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

The Aging Process and the Current Financial Mess

I just could not resist posting this latest tidbit about the aging process:

Like our current financial crisis, the aging process might also be a product excessive deregulation.

Nearly a decade ago, Sinclair and colleagues in the Massachusetts Institute of Technology lab of Leonard Guarente found that a particular sirtuin in yeast affected the aging process in two specific ways—it helped regulate gene activity in cells and repair breaks in DNA. As DNA damage accumulated over time, however, the sirtuin became too distracted to properly regulate gene activity, and as a result, characteristics of aging set in.

“Too distracted” is clearly too anthropomorphic a phrase, but in a curious way, it fits the present crisis. But wait.

The researchers have added an “enlightening” twist to the idea of “distraction”:

The problem for the cell, however, is that the sirtuin has another important job. When DNA is damaged by UV light or free radicals, sirtuins act as volunteer emergency responders. They leave their genomic guardian posts and aid the DNA repair mechanism at the site of damage.

“Distraction” is now operationally defined.

The marvelous genetic aging metaphor is ready for completion. All we have to do is to define what is presently keeping the overseers of our economic system from paying attention to the real problem.

Once we thought of the world in mechanical terms; now the world of genetics is opening a new way of looking at the world.

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Social Security: Inter and Intra-Temporal Contingency

What fresh hell is THIS?
When I first started studying Social Security in detail sometime late in 1997 I made what to me was kind of an amazing discovery. Social Security ‘crisis’ then and now tended to be perceived and discussed within the deterministic frame of Boomer Retirement, kind of a ‘demography makes destiny’ thing. Every Boomer who would ever exist was already on the face of the planet and we had reasonably good data about longevity improvements. Which seem to leave us with an open and shut case: more Boomer retirees living longer vs a declining pool of workers equals crisis down the road. Thus it made some sense to talk and think about Social Security in fixed terms of Boomers becoming eligible for retirement at known points in known numbers resulting in Social Security going ‘broke’ (however defined) at specific points in the future. The result is that reporting on Social Security tended to use deterministic language like ‘will’ as in “The Trustees tell us the Trust Fund will run short in 2034”. (And for those who point out ‘I thought the date was 2041’, well that is the point of this piece.)

But when you actually examine the numbers it became clear that in fact they were doubly contingent with any given Annual Report projecting a range of potential outcomes (your ‘intra-contingency”) while successive Reports could and did have a different range (your ‘inter-contingency’). In each case the objective seemingly fixed ‘will’ starts blurring into the subjunctive ‘would (assuming contingencies A, B, and C)’.

Well what does this gobbly-goop mean in real terms? Well lets start from the following table from EPI. Changes in Trustees Projections Over Time If we just look at the first two columns for 1996 and 1997 we are presented with just what we would expect from our deterministic model: dates of Trust Fund depletion remaining set between years with the cost of the fix going up. Open and shut case for crisis? Well not so fast.

First we can examine the Cost of Inactivity on an inter-termporal basis. Not doing anything in 1996 meant the cost of the fix went up from an immediate hike in FICA of 2.19% to fix SS to an increase of 2.23% or a change of .03% of payroll. But the flip side of that is that not doing anything had the effect of LEAVING 2.19% of 1996 your payroll dollar in your and your employer’s pocket in 1996 for that year. If we simply ignore the effects of current utility of that dollar, of current year interest, and of current year inflation we can calculate that it would take 2.19/.03 or 73 years before ‘Nothing’ became a nominally bad bet for 1996. If we add in the effects of utility, interest and inflation we can see that each makes ‘Nothing’ just that much more a good bet. Let’s say that you made $30,000 in 1996. 2.19% of that is $657 which given the employee/employer split means $328.50 in take home pay (more if you take the classical position that the real incidence of the employer match falls on the employee). It doesn’t take a huge rate of real return to make a diversion of that $328 into some other investment pay off; calculated in terms of risk/reward a strategy of ‘Nothing’ made sense in 1996. That is in retrospect. On the other hand it would have taken a real deterioration in outlook and a pretty big boost in payroll gap to make ‘Nothing’ a losing bet in real terms.

If we examine the remaining columns in the table we can see that ‘Nothing’ turned out to be a winning bet both in nominal and real terms each year from 1997 to 2004, in each year ‘Nothing’ left money in your pocket while the Cost of Inactivity actually went down, ‘crisis’ steadily got pushed out in time and shrunken in magnitude. Now certainly you wouldn’t ‘know’ this in advance, on an inter-temporal basis the contingency is kind of out of your control and critics might just claim you got lucky. Well maybe, but in actuality the numbers fell out as they did. And there was pretty good reason to expect that they would.

Why? Well it is the intra-temporal contingency. As it turns out the Social Security Report does not project a single outcome, instead each provides a range of outcomes with their best guess giving a mid-point Intermediate Cost alternative with a more optimistic Low Cost marking one end of the probability range and a more pessimistic High Cost marking the other. Now one can, and I do, dispute that the Office of the Chief Actuary has actually properly presented the range and so argue that Intermediate Cost is in fact too pessimistic, but for our narrow purposes today we can lay that aside. Instead we can just examine the first year numbers in terms of the Cost of Inactivity. If we take our strategy of ‘Nothing’ and actual numbers come in in line with Intermediate Cost we can expect a positive Cost of Inactivity which we can then if we choose discount for assumed real interest. On the other hand if the numbers come in better than Intermediate Cost the Cost of Inactivity shrinks even before any discounting. And if the numbers happen to come in near the top of the range the Cost of Inactivity actually goes negative, meaning dollars left in your pocket with no downside at all.

Now getting back to the numbers. When I read the 1997 Report I noticed two things. One was that the 1996 Low Cost projection resulted in a straight out fix of Social Security, doing ‘Nothing’ would produce a fully-funded Social Security system with no changes in payroll tax, benefits or retirement age. And what kind of economic performance would be needed? As it runs out only a future that more or less mirrored 1996. If the future on average looked like the immediate past we would be home free. But we did not need to make a bet on Low Cost long term, we did not need a crystal ball to calculate the Cost of Inactivity for any given year, instead we only need to look at the current year numbers in the newspaper. If 1997 underperformed 1996 but came in better than Intermediate Cost we could expect the Cost of Inactivity to shrink and possibly go negative (i.e. leave dollars behind and a smaller projected gap going forward). By the time I saw the 1997 Report the year was mostly over and it didn’t take a lot of bravery to predict that year end would look better than IC projections. And so it proved, the 1998 Report showed a payroll gap down from 2.23% back to 2.19%. And ten more years of Nothing has brought the gap down to 1.70%.

Which is why I laugh in the faces of people who claim I am being naive in claiming that Social Security is Not Broke. They imagine that I am betting long on Low Cost when in reality I am betting short against Intermediate Cost. Now as it turns out it looks like 2008 will turn out to be a least a nominal loser for me, we will see with the release of the next Report in March. But I am still betting that the real Cost of Inactivity by adopting a strategy of Nothing will prove to be a winner over the medium term and probably over the long term, because while my bet may be short term nothing is keeping me from peeking at numbers for the out years and the Inter-temporal contingencies are pretty low hanging fruit.

In any event there is no ‘will’ associated with any projection whether that be short or long term. Each Report year presents us with new dynamic models with new intra-temporal and inter-temporal data sets which can only be properly evaluated using concepts like ‘if’ and ‘if and only if’. The standard deterministic ‘Baby Boomer demographics’ model just doesn’t capture the contingencies. And talking points that may have been reasonable enough in 1996 are stale, stale, stale today. A fact that seems to elude a certain subset of commentators here.

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The Bail-Out Will Not Work

by cactus

Let Me State Again: The Bail-Out Will Not Work, It Cannot Work

I’m on vacation, and I check the news and Angry Bear and I find this crazy bail-out is growing like mad just in the last few days. I had a post at the start of this thing that the bail-out wasn’t going to work as it didn’t address any important issues. Keeping Citi and Goldman, Welfare, Queen & Sachs afloat is not an important issue. From the perspective of society as a whole, the point of a banking system to provide capital to entities that need that money to purchase things that lead to increased (or “better”) output in the real economy. Entities in the banking system make made money by charging interest on the rent for that money. If entitites in the banking system made poor loans, they went out of business. Hence, they had an incentive to loan to those who had “worthwhile” uses for that money. In essence, bankers functioned as inadvertent social planners.

But over time, things have morphed. Companies like Citi and Goldman, Welfare, Queen & Sachs make made more money creating complicated, opaque instruments and selling those to suckers. Or, as I put it back in March, making “a lot of money selling squirrel carcasses and calling them fillet mignon.”

But you don’t succeed at making money selling complicated, opaque instruments to suckers if those instruments go belly-up immediately after the sale. Instead, you try to ensure the amount of time between the sale and the inevitable implosion is as long possible – that allows you to sell a lot of dressed up garbage at inflated prices. And it helps to have a lot of product… which in this case made making sure that anyone willing to buy a home at very inflated prices could get a loan, so that loan could then be repackaged into a very complicated, opaque financial instrument.

The scam was a bit more complicated than the traveling elixir salesman scam from way back, and more lucrative. Instead of wandering into town and selling elixir retail, Citi and Goldman, Welfare, Queen & Sachs would find someone to buy their entire wagon-load wholesale, and that entity would then sell it on a retail basis. The problem for Citi and Goldman, Welfare, Queen & Sachs is that they forgot they were running a scam. They started to believe their own pitch, so unlike a traveling elixir salesman from way back, they were still in town when the locals discovered that not only does their wonder cure not cure anything, it makes people very, very sick.

To maintain the traveling elixir salesman analogy for a moment, the purpose of the bail-out, in essence, is this : make sure the elixir salesman doesn’t suffer for selling a harmful product and calling it a wonder-cure and provide him with the means to make more elixir. It has occurred to Paulson, however, that if the elixir is simply repackaged, it may not sell. (You don’t become Chief Elixir Salesman for nothing.) It is important to somehow ensure there are buyers for the elixir. So a few sops are thrown to wholesalers of elixir, and a few smaller ones are thrown to the folks who bought the elixir and are now suffering convulsions. And for some reason, none of these measures are leading to an increase in confidence! Imagine that.

As I’ve stated several times before, its long past time to let the structure go. Saving the elixir salespeople is simply not a worthwhile goal; in fact, its counterproductive. And as we’re seeing, tremendously costly.

Maybe, just maybe, in a world without elixir salesmen, car companies will go back to making cars people want to buy (and not being finance companies), bright young students will choose to study engineering or science rather than learning how to be scam artists, and people putting their 40 years on the assembly line will be able to afford a house whose value doesn’t drop precipitously, and walk away with a solid pension. It sure as heck ain’t gonna happen as long as we keep bailing out Goldman, Welfare, Queen & Sachs. The elixir salesmen will see to that.
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by cactus

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Another 800 billion?

By Stormy

And we have already spent the equivalent of “about $7.8 trillion in direct and indirect financial obligations. That is equal to about half the size of the nation’s entire economy… “

Well, for that price tag, why not just buy up all the troubled mortgages? In fact, at this rate, why not nationalize the entire banking system.

We are facing a Depression. And as Pete Morici tried to say on Lou Dobbs, we are not attacking part of the problem: All those jobs we lost to China because of mismatched currency. Put an adjustment (tariff) on all imported Chinese goods that would adjust for the currency mismatch.

Lou and the rest of the panel were too numbed by the amount of money being thrown at the credit problem to hear Morici. (Probably too late to do that anyway.

China will face its own problems as it loses its Sugar Daddy. “Immiserizing growth,” I think it is called: The fate of a country that depends on exports for growth.)

So here we are, on the cusp of another Depression. We can pour money into the banks, but we cannot risk a dime for our auto industry, or its 3 million employees.

There is no plan here; no thought. Just crank up the printing presses: The answer to deflation. And after this game is over and the banks are loaded to the gills with cash, we will be staring at a mountain of debt. Everyone on Lou’s panel agreed that the end game was hyperinflation, as all that money came pouring back into the system. Who knows?

I still think nationalizing the banking system is a clean solution. No more fancy derivatives or CDO’s. Let’s have an old-fashion banking system. Sideline the money boys. Send them off to China or Sudan. Let them watch ice melt in the Arctic. Count polar bears. Have them do something useful.

Who knows how this will all play out?

If we do enter a Depression, no one, certainly not I, knows what will happen then.

A line from Yeats comes to mind: “All things fall and are built again,/And those that build them again are gay.”

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It’s not that Schiff was so correct, it’s that the shows were so manipulative

by: Divorced one like Bush

Crooks and Liar’s posted this video, but their presentation seems more from a position of how correct Peter Shiff was. I think what is more important, and a better lesson to learn is how much crap was being presented by Fox as real, reliable, truthful information that “you can use”. Listen to the other “panelists”.

If we do not learn to understand “crap” reporting, if we do not learn to understand story telling for selfish purpose, if we do not learn to understand that propagandizing is not solely a political tool, but more importantly an economic tool, we will not solve our’s and the worlds current economic condition.

What this video is, is the unvailing of one of the real life experiences of the Truman show we have been living in since Reagan, only this interpretation of the story used the constructed world of finance on the stage known as the economy.

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English translation, or Kleptocracy Defined

Via CR, the Fed announcement this morning:

The Federal Reserve Board on Tuesday announced the creation of the Term Asset-Backed Securities Loan Facility (TALF), a facility that will help market participants meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities (ABS) collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration (SBA).

Let’s go through this. The government is now insuring securities based on

  1. student loans,
  2. auto loans, and
  3. credit card loans*

Note that this is not support for schooling, the automobile industry, or credit card borrowers—just the people who buy (or bought) the paper.

In short, f**k the people who actually produced the underlying value of that financial asset. Save Wall Street with Main Street’s tax monies.

I give up. Yves Smith’s old description of Paulson’s “Mussolini-Style Corporatism in Action” seems so quaint by comparison to this abomination.

*SBA loans are omitted from discussion, since there is a reasonable argument that the government insuring SBA loans is has no net cash flow implications. (The argument will prove false when it is discovered that SBA loans are being made profligately to Bush Administration contributors, but that’s a side issue.)

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Health care in MA is out of balance

The Boston Globe reports:

Call it the ‘Partners Effect:’
Elite hospitals are paid much more for care that is often no better than average. It is the best kept secret in Massachusetts medicine.

Behind the rankings
To walk the gleaming corridors of Partners’ flagship hospitals is to tour a Hippocratic Hall of Fame: Dr. William Morton first demonstrated the use of anesthesia in surgery at Mass. General in 1846. Dr. Joseph Murray carried out the first successful organ transplant at the Brigham in 1954. Today, the two hospitals manage one of the largest biomedical research budgets in the country, carrying out cutting-edge studies on everything from AIDS to arthritis and attracting patients from all over the world.
But the high-end procedures that make the Brigham and Mass. General so famous are not their bread and butter. Eighty-five percent of the time their doctors are performing the same less glamorous medicine that occupies most other hospitals: delivering babies, repairing hernias, treating pneumonia.
And it is there, in the workaday world of hospital care, that the hospitals’ reputation for unmatched excellence fades – and with it much of the rationale for the higher payments they receive for such treatments. The growing, if still inadequate, body of data available about hospital quality paints a fairly consistent picture of the care at the Brigham and Mass. General: often good, but rarely extraordinary, and sometimes inferior to the care available at other hospitals.

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The Relative Efficiency of Public and Private Health Care

Tilman Tacke and Robert Waldmann

A health care system is efficient when an increase in spending results in significant improvements in the health of a population. We test the relative efficiency of public and private health care spending in reducing infant and child mortality using cross-national data for 163 countries. There are two remarkable findings: First, an increase in public funds is both, significantly correlated with a lower mortality and significantly more efficient in reducing mortality than private health care expenditure. Second, private health care expenditure is in all estimations associated with higher, not lower, mortality, although this association is often not statistically significant. The results suggest that, holding total health care expenditure constant, a potential decrease in total infant mortality in the 163 countries from 6.9 million deaths (2002) to 4.2-5.3 million deaths for completely publicly financed health care systems, but an increase to 9.0-10.0 million deaths for completely privately financed health care. We can explain some of the gap by geographies and socioeconomic factors such as HIV prevalence, sanitation standards, corruption, and income distribution. However, the estimated difference in the efficiency of public and private health care is statistically significant in all regressions.

Tables and figure after the jump

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tilfigure1

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Table 4 reports how the coefficients of interest change when another variable is
added. All regressions summarized very very briefly in table 4 are regression 3 in table 1 with one other variable added.

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Jonathan Zasloff is being very interesting over at the Reality Based Community.

Robert Waldmann

I guess I should give permalinks although they are consecutive posts.

In random order, he asks who should be on the energy team. I have already expressed my view on this issue. I think the Reality Based Community should be the energy team.

He asks “Where is Joe Stiglitz ?” I add what about Paul Krugman. Look the problem is simple, Stiglitz is not a team player. You ask and Summers is he a team player ? The answer is clear — yes if the team is an administration. If you hire Stiglitz he *will* embarrass you later by resigning and criticizing you.

OK now the big one. Appealing to evangelicals and reducing the abortion rate. Here, I think, Zasloff creates a false dilemma.

Consider Gilgoff’s prescription:

For Obama to break the overwhelming Republican dominance of evangelicals in 2012, he’d likely have to deliver on a classic evangelical issue — for instance, pushing legislation aimed at reducing demand for abortion.

Maybe. Congressman Tim Ryan of Ohio has sponsored an act that would work to reduce … abortions by providing better prenatal care and adoptions services to pregnant moms. Several observers, most notably EJ Dionne, have praised the bill and said that Obama should support it (which I think he will).

But the problem is that that might not be the best way to reduce abortions.

If one if to believe the Alan Guttmacher Institute, which studies these things (although it also has a strong pro-choice bias), the most effective way to reduce abortions is the provision of contraception. The government could for example ensure that contraception is covered under Medicaid, or even mandate that it be part of any health insurance policy.

So ? Why do we have to choose ? The Ryan bill provides assistance to people in need. Even if one were not just pro-choice but pro-abortion one should support it. One should not allow the best to be the enemy of the good (and lose votes too).

Most importantly, there is no need to put all abortion reduction regulation into one bill. Increased access to contraception can be presented as a public health issue (for condoms) and a gender justice issue (for all other contraceptives).

The religious right will be against it in any case. There is no way to convince them by noting that the policy will reduce the number of abortions.

So a bill to help mothers sold as a measure to reduce abortions and used to win evangelical votes and a separate bill sold as a public health/women’s rights issue which will also reduce the number of abortions if it is passed over the objections of prominent evangelicals (although I would guess supported by most evangelicals whose reproductive rate shows that they would expect to personally benefit if they think you can take from insurance companies with no problem as I bet they do).

Sometimes you can build a coalition by joining policies each of which is supported by one group. Sometimes its better to build two coalitions by pretending that closely related policies are separate.

I’d say that, this time, it is a no brainer.

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