Coyote Blog

Russ Roberts over at Cafe Hayek quotes from a Cathy O’Neill review of Nate Silvers recent book:

Silver chooses to focus on individuals working in a tight competition and their motives and individual biases, which he understands and explains well. For him, modeling is a man versus wild type thing, working with your wits in a finite universe to win the chess game.

He spends very little time on the question of how people act inside larger systems, where a given modeler might be more interested in keeping their job or getting a big bonus than in making their model as accurate as possible.

In other words, Silver crafts an argument which ignores politics. This is Silver’s blind spot: in the real world politics often trump accuracy, and accurate mathematical models don’t matter as much as he hopes they would....

My conclusion: Nate Silver is a man who deeply believes in experts, even when the evidence is not good that they have aligned incentives with the public.

Distrust the experts

Call me “asinine,” but I have less faith in the experts than Nate Silver: I don’t want to trust the very people who got us into this mess, while benefitting from it, to also be in charge of cleaning it up. And, being part of the Occupy movement, I obviously think that this is the time for mass movements.

Like Ms. O'Neill, I distrust "authorities" as well, and have a real problem with debates that quickly fall into dueling appeals to authority.  She is focusing here on overt politics, but subtler pressure and signalling are important as well.  For example, since "believing" in climate alarmism in many circles is equated with a sort of positive morality (and being skeptical of such findings equated with being a bad person) there is an underlying peer pressure that is different from overt politics but just as damaging to scientific rigor.  Here is an example from the comments at Judith Curry's blog discussing research on climate sensitivity (which is the temperature response predicted if atmospheric levels of CO2 double).

While many estimates have been made, the consensus value often used is ~3°C. Like the porridge in “The Three Bears”, this value is just right – not so great as to lack credibility, and not so small as to seem benign.

Huybers (2010) showed that the treatment of clouds was the “principal source of uncertainty in models”. Indeed, his Table I shows that whereas the response of the climate system to clouds by various models varied from 0.04 to 0.37 (a wide spread), the variation of net feedback from clouds varied only from 0.49 to 0.73 (a much narrower relative range). He then examined several possible sources of compensation between climate sensitivity and radiative forcing. He concluded:

“Model conditioning need not be restricted to calibration of parameters against observations, but could also include more nebulous adjustment of parameters, for example, to fit expectations, maintain accepted conventions, or increase accord with other model results. These more nebulous adjustments are referred to as ‘tuning’.”  He suggested that one example of possible tuning is that “reported values of climate sensitivity are anchored near the 3±1.5°C range initially suggested by the ad hoc study group on carbon dioxide and climate (1979) and that these were not changed because of a lack of compelling reason to do so”.

Huybers (2010) went on to say:

“More recently reported values of climate sensitivity have not deviated substantially. The implication is that the reported values of climate sensitivity are, in a sense, tuned to maintain accepted convention.”

Translated into simple terms, the implication is that climate modelers have been heavily influenced by the early (1979) estimate that doubling of CO2 from pre-industrial levels would raise global temperatures 3±1.5°C. Modelers have chosen to compensate their widely varying estimates of climate sensitivity by adopting cloud feedback values countering the effect of climate sensitivity, thus keeping the final estimate of temperature rise due to doubling within limits preset in their minds.

There is a LOT of bad behavior out there by models.  I know that to be true because I used to be a modeler myself.  What laymen do not understand is that it is way too easy to tune and tweak and plug models to get a preconceived answer -- and the more complex the model, the easier this is to do in a non-transparent way.  Here is one example, related again to climate sensitivity

When I looked at historic temperature and CO2 levels, it was impossible for me to see how they could be in any way consistent with the high climate sensitivities that were coming out of the IPCC models.  Even if all past warming were attributed to CO2  (a heroic assertion in and of itself) the temperature increases we have seen in the past imply a climate sensitivity closer to 1 rather than 3 or 5 or even 10  (I show this analysis in more depth in this video).

My skepticism was increased when several skeptics pointed out a problem that should have been obvious.  The ten or twelve IPCC climate models all had very different climate sensitivities — how, if they have different climate sensitivities, do they all nearly exactly model past temperatures?  If each embodies a correct model of the climate, and each has a different climate sensitivity, only one (at most) should replicate observed data.  But they all do.  It is like someone saying she has ten clocks all showing a different time but asserting that all are correct (or worse, as the IPCC does, claiming that the average must be the right time).

The answer to this paradox came in a 2007 study by climate modeler Jeffrey Kiehl.  To understand his findings, we need to understand a bit of background on aerosols.  Aerosols are man-made pollutants, mainly combustion products, that are thought to have the effect of cooling the Earth’s climate.

What Kiehl demonstrated was that these aerosols are likely the answer to my old question about how models with high sensitivities are able to accurately model historic temperatures.  When simulating history, scientists add aerosols to their high-sensitivity models in sufficient quantities to cool them to match historic temperatures.  Then, since such aerosols are much easier to eliminate as combustion products than is CO2, they assume these aerosols go away in the future, allowing their models to produce enormous amounts of future warming.

Specifically, when he looked at the climate models used by the IPCC, Kiehl found they all used very different assumptions for aerosol cooling and, most significantly, he found that each of these varying assumptions were exactly what was required to combine with that model’s unique sensitivity assumptions to reproduce historical temperatures.  In my terminology, aerosol cooling was the plug variable.

By the way, this aerosol issue is central to recent work that is pointing to a much lower climate sensitivity to CO2 than has been reported in past IPCC reports.

What state has the highest income inequality?

Hint:  Think Hunger Games

Answer here.  It turns out that this was a trick question.  It was not any of Districts 1 through 50.  It is the Capitol, the District of Columbia.  By far.  Second place New York (district one) is not even close.

The act of shopping is often denigrated by the literati as shallow and self-indulgent.  But shopping is at the very heart of why a free market works.  It enforces discipline on suppliers because they buyers will be comparing their price and quality and feature set to their competitors.

In health care, we have all but ended the act of consumer shopping.  Most of our medical expenses are paid by third parties, and we are just not very careful when spending other people's money.  These third parties sometimes try to be diligent about what we pay, but it is a losing task and in doing so they end up irritating everyone.

And thus, we get this:

You can find it on the Internet for $250 or less. But if Medicare is paying, a standard-issue brace for back patients costs more than $900.

In a report expected Wednesday, federal investigators say Medicare paid an average of $919 for back braces that cost suppliers $191 apiece, providing a window on how wasteful spending drives up health care costs.

“The program and its beneficiaries could have paid millions of dollars less if the Medicare reimbursement amount … more closely resembled the cost to suppliers,” says the report from the inspector general of the Health and Human Services Department. The Associated Press obtained a copy.

I discuss the phenomenon in health care more in this part 1 on a three part series I wrote at Forbes

I am not sure I understand Kevin Drum's argument for capital controls.  He seems to be arguing that these controls are a sort of financial speed limit and making an awkward analogy to highway speed limits to justify them.

In a world where I as a taxpayer have to bail out banks, I don't have a huge problem with capital requirements for banks, though this seemingly simply topic is rife with unintended consequences -- I have seen it argued persuasively that the pre-2008 Basil capital requirements helped fuel the housing bubble by giving special preference to MBS in computing capital.  In fact, one might argue the same for the sovereign debt crisis, that by creating a huge demand for sovereign debt for bank balance sheets it fueled an unsustainable expansion in such debt.

Anyway, the point of this post was capital controls.  Drum quotes this from an IMF report:

19. Indeed, as the recent global financial crisis has shown, large and volatile capital flows can pose risks even for countries that have long been open and drawn benefits from capital flows and that have highly developed financial markets. For example, in several advanced economies, financial supervision and regulation failed to prevent unsustainable asset bubbles and booms in domestic demand from developing that were partly fueled by cheap external financing. Rather than favoring closed capital accounts, these experiences highlight the need for policymakers to remain vigilant to the risks. In particular, there is a constant need for sound prudential frameworks to manage the risks that capital inflows can give rise to, which may be exacerbated by financial innovation.

The logic, then, is that bubbles are exacerbated by inflows of foreign capital so capital controls can keep bubbles from getting worse.  I have very little knowledge of international finance, but let me test three thoughts I have on this:

1. Doesn't this cut both ways?  If bubbles can be inflated by capital inflows, can't they also be deflated by capital outflows?  Presumably, if people domestically see the bubble, they would logically look for other places to invest their money.  International investments outside of the overheated domestic market are a logical alternative, and such capital flows would act a s a safety valve to reduce pressure on the bubble.  So wouldn't capital controls just as likely make bubbles worse, by confining capital within the bubble, as make them better by preventing new capital from outside the country flowing in?
2. The implication here is that the controls would be dynamic.  In other words, some smart person in government would close the gates when a bubble starts to build and open them at other times.  But does that not presupposed the ability to see the bubble when one is in it?  Certainly there were a few who pointed out the housing bubble before 2008, but few in power did so.  And even if they had seen it, what is the likelihood that they would have pointed it out or taken action?  Who wants to be the politician who pops the bubble?  Remember the grief Greenspan got for pointing to an earlier bubble?
3. Controls on capital inflows tend to be anti-consumer.  Yeah, I know, no one in government ever seems to care when they pass protectionist laws that protect 100 tire workers at the cost of higher tires for 100 million drivers.  But limiting capital inflows would reduce the value of the dollar, and make anything imported (or made from imported parts or materials) more expensive.

Apparently Swedish unions are demanding a looser monetary policy

Forget Chuck Schumer's cat-out-of-the-bag 'get back to work' comments to Bernanke, now it is union-leaders who are advising the world's central bankers. "There is a not a single reason not to lower rates" exclaims Sweden's trade union confederation to the central bank as he begins negotiations with employers on wage deals for next year. His demands (for lower rates) are "far from excessive" and he adds "should not cause inflation" as Swedish organized labor have "never called for levels that ... could not be supported economically."

Inflation and monetary debasement have always been Progressive favorites -- until, of course, they were not.  Consider the plight of the worker in Weimar Germany

By mid-1923 workers were being paid as often as three times a day. Their wives would meet them, take the money and rush to the shops to exchange it for goods. However, by this time, more and more often, shops were empty. Storekeepers could not obtain goods or could not do business fast enough to protect their cash receipts. Farmers refused to bring produce into the city in return for worthless paper. Food riots broke out. Parties of workers marched into the countryside to dig up vegetables and to loot the farms. Businesses started to close down and unemployment suddenly soared. The economy was collapsing.

It was total hell.  If a worker's family member could not find something to buy in the morning with the worker's morning pay packet, the money was worthless by dinner time.  Not to mention the incredible lost productivity of all those man-hours spent running around trying to find goods on shelves (of which we got a small taste post-Sandy, as people spent hundreds of dollars of their own time waiting in queues because the government would not let gas station owners charge them an extra $20 for scarce gasoline).

I do not agree with Mitt Romney's implied protectionism in his ads, particularly when he says

Obama took GM and Chrysler into bankruptcy and sold Chrysler to Italians who are going to build Jeeps in China

The problem with Obama's intervention in the GM and Chrysler bankruptcies was cronyism -- the protection of favored insiders to the detriment of the operation of the rule of law -- rather than any accelerated globalization.  The auto industry is a global business, deal with it. We should be thrilled that Chrysler is participating in the Chinese economy, an opportunity they would not have had a generation or two ago.  This kind of populist BS is exactly why I voted Johnson, not Romney, this morning.

Anyway, this statement has been subject to a lot of "fact-checking."  Chrysler head Sergio Marchionne wrote a letter in the Detroit News, and while he did not attempt to deny the part about Italians (though that would have been funny), he did write:

Chrysler Group's production plans for the Jeep brand have become the focus of public debate.

I feel obliged to unambiguously restate our position: Jeep production will not be moved from the United States to China.

OK, thanks for the clarification.  But wait, the letter goes on.  He spends a lot of time explaining how Chrysler is investing a lot in Jeep SUV development and production, and that many jobs are being added making Jeeps.  In fact, Jeep SUV's seem to be the big bright spot in the Chrysler turnaround, which is funny because Obama's logic for handing Chrysler over to Fiat for about a dollar was that Fiat would turn Chrysler around with all of its great small car designs.

Anyway, the really interesting part comes late in the article, where he says in paragraph 9:

Together, we are working to establish a global enterprise and previously announced our intent to return Jeep production to China, the world's largest auto market, in order to satisfy local market demand, which would not otherwise be accessible.

So Chrysler ... is going to build Jeeps in China.

This is why the whole "fact check" genre is so stupid.   We could fact-check this three ways, depending on what political axe we want to grind:

1. We could say that Romney's ad was exactly correct, that Chrysler's CEO says it is going to build Jeeps in China, just as Romeny said.  Romney's statement is literally true as written, which one would think might be a good criteria for a fact-check.
2. We could say that Romney's ad was misleading, because the implication was meant to be that Chrysler is shifting North American production to China, and they are not (Politifact took this tack).
3. We could argue that Romney's entire premise is wrong, because what matters to long-term economic health and wealth creation in this country is that Chrysler is making the optimum production decisions, wherever the factories end up.  And further, that making these decisions the subject of political discourse virtually guarantees they will be made for reasons other than optimizing efficiency.  This is the fact-check I would make but you will not hear in mainstream media fact-checks, because the level of economic ignorance on trade in most of the media is simply astonishingly high.

I know, I know -- this is Wikipedia.  But there is a line there in the quantitative easing article that makes even less sense than other political topics at that site:

It should be noted that mortagage-backed securities such as are being purchased as part of the QE3 program are not based on liquid assets, and their purchase [by the Fed] does not entail inflation risks

This makes zero sense to me.  But maybe I am missing something.

First, I don't understand why the fact that the assets purchased with the printed money are liquid or not liquid.  If anything, I would have assumed that purchasing less liquid assets would have more inflation risk than the other way around.  If one puts more currency into the economy, the more currency-like the asset one pulls off the market, ie the more liquid, the less the inflation risk, I would have thought.

Second, while mortgages may not be liquid, mortgage-backed securities are very liquid.  If liquidity of the asset matters here, I am not sure why the underlying asset would matter as much as the asset itself being purchased.   I mean, by this metric, treasuries are based on a really, really illiquid asset, simply the full faith and credit of the US government.

Third, printing of money would seem to always have inflation risk, no matter what the government is purchasing with the still-wet dollars.  (yeah, I know, it's all digital).

Up until now, I had never know that there was actually a theory, propounded by people with a straight face, that trapping people in neighborhoods and institutions (like public schools) is a positive because it promotes civic virtue.  

If you own your home, then a lot of your wealth is tied in with the quality of your neighborhood. In theory, this should motivate you to vote more carefully in local elections. On the other hand, if you are a renter, and the neighborhood goes downhill, you will simply leave.

Collectivists prefer to trap households within specific government service areas. Their thinking is that with the “exit” option foreclosed, households will be forced to exercise their “voice” option, to everyone’s benefit. This is an argument against private schools. It goes back at least as far as A.O. Hirschman’s classic book, Exit, Voice, and Loyalty.

I would argue just the opposite, that this creates state monopolies ripe for abuse, and besides, is disastrous for labor mobility and thus the healthy functioning of labor markets.  People keep arguing that this recession is long because recessions after financial bubbles are always long.  I am not sure that is proven out by history.

I would argue a big reason this recession is long is that the nature of this bubble, being in housing markets, short-circuited one of the ways we get out of recessions, which is labor mobility.   Trapped in homes the government encouraged them to buy but now they cannot sell, people can't move to find new regional opportunities.  Where are the mass migrations to the North Dakota oil fields?

Just the other day I was making the point that reimporting pharmaceuticals from other countries where they are sold cheaper is not any sort of long-term solution to bringing down US drug costs.  Sure, it's frustrating that the US pays almost all of the fixed cost of drug development while other countries get these drugs closer to marginal cost.  But there is no solution to this that has everyone paying marginal cost -- unless, that is, we are willing to give up on all future drug development by sending the signal that these costs can no longer be recovered in market pricing.   All drug reimportation will do is raise the overseas cost of pharmaceuticals and hurt millions of poorer people.

I always find it ironic that drug reimportation is a favorite solution of many liberals, who are absolutely offended at paying higher costs in the US than what is paid in other countries.  Well, welcome to being rich.  You may think you are safely not-rich when you are advocating various soak-the-rich tax policies, but on an international scale, even many of America's bottom quartile would be considered well-off in poorer nations.  Compared to the US, even countries like France are substantially less wealthy.

Anyway, this was all brought to mind by this useful analysis of re-importation by Megan McArdle, though in this case it is in the context of textbook prices.

I know what you are thinking -- in this post title Coyote has engaged in some exaggeration to get our attention.  But I haven't!  Felix Salmon actually says this, in reaction to a group of CEO's who wrote an open letter to the feds seeking less deficit spending.

There are lots of serious threats out there to the economic well-being and security of the United States, and the national debt is simply not one of them.  Nor is it growing. The chart on the right, from Rex Nutting, shows what’s actually going on: total US debt to GDP was rising alarmingly until the crisis, but it has been falling impressively since then. In fact, this is the first time in over half a century that US debt to GDP has been going down rather than up.

So when the CEOs talk about “our growing debt”, what they mean is just the debt owed by the Federal government. And when the Federal government borrows money, that doesn’t even come close to making up for the fact that the CEOs themselves are not borrowing money.

Money is cheaper now than it has been in living memory: the markets are telling corporate America that they are more than willing to fund investments at unbelievably low rates. And yet the CEOs are saying no. That’s a serious threat to the economic well-being of the United States: it’s companies are refusing to invest for the future, even when the markets are begging them to.

Instead, the CEOs come out and start criticizing the Federal government for stepping in and filling the gap. If it wasn’t for the Federal deficit, the debt-to-GDP chart would be declining even more precipitously, and the economy would be a disaster. Deleveraging is a painful process, and the Federal government is — rightly — easing that pain right now. And this is the gratitude it gets in return!

I seldom do this, but let's take this apart paragraph by paragraph:

There are lots of serious threats out there to the economic well-being and security of the United States, and the national debt is simply not one of them.  Nor is it growing. The chart on the right, from Rex Nutting, shows what’s actually going on: total US debt to GDP was rising alarmingly until the crisis, but it has been falling impressively since then. In fact, this is the first time in over half a century that US debt to GDP has been going down rather than up. 

So when the CEOs talk about “our growing debt”, what they mean is just the debt owed by the Federal government.

Duh.  Of course they are talking about the government deficit and not total deficit.   But he is setting up the game he is going to play throughout the piece, switching back and forth between government debt and total debt like a magician moving a pea between two thimbles.  We can already see the game.  "Look folks debt is not a threat, it is going down", but it is going down only at this total public and private debt number.  The letter from the CEO's made the specific argument that rising government debt creates current and future issues (see: Europe).  Just because all debt may be going down does not mean that the rise of one subset of debt is not an issue.

Here are two analogies.  First, consider a neighborhood where most all the residents are paying down their credit card debt except for Fred, who is maxing out his credit cards and has just taken out a third mortgage.  The total debt for your whole neighborhood is going down, but that does not mean that Fred is not in serious trouble.

Or on a larger scale, take consumer debt.  Most categories of consumer debt are falling in the US.  But student debt is rising alarmingly.  Just because total consumer debt may be falling doesn't change the fact that rising student debt is a serious threat to the well-being of a subset of Americans.

And when the Federal government borrows money, that doesn’t even come close to making up for the fact that the CEOs themselves are not borrowing money

What??  Whoever said that the role of the Federal government is to offset changes in corporate borrowing?  In his first paragraph, he already called the rise in total debt "alarming", and I get the sense that both CEO's and consumers agree and so they have been trying to reduce their debts.  So why should the Feds be standing athwart the private unwinding of an "alarming" problem?    And how does he know CEO's and their corporations are part of this deleveraging?  I see no evidence presented.  Corporate debt is but a small part of total US debt.  Corporations may be a part of this, or not.

In fact, they are not.  Corporate borrowing in the securities market has increased almost every quarter since 2008, such that total corporate bond debt is about 10-15% higher than in 2008 (see third chart here).  And here is total debt to GDP broken down by component  (this is for non-financial sectors) source.

Government debt is basically offsetting the consumer deleveraging.  Since consumers have to eventually pay this government debt off, as they are taxpayers too, then the government is basically flipping consumers the bird, forcing them to take on debt they are trying to get rid of.  Hard working consumers think they are making progress paying off debt, but the joke is on them - the feds have taken the debt on for them, and the bill will be coming in future taxes for them and their kids.

He might argue, "this is Keynesianism."  But is it?  If corporations are actually deleveraging, we still don't know how.  Is it through diverting capital investment to debt repayment (as I think Salmon is assuming) or are they raising capital from other sources and rejiggering the right side of their balance sheets?  And even if this deleveraging is coming at the expense of corporate investment, I thought Keynesians virtually ignored investment or "I" in their calculations  (you remember, don't you, from macro: C+I+G+X-M?).  In fact, if I remember right, "I" is treated as an exogenous variable in the famous multiplier "proof".

Money is cheaper now than it has been in living memory: the markets are telling corporate America that they are more than willing to fund investments at unbelievably low rates. And yet the CEOs are saying no. That’s a serious threat to the economic well-being of the United States: it’s companies are refusing to invest for the future, even when the markets are begging them to.

This is the real howler -- that "markets" are sending a low-interest signal.  Markets are doing nothing of the sort.  The Federal Government, via the Fed, is sending this signal with near-zero overnight borrowing rates and $30-$40 billion a month in money printing that is used to buy up government debt from the market.  If any signal is being sent at all, it is that the Federal Government is main economic priority is continuing to prop up the balance sheet and profitability of major US banks.

Investment is also not solely driven by the price of funds.  There must be opportunities where businesses see returns that justify the spending.  Unlike the Federal government, which is A-OK blowing billions on companies like Solyndra, businesses don't invest for the sake of spending, they invest for returns.  A soft economy combined with enormous government driven uncertainties (e.g. what will be our costs to comply with Obamacare) are more likely to affect investment levels than changes in interest rates.

 Instead, the CEOs come out and start criticizing the Federal government for stepping in and filling the gap. If it wasn’t for the Federal deficit, the debt-to-GDP chart would be declining even more precipitously, and the economy would be a disaster. Deleveraging is a painful process, and the Federal government is — rightly — easing that pain right now. And this is the gratitude it gets in return!

This is where economic thinking has ended up in 2012:  To Salmon, it does not matter where the Federal government spends this money, so long as it is spent.  He never even tries to justify that the government is running up debt in a good cause, because what it spends money on does not matter to him.  For him, the worst possible thing for the economy is for people to spend their money paying down debt.  Spend it on more drone strikes or more Solyndras or more squirrel research -- it does not matter to Salmon as long as the money is used for anything other than to pay down debt.

Here is the bottom line:  Businesses and individuals are trying to reduce their debt.  And many hard-working people think they are being successful at this.  But the joke is on them.  The government is running up trillions in debt in their name, thwarting American's desire to de-leverage.  Mr. Salmon wants us to thank the government for this.  Hah.

All-in-all, this is an awful argument to try to justify Congressional and Presidential fecklessness vis a vis  the budget.

Obama claims to have created more jobs than Reagan.  Republicans fire back with charts that say otherwise.

Here are the true numbers for private jobs created by these Presidents in office:

• Reagan:    zero
• Obama:     zero

Just once I would like to see a Presidential candidate answer:

"Why, I didn't create a single private job in office.  Anyone I hire is by definition a public employee.  The best I can do is to keep government out of the way, as much as possible, of the private individuals who do create new businesses and new products and new technologies that tend to lead to more private employment.  The worst thing I can do is to try to be investment-banker-in-chief.  Every dollar I hand to some company I like is money taken out of the hands of 300 million private individuals, who collectively know a hell of a lot more than I as to what makes for a better business investment  (and by the way they have far better incentives that I as well, since they are investing their own hard-earned money, and should I develop the hubris to play the stimulus game, I would be investing your hard-earned money."

Reacting to the unbelievable economic ignorance he has seen in recent campaign ads, Don Boudreaux writes

If astronomy operated similarly to politics, the world’s top astronomers would compete furiously amongst themselves to see who could most effectively assure the general public that the sun orbits around a stationary flat earth – a flat earth that was created just 4,000 years ago and which sits atop a tower of turtles.

My son is in Freshman econ 101, and so I have been posting him some supply and demand curve examples.  Here is one for health care.  The question at hand:  Does government regulation including Obamacare increase access to health care?  Certainly it increases access to health care insurance, but does it increase access to actual doctors?   We will look at three major interventions.

The first and oldest is the imposition of strong, time-consuming, and costly professional licensing requirements for doctors.  At this point we are not arguing whether this is a good or bad thing, just portraying its inevitable effects on the supply and demand for doctors.

I don't think this requires much discussion. For any given price for doctor services, the quantity of doctor hours available is certainly going to increase as the barriers to entry to the profession are raised.

The second intervention is actually a set of interventions, the range of interventions that have encouraged single-payer low-deductible health insurance and have provided subsidies for this insurance.  These interventions include historic tax preferences for employer-paid employee health insurance, Medicare, Medicaid, the subsidies in Obamacare as well as the rules in Obamacare that discourage high-deductible policies and require that everyone buy insurance rather than pay as they go.  The result is a shift in the demand curve to the right, along with a shift to a more vertical demand curve (meaning people are more price-insensitive, since a third-party is paying).

The result is a substantial rise in prices, as we have seen over the last 30 years as health care prices have risen far faster than inflation

As the government pays more and more of the health care bills, this price rise leads to unsustainably high spending levels, so the government institutes price controls.  Medicare has price controls (the famous "doc fix" is related to these) and Obamacare promises many more.  This leads to huge doctor shortages, queues, waiting lists, etc.  Exactly what we see in other state-run health care systems,  The graph below posits a price cap that forces prices back to the free market rate.

So, is this better access to health care?

I know that Obamacare proponents claim that top-down government operation is going to reap all kinds of savings, thus shifting the supply curve to the right.  Since this has pretty much never happened in the whole history of government operations, I discount the claim.  When pressed for specifics, the ideas typically boil down to price or demand controls.  Price controls we discussed.  Demand controls are of the sort like "you can't get a transplant if you are over 70" or "we won't approve cancer treatments that only promise a year more life."

Most of these do not affect the chart above, since it is for doctor services and most of these cost control ideas are usually doctor intensive - more doctor time to have fewer tests, operations, drugs.  But even if we expanded the viewpoint to be for all health care, it is yet to be demonstrated that the American public will even accept these restrictions.  The very first one out of the box, a proposal to have fewer mamographies for women under a certain age, was abandoned in a firestorm of opposition from women's groups.  In all likelihood, there will be some mish-mash of demand restrictions, determined less by science and by who (users and providers) have the best lobbying organizations.

My longer series of three Forbes articles on this and other economic issues with Obamacare begin here:  Part 1 Information, Part 2 Incentives, Part 3 Rent-Seeking

Update:  Pondering on this, it may be that professional licensing also makes the supply curve steeper.  It depends on how doctors think about sunk cost.

Sometimes I have odd reactions to things.  For example, my immediate reaction to this comic book cover was, "comparative advantage fail."

I am sure that Superman would be a super-productive gardener, but there are likely much better tasks to assign him for which his comparative advantage is much greater.

I thought this was an interesting example of creative destruction.  Five years ago, Time and Newsweek were running cover stories about the "Blackberry" culture and how ubiquitous the device was in modern business.  Now, people are making fun of it for being outdated tech.  If only we could get the average voter to truly appreciate creative destruction.  We might have fewer bailouts and more economic growth.

By the way, Canada says it won't bail out Blackberry, which is good, but is interesting given that it did bail out the Canadian automotive sector just a few years ago.  In terms of total market value I would guess the Canadian automotive sector is way smaller than Blackberry at its peak.  Only a cynic would suggest the difference is that the auto sector is unionized and therefore politically organized to generate campaign donations and grass roots get-out-the-vote efforts, while RIM is not.  That would imply that bailouts were due to political pull rather than sound and consistent economic reasoning, which I am sure can't possibly be true.

PS- there are still good and valid reasons for enterprises, like the Administration and government agencies, to use the Blackberry over smartphones.  Just because they are out of favor with 16-year-old girls does not mean they don't have utility. Oddly, though, given this particular niche and comparative advantage, RIM seems to be obsoleting its installed base of enterprise servers.   I am not an expert, but I think a lot of enterprises would stick with Blackberry for quite a while just out of inertia and lack of desire to change.  But now that Blackberry is forcing them to rethink their whole enterprise platform anyway, it seems to allow other competitors solutions into play.  Or am I missing something?

Update:  Apparently RIM is saying the previous paragraph is incorrect, that the new servers will support all the old devices ... except for email, calendar, and contacts.  Unfortunately, this seems to encompass the entire Blackberry functionality.  I have had one or two of the devices, and you are a nut if you are trying to surf the web on one as your main usage.

So far, I have mainly been concerned about inflationary risks from quantitative easing, which is effectively a fancy term for substituting printed money for government debt (I know there are folks out there that swear up and down that QE does not involve printing (electronically of course) money, but it simply has to.  Operation Twist, the more recent Fed action, is different, and does not involve printing money but essentially involves the Fed taking on longer-term debt in exchange for putting more shorter term debt on the market.

Scott Minder in the Financial Times highlights another potential problem:

In 2008, just before the first of two rounds of quantitative easing, the Federal Reserve had $41bn in capital and roughly $872bn in liabilities, resulting in a debt to equity ratio of roughly 21-to-one. The Federal Reserve’s portfolio had $480bn in Treasury securities with an asset duration of about 2.5 years. Therefore, a 100 basis point increase in interest rates would have caused the value of its portfolio to fall by 2.5 per cent, or $12bn. A loss of that magnitude would have been severe but not devastating.

By 2011, the Fed’s portfolio consisted of more than $2.6tn in Treasury and agency securities, mortgage bonds and other fixed income assets, and its debt-to-equity ratio had dramatically increased to 51-to-one. Under Operation Twist, the Fed swapped its short-term securities holdings for longer-term ones, thereby extending the duration of its portfolio to more than eight years. Now, a 100 basis point increase in interest rates would cause the market value of the Federal Reserve’s assets to fall by about 8 per cent, or $200bn, leaving it insolvent, with a capital deficit of about $150bn. Hypothetically, a 5 per cent rise in interest rates could cause a trillion dollar decline in the value of the Federal Reserve’s assets.

As the economy continues to expand, the Federal Reserve will eventually seek to normalise monetary policy, resulting in higher interest rates. In this scenario, the central bank could find that the market value of its portfolio has declined to the point where it no longer has enough sellable assets to adequately reduce the money supply and maintain the purchasing power of the dollar. Given US dependence on foreign capital flows, if the stability of the dollar is drawn into question, the ability of the US to finance its deficits may falter. The Federal Reserve could then find itself the buyer of last resort for Treasury securities. In doing so, the government would become hostage to its printing press, and a currency crisis or runaway inflation could take hold.

George Dorgan observes, on the pages of Zero Hedge, that European countries are taking even large balance sheet risks.  The most surprising is the Swiss.

I found this chart interesting, but am not entirely sure what conclusion to draw (via Zero Hedge)

In 2009, I think most everyone understood that the economy would have to reduce debt and that this process would be painful in terms of creating years of slow growth.  The good news from this chart is that the financial and consumer deleveraging has indeed been occurring, so at least our pain is not for naught.  The debate that will likely go on for years after this recession is whether the rapidly increasing Federal debt helped or hurt:  did it help offset the cost of the private deleveraging, or did it drag out the recession by keeping total debt levels from dropping?  Is it private debt that matters, or total debt?  Of course this makes the analysis more complicated.

Economists advocate for Federal funding of economists.  Because if there is anything economics has taught us, its that the Feds do such a good job at allocating resources.

Via the Unbroken Window  (arguing against personal interest, I suppose, since the author is a professor of economics)

Apparently, Los Angeles has tough anti-ticket scalping laws.  This means that one is able to resell virtually any item one owns but no longer has a use for except tickets.  In this case, government officials yet again don't like someone who places little value on an item selling it to someone who places more value on that item (a concept that is otherwise the basis for our entire economy).  We can see the effect of such laws in London, where stadiums full of empty seats are juxtaposed against thousands who want to attend but can't get tickets, all because for some reason we have decided we don't like the secondary market for tickets.

A great example is embedded in this line in today's LA Times about crackdowns on scalping:

Jose Eskenazi, an associate athletic director at USC, said the university distributed football and basketball tickets free to several children's community groups but that scalpers obtained those tickets and sold them "at enormous profits."

I like the coy use of "obtained" in this sentence.  Absent a more direct accusation, I have to assume that this means that scalpers bought the tickets from the community groups.  Which likely means that strapped for cash to maintain their operations, these groups valued cash from the tickets more that the ability to send kids to a USC football game  (in fact, taking them to a USC football game would involve extra costs to the community group of transportation, security, and feeding the kids at inflated stadium prices).  It was probably entirely rational for the community groups to sell the tickets -- this is in fact a positive story.  Selling the tickets likely got them out of an expensive obligation they could not afford and generated resources for the agency.  Sure, USC was deprived of the PR boost, but if they really want the kids to come to the game, they can do it a different way (e.g. by organizing the entire trip).  This is not a reason for curtailing my right to sell my tickets for a profit.

Anyway, I have ranted about this before.  Sports team owners and music promoters have out-sized political influence (particularly in LA) and have enlisted governments to clamp down on the secondary markets for their products.

What I thought was new and interesting in this LA Times story was the evolving justification for banning ticket scalpers.  Those who have followed the war on drugs or prostitution will recognize the argument immediately:

Lee Zeidman, general manager of Staples Center/Nokia Theatre and L.A. Live, said in a separate declaration that scalpers "frequently adopt aggressive and oftentimes intimidating tactics.... To the extent that ticket scalpers are allowed to create an environment that makes guests of ours feel uncomfortable, harassed or threatened, that jeopardizes our ability to attract those guests to our property."

In court papers, prosecutors accuse scalpers of endangering citizens, creating traffic hazards and diverting scarce police resources.

"Defendants personally act as magnets for theft, robbery, and crimes of violence," the filing states. "Areas with high levels of illegal ticket sales have disproportionately high levels of theft, robbery, crimes of violence and narcotics sales and use."

Wow, you mean that if we criminalize a routine type of transaction, then criminals will tend to dominate those who engage in this transaction?  Who would have thought?  If this were true, we might expect activities that normally are run by normal, honest participants -- say, for example, alcohol distribution -- to be replaced with gangs and violent criminals if the activity is prohibited.

It's amazing to me that people can still use the the criminal activity that results from prohibition to justify prohibition.

Update:  John Stossel has an article on the London ticket scalping ban

...when they ban short-selling.  As a response to economic problems, banning short selling is roughly equivalent to banning criticism of the government during a political crisis.  Or perhaps more accurately, its like trying to improve poll results by not polling people with negative opinions.   Short-selling has utility for the actual traders involved because it helps them achieve whatever financial or risk-management goals they might have.  Short-selling has utility for the rest of us because it allows the full range of opinions to be expressed about the value of a particular company or asset.  Nothing in a market economy is worse than having prices that have no meaning.

Turns out the guy who gasses up a school bus has a green job.

When Bureau of Labor Statistics Acting Commissioner John Galvin balked on what qualifies as a green job under the agency definition, Issa responded, “Just answer the question.”

“Does someone who sweeps the floor at a company that makes solar panels -- is that a green job?” Issa asked.

“Yes,” replied Galvin, who also acknowledged that a bike-repair shop clerk, a hybrid-bus driver, any school bus driver and “the guy who puts gas in a school bus” are all defined as green jobs.

He also acknowledged that an oil lobbyist, if his work is related to environmental issues, would also have a green job.

It gets better.  Apparently, when I worked at the Exxon refinery in Baytown, TX, I had a green job:

The Bureau of Labor Statistics states a green job is either: a business that produces goods or provide services that benefit the environment or conserve natural resources, or a job in which a worker's duties involve making their establishment's production processes more environmentally friendly or use fewer natural resources

I have never encountered an industrial engineering job anywhere that was not concerned with having their processes use fewer natural resources.

I would argue the greenest of jobs are held by oil and other commodity speculators and traders.  They ensure that prices at all times accurately match our current understanding of the scarcity of each resource.  Without these accurate pricing signals, all efforts to properly invest to use more or fewer of these materials would be impossible.  Just look at the "success" of investments like Solyndra that were made irregardless of these market pricing signals.

Kevin Drum is back on his "because Republicans won't agree to more massive deficit spending, they must be purposefully trying to destroy the economy."   Literally.  He translates Republican opposition to Obama's proposed stimulus packages as being explained by this strategy:

Basically, the Republican strategy for the past three years has been this:

1. Do everything humanly possible to prevent the economy from recovering.
2. Wait for 2012.
3. Run a campaign focused on the fact that the economy is lousy.

This is such a shabby bit of false logic it is amazing anyone even attempts this any more, or more accurately, it's amazing that folks continue to buy it.  Is it really so impossible to believe that there are actually people of goodwill who wish to see the economy improve but disagree with Drum and Obama as to the correct course to achieve that?  Apparently not  (I suppose the last stimulus was so wildly succesful that it is impossible to doubt the success of another trillion or so of deficit spending?)

The irony is that for some reason I simply cannot fathom, from a political tactics point of view, he points to this chart when talking about Truman and his "do-nothing" Congress:

He's is trying to make some political tactical point, but he is so blinded by his own assumptions that he misses the real point -- that the American economy grew at records rates through a "do-nothing" Congress.  Now, I suppose Drum might argue that this was an accident of timing, but in fact Truman inherited what should have been, by Drum's Keynesian thinking, the worst economic situation ever since an enormous amount of government spending was going away after the war and new workers were simultaneously flooding back into the job market.  If any time in recent history should have demanded Keynesian stimulus, this was it, and yet a do-nothing Congress led to a massive expansion.  Hmmmm.

Swiss government bonds are trading at rates that imply a negative interest rate.  The German government is issuing bonds with interest rates of zero that are actually trading above face value.

This is really bad news.  Investing in these securities is effectively the equivalent of putting money in one's mattress -- it means that investors don't perceive any money-making uses for their money better than paying paying financially strong governments to keep it safe for a while.   I am far from an expert on banking regulations, but my first guess on this is that this is at least in part a function of bank capital requirements that effectively require banks to put a lot of cash into government securities no matter how bad the return.

Germany and Switzerland certainly are providing some value in creating a safe haven for capital, but I wonder if in the long-run this is anything but destructive, shifting wealth and investment out of the private economy and into investments with no return.

A guest blogger on Megan McArdle's blog writes:

Here's my first such idea:

Abolish Mortgage-Backed Securities (and Offspring)

CDOs and credit default swaps don't kill financial systems, mortgages kill financial systems. There has been altogether too much opproprium directed at CDOs, credit default swaps and other structuring techniques that spread financial contagion, and not enough directed at the underlying collateral. The record seems to be, however, that Dick Pratt was correct when he called the mortgage "the neutron bomb of financial products."

This makes no sense.  I don't have time for a comprehensive argument, so here are a few bullet points:

• His argument rests on the fact that mortgages have inherently hard-to-quantify risks.  I don't believe that, given how long the financial system worked just fine writing mortgages, but if this is really the case, shouldn't he be proposing to ban mortgages, not just mortgage-backed securities?
• Holding the higher-quality tranches of an MBS simply cannot, by any mechanism I can fathom, be more risky than holding a lot of individual mortgages.  In fact, for a given bank, it should spread the risk geographically and to a larger number of mortgages.
• The first actual problem with MBS's is that the default risks were under-estimated by those packaging the securities.  Basically, the top AAA tranches were too large (or too wide, I think the term is).  This is correctable, and likely already has been corrected (In fact it had more to do with the actions of the government-enforced credit rating oligopoly than with actions of bankers).
• The second actual problem with MBS's is that the default risks were under-estimated by government regulators world-wide when in Basil II and the equivalent US law changes c. 1991, MBS's were given very preferential capital requirement treatment.  Basically, MBS were treated, for capital requirements, as if they were nearly as risk-free as US treasuries, providing incentives for banks to over-weight in them.
• The largest problem was the reduction in credit requirements for mortgages.  Increasing LTV from 80% to 97% or 100% or even 100%+ hugely increased the risk of default, and no one really took that into account in MBS packaging or bank capital requirements.  Bank capital requirements for mortgages and MBS were set as if they were European style recourse loans with 80% LTV.  But the same regulations and requirements applied to MBS built on US-style non-recourse loans with 97% LTV, which is crazy.

Here is a better plan:

1. Narrow the AAA tranches of MBS
2. Fix bank capital requirements vis a vis mortgages and MBS
3. Stop encouraging high loan to values on mortgages

Veronique de Rugy is doing an awesome job debunking the myth that European countries have cut spending in any meaningful way, and that the "austerity" that Krugman et. al. keeping going on about mostly consists of raising taxes.  Perhaps because they so desperately want to raise taxes in the US, Krugman and company seem willfully blind in recognizing the tax increases in Europe and their negative consequences.