Deepish Thought

This gem is from an opinion piece published on CNN.com by a former Republican staffer turned lobbyist.  The subject is what the Obama administration can learn from the way Republicans were able to pass the Medicare prescription drug benefit:

Under the leadership of Speaker of the House J. Dennis Hastert, a veteran of many health care battles, and Senate Majority Leader Bill Frist, himself a physician, Republicans were able to get critical interest groups, including the usually left-leaning AARP and well-funded trade association PhRma, to join forces in support of the reform effort.

Yes, ladies and gentlemen, by truly heroic efforts Mr Hastert and Mr Frist managed to get the AARP to support a massive new benefit for seniors and, unbelievably, the pharmaceutical industry to support massive government subsidies for prescription drugs.  One wonders how on earth they were able to pull off such a herculean feat.

Of course, the President has in fact already lined up support from both the AARP and PhRma.  However, support from AARP members remains somewhat equivocal since funding for the plan relies on several hundred billion dollars in efficiencies (cuts) to Medicare.  If only he would follow the Republican example and drop even the pretense of making the plan fiscally sustainable perhaps all would be well.

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.

Mark Thoma has published a detailed rebuttal of the idea that the the Waxman-Markey (carbon permits) bill is a massive corporate giveaway.  Mr Thoma’s reasoning is that:

The split over the entire period from 2012 to 2050 is 53.4% for consumers and public purposes, and 20.1% for private industry.

Assuming you believe Mr Thoma’s math, Waxman-Markey is actually a massive giveaway to consumers, special interests and private industry.  This is not exactly a compelling defense.

The problem with the bill is not the manner in which the giveaways are divided.  It’s the existence of giveaways.

The whole point of a cap and trade system is to price carbon emissions and thus incorporate the cost of CO2 emissions into the price of everything those emissions produce. Price signals can then drive innovation to minimize the carbon use and ensure that maximum economic benefit comes from the level of emission we believe is acceptable.   If carbon permits are given away, regardless of who exactly the giveaways are intended to benefit, this price mechanism is undermined.

The fundamental problem here is that American public would apparently like to believe that the transition to a low carbon economy can somehow be achieved without carbon based energy becoming significantly more expensive.   Unfortunately, there is no free lunch to be had here.  A major restructuring of the US economy isn’t going to occur unless the financial incentives surrounding energy use are significantly realigned.

What Congress should have done is create a fully auctioned cap and trade system, then used the resulting revenue to lower and simplify income taxes.  This would have shifted the burden of taxation from a earned income (generally considered a social positive) to a negative externality without increasing the overall tax burden on the economy.  Energy would get more expensive while labor gets cheaper.  It would also likely have created a broad base of political support for cap and trade.

Tragically, this is not what happened.  The administration, somewhat naively, expected their fully auctioned program to become a new and fruitful source of revenue to fund its ambitious spending plans.  When this proved politically unfeasible, the congressional leadership was allowed to use carbon credits giveaways to buy off opposition to the bill.  In its desperation to achieve legislative success, congress has not flinched at undermining the bill’s original objectives.  The revised bill is more politically palatable in that it apparently won’t really affect energy costs.  Of course, if energy costs aren’t affected there is very little chance the thing will actually work.

It is revealing that Congress choose to lard the bill with energy use regulations.  If the bill were going to effectively price CO2 emissions the regulations would be redundant.  Market forces would drive change without the need for mandates from Washington.  Clearly, even Congress doesn’t really believe that the cap and trade portion of the bill will drive change.

To be fair, the successful SO2 cap and trade scheme, on which the bill is based, gave away rather than auctioned SO2 emission rights.  The prospect of selling surplus SO2 credits, or the threat of having to buy extra credits, encouraged enough companies to find ways to limit SO2 output.  So Waxman-Markey may not be completely hopeless.

However, SO2 was a relatively minor problem that could be minimized without a wholesale restructuring of the US economy.  It is extremely difficult to believe that a similarly low key approach will yield the changes required to move us towards a low carbon economy.  For those of us who believe in harnessing the power of markets to solve environmental issues Waxman-Markey is a profound disappointment.

Today’s 30-year treasury bond auction apparently went smoothly, with prices even firming slightly in subsequent trading.   I confess that I don’t fully understand why there is such strong investor demand for long term (and thus inflation sensitive) treasury debt.  Some of the possible  explanations are:

1. The bond market is deeply pessimistic about the economy, meaning that deflation is a possible concern and holding 30 year government bonds with a 4.5% yield is actually quite attractive.
2. The bond market is very optimistic (snicker) about both the Fed’s ability to shrink its balance sheet  and government’s ability to bring the fiscal deficit under control when the economy improves, meaning that inflation is not a threat.
3. Global imbalances  have become, to an extent, self perpetuating.

The third explanation arises from an old, informal rule of banking, “If you owe a $100 the bank owns you.  If you owe a $100m you own the bank”.  My thinking here is that the United States has become a debtor that is too important to be denied credit.

Due to years of conscientious currency manipulation China (and other trade surplus nations) have accumulated enormous dollar assets.  Protecting the value of these assets is not an insignificant concern.  This means that US interest rates cannot be allowed to go up in any situation where the rise would not be accompanied by an offsetting rise in the dollar.

The 30 year bond auction was just such a situation.  A poor auction would have resulted in higher long term interest rates.  Normally higher rates would put upward pressure on the dollar.  However, right now, a bad auction would imply that the government is going to have difficulty funding the deficit, increasing the likelihood that the deficit will be monetized, which would be bad for the dollar.

So a bad auction would likely mean US interest rates up and the US dollar down, which is the worst possible combination if you happen to be a foreign power that owns a lot of dollar assets.

If you were such a power my guess is that ensuring a strong auction, by say bidding for a bunch of bonds, would start to look like a good idea.  Interestingly, indirect bidding (i.e. by foreign central banks) during the Treasury auction was described as “strong”.

Sports Illustrated columnist Andy Staples is very concerned that a down economy plus a trend towards big revenue TV deals for the major conferences means that the ‘haves’ in college sports will be increasing their edge over the ‘have nots’.

On Monday, Florida coach Urban Meyer agreed to a six-year contract that will pay him $4 million a year. Earlier this year, the Alabama state university system’s trustees approved earlier a $80.6 million project that will expand Alabama’s Bryant-Denny Stadium to accommodate more than 101,000 fans. Meanwhile, on the other end of the Football Bowl Subdivision food chain, Hawaii athletic director Jim Donovan last week took a voluntary seven percent pay cut to help offset a projected $2.6 million deficit for the 2008-09 fiscal year.

I’m actually a little skeptical of this argument.  College football royalty like Florida already get the best coaches, the best facilities and (most importantly) its choice of the best players.  So it is far from certain that an increased budget will generate any better results.  Will Urban Meyer be a better football coach because his salary went up by $750K per year?

Like most human endeavors, college football is subject to diminishing returns.  Beyond a certain point adding resources to a football program like Florida’s is really just padding costs.  Where the increasing big school revenue advantage is likely to pay off is the non-revenue sports.  The excess revenue generated by the football and basketball programs can buy those big money schools a lot of wins in soccer, tennis, track and swimming.