Relevant and even prescient commentary on news, politics and the economy.

Culture Matters – Oil Curse Edition

The concept of the so-called Oil Curse is that countries that have an abundance of oil tend to be basket cases – undemocratic, kleptocratic, and poorly developed.  The Oil Curse is a special case of of what is sometimes called the Resource Curse.

Of course, not every country rich in oil has suffered from the Oil Curse.  Norway is a prime example of a nation that has benefited greatly from finding oil, but it is almost the exception that proves the rule.

On the other hand, if you think about it more broadly, there are plenty of other exceptions.  The big one is England.  Historians seem to think one of the reasons that the Industrial Revolution began there is because England had plenty of easily accessible coal and iron.  Which is to say, England struck oil, or at least the 18th century version of it.  Similarly, the oil boom that began in Titusville, PA around 1860 did great things for the US economy.

So what causes oil to be a curse for some countries but a boon to others?  One explanation commonly brought up is exploitation, particularly by Western oil companies.  I am no historian, but I don’t think this is right.  Many of the Oil Curse countries chose to go it alone, though some did so after expropriating the initial investments made by foreigners.

I think countries that appear to fall prey to the Oil Curse or any other Resource Curse don’t actually do so.  Instead, they are basket cases before the discovery of whatever resource, and they remain basket cases after.  On the other hand, countries that have functional economies that encourage innovation tend to find stumbling upon a resource to be a blessing.

Put another way…  having a culture that is conducive toward positive outcomes matters a lot.  And it seems to me that England on the verge of the Industrial Revolution, the US before 1860, and Norway before it stumbled on oil have a lot, culturally in common.  And the cultural traits those three cases have in common don’t seem to be shared by Oil Curse countries.

As I keep pointing out, the data shows that culture is a strong determinant of economic outcomes..

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Why Healthcare Premiums are increasing Faster than Healthcare Costs

invisible hand In the first three years of the PPACA, a Risk Corridor Program was established to help insurers get past the initial loss phases. This is typical of startups and was used with Republican President George Bush’s Part D Drug insurance program. The PPACA had built-in protections for insurers who enrolled many abnormally sick people, provided backup payments for very high-cost cases, and protected against big losses and gains during the first three years. Due to eliminating all “pre-existing conditions” with the implementation of the PPACA, this was the protection for companies and the incentive to take on the people with health issues. Not only did it help Insurers cover their losses; but, it was an incentive for insurers not to increase premiums. Much of the funding for the program comes from the Federal Government and profitable Insurance companies paying into the Risk Corridor fund which unprofitable companies use to recoup losses. However in the first three years losses exceeded funding from profitable companies due to a Republican Congress passing laws forcing the Risk Corridor Program to be budget neutral leaving 12.6% of the necessary funds available to make insurance companies whole. As many probably know, the shortfall of funding already forced many CO-OPs to go bankrupt and resulted in Healthcare Insurance companies pulling out of the Exchanges.

Those Healthcare Companies still a part of the PPACA have gone to Federal Court to sue the administration for sustained losses. Moda Health sued the administration for $191 million due to losses in implementing the PPACA supposedly covered by the Risk Corridor Program. Moda has dropped its program in Alaska as a result of its losses and has only received ~$14 million. The Risk Corridor Program ended in 2016 and companies now face the issue of never recouping losses beyond just this.

Interesting how the Republicans have been the proverbial slugs in the process and took advantage of the crisis they created by forcing the PPACA to be budget neutral when the Part D Drug Program had no restrictions. They limited how the PPACA can fund the same Risk Corridor Program used for George Bush’s Part D Program. In September of this year, “ five Republican Senators sent HHS Secretary Burwell a letter demanding how HHS is handling a much-maligned insurance provision within the Affordable Care Act. Earlier this month, the CMS had sent a memo to health insurance companies that said the agency would not be making risk-corridor payments for 2015 because any collections would be used to cover the $2.5 billion shortfall from 2014.”

Under the PPACA Budget Neutral Act passed by the Republicans, the administration (DOJ) must now defend the law claiming they were not guaranteed the massive payouts in the first place. In November Republicans introduced the “HHS Slush Fund Elimination Act,” which restricts the Administration from using any Federal funds for the Risk Corridor Program to settle with the healthcare companies owed money.

“We are going to repeal and replace Obamacare but, in the meantime, the last thing Americans need is for the Obama Administration to sneak in one last bailout on its way out the door,” Sen. Ben Sasse (R-Neb.)”

You can see;

- Why United Healthcare pulled out of the PPACA Exchange early as it did when a Republican controlled Congress reneged on the funding for the Risk Corridor Program to cover losses in the startup of the PPACA.

- Why Healthcare Insurance companies losing money would resort to increased premiums to compensate for the lack of Risk Corridor Program funds to cover the startup and losses.

- Why the Part D Drug companies have become successful and competitive amongst each other due to their successful startup with the availability of Risk Corridor Program funds.

All of this was an effort to deny the PPACA an opportunity to be successful by a Republican Congress who would deny its constituents healthcare just to get even with a President they did not like and deny him a legacy. Risk Corridors and associated programs still exist and will continue to exist for Medicare Part D; but then, this was pre-Obama and occurred under Republican President George Bush. No one called it a bailout then.

Furthermore, do you think any healthcare insurance company would ever want to be a part of a Government Healthcare plan for the public as implemented by Republicans after they have been repeatedly screwed by Congressional Republicans?

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Immigration, Democrats, Republicans and the NY Times

Tom Cotton, the junior United States Senator from Arkansas had a piece in the NY Times:

President-elect Trump now has a clear mandate not only to stop illegal immigration, but also to finally cut the generation-long influx of low-skilled immigrants that undermines American workers.

Yet many powerful industries benefit from such immigration. They’re arguing that immigration controls are creating a low-skilled labor shortage.

“We’re pretty much begging for workers,” Tom Nassif, the chief executive of Western Growers, a trade organization that represents farmers, said on CNN. A fast-food chain founder warned, “Our industry can’t survive without Mexican workers.”

These same industries contend that stricter immigration enforcement will further shrink the pool of workers and raise their wages. They argue that closing our borders to inexpensive foreign labor will force employers to add benefits and improve workplace conditions to attract and keep workers already here.

I have an answer to these charges: Exactly.

Higher wages, better benefits and more security for American workers are features, not bugs, of sound immigration reform. For too long, our immigration policy has skewed toward the interests of the wealthy and powerful: Employers get cheaper labor, and professionals get cheaper personal services like housekeeping. We now need an immigration policy that focuses less on the most powerful and more on everyone else.

Wasn’t this the Democrat’s position not long ago? When and why did that change?

 

Update…

1.  If it isn’t clear, Cotton is a Republican

2. The bolded section was part of Cotton’s piece, but I chose to bold it as I felt it was worth a special highlight.

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Neel Kashkari and the Minneapolis Plan to End Too Big to Fail

Neel Kashkari has been President of the Federal Reserve Bank of Minneapolis since January 1, 2016. Prior to that, he was brought over from Goldman Sachs to be Assistant Secretary of the Treasury for Stability from October 2008 to May 2009. His job was to hand out money to the banks as bailout.

I believe the first time first time he was mentioned at this blog was right after he was appointed to give away our money:

The bail-out will succeed only, repeat, only in the sense that the US succeeded in Iraq in 2003 and 2004 when Simone Ledeen and the rest of the Heritage interns were running around the country handing out trash bags full of money and giving Halliburton money for services it would never begin to render. There will be less yabbering of silly catchphrases like “but what about all the schools that were painted?” this time around, though, because the schools will be exploding when GW is no longer in office. To be extremely precise, this is what I think the success will look like: shady, undeserving characters will be enriched, young versions of the idiots who got us into the mess will launch successful careers (can you say “Kashkari”?), and the promised benefits to the American public, the schmucks footing the bill, will never materialize.

From memory, not only is that the first time I mentioned Mr. Kashkari, it is also the most complementary I have been toward him yet. But now, Mr. Kashkari is back with a new scheme to reduce the likelihood of a meltdown.

Kashkari provides this slide as a summary of his plan:

Figure 1 - The Minneapolis Plan

Figure 1  (click on the slide to embiggen)

Accompanying the slide is this platitude which also functions as a fly in the ointment:

We cannot make the risk zero, and safety isn’t free. Regulations can make the financial system safer, but they come with costs of potentially slower economic growth. Ultimately, the public has to decide how much safety they want in order to protect society from future financial crises and what price they are willing to pay for that safety.

Because Kashkari is a political creature who won’t speak clearly, to get an understanding of what the vegetables he wants us to eat taste like we go to the full plan:

We measure the cost of higher capital requirements in terms of lost GDP due to tighter lending conditions. This calculation requires a number of steps. We trace the impact of higher capital requirements to lower bank return on equity (ROE) and then to higher loan rates. Higher loan rates slow economic growth by restricting borrowing. As noted above, this approach closely follows the BIS.

And the banks agree:

The Financial Services Forum that represents U.S. financial services companies cautioned that implementing the recommendations would stymie the economy. “For those looking to accelerate economic growth and job creation, tripling bank capital levels — already double from pre-crisis levels — will make it much harder to meet those goals,” the forum’s spokeswoman, Laena Fallon, said by e-mail.

So, to summarize the negative side of this proposal: more stringent regulatory requirements –> higher interest rates –> less borrowing –> slower growth in GDP.

I recognize that this is gospel in the banking and regulatory community, and its been many moons since I thought of myself as an economist, but this seems pretty daft to me. Or rather, it seems like regulatory capture speaking. Consider for a moment this seemingly unrelated graph:

Figure 2 - The Fed Funds Rate and the Bank Prime Rate

Figure 2.

Note that the bank prime rate (orange line on the graph) is almost perfectly correlated with the fed funds rate (blue line on the graph) which is set by the Federal Reserve Bank. The difference between the two lines is shown in the gray bars. Do you see the large, sustained increase in that difference between the pre-Crisis period and the present that is due to the large increase in capital requirements we’ve already seen? No? Well, that’s because it didn’t happen. This notion that increased capital requirements raises the interest rates that banks charge their customers makes perfect sense in theory, but it stubbornly refuses to actually be true in the real world.

However, let’s assume this time things will be different. Let’s assume that unlike what we’ve seen so far, this time increased capital requirements do lead to a big sustained increase in the bank prime rate. Say for the sake of this post that the requirements effectively doubles the difference between the fed funds rate and the bank prime rate, permanently. What changes?

Well, if the Fed decided, at that point, that it wanted to raise or lower the interest rates charged by banks, it would do what it currently does in the same situation, namely change the federal funds rate. If anything changes at all, maybe, just maybe it will do so at the lower bound. And if there were some evidence that the Fed knows what its doing when the Fed Funds rate is near the lower bound, I admit that would be a concern.

So there’s no downside to this plan, at least as far as I can see.  Of course, the plan is just the tame one we’ve already enacted, but with a bit more in the way of a bite and, courtesy of Mr. Kashkari, a more extravagant soundtrack.  The Federal Reserve Bank of Minneapolis has a good sized research team. Kashkari could have asked any of them of to explain how the Fed Funds rate works, or about the relationship between the Fed Funds rate and the rates charged by banks. But failing upwards requires ignorance.  The higher up you are, the more ignorance is required. It is clear Mr. Kashkari has further to rise.

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T. Rex: Engineering Fantasies

Global warming? “It’s an engineering problem, and it has engineering solutions.”

According to Rex Tillerson, Donald Trump’s choice for Secretary of State, adapting to climate change is an engineering problem that has an engineering solution. A soundbite from a Council on Foreign Relations presentation by Tillerson has been widely reported. But it is worthwhile to consider his full answer and its context.

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