Rdan

by Bruce Webb

In the near four months since it passed out of Committee there has been little discussion of the Senate HELP Bill and the reason is clear, Max Baucus made it clear that Senate Finance would write a bill from the ground up. What this has meant is that the basis for comparing and contrasting alternate bills has been HR3200, the House Tri-Committee Bill. There are three main bills that have been presented in opposition to HR3200 with the Senate Finance Committee coming at it from the center-right while Wyden's Free Choice Act and HR676, Single Payer, coming from the left.

The major critiques of HR3200 have focused around the Public Option, with SFC debating whether it should even be part of the bill, while the Free Choice Act and HR676 arguing that it is too weak. This latter set of arguments seems to me largely driven by a profound misreading of the bill that may in its turn be driven by ideology from the Single Payer Now folk that have combined into a toxic stew that has led both the original HR3200 and his successor to be labeled in the harshest possible ways.

In the eyes of many progressives the problem with the PO is that it is just too cramped and limited to a "small sliver" of the American people, that "200 million people" will find it unavailable, that only people who are currently uninsured can get it, and so on. Well none of that is right, but seeing why will take some lengthy quotation and parsing, which for those interested can be found under the fold.

During the campaign Obama promised people that if they liked their current insurance they could keep it, and the bill does that, but what too many people took away is the idea that if they had current insurance, particularly through their employer that they HAD to keep it, that only those people who didn't have coverage at all, mostly the young, the self-employed, and workers in small businesses, would be served by the Exchange and the PO. Well lets go to the text, in this case the new House Bill.

SEC. 302. EXCHANGE-ELIGIBLE INDIVIDUALS AND EMPLOYERS.
(a) ACCESS TO COVERAGE.—In accordance with this section, all individuals are eligible to obtain coverage through enrollment in an Exchange-participating health benefits plan offered through the Health Insurance Exchange unless such individuals are enrolled in another qualified health benefits plan or other acceptable coverage. (p.156)

The key word here is "enrolled". Under the bill if your employer offers you insurance it has to be in the form of a Qualified Health Benefits Plan or QHBP, meaning that it has to meet all the accessibility, affordability and coverage provisions applicable to an Exchange plan which should mean in practice there would be little advantage to getting a QHBP Plan inside or outside the Exchange. So the bill writers and subsequently the CBO built in the assumption that most people who accept employer coverage, to the degree that they added a provision for employers to auto-enroll employees in the lowest cost plan offered by the employer. This process led many people to believe they were then simply locked into the company plan. Well not so fast, NOTHING permently locks you in, instead you have a number of different opt-out options.

Now one not acceptble option is simply not to have insurance at all, there are some religious exceptions but under the Individual Responsibility section there is a requirement for individuals to prove they have 'Acceptable Coverage'. And what is that?

(2) ACCEPTABLE COVERAGE.—For purposes of
this division, the term ‘‘acceptable coverage’’ means
any of the following:
(A) QUALIFIED HEALTH BENEFITS PLAN COVERAGE.—Coverage under a qualified health benefits plan.
(B) GRANDFATHERED HEALTH INSURANCE COVERAGE; COVERAGE UNDER CURRENT GROUP HEALTH PLAN.—Coverage under a grand- fathered health insurance coverage (as defined in subsection (a) of section 202) or under a current group health plan (described in sub- section (b) of such section).
(C) MEDICARE.—Coverage under part A of title XVIII of the Social Security Act.
(D) MEDICAID.—Coverage for medical assistance under title XIX of the Social Security Act, excluding such coverage that is only available because of the application of subsection (u), (z), or (aa) of section 1902 of such Act.
(E) MEMBERS OF THE ARMED FORCES AND DEPENDENTS (INCLUDING TRICARE).—
Coverage under chapter 55 of title 10, United States Code, including similar coverage furnished under section 1781 of title 38 of such Code.
(F) VA.—Coverage under the veteran’s health care program under chapter 17 of title 10 United States Code.
(G) OTHER COVERAGE.—Such other health benefits coverage, such as a State health benefits risk pool, as the Commissioner, in coordination with the Secretary of the Treasury, recognizes for purposes of this paragraph.

Well that is clear enough, an individual meets his responsibility requirement by showing he is covered under his employer plan, his spouse's employer plan, perhaps a parent's family plan or by a range of other public insurance plans. And in any of those latter situations the employee can opt-out of new employer coverage offers. But one of these opt-out possibilities is somewhat hidden here, that is the one that allows any employee to opt-out of employer coverage altogether and get an individual or group plan through the Exchange, including the PO, because in doing so he would meet the requirement of (A), the Public Option is explicitly defined as a QHBP. So where did the idea that the PO was only for the uninsured and was so limited to a fraction of the population arise?

Well a couple of places. First as noted the expectation is that most new employees without health insurance would simply enroll in whatever employer supplied plan level that met their needs, and that those who failed to do so would simply be auto-enrolled by the employer as provided in Sec 412 (c)

(c) AUTOMATIC ENROLLMENT FOR EMPLOYER SPONSORED HEALTH BENEFITS.—
(1) IN GENERAL.—The requirement of this subsection with respect to an employer and an employee is that the employer automatically enroll such employee into the employment-based health benefits plan for individual coverage under the plan option with the lowest applicable employee premium.
(2) OPT-OUT.—In no case may an employer automatically enroll an employee in a plan under paragraph (1) if such employee makes an affirmative election to opt out of such plan or to elect coverage under an employment-based health benefits plan offered by such employer. An employer shall provide an employee with a 30-day period to make such an affirmative election before the employer may automatically enroll the employee in such a plan. (p. 273-4)

If the employee does opt-out during that 30 days he is not "enrolled" and so falls under the definition of "exchange eligible individual" as defined in Sec 302. At which point the provisions of Sec 411 (3) kick in:

(3) CONTRIBUTION IN LIEU OF COVERAGE.—
Beginning with Y2, if an employee declines such offer but otherwise obtains coverage in an Exchange- participating health benefits plan (other than by reason of being covered by family coverage as a spouse or dependent of the primary insured), the employer shall make a timely contribution to the Health Insurance Exchange with respect to each such employee in accordance with section 413.

In short you are 'exchange eligible' unless you ACCEPT enrollment or ALLOW yourself to be auto-enrolled. On my reading there is no such thing as a lockout for any given individual, if you want the PO you can get it, though not without taking some positive action.

But what about employers? Why are they locked out of the Exchange and the PO? Well the answer is that they aren't, at least not permanently, that is simply the result of misunderstanding the language governing 'transition'. Subject for another post.

UPDATED

Divorced one like Bush wants to know how accurate the polling was that came up with a consensous that the GDP rose 3.5% in the third quarter. I did my own poll last night at band practice and 100% of the self employed band members (only one for an employer and that's the public school system) said they did not see it in their business.

I think this GDP rise, "we're out of the recession" was just more of the inside the beltway pundit MSM happy talk. How else can you explain a 200 point rise in the Dow?

UPDATE:
I took another poll today. It's of retail. It's a poll of 1, but I think it's significant. The results are good. Retail sales were up 5.3% for the 3rd quarter over the same time last year. WOW! I think I'll buy stock in this company. Here's how it broke out:
July up 19.4%,
August down 14.2%,
September up 12.2%.
Six out of the last nine months were negative as compared to last year.

Here's how the money flowed:
Account sales down 11.8%,
American Express up 78.4%,
Cash down 3.2%,
Discover down 39%,
Visa/Master Card up 24.6%.

Here's the Advanced Retail Sale report from October 14, 2009

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for September, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $344.7 billion, a decrease of 1.5 percent (±0.5%) from the previous month and 5.7 percent (±0.7%) below September 2008. Total sales for the July through September 2009 period were down 6.6 percent (±0.3%) from the same period a year ago. The July to August 2009 percent change was revised from +2.7 percent (±0.5%) to +2.2 percent (±0.2%).

Retail trade sales were down 1.7 percent (±0.7%) from August 2009 and 6.4 percent (±0.7%) below last year. Gasoline stations sales were down 25.3 percent (±1.3%) from September 2008 and building material and garden equipment and supplies dealers were down 13.0 percent (±2.0%) from last year.

And the Dow came back to reality today. At least for the moment.

by Bruce Webb




Well I have been venturing around the blogosphere and it is grievously clear that most people did not take my advice and Read the Bill!. Well it is not too late: http://docs.house.gov/rules/health/111_ahcaa.pdf (3.3 MB) Moreover CBO followed up with their preliminary analysis:
http://www.cbo.gov/ftpdocs/106xx/doc10688/hr3962Rangel.pdf

The above image is Table 2 and it shows the before (current law) and after numbers. There is a substantial amount of confusion on this with some people adding where instead they should be subtracting and I'll have to admit while I got the arithmetic operation I mislabeled the results elsewhere. So lets sort it out.

Under current, pre-reform law CBO projected that by 2019 there would be 54 million uninsured American residents, which figure includes undocumented workers. Since under current political conditions it is impossible to extend real reform to include "illegals" any solution will be by nature incomplete. In the case at hand CBO projects that the House bill would extend coverage to 36 million residents leaving 18 million without insurance. Of that 18 million a third or 6 million will be "illegals" leaving 12 million legal non-elderly residents without coverage (some people have tried to add 18 + 12 to get to 30, going the wrong way down One Way Math Street). This 12 million number will include both the so-called 'invincibles' who would rather pay the fine than get coverage as well as people who are Medicaid eligible but for whatever reasons can't manage the paperwork labyrinth. But generally if you are a legal resident of the U.S. who wants insurance you will be able to get it. (Affordability is another question, I think the bill contains adequate provisions for that, others will have differing opinions, we can fight that out in comments or on subsequent posts).

In percentages that adds up to 94% of the total non-elderly population up from 81% today, while it is 96% of the legal non-elderly population, up from 83% today. Not exactly the Universal Single Coverage that people like me would like, but still closing roughly 75% of the gap. Not bad considering the somewhat artificial restraints of both keeping the bill's cost under $900 billion AND making it deficit neutral over the ten year window.

(Minor note. People are still referring to 'HR3200' but as you can see the bill number has changed to 'HR3962'

The question:

How much was credit being funneled away from all other sectors in the economy?

The answer: Very little if any. Neither the general consumer lending:

nor the specific Real Estate lending:

appears to run in a different direction that Business Loans, except possibly, in the latter case, in late 2003 and early 2004.

Looking at the absolute numbers, while there is a significant negative correlation with consumer lending for the period, that is more than offset by the significant positive correlation with Real Estate lending over the period.*

So the statement probably made a good soundbite, but the reality is that all lending generally increased during the peak of the bubble. There does not appear to be evidence of "crowding out" of Business Loans.

*Real Estate lending for the period averages more than four times greater than consumer lending (2.73 trillion v. 680 billion), so the net result over the period is positive to business lending.

By contrast, a regression of the changes over the same period and there is virtually no support for the idea; Adjusted R^2 was slightly negative, and the coefficients both include 0 in a 95% confidence interval.

Rdan

Hat tip Naked Capitalism regarding the Financial Stabilility Improvement Act as described by Washington's Blog concerning banks/investment companies 'too big to fail' actions by the US and EU countries.
October 29, 2009 begins testimony on more emergency powers by the executive branch.

The House Committee on Financial Services will hold a hearing on the bill tomorrow, with Tim Geithner, Sheila Bair, John C. Dugan (Comptroller of the Currency), Daniel K. Tarullo (Governor, Board of Governors of the Federal Reserve System), John E. Bowman (Acting Director, Office of Thrift Supervision), Richard Trumka (President, AFLCIO), and others as witnesses.

Since unitary executive power has been the trend in the last few decades, each party sort of picking its turf to expand regardless of actual programs, this is a worry. It is timely to review how the F-22 stayed alive and well regardless of inefficiencies, and the opportunities costs of this way of doing business. Decades of costs.

Are we ever going to try and deal with the main street economy, or is that for historians? Where is the vision for more than the welfare of financials, or multinational companies?

(Data via Yahoo! Finance)

by divorced one like Bush

While your reading this, think about the physics concept of two things occupying the same time and space. Think about the similar idea that light is both a wave and a particle. Think about the message we have been told that many very bright people (like physicist) went to Wall Street.

During my lunch break I was watching C-span, the Senate. My Senator, Mr. Whitehouse was speaking on the need to move on the extension for unemployment insurance. Two comments were made. First, that 7000 people per day are falling off the unemployment rolls since October eighth.

Seven thousand people per day! Got to wonder how many of these have no health insurance and thus will become a member of the forty four thousand group that dies because of no health insurance.

This brings up the second comment Senator Whitehouse made as a means of putting a face, a person, people into the economic equations. There is a woman, a mother of 2 children in their early teens who has been unemployed for 13 months. She is recovering from a heart attack.

Now, you do not have to take my word for this, but it is rather well understood that stress is a cause of heart disease, though stress is not selective. It can cause havoc with just about any system of the body and it usually effects more than just one simply do to the fact that our body's systems do not function in isolation to all the others.

So just what do you think is going to happen to this mother and her family if she falls off the unemployment rolls? Does she no longer cost our society? For those who argue that people think the public option or the real solution, a single payer system means "free", I ask: Do you theorize that this mother and her family will no longer be an effect on your personal income when her unemployment stops and thus their life is free to you?

Do you/we understand that this woman is the realization of two things occupying the same space and time, yet appearing as two different entities in the "science" of economics? This woman and her family will not be free to us! This woman will cost us regardless. It is not, I am sure, this woman or I who thinks her life should be free (as in no money needed). It's only those who think this woman costing them is an inefficiency who think her life should be free. They mistake the loss of risk do to the accumulation of money as free from cost.

We all cost each other in some way. Our goal should be to make efficient, every one in our economic system. We should, at this time after having so many experiences with recessions/depressions, understand that the only true efficiency of an economic system is the efficiency of people's lives. The only way to efficiency is to reduce risk collectively. But, instead we are still chasing the efficiency of money as in not having the health care cost bust a budget (but Ok'ing the war) or equating unemployment as costing us while we bail out Wall Street.

With all the bright people we are told that went from physics/mathematics to Wall Street, people who understand the ability for something to appear the same, yet different, that one thing can occupy two places at once yet have two things occupy the same space and time, how can they/we not understand that an economy is not and can not be discussed, manipulated or changed without a basic acceptance that it is one living and breathing, energy producing and expending entity? It's efficiency, as in the conservation of energy law is found in people, not money. An economy's efficiency is calculated by the accumulated reduction of risk, not increase in money. Counting, manipulating, playing with the money is like playing with the energy and ignoring the matter.

This woman Senator Whitehouse talked about and her situation is the phenomenon realized of the Theory of Everything which Einstein went to his death trying to solve . Einstein was working in the wrong science. Had he been in economics he would have succeed in proving this Theory I believe. But, if not him, then certainly John Nash should be able to recognize such. It is his theory that takes into consideration everyone's decisions. We're talking integration. Systems. Ecosystems, physiologic systems, physics, economic systems all described in mathematics. Math, the thing those people on Wall Street and the Chicago School (or is it the lake school?)are suppose to actually understand.

For our mother in this story who has heart disease, the real cure is not going to be found in health care. For her, solving the health care insurance problem is only a stop gap measure which does not maximize the efficiency of her life such that her cost to us is as close to free as it can be. To accomplish such, she needs money in hand. Only money in hand can allow her the ability to make the type of decisions that will reduce her risk and thus cost to us. Simultaneously, solving just the money in hand will not solve her health issues. She is one entity in different economic time/space. We can accept such or, we can keep ignoring the realm in which the solution to the Theory of Everything is found and keep treating economics as physics: A science with a mathematical dichotomy between the small and large.

http://docs.house.gov/rules/health/111_ahcaa.pdf (3.3 MB)

The House Bill is out. It's different, at a minimum in its numbering, 'Sec 113' and 'Sec 116' don't mean what they did yesterday. I'm going to take some time to read through the naughty bits, maybe some of you could too. Discussion/updates later.

Update one. (Sec 102) Medical Loss Ratios set at a minimum of 85% but could be set higher. Cue the squealing from AHIP.

Two (Sec 105) Group plans required to offer optional coverage of kids up to the age of 26.

Three (Sec 107). In (I think) 22 states it was legal to treat a history of Domestic Violence as a pre-existing condition that could be denied coverage. This bill would eliminate that particular barbarity.

(Sec 110). Sweet!! No longer can you screw over retirees after the fact. If you retire with health care coverage you keep it. (Corporations are infamous for pulling this particular chair out from under former employees.)

(Sec 202) is the new Sec 102, the one certain wingnuts insisted banned individual private insurance altogether. Wingnut 102: How HR3200 Outlaws Private Health Insurance. Ah! Good times! To recap: if you got shitty individual insurance now you can keep it, but after Jan 1, 2013 new individual plans have to be offered through the Exchange and so be QHBPs (Qualified Health Benefit Plans)

(Sec 213) is the new Sec 113, Insurance Rating Rules. As in the original the premium ratio due to age can't be higher than 2:1 (insurance companies were pushing for 5:1 or even 7:1),

(Sec 262) Anti-trust exemption repealed.

Rdan

The new template is done for the most part and will be replacing the current template in November, about mid-month. It is faster and cleaner and should serve us well. There will be additional services included. Anyone who wants to take a look at the proto-type can in the near future.

Robert Waldmann

The proposal made here in "Public Option Harder Ball" received enthusiastic support when it was coincidentally semi proposed as opt-in by Sen Carper (D-Bankruptcy Reform) and modified to to opt-out by Senator Schumer (D-tough guy). As presented here on September 4 it was clearly unconstitutional and needed work.

Now I have another idea. I'm not sure if it is a joke or a debate transforming proposal. I got the idea from Rich Lowry who asked "Does a state get to opt-out of the taxes too?" Hmmm now that is an interesting idea.



First don't give Lowry too much credit for originality. The bogus argument is clearly the right wing talking point of the day. I have no way of knowing who thought of it or how it spread.

Lowry is pretending that "the taxes" pay for the public option. Since the cost of a robust public option is negative $ 100 B over ten years*, I guess the way to implement his proposal is to give states a second option -- the option to voluntarily send money to the Federal Treasury to make up for the extra cost due to their choice to opt out of the public option. the value of this second option is zero, so, taken literally, Lowry's proposal amounts to nothing.

But one can make sense of it. States could be allowed to opt out of federal financing. That is they get the medicare tax, the excise tax on cadillac plans. the share of income taxes that go to medicare and medicaid the whole boodle and, in exchange they must provide medicaid, medicare and health care reform insurance subsidies to their citizens.

That way no state would subsidize health care in any other state.

If Rich Lowry were sincere he would support such a proposal. he would also be unable to travel safely in Red America if the massive subsidies they get from Blue America were actually cut off. Of course that won't happen. Senators from states which get more back from the Federal government than they pay in taxes will make very sure that the proposal is blocked. The utter hypocritical dishonesty of Lowry's argument will be made clear.

OK semi serious modified proposal. This just concerns health care reform. The hard part is to decide how to distribute the Medicare budget cuts. I'd say a state can opt out of the fiscal consequences of health care reform if it
1) pays all of the cost of expanding medicaid
2) pays the subsidies.
3) keeps all excise tax revenues collected in the state
and
4) Gets a share of the medicaid cuts proportional to medicare payroll taxes paid collected in the state.

4 is the hard part. Medicare is largely funded with income taxes. I just use payroll tax revenues as a rough yardstick. The plan would probably work fine if the share of Medicare savings were proportional to population.

Now if Texas were to opt out of the fiscal aspects, they would give a huge gift back to the rest of the USA. They have a huge number of currently uninsured people many of whom would get subsidies. They have a lot of poor people. Generally a larger fraction of the population of states with Republican senators are poor enough to qualify for expanded medicare. Also a larger fraction are poor enough for subsidies.

In contrast, my proposal would be wonderful for New York, Massachusetts and, especially Maine. Maine surely would gain from opting out of subsidizing Texas.

Basically all egalitarian Federal programs transfer from Blue states to right wing, anti big government, states rights states. Their representatives make a career of biting the hand that feeds them. They keep doing it, because the hand keeps coming back to be bit again. I think offering to leave them fiscally alone will make them sputter and gasp and maybe even deal with reality (I'm a dreamer).

*Update: One correction and one update. I remembered the CBO score of the robust public option incorrectly. The CBO said it would save $ 110 Billion over 10 years not just $100 billion as I wrote. I apologise for the error.

The update is that this is no longer relevant. There will be no robust public option. Democratic leaders in the house have given up on it and are going with a level playing field public option

In the end, Pelosi, D-Calif., and other House leaders were unable to round up the necessary votes for their preferred version of the government insurance plan — one that would base payment rates to providers on rates paid by Medicare. Instead, the Health and Human Services secretary would negotiate rates with providers, the approach preferred by moderates and the one that will be featured in the Senate's version.

The CBO estimates much lower savings from this version of the public option. However, it has scored it. The CBO estimate of the cost is negative $ 25 billion.

So thank the moderates in the House and Senate dear US taxpayers**. According to the CBO, you just donated roughly $85 billion over 10 years to health insurance companies and health care providers. You can hope that more money for providers will lead to better care.

** I live in Italy and pay roughly 0 US taxes due to the foreign earned income exclusion and my meager wealth. I do pay lots and lots of taxes. A larger share of my income than anyone in the US I guess. Of course all of my earned income comes from taxpayers, so I can't complain.

Also note "earned" is a legal term and expresses no opinion about whether it is possible for me to really earn that money while spending so much time typing away on the web.

=
By Spencer,

The issue of a jobless recovery is getting a lot of attention recently.

I've found the best way to look at the issue is to compare the change in real growth and productivity over the long run. There have been three periods of different productivity trends in modern US economic history.

Prior to about 1973 productivity growth averaged 2.8%. In the second or low productivity era, running from 1974 to 1995, productivity growth slowed to 1.5% before rebounding to 2.4% since 1995.

But real GDP growth also slowed over this period. As a consequence, the ratio of real GDP growth to productivity growth fell from 68% in the early strong productivity to 50% in the weak productivity era before rebounding to over 80% in the most recent era. Basically, real GDP growth equals productivity growth plus hours worked or employment growth. A consequence of stronger productivity in an era of weaker GDP growth this suggests that each percentage point increase in real GDP growth generates a much weaker increase in hours worked or employment. Currently, a percentage point increase in real GDP growth now generates under a 0.2 percentage point increase in hours worked versus 0.3 in the pre-1974 era and 0.5 percentage points in the low productivity era.



But to a certain extent comparing productivity and real GDP is comparing apples to oranges. To be accurate one should look at productivity versus output in the nonfarm sector. GDP includes the farm sector of course, but also the nonprofit and government sectors where productivity is assumed to be zero.

If you look at what happened in the 1990s and early 2000s recoveries in the nonfarm business sector, you see that productivity growth significantly outpaced output growth in the early recovery phase of the cycle. As a consequence hours worked or employment fell, generating the jobless recoveries. It looks like the problem in these two cycles was much weaker growth rather than strong productivity.


This shift to an environment of stronger productivity and weaker real growth generated an interesting development that has received little attention among economists or in the business press.

This development was a secular decline in labor's share of the pie. Prior to the 1982 recession there was a strong cyclical pattern of labor's but it was around a long term or secular flat trend. But since the early 1980s labor's share of the pie has fallen sharply by about ten percentage points. Note that the chart is of labor compensation divided by nominal output indexed to 1992 = 100. That is because the data for each series is reported as an index number at 1992=100 rather than in dollar terms. So the scale is set to 1992 =100 rather than in percentage points. But it still shows that labor payments as a share of nonfarm business total ouput has declined sharply over the last 20 years and prior to the latest cycle we did not even see the normal late cycle uptick in labor's share.



If this chart gets a lot of attention it will be interesting to see how the libertarian and/or conservative analysts who keep coming up with all types of excuses to explain away the weakness in real labor compensation in recent years explain this away. If you really want to raise a stink you could look at this as a great example of the Marxist immiseration of labor that Marx believed was one of the internal contradictions of capitalism that would eventually lead to its self destruction.


additional chart in response to comments.

Robert Waldmann

Sen. Joe Lieberman (I-Conn.) said Tuesday that he’d back a GOP filibuster of Senate Majority Leader Harry Reid’s health care reform bill.


Lieberman, who caucuses with Democrats and is positioning himself as a fiscal hawk on the issue, said he opposes any health care bill that includes a government-run insurance program — even if it includes a provision allowing states to opt out of the program, as Reid has said the Senate bill will.

Sorry for the link to Manu Raju at Politico who thinks that to support increased spending and deficits makes one a fiscal hawk.

Recently, a Lieberman aid publicly said he would vote for cloture. This is a stab in the back. I may be abusing my angrybear password, but I think readers might be interested in this link

http://lieberman.senate.gov/contact/index.cfm?regarding=issue

update: Some actual economic news for AngryBears. Lieberman climbs Mt Aetna

update 2: If it's not too much bother, could people who e-mail Liberman copy their e-mail and post it as a comment here. Trying not to clog angrybear comment threads.

For those who think Lieberman is a puppet of the insurance industry I say



And to those who think that they can claim to be fiscal hawks while demanding that more public money be sent to the insurance companies I recall Gary Larson's warning as posted on Doug Elmendorf's office door 20 years ago.

One of the most notable things about ski trips to the States from Canada was that they offered "U.S. medical insurance"—a buy-in that cost around the same as a lift ticket if you wanted to ski Stowe instead of Tremblant.

One of the scariest moments in Sicko is when the Canadian relatives note that they don't dare go to the States, telling about a friend whose injury while golfing in Florida ended up costing him about US$60,000 out of pocket.

U.S. native Tina Fetner at Scatterplot recapitulates those feelings in relating her ASA experience. Fortuantely, her experience has a cheerful happy ending. And her closing line summarizes why there is such a push among people for a "public option,"; the current U.S. system doesn't work:

The idea that the insurance payouts are an unproblematic obligation that the insurance company just lives up to without question had become so foreign to me that this feels like bonus cash. This is what insurance should be.

The Devil will still be in the details, but at least there might be details, instead of a 300% increase in non-treatment insurance payments.

rdan

Greenberg is back using the same business strategies he used at AIG.

(hat tip Ruthie Ackerman, assoc. ed. New Deal 2.0) To point to Marshall Auerback an investment strategist who writes at New Deal 2.0 "Happy Halloween: Pay Curbs are a Trick on the Taxpayer, Not a Treat" feels like an anti-climax...Greenberg is way ahead of the curve. Worth saying but who will read it?

guest post by run 75441

While the American Banking Association held their "Roaring Twenties" party to kick off their annual meeting, people from 20 different states, as far away as California, came together to kick off "Showdown Chicago" protesting the loss of jobs and the harsh and speculative practices put in place by banks and W$ since 2000. Friday's events were spent teaching the group the various chants and acquainting them with how to conduct a peaceful protest.

The meeting was brokem up into an introduction of instruction and then a meeting listening to a panel of speakiers including Senator Durbin of Illinois who has been leading the effort to pass the Consumer Finance Protection Agency in the Senate. Having been rejected twice, he promised to continue his efforts in getting the CFPA passed. Including Senator Durbin, many of the same Senators backing the CFPA also voted "yea" for the Financial Services Modernization Act in 1999/2000 and the restriction on governing the derivaives market. They now find themselves voting for bills that will protect consumers which will still fail to fix the fundamental problem with W$ and banking.

The meeting broke up ay 6:30PM and the group formed outside to march to the ABA's "Roaring Twenties" party. Like myself, others found it ironic the ABA would use this as a theme for their annual meeting in Chicago.

Some clips from the Showdown Chicago Site:

Wells Fargo protest
One Foreclosure
Goldman Sachs
Pictures of Protestors
________________________________________
by run 75441

Robert Waldmann

Harry Reid is sending a health care reform bill with a public option and an opt out clause to the floor of the Senate. . Josh Marshall explains why it is good policy and notes "the importance that an outside-the-box idea can have in significantly changing the terms of a major policy debate."

I really think you read it here first. (not saying that it wasn't written somewhere else, but I assume you are an angrybear reader because you are reading this post.

by Bruce Webb

Well it looks like Harry Reid is going to introduce a bill that includes a Public Option with a state opt-out provision. Which I guess means the Tenthers won't have to secede from the Union after all. But it raises some questions.

Let's say I am from Washington State and have an individual plan through the Public Option and am visiting relatives in Indiana, an opt out state. And I fall down on the ice and break a bone. Under those circumstances I would think they would have to accept my insurance, opt out can't mean that you just become uncovered every time you fly over Mississippi. That's scenario one.

Scenario two. I move to Indiana temporarily for a contract job lasting more than a year. Surely I can maintain my coverage?

Scenario two A. I move to Indiana on that temporary contract and get engaged and marry my High School crush. (Hi LT!). Am I prevented from adding her to my plan?

Scenario three. I am an executive in Seattle for a company that buys insurance from the PO but maintain my full time residence in Coeur d'Alene Idaho (which as a live free or die red state opted out) and commute by plane. Is my Public Option plan affected?

Scenario four. I am a self-employed consultant based out of my lake front house in Coeur d'Alene but spend much of my time working for clients in Portland and Seattle. Whether or not I maintain a residence in either city what prevents me from stopping by the insurance office and signing up for the PO through the Exchange? Can one state actually prevent you from buying a perfectly legal product in another state and having your local doctor accept that product? What use then is the Commerce Clause?

Scenario five. I run a consulting shop incorporated in Idaho but with a small office in Portland and Billings and a larger one in Seattle. If Idaho has opted out I am actually prevented from buying a group plan on the Washington Exchange and including myself and my small Oregon and Montana staffs in it along with my larger Seattle group?

I could multiply scenarios endlessly but the question remains: how do individual states enforce an opt-out and under what circumstances? How much presence do you have to maintain in a state that offers the public option to be able to buy through their exchange?

Under our system states have a certain amount of freedom to decide what gets bought and sold within their state boundaries plus some rights to regulate what crosses those borders (for example fireworks). But I just don't see how they can block medical providers from accepting health insurance policies written in another state or realistically how they can block their own citizens from purchasing such insurance. And certainly I can't see setting up a system where tourists and part-time residents have their insurance honored but full time residents don't.

Unless states can mandate that all individuals and employers purchase insurance in-state in addition to whatever coverage they may have through another state I just don't see how opt-out does anything but prevent insurance sales on your own state exchange.

Which is why I don't think supporters of the PO have much to worry about as concerns Opt-Out. It seems to just be a sop thrown to more conservative states who don't want to get tinged with accusations of collaboration with socialism (or something). From a mechanical standpoint I just don't see how you enforce this. Any ideas?

by cactus

How much are all those folks at the various TARP corporate welfare recipients worth? We're being deluged with stories about how many executives at such institutions are leaving because the big bad gubmint is limiting their pay, and how that's going to hurt us in the long run. Worse, we're told that this process is going to hurt us - after all, these are the rain-makers, the guys who bring in the money. Do we want the best people working for us, or do we want to pinch pennies and get a band of oafchucks who don't know their butts from a hole in the ground.

There are a few problems I see with this. First is that most of the companies that are getting corporate welfare are not doing so because they're run by people who know what they're doing, at least in general. Sure, not everyone at BofA is a cretin, but its clear that some disastrous decisions were made there over the past few years by some very high paid people. Keeping people like that onboard is not good for the taxpayer.

But the question of value - how much value individuals bring to an organization - is more general. Essentially its a marginal benefits issue. It is the amount of money that a person can bring into the corporation above and beyond what someone else in that same position would bring in. If a person brings in hundreds of millions of dollars, but they're able to do so only because they work for that corporation, and anyone else in the same position could bring in the same amount, than that person is not really worth very much to the corporation.

Think of it this way... by virtue of pressing the "print" button at the publishing company that puts out the latest Dan Brown book, someone at the company is allowing that company to sell a heck of a lot of books. But just about anyone could have pressed that button.

That brings up two points:

1. The relevant question, when it comes to a person's pay, is what are the marginal benefits a person brings to an organization. Off the top of my head, I don't see how to measure that. And perhaps not all the information necessary to reach that figure is available all at once. Destroying a company takes years (as a number of chief executives have demonstrated, some on multiple occasions), and in the meanwhile, the folks in charge continue getting paid a lot.

2. Its hard to see how the combined marginal benefits of the top twenty five individuals or so in a company that made a serious of disastrous decisions resulting in the loss of tens of billions of dollars - an outcome that would surely lead to bankruptcy if not for the intervention of the government - are positive. For some of them, yes, but on the whole they have to not only be negative, but extremely negative. As per point one, I'm not sure how to measure the contribution of each individual, but, speaking as a shareholder (via Uncle Sam) the fact that folks are leaving in droves from BofA or Citi or AIG doesn't bother me at all. In fact, I'd feel better about the prospects of those companies if more of them left.
____________________________________
by cactus

by Rebecca

Policymakers across Latin America are announcing measures to stem currency appreciation against the $US. Since March 2009, the $US depreciated 25% against the Colombian peso, 28% against the Brazilian real, 14% against the Mexican peso, 12% against the Peruvian nuevo sol, and 11% against the Chilean peso.

Much of the $US's lost value is due to a renewed risk appetite as the "flight to (US) quality" unwinds somewhat. Even so, emerging market policymakers are worried; and governments across the region are stepping up to halt the appreciation either directly (Peru) or with quasi-capital controls (Brazil).

The Brazilian government announced a 2% tax on foreign capital flows into the domestic fixed income and equity markets. And to Brazil's northwest, the Colombian central bank on Friday announced plans for direct intervention in the foreign exchange market to the tune of 3 trillion pesos (only after lesser and indirect measures announced the previous week proved only transiently effective). And Peru's central bank has been purchasing $US on a regular basis since September 2009.

As the chart above illustrates, the Banco Central de Reserva del Perú has been very successful in stemming the appreciation. Colombia's initial efforts (like halting the repatriation of foreign dollar holdings) were successful but only to a point - the peso fell almost 4% against the $US; but since then, the peso has settled to around 1917 Peso/$US. Brazil's efforts, however, did little to break the trend of the real: the $US appreciated roughly 2% in the wake of the capital tax announcement, but the BRL (the real) gained back every bit of value that it lost in about 2.5 days. As one of my colleagues said, "you can't submerge a beach ball".

I suspect that Colombia's direct intervention announced on Friday will successfully drive down the value of the peso, as the foreign capital inflows are primarily from $US-denominated government bond issues (little equity flows). It's kind of interesting that the government is concerned about the appreciation of the peso but issuing debt denominated in $US.......

Brazil's capital markets are too big and too enticing to foreigners right now (see charts below) - more direct measures are needed to stop the BRL's appreciation. We will see if the Banco Central do Brasil goes there - Asia's certainly doing it!















Text added: The charts illustrate the EXTERNAL bond and equity issuance by country as a share of total issuance in Latin America from the IMF Global Financial Stability Report.

Rebecca Wilder

Tom aka Rusty Rustbelt

The Newest “Hot Thing”

As promised, after an eight day swing of health care conferences (speaking and listening) I am back in action. So what is the new hot thing among providers?

Integrated Delivery Systems (IDS)

This is hot, but not really new. IDS became hot in the 90s when it appeared capitation would be the new dominant payment model (capitation failed to catch on for a number of reasons). Many systems use varieties and level of IDS models.

IDS is hot both in anticipation of reform legislation and also because of the economics of medicine. I suspect it will remain hot regardless of whether or not there is reform.

IDS presents in many models, but the key is a central hub (hospital or hospitals) integrating the spokes (physicians, ancillaries) via various methods and structures; affiliation, ownership, networking, etc. The IDS may or may not be linked with an insurance product.

The purpose is better coordination, leading to better care and lower (or slower climbing) costs. In my experience, this works better in larger urban markets than smaller or rural markets, but a lot of really smart people are working on this concept.

Specialists, and especially surgeons, have often been hesitant to embrace IDS structures, seeing only more work and less compensation, offset only by a little less financial risk. I suspect the surgeons will be throwing in the towel and joining up in larger numbers, again, with or without reform.

I have about 1200 pages to read before I make more detailed comments, but this appears to be the wave of the future.

Bruce Bartlett posts a note that could have come from me (but, for reasons that will become obvious, did not:

During the 8 Reagan years, when marginal [tax] rates were sharply cut (but deficits were substantial), equities on the NYSE and the S & P 500 about doubled.

During the 4 Bush 41 years, when the top MTR was increased (only slightly), equities rose about 50%.

During the 8 Clinton Years, when MTRs were substantially increased, equities tripled, deficits turned into large surpluses (as far as the eye could see, leading some to fear that the Fed would be unable to conduct monetary policy if the public debt was redeemed).

The market today is roughly where it was (a bit higher) when Bush 43 took over, who cut MTRs, but ballooned the deficit.

So, Bush 41 and Clinton raised MTRs without tanking the economy, and Clinton left Bush 43 with a fabulous fiscal situation.

So much for the Republican argument that reducing MTRs is the nirvana of tax/economic policy and raising MTRs its death knell.

The e-mail was from "a person well known in conservative economic circles" who "asked that [Mr. Bartlett] not use his or her name if I used this information."

We're not talking about proprietary information here. And it is saddening that a prominent economist would not be able to discuss such elementary data in public without the promise of anonymity.

Ken Houghton, having realized there is still a Commercial Paper market, looks at one implication of it.

One of the things that gets ignored in all the fussing about government debt is how small it is by comparison to corporate debt.

The shortest-term debt, Commercial Paper, can be very interesting. With a maturity that is by definition nine months (270 days) or less—and often for financial institutions overnight, for others rolled over weekly—Commercial Paper can be the lifeblood of an institution.

For Financial Institutions, it's even more extreme. The prime example is Drexel Burnham Lambert, which failed in large part due to its CP being downgraded, leaving it to turn to the Fed as its Lender of Last Resort. Wikipedia tells the story, using James B. Stewart's Den of Thieves as its source:

Unfortunately for Drexel, one of first hostile deals came back to haunt it at this point. Unocal's investment bank at the time of Pickens' raid on it was the establishment firm of Dillon, Read—and its former chairman, Nicholas F. Brady, was now Secretary of the Treasury. Brady had never forgiven Drexel for its role in the Unocal deal, and would not even consider signing off on a bailout. Accordingly, he, the SEC, the NYSE and the Fed strongly advised Joseph to file for bankruptcy. Later the next day, Drexel officially filed for Chapter 11 bankruptcy protection.

Financial Institutions live and die by their CP sales. Or at least they did before the Greenspan Put. Here's a chart of Domestic Financial CP Outstanding and Excessive Reserves over the past twelvemonth:

It certainly appears that the banks are using their "excess reserves" to make up for an inability to issue Commercial Paper in the amounts they did before. Perhaps the Fed Governors who are talking up recovery (h/t David Wessel's Twitter feed) should wait until the debt markets strengthen a bit as well.

Dr. Black starts digging into the question why so many Georgia-based banks fail. The picture painted isn't pretty:

The review also contains a photo of a planned 238 townhouse project that the bank financed for $5.6 million in 2007 even as the real estate market was softening. By September 2008 about three quarters of the loan had been disbursed. The photo taken in 2009 shows an empty lot with no construction on it. The FDIC now appraises the property's value at $1 million.

By my current count, 25 of the 129 bank failures of 2008—seven more than Illinois and ten more than California. (Only Florida is also in double-digits, with 11 failures, three of which came yesterday.)

AB Commenter Nancy Ortiz was all over this possibility back at the end of June:

I wonder if the GA phenomenon isn't some sort of scam. If I have some money to invest, why can't I open a bank, solicit customers, provide basic services with high fees, sell stock, etc. Then I can use the resulting cash to give loans to people, getting high interest on various real estate or commercial ventures. Or, in GA, I might want to bribe state politicians by means of loans on overvalued assets. I could make loans like that to the governor, for example, in exchange for tax advantages, specific favorable legislative measures (income tax exemptions on other enterprises I own, for example) water rights, state contracts, you name it. I could make a lot of money that way, and the FDIC would pick up the individual depositers losses, or not, if I have sold them uninsured CD's. Another small bank bites the dust, and I go on an extended cruise to....um, Argentina. It's cold down there at this time of year, but later, I hear the weather's quite nice.

while Guest followed with a possible point of salience:

Georgia has too many banks -- one bank for every 28,000 residents. Georgia also had a big surge of commercial lending for risky real estate deals. This seems more like the savings and loan crisis of the 1980s than the sub-prime crisis.

I admire the optimism of Guest (and the Atlanta Journal-Constitution).

Also noted for the record, in the interest of full disclosure: the Business Week piece cited by Dr. Black was written by my neighbor and former editor, Peter Carbonara.

Wired offers pictures of tricked out electric vehicles. Muscle car readers age 80 86 years old! You know who you are.

rdan

Reader donald sent this note for consideration:

Sunday night while slogging back up to Burlington from Hartford, CT (460 miles round trip as it turns out) we were listening to NPR. I didn't think to make a note of what show, but it was discussing health care and brought up a point I wasn't aware of that explains a lot of the rational part of the current controversy.

The story is that a decade ago Aetna was in trouble in the health insurance field. They returned to profitability not by greater efficiency or any of the other things one might expect, but by dumping hundreds of thousands of customers in markets where they were weak relative to other providers.

Why would showing customers the door be a money making move? Because insurance companies negotiate rates with providers, and the bigger the company in any given market, the more clout it has to negotiate lower rates. Costs are shifted to weaker players in the local market and to their customers.

I think this explains one reason why the health insurance companies fear a government option. The government would likely be a strong player in many (most) markets, and will negotiate good deals. Costs will be shifted to the health insurance companies by the free marketplace with no subsidies of other unfair competitive tactics. The insurance companies are not afraid of unfair competition exactly. They are afraid of being "Walmarted"

Is there a way to avoid this? The NPR program claims there is. According to them Maryland sets the price for all medical procedures so that all insurance companies are reimbursed at the same rate for the same procedure. That (purportedly) means that health insurance companies in Maryland have a leveller playing field than the rest of the country and have to compete on the basis of factors other than the deals they can negotiate with healthcare providers.

I believe that similar practices exist in countries with health care systems that actually work. Perhaps we should consider something similar nationwide in the US.

rdan

This American Psychological Association study is a follow up to Robert's Wobegone economics post. Taken from comments by reader rd.

The abstract is quoted:

People tend to hold overly favorable views of their abilities in many social and intellectual domains. The authors suggest that this overestimation occurs, in part, because people who are unskilled in these domains suffer a dual burden: Not only do these people reach erroneous conclusions and make unfortunate choices, but their incompetence robs them of the metacognitive ability to realize it. Across 4 studies, the authors found that participants scoring in the bottom quartile on tests of humor, grammar, and logic grossly overestimated their test performance and ability. Although their test scores put them in the 12th percentile, they estimated themselves to be in the 62nd. Several analyses linked this miscalibration to deficits in metacognitive skill, or the capacity to distinguish accuracy from error. Paradoxically, improving the skills of participants, and thus increasing their metacognitive competence, helped them recognize the limitations of their abilities.

by Linda Beale
(cross posted from ataxingmatter)

(Rdan: The link worth noting is Susan Altmeyer's...the Journal opinion is simply misleading)

Link worth noting : Wall St.Journal and Golf Carts

Tax Prof noted the Wall Street Journal editorial titled Cash for Clubbers(Oct. 17, 2009), which suggests that "thanks to President Obama's stimulus plan", the government is now "paying Americans" to buy golf carts. The Journal notes that golf cart dealerships are enticing people in with the credit (which only applies to certain road-worthy carts) and that this "golf-cart fiasco perfectly illustrates tax policy in the age of Obama" when "politicians dole out credits" and "Democrats then insist that to pay for these absurdities they have no choice but to raise tax rates on other things."

The Journal is playing somewhat fast and loose with the credit and with who is responsible. As to responsibility, it was passed before Obama took office, so surely it cannot "perfectly illustrate" Obama's policy. And the "politicians [who] dole out credits" have been members of the GOP during its majority control, because they argue for tax cuts of all kinds, including credits that are clearly unnecessary (the R&D credit, for example, that I think the Wall St. Journal has defended as one of those "extension" provisions that it claims is vital to competitiveness). The Republicans passed many of these boondoggle loopholes during the time they had control between Reagan and Bush with the underlying premise that tax cuts generate more tax revenues, while at the same time they had to raise the debt limit so that the government could borrow money to fund the tax cuts and the deficit grew by unprecedented amounts. While the Democrats have been far from perfect on these matters (e.g., including many more tax provisions than I think they should have in the stimulus bill, compared to direct spending on good projects in the public interest), at the same time Democrats have, to their credit, at least acknowledged that there is a cost to doling out credits--that tax cuts do not magically deliver more money instead of less and that we likely will need some tax increases after this long gorging on tax cut after tax cut that hasn't delivered either new jogs or high government revenues.

Tax Prof has a well thought out piece by Sue Altmeyer on the Journal piece. She notes that the IRS ruling that golf carts may qualify if they are street-legal dates to 2000 (put out in the early months, that is, of the George W. Bush administration by the business friendly Bush IRS). Similarly, the credit (section 30D) was enacted in 2008 (and doesn't permit the vehicle to be bought for resale, thus undoing the scheme discussed in the Journal whereby a Floridian self-styled "the Golf Cart Man" promises a special boon by combining purchases with his repurchases. Further, she notes that Notice 2009-54 (that's under Obama) states that the motor vehicles covered are supposed to be manufactured for primarily street use. And that notice also suggests that you should make sure that the credit being advertised by golf cart salesmen really applies by asking them for an IRS acknowledgement. The 2009 stimulus bill did make some changes (at whose urging?).

Hat tip to Tax Prof and thanks to Sue Altmeyer for a cogent piece.

rdan

Dean Baker suggests some action in the form of a demonstration at the Chicago Bankers Association meeting October 25-26, 2009.

Yves at Naked Capistalism recommends going, and Slate open forum contains comments.

Several readers who live in the region have indicated they will be going. Perhaps we will get reports. Do you think they have sonic cannons in Chicago, even if demonstators are older and wear business casual?

Robert Waldmann

The average person thinks he has higher than average intelligence. This is an empirical fact [citation needed]. It is not incorporated into standard finance theory, but it matters a lot. It has been argued that the high volume of transactions on financial markets can be understood easily. If two people with equal quality information each think they have better information than the other, each will think that he or she benefits when they take bets against each other [citation needed plus why didn't I think of this].

This psychological fact can also explain bubbles. A bubble can grow and burst if people don't recognise that it is a bubble. A bubble can also grow and burst even if people recognise there is a bubble, but each thinks that he or she will be the first to detect the peak. This theory of bubbles fits the sort of things traders say during bubbles. The standard phrase for this sort of reasoning is the greater fool hypothesis.

Human overconfidence makes us very tempted by the greater fool hypothesis, even if we are the greatest fool. Given the risks, overconfident people self select into finance. Given personel management at financial firms, people who have been lucky will have power over lots of money -- there is no way to tell luck from skill. They will also tend to be overconfident -- there is no way to tell luck from skill.

It is trivially easy to write a model in which it is very important that everyone thinks they will detect something sooner than everyone else. It doesn't even matter much what that something is.



This model is unusually pointless. The point should be obvious given the discussion above. In fact, I think the point was obvious to many people long before I wrote this post. The model clarifies nothing. If you understand the point it is supposed to illustrate, you might be able to follow it and gain nothing.

A very simple model of bubbles. Time is discrete. Agents are risk neutral. There are two assets. One is a risk free asset which pays interest rate r. The risk free asset is a storage technology, so the amount of risk free asset is not in fixed supply. There is one share which pays dividend r each period. Population is a continuum normalized to one (each agent is infinitesimal compared to the market). Agents are not allowed to hold short positions (borrowing is shorting the storage technology). The last assumption is just needed to keep each agent's demand bounded given risk neutrality.

There is a random variable X_t which is equal to 0 with proability a(t) and equal to zero with probability 1-a_t. I am going to be very vague about a(t) but just note that it grows so there is some big T such that a(T)=1. This will amount to saying that everyone knows the bubble must burst by T+2.

Agents do not see this variable instantly. If the variable is 0 at period t, then agents perceive that it is zero in period t+2. Agents know this is true of all other agents and was true of him in the past, but each thinks that he has extra alertness and perceives X_t in period t+1. For the moment agents don't understand that other agents are over confident. They think the other agents know that the other agents detect X_t in period t+2.

What can happen to the price P_t of the share in this model ? It is easier to ask what can't happen, since many things can happen.

One possibility is that P_1 = 1 all the time. Both assets are, in practice, riskless paying return r with certainty.

It is alos possible that there will be an unsustainable speculative bubble. P_t can be greater than one when X_t-2 = 1 and fall to one when X_t-2 = 0.

First the standard assumption. All agents are rational. No agent is over confident. Each knows he sees X_t after the same 2 period lag as everyone else.
There can be a sunspot equilibrium only if P can go to infinity.

X_t-3 = 0
X_t = 1

1)x_(t-3) = 0, P_t-1=0
2) X_(t-2)= 1 P_t= P_t
3) if X_(t-1) = 0, P_(t+1) = 1
if X_(t-1)= 0 P_(t+1) = (P_t(1+r)-a(t-1)P_(t-1) + r)/(1-a(t-1))

Formula 3 also gives P_(t+1) conditional on P_(t+2) and X_t=1 and etc.
This would work fine except for the assumption that there is a T such that a(T) = 1. That assumption amounts to the assumption that everyone knows the bubble must burst by period T+2 at the latest. There will be a zero in the denominator of the formula for X_(T+1).

So by backwards induction, there can be no bubble.
Ignoring that, imagine an overcondent agent. An overconfident agent is sure that in period t+1 the price will be greater than one so long as X_(t-2) = 1. An overconfident agent thinks he is seeing the signal one period before he really sees it, so he thinks this means X_(t-1)=1. This means an overconfident agent will put any amount of his money (up to all of it) in the risky asset in period t so long as equation 4 holds

4) X_(t-2)= 1 P_(t+1) = (P_t(1+r) - r)

Uh oh. There is no a in that equation. An overconfindent agent thinks the probability of the bubble bursting has nothing to do with his choice in period t, since he is sure that the bubble won't burst in period t+1.

Actually even if agents know all other agents are overconfident, it doesn't matter. It is enough that I think that the other guys definitely won't see the sunspot that says "bubble bursting now" for 2 periods.

Finally, it is not necessary for agents to over estimate the spead at which they detect the signal. If agents actually see the signal after one period, but each thinks that all other agents see it after two periods, then everything works the same except that the subscripts on X are a little less irritating.

By Spencer

In 1971 when Nixon imposed price controls he did not do it because the on-going domestic inflation rate was about to accelerate. Rather, he imposed price controls because he expected the planned dollar devaluation to be very inflationary.

But his actions just reflected the economic consensus that the dollar devaluation would be highly inflationary. But since 1971 we have learned that this basic attitude -- based largely on the old two commodity two country model widely taught in introductory economic courses -- just did not reflect the reality of a 180 country and infinite product world. What we have learned in the 31 years since the Nixon devaluation is that business is much more flexible and adaptable than this simple model implies. As a consequence the inflationary impact of a weak dollar is much smaller than generally believed.

Actually, if you look at the historic data the correlation between the change in the dollar and the change in inflation is plus 0.2. That is not very powerful, but even more important it is the wrong sign. The positive correlation implies that a weak dollar is deflationary and we were all taught in introductory economics that this can not be true.



Moreover, if you look at the historic record the dollar has fallen in 23 of the last 31 years since
Nixon first devalued the dollar in 1971, or almost two-thirds of the time. This implies that a weak dollar is more the norm for the US than a strong dollar.

Another example of how the economy is much more flexible than theory implies is to look at what happened when the Chinese Yuan appreciated about 21% from 2004 to 2007. As the chart shows the price index of US imports from China rose after a lag from around 97 (2003=100) to almost 104 in 2007, a gain of about 7%, or one third of the Yuan appreciation. Moreover, after the Yuan quit appreciating the price of US imports from China fell back to about 100, so the net result of the 21% change in the $/yuan exchange rate was about a net 3% rise in the price of US imports from China. Note that the two scales in the chart are on a 3 to 1 ratio.

The other argument around is that a weak dollar cause commodity inflation, and as evidence the tight correlation between the dollar and oil since around 2000 is shown. However, from the 1970s through the 1990s the correlation between the dollar and oil was positive. Around 1980 one of the CFA exam economic questions was how did higher oil prices impact the dollar. The correct answer was that since oil was denominated in dollars higher oil prices meant that Europeans, the Japanese and others had to buy more dollars to buy the same amount of oil.
So higher oil prices caused the dollar to appreciate. I guess this is just another example of the old line that economist do not change their exam questions, they just change the answers.

Now it looks like a weak dollar means that the price of oil in Euros and/or Yen, etc, does not rise as much so that the negative price elasticity of demand from higher oil prices is dampened and a weak dollar causes oil and/or commodity prices to rise more than they would with a flat dollar.

rdan
(cross posted from Roosevelt Institution)

Rdan here...'Opt in' or 'opt out' is one basic profit strategy device for use of a 'service'. A personal example comes in the form of my son with Chase Bank checking account. Because a transfer of funds was late (our fault) of $240, he received a penalty of $29 for three checks of $80 each, plus the overdraft fees as each check penalty took him over his balance (of $70) for $35 each, for a penalty total $192 in a day or two. The bank rejected a request to eliminate the overdraft fees.

If you have experienced the $29 fee on a debit card for a $1.75 cup of coffee, the irritation factor is high, as the opt out portion of overdraft was not available at the time, not until June 2010 I believe.

The sins of the son will haunt the father. That was the last straw for me too in this profits game...I canceled both of my Chase credit cards (one held since 1992) and told them why.

Banks Must Protect Consumers to Protect Themselves by Richard H. Neiman and Jonathan Mintz

Jonathan Mintz, the Commissioner of the New York City Department of Consumer Affairs, and Richard H. Neiman, the Superintendent of Banks for the State of New York, argue that consumer protection and prudent bank regulation are not in conflict.

For over a year, most of us have agreed that reform of our financial regulatory system is essential to our future financial stability and economic growth. Yet further consensus has been difficult to achieve.

With House committee debate and markup of Congress’s reform bills underway we, a bank regulator and a consumer protection official write to unify two perspectives that have created more conflict than necessary in this debate. We reject the myth, as many have unfortunately framed it, that consumer protection and prudent bank regulation are in conflict. Risky or deceptive financial products hurt the economy as a whole as much as they hurt the consumer. The public deserves — and our economy requires — that we concentrate on a strengthened system of financial oversight that demands clear, fair, and prudent banking and lending products and practices.

More important than the discourse over whether it would be better to combine or separate bank regulatory and consumer protection agencies is the idea that we first collectively agree that the solution must leverage and strengthen the resources of both disciplines. The New York State Banking Department (NYSBD) is the oldest bank regulatory agency in the nation, regulating state-licensed and state-chartered financial entities. New York City’s Department of Consumer Affairs (DCA) is the first municipal consumer protection agency in the nation, enforcing a fair and vibrant consumer marketplace. Through our cooperation in developing consumer products and financial education programs, we have experienced firsthand the benefits of combining our perspectives and offer three observations based on that experience.

Update: Rdan here....Yves weighs in on the issue as well.

First, smart consumer protections enhance choice and encourage a more competitive and more stable marketplace. Consumer protection at its core is about a clear offer that can be meaningfully accepted; it is a red herring to suggest that consumer protection leads to limitations on consumer choice. Excessive latitude toward overly complex, aggressive and deceptive marketing created a robust but short-term recipe for profit, but sacrificed sustained profitability, a stable customer base and ultimately the entire economy. And it decimated millions of individual families’ financial stability, primarily those least able to afford having their modest resources plundered.

Second, while expanding financial literacy is critical, it is insufficient alone to protect consumers. Deceptive practices must be banned and truly effective disclosures for complex products must be required. The vast bulk of consumers who avoid mainstream banking do so because of well-founded fears of unexpected and destabilizing fees and hidden product features, not a lack of education. Overdraft protection plan fees are the prime example. The Federal Deposit Insurance Corporation reports that overdraft fees on debit transactions-which average $27 on overdrafts averaging just $20-represents a staggering annual percentage rate of 3,540 percent. According to a recent Moebs Study, bank revenues from these fees may total $38.5 billion this year alone. Credit products offer more of the same: hidden disclosures, costly fees and imposed surprises. In addition to prohibiting unacceptably unsafe financial products and services, we need to empower consumers to distinguish between safe and potentially dangerous products, for their benefit and the stability of our economic system.

Third, we therefore propose the development of a nationally recognized rating system that would clearly communicate product safety and complexity. With advice from diverse stakeholders, this rating function would be enforced across the spectrum of banking regulators. These product ratings would aid consumers in selecting suitable products, and would provide a useful tool for evaluating Community Reinvestment Act (CRA) compliance in a qualitative way, reforming the program’s stifling “check-the-box” mentality which fails to bring meaningful banking services to many communities.

For example, simple and transparent products would be appropriate for many consumers and could receive green light safety ratings. Product features that add complexity or riskiness for those with lower incomes could be given a yellow light designation. And products with features that are inherently dangerous or expensive to the majority of such consumers could be labeled with a red warning, alerting consumers to high risk. Think of skiing. Who would ever venture down a mountain without first knowing if the trail was rated for beginners or was a double black diamond, for experts only?

Approaches such as this ratings system wouldn’t constrain financial institutions to anything other than free market competition, while at the same time empowering consumers to choose the most appropriate financial products and services for their individual needs. If this idea can unite these two regulators, perhaps it can unite the two sides of the debate as well.

Richard H. Neiman is the Superintendent of Banks for the State of New York and Jonathan Mintz is the Commissioner of Consumer Affairs for the City of New York.

I think we may have suspected this for quite some time now ... yet we keep handing out Happy Meal vouchers as prizes and rewards for school kids. "Happy" indeed.

Junk food turns rats into addicts
Bacon, cheesecake and Ho Hos alter pleasure centers in rats' brains
By Laura Sanders
Science News Online

CHICAGO — Junk food elicits addictive behavior in rats similar to the behaviors of rats addicted to heroin, a new study finds. Pleasure centers in the brains of rats addicted to high-fat, high-calorie diets became less responsive as the binging wore on, making the rats consume more and more food. The results, presented October 20 at the Society for Neuroscience’s annual meeting, may help explain the changes in the brain that lead people to overeat.

“This is the most complete evidence to date that suggests obesity and drug addiction have common neurobiological underpinnings,” says study coauthor Paul Johnson of the Scripps Research Institute in Jupiter, Fla.

[...]

These reward pathway deficits persisted for weeks after the rats stopped eating the junk food, the researchers found. “It’s almost as if you break these things, it’s very, very hard to go back to the way things were before,” Kenny says. When the junk food was taken away and the rats had access only to nutritious chow (what Kenny calls the “salad option”), the obese rats refused to eat. “They starve themselves for two weeks afterward,” Kenny says. “Their dietary preferences are dramatically shifted.”

Scientists are interested in determining the long-term effect of altering the reward system. “We might not see it when we look at the animal,” says obesity expert Ralph DiLeone of Yale University School of Medicine. “They might be a normal weight, but how they respond to food in the future may be permanently altered.”
-complete article here

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by Bruce Webb

(Somehow I got caught in HTML hell and can't get this post to render correctly, not only did the read more not work it took out a paragraph with it. So I moved the post over to my site: The Magna Carta: What it is and what it isn't It does feed into the Kennedy-Webb discussion below. But if you are interested you will have to take it on over to the Bruce Web, because I can't figure out what went wrong)

by Bruce Webb

Scottish Professor Gavin Kennedy is the blog-proprietor of ADAM SMITH'S LOST LEGACY and a new (and continuing?) contributer to Angry Bear, most recently with Spare Us From the Invisible Hand. In an earlier post by Gavin Adam Smith in a Broader Legacy I responded to one of our regular Angry Bear glibertarians and rather than disrupting Prof. Kennedy's thread further took it to my own post at the Bruce Web Adam Smith and Glibertarianism which in turn led to some back and forth between Prof. Kennedy and me on ASLL and the Bruce Web with two posts from Gavin and two from me including Marx, Smith and the Ages of Man.

The discussion was initially about the development of private property and its relation to both liberty and rising consumption/population levels as that is seen developed in the works of Adam Smith. In the course of the discussion it appears that Prof. Kennedy and I have radically diverging views not only on the underlying nature of pre-historic, ancient and some current economic modes of production but also on how those resolve themselves in the conceptual conflict of 'liberty' vs 'democracy'.

It is all rather a departure from the more numeric analysis typical of Angry Bear, but for those interested in history, economic history in relation to modes of production, the economic and philosophical thought of Adam Smith feel free to jump in at either or both sites. In an upcoming post I am going to add some discussion of 'democracy' as it relates to the development of English Land Law, where the latter was marked in large part by its suppression of the former. Hints so far are that Prof. Kennedy and I are coming at this last question from totally different perspectives. Which may reflect fundamental differences between the British historical view of democracy and that expressed in the American Declaration of Independence. We'll have to see how it goes.

Got ideas to share?

It has long been a standard claim of economics—iirc, Robert Lucas was the first to say it aloud, though it may have been Gary Becker*—that a man who marries his housekeeper lowers GDP.

Apparently, Dubner and Levitt have taken this claim—along with their Rick James title**—to heart. Echidne has the details. A short sample:

There is one labour market women have always dominated: prostitution. Its business model is built upon a simple premise. Since time immemorial and all over the world, men have wanted more sex than they could get for free. So what inevitably emerges is a supply of women who, for the right price, are willing to satisfy this demand. But what is the right price?...

It turns out that the typical street prostitute in Chicago works 13 hours a week, performing 10 sex acts during that period, and earns an hourly wage of approximately $27. So her weekly take-home pay is roughly $350. This includes an average of $20 that a prostitute steals from her customers and drugs accepted in lieu of cash.

If I didn't know that Levitt has done some research on prostitution, I would think he left this section solely to Dubner. As it is, the skewed perspective (supply-side only) wouldn't even pass muster in a basic neoclassical labor market model, and that the authors are trying to sell this as "economics" is, to extend a recent note from Brad DeLong that "Levitt and Dubner today appear to no longer be thinking like economists", going to do Levitt much more harm than good.

Perhaps the difference between prostitutes and economists is that only the former have to worry about their reputation.

*Google indicates that the source is Pigou (1932). Does this explain the popularity of the Pigou Club?

**At this point, I'm betting they chose the title because of Abigail Breslin.