.  I've read a few.

Wednesday, August 04, 2010

Crowding Out the Crowding Out Argument?

On CNBC the other day, Steve Leisman told Larry Kudlow that he was going to 'crowd out' his 'crowding out' argument.  Last I checked, the textbooks still say that increasing government deficits lead to temporary (short-run) increase in GDP, which disappears when prices adjust in the medium term.  But, sadly, we ARE left with a higher rate of inflation and a higher interest rate in the medium-term.

The higher interest rate obviously leads to less private investment.  Thus, stimulative fiscal policy increases budget deficits which increases the interest rate which decreases private investment.  This is what crowding out is.  So, I'm not sure why Leisman says that he can crowd out Kudlow's crowding out argument. 

I guess I should go back and watch the exchange with more attention.

Thursday, July 08, 2010

Vegas Return, and Paul Krugman

Upon my return from Vegas I read Greg Mankiw's blog regarding Paul Krugman's feelings on fiscal stimulus skeptics.  To sum, Krugman thinks they're stupid, or with more nuance, Krugman wants to persuade his readers that stimulus skeptics are stupid.

My opinion of Krugman declines weekly.  I think he started off as a brilliant economist, was immensely rewarded for his work, then decided to eschew sound economic reasoning in favor of promoting his agenda.  The easiest way to demonstrate Krugman's lack of intellectual honesty in his columns is to point out an example of great honesty.  On his blog Wednesday, Mankiw outlined Krugman's argument that fiscal stimulus skeptics are illogical.  He then points out a few ways in which skeptics may be right.  But he doesn't stop there, he goes so far as to say what particular belief Krugman holds that enables his continuing belief in stimulus.

"...he does not believe that the distortionary effects of taxes are particularly large and so they do not figure much into his policy analysis. "
Krugman also points out a correlation between low investment and a weak economy, concluding that investment is down because the economy is weak.  Here, Krugman wants you to believe that fiscal stimulus is required to bring the economy back to life and thus restore investment.  Mankiw points out that no one has yet proven the causal relationship between investment and the business cycle.  It could be that investment slows down for other factors, which leads to a weak economy.  Fiscal stimulus packages may not fix the problems that led to decreased investment to begin with.  Krugman, a Nobel Prize winning economist knows this, but he is willing to mislead his many readers in the New York Times to garner support for fiscal stimulus that many economists think have an enervating effect on future private business investment.  

Reading Mankiw's blog leaves a person informed about differing beliefs on economic phenomenon.  Reading Krugman's articles misleads and indoctrinates.

(For those of you who saw Get Him to the Greek, Krugman had a cameo.  Classic.)

Wednesday, June 30, 2010

New Financial Regulation

I'm not sure what to make of the new financial reform package being ushered through the House.  In this past Friday's WSJ, an analyst at Moody's 'Economist' said he expects the bill to shave off about .3% per year from the United States' Gross Domestic Product (GDP).  Others say the reforms will restore confidence in the U.S. Financial sector and encourage investment.  I have no exact predictions of my own, but I fear the reforms add bureaucracy in areas where none is necessary (thus reducing efficiency and profits in the financial sector), discourage innovative investment practices, and aim the spotlight at hedge funds instead of at the strange brew of government incentives encouraging sub-prime lending.

Unfortunately, as with most government policies, we must sit and wait to see the real economic effects of the regulations.

Monday, June 28, 2010

Try Again

Building new skills is necessary.  To that end, I will try a third time to click on the link button, type in the link, publish the post, and then observe the results.Mankiw's Article

Posting the link, second attempt.

Fiscal Stimulus: Government Spending versus Tax Cuts

Greg Mankiw wrote a good article summarizing the current state of the debate between these two stimulus strategies.

Wednesday, June 23, 2010

Wartime Planning...Easy (Part II)

In Part I, I asked what economic planners should plan for. But answering this question requires the reader to understand the role of an economic planner. To paint as clear of a picture as possible, I will constrain our considerations to what we observe in the real world. In any case I can imagine throughout history, the role of economic planner was held by those who retained political power in their country.

The nature of politics is such that the ruling class, or the political party holding power at a given moment, will likely pursue policies or directives that perpetuate their control. They want to retain power. Assigning the responsibility of economic planning to the political class in control has lead, in the past, to economic planning designed to increase that control. I am unaware of any ruling regimes that have used economic planning to decrease their political power. Indeed, given the desire to maintain rule or control, failing to use the powerful tool of economic planning to further that desire would be irrational. It is generally safe to assume that people are rational in the weak sense that they generally do not do things that directly contradict what they see as in their self-interest.

Thus, let us return to the question of what economic planners should plan for with the following information in mind. First, economic planners are those who hold political power. Second, these individuals do not want to relinquish political power. So, what do you think economic planners (in the real world) should plan for?

Monday, June 21, 2010

Wartime Planning...Easy.

While reading Bruce Caldwell's introduction to Hayek's 'The Road to Serfdom, I began meditating on economic planning. A plan is simple enough as a stand alone concept. It is a set of strategies employed to achieve a desired end (my definition). An economic plan, then, is a set of strategies employed to achieve an economics related end. For example, suppose the United States decided to gear the entire US manufacturing base towards Diet Sprite production. Let's ignore the fact that this would destroy the economy and just say that Diet Sprite production would be pretty easy.

But this is too simplistic. Consider wartime planning. During WWII, a massive portion of the US industrial base was retooled to meet the needs of our military forces whether it be arms manufacturing, rubber production, or any other functions related to war. In other words, fighting a war and planning an economy designed to aid and sustain the US war fighting capabilities allows economic planners to limit their considerations to just those involved in regulating on our enemies.

Here is a question (assume that planning is the way to go): during times of peace, what should economic planners plan for? What end should they try to achieve?

Thursday, June 17, 2010

The Overton Window

A student brought up the new Glenn Beck fiction book, The Overton Window.  The actual Overton window in political theory refers to the phenomenon that at any given time, there is a range of political ideas that the majority of the country finds palatable.  Ideas outside this range are typically career killers and thus politicians who wish to continue as politicians are actually incentivized to think inside the box...or window, in this case. 

Another professor brought up a classic example.  Steve Largent ran for Governor of Oklahoma several years back.  Oklahoma is notorious for its massive administrative layers and bureaucracy in the public education system.  For instance, Broken Arrow, which boasts the largest high school in the state, has one superintendent.  Berryhill High School, a school that is two or three classifications (classified according to size) lower than Broken Arrow also has one superintendent.  In many cases, there are towns with fewer than 500 people with their own public school superintendent.  Largent's proposal was to get rid of some of this bureaucracy by consolidating the administrations of many smaller schools. 

Largent's idea must have been outside the Overton window considering his subsequent loss of the election and disappearance  from politics in Oklahoma altogether.  I wonder if his idea would still be outside that window in today's economic/political climate.

Thursday, June 10, 2010


While shopping in a bookstore, a friend who works there asked me if I had heard of 'The Road to Serfdom'. Indeed. I started to explain the ideological struggle between Hayek and Keynes and outline the Austrian, Chicago, and Keynesian schools of thought. I got about as far as saying the author of 'The Road to Serfdom' is Hayek. Summarizing these paradigms in 30 seconds usually leads to some sloppy, if not outright incorrect, characterizations.

At any rate, my friend told me that people were calling the store frequently and asking for Hayek's book. I went to the economics section and, indeed, there were no copies left whereas there were multiple ones a few weeks back. I couldn't help but think that the turn towards Hayek is the result of the silliness of our European friends as they wring their hands at the inefficacy of goverent profligacy to sustain a prosperous state.

I am watching the PBS production, Commanding Heights. I cannot help but be taken in by Hayek's charm. I'm glad the international community recognized the value of his contribution while he was alive to enjoy it.

Thursday, June 03, 2010

If The Germans Can...

The Germans just cut their government spending in an attempt to decrease their budget deficit.

More than one person, reflecting on Greece, has asked me how a country can go into bankruptcy or why a country cannot just keep going the way it's going. Why all of the sudden decide that a country is in danger of economic collapse.

I think the easiest answer to this question is to look at an analogous scenario using any large corporation. If I go to a lending institution and ask for money to upgrade my property, plants, and equipment, an analysis of my ability to repay the borrowed funds is undertaken. If my balance sheets and other financial statements indicate high revenue with low costs, no other outstanding debt, and good management, then I will most likely receive the funds with a low interest rate.

If I continue going to financial institutions asking for more funds, without retiring my previous debts, I will likely have to pay an increasingly high interest rate. At some point, a lending company may decide that my company can not repay outstanding debt, let alone any new debt. At this point I will be unable to finance continued operations of my company and be unable to pay off existing debt because I was using new loans to pay off old ones.

My best bet to obtain new loans is to demonstrate that I have cut costs (goverment spending) and expect my future profits (economic growth) to improve dramatically, enough to where, in time, I will catch up on all the old debt and be able to pay off the new as well.

Germany is doing this now, before intrnational lenders are calling for their heads. It's too late for Greece, according to most headlines. But, perhaps Ireland, Italy, Portugal, California, New York, and Illinois can still learn a lesson from our German friends.

Thursday, May 27, 2010

Thought Provoking Fun

Imagine two cavemen with their families.  Suppose they roam the earth without running into any other members of their kind until one day they happen across one another.  Do the two cavemen decide to live with one another?  If they do, why?  In my experience, libertarians and communitarians answer this question differently.  If you are unfamiliar with typical libertarian and communitarian answers, then you may end up giving an answer that belongs to the opposite end of the political spectrum.  That is, you may consider yourself libertarian or communitarian but support the opposite side with your fundamental beliefs regarding human nature.

Thursday, May 20, 2010

Does Liberal Education Policy Cause Childhood Obesity

The quality of public school breakfasts and lunches is oft bemoaned in the media.  As a recipient of such meals, I can attest to their questionable nutritional value (although they were all very tasty).  The typical narrative is that poor public school food choices contribute to childhood obesity.  The logic here is sound.  Taking in more calories than you expend leads to weight gain. 

However, there is a relationship between liberal education policy and childhood obesity that requires examining.  First, schools are required to provide meals to children and are then asked to do so at the lowest cost possible.  Easy to prepare and cheap food that still tastes good is often the least healthy, most caloric-dense food available with high levels of fat and preservatives.  Second, liberal policy mandates that students whose parents' income falls below a certain level be allowed to consume this food either very cheaply or for free. 

What does this amount to?  Poverty-stricken (often minority) students are given free or cheap food that is blamed for causing childhood diabetes and related ailments.  A class-action lawsuit against liberals should be inevitable since one could interpret their educational policies as an attempt to destroy the lives of poor minority children.

Is there an alternative?  Yes.  Take the value of the school-provided breakfast and lunch and give a non-transferable gift card redeemable only at a local grocer to qualifying families.  It is not too late for the left to halt their war on the poor.

Thursday, May 13, 2010

Growth and Equity

Daniel Henninger's article in today's WSJ was primarily about the Republican party capitalizing on billing themselves as the We're Not Europe Party.  Whether this strategy is optimal, Henninger brings up a good point.  Faust is a character who sells his soul to the devil in exchange for a comfortable, successful life.

As mentioned in a previous blog, Greg Mankiw outlines the tradeoff between economic efficiency and economic equity.  If you want more equity, you must sacrifice efficiency.  Put simply, fairness comes at the expense of growth.  Members of the European Union have long favored equity over efficiency, and the bill must now be paid (paraphrasing Henninger, here).

A great paragraph from Henninger's article:
Barack Obama would never say it is his intention to make the U.S. go stagnant by suppressing wealth creation in return for a Faustian deal on social equity.  But his health system required an astonishing array of new taxes on growth industries.  He is raising taxes on incomes, dividends, capital gains and interest.  His energy reform requires massive taxes.  His government revels in "keeping a boot on the neck" of a struggling private firm.  Wall Street's business is being criminalized.
  I suppose one way to look at what we want our future outlook to be here in the U.S. is to ask a question.  Do we want the future rhetoric regarding U.S. economic output to sound like today's rhetoric about Europe?  Or, do we want it to sound like the rhetoric surrounding Asian growth?

I favor the latter.

Tuesday, May 11, 2010

While Saddened by the hardship and turmoil the Greek debt crisis has spawned, I cannot allow such compelling material for teaching go unnoticed.  So, I am compiling a set of articles from various sources to create a packet for my Econ of Social Issues classes next semester.

I am fascinated by the spectacle of unionized government employees, a huge and primary source of the crisis, protesting in the streets against wage freezes and pension cuts. Instead they want the government to increase tax rates, a wealth destroying activity. So, those who make a living from state revenue are are in the streets arguing for policies that reduce state revenue, yet they hope to maintain the same level of income and pay raises?

That basic economic principles are not exactly mainstream knowledge is the only reason I do not view these protesters in the harshest of lights.

If anyone knows of some great articles I should include in the packet, please let me know.

Wednesday, May 05, 2010

It Never Gets Old

Winning, that is. On a recent lake trip with some of my lifelong friends we made a stop at a miniature golf course. Wagers were made, talent displayed, and improbable shots were in abundance. Despite having doctors, lawyers, entrepreneurs, and...beginner economists in the mix (all seemingly people one would take seriously) there was quite a bit of jubilation and childlike cheer expressed at the successes and failures on the course.

And, when all was said and done, I found that winning at mini-golf is...satisfying. My apologies to the members of the group who were dominated by Michael Garrison.

Tuesday, May 04, 2010


In Monday's WSJ, Mary Anastasia O'Grady summarized the shortages of coffee resulting from a Chavez led takeover of that sector a few years ago.

A telling part of O'Grady article comes when she labels the shortages of coffee resulting from price controls, regulation, and capital controls as predictable.

Are there truly heads of state that think instituting price controls on a product will ensure affordability and adequate supply to meet demand? I believe they do know this. The economics behind price controls is well-established. Even someone displaying a total lack of interest in basic economic principles as Chavez does must have an advisor paying attention to the potential adverse effects of policy.

O'Grady concludes that Chavez knows that his great socialist experiment (yet another) has failed. But he intends to go down with a miserable flair. I agree.

Tuesday, April 27, 2010

Motivational Recessions?

My levels of motivation follow a cyclical pattern. Some weeks I cannot wait to get out of bed and begin my day. These weeks are precious and represent the best version myself. When in this mindset I can absorb information and churn out ideas at a frenetic pace. Other weeks, I get out of bed when I have to and do enough work to prevent feeling guilty.

During these slow times I wish for the fast pace times of high motivation but it doesn't seem to translate into action. I've found a useful tool to make these slow times productive. I look at this period as a time of retrenchment, where I look over my vast list of ideas formulated during the 'fast times' and pick the best ones. I then write out strategies and objectives to advance those ideas. Some ideas are put on the backburners, or put out of their misery. But, I know that a period of high motivation is around the corner, and I don't sweat the loss of ideas, they will be replaced.

Saturday, April 24, 2010

Unseen Victims of Democrat Policy

A WSJ article today, written by Anne Jolis, presented Paul Kagame, the warlord of Rwanda, who led an army outnumbered two to one and ousted a genocidal leader who had slaughtered 800,000 of his own citizens. During an interview with Jolis, Kagame made is attitude about foreign aid quite clear: they don't want it.

Instead of asking for aid, Kagame boasted of his nation's attainment of self-sufficiency in feeding itself and of their slashing of foreighn aid by half over the past 15 years. Kagame told Jolis that Rwanda's greatest needs were for other countries to stop subsidizing their own agriculture and to get rid of import tariffs.

Domestic agricultural subsidies in the United States lower the price of domestically grown produce while import tariffs make the price of foreign produce imports higher. This combination of policies helps domestic agricultural producers but hurts the citizens of developing countries.

Developing nations have limited options for exporting goods. Often, they lack the technological sophistication to export anything other than what they can grow on their own soil. Their labor is cheap and their land worth little, thus the price of their exported goods should be very low compared to rhe same good produced in a technologically advanced society where labor is expensive and land comes at a premium.

In economics, when one country can produce something at a lower cost (opportunity cost, actually, but thats another lesson) than another country, we say that country has a comparative advantage in producing that product. The US can produce technologically advanced goods at a lower cost than most other countries, but it is relatively expensive for us to produce such things as corn and wheat compared to how cheaply other countries can produce the same good. That is, Rwanda has the comparative advantage over the US in producing cheap agricultural products.

Devoting resources and taxpayer wealth to subsidizing the production of goods we don't have a comparative advantage in is wasteful, inefficient, and damaging to developing economies.

The US should lower it's agricultural subsidies and abolish import tariffs.

Tuesday, April 20, 2010

First Things First

A recurring criticism of U.S. Foreign policy I often hear from rhe political left is that we often engage in lop-sided transactions, using our political, military, and economic clout to coerce developing and/or weaker nations into accepting unfavorable terms.

There are several problems with this critique, but one suprcedes the others. Why would one criticize a country's leaders for advancing their nation's interest at the expense of others? That is their job.

The world has limited natural resources. Once a border is drawn on a map and two groups made distinct, those groups are in direct competition with each other for those resources. With limited resources, for one group to gain, the other must lose.

Few leaders actively pursue transactions with other countries that hurt their citizens, why should we expect them to?

SEC Actions

The SEC filed charges of fraud against Goldman-Sachs yesterday, which immediately dropped GS shares fueling a 'flight to quality' in the stock market. After the dust cleared the Dow had fallen 100+ points.

The SEC is under enormous political pressure to find evidence of wrongdoing in the financial services sector. The charges filed against GS Are the first of many, I suspect, but will ultimately backfire.

While the SEC and GS battle it out, a massive destruction of wealth is getting little attention. Most unsophisticated investors rely on mutual funds as their primary investing tool. Many mutual funds are well-diversified and have interest in many stocks. As a result, their returns typically mimic the return on the Dow. When the SEC responded to political pressure and filed charges against what many see as the flagship company of our financial services sector, they induced a panicked sell-off, knocking the Dow down and wiping out enormous amounts of wealth. And this, just after the deadline to file taxe returns.

Saturday, April 17, 2010

SEC Actions

The SEC filed charges of fraud against Goldman-Sachs yesterday, which immediately dropped GS shares fueling a 'flight to quality' in the stock market. After the dust cleared the Dow had fallen 100+ points.

The SEC is under enormous political pressure to find evidence of wrongdoing in the financial services sector. The charges filed against GS Are the first of many, I suspect, but will ultimately backfire.

While the SEC and GS battle it out, a massive destruction of wealth is getting little attention. Most unsophisticated investors rely on mutual funds as their primary investing tool. Many mutual funds are well-diversified and have interest in many stocks. As a result, their returns typically mimic the return on the Dow. When the SEC responded to political pressure and filed charges against what many see as the flagship company of our financial services sector, they induced a panicked sell-off, knocking the Dow down and wiping out enormous amounts of wealth. And this, just after the deadline to file taxe returns.

Tuesday, April 13, 2010

Unions and the Destruction of High Culture?

A recent interview on CNBC with Nina Munk, a contributing editor with Vanity Fair, outlined the budgetary problems plaguing the New York Metropolitan Opera.  This interview was fascinating.  Ms. Munk oscillated between bemoaning the loss of high culture if the opera were to close and reprimanding its management for running a horrible, horrible business.

According to the interview, the NYMO brought in around $250 million in revenue, but its costs were nearly double that amount.  Faced with bankruptcy, management is negotiating with various labor unions (hammer users, voice users, electricity conjurers, light manipulators, and others) to cut costs.  As unions are known to do, they will not budge.  

Unions, while starting out as advocates for their constituents, almost always end up mauling the hand, if not destroying it utterly, that feeds them.  If this example does not convince you of the veracity of this claim, then I would point out the following examples: Greece and California.
A recent article in the WSJ outlined the woes felt in Europe at the high levels of youth unemployment. The article asked, is the United States headed in the same direction?

Let's see. The minimum wage increased from $5.55 or so, to $7.50 or so, over the past couple of years. Higher minimum wages increase unemployment among the young. The federal government is increasing taxes on the wealthiest households, which will hit many small business owners and restrict new investment and hiring. The federal government is running up large amounts of debt, and increasing the yields required on two and ten year treasury notes, which will increase the rates at which investors can borrow funds.

Despite the current administration's stated goals to decrease unemployment, so far their actions seem designed to promote long-term high unemployment.

Thursday, April 01, 2010

This past Monday, I happily joined the University of Central Oklahoma chapter of Student's In Free Enterprise for their regional championships in Dallas, Texas. Our squad acquitted themselves admirably. They were professional in appearance and manner and took home a trophy for 'Rookie of the Year.' Our SIFE team has already begun generating ideas that will help them win regionals next year and compete at the national level. I look forward to the coming year.

While several experiences in Dallas are noteworthy, one stands out. During the faculty adviser luncheon, a SIFE representative announced changes to the SIFE mission statement/areas of focus for next year's competition. A question and answer session followed, and rather quickly someone noted that the term 'free-enterprise' was stricken from the new format. The representative hemmed and hawed, stating that 'free-enterprise' was redundant with the rest of the phrasing. Quite a bit of scoffing followed her explanation and a professor raised their hand and asked "How many present would like to see the term 'free-enterprise' put back into the mission statement?" All, or almost all, present raised their hands.

SIFE's removal of 'free-enterprise,' to me, represented a little bit of political hedging. I understand. But the faculty adviser response to that removal was rather...cheering.

Friday, March 26, 2010

Political Process and Consequence

Political maneuvering often alienates the average constituent, leaving him discouraged or disgusted after witnessing a round of deal-making, concessions, and debate.

The latest strategy employed by Democrats to pass health-care legislation most likely left at least one-half of the political spectrum….bummed.  According to recent polls by Rasmussen and Gallup, 45% strongly oppose the health-care bill and 26 strongly favor it.  In all, 54% of likely voters oppose the legislation and 41% are in favor.
Mid-term elections loom in November and Republican’s made Democrats pay dearly for the House Democrat’s use of ‘reconciliation’ to pass their health-care legislation.  Kimberley A. Strassel's article in the Friday, March 26 WSJ explains the 'reconciliation method.'

...reconciliation allowed Republicans to bring up unlimited amendments.  Because Majority Leader Harry Reid could not allow the reconciliation bill to be changed in any way--which would send it back to the House--his party was obliged to vote down every one of those amendments.  And every one had been designed to make even hardened pols whimper.
Democrats voted 'No' when asked to include the following the health-care bill.
1) Government will not subsidize erectile dysfunction drugs for pedophiles and rapists.
2) Wounded soldiers shouldn't be subject to the new tax on medical devices (like wheelchairs).
3) Critical access rural hospitals should not have their funding cut.

Strassel explains:
And so on it went...All Democrats in favor of taxing pacemakers? Aye!  All Democrats in favor of keeping those seedy vote buyoffs? Aye!  All Democrats in favor of raising taxes on middle-income families? Aye!  All Democrats in favor of exempting themselves from elements of ObamaCare? Aye!  The record now shows that Arkansas's Blanche Lincoln in on board with higher premiums, that Colorado's Michael Bennet is good to go with gutting Medicare Advantage, that Nevada's Harry Reid is just fine with rationing, that New York's Kirsten Gillibrand is cool with taxes on investment income, that California's Barbara Boxer is right-p with employer mandates.

In November, the Republicans will have a huge stockpile of controversial topics that they will use to back Democrats into corners.  They will ask, "How could you support giving Viagra to child molester," or "Why would you oppose allowing veterans to get a tax break when they have to buy a wheelchair after losing their legs in the war in Iraq?"  Reconciliation got health-care passed.  But it could destroy the Democrat majority this November.

Thursday, March 25, 2010

In today's WSJ, Marcus Walker and Alessandra Galloni outline the European Union's current struggles with Greece, organized labor, and infighting amongst union members.

Greece's primary struggle centers around bringing to heel its massive government debt.  Steps towards this end have been termed 'austerity measures' by the global media.  Multiple steps are under consideration, but perhaps the greatest in magnitude and most controversial is the slashing of benefits and pensions given to the country's current and former workers.  Nationwide protests greeted the measures as thousands of unionized labor participants poured into the streets and deemed the austerity measures as unfair or even unnecessary (by those who understand little about how economies work).

Cutting government entitlements in order to prevent economic collapse does not seem protest-worthy.  To put another way, protesting against the economic survival of your own nation seems reprehensible and unfathomable.  For this reason I cannot accept that the average protester understands that maintaining their benefits, pensions, and jobs will come at the expense of the entire nation's economy and result in Greece expulsion from the EU.
Walker and Galloni rightly point out that Europe has a choice to make.  The EU can choose to create a society with broad and generous social safety nets and sacrifice economic growth, or they can cut spending on pensions, benefits, and social programs.  The term 'austerity' brings something harsh to mind, but harsh measures are exactly what walking countries like Greece back from the edge of economic abyss requires.  Countries in socialist-leaning Europe will need the willpower to break the back of organized labor.

The following excerpt from Walker and Galloni's article represents the thinking prevalent in many European workers:

Even in France, some erstwhile oppoents of reforms are changing their tune.  Julie Coudry became a French household name four years ago when she helped organize huge student protests against a law introducing short-term contracts for young workers, a move the government believed would put unemployed youths to work...Today, the 31-year-old Ms. Coudry runs a nonprofit organization that encourages French corporations to hire more university graduates.  Ms. Coudry, while not repudiating her activism, says she realizes that past job protections are untenable.  "The state has huge debt, 25% of young people are jobless, and so I am part of a new generation that has decided to take matters into our own hands," she says.  "We've decided that we can't expect everything from the state." 

Let's hope America's youth never get to the point where they have to decide that the state isn't their provider.

Wednesday, March 24, 2010

What Now?  How About Health-Care Reform

Holman W. Jenkins, Jr. Opines in Today's WSJ that after passing health-care reform, we are in a great position to carry out some health-care reform....

Jenkins argues that the president, congress, and politics in general have failed this country by writing legislation requiring everyone to have insurance.  The result of this legislation is that rising health insurance costs is no longer the health insurance industry's problem since consumer's cannot respond by dropping insurance.  Jenkin's argues that root cause of our health-care industry woes is the $250 billion-a-year tax benefit for employer provided insurance (EPI).

A brief description EPI's evolution follows: Prior to WWII, EPI was rare.  During WWII, prices and wages were frozen.  However, employers could get around the wage freeze by offering health benefits packages, EPI.  EPI was not taxed by the IRS for several years, and when they finally did get around to taxing it there was a strong public backlash.  Congress acted to make EPI tax exempt.  From this point on, individual consumers did not have to face the reality of their health care choices.  The rest is a history of rising costs caused in part by consumer choices made in the absence of responsibility. 

For example: if I participate in a basketball game and the next day my ankle is tender, through my insurance I can seek out the best podiatrist in the region, pay out a small deductible, and receive first rate diagnosis and treatment. However, if I were faced with paying the full cost of my care, I would most likely choose more economical means of alleviating the tenderness of my ankle (ice).

The current health-care bill does nothing to change my incentive to seek out the priciest health-care options available.  It does nothing to bring health-care costs back home to the consumer.  As long as consumers continue to choose the priciest, and often unnecessary, treatments available through their insurance, health-care costs will continue to rise.  However, as Jenkins argues, that is no longer the insurance industry's problem.

The problem is now the government's and ours.  The government must provide subsidies to the required additional 32 million insured mandated by the current health-care bill and tax payers must provide the government with funding for the subsidy.

To sum: increases in health care costs continue unabated.  The government requires everyone to have insurance and will subsidize poor households so they can meet this requirement.  Health insurance companies will increase their premiums to pay for rising costs of health-care, thus requiring greater subsidies to the poor.  The government will fund the increasing costs of its subsidies to the poor by increasing income and investment taxes on the wealthy.  There is no reason to believe this process will not spiral out of control until something gives.

Tuesday, March 23, 2010

Health Care Bill (Part III, What Brought About the Current Health Care Climate?)

The following are paraphrased excerpts or direct quotes from an article by Milton Friedman with the headline "A Way Out of Soviet-Style Health Care."  The article was published in the WSJ on April 17, 1996.

1) Prior to WWII, individuals were responsible for their own medical care.  They could pay for it out of pocket or they could buy insurance.  "Sliding scale" fees plus porofessional ethics assured that the poor got care.  On entry to a hospital, the first question was "What's wrong?" not "What is your insurance?" 

2) First major change to this arrangement was a byproduct of wage and price controls imposed during WWII.  Employers could not offer high wages to potential and current employees so they began offering benefits packages.  These included employer provided health insurance which was a new phenomenon and was not regulated by current tax regulations.  So employers treated it as exempt from withholding tax.
3) The IRS eventually caught on and issued regulations requiring employer-provided medicare costs to be included in taxable wages.  This sparked a storm of protest from employees and Congress eventually passed legislation exempting employer-provided healthcare from both the personal and the corporate income tax.  This removed the employee from the medical care decision process.

4) Second major change was the enactment of Medicare and Medicaid in 1965.  "These added another large slice of the population to those for whom medical care, though not completely "free," thanks to deductibles and co[payments, was mostly paid by a third party, providing little incentive to economize on medical care.  The resulting dramatic rise in expenditures on medical care led to the imposition of controls on both patients and suppliers of medical care in a futile attempt to hold down costs." 

5) "The best way to restore freedom of choice to both patient and physician and to control costs would be to eliminate the tax exemption of employer-provided medical care.  However, that is clearly not feasible politically.  The best alternative available tis to extend the tax exemption to all expenditures on medical care, whether made by the patient directly or by employers, to establish a level playing field.
Health Care (Part II)
From Harvard Economist, Greg Mankiw.  He explains how I feel probably better than I could myself.

Healthcare, Tradeoffs, and the Road Ahead

Well, it appears certain that the healthcare reform bill will become law. One thing I have been struck by in watching this debate is how strident it has been, among both proponents and opponents of the legislation. As a weak-willed eclectic, I can see arguments on both sides. Life is full of tradeoffs, and so most issues strike me as involving shades of grey rather than being black and white. As a result, I find it hard to envision the people I disagree with as demons.

Arthur Okun said the big tradeoff in economics is between equality and efficiency. The health reform bill offers more equality (expanded insurance, more redistribution) and less efficiency (higher marginal tax rates). Whether you think this is a good or bad choice to make, it should not be hard to see the other point of view.

I like to think of the big tradeoff as being between community and liberty. From this perspective, the health reform bill offers more community (all Americans get health insurance, regulated by a centralized authority) and less liberty (insurance mandates, higher taxes). Once again, regardless of whether you are more communitarian or libertarian, a reasonable person should be able to understand the opposite vantagepoint.

In the end, while I understood the arguments in favor of the bill, I could not support it. In part, that is because I am generally more of a libertarian than a communitarian. In addition, I could not help but fear that the legislation will add to the fiscal burden we are leaving to future generations. Some economists (such as my Harvard colleague David Cutler) think there are great cost savings in the bill. I hope he is right, but I am skeptical. Some people say the Congressional Budget Office gave the legislation a clean bill of health regarding its fiscal impact. I believe that is completely wrong, for several reasons (click here, here, and here). My judgment is that this health bill adds significantly to our long-term fiscal problems.

The Obama administration's political philosophy is more egalitarian and more communitarian than mine. Their spending programs require much higher taxes than we have now and, indeed, much higher taxes than they have had the temerity to propose. Here is the question I have been wondering about: How long can the President wait before he comes clean with the American people and explains how high taxes needs to rise to pay for his vision of government?
Health Care Bill (Part I: Some Facts)

The health care bill has passed.  I do not want to comment on the political maneuverings employed to get the bill through the House, as I am sure readers of this post would lose all sense of security and confidence they have in the U.S. Government.  So, I will analyze the health care bill in light of facts, the incentives it creates, and the ideologies represented and rebuffed in the bill.

First, we should understand the facts of the health care bill.  According to the WSJ on Monday, March 22, 2010, the health care bill will cost $940 billion over 10 years.  It will reduce the projected deficit by $143 billion, and increase coverage by $32 million.  The number of people enrolled in insurance exchanges by 2019 will be 24 million.  There will be a new Medicare tax on unearned income of 3.8%.  The bill is 2, 562 pages long.

In the WSJ from the same day, Greg Hitt and Janet Adamy offer the following insights:
1) The legislation would expand Medicaid, the federal-state health program for poor, and create subsidies to help low-and middle-income families comply with a mandate that nearly everyone must carry insurance. 
2) Among other things, it would cut $427 billion from Medicare payments to health providers, establish a network of state marketplaces to promote insurance competition, and impose regulations on the insurance industry, including rules that prohibit them from denying coverage.
3) The CBO has said the legislation would extend health coverage to 23 million Americans now without insurance.  They also estimate the legislation as written would hold budget deficits over 10 years $143 billion lower than they otherwise would be.  Also, it ensures that 95% of legal U.S. residents have insurance by 2019, up from 83% today.
4) About 19 million lower-earning Americans would get tax credits to offset the cost of buying insurance, with the help stretching up to a family of four earning $88,000 a year.  A further 16 million people would get insurance through an expansion of the federal-state Medicaid program to make it available to family of four earning up to $29,000 a year.
5) Tax increases needed to finance the program would hit a range of industries, from insurers to tanning services.  Over the next decade, $108 billion in new fees will fall on insurers, drug makers and medical-device companies.  Families earning more than $250k a year will pay a higher Medicare payroll tax, and see that tax expanded to investment income.  High-value insurance plans will also be hit with 40% tax starting in 2018. 
A post from a physician-friend.

The Senate's inaction has allowed for Medicare payments to physicians to be cut by 21% starting Monday. This is a MAJOR problem as many practices cannot survive already due to low payouts by Medicare. Our rapidly growing population of seniors will suffer greatly from offices shutting their doors to people over 65 and to those with medical and psychiatric disabilities.
In an interview in Saturday's WSJ, Marc Rubio outlined a few of his key positions. I agree with his remarks.

Rubio is for the following:
1. Lower capital gains taxes.
2. Decrease corporate tax rates from 35% (second highest in developed world) to at the highest 25%

"The bottom line is that jobs in America are created by people who decide to start a business or expand an existing business." They will do so only if allowed to keep what they earn and don't have a "big target on their back for the government to come after them for higher taxes.

America's swelling debts will trigger a demand by global lenders that "America do something, either cut spending, which will be increasingly painful as government becomes a bigger and bigger part of the economy, or find sources of revenue." Then, amid a crisis, Democrats will force voters to accept a Value Added Tax or see dramatic cuts to Social Security and Medicare just as the baby boomers are entering retirement.

What do you think?
From WSJ Opinion Article, Friday, March 19, 2010. By Kimberley A. Strassel

Paraphrase of Article:
Jason Altmire is the Pennsylvania House Democrat who has become a key possible switch vote in his party's plans to pass unpopular health legislation. He voted no on the first house bill for the simple reason that it offended his constituents.
Mr. Altmire won his 2006 election by campaigning as a pro-veteran, pro-business, pro-drilling, pro-life democrat. He's held on to his seat by flacking his conservative credentials, most recently by flying to Haiti to help jailed missionaries. To explain why he voted no in November to the health care package, he just said "My district isn't there."

Mrs. Pelosi and the left are there, and unfortunately for Mr. Altmire, they had him pegged as a junior member vulnerable to tender persuasion. Within a week of his no vote, was up in his district with vicious ads, warning they'd mobilize against him this fall. In the past, Democratic House leaders helped get Mr. Altmire's legislation and amendments a vote, so he could show folks back home he was effective. No more. Party money-crucial for a new member in a district that leans right? No. Union dollars-more than a half-million that went to Mr. Altmire's past two campaigns? Gone.

End of Paraphrase.

What do you guys think of this treatment of dissenting members of a party. It goes on in both political parties obviously. What are the ramifications for this treatment of dissenting voters?