Deepish Thought

Congress spent the past week having a serious, thoughtful, substantive and bipartisan debate about Syria.

On the down side this does highlight an uncomfortable truth. The partisan dysfunction we normally expect from Washington isn’t due to the failings of our elected representatives, however much we might enjoy blaming them. When circumstances require it, Congress is clearly capable of operating in the way we say we’d prefer.

The fact that serious, thoughtful, substantive and bipartisan debate is largely absent from every other issue simply reflects the deep political divisions in the country as a whole. Red and blue voters demand that their representatives hold to strict party lines. So they do.

James Fallows of the Atlantic has given seven reasons that Paul Ryan’s budget proposal is neither brave nor serious.   I’ll grant that 6 out of 7 are pretty solid.  The exception is:

3) A plan that exempts from future Medicare cuts anyone born before 1957 — about a quarter of the population, which includes me — is neither brave nor serious. See “canny or cynical: take your pick” above.

This may not be brave, but is definitely serious.

Old people are numerous and prone to voting.  They also have a choice.  If you are in your mid-fifties or older today there is a reasonable chance that you will be dead before the country’s fiscal situation implodes.  It therefore makes sense to veto any proposal that reduces benefits.

There are plenty of voters under the age of 54, but they are in a very different situation.  Barring untimely demise, these Americans will live to see the nation’s fiscal Waterloo.  They therefore have an incentive to accept painful reforms in order to avert the otherwise inevitable disaster.

The political reality is that no reform that adversely impacts current AARP members has any chance of adoption.  It is neither brave nor serious to ignore that fact.

I’m not sure exactly how they do it, but Goldman Sachs has an incredible ability to receive credit for being smarter than they probably are.  Consider this from the Wall Street Journal’s Opinion page (gated):

In fact, the firm’s real talent isn’t knowing what the price will be, but what the price is. And Goldman clearly hit the mark with the $50 billion valuation implied by its $450 million investment in Facebook last week. The firm also rigged up a deal to make $1.5 billion in Facebook shares indirectly available to its well-heeled clients, and every sign is that the offer was oversubscribed.

If the offer was oversubscribed then Goldman clearly did not “hit the mark”.  Having more willing buyers than shares to sell means the price was set too low and Goldman left money on the table – to the detriment of their clients, the existing shareholders of Facebook.

I’m curious about how far an Islamic center needs to be from Ground Zero before the terrorists stop winning.

(Paraphrased from the comments on this blog post)

“I hope there’s a money tree somewhere to pay for all of this.”

“There used to be a money tree, but the magic pony ate it.”

“Don’t worry about the magic pony.  It may eat money trees, but it craps pure un-rationed efficient high-quality government health care for every American.”

This is from a fascinating article on the impact the taxman has had on boxing:

The 1950s was the era of the 90 percent top marginal tax rate, and by the end of that decade live gate receipts for top championship fights were supplemented by the proceeds from closed circuit telecasts to movie theaters. A second fight in one tax year would yield very little additional income, hardly worth the risk of losing the title. And so, the three fights between Floyd Patterson and Ingemar Johansson stretched over three years (1959-1961); the two between Patterson and Sonny Liston over two years (1962-1963), as was also true for the two bouts between Liston and Cassius Clay (Muhammad Ali) (1964-1965). Then, the Tax Reform Act of 1964 cut the top marginal tax rate to 70 percent effective in 1965. The result: two heavyweight title fights in 1965, and five in 1966. You can look it up.

The lesson can be summed up in two words – INCENTIVES MATTER

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.