Deepish Thought

Now that health reform (at least in its current form) is more or less dead, it is time to ask who is more relieved:

1. The consumers and taxpayers saved from a disastrous attempt at reform
2. The Democratic caucus which has been saved from having to pass it’s own disastrous attempt at reform

Scott Brown may just have saved a lot of Democratic political careers.

Former Secretary of Labor and commentator extraordinaire, Robert Reich, has been raised an interesting question:

So how can the Dow Jones Industrial Average be flirting with 10,000 when consumers, who make up 70 percent of the economy, have had to cut way back on buying because they have no money? Jobs continue to disappear. One out of six Americans is either unemployed or underemployed. Homes can no longer function as piggy banks because they’re worth almost a third less than they were two years ago. And for the first time in more than a decade, Americans are now having to pay down their debts and start to save.

Even more curious, how can the Dow be so far up when every business and Wall Street executive I come across tells me government is crushing the economy with its huge deficits, and its supposed “takeover” of health care, autos, housing, energy, and finance? Their anguished cries of “socialism” are almost drowning out all their cheering over the surging Dow.

So, if all this Keynesian policy is so bad for the economy, why are investors so bullish?  Mr Reich’s argument is the Keynesian stimulus is working for corporate America (if not for ordinary Americans).

However, there are several plausible (non-Keynesian) explanations:

1. The bull run is really just a bounce back from the panic selling that occurred earlier in the year.  Even if the economic outlook remains bleak, it’s much less bleak than it was.  Relief that the world isn’t going to end isn’t inconsistent with concern about the future.
2. US corporations are poised to benefit from a rebound in the world economy and a sinking dollar.  There is nothing inconsistent about being bearish on the US economy and bullish on multi-nationals.
3. The market may think that many of the Obama administration’s more ambitious proposals aren’t actually going to pass.  Cap-and-trade is already on the rocks, getting health reform through the Senate is far from certain and the volume of concern about the deficit increases every day.  If investors think the Keynesian surge is already abating they may be more comfortable buying stocks.
4. It is clear that the government will find a reason to bailout just about any large corporation that runs into trouble.  This policy of socializing losses is likely to promote corporate risk taking on a fairly epic scale.  More risk means higher profit potential, which in turn means higher stock prices (arguably this is a form of state subsidy, but has little to do with boosting aggregate demand).

The New York Times has found a working example of a public health care option that may, or may not, put all your concerns to rest.

The early results are in. Today, almost all residents in the city have affordable access to a comprehensive health care delivery system through the Healthy San Francisco program.

This sounds like good news.  However, there are some caveats:

• Mandated health spending by employers is substantially higher than in Massachusetts (which doesn’t have a public option) or any of the national plans being considered by congress.
• The public option is somewhat limited in that services are only available in San Francisco (it isn’t technically insurance)
• The costs are being passed on to consumers in the form of higher prices.  Healthcare surcharges are now common for service businesses.

Salient facts not mentioned in the Op-ed piece are that:

• San Francisco started with an uninsured population of 60,000 out of a total population of 809,000.  7.4% uninsured is less than half the rate for the country as a whole.
• In the the last census the City and County of San Francisco was 19th wealthiest county in the US with a per capita income 1.5 times that of the country as a whole.

So, one of the richest counties in the country was able to institute a very expensive health scheme that includes a public option in order to cover a relatively small uninsured population.

Furthermore, this has not resulted in obvious negative employment consequences, or dumping of employees onto the public option, because employers have been able to pass on most of the cost to consumers, and the mandated employer spending is so high that the public option doesn’t really compete with private insurance.

On the whole, it appears that San Francisco’s plan works by not being very much like anything that the administration is proposing.

The front page of today’s Wall Street Journal features yet another article on the bonuses being paid to bankers at institutions recently bailed out, or essentially owned, by taxpayers.

For those of us who aren’t collecting these bonuses this is either infuriating, mystifying or simply mind numbing.  It may be helpful to step back for a moment and look at why banking can be such a lucrative profession.  Consider the following example:

Bob over at Silverman Slacks is setting up a deal to sell a package of derivatives to a group of hedge funds.  An average investment banker should be able to get $1B for these securities.  However, because of his superior acumen, drive, reputation, persuasiveness and network of contacts, Bob can do 0.001% better than the average I banker.

In most industries a 0.001% advantage is insignificant.  However, because of the scale of the transaction involved, in this case that 0.001% advantage translates into $1m in additional profit for Silverman.  Or at least it would, if not not for the inconvenient fact that Bob understands the significance of his 0.001% edge.

In order to prevent Bob from taking his 0.001% advantage over the road to Morbid Stansted, Silverman has to cut Bob in on the additional profits his superior abilities generate.  Assuming that Bob can reliably generate $1m in additional revenue on $1B deals then Silverman, assuming management is rational and the market for “talent” is competitive, should be willing to pay Bob $999,999 per deal.  If they don’t, Morbid Stansted will.  With this kind of a compensation package Bob doesn’t have to pull off many $1B deals to reel in a multi-million dollar bonus.

Wall Street types, who almost never suffer from a surplus of modesty, like to claim that they earn extraordinary bonuses with extraordinary performance.  This is complete rubbish.  The scale of transactions on Wall Street amplifies the effect of even incrementally above average performance.  Meanwhile the personality driven nature of the business ensures that the rewards from incrementally above average results flow disproportionately to the “talent” that provided the incremental advantage.

Note that this incremental advantage doesn’t have to come in the form of higher profits for the banks.  Incrementally lower losses are just as valuable.  This is why banks are compelled to pay huge bonuses even when their results don’t seem to merit it.

Brad DeLong has come up with an interesting fiscal policy proposal (emphasis mine):

The fact is that the appropriate fiscal policy for the U.S, right now is to pass: (a) a bigger stimulus over the next two years, (b) a standby tax increase to return the federal budget to primary surplus by 2012, and (c) devout and lengthy prayers that confidence in the dollar doesn’t collapse and send interest rates on U.S. Treasuries above the economy’s growth rate–in which case the situation changes from its current value of “dire” to “catastrophic.”

I suspect we should be a little suspicious of any policy prescription that includes “devout and lengthy prayers” as a key component.  Particularly when the other components seem designed to create the problem that the devout and lengthy prayer is intended to prevent.

If I understand Brad’s view correctly, the government appears to have two options:

1. Continue on the current path and endure an extended, painful recession.
2. Spend like a drunk sailor on shore leave, in which case things will either get better or confidence in the dollar will collapse, interest rates will shoot up and the economy will fall apart (those of us with limited faith in the power of prayer to influence economic trends would call this gambling).

I don’t know about you, but I need a drink.

Brad DeLong, in his “Fair, Balanced, Reality-Based, and More than Two-Handed” blog recently posted a couple of charts to buttress his contention that, “employment losses are about to be bigger than in any previous recession since the Great Depression itself”.

The more alarming chart is taken from Nancy Pelosi’s office wall:

A naive observer might conclude that the current recession is the worst since WWII.  Unfortunately this chart doesn’t adjust for the dramatic overall expansion of the labor force over the last fifty odd years.  William J. Polley has produced a more informative (less ludicrously tendencious) percentage based comparison.  Note that the current recession actually falls somewhere in the middle of the pack for post WWII recessions.

The second chart is an annotated copy of the Time Magazine original.

There is nothing actually wrong with the chart.  However, the annotations are interesting.  Mr DeLong has added the names of the Presidents who happened to be in office during the charted recessions.  It isn’t clear what Mr DeLong’s purpose in doing this was exactly.  Perhaps Mr DeLong is trying to suggest responsibility.  If so, he appears to have made the classic mistake of confusing correlation with causation.

The other questionable addition is the gratuitous highlighting of the current recession.  Painting something bright red and labelling it with a honking a great sign is not exactly the strategy of someone seeking to make a sober analysis.  Perhaps the real purpose of this overdone annotation is to conceal the fact that, when charted in relative terms, the trajectory of employment in the current recession looks a lot like that of the 1981 recession.  While certainly very unpleasant, the 1981 recession did not in fact result in the end of civilization, which is not the kind of thing you want to dwell on if you are trying to sell people on your, “the world is going to end if Congress doesn’t spend” view of the world.

In a revolutionary move your faithful correspondent is going to actually offer some evidence of his competence as a pundit. While the value of his opinions on politics, culture, economics and business are still in doubt, his brilliance in the arena of American Football can no longer be denied. In the Peter King Challenge your favorite blogger proved better than Sports Illustrated correspondent Peter King at predicting the results of NFL games.

Your inestimable reporter is so pleased with this unprecedented triumph that he has begun to refer to himself in the third person. The inevitable fall to earth is anticipated shortly.