Robert Reich (Bust Up the Health Insurance Trusts)

I can certainly get behind this. It’s competition one of the basic tenets necessary for a functioning free-market economy?

Regardless of what happens at the White House’s health care meeting… we’ve got to make sure health insurers compete for every one of our dollars. The Federal Trade Commission should launch an investigation immediately, and end the health care trusts.

via Robert Reich (Bust Up the Health Insurance Trusts).

NPR: Turn Students Into Investments

OK, I love the Planet Money podcast and would recommend it to absolutely everyone. While I haven’t yet listened to the podcast in question, I must say that my lunch began to curdle in my stomach just a little when I read this post: NPR: Turn Students Into Investments.

“What if teachers were paid based on the future income their students make… That way the students would turn into ‘investments’ for the teachers.”

No offense to Ryan C., who made the suggestion, but this is a disastrous idea.

A number of flaws are already expressed in the comments, so I didn’t add to those. The one’s I find most compelling aren’t the practical/logistical problems, but the moral/philosophical ones. What does this approach say about our values as a society? Capitalism, as an ideology, is reductionist and dehumanizing, whereas education has the potential to elevate people to the very pinnacle of their human potential, something the market is woefully unable to reflect.

Talk Softly and Carry a Big Trust-Busting Stick

Someone finally said it. It’s taken nearly six months, but someone is finally calling for the trust-busting stick. Baseline Scenario linked to this site yesterday.

DECENTRALIZE: Banks must be broken up and sold back to the private market with new antitrust rules in place– new banks, managed by new people. Any bank that’s “too big to fail” means that it’s too big for a free market to function. (A New Way Forward)

That’s what I’m talking about. I’m less certain of the need to nationalize, but only marginally so. This, however, reorganization into smaller companies is something I am convinced of.

It’s the Crushing Debt, Stupid

I’m a big fan of This American Life. One reason is the fantastic coverage of the economic crisis. The most recent installment, Bad Bank, aired a couple weeks ago, and I caught up via the podcast this week. Very good. For those of you who hated economics at university (which is pretty much everyone if the, “Ugh!” and, “I’m sorry,” reactions by those who asked me what my major was is anything to judge by) but want – no NEED! – to better understand what is happening in the world today, it’s a must-listen-to episode. Not only do they do a very good job of making the jargon filled financial world very approachable and understandable, they are also among the first people I’ve heard mention the possibility that everyone might just be completely missing the point, the problem that is really at the core of the crisis.

Toward the end of their act, while talking with David Beim, a professor as Columbia Business School, they throw this out: Rather than toxic assets, perhaps the real problem the crushing burden of household debt that has been fueled the last ten or 20 years of economic growth. (Robert Reich has also been beating this drum with consistency the past few months.) Perhaps, in an age when the ratio of household debt to GDP is 100% – a stat not seen since 1929 – getting back on track, back to “business as usual” might not be a wise move. To quote from the show:

David Beim: Yes. That chart [depicting the ratio of household debt to GDP over the last 80 years] is the most striking piece of evidence that I have that what is happening to us is something that goes way beyond toxic assets in banks, it’s something that had little to do with mortgage securitization, or ethics on Wall Street, or anything else. It says the problem is us. The problem is not the banks, greedy though they may be, overpaid though they may be. The problem is us. We have over-borrowed. We have been living very high on the hog. We are, our standard of living has been rising dramatically over the last 25 years, and we have been borrowing to make much of that prosperity happen.

Alex Blumberg: And so, when you see Congress, sort of saying we need more, we need to make sure there are strings attached to this money, to make sure the banks are lending it out, that doesn’t make any sense.

David Beim: It makes, not only no sense, it makes reverse sense. It’s nonsense. Because what the banks have done is already lend too much. The name of this problem is too much debt. We have over-borrowed, and we have done that over many, many decades. And now it’s reached just an unbearable peak where people on average cannot repay the debts they’ve got. In the face of that, it is no solution to try to lend more.

People are tapped out. Two decades of short-term thinking by everyone, from politicians and CEOs to moms and dads, has gutted the house and left a fragile shell standing… until recently when that shell collapsed. These are the just and expected consequenses of excessive leveraging, i.e. managing the payment instead of the cost. Getting that train back on track is not going to do any good. Unfortunately, I’m beginning to think the only thing that might derail that train is a “Lost Decade” of our own. With the Dow already at late 90′s levels and so much more to go before this is all cleaned up, we may even be looking at a lost quarter century.

Demand-Side Economics

First, understand that the main problem right now is not the supply of credit. Yes, Wall Street is paralyzed at the moment because the bursting of the housing and other asset bubbles means that lenders are fearful that creditors won’t repay loans. But even if credit were flowing, those loans wouldn’t save jobs. Businesses want to borrow now only to remain solvent and keep their creditors at bay. If they fail to do so, and creditors push them into reorganization under bankruptcy, they’ll cut their payrolls, to be sure. But they’re already cutting their payrolls. It’s far from clear they’d cut more jobs under bankruptcy reorganization than they’re already cutting under pressure to avoid bankruptcy and remain solvent.

This means bailing out Wall Street or the auto industry or the insurance industry or the housing industry may at most help satisfy creditors for a time and put off the day of reckoning, but industry bailouts won’t reverse the downward cycle of job losses.

The real problem is on the demand side of the economy.

via Robert Reich’s Blog: The Mini Depression and the Maximum-Strength Remedy

The Cost of Inaction

Earlier this week I heard a Morning Edition story on mandating annual flu vaccinations for elementary school children. There is some evidence that in addition to protecting the children themselves such a program may reduce the outbreak of flu in the population at large. In the story one dissenting interviewee said a decision should only consider the impact on the children themselves without regard to the potential benefit to the broader population.

To me that just seems to be bad thinking. We can’t compartmentalize complex issues by looking at a single tree. We must look at the whole forest.

In January Robert Reich made the same point commenting on the upcoming presidential election: Look for the candidate that can connect the dots. Foreign policy is connected to energy policy which is connected to trade policy which is immigration policy and so on. Good candidates, he argues, are ones who see the connections and offer solutions with the entire forest in view.

There’s a lesson I’m re-learning the hard way. I took my share of economics courses at university. (I was an economics major after all.) One of the basic assumptions about competitive markets is that they capture all costs, including the often overlooked opportunity cost. Put simply opportunity cost is what you lose by choosing one thing over another. A simple example, if I sit on the couch and watch the ABC special on the British monarchy, one opportunity cost is that I cannot spend those two hours reading or playing guitar. Just a hypothetical, of course.

But here’s another often overlooked aspect of opportunity cost, the cost of inaction. In economic terms doing nothing is as much of a choice as doing something. Failing to consider the question, “What is the cost if I wait or do nothing?” can be just as expensive as acting unwisely.

Economics and Birthdays

This was in Monday’s Writer’s Almanac:

We don’t know when Adam Smith was born, but it was on this day in 1723 that Smith, the economist who popularized the idea of free trade, was baptized in Kirkcaldy, Scotland. His first important book was The Theory of Moral Sentiments (1759), in which he argued that all people are selfish, but that the combined selfishness of many people benefits everyone. He wrote, “[We are] led by an invisible hand … without knowing it, without intending it, [to] advance the interest of the society.” He developed this idea in the book for which he is best remembered, Wealth of Nations (1776). That book established many of the most important principles for economists for the next two hundred years.

Adam Smith wrote, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.”

Today is also the birthday of the economist John Maynard Keynes, (books by this author), born in Cambridge, England (1883). He’s best known for his book The General Theory of Employment, Interest and Money, published during the Great Depression in 1935. He argued that governments can correct severe depressions by spending lots of money, even if it means running a deficit, to put people back to work. Keynes greatly influenced Franklin D. Roosevelt’s New Deal policies, and his ideas have been used to justify budget deficits ever since.

Interesting that these two men share a birthday, or something like it. Also interesting that the birthday is so close to my own. (At least it’s interesting to me.) A couple thoughts to share… mostly on Smith.

Invisible Hand

Invisible Hand? Not So Much

The Invisible Hand is broken… if indeed it ever existed. Within the constraints of perfect competition, the Invisible Hand the collective selfishness might (See my next thought.) work out to the benefit of most… or at least many. Not in today’s economy, which is a far cry from anything resembling perfect competition. Atomicity? Nope; try oligarchy. Homogeneity? Perhaps, but billions of marketing dollars are working hard to obfuscate that fact. Perfect Information? Equal Access? Free Entry? Not if the oligarchies have anything to say about it… and they do!

No, the Invisible Hand of the market has been bound and gagged. Motivated self-interest serves only the self, and those who possess power are best able to serve themselves.

Selfishness Is NOT an Agent of Good

It is noteworthy that Smith doesn’t say, “People will overcome and progress beyond selfishness, attaining to a more noble fundamental value.” No, he says in effect: “We’re all selfish bastards, and that ain’t gonna change. Fortunately, there is Something beyond our selfish little souls to protect us from each other.”

As a Christian I have to respond, “Close, but not far enough.” True Something is kind enough to protect us from ourselves to an extent, but it doesn’t end there. There is the possibility of real transformation of the soul. Self-interest need not be our driving motivation. Instead, our souls can be moved by genuine love.

Check Please!

The economic difference between Republicans and Democrats has nothing to do with accepting or rejecting Keynesian theory. Maybe it did at one time, but not anymore. Both parties embrace a bigger government role, because it protects their power and position. They only quibble over where government should expand next.

I was ready to shut the door on politics in 2004. Today, the door still remains cracked… but just a little. I’ve got some thinking to do here, still.