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

Be Famous!

Not really, but you can be famous for fifteen minutes, or more accurately, famous for fifteen people. For various vacation and job-related reasons, Kash will be posting rarely from around 12/25 to 1/8 and I won’t be able to post much during the first week in January. But you can.

My first guest-blogging experiment was a smashing success (it brought Kash to the blog), so bringing in a guest-blogger or two seems like a much better idea than going on hiatus. If you’re interested, email me a sample post. Regardless of who wins, I’ll definitely post every reasonable entry (perhaps with some editing), so there’s nothing to lose.

There are few requirements. An interest in economics is important but a Ph.D is not. Acceptable political views range from a bit right of Nader to John McCain, which probably encompasses at least 70% of the population. And it’s definitely open to people with their own blogs. In fact, it’s probably a great way for a new blog to gain a modest amount of exposure.

AB

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If You Thought Ari Fleischer Was Good

Susan, in her run-down of the candidates, has an idea for an even better press secretary, though I’d replace “Dean” with “any Democratic President”:

Al Sharpton. Rev, I like your style. I really do. But I wish you’d answer questions directly, it’s really annoying. However, my fondest wish would be to see you as White House press secretary under President Dean’s first administration.

AB

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A New Transfer from US Taxpayers to Corporate America

This newly announced transfer is more subtle than some of the Bush administration’s many, many actions that have transferred wealth from US taxpayers to a few select corporations – and thus to those few individuals who own and run them – but it’s a transfer nonetheless.

What am I referring to? I’m referring to the Bush administration’s announcement that firms from Canada, France, Germany, Russia, and other war-opposers are not allowed to bid for the $19bn in Iraq reconstruction contracts. The result of such a ban will be to reduce the competition that the various contracts will be subject to. And when competition is reduced, prices almost always go up. A perfect example of what happens when contracts are awarded with less-than-full competition can be found in today’s NYTimes:

The United States government is paying the Halliburton Company an average of $2.64 a gallon to import gasoline and other fuel to Iraq from Kuwait, more than twice what others are paying to truck in Kuwaiti fuel, government documents show…

A company’s profits on the transport and sale of gasoline are usually razor-thin, with companies losing contracts if they overbid by half a penny a gallon. Independent experts who reviewed Halliburton’s percentage of its gas importation contract said the company’s 26-cent charge per gallon of gas from Kuwait appeared to be extremely high.

Less competition (and Halliburton faced none in receiving its contract), higher prices.

But who pays these higher prices? Naturally, the US taxpayer. Nearly all of the money for Iraq’s reconstruction is coming from US taxpayers, as we all know. And where does the extra money go? In this case, Halliburton will earn increased profits, most of which will probably go to its executives and largest shareholders.

With the Bush administration’s newly announced rules regarding bidding for future reconstruction contracts, we can be sure that the winners of future contracts to rebuild Iraq will also face less competition, charge higher prices, earn higher profits, and accomplish less than they would have if they had faced full international competition. Of course, some bids may still face competition, either between competing US firms, or with firms from the other members of the coalition such as the UK, Micronesia, or Albania. But many contracts will doubtless face less competition than they would have otherwise.

That’s why these new rules mean that US taxpayers will have to pay more money to get less rebuilding done in Iraq — and the difference will end up as increased profits for a few big American corporations. As AB put it yesterday in his excellent analysis of Medicare reform, I will leave it as an excercise for the reader to figure out which US firms will gain the most.

Kash

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Campaign Finance Reform Upheld

The Supreme Court just issued a ruling upholding the McCain-Feingold campaign finance law that was passed in 2002. So now it’s official: the ban on soft money stands.

Who is celebrating more today, Democrats or Republicans? I think it’s an open question — but it may well be Republicans. Democrats have suffered most under the campaign finance law, because in the past they’ve typically received a few mega-donations for the bulk of their funding, whereas Republicans have been better at receiving a larger number of $1000 or $2000 hard money donations.

But that may be becoming less relevant. As I discussed in this previous post, some mega-donors are finding alternate ways to use their money to help Democrats. One unintended consequence of campaign finance may therefore be the rise of organizations like MoveOn, as this interesting Salon article describes. It’s an interesting question, whether MoveOn would have been so successful without campaign finance reform.

Kash

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Playing Hardball with Bush

Hardball is the only game that the Bush administration is interested in playing, both domestically and internationally. It played it again yesterday, with the news that countries that didn’t support the Iraq invasion will be punished by being declared ineligible to bid on reconstruction contracts.

The Europeans are catching on, though. First, there was the case of the steel tariffs, where the EU discovered that threatening to impose tariffs on the US worked to get Bush’s attention. Now the lesson seems to be sinking in: diplomacy and dialogue won’t accomplish things with the Bush administration – only threats and punishment will. So, they’ve switched tactics over another trade dispute, and on December 8 they decided to levy tariffs on $4bn of US goods in retaliation for a US law that the WTO has ruled unfairly subsidizes US exporters at the expense of other countries.

The interesting thing is that the WTO actually issued its final ruling in the EU’s favor on this case back in May, at which time the EU had the legal authority to impose retaliatory tariffs on the US. However, until this week, they had decided not to actually impose the tariffs, and instead pursue a dialogue with the US to allow for a non-confrontational resolution to the US’s violation of WTO rules. It seems that after having hardballs thrown at them by the Bush administration for 3 years – with another one yesterday – and seeing the positive results when they throw a hardball back at Bush, the Europeans have learned that dialogue and patience will not be rewarded.

Kash

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Food For Thought

Take a quick look at the graph in the previous post and ask yourself what happens when healthy seniors who are reasonably sure that their drug costs will be under $800 decide to opt out of the coverage program. Hint: total revenue from drug premiums goes down and the average drug cost per enrollee goes up.

AB

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Medicare Drug Benefit Update

Reading Today’s Daily Howler, I see that the NYT has a new story on the Medicare drug benefit. The Problem? The NYT’s figures and analysis exclude the $420 annual premium, grossly overstating the true benefits provided under the plan.

To illustrate the distortion, I took the data from an earlier post on the Medicare Drug Benefit and divided the out-of-pocket expense by total drug costs to derive the percentage of drug costs paid by the enrollee. Then I repeated the analysis with the enrollee’s premium costs excluded. As you can see, excluding those costs changes the picture substantially, particularly when expenses are in the non-catastrophic range. For example, $810 is the break-even number, meaning that if an enrollee’s total drug costs are $810 then total out-of-pocket expenses are exactly $810. If drug costs are less than that, the enrollee is paying more than she would without coverage, and vice-versa. While in reality a senior with $810 in drug costs pays an amount equal to 100% of their drug costs, the Times’ error makes it incorrectly appear that the government is paying a bit more than 50% of that senior’s drug costs (and the senior a bit less than 50%).

Note that the problem is not that seniors with less than $810 in drug costs will pay more under the plan than they would otherwise. That’s the nature of insurance and risk-sharing. Everybody puts some money into a pool at the start of the year. Those who are unlucky and need a lot of prescription drugs withdraw money; the fortunate ones are healthy and do not take money out of the pool. (One difference in this case is that seniors put only a portion of the money into the pool. Taxpayers add the rest.)

The problem is that by excluding the deductible the NYT — either out of ignorance or malevolence — grossly overstates the value of the just-signed plan. Left as an exercise for the reader is why the allegedly Liberal New York Times would distort thusly.

AB

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The Dean Endorsement, con’t

Wondering if Gore’s endorsement of Dean matters? Take a look at this graph to see the effect it has had on Dean shares in the Iowa Electronic Market. The price of Dean shares is represented by the green line.

Apparently, at least among the individuals trading shares on the IEM, this news has increased Dean’s chance of winning the nomination from about 60% to about 70%. Not a bad bounce from a single endorsement.

For those who aren’t familiar with it, by the way, the IEM is a forum at which individuals can buy and sell shares representing individual candidates, either for the nomination or for the general election. If you’re holding a share of Dean and he wins the nomination, you get $1. If you paid less than $1 for the share, you keep the profits. It’s a fantastic way to check the opinion of a bunch of people (those who trade on the IEM) who put their money where their mouth is.

Kash

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The Fed’s Take

The Fed’s Open Market Committee – the group that sets the US’s short term interest rates – met today and decided to hold interest rates constant. They also issued a statement indicating their sense of the economy’s direction:

The Committee perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. The probability of an unwelcome fall in inflation has diminished in recent months and now appears almost equal to that of a rise in inflation. However, with inflation quite low and resource use slack, the Committee believes that policy accommodation can be maintained for a considerable period.

Kash

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Comparing Two Great Depreciations

The dollar continued its fall against the euro today, hitting its eighth record low in a row. It’s now down to around 1.22 $/€. This set me to wondering. Sure the dollar has fallen pretty consistently over the past couple of months. But is this depreciation of the dollar large by historical standards?

The most dramatic depreciation of the dollar over the past quarter century was the roughly 50% fall in the dollar between early 1985 and late 1987. That dollar depreciation was intentional – all of the major economies of the world agreed to jointly act to push down the dollar, in the famous “Plaza Accord” of 1985. (Okay, maybe ‘famous’ is the wrong word to use… unless you’re talking to a bunch of international economists.)

So I find it interesting to see that the recent history of the dollar against the euro looks remarkably similar to the path of the dollar against the DM back in the 1980s. Here’s the graph:

The answer to my original question is yes. The current depreciation is indeed large by historical standards – and is starting to approach the magnitude of the most dramatic dollar depreciation in the past quarter century.

Kash

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