Happy Holiday Weekend

My dad was in a glee club, either in College or outside of College but during that time, in the early 1930s. He used to sing a verse or two of this song on occasion. I believe I learned Paul Robeson's name from my dad, not from school. My dad admired Robeson, but I think more for his singing than for his politics.

The Joys of Upgrading Your Browser

These are two tools I have used fairly regularly. Firefox 5 doesn't seem to like them. I went to the Kwout site and they seemed to have done something to address the issue, but what they had wasn't working for me. I haven't yet looked into Delicious. I suppose you can still use their tools by pasting in urls, but the bookmark tools were so easy. Hurray for progress.

Sticking to one's guns

I've reached the last third of Richard Ellmann's James Joyce. The time is after World War I. Joyce, who spent most of the war in Zurich, is back in Trieste. He is working to complete Ulysses, which he wrote episode by episode, with the style and narrative effect different for each. It didn't occur to me until just now, but what Joyce was doing in the writing in that sense must be similar to what Picasso was doing with his painting - depicting simultaneity yet from different perspectives. That necessitated the style changes and the underlying issue Joyce was tackling to change with each episode.

But Joyce was not very productive in this period. He lived in a cramped flat with 9 other people, his family, his brother, and another family. There was rampant inflation and scarcity of food and places to live. He needed new clothes but couldn't afford them. He had an anonymous patron who sent him funds regularly, but they were insufficient. He had a nominal job at the University teaching English but it didn't pay much and it took away time from the writing. Ultimately he quit that so he could focus on the writing. His work was high minded and while it appealed to aesthetes it didn't sell particularly well so didn't generate a lot of royalties. He could have written more popular stuff. He had the opportunities. His name was then well known. But that would have been time taken away from working on Ulysses so he declined those opportunities.

Ellmann gives us some rather fascinating correspondence between Joyce and Ezra Pound, who is his intellectual booster and go between to the world of the literati. Pound, in discussing Joyce with others, reports that Joyce had a deserved reputation of being difficult to get along with, but in most instances regarding the crux of the argument Joyce was in the main right. And in the absence of these disagreements Joyce could be affable and charming.

I have been scratching my head the last few days on whether it is only the artist who can resist compromise to get on with matters, the art the justification for the purity of thought, or whether the rest of us should too. If you juxtapose reading about Joyce with reading about the negotiations on raising the debt ceiling, I have been making those juxtapositions since they seem inevitable to me, how can it be to so admire Joyce and yet hold the Grover Norquist acolytes in such low regard? Here sticking to one's guns seems an irresponsible vice. Vin Weber is making compromise look like the higher intellectual form. What is the principle that determines which is better?

Yesterday I got back my teaching evaluations. I will write a post later dedicated just to them. But here I simply want to note that my intermediate something I've written about earlier. My students found my tests very difficult and they judged my teaching inadequate because it didn't prepare them to score well on the exams. I should note that as a teacher Joyce was a very harsh grader, but was very informal in his lectures and somewhat disorganized in his instruction. In this respect, he is similar to me.

Can the teacher afford to take on the mindset of the writer?

A Nightmare from Wall Street

I didn't sleep well last night. I woke up from a bad dream around 12:30 and couldn't get back to sleep till around 6. We now have HBO. Even though we have seemingly a zillion channels on the satellite, most of the programming appears repetitive or dim witted. One might take that as a good thing (an incentive to read a book, for example). But we like our guilty pleasures too. So yesterday I was channel surfing and stumbled onto TooBig to Fail, an HBO original movie, from the book by Andrew Ross Sorkin.
It's what caused the bad dreams, of that I have no doubt, though it may very well be me, not the movie itself.

Here are a few different thoughts that occurred to me watching the film. First, most of the film concerns the events leading up to to the Lehman Brothers bankruptcy after the rescue of Bear Stearns. I was struck by how recent that was. It's not yet three years since Lehman failed. In how burdensome the Great Recession seems, it feels as if its been a decade, or more. Of course the events leading up to that bank run were some time in the making. But the debacle itself wasn't that long ago.

Next, in movie terms it is a pretty traditional drama. The hero is Henry Paulson, the Treasury Secretary, played by William Hurt in a way to draw empathy to the character. The villian is Dick Fuld, head of Lehman Brothers, played by James Woods who is very good in being completely unsympathetic and totally arrogant. Throughout the movie I kept asking myself, do they really want Paulson to come off as a good guy? Maybe he was a good guy measured by his intent. But he was a ditz in pursuing his goals, which I'll get to in the next point. (Possibly this is a way to interpret President Bush as well.) This review says as much.

Third, even if the financial world as we know it seemed to be coming to an end, Paulson (and Bernanke and Geitner) acted as if they were constrained in what they could do. Bear Stearns had been bought out in a "firesale" by JP Morgan Chase, with government assurances about losses. Lehman needed a similar arrangement, but Paulson was adamant about no government assurances. Had the contagion been limited to Lehman and Merrill Lynch, the next bank in line, that might have been the right call. But Paulson completely didn't anticipate AIG failing while the Lehman arrangement was being worked on. Had he anticipated the AIG failure, he couldn't possibly have acted in such an inconsistent manner.

Fourth, as complex as the deals looked to be to put them in place, it was very odd to see Paulson's decision making as sequential rather than doing things in parallel. The potential buyers of Lehman (after Dick Fulk completely screwed it up with a Korean consortium) were Bank of America and Barclays Bank. Perhaps he couldn't talk directly to their management, but Barclays had British regulators. Paulson didn't talk to them. Ultimately, they came to him to tell him they were blocking the deal.

If you look at Paulson's Wikipedia entry, it is pretty damning. So one wonders whether the movie was being ironical in its depiction of Paulson. But I didn't get other movie-type clues that they were doing that.

Fifth, even as the system seemed to be falling apart the heads of the other investment banks were very reluctant to help out a rival for the good of the system. Eventually they agree to chip in $1 billion dollars per to help out Lehman, only to find that the British regulators were going to block the deal.

The movie ends by noting in text that the industry is more concentrated now and none of the real problems have been addressed. It is a nightmare from which the economy as a whole has not awakened.

Waiting for the Return

Here's a story with no spinning.
The Yankees are mainly winning
And without Derek Jeter.

They're in the Division race
A half game out of first place
Yet without Derek Jeter.

Absent the Yankees' Pride
Will the team start to slide
Cause they miss Derek Jeter?

At the time for Joe D to go
The Yankees had Mickey in tow.
Who'll replace Derek Jeter?

Though he's a milestone to face
It's under pressure with grace
We'll recall Derek Jeter.

Now fans have a sinking feeling
Since their hero's hardly healing.
Come back home Derek Jeter.

It's not at all fun to discover
Aging slows how we recover.
Born in June Derek Jeter.

If you want the real score
His injured calf is still sore.
Best of luck Derek Jeter.

New York Yankees' Derek Jeter continues onfield work in rehab but has soreness - ESPN New York via kwout

A disconnect between the image at the top....and the reality on the ground

This piece is an interesting read because it gives a different view of Governor Mitch Daniels than has been represented in the press as of late. The comments are interesting too, though they are not uplifting.

Jurist Prudence

I was on jury duty this week, but I never made it past the waiting room. On 3 of the 5 days (tomorrow is one of them) they didn't call anybody in. Yesterday I went, sat around for a couple of hours, and then was dismissed, as were a majority of the others on jury duty who also were waiting.

Perhaps people have finally figured out that crime doesn't pay, though that's probably not it. Maybe most of the cases on the docket were settled - a triumph of rationality. And maybe its the time of the year. Lawyers and judges need vacations too. Still, it's a far cry from my experience 20 years ago. I was on a jury for a felony trial back then. Pretty gruesome stuff but very intriguing.

I guess I'll watch some reruns of Perry Mason.

The decline of excellence due to aging

The mythology is that old-time players, who did not lift weights and knew nothing about nutrition, had mercilessly short careers. And that today’s players, who condition themselves year-round — often with the help of private trainers, the most up-to-date scientific methods, nutritionists and massage therapists — play longer and have more years of peak performance. It makes sense. It’s also not true.

Interesting piece. But I think there is something missing in it, which is the role that injury plays, particularly injury that is not reported in the papers. One has the impression now that Jeter used to be able to perform at a high level even with minor injuries. But now he can't.

An Essay Entitled Rethinking The Social Contract

What started as a blog post became a longish essay. This is a draft that I really struggled to write. Many people are dissatisfied with the current rhetoric about what to do for the economy. But they don't have an alternative vision to champion. This is my attempt to create such a vision. Sorry about the length. If you do read it through I would really appreciate getting comments on it.

The search for improbable economic growth

Columbus traveled west to find the East
His trip a test that found a different beast.

And so it is now with economic recovery
We wonder how we'll make that discovery.

The data show with so many numbers
From the recessionary blow the economy still slumbers.

Will the private sector spend very much more?
Producing a growth vector once was a fiscal policy chore.

With no wind at our backs in the doldrums we drift
To end the employment slack the economy needs more lift.

Hoping for good news surely we're all very eager.
Yet in many pundits' views the results are apt to be meager.

Congress more concerned with the debt than that the economy it should bail.
Has gotten some Keynesians upset but their ship's already sailed.

So where the economy will head is anybody's guess
Journeying with a sense of dread it'll be more of a mess.

The Economy and D.C. - Renewed Weakness - NYTimes.com via kwout

It must not have been love.

What was Congressman Weiner thinking?

Erich Segal, ‘Love Story’ Author, Dies at 72 - NewYorkTimes.com

Jing as Alternative to Kwout

I've got a wide screen computer/monitor at home and I've had difficulties getting the captures with Kwout to make the text clear. So I'm trying Jing as an alternative in this post and let the reader be the judge of whether this is better visually. I used control minus in my browser to make the width of this capture under 600 pixels. And then in blogger I'm using my own html for the image rather than blogger's tool. Also, I put a double border on it for effect. This is a bit more effort, but it looks somewhat better on my computer screen, though still is not perfectly clear.

We Shall See What Stuff You Are Made - NewYorkTimes.com

Blogger versus Facebook Text Editors

I've been using the Facebook feature that allows import of a blog into Notes. (See the first entry at the link.) Unfortunately, the feed doesn't seem to be updating in Facebook, while it does update elsewhere. So recently I've taken to manually importing on a post by post basis. Having done this a bit, here are some observations.

1. Since my posts are not simply un-styled text, but have links, embedded images, and some formatting, I've taken to copy the html version that Blogger produces and paste that into the Facebook editor.

2. Some of the html commands come through fine. For example, (blockquote)quoted text(/blockquote)*. Blogger renders the quoted text by indenting. Facebook renders it by putting a vertical bar to the left. But the idea of a block quote does translate.

3. Other html commands that Blogger utilizes Facebook doesn't recognize. For me, the biggest of these is (div)paragraph formatting(/div). The div tag can then have a bunch of different attributes such as alignment, font style, font color, other text formatting. Facebook doesn't do any of that.

4. Facebook seems to like old html, the type I first learned. For example, (b)bolded text(/b) and (u)underlined text(/u). So if I want to keep the formatting then I need to redo in Facebook.

I find this mildly disturbing. I get that Facebook wants to be really simple in its editing, but if it can bring in an RSS feed and the feed has the formatting, it should allow its Notes editor to produce the formatting as well.

*I am using parenthesis () rather than the less than sign and the greater than sign <> to display the html so readers can see the tags. Otherwise, Blogger will render it.

Advise and Dissent

Peter Diamond is an extraordinarily good economist. He certainly doesn't need this humiliation. It does make you feel that Congress deliberately wants to solve the wrong problem.

When a Nobel Prize Isn’t Enough - NYTimes.com via kwout

In Memory Of

In front of a portal that will not open,
The agent we have sought offers to assist.

The agent doesn't want our money.
He wants to relieve us of our burden.

What is it that we want?
Do we really want the agent's help?

Do we have the right to choose?
That's the question others ask.

Having helped to open the door,
The agent comes to believe he has done good.

It is a common story,
One that repeats often.

The story ends for us.
For the agent, it is but one chapter.

Part way through the book, the agent changes.
He comes to believe the book is about him.

The agent has a righteous streak.
He no longer feels any restraint.

He can see our burden.
He can relieve it by himself.

Others now blame him.
He shouldn't have chosen for us.

The agent has now passed.
Let's reflect on what he has done.

Was he a hero for letting others see the burden?
Or a criminal for having opened the portal?

We are unsure. We wish we could discuss without hyperbole.
We fear that is not possible.

Dr. Jack Kevorkian Dies at 83 - Backed Assisted Suicide - NYTimes.com via kwout

The Business Roundtable as Little Red Riding Hood and Government Regulation as the Big Bad Wolf

Where is Edward Everett Horton when you need him?

Washington War of Ideas Overshadows Need for Jobs - NYTimes.com via kwout

Hacking Away

Public goods are no more.
Spending cuts are what's in store
For state governments and their residents.

What's been long valued has ceased to matter
With the budget all in tatters
It's reducing the deficit that takes precedent.

In the absence of government trust
Trying to increase fees proved a bust.
The need to close some state parks thus evident.

Will the spirit of Jack London nonetheless remain?
Or for the park closers make a permanent stain?
If I were one of them, I'd be hesitant.

California's Disappearing State Parks - NYTimes.com via kwout

Laying Pundits End to End

"A desk is a dangerous place from which to watch the world."
-- John le Carre

A desk may be even a more dangerous place from which to shape the world. Nonetheless, I'm going to try to do so in this post. I have been struggling for the last week or so to think through what steps government should be taking to aid middle income (note that I didn't say middle class) families, both for the here and now and for the indefinite future and to do so in such a way that those of us at or above the 80th percentile in the income distribution (the vast majority of whom feel they are middle class) would willingly agree these are good things to be doing. For the last year where the Census data is available, 2009, median household income in the U.S. was not quite $50,000, while at the 80th percentile household income was $100,000.

Income as a welfare measure is far from perfect. Work that is done outside the marketplace isn't counted in the measure. Spending on things like security don't directly raise welfare at all. Such spending simply aims to prevent loss of what has already been attained. So there certainly can be a critique of what I propose in this post simply on those measurement grounds. With that caveat, the proposal aims to raise income, at the median (and below) as well as at 80th percentile (and above).

Revenue Side

In the Facebook group I started, For A More Compassionate And Saner America, I've taken as a theme that the people in this relatively well off group should shoulder greater social responsibility by paying more in Federal income tax. Let me do a quick and dirty calculation to aggregate up the revenue increase likely to be generated by this proposal if it were approved. For this we need to know the average adjusted gross income of those in the relatively well off group. I don't know what that is, so I'm simply going to make a guesstimate and say it is $150,000. This is a source of error in the calculation but one can readily see how to adjust the calculation with a better number if one had it. Since in my proposal only income above the 80th percentile would be subject to increased tax we are talking about $50,000 per household subject to the tax increase.

Next we need to know how many households are in the group. To do this, I used the Census QuickFacts page. The population growth rate was 9.1% from 2000 to 2009. I'm going to assume the household growth rate was the same. There were 105,480,101 households so the guess on the number of households in 2009 is: 1.091 x 105,480,101 = 115,078,790. To benchmark this number, note that the QuickFacts page also provides the number of housing units, not quite 130 million. If my household number is in the ballpark then the excess of housing units would be explained either by some people having multiple homes or by there being an excess supply of housing units available due to over building (more on this later in the piece). To me, that makes the number seem plausible. We will take 20% of this number as the size of the privileged group (since we are at the 8oth percentile and above).

Finally, if this group returned to the Clinton era tax rates, I take this as an increase in marginal tax rates of 3%. The revenue so generated is then:

$50,000 x .03 x 115,078,790 x 0.2 = $34,523,637,057

This amount, about $34.5 billion, is on the low side because I used 2009 households instead of 2011 and population is growing. Further, it is again on the low side since the highest marginal tax rate (for married filing jointly) was 39.6% while now it is 35%. So people in the highest bracket would see more than a 3% increase in their taxes if we returned to the Clinton era rates. Even still, it is a large amount of income. So it behooves us to suggest how it should be spent and not simply take on faith that it will be spent well.

Before getting to the proposal, let me note that while large it is nowhere near large enough to itself solve the Federal budget deficit issue. For my own understanding, I break up the Federal budget into three large components - the real economy, social insurance, and military. Here the focus is entirely on the first component, the real economy. The other components require their own modifications. I believe there is much confusion because the components get lumped together. So the real economy part gets wacked in the budget proposals because the social insurance and military spending pieces are out of balance. This is a mistake.

The Issues

Structural Changes in the Economy - Michael Spence, an eminent economist and Nobel laureate was on the Charlie Rose Show last week. Contrasting the period in the aftermath of World War II, where the U.S. was the clear dominant player economically around the globe, to the present with the emergence of Brazil, China, India and other rapidly developing nations we are moving much closer to parity. This implies substantially increased competition in the global marketplace with no guarantee at all the American made products and services will be preferred worldwide. In turn this means there will be pressure put on employment in sectors of the economy that deal in "tradeables" and either that American economy must expand its production of non-tradeables to employ the population in full or that workers must acquire the appropriate human capital to be valued in the tradeables sector.

My own view on this issue is that many families at or near the median in the income distribution have historically done blue collar work. The ethos of the family unit has been built around that notion. While Spence may be right about the human capital acquisition, it is probably wrong to infer that large numbers of blue collar worker and their families should be switching to white collar work. What is needed instead is to find competitive blue collar work. Consider, for example, this feel-good story about the rejuvenation of the American auto industry, which now seems to be focused on building fuel-efficient small cars. Auto manufacturing provides a case in point for what needs to happen across the entire economy.

Huge Private Debt Overhang and High Unemployment - Paul Krugman, another Nobelist, argues in his most recent column that Washington is not paying sufficient attention to the unemployment problem. In his analysis the main culprit is weak aggregate demand. The cause is simple enough to understand - too many households became highly leveraged and now have to pay the piper. Their lack of spending encourages business to be cautious and sit on cash reserves rather than invest them. Add to this the decline in housing prices and the concomitant loss of wealth that those who had equity in their homes have experienced and the still large number of foreclosed homes that have yet to be resold which are keeping housing prices down and deterring new home construction. So in addition to the debt people hold they are apt to be glum about their future prospects. This pessimism further weakens demand.

I agree with the assessment and want to add a couple of points to it. First, with the unemployment rate high and wages depressed, it is hard for many people to reduce their debt substantially, even while they willfully restrain their spending. Second, even if optimism were restored at the consumer level, banks are not lending to people who had debt issues in the past. So individual access to credit is now limited and that further restrains demand. Third, these are likely to persist, a self-fulfilling negative cycle. Something external is needed to break this cycle.

Long Lags with Fiscal Policy Due to Lack of Shovel Ready Projects - One big issue with with President's Obama original stimulus package was that much authorized spending didn't happen in a timely fashion. Government procurement at the state and local level is regulated and bid processes must be followed. So even if funds have been authorized it takes a while to have those monies spent. We therefore didn't get as big an immediate kick to the to the economy as we needed back in winter of 2009.

Some have concluded from this that fiscal policy is the wrong instrument to use to address business cycle fluctuations and the clearly have a point. Monetary policy is certainly more agile. However, monetary policy doesn't address underlying structural issues. So in my view fiscal policy has a role but it needs attention on an ongoing basis, not simply as an emergency measure.

The Proposal

Let me use the following observation to motivate the idea. For years and years the Campus at Illinois had a structural problem - deferred maintenance. There are many older buildings and they required upgrades on their HVAC and electric systems and perhaps their plumbing too. Then given that work would be done, sprucing up the interiors makes sense as well. For many years the problem was discussed but not addressed at all. New buildings, funded in part by donors who made large contributions, but also with substantial Campus dollars (and until the past decade State matching dollars), got erected at a fairly rapid clip. In the meantime nothing was done about the deferred maintenance problem. Now the Campus is addressing the issue. What changed? There is now a separate student fee assessed specifically to address the problem. With targeted funding a credible plan was developed and has been put into place. The first of this activity started about a year ago.

Thinking about the analog at the national level, we seem to have little problem finding capital to build brand spanking new sports facilities - frequently financed by bond issues to be repaid with tax dollars, though the teams are privately owned. But to renovate or replace an old school, library, or community center, that is a different matter. Community support for funding such projects will vary directly with the business cycle. And to the extent that the funding requirement is episodic rather than recurrent there will be a psychological tendency to push off the funding pain and delay the project. Taxpayers are also sensibly reluctant for local governments to build "war chests" for fear that opportunistic politicians will squander the funds. Further, the benefit from such capital replacement may be visible to some citizens but not others. A parent who has a kid in the school is more likely to favor capital investment in the schools. It's easier to get endorsement to fix potholes in the roads than it is to upgrade water treatment facilities. This, however, doesn't speak at all to the necessity of the upgrade. It is a poor strategy to wait until a crisis has developed before doing replacement or upgrade investment.

The issue is by no means new. Consider this Report from the CBO on the issue dating from the Reagan years. (Note that buildings such as schools are not included in these numbers. Funding for buildings is in a non-infrastructure budget category.) As the graph below (from page xiv of the report) makes clear, while there was concern about the overall spending on infrastructure, the bigger issue seemed to be that operating expenditures were crowding out capital investment in infrastructure.

A more recent CBO presentation makes clear that the issue is mainly with State level funding of infrastructure. States do provide the lion's share of infrastructure funding.

Further - since States are supposed to balance their budgets on an annualized basis rather than over the entire business cycle, their spending is pro-cyclic. For infrastructure capital investment, however, it would be much better if the spending were acyclic, providing some stimulus in troughs and some restraint in peaks of the business cycle. (In other words, while the housing market is in the dumps now it would be good for their to be new construction in public works. When the housing markets heat up again, the public works construction will help to keep the housing market from overheating.)

We need such a focused entity at the Federal level to direct new investment and substantial upgrades to the existing stock of public capital. I would call this thing the Federal Investment Bank, an independent entity with the discretion to optimize for the long run public capital growth and maintenance. In its governance structure, the Federal Investment Bank could be modeled after the Federal Reserve. This history of the Fed makes for a fascinating read. There were prior attempts at a national bank. Those failed. Many now view Woodrow Wilson's Presidency as largely failed (due to the Treaty of Versailles and the League of Nations). Yet the Fed endures and serves as a fitting tribute to Wilson's legacy. Though many have criticized the Fed for improperly conducting monetary policy from time to time, there is no doubt it has played a very important economic role in encouraging balanced growth and combating inflation. Likewise we need to encourage balanced growth in our public capital and ensure there is adequate capacity that is in good working order. A dedicated entity that vigilantly pursues the maintenance and growth of public capital and that has the funding necessary to make such growth a reality would be a marked improvement over the status quo.

The above is an entirely un-sexy argument. Who gets excited about infrastructure and other public capital? But it clearly is important since there are obviously issues with how investment in public capital is managed at present, so the above is actually a pretty easy argument to make. And it is an argument that's been made without considering the employment implications. Now let's look at those briefly. Public capital is non-tradeable. The jobs created in public capital investment would largely be construction jobs. The beneficiaries of that employment would be middle income people. We need the public capital for the consumption benefit it provides, but that there is an employment benefit as well makes the argument for doing this well more compelling. Let's use that observation as we move to the more sexy and more controversial part of the recommendation.

Let's consider industrial policy, a subject that appears taboo in the political discourse in Washington, but that is likely to become increasingly discussed if the employment picture doesn't brighten. The economist Dani Rodrik makes the point that though Americans don't like to talk about industrial policy, certainly it has been very important in the high growth sectors of our economy, information technology in particular.

But when it comes to industrial policy, it is the United States that takes the cake. This is ironic, because the term “industrial policy” is anathema in American political discourse. It is used almost exclusively to browbeat political opponents with accusations of Stalinist economic designs.
Yet the US owes much of its innovative prowess to government support. As Harvard Business School professor Josh Lerner explains in his book Boulevard of Broken Dreams, US Department of Defense contracts played a crucial role in accelerating the early growth of Silicon Valley. The Internet, possibly the most significant innovation of our time, grew out of a Defense Department project initiated in 1969.

Yet Rodrik's example suggests a critique based on intentionality. The Arpanet doesn't appear to have been conceived with Silicon Valley in mind. Originally, Arpanet had a military purpose. It is quite a different matter to invest in R&D broadly up front, taking a portfolio approach to the investment strategy, than to look historically at a specific R&D project and connect it to subsequent industrial developments. I believe a good case can be made that with the Arapnet, we just got lucky. (As we did with GPS.) Rodrik reports in fact that current Department of Energy projects are part of a broad portfolio approach to next generation technology development.

Much industrial policy, both here and abroad, happens not via R&D but rather via "strategic subsidies and tariffs." And with that one must ask: what are the goals - infant industry protection, monopolistic exploitation, patronage to certain sectors of the economy, or something else? Many seem to believe there are short run employment benefits to be had from this type of industrial policy. The media shapes our perception on these issues and nowadays many seem to feel that China is growing rapidly because it has a good an effective industrial policy while the U.S. is limping along because its policies are not nearly as coherent. Consider this piece that focuses on rare earth elements to illustrate how China leverages its own natural endowments for strategic advantage. One must also ask, what are the pernicious side effects from such market interference? The side effects seem mostly to occur in the long terms. A policy lingers well after it no longer is useful, because a powerful narrow constituency wants it and lobbies hard to retain it.

However, with this both the consumption benefit and employment benefit can get lost. Further, the opportunity cost of such policies is usually not considered. So, for example, subsidies on ethanol (a biggie where I live) or on sugar beets mean there is less to subsidize electric car production or new battery development. Even if the Department of Energy has a good portfolio of projects it is funding within its purview, it doesn't mean that overall there is a good portfolio of projects being put forward. And further the criteria used to support subsidies might vary, in which case we lose overall coherence.

So the argument put forward here is that the Federal Investment Bank should have a second division, this one focused on industrial policy. I would suggest further that the focus should be on infant industry protection and employment growth, on the one hand, and the deliberate expiration of protective elements once the sector has reached a degree of maturity. The division would keep a variety of programs intact that varied by their maturity. It's ability to start new programs would be disciplined by its retiring older programs. The idea would be to attain some sanity to the industrial policy and remove it from some of the harsher political calculus that comes into play at present.

The Federal Investment Bank is an idea whose time has come. Congress and the White House together don't seem able to manage the issues well. Let's bring about an independent entity that can do the job.

Health Care Costs

It seems everyone understands that when you buy a drink in a hotel bar there will be a huge markup. My students came up with that example in class without my prompt. The economic explanation is called “local monopoly.” Some patrons have decided they don’t want to leave the hotel and among those some want a drink. Those customers are captured, so sock it to them. The same economics explains how some hotels (in my experience, the more expensive ones) price Internet access. Airports used to do the same sort of thing. They’d offer up the food service concession to a single vendor. Food would be very pricey and of poor quality. At least the hotels don’t appear to have watered down the drinks.

Somewhere along the line municipalities seemed to figure out that making weary travelers experience mediocre food at high prices wasn’t the best way to market their town. Now virtually every airport of size has a variety of food vendors from familiar national chains. Their pricing and food quality is comparable to what you’d see from a non-airport location in the chain. I don’t really remember when this transition took place, but in my thinking as an economist the timing must have coincided more or less with airline deregulation and the rise of the hub and spoke system. Airports generate much of their income form the airlines in the form of gate fees. Airlines that dominate an entire airport (or an entire terminal at the airport) would prefer the food to be decent and priced reasonably. So airports could make more in gate fees if they altered the way they did their food franchise was done.

Let me get to a different sort of example before addressing the issues of this post. This is part of a scene from a West Wing Episode called Process Stories:

DONNA: Five hundred dollar screwdrivers is why you didn't vote for the President?

JACK: I work for the President, that's a lot.

DONNA: It's wasteful spending.

JACK: Not it's not.

DONNA: A four hundred dollar ashtray?

JACK: (sighs) (hits ashtray)

DONNA: What was that?

JACK: A four hundred dollar ashtray. It's off the USS Greeneville, a nuclear attack submarine and a likely target for a torpedo. And when you get hit with one you've got enough problems without glass flying into the eyes of the navigator and the Officer of the deck. The one's built to break into three dull pieces. We lead a slightly different life out there and it costs a little more money.

I confronted this issue when as a campus administrator the “smart classrooms” were under my purview. The particular issue was what type of combo vcr/dvd players to buy. The home versions of these units were relatively inexpensive. The industrial version much more pricey. But the industrial version wouldn’t break down nearly as much, and every technology person will tell you that you have to look at total cost of ownership, not simply purchase price, to determine which choice is really cost effective. With the staff time that provided support of the classrooms very scarce, buying the industrial versions made sense, even if it rubbed the wrong way outsiders who would look at this spending and see it as too expensive. They simply hadn’t thought through the total cost of ownership issue.

* * * * *

Everyone at Illinois has healthcare on their minds now. We are in the midst of the Benefits Choice Period and unlike in the past where no choice simply defaulted to the plan we had the previous year, now the plans that most of us had in the past will no longer be available. The State went through an RFP process, one for Health Maintenance Organization (HMO) provision, another for Open Access Provider (OAP) provision. My current provider is HealthAlliance HMO. It was one of the bidders in the RFP, but it was not selected. Blue Cross/Blue Shield won in the HMO category. Alas, they are not available in my geographic area. And even if they were, it is unclear that we could stay with our current doctors. So we must move to an OAP, and so must others at Illinois. Further, the OAPs that are available are Tier II, meaning they feature a 10% deductible on services rendered.

Let me spend a moment simply on the RFP process. Since I’ve been involved in procurement elsewhere that has been through an RFP (for the Campus learning management system) the purpose is to produce the “best package” by going through a competitive bidding process, under the belief that such competition elicits the best packages. But then an odd thing happened with this particular RFP. We still get a variety of providers to choose from rather than just one.

One therefore has to ask, why have an RFP at all? Why not, instead, simply announce a state contribution per member for each plan and have as many plans as would like sign up with pricing accordingly, which would let the providers decide how much to charge via premiums versus how much to charge via deductibles or co-pays. Friends of mine are miffed that Heath Alliance is not available. I’m miffed too. If it were available but at a substantially higher premium than the OAPs, how would that have played out? I don’t know. But if you look at the map of provision by Illinois counties, you see the choices are non-uniform across the state. (One plan, called Quality Care Health Plan is available to all members in the state. It is plainly more expensive, but it does provide coverage for non-networked providers which can be of value if you need to see a specialist out of the area or if you need health care while traveling.) So, to justify the RFP, either you have to argue that we in the counties with fewer choices are as well off as before though we have to move to the OAP plans or you have to argue that overall across the state we are better off in aggregate because those in counties with more choices will win more than others in counties with fewer choices will lose. The latter might be true. It would require some estimate to be made about the out-of-pocket expense members will experience under these various plans. Unfortunately, such a calculation doesn’t seem to have been made and it didn’t enter into the selection process. Only premiums were used to determine the winners in the RFP.

Now let me say a word about the politics around health care for State employees. The State had been running a huge deficit and health care costs for State employees count as a big expenditure item, so it is good and correct to try to reduce that expenditure. There are two possible ways of doing this – one is to have the insurance providers receive less, the other is for the employees to pay more. My eyeballing of the outcome is that we have some of both. But that leads to a further quandary. Is this one and done or is it likely to be ongoing this way with subsequent RFPs produce winning bidders that have relatively modest premiums but higher and higher deductibles? If I were betting, I’d put my money on the latter as to where we are heading.

Now let me try to connect this health care bit with what I wrote up front about pricing in hotel bars. When you are in an HMO, you are largely oblivious to pricing. You make co-pays that don’t depend on the prices charged. And for most doctor visits, for example I took my son to see the optometrist this week to see if he needed a new prescription for his glasses, you don’t see the price of the visit. You only see the co-pay. So the insured is literally ignorant of the price the insurance company pays the medical provider. The situation is different when a surgery is performed or a non-surgical procedure is done that warrants a bill being generated. Then you get pages and pages of charges, most of which you are inclined to ignore, just as you ignore the language of the license agreement as you install new software. You only look the bottom line – how big a check you must write. That’s determined by the HMO’s co-pay. So HMOs are bad on making patients aware of what the insurance company pays the health care provider.

Let’s hold in check for a minute whether that ignorance is itself a good or bad thing. Let’s first consider the OAP approach in Tier II, where there are deductibles that are a fraction (10%) of the billed expenditure. So the amount the insured pays now varies directly with what is billed. (There is a cap on this for the full year. Once the cap is reached there is no further deductible paid.) At least for recurrently consumed medical services, under this approach there is a way for the insured to learn about the transaction prices. Armed with such knowledge, what impact would that have on behavior? If there is price variation for the same type of service within the network, conceivably the insured could do comparison shopping. In towns like Champaign, however, much of the health care is provided by either Carle Clinic or Christie Clinic, and their associated hospitals. For most services price depends on the service but not on who provides it. So shopping for the best price is not going to happen. Shopping for a preferred doctor within the network, however, will happen. Sometimes, however, given the system capacity constraints this amounts to shopping for a doctor who is available.

The other possibility that knowledge of transaction price (and incurring some share of it) will produce is that the insured will on occasion refrain from getting the service. This possibility also exists in the co-pay model. Indeed it explains why the co-pay exists. And at least with our provider, Carle, the possibility is further encouraged by providing a phone number for the Patient Advisory Nurse, who gives ready counsel and offers home treatment suggestions when that appears a sufficient alternative. The principle at play seems to be if the situation is mild then treat it at home, but if it is serious enough then come in for an office visit. In my limited experience with this some wiggle room is left to account for how the patient assesses the situation and how nervous the patient seems in the circumstance. There is a walk-in clinic for those who feel the need and can’t wait for a scheduled visit, but don’t feel the situation is serious enough to go to the emergency room. To this already somewhat complex calculus, the OAP Tier II approach lets a variable price based on the nature of the transaction come into play.

Let’s agree, because basic economics tells us that it is true, that the demand for the service will be more elastic when the patient bears some of the cost than when all the cost is borne by the insurer. So, to the extent that health care pricing is like hotel bar pricing, with very high markups built in, making the insured bear part of the cost and thereby making the demand more elastic should have a good effect on the prices that are charged. In other words this is a cost containment measure in accord with standard economic analysis.

But the above discussion really focuses on out-patient services only. In-patients, once at the hospital, don’t really shop for services at all. The in-patient is under the care of an attending physician who makes recommendations for xyz tests and treatments, not all of which can or should be forecast in advanced. Having the patient bear some of the cost might affect the demand elasticity for certain types of “elective” procedures, but once having elected to do the procedure the consequence of the patient bearing a fraction of the cost is simply to lessen what the insurance company pays. Thus, if there is an issue of hotel bar pricing in the health care costs of in-patients, it is far from clear that addressing the patient “moral hazard” via deductibles will do much if anything to contain costs.

This gets to the other way of thinking about cost containment for healthcare, which focuses on the total-cost-of-ownership issue – prevention and early detection. With that, consider for example that dreaded procedure the colonoscopy. Here I will speak only for myself, not the entire population. I hate going to the doctor and doing these things. The recommendation, I believe, is to have a colonoscopy for the first time when you turn 50. I had mine when I was 55. Likewise, I eschewed regular physicals and for a long time really didn’t have a primary care physician. What changed this for me? The answer in a nutshell is pain. When it hurts enough, then you go to see the doctor. Relieving the pain trumps the aversion to the doctor visit. I self-diagnosed sciatica. It proved to be arthritis and bone spurs. In the process it was learned that my blood pressure was high. So now I’m on meds for that. The colonoscopy followed as part of the bargain.

The Affordable Care Act aims to encourage better prevention and early detection. For my last physical and on several recent renewals of my meds, there was no co-pay whatsoever. But I needed somebody else to inform me that was a consequence of the act, not a decision made independently by HealthAlliance. I wouldn’t have known otherwise. Pricing that you only discover as you complete the transaction can’t really serve to guide behavior.

I’d like to make two other observations and then close. That last physical I had was done by a nurse-practitioner not my primary care doctor, though apparently they consult with one another. Since I didn’t have any new problems, this seemed ok to me. A couple of nights ago on the News Hour they had a very interesting segment on nurses as complete substitutes for primary care doctors, in low income neighborhoods where there is a shortage of doctors. The argument is that nurses could do more than we typically allow them to do and where there aren’t enough doctors it makes sense to give the nurses more responsibility. Now translate the argument to the situation I’ve been discussing. Are we likely to see pricing alternatives where, given a particular health issue, for a lower price you can see a nurse and for a higher price you can see a doctor? Economists are normally in favor of this sort of price discrimination as it leads to efficiency in allocation. But differential health care based on willingness to pay makes me queasy. Indeed, if you look at how premiums are calculated for the State of Illinois plans (page 6 of the document, page 8 of the pdf) there is a modest amount of progressivity built in; premiums rise with salary until a certain threshold. If there is progressivity in the premiums, why undo that in terms of the care provided. Deductibles that are a share of the transaction price, as distinct from co-pays that don’t vary with the transaction price, provide an incentive toward such differential care.

At the moment, I’m exempt from Medicare. Having been part of the (underfunded) State of Illinois system for a sufficiently long period my withholdings have gone to the State, not to the Feds. As a result, my healthcare plan is the same one my children are on. (They are under the age of 26.) At present I pay about $800/year in premiums for their healthcare on a per child basis. They then have the same coverage as I do. If you look at the subsequent page of the document linked to in the previous paragraph, you can see the premiums for dependent care, which don’t feature any progressivity in them. Instead, what is obvious is that the incremental cost for the second dependent is lower than the cost for the first dependent and there is zero incremental cost for dependents beyond two. So there is some cross subsidy built into the pricing. In this case large families are receiving a subsidy. To my knowledge nobody is bent out of shape on this point.

This gets you to think about other cross-subsidies in the system. As a retiree, my premiums are zero (this is akin to how Medicare functions). But otherwise premiums don’t vary by age. Nor do they vary by prior healthcare expenditure or current diagnosis. People seem to like these type of cross subsidies. High deductibles can undo the cross subsidization.

We should think about that.

Visceral Reactions or Strategic Thinking

When is a decision a mistake? This piece argues that President Obama made an error by saying last week in his televised address that any peace agreement between the Palestinians and the Israelis would leave Israel with its 1967 borders. Prime Minister Netanyahu vehemently disagreed. Milbank writes of the Israeli exchange student who is living in his home, a middle of the roader who is not inclined to favor Netanyahu's Likud party, nonetheless cheering Netanyahu's speech to a joint session of Congress, where he affirmed that the original borders are not defensible. If President Obama's remarks drove this middle of the road Israeli to become a Netanyahu supporter, then Obama's remarks on that subject were a mistake, so says Milbank. Of course, it takes two sides to make a peace and the Palestinians panned Netanyahu's speech. It seemed, however, that Congress loved that speech. Doesn't that simply help to prolong the stalemate? If a year or two hence the situation seems riper for striking a peace, might Obama's speech have some positive benefit then? Why must we judge the effectiveness of a decision immediately after it is made and not let the fullness of time weigh in on the judgment?

Into Netanyahu’s arms - The Washington Post via kwout