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

Weekend Reflection Points

The lead article in the current AER is available here (gated, apparently, though the link isn’t working; h/t Tom Bozzo [on FB] and Brad DeLong; I was using the paper copy). The most interesting part so far: the authors only considered the documented costs of air pollution—not land, not water—in deriving the (embarrassingly negative) ROI figures for coal and oil.

As Cousin Lucia and Tom Zeller, Jr., note today, the cost of water pollution makes oil power plants an even worse option.

In such a context, Europe in general and Germany (the top maker of solar panels until China recently passed them) in particular rubs in our faces that they’re winning on the alternative-energy sources front (h/t Barry Ritholtz):

The 15 mile-per-hour winds that buffeted northern Germany on July 24 caused the nation’s 21,600 windmills to generate so much power that utilities such as EON AG and RWE AG (RWE) had to pay consumers to take it off the grid.

Rather than an anomaly, the event marked the 31st hour this year when power companies lost money on their electricity in the intraday market because of a torrent of supply from wind and solar parks. The phenomenon was unheard of five years ago.


Meanwhile, back in the U.S., it is no secret that Brad and Robert Waldmann are on one (affirmative) side of the TARP-was-a-success argument, and I’m on the other.* But even the Success crowd may pause to wonder if the short-term “profit” was a good long-term strategy:

Some large U.S. banks would have stronger capital bases to better deal with today’s market stresses had regulators not relaxed bailout repayment criteria in late 2009, a new government audit showed on Friday.

Bank of America (BAC.N) Citigroup (C.N), Wells Fargo (WFC.N) and PNC Financial (PNC.N) were allowed exit the Troubled Asset Relief Program without raising as much equity capital as initially prescribed by the Federal Reserve, the TARP Special Inspector General said in the report.

Following bank stress tests earlier in 2009, the Fed gave several banks guidance that they must raise $1 in common equity for every $2 in TARP bailout funds repaid — a formula meant to enable them to withstand future stresses.

But this standard — which was never previously made public — was quickly relaxed, allowing Bank of America, Citi and Wells Fargo to repay taxpayers nearly simultaneously in December 2009,** raising a combined $49.1 billion in equity capital.

Enforcement of the $1 in equity for every $2 repaid guidance would have required $57.5 billion in equity capital to be raised by the three institutions. PNC was later allowed to exit TARP under similar relaxed guidance. [emphasis mine]

The most recent SIGTARP report (28 July 2011), uses the word “Bailout” only once in its 304 pages—and that’s in the title of testimony by Sheila Bair, ““Statement of Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation on The Changing Role of the FDIC before the Subcommittee on TARP, Financial Services, and Bailouts of Public and Private Programs; Committee on Oversight and Government Reform, U.S. House Of Representatives.”

Noted for the record: Patch uses the same article (with minor customization) in multiple locales, highlighting it as a “local” piece. I defer to Felix as to whether this is in keeping with the rest of their “business model.”

As Dan Becker can tell you, the small business “ownership society” is not for the faint of heart. Nor, as anyone who thinks about it for more than three seconds can tell you, is it a primary driver of employment growth. Yet when the most visible and successful Management Consultancy in the United States thinks about growth, its two primary points are “take monies from the government” and “expand small businesses.” But give them credit for recognizing a point that is often obscured by H1-B trolls technology firm leaders such as Meg Whitman:

[I]t’s not just the young who can help fill the skills gap; older, experienced workers can play a part, too. In the US aerospace sector, 60 percent of the workforce is over 45. A practical response would be for governments to remove barriers—particularly those related to the provision of health care and to benefits rules—that prevent older workers from staying in the workforce longer. Germany and the Netherlands raised the participation rate of the 55-to-64 age group by 21 and 24 percentage points, respectively, between 1990 and 2009. In the Netherlands, there were significant changes to pensions and welfare benefits to improve incentives to work longer, coupled with initiatives to change public perceptions, improve employability, and reduce discrimination against older workers. [emphasis mine]

It’s nice to see McKinsey endorsing Medicare For All.

*As a general rule, the Econ-first analysts are affirmatives, the finance-grounded ones are negative. If you have to think about why that would be: one group makes its living finding $100 bills on the sidewalk that the other one swears cannot exist. As the Mark Thomas of the world would note, the issue of priors might need to be addressed.

**The reason December 2009 is important is that it meant that monies that otherwise would have to have been used to shore up capital were instead paid out as bonuses by the now-uncontrolled banks, or, in Reuterspeak, “keen to escape executive compensation restrictions associated with the bailout funds.”

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The Road to Serfdom!!

Brad DeLong points us to a post from The Nation on early Koch brothers and Hayek The Road to Serfdom!!

Yasha Levine and Mark Ames:

Charles Koch to Friedrich Hayek: Use Social Security!: [I]n early June 1973, weeks after [Charles] Koch was appointed president of the Institute for Humane Studies. Along with his brothers, Koch inherited his father’s privately held oil company in 1967…. Koch invited Hayek to serve as the institute’s “distinguished senior scholar” in preparation for its first conference on Austrian economics, to be held in June 1974.

Hayek initially declined Koch’s offer. In a letter to IHS secretary Kenneth Templeton Jr., dated June 16, 1973, Hayek explains that he underwent gall bladder surgery in Austria earlier that year, which only heightened his fear of “the problems (and costs) of falling ill away from home.” (Thanks to waves of progressive reforms, postwar Austria had near universal healthcare and robust social insurance plans that Hayek would have been eligible for.)

IHS vice president George Pearson (who later became a top Koch Industries executive) responded three weeks later, conceding that it was all but impossible to arrange affordable private medical insurance for Hayek in the United States. However, thanks to research by Yale Brozen, a libertarian economist at the University of Chicago, Pearson happily reported that “social security was passed at the University of Chicago while you [Hayek] were there in 1951. You had an option of being in the program. If you so elected at that time, you may be entitled to coverage now.”

A few weeks later, the institute reported the good news: Professor Hayek had indeed opted into Social Security while he was teaching at Chicago…. He was eligible…. On August 10, 1973, Koch wrote a letter appealing to Hayek to accept a shorter stay at the IHS, hard-selling Hayek on Social Security’s retirement benefits, which Koch encouraged Hayek to draw on even outside America. He also assured Hayek that Medicare, which had been created in 1965 by the Social Security amendments as part of Lyndon Johnson’s Great Society programs, would cover his medical needs…. [T]aking on the unlikely role of Social Security Administration customer service rep, Koch adds, “In order to be eligible for medical coverage you must apply during the registration period which is anytime from January 1 to March 31. For your further information, I am enclosing a pamphlet on Social Security.”

(h/t Mike Kimel)

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Libertarians, Government and Choice

by Mike Kimel

It has been a very long time since I looked at the National Review. Apparently it is still there.

Jonah Goldberg (apparently also still there) had a post that begins like this:

And now let us recall the “Fable of the Shoes.”

In his 1973 Libertarian Manifesto, the late Murray Rothbard argued that the biggest obstacle in the road out of serfdom was “status quo bias.” In society, we’re accustomed to rapid change. “New products, new life styles, new ideas are often embraced eagerly.” Not so with government. When it comes to police or firefighting or sanitation, government must do those things because that’s what government has (allegedly) always done.

“So identified has the State become in the public mind with the provision of these services,” Rothbard laments, “that an attack on State financing appears to many people as an attack on the service itself.” The libertarian who wants to get the government out of a certain business is “treated in the same way as he would be if the government had, for various reasons, been supplying shoes as a tax-financed monopoly from time immemorial.”

If everyone had always gotten their shoes from the government, writes Rothbard, the proponent of shoe privatization would be greeted as a kind of lunatic. “How could you?” defenders of the status quo would squeal. “You are opposed to the public, and to poor people, wearing shoes! And who would supply shoes . . . if the government got out of the business? Tell us that! Be constructive! It’s easy to be negative and smart-alecky about government; but tell us who would supply shoes? Which people? How many shoe stores would be available in each city and town? . . . What material would they use? . . . Suppose a poor person didn’t have the money to buy a pair?”

All that is true. But what Rothbard apparently didn’t get, and no doubt Goldberg doesn’t either, is that it goes the other way too. If people always got their shoes from the private sector, it would never occur to anyone that the government might provide shoes. Now it might seem stupid for the government to be in the business of footwear distribution, and in general, outside of the military, my guess is that it is.

But sometimes a different approach is what works. Sometimes when the government is doing things, it is doing them inefficiently and the private sector can do better. But sometimes it goes the other way. Sometimes when the private sector is doing things, it is doing them inefficiently and the government can do better. And sometimes, sometimes its a good idea for things to be done worse, and in a way that only the government can.

I’ll give you an example. I’ve noted a few times that you can stroll into most car dealerships in Brazil today and buy a tri-flex car. That is, the same car can run on any mix of gasoline, ethanol and natural gas. (There are two fuel tanks – one for ethanol and/or gasoline and one for natural gas.) You can then drive that vehicle into any number of fueling stations and fill up with whatever fuel is going to get you the most miles (er, kilometers) for your dollar (er, real). The technology to run cars on a number of different fuels, which you won’t see in the US for a very long time, is marketed under such exotic brand names as GM, Ford, Toyota, Honda, Volkswagen and Fiat to name a few. (Look ’em up if you haven’t heard of ’em.)

I’ve posted on how it came to be that Brazilians have choices that Americans do not, namely to buy a tri-flex vehicle. The Brazilian government wanted to reduce the country’s dependence on gasoline, but it realized that nobody would buy a car that ran on a fuel other than gasoline if there was no place to buy that fuel, and hence no manufacturer would make such cars. The government also realized that Shell and Esso and Texaco (remember them?) weren’t going to start selling other types of fuel because there weren’t enough cars on the road that could use those fuels. But the Brazilian government owned an oil company that had a chain of gas stations. One fine day, that chain of gas stations started selling ethanol even though there was no market for it. It wasn’t profitable. It was insane. No private company would have done something that stupid. But the result, a few decades later, is that about 80% of cars sold in Brazil in 2010 were flex-fuel. Guess what percentage of cars sold in the US in 2010 were tri-flex?

Rothbard would never approve of what the Brazilian government did. Neither would Goldberg. Personally, I like having choices. I wish I could pick among three different fuels for my car and go with whichever is cheapest. I suspect that in a few decades, when that technology finally arrives in the US, Goldberg might like having those choices too.

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Disaster Aid Disaster Averted, barely

By Linda Beale

Disaster Aid Disaster Averted, barely.

Once again, Republicans intent on obstructing the normal operation of the federal government unless they can extract cuts to programs they don’t like (in the name of deficit reduction) applied the combination of House recalcitrance and Senate anti-majoritarian filibuster to threaten a government shutdown and siderail needed funding for emergency assistance to ordinary Americans until they could get at least some of their objectives. A compromise that will get money to FEMA and keep the government funded for a spell has been reached.

(AP video at ataxingmatter, see link…I am still mostly missing my internet connections)

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Republican candidates and taxes

Think Progress carries quotes from the Presidential contenders and election slogans

The release of this plan immediately spurred the natural Republican tax apoplexy, with the GOP presidential candidates decrying tax increases as a surefire way to destroy jobs:

MITT ROMNEY: President Obama’s plan to raise taxes will have a crushing impact on economic growth. Higher taxes mean fewer jobs – it’s that simple. This is yet another indication that President Obama has no clue how to bring our economy back.

RICK PERRY: President Obama’s plan is a bait and switch that offers more than a trillion dollars in higher taxes for a promise of temporary tax relief…Worst of all, the Obama plan fails to provide the certainty employers need to create jobs.


MICHELE BACHMANN: Mr. President – you don’t create jobs by increasing taxes on job creators. The President’s plan to raise taxes on the American people is the wrong policy to create economic growth and jobs and shows he doesn’t understand how to turn our economy around…If Warren Buffett believes he doesn’t pay enough taxes, then he should write a check today to the Treasury, but he and the President shouldn’t enact warfare on the millions of small businesses, on charities and on middle class America with increased tax burdens.

RON PAUL:[W]hen the President starts targeting the so-called rich, he’s really targeting small business owners, so ultimately he’s threatening the little guy. The President’s plan, then, will result in a fatal broadside to the national economy from Main Street on down….A $1.5 trillion tax hike will do nothing to help us out of this mess we’re in, and will more than likely create more problems, lead to less investment, and cause more job loss at a time when Americans of all kinds are hurting.

JON HUNTSMAN: President Obama continues to demonstrate that he has no new ideas on how to create American jobs. For two and a half years he’s been peddling a version of the Buffett Tax Hike as a key pillar of his failed attempt to tax and spend and regulate this country to prosperity. That simply hasn’t worked and it won’t work now.

HERMAN CAIN: Here’s what I can tell [Obama] about math: raising taxes on anyone, no matter their income level, will do nothing to stimulate our economy, create jobs or balance our federal budget. Increasing taxes on the private sector will destroy jobs, further damaging our economy and sending even less revenue to the federal government.

NEWT GINGRICH: In the midst of the worst economy since the Great Depression, job creation must be job one for our political leaders. Instead, the president has chosen a path of political gamesmanship and class warfare with a plan that would kill jobs with higher taxes on small businesses and private capital.

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Prostate Cancer Advance, and Europeans Free Riding on American Research

by Mike Kimel

There’s a story going around in the news about a new prostate cancer drug. Here’s press release:

A life-extending new drug to treat patients with advanced prostate cancer, developed by The Institute of Cancer Research (ICR) and The Royal Marsden Hospital, has received its UK license.

Abiraterone acetate, marketed by Janssen under the trade name ZYTIGA®, has been shown in clinical trials to prolong survival for men with advanced prostate cancer. An estimated 10,500 men in the UK have advanced prostate cancer that has become resistant to standard hormone treatments.

The once-daily pill officially launches in the UK today after the European Commission earlier this month approved it for the treatment of metastatic prostate cancer. Abiraterone acetate was licensed for use in combination with the steroids prednisone or prednisolone, by men whose disease has developed resistance to conventional hormone therapies and docetaxel-based chemotherapy.

Abiraterone acetate is a new type of treatment for prostate cancer that works by blocking the synthesis of testosterone in all tissues including the tumour itself, not just the testes. This testosterone would otherwise continue to fuel prostate cancer growth and spread. Abiraterone was discovered at the ICR in what is now the Cancer Research UK Cancer Therapeutics Unit and further developed at the ICR and The Royal Marsden.*

The ICR’s Chief Executive Professor Alan Ashworth says: “This drug was discovered in the UK at The Institute of Cancer Research. Its launch is the culmination of immense hard work and dedication by scientists and clinicians here and around the world. To have reached the point where thousands of prostate cancer patients will be able to benefit from this life-extending treatment is hugely rewarding.”

Royal Marsden Chief Executive Cally Palmer says: “The development of abiraterone by The Royal Marsden and the ICR highlights the national importance of funding pioneering cancer research. We are delighted our patients at The Royal Marsden have been among the first to benefit from the very latest in drug development.”

Another quote:

Results of a major international Phase III trial of almost 2,000 men jointly led by Professor Johann de Bono from the ICR and The Royal Marsden showed that patients given abiraterone acetate lived on average 15.8 months compared to 11.2 months for men taking a placebo. Pain also eased for a higher proportion of patients taking abiraterone, while side effects were easily manageable and reversible.

From the footnotes:

Cancer Research Technology assigned abiraterone acetate to BTG International Ltd, who in turn licensed it to Cougar Biotechnology Inc., now a member of the Janssen Pharmaceutical Companies.

Now, I’m not that familiar with British entitites, but as I understand it, a publicly funded university and its research hospital developed a new wonder-drug using grants from the public, a charity, and a formerly government owned but now private company. Commercialization rights eventually ended up with Janssen, a company owned by Johnson & Johnson.

How long will it be before Zytiga gets trotted out as an example of the European healthcare system free-riding on American research and who will be the first pundit to make that argument?

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Angry Bear contributor now at Economonitor

Angry Bear contributor Rebecca Wilder has begun writing her own column, The Wilder View, at the internationally prestigious Economonitor (Nouriel Roubini).

The Wilder View at Economonitor

Europe: Why the One-Size-Fits-All Solution Won’t Work and

Linking sovereign risk to corporate credit spreads in Europe

…and is interviewed and quoted by Floyd Norris in the New York Times.

Government Debt Doesn’t Tell the Whole Story
New York Times by Floyd Norris

In Ireland, as in Spain, the government paid down debt while private sector grew,” said Rebecca Wilder, an economist and money manager whose blog at the …

You can follow her there in the sidebar feed for other blog contributions.

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Health Care Thoughts: No CLASS Act

Health Care Thoughts: No CLASS Act

The Community Living Assistance Services and Supports, aka CLASS, was to be an integral part of PPACA (Obamacare), providing a funding source for some part of long-term care costs.

When DHHS Secretary Sebelius declared she would have to fix the program because the poor design was not financially viable, the vultures started to circle. Now it appears the Obama administration is likely to abandon the program, due to the poor design.

Liberals will not believe me, but complexity is the enemy of successful implementation, and PPACA is too complicated to work.

Tom aka Rusty Rustbelt

(I don’t agree with Rusty’s notion that ‘liberals’ won’t agree…comments after the jump)

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PSA: Steve Keen at the Roosevelt in NYC tonight at 5:00/6:00

Talk is called “Neat, Plausible, and Wrong: the Deluded Discipline of Economics.”

I have to quibble with the “plausible” portion: there is no possible way to rationalize contemporary Microeconomics with any reasonable conceit that the Macroeconomics produced are “first-best” or anything similar.*

I doubt I’ll be there at 5:00, but certainly by 6:00. Hope to see some of you there.

Any questions for Professor Keen can be emailed to me or put in comments.

*This may be the root of my disagreement with Brad DeLong, who learned Macro and Micro when it was still possible—barely—to envision a GUT of Economics, even in a (weak form, as it were) Arrow-Debreu world. In the past thirty years, the strange delusion that Arrow-Debreu actually reflects the world has come to dominant Micro—with the rather predictable adverse consequence that Macro has to be more-than-the-sum-of-the-parts—i.e., include a positive social aspect—to be the best of all posible current worlds. But a positive social aspect is not part of the NeoKeynesian** cant, so you end up, effectively, declaring (for instance) that Gary Becker is wrong and discrimination is a beneficial business practice.

**As I have noted before, in economics the phrase “neo” is added to the front of a word if you are putting forth a belief set that is diametrically opposed to what came before: neoClassical and neoKeynesian are the most obvious examples of this.

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