HAPPY NEW YEAR!

Happy New Year to my readers, followers and everyone else.

US Income Equality Would Create Political Instability And Unrest

When one considers income mobility in the US, one realizes that discussions about income inequality and wealth creation miss the main point. Achieving income equality and leveling wealth creation would lead to many more negatives than positives.

There is tremendous opportunity for individual wealth improvement in the US and the 'wealthy' and 'very wealthy' are an ever changing group of people from the lower income percentiles. This 'dynamism' is more prevalent in the US than any other country in the world. Policies to create income equality would remove this dynamic nature of our capitalistic economy and create true class warfare. It would lock people into their income percentiles. A Hyundai owner would never get rich enough to become a Mercedes owner. Wealth creation and extreme income gains are rare and it is its rarity that preserves our political stability. It gives hope to all that things will get better, that anyone can be a rich person, anyone can start a business, become a CEO, investment banker or top 100 lawfirm lawyer, etc.

For example:

There is considerable income mobility of individuals in the U.S. economy; half of taxpayers move to a different income quintile over 10 year periods.
About half of taxpayers who began in the bottom income quintile moved up to a higher income group.

A 2007 study found, "Among those with the very highest incomes in 1996 – the top 1/100 of 1 percent – only 25 percent remained in this group in 2005. Moreover, the median real income of these taxpayers declined over this period."

The degree of mobility among income groups tends to be a stable phenomenon of the US.

See: https://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/OTA-Report-Income-Mobility-2008.pdf [Link corrected].

Also see below from: http://www.heritage.org/research/taxes/bg1418.cfm

A 1992 Treasury Department study showed that between 1979 and 1988, 86 percent of those in the bottom income quintile moved to a higher quintile, and 35 percent in the top income quintile moved to a lower quintile.

A 1995 Federal Reserve Bank of Dallas report showed that almost three-fourths of those in the bottom quintile in 1975 were in a higher quintile by 1991, and almost 40 percent in the top quintile moved down to a lower quintile over the same period.

A 1996 Urban Institute study showed that large numbers of Americans move into a new income quintile, with estimates ranging from 25 percent to 40 percent in a single year. The same study found even higher mobility rates over longer periods: about 45 percent over five years and 60 percent over 9-year and 17-year periods.

In 1998, the Census Bureau reported that, on average, over 41 percent of Americans increased their inflation-adjusted income by 5 percent or more per year from 1984 to 1994.

The primary reasons for changes in income from year to year were changes in marital status, changes in the number of workers in the household, and moving into or out of full-time, year-round employment.

A 2000 Economic Policy Institute study showed that almost 60 percent of Americans in the lowest income quintile in 1969 were in a higher quintile in 1996, and over 61 percent in the highest income quintile had moved down into a lower income quintile during the same period.

A comment I posted on Mark Thoma's blog, Economist's View, "Is Our Tax System Helping Us Create Wealth?"

Security Theater Leads To Ineffectual Laws And Measures: Also Applies To Medical Reform And Other Legislation

"Security theater" refers to security measures that make people feel more secure without doing anything to actually improve their security. An example: the photo ID checks that have sprung up in office buildings. No one has ever explained why verifying that someone has a photo ID provides any actual security, but it looks like security to have a uniformed guard-for-hire looking at ID cards.

From "Is aviation security mostly for show?" by Bruce Schneier, Special to CNN.

Current health reform proposed legislation is more theater than effective changes to our medical and health care system. So is much of what Congress and state legislatures do these days.

Heart Medical Devices Approved Without Sufficient Scientific Review

medical devices implanted each year in hundreds of thousands of U.S. heart patients often are approved by government regulators based on insufficient scientific review, researchers said.

About two of three cardiovascular devices approved by the U.S. Food and Drug Administration from 2000 to 2007 were tested in a single clinical trial rather than multiple studies....

From Bloomberg's article, "Medical Device Studies Lack Scientific Rigor, Researchers Find" by David Olmos.

The article is a criticism of the FDA, but a more fundamental philosophical question is, what is the proper standard of review for medical devices and drugs?

The review standards determine what medical devices and treatment are approved, experimental and not approved. It also determines the cost incurred and time required by pharmaceutical and medical device companies to get approval for their new medical products. Higher approval costs act as a disincentive, especially for low cost and limited use products.

McKinsey On Using Bad Banks To Salvage Troubled Banks

Read McKinsey Consulting firm's thoughts and analysis on resolving banks with troubled assets in "Understanding the bad bank" by Gabriel Brenna, Thomas Poppensieker, and Sebastian Schneider, December 2009, McKinsey Quarterly.

“Bad banks” are back. The concept is simple. The bank divides its assets into two categories. Into the bad pile go the illiquid and risky securities that are the bane of the banking system, along with other troubled assets....What are left are the good assets that represent the ongoing business of the core bank.

Read the complete McKinsey article here.

Worth Repeating: Markets Fail, That's Why We Need Markets.

Thank you to Mark Perry for posting about and linking to an article by Arnold Kling and Nick Schulz published in the Christian Science Monitor.

Perry states:

This seemingly paradoxical view is based on several overlapping strands of research in economics as it pertains to development, history, technology, business expansion, and new-firm formation. According to this view, entrepreneurs at work in the economy – in finance, high tech, manufacturing, services, and beyond – are constantly experimenting, creating new business models, techniques, and technologies that upend the established order of things.

Read Mark's post, "Markets Fail. That's Why We Need Markets" here.

Excellent Post In Honor Of Ronald Coase's 99th Birthday By Landsburg

The second great idea about externalities sprang full-blown from the mind of a law professor and subsequent Nobel prize winner named Ronald Coase, who stunned the profession in 1960 by pointing out.... If you breathe the pollution from my factory, I’m imposing a cost on you—but at the same time, you’re imposing a cost on me. After all, if you lived somewhere else, you wouldn’t be complaining about the smoke and I wouldn’t be getting punished for it.

This insight—so simple once stated, but thoroughly astonishing to the economists of 1960 (I’ve heard tales of this astonishment from several of the participants in Coase’s historic seminar)—means that in a case of externalities, pure theory can never tell you who should bear the costs; you’ve got to look at the specifics of the case.

From the excellent blog post, "Happy 99th Birthday, Ronald Coase" by Steve Landsburg.

Health Care Costs Will Only Get Worse

The Democrats' health care legislation, however, puts more distance between Americans and the payment process and promotes dependence on government. That will only drive down consumers' out-of-pocket expenses even further and force overall health care spending upward. Under such a regime, the system will be worse off than it is now.

From an Investor's Business Daily editorial, "Once Patients Pay, Health Costs Will Fall."

Copy of IBD article also at Carpe Diem by Mark Perry.

(HT: Mark Perry and Carpe Diem).

Updated GPO Link To Senate Health Care Bill, S3590

Today, the Government Printing Office posted the final PDF version of S3590, Patient Protection and Affordable Care Act that passed the Senate.

About an hour ago, I updated the sidebar link to the final GPO version of the Senate health care bill. It is a 2400 page PDF and it may take a few seconds or longer to open.[Sidebar links were removed.]

Complicated CDO Pricing Did Not Create The Banking Crisis

A comment I posted on Felix Salmon's Reuters blog, "It’s impossible to price a CDO" that blames the inability to compute CDO prices and Goldman Sachs for the financial crisis.

All derivatives, futures, options and swaps are zero sum. One counterparty’s gain is the other party’s loss. CDOs behave as any other derivatives behave when it comes to winners and losers.

For many years, farmers have used agricultural derivatives purchased at planting time to protect themselves from the uncertainty about crop yields and prices at harvest time. Speculators, investors and food companies are the counterparties to the farmers.

All the computers in the world combined and all the supercomputers cannot accurately predict harvest time prices. Weather, droughts, floods, hurricanes, frost, crop diseases, foreign growers internal country politics, wars, tariffs, strikes, oil price spikes, e coli and salmonella outbreaks and other price effecting events are too unpredictable to know with any degree of uncertainty in advance.

Yet, the agricultural derivatives markets work very well and without the ability to compute future outcomes.

There is much more to the CDO problem than nuclear waste mortgages and computational difficulties.

Financial nuclear waste sells all the time without blowups as occurred in the mortgage market. Investors with high-risk tolerance buy, invest in and trade debt of bankrupt companies, junk bonds of very low credit rated companies, start-ups, and other high risk, high probability of default debt all the time.

Financial markets exist for all kinds of debt with high degrees of uncertainty about future events and with high likelihood of defaults without major problems.

If Goldman was selling snake oil, there was nothing compelling the buyers to buy and invest in the snake oil. Was Goldman holding a gun to each investor and buyer’s head of the CDOs?

Furthermore, and a more compelling argument, is that US Treasury bonds of all maturities from a few days to 20 years was available to the same investors who purchased Goldman’s so called nuclear waste. When there was a safe, transparent alternative investment that all the buyers knew about, why did they buy CDOs? US Treasuries are better than AAA rated!

Additionally, private equity, hedge funds and mutual funds were not the investors who ran into problems purchasing CDOs, (the mutual fund that broke the buck was a higher risk fund that attempted to increase its yield by heavily investing in higher risk securities like mortgage derivatives and just because it called itself a money market fund the Fed panicked).

The banks, who are sophisticated investors, suffered the most losses from the CDO market collapse.

What really went wrong for the financial institutions from the collapse of the CDO markets due to excessive mortgage defaults was that the financial institutions were overly invested in these kinds of debt.

Market prices collapse all the time for different kinds of investments, be it Gold, foreign currencies, commodity prices, etc. There is one simple rule of investing that has stood the test of time and does not need a lot of computer power. The rule is DO Not Put All Your Eggs In One Basket. The banks were not diversified. They bet the bank on mortgage related debt and they lost. They were gamblers that put everything on red on the roulette wheel and black came up.

Why banks did it is a whole other discussion, but Goldman was not the cause. Yes, it had the product that blew up, but it id not create the hunger in the buyers and investors for that product. Goldman met the banks cravings for these investments, but it id not make the banks the junkies that they were for this crack.

If the CDO outcomes were not computable by the buyers, then the CDO outcomes were not computable by Goldman. Goldman could not know in advance that it would see windfall gains.

Furthermore, the CDOs that ran into the most problems were the ones originated after the housing market started to collapse and that data was publicly available to the investors, including as to which areas of the US were seeing the sharpest price declines. Plus, the investors knew or could easily ask Goldman and Goldman would tell them which areas of the country had the mortgages in the CDOs they were buying.

Most of the responsibility for the problems should go the regulators. They overlooked the lack of diversification and the overinvestment in mortgage derivative debt. They promulgated rules that allowed banks to hold for each dollar of capital against a residential mortgage, two and one half times as much CDO mortgage debt. The regulators, through capital rules that promoted capital arbitrage, turned banks into crack heads for CDOs and then failed to supervise their addicted banks.

Goldman was like a bartender. It had a secondary and not a primary responsibility. It did not create the alcoholics, but at some point, it should have seen that the regulators were not stepping up to the plate and that their customers were in over their heads and too drunk to drive anymore. However, the regulators created the drunken banks and not Goldman. Goldman was at worst opportunistic.

Obama Does Not Know How To Be A CEO

Years ago, Bill Gates once remarked that he had to be careful about comments he made to Microsoft employees. He said he once idly asked an employee and how a particular project was going and that caused million of Microsoft dollars to be diverted to that project.

Obama has no clue as to what it means to be a chief executive. The shambles of the two health care reform bills that we are now facing and trying to reconcile is a function of his lack of leadership as a CEO. Leaders know that people who work for them take a boss's comments as a directive, a guide to acceptable behavior and future worthwhile endeavors. Leaders need to provide some clarity as to specific product and service objectives, which for Obama are not just broad legislative agendas but the major items included or excluded from the bills. Otherwise, the ending legislation will reflect a Congressional power struggle chaotic mess. He needs to give Congress effective anchor points for inclusion in major legislation even if it upsets some of his constituency.

His glibness only undermines his clarity, creates an atmosphere of uncertainty, generates confusion about goals and politicizes the internal workings of the organization.

Whether we look at the dysfunctional specifics of the stimulus bill or the House and Senate health care bills, there is an obvious lack of goal orientation and effective supervision. Health care is passing because it is a 60-year goal of the Democratic Party. Very little, if any of the health care or stimulus legislation is a result of Obama. After Bush, with the severity of the recession and very high unemployment, passing safety net social programs, such as effective stimulus or health care for all, should have been a piece of cake and a slam-dunk. Instead, the stimulus law and the health care bills are ineffectual at achieving their intended societal goals and atrocities of the legislative process. If anything, his statements about not taxing the middle class or employer health benefits and his protectiveness of union Cadillac health plans have only made the entire legislative process more difficult for Congress and potentially hinder his achievement of universal, affordable health care.

Obama's leadership stops at rubric. Title a bill 'health care reform' or 'stimulus', leave his union pals alone and he is satisfied. CEOs that manage corporations as Obama manages the US, quickly find they lose market share, profits and their jobs through bankruptcy or replacement.

The President needs to provide clear goals with some legislative specificity. He needs to make tough choices and hold Congress and his subordinates accountable. He has to mature and become a leader quickly or his and the Democratic Party's popularity will continue to decline. Leadership is more than espousing nice statements about hopeful results. It is about making tough decisions and setting specific, realistic, achievable targets with the agreement of some and the disagreement of others of your loyal fans. If all your supporters agree with you, you are not making the tough choices you need to make. Pleasing everyone in your circle never gets tough things accomplished satisfactorily.

Above is the comment I posted on the Wall St. Journal, "Tax Audits Are No Laughing Matter: A president shouldn't even joke about abusing IRS power" by Glenn Harlan Reynolds. Reynolds' article is about President Obama's casual statements about asking the IRS to audit Arizona State University because it did not confer an honorary degree on the President.

TSA Public Option Fails, Private Option Works

Oops, I guess the private option transit security works better than the public option, the TSA!

On December 25th 2009, the government's (post-9/11) security procedures all failed, and the only good news came once again from alert individuals:

Read the article from the National Review by Mark Steyn."

Why Insurance Company Share Prices Rose Despite Costly Health Care Reform

Despite new health reform legislative prospects that appear to increase insurance company costs and decrease insurance company profits, insurance company stocks are rising in value more than the S&P.

A comment I posted on Econlog.com, "What Just Happened?" by Bryan Caplan to his question on his blog about the price rise in insurance company shares.

The fallacy in the argument is that it does not distinguish between risk avoiders and risk takers.

For instance, studies do not find the existence of adverse selection in the insurance market. See, http://knowledge.wpcarey.asu.edu/article.cfm?articleid=1800.

Risk takers feel invincible, do not buy insurance, do not go to doctors, deny sickness, etc. Risk avoiders have healthier lifestyles, are less ill and are more likely to buy insurance. Risk takers also have a higher mortality rate than others, e.g, car drivers who excessively speed, or excessively drink and drive, and many other high risk/high mortality life style choices.

Many of the uninsured are the 21-35 year olds, who are greater risk takers than the overall population, and other people who have a higher risk tolerance and also do not buy insurance. The behavior is independent of affordability. Many of these people do not go to doctors for check ups to find diseases and even if they are ill they avoid doctors.

Penalties and subsidies will not push these risk takers to get insurance and they will not go to doctors to discover diseases that need extensive medical care. By the time symptoms appear in this group, it is too late for medical care, e.g., they have a heart attack and die, or cancer has spread to a point beyond any treatment.

Insurance companies will never provide insurance for many of these medically expensive people because insurance coverage is voluntary with a penalty and not automatic. The default is not insured for this group. They needed to read Nudge.

Since Medicare, Medicaid, CHIP existed for the poor already, the uninsured in these groups most likely voluntarily chose not to seek medical care. Insurance affordability was never an issue with these groups. Making it more affordable does not increase the insurance in this group.

Additionally, seniors are the most expensive medical group and Medicare already covers them. There is no increase private insurance cost to insurance companies under the legislation for the old.

The stock market is expecting insurance companies to be much more profitable under the health care legislation than originally expected. It is not expecting a lot of adverse selection and not a lot of new insureds who need expensive medical care. It is expecting more income for new insurance from the healthier segment of the uninsured. It is also probably expecting some rationing and capping of medical costs under the new legislation insured.

All of the above leads to higher stock prices.

Obama's Xmas Present To Fannie And Freddie

The Obama administration pledged Thursday to provide unlimited financial assistance to mortgage giants Fannie Mae and Freddie Mac, an eleventh-hour move that allows the government to exceed the current $400 billion cap on emergency aid without seeking permission from a bailout-weary Congress.

The Christmas Eve announcement by the Treasury Department means that it can continue to run the companies, which were seized last year, as arms of the government for the rest of President Obama's current term.

From The Washington Post, "U.S. promises unlimited financial assistance to Fannie Mae, Freddie Mac" by Zachary A. Goldfarb.

Company Matching Contribution To 401Ks Are Returning

In recent weeks a number of large companies, including JP Morgan Chase, Federal Express, and Black & Decker, have announced plans to reinstate suspended 401(k) matches, and two surveys suggest that more such announcements are to come.

From "401(k) Contributions Are Back" by Alix Stuart on CFO.com. Read the complete article from CFO.com here.

As Obama's Approval Ratings Drop To Lowest Levels, Health Care Law At Risk

After Senate 60-40 Health Care Vote, Obama's disapproval rating of 46 percent is at its highest level yet during his term of office.

From Tuesday's Rasmussen's Daily Tracking Poll:

For the second straight day, the update shows the highest level of Strong Disapproval yet recorded for this President [Obama]. That negative rating had never topped 42% before yesterday. However, it has risen dramatically since the Senate found 60 votes to move forward with the proposed health care reform legislation. Most voters (55%) oppose the health care legislation and senior citizens are even more likely than younger voters to dislike the plan.

The survey also found that Obama's approval index is at -21, the lowest it has been in his presidency:

The Rasmussen Reports daily Presidential Tracking Poll for Tuesday shows that 25% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as President. Forty-six percent (46%) Strongly Disapprove giving Obama a Presidential Approval Index rating of -21 That’s the lowest Approval Index rating yet recorded for this President.

If Obama's and Congress's approval ratings continue to decline, it is easy to see the Senate and House health care coalitions fracturing, the two versions of the health care bills remaining forever in limbo in conference committee and never becoming law.

Even if the conference committee reaches a compromise and agrees to a final health care bill, both the Senate and the House get another chance. They will vote on and need to approve the conference report of the new version of the bill. With low approval ratings, voter backlash and fears of reelection losses, Congress could vote down the conference report and the health care bill will not become law.

Are Democrats really such ideologues that they are willing to lose reelection, empower Republicans and possibly create a third party, to enact an unwanted and unliked social program?

So far, the answer looks like yes, but the post Senate vote poll numbers and voter sentiment are just beginning to come in, and we all know elected officials run for cover and change their policies whenever the going gets tough. A month from now, we will see if the public has second thoughts about disliking health care reform. If the public does not change its mind, we will get to see how committed our elected officials are to their version of health care reform over reelection.

Why Health Reform Did Not Get Bipartisan Support But Medicare And Social Security Did

It has always been about costs. Debt for social programs was not as big an issue in the past. When Social Security passed, US life expectancy was below retirement age. You worked until you died. Workers paying for retirees was a feasible plan. See, http://www.infoplease.com/ipa/A0005148.html.

Medicare started as universal health, but became a senior health plan to pass and life expectancy was about 6-7 years less than now and doctor and hospital usage was much lower. The 65 year olds at that time were before baby boomer retirees' bulge and before the retirees of US population growth of the immigration influx of early 1900s and there was the belief the Medicare tax would pay for it.

Finding the money for social programs is much more difficult now. We have expanded the numbers and percentage of the population we include and are much less willing to tax those workers who will benefit as we did with social security and Medicare.

Now we want to tax the rich to pay for an ever-expanding list of needs of the rest of the population.

Every economist recommended eliminating the employer deduction for worker health benefits. The new tax receipts would have funded the entire plan. President Obama took off the table the ability to do the most economically sensible thing to reform health care. Obama also committed to not taxing the middle class, eliminating the ability of Congress to tax those who would benefit, such as taxing workers before they lost their health insurance to unemployment and middle class individuals before they got pre-existing conditions.

Much of the Congressional health care spectacle is because Obama tied the hands of Democrats and prevented them from doing the most sensible things to achieve their goal of universal health care. Obama turned it into class warfare and a conservative versus liberal war through the removal of many of the best options for independent, conservative and republican agreement with the plan.

In doing so, Obama's initial actions resulted in many bad compromises and provisions in the final reform that would not have been there otherwise. Obama will get credit for passing health reform, but he should also take the credit for being the cause of many of the bad provisions in it.

A comment I posted on Ezra Klein's Washington Post blog, "The Senate begins to pass health-care reform".

What Happens If The President's Approval Ratings Continue To Decline With Passed Health Care Reform?

The late Sunday night/early Monday morning (after 1 AM) 60-40 procedural vote in the US Senate to prevent filibuster of the Reid amendment (the one with all the deals he made to prevent filibuster and get 60 yes Senate votes for health care reform) almost guarantees the Senate will pass a health care reform bill later this week.

What happens if the polls show a continuing decline in the Democrat party's, President Obama's and Congress' approval ratings? If a bump in approval ratings for the Democrats and the President does not occur upon Senate passage of health care reform, will the members of Congress panic and allow the health care bill to disappear in the Congressional reconciliation process (conference committee) to unify the House and Senate versions of health care reform?

What happens if upon returning to their home states during the Congressional winter recess, voters express a greater disapproval of health care reform than they did before the vote instead of a thank you?

Keep an eye on voter polls to see how the public reacts to the passage of the health reform bill in the Senate. If approval ratings and Democratic reelection prospects continue to decline, will there be Congressional attempts to prevent health care reform from happening? Or is health care reform inevitable and unstoppable at this point no matter what affect it has on approval ratings or reelection prospects?

Will Health Care Reform Be Legislative Vaporware?

Vaporware, a term from the computer industry where software companies announce their forthcoming release of new beneficial software that never materializes, appropriately applies to health care reform legislation

Congress will pass and the President will sign a health care reform law, but will it accomplish its many goals and have the many promised health care benefits or will it become a law that does not achieve its intended results? Could it actually make the machinery of our health care system function more poorly?

We must not forget that the benefit of this product called "health care" is the outcome to the patient and not its costs or insurability.

Many of us treat a law, such as whatever will pass for health care reform, as a final delivered product with all the previously promised beneficial features. Health reform requires more than the passage of a law called health reform. It requires accomplishing and solving many difficult and not well-understood health care issues.

Many laws are simple in that they do not involve modifying the process of an entire sector of the US economy. Most laws are categorizations that add to or remove from existing processes. A law that declares an action criminal, a felony, a higher fine, a health hazard, taxable, etc. and by declaration adds or subtracts from an existing framework easily achieves its intended results because the passage of the law itself achieves the results.

The well intended passage (and I give Congress and the President the benefit of the doubt that their actions are well intended) of a law in an area as large, as complex and as intertwined as health care requires more than enactment for achieving its original goals. It requires much more than a declaration of Congressional wishes and a redefinition of health care, health insurance, uninsured, etc.

Until any health care law is fully functioning, there is a lot of uncertainty as to its effectiveness, no matter how well intentioned. In the health care debate, our upset was with process and costs, but not outcomes. We never heard that doctors were doing appendectomies wrong or that too many patients with appendicitis died. We heard that appendectomies cost too much out of pocket or that someone could not or did not get affordable insurance to cover the needed medical care.

What we do not yet understand about any health care reform law that passes Congress is how that law will affect health outcomes. It is quite possible, and likely, that any health law making as much of a change to health insurance and health care as will likely pass Congress, will also likely affect delivery and choices of treatment, doctor availability, and health outcomes.

Whether the law will lower costs, decrease the number of uninsured and improve health outcomes is unknown until medicine functions for some time under the new legislation. While many will say it is in any case a first step toward improved health care outcomes, increased insurance availability and lowered costs, and that Congress will modify it as needed, a poorly laid foundation will never result in a quality home.

To me, health care reform legislative passage is vaporware. It is solely a promise of beneficial outcomes and intended benefits. Until, the law is functioning for a few years, after all its provisions take effect, will I and the rest of the US know whether a real, functioning, improved, lower cost health care system exists. Until such time, passage of the law is merely an announcement of intended benefits. It is vaporware.

The Senate Health Care Amendments To Get 60 Votes

A web link to the Senate health care amendments, known as the Manager's Amendments #3276, that made possible the promise of 60 Senate yes votes as a PDF.

The site also provides a link to the Senate health care reform bill, "Patient Protection and Affordable Care Act", HR 3590 as a PDF.

The link to both documents is from the Senate Democrats' website.

I will try to maintain permanent links to he House and Senate health care bills and amendments on the right sidebar to this blog as long as the bills are under active consideration. Note: RSS feeds will not update when the sidebar is updated.

Medicare Denies Twice As Many Medical Claims As Private Insurers

According to the American Medical Association’s National Health Insurer Report Card for 2008, the government’s health plan, Medicare, denied medical claims at nearly double the average for private insurers: Medicare denied 6.85% of claims. The highest private insurance denier was Aetna @ 6.8%, followed by Anthem Blue Cross @ 3.44, with an average denial rate of medical claims by private insurers of 3.88%

In its 2009 National Health Insurer Report Card, the AMA reports that Medicare denied only 4% of claims—a big improvement, but outpaced better still by the private insurers. The prior year’s high private denier, Aetna, reduced denials to 1.81%—an astounding 75% improvement—with similar declines by all other private insurers, to average only 2.79%.

From "Medicare’s Refusal of Medical Claims Continues to Outpace Private Rate" by Mary Theroux on the Beacon blog. Read her complete blog post here.

Obamacare is a Welfare Program

US Congressional health reform will destroy the private insurance market with or without a public option:

While a public option would certainly hasten the death of the private-insurance market in America, it is not a necessary means to that end. By destroying the economic structure of insurance, House Resolution 3962 would convert an already-overregulated industry into a pseudo-private welfare program. Even without a public option, insurance companies would be kept from controlling costs or adjusting their prices. The inevitable result will be the complete dissolution of the private health-insurance market.

From "New Regulations Will Destroy the Insurance Market" on Mises Daily blog, by Eric M. Staib, December 17, 2009. Read the complete post here.

Government Does Not Respond Like Private Business

A comment, below, I posted on Capital Gains and Games blog, "Why We Still Have A Deficit" by Stan Collender.

The two questions (reduce overall government and reduce specific services) expose the problem with reducing government deficits, but not in the way you described.

Governments and government workers lack motivation to become efficient. When faced with cutting a government budget, the government's response is always reducing services. There is rarely (more likely never) any discussion of cutting the costs of government employees, such as their extensive benefits, retirement packages, or union multi-year wage increases.

In this downturn, many private workers saw wage decreases, bonus decreases, benefits decreases, increased work responsibility at the same or lower wage, layoffs, etc. and the businesses continued to provide their product and services. Plus businesses sought ways to become more efficient and less costly.

Where in government has there been anything equivalent to the way private business reacts?

As soon as the public complains about taxes, politicians threaten cuts in services. Service cuts should be the last response. The politicians' first response should be to look for cost savings in the way the service is delivered, and then they should tell workers that some of their benefits and wages will be cut, then layoffs and only then as a last resort tax increases.

Look at the government takeover of the auto companies. It makes great business and economic sense to close some of the dealerships. The auto companies announced that they would close some dealerships to save money. After government involvement in the companies, the government stepped in to keep money losing dealerships open.

We have a deficit because government does not respond to economic choices the way private businesses do. It is not the taxpayers fault that government does not ask the right questions, such as do you want to have service A, if we find a way to reduce cost by doing X, or if we have to stop paying all or most of the cost of employee benefits and pensions, etc.

Ask different questions, like those that private businesses ask themselves everyday, and I think you will reach a different conclusion.

Bad News For US Employment Growth

Bad news for US employment. After decades of growth, overall US industrial capacity is shrinking.

Industrial capacity shrunk by .9 percent from fourth quarter 2008 to 2009. In previous years, IC grew.

4th qtr to 4th qtr:

2009: -.9 percent
2008: 1.1 percent
2007: 2.0 percent
2006: 1.5 percent

Average annual rate, from 1972 to 2009:

1995 to 2009: 2.7 percent
1989 to 1994: 2.3 percent
1980 to 1988: 1.9 percent
1972 to 1979: 3.1 percent

The Federal Reserve defines industrial capacity as "sustainable maximum output – the greatest level of output a plant can maintain within the framework of a realistic work schedule, after factoring in normal downtime and assuming sufficient availability of inputs to operate the capital in place."

Data source: http://www.federalreserve.gov/releases/G17/Current/table8.htm.

Industrial capacity definition source: http://www.federalreserve.gov/releases/G17/cap_notes.htm

Government Ownership Dangerous To Americans

From the testimony of George Mason University School of Law Asst. Prof. JW Verret at the House Hearing on the Government as Shareholder on December 16, 2009:

Through the bailout our government has become a controlling shareholder in many bedrocks of the business community. Some political leaders have argued that since the government owns these companies, it should seek to control their day to day business decisions. The reason I have joined you today is to explain why this view is not only misguided, but downright dangerous to the taxpayer’s investment as well as the pension funds and retirement funds of ordinary Americans.

Read Verret's complete testimony here.

High Frequency Trading Is Positive: Malkiel

In their quest to find trading profits, competition among high-frequency traders also serves to tighten bid-offer spreads, reducing transactions costs for all market participants, both institutional and retail. Rather than harming long-term investors, high-frequency trading reduces spreads, provides price discovery, increases liquidity and makes the market a fairer place to do business.

Technology has dramatically improved the efficiency of our trading markets. Rather than putting the individual investor at a disadvantage, high-frequency trading cuts costs significantly for everyone. Individual investors are the ultimate beneficiaries when their pension funds and mutual funds can transact large volumes of trades anonymously with great speed and at lower cost.

From the Financial Time article, "High-frequency trading is a natural part of market evolution" by Burton Malkiel, December 14 2009.

Health Care Reform Is Easy: Politics Is Hard

Health Reform, some ideas but not all:

Eliminate employer tax deduction for employee health insurance benefits

Allow the sale of nationally approved health insurance policies in all states

Establish a low cost, minimum benefit national policy, such as a catastrophic insurance policy, that overrides all state insurance minimum benefit requirements

Reestablish Medicare, Medicaid and CHIP as a medical insurance voucher system, similar to the FOOD Stamp program, for the purchase of private health insurance

Increase the number of medical school, nursing school and doctor assistant yearly graduates

Allow state licensed medical professionals to work in all states without need of relicensing

Allow many more foreign medical school graduates to practice medicine in the US

Remove antitrust exemption for insurance companies

And others that will increase insurance and medical provider competition, increase the number of medical providers, and put the responsibility for purchasing, price negotiating and paying for health insurance directly in the hands of the consumer


Politics, some observations but not all:

Do not do anything that will jeopardize insurance industry dollar contributions for Congressional reelections

Do not do anything that will risk reelection

Eliminate provisions that upset interest groups

Include provisions to increase federal government control of medicine and health

Include a government benefit program

Eliminate all risk pricing of health insurance policies

Mandate expensive required benefits for all health insurance policies

Make any compromises necessary to get Congressional holdout votes

Do not include provisions that will lower the cost of health care or health care insurance for the consumer

Include provisions that will increase federal government expenditures

And other provisions that most people cannot even imagine

Substantial Return On Investment From Cancer Research Went To Patients And Not Medical Providers: Will Health Care Reform Limit R&D?

From a patient's point of view, the rate of return to R&D investments against cancer is substantial and most of the gain went to the patients and not to health care providers or pharmaceutical companies.

Between 1988 and 2000, life expectancy for cancer patients increased by roughly four years, and the average willingness-to-pay for these survival gains was roughly $322,000. Improvements in cancer survival during this period created 23 million additional life-years and roughly $1.9 trillion of additional social value, implying that the average life-year was worth approximately $82,000 to its recipient. Health care providers and pharmaceutical companies appropriated 5-19% of this total, with the rest accruing to patients. The share of value flowing to patients has been rising over time. These calculations suggest that from the patient's point of view, the rate of return to R&D investments against cancer has been substantial.

From "An Economic Evaluation of the War on Cancer" by Eric C. Sun, Anupam B. Jena, Darius N. Lakdawalla, Carolina M. Reyes, Tomas J. Philipson, and Dana P. Goldman, NBER Working Paper No. 15574, Issued December 2009 (unfortunately gated).

Will health care reform limit future r&d investment and the positive results that come out of research? Or will the r&d aspect of health care remain unchanged or improved?

Milton Recht

Is Preventing Asset Bubbles Worse For The Economy?

But would we have destroyed Amazon.com, Ebay and Google to name a few very successful internet companies in the process of controlling the internet bubble? Will the long term effect of a remedy for controlling asset bubbles, destroy future industries? Wasn't Holland's tulip industry the result of tulip bulb mania, a bubble?

How does government distinguish from innovation and asset bubbles? Innovation and new industry result in a rush of new investment, asset price increases, financial collapse of many participants, asset declines and survival of a few big winners that go on to create new opportunities and economic growth. Can we distinguish innovation from so-called bubbles, which have no positive economic and social welfare effect?

By preventing bubbles, we prevent major investment in new technologies, processes and industries. We will create a world with very little economic growth, a world without structural shifts in technologies, if our goal is to prevent new bubbles.

If we believe in increasing asset price bubbles and want to prevent them from occurring, shouldn't we also believe in decreasing asset price bubbles, where prices collapse too far and too fast and want to prevent price declines also? Isn't preventing bubbles really just an alternative way of saying we do not want major price changes? Wouldn't prevention of price movements substantially distort the world's economies and lead to worse results than any asset bubble?

Isn't it is better to figure out remedies for the occasional negative effects of bubbles than to try to prevent them from happening?

And of course, there is always a possibility that asset price bubbles and eventual collapse are a rational response to economic events at the time that we are too ill informed to understand correctly.

My comment to "Using a hammer or a wrench to pop asset price bubbles?" by Antonio Fatás posted on the Antonio Fatas and Ilian Mihov on the Global Economy blog.

Rebecca Is Back

After a short hiatus, Rebecca Wilder returns with 5 blog posts in a week. Check out her blog, News N Economics, if you are interested in the substantive analysis of economic statistics.

Increases In Income Inequality Improve Health

countries that experienced big increases in inequality saw bigger improvements in health than those where inequality stayed stable or fell. In most cases, the effect isn’t significant, but the data certainly don’t support the hypothesis that rising inequality harms population health.

From "Look at the changes, not at the levels" by Andrew Leigh.

Read the complete post on Core Economics blog here.

Is Too Much Money Invested In Infrastructure In The US?

Is too much money invested in infrastructure in the US?

There are two categories of government infrastructure investment. There is new infrastructure investment and there is investment in the replacement and repair of existing infrastructure.

There is a lot of older infrastructure in the US at the end of its useful life, but since its original construction, there were population and economic shifts. More people are moving (have moved) from colder climates to warmer climates, from central US to be closer to the coasts, from rural and metropolitan areas to suburban and exosuburban areas. Government infrastructure investment should follow US population and economic shifts to maximize the return to the public from the investment.

The existing infrastructure in many parts of the US is greater than is needed for the local population and economic base. As much as we need a program to invest in new and existing infrastructure in parts of the US, we also need a program to disinvest from infrastructure in many parts of the US. Many areas of the US have an overbuilt infrastructure. These areas have lost significant parts of their population and economic base and there is little if any need to maintain the full extent of the existing infrastructure in those parts of the US.

Too often infrastructure investment, both at the federal and local government levels, is based on the existence of an old infrastructure and political pork barrel and not on the most beneficial and productive allocation of limited infrastructure funds to maximize the return to the public. Just because an infrastructure is deteriorating and needs major repair or replacement is by itself insufficient reason to invest in it.

The above is the comment I posted on Capital Gains and Games blog, "A Capital Budget: Taking the First Steps" by Andrew Samwick.

As Tiger Woods Marketability Crashes Ashley Dupre Rises

Ashley Dupre Gets Advice Column For The New York Post. She was Eliot Spitzer's call girl.

Friends With Benefits: Noise To Signal Cartoon:

Cartoon: Friends With Benefits

Source: Noise To Signal

Nobel Economics Laureate Paul Samuelson Dies At 94

Nobel Economics Laureate Paul Samuelson Dies At 94.

Reuters article via New York Times, "Nobel Economics Laureate Samuelson Dies At 94."

New York Times obituary.

Wall Street Journal article, "Economist Paul Samuelson Dies at 94."

Basel Committee Divided On Counter-cyclical Bank Capital

Unresolved differences between central bankers and prudential supervisors mean the Basel Committee's forthcoming package of reform proposals will not include substantive detail on one of the most-discussed measures – a counter-cyclical capital buffer. At a crunch meeting in Basel on Tuesday and Wednesday, the committee had hoped to finalise proposals on five key areas - liquidity standards, a leverage ratio, capital quality, the resolution of "too big to fail" institutions, and the counter-cyclical buffer. But the meeting concluded without agreement on the last of these items, according to attendees.

From "Basel Committee divided on counter-cyclical capital" by Joel Clark and Duncan Wood, published on Risk.net.

Is There More Devastation From Global Warming Than Coastal Flooding?

What worries you most about climate change?
Sea level rise, because of the sheer amount of infrastructure at risk. One meter rise is enough to put New York City’s airports underwater.

From The Earth Institute blog, State of the Planet interview with Peter deMenocal, a marine geologist who studies sea-bottom sediments for clues to past climates.

If the most worrisome climate change problem for the US is that two New York airports will be underwater and low-lying coastal flooding will occur, then why do we need an international meeting in Copenhagen to reach agreements on greenhouse gases emissions and climate warming?

Yes losing two NY airports requires action, such as building a high-speed rail line to Newburgh Airport or building a new airport on higher ground. Are two airports a global warming crisis?

If coastal flooding is the biggest issue, and it will occur over time and not all at once like a hurricane Katrina, then there is sufficient time to deal with the problem without greenhouse gas controls, such as dikes as in Holland, or rebuilding as necessary in more interior locations.

The part of the global warming debate that I find lacking is the distinction between political and economic power shifting due to global warming and the likelihood of complete devastation of the human race. So far, most of the discussion and scientific debates seem to indicate that the problem with global warming is the shifting of political and economic power and not the destruction of the planet or its inhabitants.

As long as the public sees global warming as an economic and political power grab, its costs will seem excessive and unreasonable to the general US populace and it will not be supported by the majority of US inhabitants.

See my earlier post, "A Non-hysterical, Sensible View Of Climate Change."

Tax Cuts Are The Best Stimulus Measures

Fiscal stimuli based upon tax cuts are more likely to increase growth than those based upon spending increases. As for fiscal adjustments those based upon spending cuts and no tax increases are more likely to reduce deficits and debt over GDP ratios than those based upon tax increases. In addition, adjustments on the spending side rather than on the tax side are less likely to create recessions. We confirm these results with simple regression analysis.

From a research paper, "Large changes in fiscal policy: taxes versus spending" by Alberto Alesina and Silvia Ardagna, August 2009, Revised: October 2009.

The New York Times is publishing an article by Greg Mankiw, "Tax Cuts Might Accomplish What Spending Hasn’t" on Sunday, December 12, 2009 that discusses and summarizes current economic research that shows that of the three government options to combat economic slowdowns; deficit financed stimulus spending (Keynesian approach), tax financed stimulus spending and tax cuts. According to Mankiw's summary of the research, tax cuts that promote investment are the most effective remedy to increase an economy's output.

How Much Will Madoff Victims Collect?

Most of the people who say they lost money with Bernard Madoff have had their claims denied because they invested with the con man indirectly or withdrew more money than they put in.

Trustee Irving Picard has turned down about 9,900 of the 11,500 people whose claims he has analyzed, with another 4,500 cases still to be looked into. The 1,600 people whose claims he has approved have losses totaling $4.69 billion, though they’ll get at most $500,000 to begin with....

From Bloomberg article, "Most Madoff Victims Denied SIPC Repayments a Year After Arrest" by Erik Larson.

Is US Life Expectancy As Bad As Commonly Reported?

A slightly modified version of a comment I posted on the NY Times Freakonomics blog, "Why Does the U.S Rank 29th in Longevity?" by Stephen Dubner.

Countries have different homicide death and accidental injury death rates, such as due to auto accidents. When these and other non-health care related death rates are standardized so meaningful comparisons for health care related deaths can be made, the US ranks number one in life expectancy. See published studies by University of Iowa, Robert L. Ohsfeldt and John E. Schneider.

Additionally, there are differences in the treatment of premature and newborns that die at or shortly after birth. The US is one of the most inclusive in the use of infant death statistics and this lowers its reported life expectancy statistics.

In addition, the OECD fact book where most of the comparative international health cost statistics come from has a warning at the beginning that the numbers are not comparable. For example, some countries include long-term health care and others do not.

Furthermore, although not mentioned in the fact book, different countries have different reporting times for gathering data. While the US data is the most current available, some countries are reporting data that is a year older than the US's data as the current year's data. When costs are rising as they are in healthcare, it means the other country's data is older than the US numbers and therefore lower than it should be. In many cases, US health care costs should be compared to other countries' following years' costs, which will be higher by anywhere from 5-15 percent.

From OECD fact book, "Comparability:
OECD countries are at varying stages of reporting total expenditure on health according to the boundary of health care proposed in the OECD manual A System of Health Accounts (SHA). This means that data reported are at varying levels of comparability…. limitations do remain (even among those countries where total expenditure is fairly comparable), due to the fact that data reporting is connected to current administrative records of financing systems. For example, different practices regarding the inclusion of long-term care in health or social expenditure are a major factor affecting data comparability."

When corrections are made to the US health cost data to make it comparable to other countries' data, the US no longer looks as expensive nor are its health results as bad.

When life style differences are included, such as smoking, obesity, teenage pregnancies (of which the US has the highest developed world rate and which lead to more premature and low birth weight babies and to lifelong medical problems), the US has the best medical system in the world.

Health care researchers know these facts about international comparisons. The problem is that too often, politicians, those that align themselves with the politicians and the mass media use the unadjusted numbers to achieve political outcomes by making US healthcare look bad when it is not.

See my previous post, "US First In Life Expectancy; Better Than OECD Countries" of August 2, 2009.

Did Climatologists Fake Global Warming Data?

Megan McArdle at the Atlantic asked if the global warming scientists falsified the data, "ClimateGate: Was Data Faked?"

I posted the following comment to her article:

Any number of past data points (temperatures) will successfully fit into many different models that lend themselves to different explanations of causes. What distinguishes a valid model from another is not its goodness of fit with historic data, but the goodness of fit of model predictions with actual outcomes for periods beyond the data set used.

If climatologists have a good model (and without a good model they do not have a good understanding of cause and effect for temperature changes), then the model should be able to predict future measurable temperature outcomes with an acceptable degree of accuracy beyond the time frame of the data used to develop the model.

It is my understanding that the models used and developed by global warming climatologists fail to predict accurately the global temperature outcomes for the decade just ending. That means the model is not validated. If a model is not valid for out of data time frame predictions, it is not a valid model and it offers no guidance on past causes and effects.

Too much effort is put into worrying about past data. Just ask them to predict the next decade global temperatures and watch if those results occur. Even if there are agreements in Copenhagen for massive reductions in man-made greenhouse gases, there will be enough time to see if the climatologists' predictions are accurate and to reassess the need to curb man-made green house gases.

Many of the other comments are worth reading. Some link to actual data, such as ice amounts at the polar caps and coastal sea level data, so one can judge for themselves if all the hype about global warming is true.

Pros And Cons For Man-Made CO2 And Climate Warming

An excellent side by side chart from Information is Beautiful showing the arguments for and against man-made global warming. It was prepared by David McCandless, a London-based author, writer and designer who has written for The Guardian, Wired and other publications.

Double click on above hyperlink to read a full screen chart.

Hiring Still Below Job Separations

According to the Bureau of Labor Statistics, at the end of October, more employees were leaving and losing jobs than were finding jobs. The hiring rate was 3.0 percent and the job separation rate at 3.2 percent.

The job openings rate was unchanged over the month at 1.9 percent, or 2.5 million jobs. There are 15.4 million unemployed!

Are Call Girls And Prostitutes More Discreet Than Tiger Wood's Mistresses?

Two more of Tiger Woods’ mistresses are talking to tabloids and Eliot Spitzer's girl Ashley Dupré is criticizing them for cashing in. Former call girl Tracy Quan on why prostitutes often act classier than mistresses once the cat's out of the bag.

From The Daily Beast, "Call Girls Out-Class Mistresses" by Tracy Quan.

It is all about economic incentives. Prostitutes have economic incentives to be discreet and mistresses do not. Read the complete Daily Beast article here.

Thanks Carpe Diem

A special thank you to Carpe Diem blog and Mark Perry for mentioning me, highlighting one of my comments and using it as a blog post.

My comment about the "unbanked" as posted on Carpe Diem follows:

The Unbanked: Xenophobia and Elite Paternalism

Sometimes a comment on a CD post is so good that it deserves its own post. Milton Recht's comment below on this CD post about the "nonproblem" of "the unbanked" is one such example:

If one receives a check and wants to use it to pay a bill, it is difficult at a bank to accomplish the goal. If the check is deposited into a checking account without sufficient funds in the account to cover the check, it can be several days before the check clears. You cannot pay the bank to have the cash immediately. However, you can go to a check casher, pay a fee, have the cash immediately, and get a money order to pay the bill or pay your utility bill right there at the check casher with the funds from the check. Additionally, many hard working people cannot get to a bank during their working day and check cashers and other non-bank service providers are open at more convenient times, speak the foreign languages of their customers, and if necessary, easily remit the funds to another country.

The reason there are unbanked is that banks either do not provide the needed service within the necessary time frame of people who need to live from check to check, or the total cost, including things like getting your electric turned off, are higher at banks than at the alternatives that the unbanked use.

The FDIC fails to understand it is a rational economic decision that the unbanked are making. Unless there are unmet needs of the unbanked, it should leave well enough alone. If banks could provide the needed services at a lower price and more conveniently, the banks will increase their market share of this clientele. Otherwise, the unbanked population will remain. The non-bank providers (check cashing and payday-loan companies) are filling a market need that traditional banks are not meeting.

To me it is a subtle form of xenophobia and elite paternalism. The regulatory class of people (e.g. FDIC) determines that its way of doing things is the only way and the uneducated and minority ethnic groups are too ill informed and irrational to know what they are doing and what is best for them. The groups must be converted for their own good. The regulators justify their concern and actions by doing some partial and incorrect analysis that shows the group in question is overpaying and therefore it is necessary for the government to step in and protect people against their will and voluntary actions.

A Non-hysterical, Sensible View Of Climate Change

Then along came Al Gore, a Democrat who lost the election for president. Climate change became a partisan issue. We could have used a Carl Sagan of climate, a serious spokesman for science.
***
Who will be hardest hit by climate change?
Most of the large temperature changes will happen at the poles—where no one lives. The next largest will be the temperate zones, home to wealthy countries with manufacturing and service-based economies. But our wealth will permit us to cope. It will not be pleasant, but at least we will be able to manage. The real irony is that temperature change will be smallest in the tropics and subtropics, but because these areas are poor, densely populated and dependent on agriculture, they will suffer most. If you’re on the edge of survival you can’t take small change[s].

From Kim Martineau's interview of Professor John Mutter, "You Can Ignore Polar Bears, But Not People" on State Of The Planet blog. Mutter is Professor, Department of Earth and Environmental Sciences and Department of International and Public Affairs at Columbia University.

Pearl Harbor Attack, December 7, 1941

In memory of all those who died in the Japanese attack on Pearl Harbor on December 7, 1941.

A searchable Pearl Harbor causality list here.

The Eyewitness to History description of the attack here.

Wikipedia article about the attack here.

Pearl Harbor attack news video.


More information and videos about the Pearl Harbor attack are available at pearlharbor.org.

CNNMoney: Why Cheap Oil Is Here To Stay

"The world will never run out of oil," Deutsche Bank analysts wrote in a recent research note, echoing the old logic that the Stone Age didn't end because the world ran out of stone. "If the oil age does end, it likely will be because we become more efficient and simply use less petroleum."

From "Why cheap oil is here to stay" on CNNMoney.

(HT: Mark Perry, Carpe Diem)

Another Valid Critique Of Obama's Job Summit By John Stossel

Will at least some free-market economists get to speak? No. The White House will hear from Paul Krugman, Joe Stiglitz, and Jeffrey Sachs. "Fresh ideas" won’t be heard from these folks.

They and the political class can’t imagine a decentralized world where good things happen…without them. But in the real world, that’s exactly how good things happen, and how jobs are created.

When government sets simple rules that everyone understands and then gets out of the way, free people create jobs.

Hong Kong demonstrates this. Last century, Hong Kong was third world poor. 50 years ago, its citizens’ average income was under $700 (in today’s dollars) per year. Today, it’s $43,800. Hong Kong got rich because Hong Kong’s rulers, stuffy British bureaucrats, practiced what I’ll call “benign neglect”: they enforced rule of law—kept people from stealing from each other, or killing each other--- but then sat around and drank tea. They left people alone, and free people, left alone, created prosperity.

From John Stossel's post on the Fox Business blog, "Who Creates Jobs?"

Criticism Of Obama's Job Summit

Doug Reich on The Rational Capitalist blog posted his valid criticism of Obama's job summit, "Obama Open To Any Ideas to Create Jobs, Except Ideas that Will Create Jobs"

Obama can be counted on to myopically focus on the problem as a isolated fact without any context or relationship to a more general problem. With such an approach, he can not solve any problem. Instead, he must rely on the opinions of others guided only by a vague criteria euphemistically masking his default moral-political ideology by cultural osmosis: sacrifice, egalitarianism, and collectivism.

Read Reich's entire post here.

Google Does Not Want All The Talent

Every now and then the company removes from consideration one of its superhuman job candidates, to avoid an over-concentration of brilliance. Google, you see, doesn't want to become a black hole of awesome.

From "Google Rejects Awesome People So It Doesn't Hog All of Them" by Ryan Tate.

Do Recessions Create Captive Resident Taxpayers

Casey Mulligan in the New York Times Economix section and on his blog, Supply and Demand (in that order), "Recession Creates a Captive Audience of Taxpayers" argues that the housing crisis decline in the ability to sell a home and in geographic mobility creates a captive audience, which allows local municipalities to raise taxes unimpeded. I posted a comment, below, that argues just the opposite. Governments will be more restricted in their ability to raise taxes.

Al Hirschman, "Exit, Voice and Loyalty."

There is a trade-off between emigration (exiting), and political dissent (voice). As more people can emigrate, there is little motivation for them to use politics to protest the local government's actions. Those that remain are the most captive and most tolerant of local government policies.

As the populace loses its ability to exit a locality with unpleasant governmental actions, there will be increased reliance on political protests and dissent and increased motivation to vote out of office those who promote undesirable actions.

If mobility does not increase soon, I think you will see just the opposite of your prognosis. More voices and protests will be heard at the local government level. More unhappy citizens will be engaged in local politics and motivated to vote. Local governments will be forced to undo many of the burdens they placed on their citizens.

People have cut expenses under their control, such as autos, gasoline, restaurants, clothes, vacations, travel, credit card debt, etc. People already cut consumption expenditures. The next available phase of cuts will be local government expenditures to curtail the continuing increase in local taxes and fees.

Boeing, Estée Lauder, Smith International, and Visa Executives Discuss Strategy After The Downturn: McKinsey Quarterly

From December 2009, Mckinsey Quarterly, "Navigating the new normal: A conversation with four chief strategy officers," including video and transcript.

Are we experiencing a conventional economic cycle? Or did the financial crisis of 2008 and subsequent global economic downturn mark the beginning of a “new normal” characterized by fundamental changes in the use of leverage, trajectory of globalization, nature of consumption patterns, and appetite for risk taking?

Read the entire article here.

Here We Go Again: History On A Merry Go Round

Truman: Korea
Kennedy-Johnson: Vietnam
Bush II: Iraq
Obama: Afghanistan
?: Iran

Climategate Allows Diversity Of Opinions On Global Warming: Climate Catastrophe Hysteria Is Unfounded

Richard S. Lindzen, professor of meteorology at the Massachusetts Institute of Technology, wrote an excellent opinion piece, "The Climate Science Isn't Settled: Confident predictions of catastrophe are unwarranted" in the Wall St. Journal.

Lindzen notes several known climate science points that call into question the current hysteria about global warming, without any resort to information unveiled in the current Climategate email scandal.

The benefit of the release of all the Climategate emails is not that it shows that data was destroyed, fudged and dissent blocked. The benefit is that news organizations and other mainstream mass media will now allow dissenting scientific opinions to be expressed to the public without ridicule.

For example, one of several scientific points Lindzen notes in his article:

The general support for warming is based not so much on the quality of the data, but rather on the fact that there was a little ice age from about the 15th to the 19th century. Thus it is not surprising that temperatures should increase as we emerged from this episode.

Read his entire article here.

Obama's Advisors Lack Business Experience And Wisdom

The following chart shows that President Obama's cabinet lacks the business experience and wisdom of every other president's cabinet since Teddy Roosevelt's cabinet, 110 years ago.

The above chart is from THE ENTERPRISE BLOG, "Help Wanted, No Private Sector Experience Required" By Nick Schulz and originally from a JP Morgan research report.

Schulz concludes:

When one considers that public sector employment has ranged since the 1950s at between 15 percent and 19 percent of the population, the makeup of the current cabinet—over 90 percent of its prior experience was in the public sector—is remarkable.

Addendum: [See my December 27, 2009, post, "Obama Does Not Know How To Be A CEO."]

Side By Side Comparison Of House And Senate Health Reform Bills

The Henry J Kaiser Foundation produced a side-by-side comparison of the House and Senate health reform bills, HR 3962 and HR 3590, respectively. The foundation intends to keep the site updated as the bills are modified.

The health care bills' comparison is available here.

Structural Employment Changes In Recessions

My comment to a post by Arnold Kling, "The Great Depression as a Recalculation" of his summary of an interview with Bruce Greenwald by Robert Huebscher, "Bruce Greenwald on Structural Problems in the Economy and Unemployment" follows:

Bruce (by the way, he is far more intelligent and knowledgeable than I am) is talking about sector changes in employment. Whether or not his example of agriculture is correct, during times of economic retrenchments, some industries suffer more and reduce employment more than others. When the economy rebounds, the new economic growth does not entirely reverse an industry's previous employment and production declines and undo a particular industry's employment losses. The employment and production growth occur in different areas due to changes in demand, changes in production efficiency and capital investment that affect the need for labor.

Bruce and Arnold do not mention that there are also changes that occur within sectors. There is a constant churning of labor in the economy, which can result in significant changes in the characteristics of the labor force within an industry. As companies let employees go, companies hire new employees with different attributes.

In times of increasing unemployment and a slowing economy, there is an excess of employee applicants for jobs. Employers could lower salaries and benefits in response to the excess of available workers. Most of the time, it appears that wages and benefits do not decline (sticky wages). Instead, employers raise the requirements for their open positions. They are able to hire workers with more education and more experience at or slightly above the previous wage paid for the position, but at a lower wage than they would have paid before the economic slowdown. During recessions, there are often complaints of workers being overqualified and underutilized for positions they have, but it allows some companies to use the newly available unused talent within their business to achieve competitive advantages. During the Depression, some jobs added a high school degree as a new requirement.

As employers accumulate more experienced, more skilled, and more educated workers, the employers expand, restructure and modify jobs to increase efficiencies. Additionally, companies can use the workers' experience and unused skills to expand their institutional knowledge, focus on other aspects of the industry and reduce a competitor's advantage. The internal changes to the talent pool within an existing industry allow it to respond to competitive changes proactively, dynamically and flexibly.

It was the internal industry and employee skill changes during the recession Depression that allowed industries to grow post WWII.

One could argue that the rigidities of job definitions, job responsibilities, and hiring and firing rules caused by the unionization of the US auto industry prevented the auto industry from making the necessary internal structural job modifications, increase workers' experience and gain institutional skills in times of previous economic recessions and auto sales slowdowns. The inability of the auto industry to avail itself of cheap talent, without reducing wages, during recessionary times hindered its competitiveness and allowed new competitors to take away significant market share.

Basel II Banking Rules Had Perverse Effects

International banking rules such as Basel II have had the perverse effect of imposing the greatest capital restrictions on the smaller and less diversified banks that posed the least risk to the system, while the large “super-spreader” institutions were given more leeway. Borrowing an analogy from sexually transmitted disease, Mr Haldane says: “Basel vaccinated the naturally immune at the expense of the contagious; the celibate were inoculated, the promiscuous intoxicated.”

From "Organic mechanics" by Clive Cookson, Gillian Tett and Chris Cook published November 26, 2009 on FT.com.

Adam Sandler Singing Thanksgiving Song On SNL

HAPPY THANKSGIVING

HAVE A SAFE, WONDERFUL AND HAPPY THANKSGIVING!

Price Discrimination Does Or Does Not Explain Everything

Price Discrimination Explains Everything by Arnold Kling.

Price Discrimination Does Not Explain Everything by Adam Ozimek.

The Stimulus Problem Is Who Got It

Tom Lindmark on But Then What blog says about the stimulus, "a lot of the commentary that I’ve seen suggests that it’s not a size problem with stimulus so much as it is one of execution. The stimulus was captured by the political class and directed towards those projects which would provide the maximum return in reelection cash....

The problem isn’t that there wasn’t enough money handed out, it’s who it was handed out to."

Read Tom's complete post, "The Stimulus Fallacy."
[Weblinks updated.]

Do SAT Math Scores Show Societal Bias Hinders Female Scientists Career Objectives?

Mark Perry on Carpe Diem posted a blog, "800 SAT Math Scores: Male-Female Ratio is 2.22:1" that shows that on the Math portion of the SAT, males outnumber females by over 2 to 1 at the 800 level. The male excess ratio tapers off until the 580 score level where females begin to outnumber males. Mark believes this shows why females are under-represented in the sciences.

Mark says:

If we are trying to explain the over-representation of males in science, math and engineering departments at MIT and Harvard, especially if that group represents those who score 800 on the SAT math test, the explanation seems pretty clear, convincing and straightforward: males are over-represented by a factor of more 2:1 for SAT math test scores of 800 points.

I posted a comment on the Carpe Diem blog in response with the belief that the SAT scores do not show, as Mark Perry indicates, that there is not a societal and cultural bias that is causing the under-representation of females in the sciences.

My comment:

If there is a societal and cultural bias such that females feel less feminine or attractive if they show high math or science ability or interest, some of the females most aware that they possess above average math and science abilities will attempt to hide these traits to increase their attractiveness and femininity. Similar results will occur if the females believe it is unfeminine to score higher than their desired boyfriends score.

Potentially high SAT math and science female scorers will most likely know based on past school test scores that they have the capability to score high on math and science tests.

One would expect these previously high math and science scoring females to underperform intentionally (not necessarily consciously), with the greatest underperformance occurring at the highest score levels. It is the highest female math and science score achievers who would have felt the biggest negative effect of the cultural and societal bias against female success in math and science. As female test takers approach the average, they will have had felt fewer negative effects from their previous math and science scores. The high female scorers will have the most motivation to limit their effort and underperform based on their abilities.

The SAT score results are therefore consistent with the assumption that there exist cultural and societal factors limiting female achievement in the math and sciences. It is the societal bias that will cause the appearance of an excess of males at the highest test score results and the tampering off as the scores approach the middle.

Does Excessive Drinking Cause Accidents Or Are They Both Symptoms Of Risk Taking Behavior?

My comment I posted on Jeffrey Miron's Blog "Libertarianism, from A to Z" in response to Miron's discussion of New York State legislature's attempt to pass a tougher DUI law and make it a felony to drive while intoxicated with a child in the vehicle. Additionally, the proposed law would require first-time convicted drunken drivers to buy a device that prevents them from driving their cars if they have been drinking.

My comment:

Your [Jeffrey Miron] paper, "Does the Minimum Legal Drinking Age Save Lives?" showed that MLDA laws have a minimal impact on teenage drinking. Do DUI laws decrease the incidence of drunk driving? Or drunk driving accidents? Are alternatives such as the designated driver campaigns more important in changing behavior?

As you mention, police will and are currently letting some offenders off with a warning, offenses are bargained down and offenders continue to drive.

Additionally, there is a cause and effect issue. Do people who have aggressive, asocial, risky behaviors, such as tailing, speeding, ignoring stop signs and red lights, turning without signaling, etc. get into accidents and they also drink because it is a risky behavior or is it the drinking that causes the accidents? While I am in no way approving drinking and driving, I think it is more often a concurrent behavior and not a cause.

The law is probably more punitive than preventive. It is also a law that provides more comfort to the general population by the public's perception that the government is doing something than by the law actually achieving any reduction in the aberrant behavior.

Some people regularly take more risks in their daily lives and engage in more anti-social behavior than others and have more negative impacts on themselves and society than the average person. Of course, it would be very nice to avoid or at least minimize the negative societal outcomes.

Often, some risky behaviors are looked at as the causes of the harm, when in fact the risky behaviors are really manifestations of the same underlying psychology that caused the harm and are not the causes. These behaviors occur concurrently and are often seen as causes because they are associated with the harm, but prohibition of these actions will not stop negative effects because they are concurrent manifestations and not causes.

Excessive drinking and risky, accident-prone driving are probably caused by the same psychological characteristics and one probably does not cause the other.

Did Contract Rigidities And Law Function As 'Social Suicide Pacts' During The Financial Crisis?

Modification-proof contracts boost commitment and can help overcome information problems. But when such rigid contracts are ubiquitous, they can function as social suicide pacts, compelling enforcement despite significant externalities. At the heart of the current financial crisis is a contract designed to be hyper-rigid: the pooling and servicing agreement (PSA), which governs residential mortgage securitization. The PSA combines formal, structural and functional barriers to its own modification with restrictions on the modification of underlying mortgage loans. Such layered rigidities fuel foreclosures, with spillover effects for homeowners, communities, financial institutions, financial markets, and the macroeconomy.

This Article situates PSAs in the context of theoretical and policy debates about contract rigidity, bond contract modification, and contractual bankruptcy.

From a recent article, "Rewriting Frankenstein Contracts: The Workout Prohibition in Residential Mortgage-Backed Securities" by Anna Gelpern, American University Washington College of Law, and Adam J. Levitin, Georgetown University - Law Center. [Free Download].

The paper suggests a few strategies:

These strategies include narrowly tailored legislation that renders the problem terms unenforceable on public policy grounds, administrative restructuring mandates, and special bankruptcy regimes.

(HT: The Conglomerate Blog)

Academia Vs Business: XKCD

The marvelous wonders and insights of XKCD.

Harvard Medical School Dean Says Congressional Health Reform Gets An 'F' Grade

Jeffrey Flier, Dean of the Harvard Medical School, gives the Congressional health reform proposals a failing grade in an opinion piece in The Wall Street Journal.
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Flier writes:

In discussions with dozens of health-care leaders and economists, I find near unanimity of opinion that, whatever its shape, the final legislation that will emerge from Congress will markedly accelerate national health-care spending rather than restrain it. Likewise, nearly all agree that the legislation would do little or nothing to improve quality or change health-care's dysfunctional delivery system.

From "Health 'Reform' Gets a Failing Grade" by Jeffrey S. Flier, Dean of the Harvard Medical School, in Wednesday, November 18, 2009, Wall St. Journal.