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CRA and Ritholtz

by cactus

Since I just had a post on Bailout Nation, the book Barry Ritholtz co-wrote with Aaron Task, I figured, why not have another post about Ritholtz. See, something I read on his blog has been botheirng me for a few weeks now.

Ritholtz has done a great job pointing out over and over that the Community Reinvestment Act (CRA) had just about nothing to do with the economic meltdown. Finally, he got pissed and issued a challenge:

Well, its time to put up or shut up: I hereby challenge any of those who believe the CRA is at prime fault in the housing boom and collapse, and economic morass we are in to a debate. The question for debate: “Is the CRA significantly to blame for the credit crisis?”
A mutually agreed upon time and place, outcome determined by a fair jury, for any dollar amount between $10,000 up to $100,000 dollars (i.e., for more than just bragging rights).

I don’t think that was a good idea. Here’s my reasoning…

1. There’s no such thing as a fair jury. And even if there was, being fair doesn’t mean the jury can’t be bamboozled. Presentation matters a lot. If that wasn’t the case, there’d be no need for attorneys. Most people would present their own case and save the expense of having an attorney.

2. That means a jury could get it wrong.

3. While Ritholtz’ challenge may have a commendable outcome in this instance, it has a deleterious effect in the long run, putting the debate out of reach of most people who cannot afford to take the risk of losing the same amount of money that Ritholtz can. And what if Steve Forbes puts up a similar challenge for a few tens of millions? Even if Forbes’ position is buffoonish – and in my opinion, if Forbes has a position on whatever subject, it probably is buffoonish – very, very few people could afford to have that debate on the offchance that the jury got the wrong conclusion. Probably even Ritholz would be priced out. The end result is that realistically, only folks like Bill Gates would be entitled to an opinion.

I’m all for holding people responsible for the consequences of their inanity, including whatever silly notions they propagate, but I think Ritholtz has the wrong target here. As bad as the clowns who just won’t get the facts right after the fact are, they pale in comparison to the schmucks who perpetrated the fraud. Its the fraudsters who should be held liable for all this mess.

To close in Barry Ritholz fashion, what say ye?
by cactus

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PSA: WorldCon with an Economist

The first item on Charlie Stross’s World Science Fiction Convention schedule:

Thursday August 6th, 5pm (Location: P-511CF)
Title: In Conversation: Paul Krugman and Charles Stross
Description: 90 minutes of Charles Stross discussing SF, economics, and other topics with Paul Krugman. [link in original]

Those who might wonder why Krugman would be an appropriate guest at Anticipation (this year’s WorldCon, being held in Montreal starting six yearsdays [h/t Loyal Reader] after we move back to NJ*) are referred to this paper [PDF], which I previously discussed at Tom’s place.

*Which is why Shira doesn’t want to do the eight panels on which she was scheduled.

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This May Make Robert Shiller and SocSec recipients happy…

but it doesn’t do that much for the rest of us. Via The Ambrosini Critique, Scott Sumner discovers there was no housing crash:

The BLS claims that housing prices are up 2.1% in the last 12 months….According to the BLS, housing makes up nearly 40% of the core basket of goods and services.

Further reading gets us to the base of the claim: Owner-Equivalent Rents went up 2.7% in the past year. CR was all over this in April and May. Take a gander at this chart–from the CR posting in May:
Price-to-Rent Ratio

So while the ratio has gone from 1.4 to 1.1 (which would be more than a 21% decline), almost a whole 10% of that change has been because the base (rent) has gone up. The other 19% of decline doesn’t matter for BLS in(de)flation calculation purposes.

No one better tell David Malpass or his investors at Encima Global (motto: “Failing Up is Always an Option”; see the Forbes article link at the left side of the Encima page).

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Consumer Financial Product Agency

from Baseline Scenario

Three myths about the consumer financial product agency by Elizabeth Warren is well written and timely at Baseline Scenario.

I’ve written a lot about the creation of a new Consumer Protection Financial Agency (CFPA), starting with an article I wrote in the Democracy Journal in the summer of 2007. My writing has helped me work through the idea and has advanced a conversation about what kind of changes in financial products would be most effective. A couple of weeks ago, I testified before the House Financial Services Committee about why I think a new consumer agency is so important, and I’ve argued the case many times.

Today, though, I’d like to post specifically about some of the push back that has developed on this issue. In particular, I’d like to focus on three big myths – myths designed to protect the same status quo that triggered the economic crisis.

MYTH #1: CFPA Will Limit Consumer Choice and Hinder Innovation

At a recent hearing on the CFPA, Rep. Brad Miller challenged an industry representative to identify one consumer who chose double-cycle billing to be included within the terms and conditions of his or her credit card contract. It was a great moment. If the status quo is about choice, then explain why half of those with subprime mortgages chose high-risk, high-cost loans when they qualified for prime mortgages. If the status quo is about choice, then explain why Citibank declared itself consumer friendly, dropped universal default, then quietly picked it up again the following year because they said consumers couldn’t tell whether they had the term or not.

The truth, of course, is that no consumer “chooses” to accept the tricks and traps buried within the legalese of financial products. Rather, consumers must choose among various products with one feature in common: dozens of pages of incomprehensible fine print.

The CFPA will not limit consumer choice. Instead, it will focus on putting consumers in a position to make choices for themselves by streamlining regulations, making disclosures smarter, and making financial products easier to understand and compare. The Agency will promote plain vanilla contracts—short, easy to read mortgages and credit card agreements. The key principle behind the new agency is that disclosure that runs on for pages is not real disclosure—it’s just a way to hide more tricks. Real disclosure means that a lender has to be able to explain what it is selling so that the customer can read it and understand it. Once consumers can understand the risk and costs of various products – and can compare those products quickly and cheaply – the market will innovate around their preferences.

Daniel Carpenter, a Professor of Government at Harvard University, has written a great deal about the modern pharmaceutical industry. While anyone with a bathtub and some chemicals could be a drug manufacturer a century ago, Carpenter points out that drug companies were willing to invest far more in research and development to bring good drugs to the market once FDA regulations drove out bad drugs and useless drugs. Good regulations support product innovation.

MYTH #2: The CFPA Will Add Another Layer of Regulation and Increase Regulatory Burden

Current regulations in the consumer financial area are layered on like pancakes—see a problem and fry up a regulation, but don’t integrate it with the earlier regulation. Today, seven different federal agencies have some form of regulations dealing with consumer credit. The result is a complicated, fragmented, expensive, and ineffective system. With consolidated and coherent authority, the CFPA can harmonize and streamline the regulatory system—while making it more effective.

But the real regulatory break-through for the CFPA would be the promotion of “plain vanilla” contracts that would likely meet the needs of about 95% of consumers. These contracts would have a regulatory safe harbor. By using an off-the-shelf template for a plain vanilla contracts and filling in the blanks for interest rates, penalty rates and a few other key terms, a financial institution can legally satisfy all its federal regulatory requirements—no need to do more.

Of course, some banks would want to offer more complicated products. For many, they could file-and-use, so long as they met the same regulatory standards of adequately disclosing risks and explaining costs—briefly enough and clearly enough for people to understand them.

A streamlined new regulatory regime would have a serious impact on the credit industry. Today’s complicated disclosure system favors big lenders that can hire a legion of lawyers to navigate the rules—and spread the costs among millions of customers. Those complex rules fall much harder on a smaller institution that must navigate the same regulatory twists and turns, but with far smaller administrative staffs. Plain vanilla contracts will be particularly beneficial for community banks and credit unions that will be able to divert fewer resources toward regulatory compliance and more toward customer service and innovation.

MYTH #3: Prudential and Consumer Regulation Cannot Be Separated

Make no mistake: This is a fancy claim for the status quo. If the CFPA can be left with the current bank regulators, then it can be smothered in the crib. For decades, the Federal Reserve and the bank regulators (the OCC and the OTS) have had the legal authority to protect consumers. They have brought us to this crisis by consistently refusing to exercise that authority.

The agencies’ well-documented failures – discussed in detail by Travis Plunkett and Ed Mierzwinski here and by Professor Patricia McCoy here — are largely the result of two structural flaws. The first is that financial institutions can now choose their own regulators. By changing from a bank charter to a thrift charter, for example, a financial institution can change from one regulator to another. The regulators’ budget comes in large part from the institutions they regulate. If a big financial institution leaves one regulator, the agency will face a budget shortfall and the agency will likely shrink. Knowing this, financial institutions can shop around for the regulator that provides the most lax oversight, and regulators can compete by offering to regulate less. Regulatory arbitrage triggered a race to the bottom among prudential regulators and blocked any hope of real consumer protection.

The second structural reason that prudential regulators failed to exercise their authority to protect consumers is a cultural one: consumer protection staff at existing agencies find themselves at the bottom of the pecking order because these agencies are designed to focus on other matters. At the Federal Reserve, senior officers and staff wake up every morning thinking about monetary policy. At the OCC and OTS, agency heads wake up thinking about capital adequacy requirements and safety and soundness. Consumer protection issues are—at best—an afterthought. The CFPA would create a home in Washington for people who wake up each morning thinking about whether American families are playing on a level field when they buy financial products. By bringing economic experts who care about consumer financial issues under one roof, CFPA can develop as a smart agency that develops real expertise.

A single consumer agency would also be able to make sure that the same products face the same regulations. Today, mortgages are regulated differently depending on whether they are issued by a bank, a nationally-chartered thrift, a nationally-chartered credit union, and so on. Imagine for a moment if toasters or toys had different safety standards depending on who manufactured them. Or, even worse, imagine if some manufacturers could bypass safety standards almost in entirety – as is now the case for non-depository financial institutions. It is time for one Agency to regulate financial products in a consistent manner across the board.

In 2001, Canada created an independent agency much like the proposed CFPA. I recently spoke with some Canadian economists, and they not only said the system works, they also expressed bewilderment about the idea that prudential and consumer regulation would be combined. As one said, they “have different ways of thinking about the world.”

At the end of the day, industry lobbyists try hard to invent myths and make things sound confusing to intimidate the public and to keep policymakers from acting. But this issue is simple: keeping safety and soundness and consumer protection together has not ensured safety and soundness, has not protected consumers, has not fostered choice and innovation, and has not minimized regulatory burden. In fact, the current regulatory structure that combines consumer protection with other bank oversight responsibilities has led to the kind of bad regulatory oversight that has led us to this crisis. The CFPA would put someone in Washington—someone with real power—who cares about customers. That’s good for families, good for market competition, and good for our economy.

Update: Fixed link to Democracy article in first paragraph. Thanks to Uncle Billy vs. Mont Pelerin.

By Elizabeth Warren

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Massachusetts is fixing the fixed health care system: more administration?

by divorced one like Bush

In this debate on how to finance health care, we are hearing about the costs to deliver health care and how to bring them down. Mass is now proposing a capitated payment system that will be government created. It is the latest fix to a herald “fixed” problem. Which begs the question, why do they need to fix it again, yet, still?

The 10-member commission… voted unanimously to largely scrap the current system, in which insurers typically pay doctors and hospitals a negotiated fee for each individual procedure or visit. That arrangement is widely seen as leading to unneeded tests and procedures.
A state commission recommended yesterday that Massachusetts dramatically change how doctors and hospitals are paid…the group wants private insurers and the state and federal Medicaid program to pay providers a set payment for each patient that covers all that person’s care for an entire year and to make the radical shift within five years. Providers would have to work within a predetermined budget, forcing them to better coordinate patients’ care, which could improve quality and reduce costs.
The plan would require significant restructuring of the healthcare system, and some of its components would need legislative approval. Primary-care doctors, specialists, hospitals, and home healthcare agencies would have to form so-called accountable care organizations. Patients would choose a primary care doctor to coordinate their care, mostly within the organization. Insurers would pay the accountable care organization a flat yearly per-patient fee to be divided among the providers.

Read the above again: recommended…that Massachusetts dramatically change… to make the radical shift… The plan would require significant restructuring of the healthcare system, and some of its components would need legislative approval… to form so-called accountable care organizations.

Deja vu?

Dramatically? Radical? Significant? Legislative approval? An entirely new thingy called “accountable care organizations? What? IPA, HMO, PPO, POS, EPO, Self Directed, HSA, Capitated, IME, Primary Care, Fee-for-service, PCP, CAM, and for Massachusetts specifically; Commonwealth Connector just didn’t do it for you. We need more? “Doctor”, “insurer”, “patient”, “government” were not enough?

I want to know, just how much in administration cost will this new fix add? Is this the old promise of managed care, that the savings will accumulate enough to pay for the cost of administration plus a profit? Hasn’t worked yet.

It may work I guess, if we just add enough superlatives in our sentences while we present the new and improved Model T. Or maybe not. From the journal, Medical Care: Managed Health Plan Effects on the Specialty Referral Process:

Results. The percentages of office visits resulting in a referral were similar between the two gatekeeping groups and higher than the no gatekeeping group. Patients in plans with capitated PCP payment were more likely to be referred for discretionary indications than those in nongatekeeping plans (15.5% v 9.9%, P The frequency of referring physician coordination activities did not vary by health plan type. The proportion of patients in gatekeeping health plans within a practice was directly related to employing staff as referral coordinators, allowing nurses to refer without physician consultation, and permitting patients to request referrals by leaving recorded telephone messages.

Massachusetts states: That arrangement is widely seen as leading to unneeded tests and procedures. They were referring to the method of paying a doctor. Yet the study shows that the referral patterns don’t change with changing the method of payment. Well, does Massachusetts think the unneeded tests and procedures are happening without referrals?

Pick the approach, it didn’t change the referral pattern and, systems were set up by those being managed to make the referral process more efficient. So, either the patients need the referral (thus tests and procedures) and none of these money managing approaches are going to ultimately stop it, or the PCP finds a way to keep the traffic moving through the office because the more patients served the more money collected. (Deja vu) It’s a solution to a head-count/ piece-work payment system that still does not get the doc to do the job of applying the knowledge of health and healing to a given person’s presentation. (I’m accepting bets on how long it will be before we hear about the next fixing of the latest fixed Mass health care system. Post your bet in comments.)

This gets us to the one area that has been rolled out many times, but is often excused off as not being reliable as to achieving real savings and thus why we really don’t want a government funded single payer solution (other than our pride of not thinking of it first): Administration costs. It is the old medicare is cheaper than private insurance because of administration cost argument.

We’re hearing of the new plan being modeled on the Massachusetts system. It’s not working as noted by the need to fix it again (though past experience with other states showed it would not work). The fix is more administration costs on top of more administration costs. If they keep going this way, soon a medicare modeled administration system’s costs will be comparable to the private insurer, thus defeating the need to fix health care. So lets just accept that health care costs a lot to administrate, stop wasting time trying to reduce the cost and let the private system stay?


From this article: Costs of Health Care Administration in the United States and Canada, NEJM 2003, we learn that administrative costs have been rising faster in the US than in Canada.

We investigated whether the ascendancy of computerization, managed care, and the adoption of more businesslike approaches to health care have decreased administrative costs.

For the United States and Canada, we calculated the administrative costs of health insurers, employers’ health benefit programs, hospitals, practitioners’ offices, nursing homes, and home care agencies in 1999.

In 1999, health administration costs totaled at least $294.3 billion in the United States, or $1,059 per capita, as compared with $307 per capita in Canada. After exclusions, administration accounted for 31.0 percent of health care expenditures in the United States and 16.7 percent of health care expenditures in Canada. Canada’s national health insurance program had overhead of 1.3 percent; the overhead among Canada’s private insurers was higher than that in the United States (13.2 percent vs. 11.7 percent). Providers’ administrative costs were far lower in Canada.

Between 1969 and 1999, the share of the U.S. health care labor force accounted for by administrative workers grew from 18.2 percent to 27.3 percent. In Canada, it grew from 16.0 percent in 1971 to 19.1 percent in 1996. (Both nations’ figures exclude insurance-industry personnel.)

You know, I think maybe administration has become a growth industry for the health insurance industry? Was this part of the plan to shift us to a service economy?
Understand what the authors are saying here. It’s not just administrative costs related to the job of getting the patient’s dollar to the provider (medicare vs private), it’s the overall costs to the entire health care system as a results of the “administrative” systems the private insurance industry has put in place to “save us money”. No one is immune from paying these costs. They are part of the premiums charged, fees withheld, claims refiled, etc. All this administrative labor to control the costs, and yet the cost of health care keeps rising. Well, if the insurance employees can’t stop the rising costs, then what are we paying them for?

This is starting to make me think that Bruce Webb’s “do nothing plan” for Social Security should be applied to fixing health care. In this case the “do nothing” plan would be to get rid of the paper chase and achieve real savings. That is, do nothing regarding active management of health care costs via administrative systems. Don’t try to manage the doc’s, just let them do what they do and save money by eliminating all the systems that try to manage them. Though, there is a way to manage the doc’s that would not cost us in administration: competition among provider types. Let the various algorithms of applying the knowledge of health and healing compete. Thus, research such as this needs to be considered regardless of one’s opinion of the group studied.

Clinical and cost utilization based on 70274 member-months over a 7-year period demonstrated decreases of 60.2% in-hospital admissions, 59.0% hospital days, 62.0% outpatient surgeries and procedures, and 85% pharmaceutical costs when compared with conventional medicine IPA performance for the same health maintenance organization product in the same geography and time frame.

How about that, a reduction in “unneeded test and procedures” without adding administration costs. Let the doc’s be but, use the clinical practice approach that actually cuts the “unneeded” because it is unneeded. I think there is a lesson here? Something along the lines of free market capitalism only the market is not the types of insurance competing for the patient, it’s the types of doctors that need to compete for the patient.

I got side tracked. Lets stay with the one area for cost reductions: Administration. The authors:

The gap between U.S. and Canadian spending on health care administration has grown to $752 per capita. A large sum might be saved in the United States if administrative costs could be trimmed by implementing a Canadian-style health care system.

Despite these imprecisions, the difference in the costs of health care administration between the United States and Canada is clearly large and growing. Is $294.3 billion annually for U.S. health care administration money well spent?

Well, is it? Did they even ask?

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C Street


Jeff Sharlet and The Family from a Salon post:

Today’s roll call is just as impressive: Men under the Family’s religio-political counsel include, in addition to Ensign, Coburn and Pickering, Sens. Chuck Grassley, R-Iowa, and Jim DeMint and Lindsey Graham, both R-S.C.; James Inhofe, R-Okla., John Thune, R-S.D., and recent senators and high officials such as John Ashcroft, Ed Meese, Pete Domenici and Don Nickles. Over in the House there’s Joe Pitts, R-Penn., Frank Wolf, R-Va., Zach Wamp, R-Tenn., Robert Aderholt, R-Ala., Ander Crenshaw, R-Fla., Todd Tiahrt, R-Kan., Marsha Blackburn, R-Tenn., Jo Ann Emerson, R-Mo., and John R. Carter, R-Texas. Historically, the Family has been strongly Republican, but it includes Democrats, too. There’s Mike McIntyre of North Carolina, for instance, a vocal defender of putting the Ten Commandments in public places, and Sen. Mark Pryor, the pro-war Arkansas Democrat responsible for scuttling Obama’s labor agenda. Sen. Pryor explained to me the meaning of bipartisanship he’d learned through the Family: “Jesus didn’t come to take sides. He came to take over.” And by Jesus, the Family means the Family.

I am not sure how to put this in context, and the performance of some of the players involved is quite disturbing, especially if most is still secret.

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Wingnut 102A: When private insurance is outlawed only outlaws will have insurance

OR; HR3200 Sec 102 revisited. by Bruce Webb

We first visited the health care reform meme sweeping the right wing of the Blogosphere with this post HR3200 abolishes private health insurance. This seemed at first to be a simple confusion of the limits of the following from Sec 102 of the legislation:

(A) IN GENERAL.—Except as provided in this paragraph, the individual health insurance issuer offering such coverage does not enroll any individual in such coverage if the first effective date of coverage is on or after the first day of Y1.

I pointed out that Sec 102 only refers to ‘Grandfathered’ plans and not to ‘Qualified’ plans eligible to be included in the new Exchanges. But regular commenter Movie Guy showed that the confusion might be on my part and the result of inadequate attention to Sec 123-144. As he put it in comments:

Section 102 can’t be viewed in isolation. Moreover, Section 102 can’t simply be compared to Section 101 as the magic answer. There is far more involved than Webb’s explanations and opinions expressed in the comment posts on the open thread and this main post and related comments. Aside from reading the entire bill, one would need to read some provisions in existing U.S. Code as cited by the bill. This provides the broader picture.

The problem with Section 102 is the clock.

If this provision of the bill is also adopted by the U.S. Senate and a conference bill is passed and subsequently signed by the President, there will be a gap period that isn’t being addressed. The cutoff dates are specific. Yet, the Administration will not have a “Commissioner” until the individual is nominated and confirmed by the U.S. Senate. The “Health Benefits Advisory Committee” will not be in place until the members are selected; the Committee has 18 months to make its initial recommendations. Moreover, the Committee will be advising the Secretary of Health and Human Services. And you can’t call the “Health Insurance Ombudsman” until the “Commissioner” appoints one. Recommend reading some of the other sections, including Sections 123-144.

During the interim period, who will be approving the plans acceptable for the “Health Insurance Exchange” under subtitle A of title II? Based on what criteria? Those are responsibilities identified for the “Commissioner”.

If you lose your job on or after day 1 of the enacted legislation and your company insurance is terminated, what will you do until such time as the “Commissioner”, “Health Insurance Exchange”, Commissioner identified criteria, and accepted list of insurance providers are identified? Who will be able to get new health insurance until that system is up and running? Not Cobra. That won’t be allowed.

If you’re starting a business and need health insurance for yourself and a few employees during the gap period, what are your options for health insurance?

That’s why Section 102 is insane.

Well after wading through a lot of the text of the Bill I came to the conclusion that much of the problem was terminological. Bur rather than waste the research that got me to that point I will include it after the fold. If nothing else it clarifies the proposed timeline.
(UPDATE: in comments on the previous post MG has conceded that if my reading below is correct that his concerns have been largely addressed. But given that there are others out there with this same take, I am going to leave this post up as is.)

First from the Bill text:

p.32 DEADLINE.—The Health Benefits Advisory Committee shall recommend initial benefit standards to the Secretary not later than 1 year after the date of the enactment of this Act.

Not later than 45 days after the date of receipt of benefit standards recommended under section 123 (including such standards as modified under paragraph (2)(B)), the Secretary shall review such standards and shall determine whether to propose adoption of such standards as a package.

p.36 (b) ADOPTION OF STANDARDS.— (1) INITIAL STANDARDS.—Not later than 18 months after the date of the enactment of this Act, the Secretary shall, through the rulemaking process consistent with subsection (a), adopt an initial set of benefit standards.

p. 72 (a) ESTABLISHMENT.—There is established within the Health Choices Administration and under the direction of the Commissioner a Health Insurance Exchange in order to facilitate access of individuals and employers, through a transparent process, to a variety of choices of affordable, quality health insurance coverage, including a public health insurance option.

p. 88-89 2) SOLICITING AND NEGOTIATING BIDS; CONTRACTS.—The Commissioner shall— (A) solicit bids from QHBP offering entities for the offering of Exchange-participating health benefits plans; (B) based upon a review of such bids, negotiate with such entities for the offering of such plans; and (C) enter into contracts with such entities for the offering of such plans through the Health Insurance Exchange under terms (consistent with this title) negotiated between the Commissioner and such entities .

At risk of spoiling the punchline it is necessary to maintain a clear distinction between “date of the enactment of the Act” and day one of “Y 1”. Which latter is defined as follows:
(25) Y1, Y2, ETC..—The terms ‘‘Y1’’ , ‘‘Y2’’, ‘‘Y3’’, ‘‘Y4’’, ‘‘Y5’’, and similar subsequently numbered terms, mean 2013 and subsequent years, respectively.

Before returning to the point lets examine the implementation timeline (from comments)

First unless the Blue Dogs get their way the current plan by the President and House Leadership is to get this bill enacted this year. So lets take the effective date as Jan. 1, 2010.

Second the clock for the Health Benefits Advisory Committee is not 18 months it is one year and the clock starts not when the members are appointed but at the date of enacting of the bill. Meaning that standards will be in place by Jan 1, 2011.

Third this gives the Senate a full year to confirm the Commissioner. Nor do I see that the appointment of the Ombudsman makes much difference here, his role seems relatively minor for implementation.

Fourth, the Commissioner is limited to 45 days to review the standards once received and must have them through the Rule process within 18 months of enactment. Meaning that adopted standards would be in place no later than June 30, 2011.

Fifth the general outlines of the standards are well established in the bill itself, and if the Advisory Committee develops its specific recommendations in a publicly accessible form (and note that insurance companies have representation on the Committee) insurance companies have almost two years to prepare themselves for contract negotiations in the summer of 2011.

Sixth which gives the Commissioner and the companies another 18 months for contract approval and administrative implementation.

So to repeat the question:

If you lose your job on or after day 1 of the enacted legislation and your company insurance is terminated, what will you do until such time as the “Commissioner”, “Health Insurance Exchange”, Commissioner identified criteria, and accepted list of insurance providers are identified? Who will be able to get new health insurance until that system is up and running?

Well on my reading if you lose your job and so your insurance between “day 1 of the enacted legislation” and “day 1 of Y 1” you can get insurance just where you always would have if you lost your job between tomorrow and the date of enactment. As a matter of personal convenience you might ask if the company plans to participate in the Exchange after it goes into operation Jan 1. 2013 but I just am not seeing the inherent insanity some others do. Instead I see two fundamental mistakes. One the belief that the clocks start from the point that the Commissioner and Committee members are confirmed rather than the date the act is enacted. And the second a confusion between that date and Y 1 as referenced in Sec 102, i.e. 2013..

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Broken Okun

Robert Waldmann

is honestly puzzled by this post by Brad DeLong. Brad notes that firms don’t seem to be hoarding labor and goes on to predict a jobless recovery.

We Are Live at The Week with “The Jobless Recovery Has Begun”..

“Okun’s Law.” Here is the gist: if GDP (production and incomes, that is) rises or falls two percent due to the business cycle, the unemployment rate will rise or fall by one percent. The magnitude of swings in unemployment will always be half or nearly half the magnitude of swings in GDP.


Four reasons: (a) businesses will tend to “hoard labor” in recessions, keeping useful workers around and on the payroll even when there is temporarily nothing for them to do;


Okun’s Law is broken—especially with regard to the retention of workers in a downturn.


Manufacturing firms used to think that their most important asset was skilled workers. Hence they hung onto them, “hoarding labor” in recessions. And they especially did not want to let go of their prime productive asset when the recovery began. Skilled workers were the franchise. Now, by contrast, it looks as though firms think that their workers are much more disposable—that it’s their brands or their machines or their procedures and organizations that are key assets.

now out of order

“get ready for another jobless recovery.”

Huh ? Okun’s law was symmetric. Why isn’t the new broken-Okun law symmetric ? If the Okun’s law coefficient has shifted from 0.5 to over 1, wouldn’t that suggest that there will be a huge increase in employment when GNP recovers ?

Semi theory after the jump.

To get a bit almost theoretical, if firms don’t have hoards of hoarded workers, they will have to hire new workers in order to incrase production.

I think that Brad’s model, in which the change is caused by a reduction in the value of trained workers perceived by managers, should imply a prediction of a recovery with unusually an rapid increase in employment.

My guess is that Brad is not allowing his theoretical speculation blind him to the fact that the last two recoveries were jobless. Based on atheoretical empiricisms (which is as Paul Krugman notes always accidental theorizing) I too predict a jobless recovery, but I think that Brad’s informal model implies the opposite prediction.

I can reformulate Brad’s model. The key variable is managers perception of the persistence of shifts in demand for their products. If they think that demand for their products will recover soon, they hoard labor. If they think that it will stay low, they lay off workers until they can just meet current demand.

this means that a recession accompanied by a sectoral shift will cause a larger decline in employment. During the recovery, firms in the expanding sector will increase employment slowly as they can only train so many new workers (workers recalled from temporary layoff don’t have to be re-trained). The story is that asectoral shift causes high unemployment, a drop in demand causes high unemployment and the combination causes a sharp decline in employment followed by a jobless recovery.

Oddly, however, Brad and I have co-authored a paper with a third explanation.

Our claim is that in the USA the Okun’s law coefficient is an increasing function of the unemployment rate. The story is simple, if there is high unemployment, firms can lay workers off and then rehire them later, because the workers won’t have found new jobs and will just have to wait to get their old jobs off. This suggests that the modified Okun’s law gives a nonlinear and in particular concave relationship between unemployment and GNP minus trend (or GNP minus peak or GNP minus last years GNP). This means that the drop in GNP wich corresponds to an increase of unemployment form say 5 to 9 % is less than twice the drop in GNP which corresponds to an increase from 5% to 7%. A model in a published paper predicts well out of sample. So why is Brad psychoanalyzing businessmen ?

Of course the accidental theorist might be attracted to the accidental theory which says recoveries are jobless when the President is named George Bush. Fits the data and implies a normal recovery.

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A Review of the First Half of Bailout Nation

by cactus

A Review of the First Half of Bailout Nation

Barry Ritholtz is on my mind. I started reading Bailout Nation, Barry Ritholtz’s book (with co-author Aaron Task) about the mess we’re in, and I’m about half through. Its an easy read, and yet very informative, even though I’ve been following the whole mess for a while (and reading Ritholtz’s blog). The book ties together a lot of what look like disparate facts into a coherent and plausible story that nicely fits the facts better than any alternative presentation I’ve read. I only really have two quibbles so far – one is that the book repeats \a few points a number of times.

Another is that it seems to me that the book does not ascribe sufficient, er, richness or texture to the behavior we saw in Alan Greenspan. It assumes that Greenspan was little more than a bumbling buffoon behaving in a self-contradictory fashion, a Randian free marketeer whose primary goal was to keep equity prices up. I believed all that about Greenspan before I read the book, but Ritholtz and Task do a fine job of making the case to those who haven’t been following Greenspan’s antics all that closely. The problem, though, is that Greenspan has other motivations that should be equally obvious from the very information that the book presents.

For instance, in pages 84 and 85, the book indicts that the collapse of the NASDAQ “prodded the Federal Reserve into action. Greenspan began unprecedented mop-p operation after the bubble popped…. In January 2001, the federal Reserve started an extraordinary rate-cutting process, one for which there is no comparison.” At the bottom of the page is a table showing how the Fed made 11 rate cuts in 2001, dropping the FF from 6.5% to 1.75%. Over the subsequent pages, we are told about how the Fed then proceeded to keep rates extraordinarily low for years… and we’re told how what the degree to which the Fed acted and kept rates down was unprecedented in the Fed’s history.

All true, from Greenspan’s goal of propping up equities to the rate cuts, but there’s one thing… the NASDAQ bubbled popped in March of 2000. Greenspan only sprung into action in January of 2001. The bumbling buffoon full of self-contradictions could have sprung into action at any point, but he chose not to do so until it was evident that the next President was going to be someone he thought he agreed with ideologically, someone he felt was a fellow traveller.

Ritholtz has used the term nonfeasance (both in his blog and in the book) to describe the behavior of entities like the Fed (and the SEC and the CFTC and the rest of the clowns) toward regulating the financial sector. That is, those regulators chose to look the other way rather than step in and prevent the Wall Street circus from running amok. But Ritholtz is only partly right about the behavior of the so-called regulators, and most especially Greenspan’s Fed. See, there was nonfeasance until GW took over. After that, there was antifeasance. The cops that had previously looked aside while a gang of their buddies broke into stores in the middle of the night graduated to driving the getaway car and knocking off rival gangs. And Greenspan, at least, seems to have graduated about the time we got a President who was singing his tune. I personally don’t see that as a coincidence.
by cactus

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