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

Public Option…for property insurance

rdan

Trent Lott demonstrates pretty normal behavior for people who think they are prepared and are not…I guess he did not need to sign a waiver of never regretting not buying public backed insurance. Of course, how that gibes with the rhetoric of no public option and ‘taking responsibility’ is very human…it tends to change upon need and whim. Of course this will bust the snark-o-meter.
(hat tip reader dani harkin)

David Cay Johnston writes:

Unlike people without health insurance, homeowners have access to public option flood insurance.

Even those who fail to take personal responsibility to buy insurance to protect their property can get benefits, thanks in good part to politicians who are leading opponents of public option healthcare.

Consider the example of Trent Lott of Mississippi, who was that state’s senior senator when Hurricane Katrina hit in 2005, flooding his home looking out on the Gulf. Lott had not exercised personal responsibility by taking out flood insurance even though it was available from the federal government at low cost. He did have private insurance, but his insurer refused to pay much of the claim, saying it was not wind damage (which was covered by the policy), but water damage (which was excluded).

Weeks later Lott introduced Senate Bill 1936, which would have authorized retroactive flood insurance. The idea came from Representative Gene Taylor, a Democrat who represented the Mississippi Gulf Coast, which should remind us that when there is voter demand for reform, and campaign contributions are not the driving force, the parties have worked together.

Lott’s bill would have let flood victims pay 10 years of flood insurance premiums after-the-fact plus a 5 percent late payment penalty. Since this storm was rated a once in 500 years occurrence, even 10 years of premiums would not come close to covering the real costs, meaning a taxpayer subsidy was built into the Lott bill.

Instead of being laughed at by his fellow Republicans for promoting socialism, the concept of retroactive relief was warmly embraced, although not the idea for retroactive insurance. Instead the government went with handouts.

Senator Thad Cochran, also a Mississippi Republican and at the time chairman of the Senate Appropriations Committee, was key to getting taxpayer benefits for flooded property, according to Taylor’s staff. The benefits were issued and expanded twice, a total of about $18 billion in all, Taylor’s staff estimated.

Contrast the two Mississippi Republican senators’ determined action to get welfare for flooded buildings with their votes against expanding SCHIP health insurance for poor children.

Cochran opposes a public option in health care; Lott, now a lobbyist, says Obama should just declare victory after some minor tweaks, a way to oppose without quite saying so…

Any blue dogs do the same??

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Defending Schumpeter from Krugman

Robert Waldmann

Paul Krugman does not think highly of Austrian or liquidationist theories of the business cycle. He recently remade an argument which is hard to refute “the whole notion falls apart when you ask why, say, a housing boom — which requires shifting resources into housing — doesn’t produce the same kind of unemployment as a housing bust that shifts resources out of housing.”

I think the answer is simple — labor market rents. A bit more after the jump.

Well except not for this recession. I think there is one key additional assumption on which which Schumpeter relied without knowing what he was doing (this is also a case for using models and not just stories). The assumption is that there are labor market rents so the same worker will receive a higher wage in one sector than in another (and it’s not a compensating differential).

IN Schumpeter’s story, the two sectors are capital goods production and everything else (agriculture, consumption goods production and services). The key assumption that he needs is that workers would really rather work in capital goods production, because they get higher wages there. There is strong empirical evidence that this is true.

In Schumpeter’s story as written there is a bubble with over-investment, the build up of an excessive capital stock then a recession with low investment until the aggregate capital labor ratio is brought back down due to depreciation, population growth (Solow might add exogenous labor augmenting technological progress).

Your question is “Why is prolonged unemployment required to move someone from capital goods production to other and not vice versa ?” My answer is that workers in other sectors are eager to get high wage jobs producing capital goods so there is always, no matter what, at any unemployment rate a queue of workers in line for those jobs. Thus the minimum unemployment rate ever seen is plenty to support any flow into capital goods production.

However, to get people to flow the other way takes a huge push — high unemployment. I’m pretty sure I can write down a model that works in an hour. Note I said write down not type up.

Clock starts 9:00 pm EST October 6 2009.

update:Now 9:51 pm EST October 6 2009. I haven’t been watching the clock. I claim that I have a model written down. It is not solved (no closed form solution for numerical solution).

update 2: In the cold grey light of morning, my 1 hour model looks pretty dumb. I have modified it so it isn’t totally dumb and might actually simulate it numerically. However I did run a bit over the hour as it is now 2:14 AM EST. I did sleep most of that time.

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Good Policy from the Bush administration

Robert Waldmann

OK now that I have your attention, the policy is publicly funded primary care in public clinics staffed by federal employees (including the MDs). This is an excellent policy which provides care for the uninsured and reduces health care spending, because then they don’t have to go to emergency rooms then declare bankruptcy. So says the notoriously lefty Wall Street Journal (news pages but still the WSJ)
via Atrios of course.

Details and explanation of why this makes me praise Bush II after the jump.

Click the link for a serious description. I want to cut and past a patient testimonial

O’Delia Mandrell, 57 years old, said she got “pretty desperate” last year and went to the center for the first time. The former Navy reservist won’t receive full health benefits until she turns 60, and said she had to quit working other jobs because of a virus that has weakened her body. Doctors think it may be Lyme disease.

“They haven’t charged me a dime and really work with me 100%,” she said.

Warning, your milage may differ. Typically there are fees on a sliding scale based on income starting at $20 a visit.

Now how much does this cheap care cost the country ?

A new report by researchers at George Washington University estimated that additional funding for centers in the House bill would save the health-care system $212 billion to $251 billion over the next decade, in part by reducing the number of visits to hospitals and more highly paid private doctors.

One of the toughest information gathering challenges I have ever faced was the challenge to find a good Bush administration policy initiative. The fact that the challenge came from Andrei Shleifer, who is uhm not a lefty, made it especially interesting. So now I read

“Former President George W. Bush doubled financing for the centers, bringing their number to 1,200 nationwide.”

Another example would be HUD adopting “housing first,” that is not so tough love for the homeless based on the idea that the homeless would be better off if we just gave them apartments (even if they are still abusing substances).

The point is that public assistance in the USA is so insanely stingy and punitive that even the Bush administration made major progress here and there by reducing the stinginess and punitiveness.

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Chinese Yuan

By Spencer,

Reading the financial press, various economic blogs and watching CNBC clearly leaves the impression that the current weakness in the dollar is having such a massive adverse impact on the holding of the Peoples Bank of China ( the Chinese central bank) that they are very seriously considering selling their dollar holdings and shifting into alternative reserve assets.

Given all that I’ve been reading and hearing I thought it would be informative for people to see what is actually happening to the Yuan-Dollar exchange rate.

That’s right. The Yuan is pegged to the dollar and has not changed one cent this year. Because the dollar has weakened this means that the yuan has weakened against the Euro and Yen, but the change is not out of line with other swings over the past decade. This means that Chinese exports have become more competitive in Japan and Europe, a highly desirable result from the
perspective of the Peoples Bank of China..

Actually, given the rally in the US bond market so far this year the Peoples Bank of China has actually experienced a very significant increase in the value of its holdings of US financial assets so far this year.

Makes one wonder about the value of so much of the information provided by the press, CNBC and economic blogs.

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Adam Smith’s Lost Legacy

rdan

Adam Smith’s Lost Legacy, a blog maintained by Gavin Kennedy who resides in Edinburgh, Scotland, is a wonderful gem to visit to take a thorough look at the broad extent of Smith’s writings. He makes a wonderful defense of Adam Smith that rescues his reputation as a thinking man instead of the one dimensional character presented today. Is Adam Smith from Chicago or Kirkcaldy?

We lose something of our character if we do not get his name off bumpersticker style proclamations of his intellect demonstrated by the two soundbites attached to his name: one, reduced simply to a fetish about an ‘invisible hand’ in markets by some of his promoters in media (or even detractors), and two even as he is taught in textbooks to college freshmen by good teachers. Lively conversation will happen I hope.

With kind permission from Mr. Kennedy, I will cross post some of his posts this week.

Update: David Leonhardt writes a cogent piece in the New York Times on Adam Smith.

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The Fed called a mulligan

by Rebecca

Ex post, it is obvious that the Fed was way too tight in the second half of 2008. To be sure, the FOMC was actively engaged in its standard easing policies; however, the Fed got the Treasury to aid in its sterilization efforts, and later the Fed fast-tracked the interest on reserves (IOR) program (originally set for an October 1, 2011 start). The Fed was misguided in its sterilization efforts, as aggregate demand was already collapsing.

Something was afoot well before the collapse of Lehman Brothers. David Beckworth at Macro and Other Market Musings backs up Scott Sumner’s (TheMoneyIllusion blog) theories with an intuitive analysis using the equation of exchange (MV = PY):

Below is a table with the results in annualized values (Click to enlarge):

This table confirms what we saw in the levels: a sharp decline in velocity appears to be the main contributor to the collapse in nominal spending in late 2008 and early 2009 as changes in the monetary base and the money multiplier largely offset each other.

… (And a little later)

Unfortunately, though, it appears the Fed was so focused on preventing its credit easing program from destabilizing the money supply that it overlooked, or least underestimated, developments with real money demand (i.e. velocity). As a consequence, nominal spending crashed.

This line research essentially posits that the Fed got it terribly wrong in the second half of 2008. As David shows in the table above, the velocity of money was dropping with households clinging to cash under heightened economic uncertainty.

If this theory is true, then one could view the $300 billion Treasury buyback program (see the NY Fed’s Q&A here) as the Fed’s equivalent of “calling a mulligan” in an attempt to take back its sterilization efforts in 2008.

The $300 billion buyback of Treasuries will restock about 75% of the Fed’s Treasury holdings (focused in notes and bonds rather than bills, but there is a contemporaneous objective to pull long rates down) that dwindled previous to the onset of the SFP account. Unfortunately, though, it was already too late.

(The Treasury issued short-term notes and deposited the proceeds with the Fed in order to aid in the Fed’s sterilization efforts – see an old post of mine for a more thorough explanation of the SFP, or the Supplementary Financing Program.)

Another event recently occurred that would support the view that the FOMC is backpedaling: the Treasury’s Supplementary Financing Program (SFP) is going bye bye.

The Treasury started this week to unwind its account with the Fed (the SFP listed on the liabilities side of the Fed balance sheet). This is almost surely going to end up as excess reserve balances in the banking institution, as the Fed is unlikely to sterilize these flows. (Note that one could see if the Fed was sterilizing the flows if its Treasury holdings started to fall again.)

I guess that the real question is: where would we be now if the Fed had pushed harder on the money supply in 2008? I imagine that Angry Bear readers have many thoughts on this.

Rebecca Wilder

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Social Security: An Update

by Bruce Webb

If you click on the Social Security link in the upper left sidebar you are sent to an index page on my website which in turn links back to an extended series of posts here at Angry Bear starting in May of 2008. Something that apparently a reader did this morning leaving the following comment:

Larry said…
I’d greatly appreciate an update, given the latest revenue numbers, which show outlays exceeding income at least for the time being.

Well I left an extended reply there but thought I would supplement it with a brief version here. (Well it didn’t turn out brief, sorry.)

It is quite possible that 2009 and 2010 will see Social Security go cash flow negative in that they will take in a little less in cash via payroll tax and tax on benefits than they will pay out in benefits. Whether this is a problem or not depends on your views about the Social Security Trust Fund. Legally Social Security has roughly $2.5 trillion dollars in assets which in turn represent about 20% of total U.S. Public Debt. Under the law Social Security is on an equal standing with all other creditors who have lent money to the U.S. and expect to get it back based on Full Faith and Credit of the United States. Now there are some valid questions about whether the U.S. can sustain a Public Debt load that is as of last Friday $11,920,519,164,319.42 and projected to grow at $1 trillion a year for the next 10 years. On the other hand people who are using legalisms to tell you that somehow the $2.5 trillion of that $11.9 trillion that is owed to current workers and retirees is in a junior debt position to the $800.5 billion owed to China are blowing smoke. Legally, morally and even more important electorally the claims of American workers and retirees are if anything better than those of the Chinese Central Bank.

There are people who will make earnest claims that one branch of government cannot owe money to another branch. There is no legal basis for that claim, it is a simple exercise in logical hair splitting. The reality is this. A major part of total American income has been tapped to pay out retirement benefits to workers and to build up a reserve to continue those pay outs for future retirees. The excess dollars have been borrowed on behalf of all Americans including those who gain their income from sources not exposed to this particular source of taxation. Those people, whose incomes range from the lower six to the upper eight digits, by and large don’t want to pay those dollars back and have hired people to manufacture reasons to convince people making five digit incomes or less that America as a whole simply can’t afford to pay that money back and that the lower 95% or so of Americans just have to lump it and accept that as a lost cost. Well we don’t have to lump it and have at our disposal democratic means that ensure that the the six to eight digit people pay back their fair share of the money that we all borrowed. Unless of course we fall for the spin being presented by the paid spinners at the Concord Coalition, Cato, and American Enterprise Institute. (And those were not chosen at random, they are the collective headquarters of the War on Social Security).

So my answer to Larry is: We have $2.5 trillion dollars backed by the Full Faith and Credit of the United States in the Social Security Trust Funds. Those dollars are currently earning around $110 billion in interest this year which is more than enough to cover what may be a $5 billion or so shortfall in tax income this year and potentially more next. Social Security is still running large surpluses and Trust Fund balances will continue to increase until around 2022 and then start shrinking until they fall under a 100% reserve around 2026 en route to running out totally by 2037. If we want to maintain full scheduled benefits after 2037 we need to make minor changes in revenue either starting immediately or when Social Security falls out of Short Term Actuarial Balance (which the Trustees define as not having a 100% reserve in each of the next 10 years). But unless you simply discount that $2.5 trillion dollar balance and the interest it earns to zero a cash flow shortfall representing less than 1% of total outlays for Social Security is absolutely nothing to worry about. And those who earnestly tell you different are liars, thieves or people deceived by the liars and thieves.

(BTW some of the liars are some of the nicest people you will meet. Just as people who are paid to represent rapists and murderers may be nice people in person. That doesn’t mean that their goals are benign. So feel free to substitute ‘paid advocate’ for ‘liar’ if you like, it doesn’t change the substance.)

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Why Canada and Mexico are Different (It’s Not Just Toque versus Sombrero)

Canadians feel intuitively that trade restrictions between the US and Canada are different from those between the US and Mexico and other low-wage nations. It’s not just that Canadians want to protect their own interests, though of course we do. Perhaps this paper can expand the discussion.

From “International trade, offshoring, and US wages“, Avraham Ebenstein Ann Harrison Margaret McMillan Shannon Phillips, 31 August 2009

“…We then ask whether falling manufacturing employment and rising wage inequality are related to trends in offshoring activities and international trade. One measure of the increase in offshoring activities for US companies is the number of workers employed “offshore” by US multinationals (firms which account for most of US manufacturing employment). Figure 3 shows that the number of workers employed by US multinationals in low-income countries nearly doubled over the last 25 years, while such employment in high-income countries remained roughly constant. One implication is that any employment costs at home of offshoring activities abroad are likely to be concentrated in low-income countries (a result our research confirms)…”

“…Policies (such as those proposed by the Obama administration) designed to curb the negative effects of offshoring on US jobs need to distinguish between offshoring to rich and poor countries. Since the negative effects are restricted to lowincome destinations, any policies which discourage offshoring in high-income regions (such as Ireland or France) will have the unintended effect of hurting the very workers they are designed to protect…”

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TARP, Yet Again: Inflationary?

Back in the old days of derivatives (the mid-1980s), there was an international commercial bank that was famous for declaring how much good derivatives had done for it.

It was famous because it was common knowledge in the marketplace that the bank would have its swap counterparties “buy out” the positions where it was due money, while those on which it had a debit debit were kept on its books.

So I wasn’t exactly either surprised or believing when the NYT announced, to much fanfare, that there was a “profit” being made on the bailout funds. As Bruce Webb noted here at the time:

These early returns are by no means a full accounting of the huge financial rescue undertaken by the federal government last year to stabilize teetering banks and other companies.

The government still faces potentially huge long-term losses from its bailouts of the insurance giant American International Group, the mortgage finance companies Fannie Mae and Freddie Mac, and the automakers General Motors and Chrysler. The Treasury Department could also take a hit from its guarantees on billions of dollars of toxic mortgages.

But it got nice headlines at the end of August, when talk of “green shoots” and “inflation fears”needed to get momentum.

Featured less prominently is a now-week-old LAT article with a more realistic perspective:

The Treasury is unlikely to get back the full amount of money lent under the Troubled Asset Relief Program despite a recent spate of repayments from large banks, warned the program’s watchdog.

The program “played a significant role” in rescuing the financial system from a meltdown, Neil Barofsky, special inspector general for TARP, testified before the Senate Banking Committee on Thursday. But it was “extremely unlikely that the taxpayer will see a full return on its TARP investment,” according to his prepared testimony.

The official story remains that the large banks will be paying everything back. If that’s true, then the answer to Rebecca’s question of how to drain liquidity from the financial system is clear: take the paybacks and disappear the monies. It’s only if there is an excess shortfall on the securities that excess money will be in the system.

So, if the NYT was correct at the end of August, or the cheerleaders are correct now, there will not be an inflation issue, or an excess bubble, just a little “extra lubricant” making certain that valuable securities attain their full value that will naturally be removed from the system (both as cash and as Lines of Credit) as the value is realized.

Indeed, the only reason to fear inflation from TARP/TAF sources is if you expect a significant shortfall in the actual values, something for which you can only compensate by leaving a large quantity of excess lendings in the market. Which, by definition, will not and cannot happen if all the major players repay their allocations in full (let alone with interest).

Second derivatives don’t make inflation. And money loaned by the Fed that is fully repaid doesn’t make inflation unless it is loaned out (“multiplier effect”), which hasn’t been and still isn’t happening.

What there is is “excess” cash sitting on bank balance sheets in lieu of full repayments. But it’s not being used for other things—no multiplier effect—and it can be disappeared by the Fed as it is paid back.

So where is the inflation, unless money has been added to the system without there being value behind it?

Somewhere, an old derivatives manager is watching. Maybe he recognizes his strategy in the story unfolding. Maybe, just maybe, he also kept underlying deals that didn’t have losses as big as the gains he took.

It’s possible. But it was never the way to bet.

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