Sunday, December 16, 2007
Presidential health care, part 2: The strange proposals of Mr. Huckabee
Mike Huckabee is a puzzling figure. A Baptist minister who doesn't believe in biology but admits knowing nothing about the subject, a man who is adamant about the need to accelerate the "war on terror" but has never heard of a national intelligence estimate and has no idea of what one is, a man whose sole qualification for office seems to be that, that, um, unh... he does have a qualification or two, doesn't he?
OK, let's be fair. Ex-governor of Arkansas Mike Huckabee has made some very clear and interesting proposals. He calls for completely abolishing the income tax and replacing it with a national sales tax, the"Fair Tax." I'll not comment on this particular proposal; it is problematic in some ways, but ought not be dismissed out of hand. America's current income tax system is an impossibly complex maze of conflicting rules and laws that literally no one can fully understand. Simply calculating taxes costs literally billions of dollars each year, a senseless waste. Abolishing the current income tax system and replacing it with a simpler system would benefit everyone. (OK, admittedly tax preparers and tax attorneys would suffer in the short run as they'd have to find legitimate work, but in the long run they too would benefit from a stronger economy, as well as from the improved self-esteem that comes from actually being productive.)
This is just background for an analysis of the Huckabee Health plan. I realize that Mike Huckabee doesn't know anything about evolution or intelligence estimates, but after reading his plan, I wonder if he knows anything at all. In paragraph 3 he addresses the issue of improving affordability by proposing (i) increased portability of health insurance from job to job, (ii) expanding health savings accounts, and (iii) "making health insurance tax deductible for individuals and families as it now is for businesses."
Umm... tax deductible? Deductible from what? If the income tax is abolished, none of this makes any sense at all. Historically, the only reason businesses preferred to pay part of salaries with health insurance was that government treated it differently from cash; hence it was tax deductible for businesses, and untaxed salary from the standpoint of employees. If corporate taxes are abolished, as Huckabee proposes, the incentive for businesses to take on this increasingly expensive burden is reduced. Forget porting your insurance from job to job; health insurance wouldn’t be a job "benefit" under the Fair Tax. This isn't necessarily a bad thing in itself, but it does mean that the Huckabee proposal is meaningless.
Or consider the medical savings account (MSA). The attractiveness of the MSA is that it lets the citizen save before tax income to pay for health care. But once all income is untaxed, the MSA is meaningless. Or how about tax deductibility of insurance? Must "we" at UC point out this makes no sense at all?
Two paragraphs down, Huckabee points out that America spends $2 trillion per year on health care, or 17% of GDP. He next compares this to the European average of 10%, and then goes through the meaningless exercise of pointing out that if we reduced spending to 11% of GDP we’d save $700 billion. This calculation is done correctly, and indicates that simple algebra isn't beyond the Huckabee campaign. But in terms of policy it means nothing at all. Huckabee has no proposals that would actually cut spending by an enormous 35%. In fact, the only other actual proposal he has is to promote electronic record keeping in some undefined way. Hillary argues that this panacea might save us $35 billion per year; some estimates go considerably higher, but nothing vaguely like $700 billion.
And more importantly, do we really want to cut health care spending? The Europeans hold down spending by rationing and by being slow to invest in expensive technology. Economist David Cutler of Harvard has carefully analyzed American health care spending, and concluded that we get very substantial net benefits for every dollar we spend on health care. Cutler finds all sorts of problems in the current system, but he shows that the fundamental cause of the enormous increase in health care spending is that we now have technologies that save lives and reduce pain and suffering. Cutler’s conclusion: we should be spending even more! Health care is a great buy.
The Huckabee "plan" is just a lot of senseless verbiage cobbled together to give a pretense of having ideas. There's some praise of the free market, praise of the benefits of preventive medicine, hand-wringing over the burden insurance costs place on business, but the sum of all this is nothing. There’s no thought involved at all, it's just claptrap that doesn’t mean anything. It's the sort thing we'd expect from a fundamentalist minister preaching to his choir: much posturing, no substance. It will play well for people who find Genesis 1 to be the definitive work in astrophysics, geology, and biology, I'm sure.
But let's not be too harsh, for the Huckabee health plan does have one important thing to contribute: it demonstrates the complete hollowness of Mike Huckabee.
17 December followup: I tried posting on a comment on the official Huckabee blog pointing out that I'd reviewed the Huckabee health care plan. Unsurprisingly, the comment was disallowed. But presumably someone from "Team Huckabee" checked to see whether the review was favorable; it will be interesting to see if they change the obvious inconsistencies I point out here.
Of course, that would leave the ones I didn't mention. Perhaps I should offer my services to Team H.? (At my usual consulting fees, of course.)
Thursday, December 13, 2007
The Approach of Terra Firma
Consumer spending is up, and Pollyannas conclude that the economic outlook is positive. Unfortunately, there's little reason to believe this. Today's new PPI figures show that prices for finished goods rose 3.2%, a substantial increase. Nothing to worry about, right? Nothing to worry about, so long as the Fed remains vigilant in its battle against inflation by raising interest rates.
Oops. And oops.
The difficulty is that the government has put itself into an impossible place. The Treasury has borrowed to finance the deficits, and the Fed has expanded the money supply to help keep interest rates low. Malinvestment, driven by cheap credit, is now being revealed, as the housing bubble pops. In order to try to "soften" the subprime landing, the Fed needs to keep expanding the money supply, thus lowering interest rates. But to fight inflation, the Fed needs to contract the money supply. Yes, oops.
We ought to let the subprime crisis alone, and stop this destructive "fine tuning." Laissez faire is long overdue... it's time for an end to Fed tampering with the money supply, and the Fed itself for that matter.
With this in mind, increased consumer spending isn't so exciting. Looser money supply, increased spending (more consumer borrowing?), continuing falling home prices (less consumer wealth), more bad subprime loans revealed, more government spending... this is a recipe for a bad comeuppance.
Tomorrow's CPI figures will be interesting. The ground approaches.
Saturday, December 08, 2007
"Birds of a feather"
Having shown himself insufficiently schooled in electoral politics, Hugo Chavez brings in a tutor.
Friday, December 07, 2007
1. It's caused by problems in real estate markets: fundamentally, a speculative bubble fed by "irrational exuberance," as it was once called.
2. This is a liquidity problem, a problem of "not enough money."
3. It's an example of the dangers of free markets and unbridled capitalism, and highlights the need for a stronger hand of government, especially in credit markets.
These are myths, and unfortunate ones, since the remedies they imply are very different from what's really needed. Let's dispel a bit of the confusion.
Myth 1 contains elements of truth. There’s certainly been a housing bubble with plenty of animal spirits (so much for the inane "wisdom" that real estate "can only go up in value.") But this entirely misses the deeper problem with the world's largest economy: we Americans depend on foreign credit, and unsustainably so. For quite some time, it's been pointed out here (e.g. my popular 24 Feb. 2006 "A-Rabs in our Ports!") and elsewhere that foreigners, and especially East Asian central banks, have been financing our federal deficits, and thus keeping our interest rates low by preventing the crowding out that would have occurred otherwise. There's no mystery here, and it's uncontroversial. Anyone who pays attention has known this for quite some time.
The controversy that arose concerned the sustainability. Supply side Pollyannas proclaimed a global savings glut that practically necessitates the U.S. running perpetual budget deficits. After all, the U.S is the safe haven, isn't it? True enough... in the same sense that it's true that real estate can never go down. It's impossible for me to understand how anyone ever really believed this, but some did.
In fact, the rest of the world has been getting increasingly uneasy about the American financial position for some time. The budget "surpluses" of the 1990s didn't take into account longer term issues with America’s welfare state: Social Security, Medicaid, and Medicare. Not that these are unsolvable problems, but the possible solutions didn't include a Republican President and Congress embarking on a growing orgy of deficits and long term spending commitments. China, our number one creditor of late, kindly played along for a while. In doing so they helped keep the renminbi low: in essence, America received inexpensive goods in exchange for U.S. government debt and dollars. This was a great deal for us... too bad we squandered it on the invasion of Iraq and similarly performing federal "investments."
Well, it turns out that America isn't the only place to invest excess funds; and certainly endless amounts of low return U.S. government debt isn't a reasonable investment, as the Chinese are now admitting. The result, as predicted, is a reduced willingness of foreigners to lend to the U.S. on the cheap, and hence upward pressure on interest rates and a falling dollar.
The poisonous mix of adjustable rate mortgages, subprime borrowers, and irrational exuberance wouldn't matter so much for a country with a sound financial balance sheet. But both the government and the private sectors depend on cheap foreign credit, which is going to be increasingly expensive. So Myth 1 is a myth simply because it misses this larger point. At heart, the problem is American insistence on living on borrowed funds.
Myth 2, "this is a liquidity problem" is easily dismissed. This isn't a liquidity problem. A liquidity problem is one in which a lender has long term (illiquid) assets and short term debits. The balance sheet balances, but the payments and receipts are out of sync. This is quite different, a credit crisis. The subprime mess involves genuine losses, as the "froth" is revealed. And there are enormous amounts of froth, i.e. bad debt. The financial engineering that packaged and repackaged and rerepackaged these bad loans has made it impossible to reasonably guess how big the problem is, but it is very big. This being a credit problem, rather than liquidity problem, means that there is no way to avoid someone taking big losses. (What we're seeing now is a fight over who that will be. Superconduit, anyone?)
Myth 3, "it's the fault of the free market:" here’s the real danger. The primary cause of all this is out-of-control federal spending, and the looney insistence by supply siders that incessant cutting of taxes without cutting spending is a recipe for something other than catastrophe, along with the insistence of America's socialist left (i.e. our two political parties, led by the GOP) on expanding the welfare state.
Secondary causes: Fed easy-money policies further encouraged the irrational exuberance. Also, the highly regulated, highly protected banking sector is regulated by the feds for the benefit of the banks. The SIVs and similar stuff that constitutes the subprime toxic waste was entirely enabled by the very unfree market and the moral hazard that arises when government stands ready to bail out the system at the taxpayer's expense. Additionally, to some unknown extent, subprime mortgages involved fraud: there’s substantial evidence that in some cases it wasn't matter of people "not reading the fine print," but rather simply fraudulent practices. Blaming the free market for fraud is akin to blaming the free market for armed robbery.
Government malfeasance caused the financial imbalance. Government malfeasance enabled the credit bubble in multiple ways. But since Myth 3 persists, the solution we'll get is more government.
The bottom line: The subprime mess isn't really a subprime mess, it's fiscal mess. The solution is fiscal responsibility, smaller government, getting government out of money and banking, and prohibiting fraud. A big part of this solution is dropping the crazy notion that Republicans are friends of free markets, and that their policies are pro-market and pro-freedom.
This mess brings back a buried memory, and it's very unsettling. When I first arrived in Moscow, Russia, one of my non-economist colleagues told me how she'd met a tipsy young Russian at a nightclub. He claimed to be an international currency trader, and was gloating that his ilk had made big on wrecking first the Asian currencies, and then the ruble. "And next," he told her, "the American dollar." Leigh asked me, the economist, if that made any sense. "I wouldn’t worry about it. Those crises were caused by financial imbalances and an enormous amount of bad investments and nonperforming debt. The U.S. has problems, but none of that third-world stuff."
Of course, that was February 1999, way back in the bad old days of Bill Clinton. Since then, we’ve had seven years of George W. Bush, enabled by a Republican Congress. I never imagined we'd have a President worse than Clinton, but... Well, thanks for the third world stuff, GOP. That you are free-marketers, that's the biggest subprime myth of all.