Monday, March 29, 2010

Government Workers Get Paid Very Well. Often More Than In the Private Sector

See The Government Pay Boom: America's most privileged class are public union workers. From the WSJ, 3-26-10, p. A19. Exerpts:
"It turns out that public employees earn salaries that are about one-third higher on average than what is provided to private workers per hour worked."

"...nearly this entire benefits gap is accounted for by unionized public employees. Nonunion public employees are paid roughly what private workers receive."

"What if government workers earned the average of what private workers earn? States and localities would save $339 billion a year from their more than $2.1 trillion budgets. These savings are larger than the combined estimated deficits for 2010 and 2011 of every state in America."

"A 2009 study by economists Robert Novy-Marx and Joshua Rauh, published in the Journal of Economic Perspectives, estimated that these government pensions are underfunded by $3.2 trillion, or $27,000 for every American household."

"The Orange County Register reports that California has 3,000 retired teachers and school administrators, who stopped working as early as age 55, collecting at least $100,000 a year in pensions for the rest of their lives."

"Illinois's pension obligations are so costly the state had to issue $3.5 billion of bonds merely to meet its mandatory contribution to the worker retirement program, which faces $85 billion, or three years of state tax revenues, in unfunded liabilities."

"California, Nevada New Jersey and Ohio all allow double dipping, which lets government workers retire in their 50s and then work another full-time job while collecting retirement checks. In Ohio, police, firefighters and teachers can retire after 30 years on the job, collect a full benefit each year and go back to work full-time doing the same job."

"Across the state, Ohio's State Teachers Retirement System paid out more than $741 million in pension benefits last school year to 15,857 faculty and staff members who were still working for school systems and building up a second retirement plan."

"The unions also neglect one of the greatest perks of government employment: job security. Short of shooting up a Post Office, government workers rarely get fired or laid off."

" Cato Institute economist Chris Edwards has analyzed Department of Labor statistics and found that private workers are three times more likely to quit their jobs than are government workers."

How One Greedy Lawyer (Bill Lerach) Hurt Business

This comes from a book review in the WSJ From Bully to Felon: How Bill Lerach shook down corporations, until his scam was uncovered. From the 3-2-10 issue, p. A21. Exerpts:
"In 1972, a young lawyer co-authored an article for the University of Pittsburgh Law Review. He targeted class-action securities lawsuits, calling them "procedural monstrosities." They were legal extortion, he said, in which plaintiffs simply use "allegations as a bargaining weapon to be disposed of when an appropriate premium has been extracted from the defendant.""

"In the course of 30 years at the New York-based firm of Milberg Weiss, Mr. Lerach would become the most feared tort lawyer in the country, pioneering an assembly-line model of "strike" lawsuits against corporate America.

In a typical case, he would charge that a company had misled shareholders; he would then sue for damages, claiming to represent a class of people who had lost money on the company's stock; and, finally, he would bully the company into paying over a settlement. In 2008 he became a national symbol for the corruption and greed that lay behind such lawsuits, going to federal prison for helping to orchestrate one of the longest- running legal scams in history."

"Along the way they show how the plaintiffs' bar has transformed the process of class actions into big business."

"Mr. Lerach (eventually with the help of dozens of employees) would monitor company stock prices, waiting for one to plunge. Then he would find some prior sunny statement from the chief executive, dig up an inside trade or two, locate a shareholder plaintiff, and scream investor fraud. Subpoenas would often open up new targets for yet more accusations. Mr. Lerach would then threaten to bankrupt the firm in court or go away for a hefty sum. "I'll own your f---ing house in Maui and the diamonds on our wife's fingers," he once warned a CEO."

"By 1992, Milberg commanded 25% of the country's securities class actions; 90% were settled out of court. The firm's profits in 1993 exceeded $100 million."

"Nobody knew until later that a lot of this legal gamesmanship was rigged. Mr. Lerach had no trouble identifying corporate targets; the hard part was rustling up plaintiff-shareholders to represent. In 1976 an investor named Seymour Lazar proposed a solution: He'd buy stocks and serve as a plaintiff—for a kickback of any payout. It was illegal to pay individual plaintiffs to serve in lawsuits, lest their interests conflict with those of the rest of the plaintiffs' class; Milberg Weiss got around that restriction by sending the kickback money through middlemen lawyers."

"The federal government wouldn't catch on to the scam until the late 1990s, when yet another of the firm's professional plaintiffs was caught in an unrelated crime and came clean."

"Democratic Party thrives on campaign contributions from the securities bar and in return blocks the reforms that might put an end to such legal extortion"

Charter Schools Flourish in Harlem

That is the title of a WSJ article which you can read by clicking here. From the 3-8-10 issue, p. A21. Exerpts:
"Nationwide, the average black 12th grader reads at the level of a white eighth grader. Yet Harlem charter students at schools like KIPP and Democracy Prep are outperforming their white peers in wealthy suburbs. At the Promise Academy charter schools, 97% of third graders scored at or above grade level in math. At Harlem Village Academy, 100% of eighth graders aced the state science exam. Every third grader at Harlem Success Academy 1, operated by Ms. Moskowitz, passed the state math exam, and 71% of them achieved the top score."

"Ms. Moskowitz, a former city council member, says that turnout at the education fair—hundreds of parents and children arrived early and stood outside in the cold before the doors were opened—refute claims that low-income minorities are indifferent to their children's educational needs.'

"Just 2,000 of the nation's 20,000 high schools produce almost half of all high-school dropouts. But nearly half of all black high-school students wind up in one of these "dropout factories.""

"The sadder reality is that 60% of all black male high-school dropouts in their mid-30s have prison records."

The Health Care Bill Could End Up Costing Alot

See Back to the ObamaCare Future: The Massachusetts 'model' moves to price controls. From the WSJ, 3-1-10, p. A24. They compare it to the Massachusetts model. Exerpts:
"As with all new entitlements, the rolling cost crisis began almost immediately. For fiscal 2010 taxpayer costs are $47 million over budget, in part due to the recession, and while the $913 million Mr. Patrick requested for 2011 is a 5% increase over 2010, spending has grown on average 6.7% per year.

Meanwhile, average Massachusetts insurance premiums are now the highest in the nation. Since 2006, they've climbed at an annual rate of 30% in the individual market. Small business costs have increased by 5.8%. Per capita health spending in Massachusetts is now 27% higher than the national average, and 15% higher even after adjusting for local wages and academic research grants. The growth rate is faster too."

"...the political class and providers blame insurers, but a better culprit is the state's insurance regulation. Incredibly, the average "medical loss ratio" in Massachusetts for individual policies is 112%—that is, insurers pay $1.12 in benefits for every $1 in premiums.

This is the direct result of forcing insurers to charge everyone more or less the same rate regardless of age or health status, which makes it rational for people to wait to enroll until they need expensive coverage. It is also the result of the state's decision to merge the individual and small-group insurance markets, which transfers individual costs onto small businesses."

"The average insurance deductible is 28% lower than the U.S. average, and the benefits are more generous with less cost-sharing. Patients are thus insensitive to the cost of care."

"Thirty states imposed hospital rate setting in the 1970s and 1980s. Except for Maryland, every one of them eventually eliminated it—including Massachusetts, in 1991—partly because it didn't control costs."

"A 1988 study in the Journal of New England Medicine found that the states with the most stringent rate-setting had mortality rates 6% to 10% higher than those that didn't."

Can You Really Outlaw Short Selling?

Maybe not. See Regulatory 'Fixes' Miss the Mark(et) By Dennis K. Berman. From the WSJ3-2-10, p. C1:
"Governments have been trying to outlaw or regulate short selling since the Dutch did it in 1610. The English even specified a ban on short sales of bank shares in 1866. In both cases, the rules were repealed or ignored."

Friday, March 26, 2010

Was The Credit Crisis Just Like An Old Fashioned Bank Run?

That is what Steven Landsburg suggests at his blog with What Really Went Wrong. He discusses a book by Gary Gorton titled Slapped By the Invisible Hand: The Panic of 2007. The basic idea is that when mutual funds like Fidelity loaned money to investment houses like Bear Stearns, they started to wonder about the collateral they were given. It is not clear but it seems like the collateral was mortgage backed bonds. Once Fidelity and others questioned the value of those bonds (which is not surprising since we built too many houses), they demanded more collateral from Bear Stearns. But, of course, they could not give everyone more collateral and they went under. Everyone started withdrawing their money. Just like a bank run.

The part about mortgage backed bonds seems similar to what the AEI reported. I had a post on this calledAEI Paper On The Credit Crisis. They suggested that regulations steered banks into hold mortgage backed bonds that were given ratings that were unrealistically high. So they held assets that were more risky than they thought.

Lifestyle Changes Reduce Breast Cancer

See Up to a third of breast cancers could be avoided. It was by AP Medical Writer Maria Cheng, posted 3-25-10, at Yahoo. Here is the intro:
"Up to a third of breast cancer cases in Western countries could be avoided if women ate less and exercised more, researchers at a conference said Thursday, renewing a sensitive debate about how lifestyle factors affect the disease.

Better treatments, early diagnosis and mammogram screenings have dramatically slowed breast cancer, but experts said the focus should now shift to changing behaviors like diet and physical activity."

So once again, individuals can shape their own destiny.

Wednesday, March 24, 2010

Taxing The Rich Has It's Downside

See Maryland's Mobile Millionaires: Income tax rates go up, rich taxpayers vanish. From the WSJ, 3-12-2010, p. A20. Exerpts:
"...after passing a millionaire surtax nearly one-third of Maryland's millionaires had gone missing, thus contributing to a decline in state revenues."

"The number of millionaire tax returns fell sharply to 5,529 from 7,898 in 2007, a 30% tumble. The taxes paid by rich filers fell by 22%, and instead of their payments increasing by $106 million, they fell by some $257 million."

"Yes, a big part of that decline results from the recession that eroded incomes, especially from capital gains. But there is also little doubt that some rich people moved out or filed their taxes in other states with lower burdens. One-in-eight millionaires who filed a Maryland tax return in 2007 filed no return in 2008."

"...Maryland lost $1 billion of its net tax base in 2008 by residents moving to other states."

New Book Questions The Need For National Health Care

See Single Payer, Many Faults: Market competition in health care? Imagine that. From the WSJ, 3-12-10, p. A17. This article is actually a book review by JOSEPH RAGO, a senior editorial page writer at the Journal. The book he reviewed is called Health Care Turning Point, By Roger M. Battistella. Exerpts:
""...most consumers of health care are largely insulated from directly paying for the services they use, health care is generally perceived as an unlimited free good. . . . Wants and needs become insatiable when care is believed to be free.""

"... the original sin of modern American health care: the government's World War II-era decision that gave businesses tax incentives to sponsor insurance for their workers but that did not extend the same dispensation to individuals."

"... no one had any reason to be assiduous about controlling the cost of care."

"Health care, he writes, is one of the "most backward sectors of the economy." It ignores "managerial and corporate practices for attaining productivity and quality improvements.""

"Since no one is scrutinizing the relation between costs and marginal benefits, for instance, medical science has become ever more specialized and technologically intensive—leading to unnecessary and overly costly procedures..."

"Medical business models haven't capitalized on economies of scale either: Almost half of U.S. hospitals have fewer than 100 beds, while one-fourth of doctors practice solo. Nor have providers reorganized to manage chronic conditions, such as diabetes, which are better handled by integrated teams than today's fragmented and uncoordinated system. And because the income of doctors and the revenue of hospitals are rarely connected to the quality of the care they provide, preventable errors—like infections acquired in hospitals—may be the third leading cause of death in the U.S."

"The solution, Mr. Battistella argues, is the "hidden pragmatism of market competition." In a competitive environment..."

"This year, government health spending, mostly through Medicare and Medicaid, surpassed private health spending for the first time—even without ObamaCare, which may well bring the public share to 70% or more."

"Mr. Battistella confesses that he finds it "hard to carry on a conversation with true believers," because their idea about health care is "too deeply rooted in ideology." They simply don't want to think about practical solutions, where markets do their best work. There's no convincing some people—especially the supposed pragmatists now pushing for de facto single payer in Washington."

Greed By Insurance Companies Might Not Be A Justification For National Health Care

See Obama's Misleading Assault on the Insurance Industry: The president knows better than his demagoguery suggests. From the WSJ 3-12-10, p. A19. Exerpts:
"One of the chief complaints about health insurers is that they refuse to provide insurance to everyone at the same price, regardless of an individual's pre-existing medical conditions."

"Yet President Obama himself has acknowledged more than once that insurers don't really have a choice.

In his Feb. 3 town-hall meeting in Nashua, N.H., he said: "You can't [demand] insurance companies . . . take somebody who's sick, who's got a pre-existing condition, if you don't have everybody covered, or at least almost everybody covered. And the reason, if you think about it, is simple. If you had a situation where not everybody was covered but an insurance company had to take you because you were sick, what everybody would do is they'd just wait till they got sick and then they'd go buy insurance. Right? And so the potential would be there to game the system."

"In his Jan. 20 ABC News interview, Mr. Obama noted that if insurance firms accepted all applicants, premiums would skyrocket, an insurance mandate would be necessary, and massive taxpayer subsidies would follow. The president obviously knows it makes no sense to blame insurance companies for paying attention to pre-existing conditions when taking on new customers."

[Obama]"... hammered the insurance industry for making huge profits at the cost of patients' finances and health."

" Fortune 500 data show that of the 43 industries that actually made a profit in 2009, health insurance ranked 35th, with profits of only 2.2% of revenues."

"...premium increases are driven not by profits but by costs..."

"When HHS issued "Insurance Companies Prosper, Families Suffer," its Feb. 18 report on firms that implemented "excessive" premium increases, plenty of nonprofit firms...made the list."

"If health insurance is so lucrative, why aren't giant companies jumping in?"

"MetLife has chosen to invest billions of dollars of free cash not in the health-insurance business but in a risky acquisition of the international life insurance business of beleaguered conglomerate AIG. And what about firms like Microsoft, General Electric, Google and Wal-Mart? They know how to enter new markets and make a profit. Why aren't they selling health plans?"

"Those who know best are persuaded that far from being easy, making money selling health insurance is tough. It is no wonder Warren Buffett told CNBC on March 1 that health insurance is one part of the vast insurance market in which he has avoided investing."

"Mr. Obama's third theme is that health insurance needs more regulation."

"Federal regulation of health insurance premiums makes little sense. Most states already have the power to review and reduce premiums. It hasn't done them much good. Massachusetts, which already has the essence of ObamaCare—no restrictions on pre-existing conditions, an individual mandate, and huge taxpayer subsidies—has the highest premiums in the nation."

"The Bay State has the power to cut premiums, but it hasn't figured out how to do that without cutting health care itself"

"State insurance regulators quickly pointed out that Mr. Obama's proposal for a federal rate authority wouldn't work and would complicate their essential task of making sure that insurance firms have sufficient funds to cover future health care costs."

It was by John Calfee, a resident scholar at the American Enterprise Institute.

More Regulations May Not Prevent Another Financial Crisis

Market Failure or Government Failure? Regulators protect the bankers. They continue to lose sight of their responsibility to protect the public. From the WSJ 3-19-10, p. A19. Exerpts:
"Without the policies followed by Fannie Mae and Freddie Mac—and the destructive changes in housing and mortgage policies, like authorizing subprime and Alt-A mortgages for impecunious borrowers—the crisis would not have happened."

"Without warning, the federal government's 30-year policy of bailing out large banks changed when it allowed Lehman Brothers to fail."

"The new financial regulations, spearheaded by Sen. Chris Dodd (D., Conn.), only bring back too big to fail by authorizing a Systemic Risk Council headed by the Treasury secretary.

"Regulation often fails either because regulators are better at announcing rules than at enforcing them, or because the regulated circumvent the regulations."

"This is because regulation is static, while markets are dynamic. If markets don't circumvent costly regulation at first they will find a way later."

"The answer is to use regulation to change incentives by making the bankers and their shareholders bear the losses."

"Secretaries Timothy Geithner and Hank Paulson told Congress at the AIG hearing earlier this month that they faced a choice: a bailout or another Great Depression. This is not true. Classic central banking offered a better alternative. Let AIG fail and lend to the market on good collateral. The Fed, acting as lender of last resort, should protect the market—not the failing firm."

"The market is not perfect. It is run by humans who make mistakes. But the same humans run government where they make different, often more costly, mistakes for which the public pays."

"Regulators talk a lot about systemic risk. They do not—and probably cannot—give a tight operational definition of what this means."

"We will not get sound banking until the CEOs of the large banks and their shareholders are forced to pay for their mistakes."

The author was Allan Meltzer, a professor of economics at Carnegie Mellon University, is the author of "A History of the Federal Reserve" (University of Chicago Press, 2004) and a visiting scholar at the American Enterprise Institute.

Syestemic Risk May Be Hard To Control

See If You Liked Fannie and Freddie... You'll love Chris Dodd's latest reform proposal. It would make many more companies too big to fail and lead to far greater financial consolidation. From the WSJ, 3-18-10, p. A19. Excerpts:
"Although the Fed failed to anticipate the financial crisis, missed the significance of the developing housing bubble, and did not prevent our largest banks from taking excessive risks, it is rewarded in the bill with authority to control the rest of the financial system."

"The Fed's authority over all these firms will extend to setting standards for capital, liquidity, leverage and risk management."

"...the Fed may order a company to terminate one or more activities, impose conditions on how the company operates, or require the company to sell or transfer assets to unaffiliated parties."

" The innovation and risk taking that have always characterized the American financial system will be stifled beneath the Fed's bureaucratic blanket. The center of gravity of the U.S. financial system will move to Washington, where large firms will have to go hat in hand to gain Fed approval for every significant move. Moreover, by designating these firms as potential threats to financial stability, the bill clearly identifies them as too big to fail. This will ensure their competitive survival since it's unimaginable that the Fed will allow them to fail while under its control."

"The real significance of the too-big-to-fail designation, as every small banker knows, is that the implicit protection of the government confers a lower cost of funds and thus significant competitive advantages."

"Gradually, our competitive financial markets will consolidate into markets dominated by a few big firms."

It was by Peter Wallison, a senior fellow at the American Enterprise Institute.

Monday, March 22, 2010

The New Health Care Bill Is Too Much Like The Massachusetts Program: Costly And Inefficient

See The Failure of RomneyCare: The former Massachusetts governor enacted something very similar to the Obama health plan. It isn't working well. From the WSJ, 3-17-10, p. A21. Exerpts are:
"While Massachusetts' uninsured rate has dropped to around 3%, 68% of the newly insured since 2006 receive coverage that is heavily or completely subsidized by taxpayers."

"More than half of the 408,000 newly insured residents pay nothing..."

"Another 140,000 remained uninsured in 2008 and were either assessed a penalty or exempted from the individual mandate because the state deemed they couldn't afford the premiums.

Mr. Romney's promise that getting everyone covered would force costs down also is far from being realized. One third of state residents polled by Harvard researchers in a study published in "Health Affairs" in 2008 said that their health costs had gone up as a result of the 2006 reforms. A typical family of four today faces total annual health costs of nearly $13,788, the highest in the country. Per capita spending is 27% higher than the national average."

"...intrusive government regulations that stifle competition in the insurance market and strict mandates on what services insurance must cover. A 2008 study by the Massachusetts Division of Health Care Finance and Policy found that the state's most expensive insurance mandates cost patients more than $1 billion between July 2004 and July 2005."

"... insurance companies are required to sell "just-in-time" policies even if people wait until they are sick to buy coverage."

"...many people are gaming the system by purchasing health insurance when they need surgery or other expensive medical care, then dropping it a few months later."

"Some Massachusetts safety-net hospitals that treat a disproportionate number of lower-income and uninsured patients are threatening bankruptcy. They still are treating a large number of people without health insurance, but the payments they receive for uncompensated care have been cut under the reform deal."

Masachusetts has a "..."critical shortage" of primary-care physicians."

"...many patients are insured in name only: They have health coverage but can't find a doctor."

"Fifty-six percent of Massachusetts internal medicine physicians no longer are accepting new patients..."

"For new patients who do get an appointment with a primary-care doctor, the average waiting time is 44 days, the Medical Society found."

"...increasing number of patients who rely on emergency rooms for basic medical services. Emergency room visits jumped 7% between 2005 and 2007. Officials have determined that half of those added ER visits didn't actually require immediate treatment..."

"Three of the four major health insurers in Massachusetts showed operating losses for 2009."

It was By GRACE-MARIE TURNER. Ms. Turner is president of the Galen Institute, a nonprofit research organization focusing on patient-centered health reform.

New Taxes That Pay For Health Care Could Damage The Economy

See ObamaCare's Worst Tax Hike form the WSJ, 3-17-10, p. A20. Excerpts are:
"...the investment tax would depress GDP by about 1.3% and reduce capital formation by 3.4%, and thus reduce the after-tax incomes of everyone not paying the tax directly in the neighborhood of 1.1% to 1.2%. Labor productivity and wages would fall across the board, while the lost government revenues from the more-sluggish economy would offset the expected receipts."

"Earning even a single dollar more than $200,000 in adjusted gross income will slap the 2.9% tax on every dollar of a taxpayer's investment income, creating a huge marginal-rate spike that will most hurt middle-class earners, as opposed to the superrich."

Charter Schools Might Be Doing Some Good

See Charter Schools and Student Performance: One study of 29 countries found that the level of competition among schools was directly tied to higher test scores in reading and math. It was in the 3-16-10 WSJ, p. A23. Excerpts:
"...the performance of American high school students has hardly budged over the past 40 years, while the per-pupil cost of operating the schools they attend has increased threefold in real dollar terms."

"Ms. Ravitch and other critics of school choice reverse causation by blaming the sad state of public schools on events that occurred long after schools had stagnated. They point, for example, to President Bush's No Child Left Behind law (enacted in 2002), mayoral governance of schools recently instituted in some cities, and the creation of a small number (4,638) of charter schools that serve less than 3% of the U.S. school-age population."

"One needs to consider the impact of restrictive collective bargaining agreements that prevent rewarding good teachers and removing ineffective ones, intrusive court interventions, and useless teacher certification laws."

"...charters must persuade parents to select them instead of a neighborhood district school. That has happened with such regularity that today there are 350,000 families on charter-school waiting lists, enough to fill over 1,000 additional charter schools."

"Among African Americans, those who favor charters outnumber opponents four to one."

"Union leaders would have us believe that charter popularity is due to the "motivated" students who attend them, not the education they provide. But charters hold lotteries when applications exceed available seats. As a result—and also because they are usually located in urban areas—over half of all charter students are either African American or Hispanic."

"The best studies are randomized experiments, the gold standard in both medical and educational research. Stanford University's Caroline Hoxby and Harvard University's Thomas Kane have conducted randomized experiments that compare students who win a charter lottery with those who applied but were not given a seat."

"...lottery winners subsequently scored considerably higher on math and reading tests than did applicants who remained in district schools."

"...the RAND Corp. found that charter high school graduation rates and college attendance rates were better than regular district school rates by 15 percentage points and eight percentage points respectively."

"...charter critics rely heavily on a report released in 2004 by the American Federation of Teachers (AFT). The AFT is hardly a disinterested investigator..."

"... a report from an ongoing study by Stanford's Center for Research on Education Outcomes (Credo), which found that there are more weak charter schools than strong ones."

"... its results are dominated by a large number of students who are in their first year at a charter school and a large number of charter schools that are in their first year of operation."

"...the greater the competition between the public and private sector, the better all students do in math, science and reading."

The author was PAUL E. PETERSON. Mr. Peterson, a professor of government at Harvard University and a Hoover Institution senior fellow, is author of the forthcoming book "Saving Schools: From Horace Mann to Virtual Learning" (Belknap/Harvard University Press).


From Perestroika Lost, New York Times, 3-14-10, p. 9, "Week in Review" section.
"The Soviet Union was strong in emergencies, but in more normal circumstances, our system condemned us to inferiority."

"What we had to abandon was quite clear: the rigid ideological, political and economic system."

Saturday, March 13, 2010

Irish Economist Responds To Krugman

Constantin Gurdgiev has written a post called Replying to Prof Krugman at his "True Economics" blog. You may have read that Krugman said "Ireland had none of the American right’s favorite villains: there was no Community Reinvestment Act, no Fannie Mae or Freddie Mac." Professor Gurdgiev shows that there were many more similarities than Krugman suggested. The government did encourage risk taking that led to the credit crisis.

Monday, March 8, 2010

Why Financial Reform Is Stalled

That is the title of a 3-1-2010 WSJ article by PETER J. WALLISON (p. A 25). You can read it by clicking here. The brief synopsis is:
"Partisan gridlock is not the reason. The administration's plans are flawed, and they're encountering resistance from both sides of the aisle in Congress."
Here are the key exerpts:
"The administration appears to have begun its regulatory reform effort with the idea propagated by candidate Barack Obama that the financial crisis was caused by deregulation. There was never any evidence for this. The banks, which were in the most trouble, are the most heavily regulated sector of the economy and their regulation has only gotten tighter since the 1930s."

"So we have the spectacle of Paul Volcker, having recently persuaded Mr. Obama to back the idea of restricting proprietary trading by banks or bank holding companies, telling a puzzled Senate Banking Committee he can't really define proprietary trading but knows it when he sees it."

"The Fed had been regulating the largest banks and bank holding companies for over 50 years—among the very companies that would be considered systemically important—yet it failed to see the risks they were taking or the impending danger.'

"Wouldn't designating particular companies as "systemically important," and subjecting them to special Fed regulation, signal to the markets that these companies were too big to fail?"

"..."the administration says all large and "interconnected" financial firms in crisis should be dealt with by a government agency, rather than by a judge in bankruptcy proceedings.

The term "interconnected" is important here. It implies that when one large firm fails it will carry others down with it, causing a systemic crisis. But that is clearly not the lesson of Lehman. Although the company went suddenly and shockingly into bankruptcy, none of its large financial counterparties failed."

"To be sure, there was a freeze-up in lending after Lehman. But that episode demonstrated the power of moral hazard—the tendency of government action to distort private decision-making. After Bear Stearns was rescued by the Fed in March 2008, market participants assumed that all companies larger than Bear would be rescued in the future. As a result, they did not take the steps to protect themselves against counterparty failure that would have been prudent in a panicky market. When Lehman was not rescued, all market participants immediately had to review the credit standing of their counterparties. No wonder lending temporarily froze."

"And it is clear creditors will be treated far more favorably in a government resolution process than in a bankruptcy.

To understand why this is true, consider the administration's reasons for preferring a government resolution process. The claim is that large, interconnected firms will drag down others when they fail. The remedy for this is to make sure their creditors and counterparties are fully paid when the takeover occurs."

"Creditors will realize that by lending to large companies that might be taken over and resolved by the government, their chances of being fully paid are better than if they lend to others that might not."

" creditors increasingly assume that large firms will be rescued, the too-big-to-fail phenomenon will grow, not decline."

Monday, March 1, 2010

Did The February 2009 Stimulus Do Any Good?

Read The Stimulus Evidence One Year On: Over five years, my research shows an extra $600 billion of public spending at the cost of $900 billion in private expenditure. That's a bad deal by Robert Barro in the WSJ, 2-23-2010, page A19. Keynesian models usually show that a $1 increase in government spendng leads to a more than $1 increase in GDP. Barro disagrees, The key exerpts are:
"I estimate a spending multiplier of around 0.4 within the same year and about 0.6 over two years. Thus, if the government spends an extra $300 billion in each of 2009 and 2010, GDP would be higher than otherwise by $120 billion in 2009 and $180 billion in 2010. These results apply for given taxes and, therefore, when spending is deficit-financed, as in 2009 and 2010. Since the multipliers are less than one, the heightened government outlays reduce other parts of GDP such as personal consumer expenditure, private domestic investment and net exports."

"I estimate that an increase in marginal tax rates reduces GDP, particularly in the next year. When one factors in the typical relationship between tax rates and tax revenue, the multiplier is around minus 1.1. Hence, an increase in taxes by $300 billion lowers GDP the next year by about $330 billion."

"I suppose that the government collects an additional $300 billion of taxes in each of 2011 and 2012. The timing of the future taxes does not matter for the main calculations—the key point is that the government has no free lunch and must collect the extra taxes eventually. Since I assume a tax multiplier of minus 1.1, applying with a one-year lag, the higher taxes reduce GDP by $330 billion in each of 2012 and 2013.

We can now put the elements together to form a "five-year plan" from 2009 to 2013. The path of incremental government outlays over the five years in billions of dollars is +300, +300, 0, 0, 0, which adds up to +600. The path for GDP is +120, +180, +60, minus 330, minus 330, adding up to minus 300. GDP falls overall because the famous "balanced-budget multiplier"—the response of GDP when government spending and taxes rise together—is negative. This result accords with the familiar pattern whereby countries with larger public sectors tend to grow slower over the long term.

The projected effect on other parts of GDP (consumer expenditure, private investment, net exports) is minus 180, minus 120, +60, minus 330, minus 330, which adds up to minus 900. Thus, viewed over five years, the fiscal stimulus package is a way to get an extra $600 billion of public spending at the cost of $900 billion in private expenditure. This is a bad deal.

The fiscal stimulus package of 2009 was a mistake. It follows that an additional stimulus package in 2010 would be another mistake."

Mr. Barro is a professor of economics at Harvard University and a senior fellow at Stanford University's Hoover Institution.

Speculation Can Be A Good Thing

So says Darrell Duffie, a professor of finance at Stanford University's Graduate School of Business. See In Defense of Financial Speculation: It is not the same thing as market manipulation from the WSJ, page 2-24-2010, page A15. The key exerpt is:
"Speculators earn a profit by absorbing risk that others don't want. Without speculators, investors would find it difficult to quickly hedge or sell their positions.

Speculators also provide us with information about the fundamental values of investments. When the fundamentals appear favorable, they buy. Otherwise, they sell. If their forecasts are correct, they profit. This causes prices to more accurately forecast an investment's value, spreading useful information."

Creative Destruction Works As Blockbuster Loses Market Share

It seems like not that long ago Blockbuster was seen as the capitalist bully on the block or the evil empire. But market forces and competition are serving consumer needs. Read Blockbuster Plots a Remake form the WSJ, 2-24-2010, page B1. The key exerpt is:
"Blockbuster's plight comes amid major shifts in how people rent and watch movies. Consumers are now getting movies through Redbox, a unit of Coinstar Inc. that operates $1-a-night movie-vending machines in grocery stores and McDonald's Corp. outlets. Netflix Inc., a mail-order and online rental service, has also stolen Blockbuster customers. Consumers are also watching movies and TV shows through on-demand cable services and electronic gadgets such as Apple Inc.'s iPod."
In trying to eye-ball the numbers from the chart they provide, it looks to me that from 2004-7 then number of stores fell about 10%, even befor the recession started.

Some Good Ideas On Health Care

Go to A Better Way to Reform Health Care: The critical problem is rising costs. The solution is more competition and greater individual control over health spending. Here's how. From the WSJ, 2-25-2010, page A13. The key exerpts are:
"Right now, $5 out of every $6 of health-care spending is paid for by someone other than the person receiving care..."

"To reduce the growth of costs, individuals must take greater responsibility for their health care, and health insurers and health-care providers must face the competitive forces of the market. Three policy changes will go a long way to achieving these objectives: (1) eliminate the tax code's bias that favors health insurance over out-of-pocket spending; (2) remove state-government barriers to purchasing and providing health services; and (3) reform medical malpractice laws."

"...for most families, buying health care through an employer is 30%-40% cheaper than buying it directly. The best way to address this clear bias is by making all health spending—including out-of-pocket payments, purchases of individual insurance, and purchases of COBRA coverage—tax-deductible."

"First, individuals must be allowed to buy health insurance offered in states other than those in which they live. The current approach of state-by-state regulation has raised costs by reducing competition among insurance companies. It has also allowed state legislatures to impose insurance mandates that raise prices, while preventing residents from getting policies more suitable for their needs.

Second, reasonable caps on damages for pain and suffering need to be established in medical malpractice cases. Caps on these kind of damages reduce costs and decrease unnecessary, defensive medicine."

"Taken together, the policy changes outlined here will produce a substantial decline in health-insurance premiums."

"It is also important to increase access to health care—but this should not be confused with increasing access to health insurance, and it cannot be achieved without getting costs under control. There are several ideas for improving access worth considering: removing artificial barriers to entry for physicians and within specialty groups, allowing states greater flexibility with Medicaid, providing tax credits for health spending, and expanding programs that provide services directly, such as Community Health Centers."
The authors were JOHN F. COGAN, GLENN HUBBARD, AND DANIEL KESSLER. Mr. Cogan, a senior fellow at Sanford University's Hoover Institution, was deputy director of the Office of Management and Budget under President Ronald Reagan. Mr. Hubbard, dean of Columbia Business School, was chairman of the Council of Economic Advisers under President George W. Bush. Mr. Kessler is a professor of business and law at Stanford University and a senior fellow at the Hoover Institution.

Short Selling Might Be Good

See Selling Investors Short: The SEC refutes its own short-sale ban from the Wall Street Journal, -26-2010, page A14. The key excerpt is:
"In fact, short-sellers make for a more efficient market by allowing all points of view to be expressed in a company's stock price. The SEC came to this conclusion several years ago when it abandoned the so-called uptick rule that had prevented a short-sale unless the last movement in the stock price had been up. The idea was that the rule would serve as a brake on market panics, preventing sharp declines in stock prices, while also preventing short-sellers from manipulating the market.

After years of study and a long pilot test, the SEC staff found no evidence that the uptick rule did any of these things. Studying the 2008 crisis, when the SEC enacted outright bans on short-selling many financial stocks, the SEC staff still hasn't found evidence that such limits benefit investors."