Why The Health Insurance Market Is NOT Competitive

Via Ezra Klein (the policy wonk du policy wonk of Health Care):

Employees, in other words, don't worry too much about the cost of their health insurance because they think their employer is picking up the tab. Employers don't worry too much about the cost of health insurance because they know employees are picking up the tab. And so there's no real constituency for cost control. If either group were actually experiencing the full cost of health insurance, the constituency for reform would be a whole lot larger than it already is.

The Bond Market Described

Via Dan Gross:

Finally, the notion that the market is telling us something—anything—ultimately rests on the erroneous assumption that financial markets represent the collective wisdom of rational actors processing information efficiently. There are plenty of cool-minded forward-thinking investors in the markets. But there are also a lot of lunatics, fools, sharks, widows and orphans, government actors with ulterior motives, algorithmic traders, greedy speculators, and whack jobs. The markets resemble the Star Wars bar scene more than they do the economics faculty lounge at Princeton.

What On Earth Is Happening In The Economy?

Several folks have taken a stab at explaining Geithner's plan.

Brad DeLong finds much to admire. My favorite question from his FAQ? "Q: What if markets never recover, the assets are not fundamentally undervalued, and even when held to maturity the government doesn't make back its money? A: Then we have worse things to worry about than government losses on TARP-program money--for we are then in a world in which the only things that have value are bottled water, sewing needles, and ammunition. "

Mark Thoma compares and contrasts the Paulson version, Geithner version and Nationalization with a simplified exercise involving cars that blow up (well the engines at least...but only some of them!).

Paul Krugman has now actually made his way out onto the ledge and really looks like he's going to jump.

These are three "liberal economists" and just look at the range of opinion, this doesn't include any conservative/Chicago School economists. And who cares what the conservatives think? They and their desperate need to adhere to their orthodoxy caused the mess.

For reactions, considered and otherwise, I give you Hilzoy at Obsidian Wings: "As someone who thinks that levels of compensation in the US are absurdly unequal, and that this is bad for the country, it's tempting to say: oh, go ahead, you idiots. Keep your sense of entitlement to other people's money. Make people come after you with pikes and tumbrils. See if I care."

Also this rather elegant summing up on the difference between what your head and you heart tell you, by Ezra Klein: "Intellectually, I'm of the crowd that thinks the A.I.G. bonuses don't deserve the continued focus of the political system. One tenth of one percent of the money we've given to one company should not obsess us. But whenever it comes up in conversation, I'm shocked at the depth of my own fury. And here's why: Not to sound naive about this, but the absence of patriotism that galls. The lack of responsibility is sickening. These bankers delivered an almost mortal wound to the American economy. Their actions threw millions out of work and wrecked the retirement savings of tens of millions more. [...] They should be begging for a shot at redemption. They should work without pay, without sleep, without credit. They should wear sackcloth and ashes. But more than that, they should be trying to help. The damage they wrought might have been unintentional, but that doesn't absolve them of responsibility for the aftermath. What we've got, however, is an economic hit-and-run, with one wrinkle: The collar-popper peeking out of the bloodied Porsche is willing to stick around if we pay him for his time. Give him a bonus and he'll dirty his hands with CPR."

Me? How the fuck should I know? You just saw three major economists disagreeing and two very rational people who basically said that despite what their rationality tells them they'd be happy to attend a Festival of Blood for Wall Street types. Weird huh? I get all pissed off, right up until it becomes an actual crisis, then I get all calm.

Except for when Repubs talk about the debt, and how we're stealing from future generations. From THEM I want to know where their oh so tender concern for my daughter was when THEY were in charge of shoveling money to their cronies in no bid contracts and tax breaks for their buds. THEY can go fuck themselves.

Economics Post (CAUTION: Extra-Dry)

OK. This has been building up, and a return to blogging by discussing the finer points of economic stimulus may be the equivalent of asking you guys to do a triple gainer into a wading pool, but I can't help myself.

Coming back from politics cold turkey was too difficult, so I'm kinda combining my (perverse) interest in economics and politics into a rant/educational opportunity. See, there are two main schools of economic thought running through academia these days and while they don't map ENTIRELY to the political parties, you don't find a lot of laissez faire Milton Friedman-wannabe clones floating around Democratic circles and you don't tend to find the John Kenneth Galbraith types lurking in the foliage at a Republican party ("Where white goes to make real dancers cry.")

So what an old (and from my point of view idiotic) macro professor told me is true...there is "Chicago School" and "Berkley School" econ...the Freshwater/Classical/Real Business Cycle and Saltwater/Keynesian versions of macroeconomics (Though there's been enough idea bleed...neither side has a monopoly on good insights...that to call them formal Classicals and Keynsians would be inaccurate, I'm going to use the two terms to ID the sides).

The key characteristic of Classicals is math. Lots of math. The two groups in academia that a Classical would admit to looking up to are mathematicans and physicists. Classicists might (MIGHT) admit that the hypothetical "rational actor" doesn't really exist, but immediately move on to claim that either a) it doesn't matter or b) in the aggregate the sum of actors are rational. Keynesians are a touch more pragmantic and more inclined to look at disciplines such as behavioral economics for insights (rather than as punching bags).

And those two schools are having a bitchslap contest. The Classicals have had their way with the economy for nigh on 20 years now, and the Keynesians are pointing out that the track record has some problems. In fact, in my admittedly somewhat partial opinion, Classicals (and their blog offspring like Megan McArdle) are beginning to twist themselves into interesting little knots in an attempt to reconcile their a priori not to be questioned assumptions and that annoying little interlocutor, the real world. In this way (he said puckishly, knowing what it would do to them if they read it) they more than slightly resemble the Marxian economists that I studied in undergraduate, desperately using more and more elaborate maths and assumption to prove that their desired conclusions are correct.

First, while you might have more trouble getting a Classical to admit it than a Keynesian, BOTH sides would actually find the proposition that "The government should act like a business/family and live within its means," to be a foolish statement. There's a reason that Micro- and Macroeconomics are divided. For governments, for the banking systems that support a modern economy, the rules are NOT the same as you or I can or should follow. It is NOT straightforward and simple...there are aspects beyond simple accounting rules...paying A $500 and A paying that $500 to B and B paying $500 to C is NOT the same as paying A $500 and A spending it. There are advantages to an economy for the velocity of money use to be high that are not found in simple microeconomic scenarios. In fact in this case, that scenario is FOUR TIMES as good for the economy.

All this by way of saying that there are two theories about stimulating the economy...monetary stimulus and fiscal stimulus. Classicists prefer monetary and Keynesians (traditionally) prefer fiscal. In practice both Classicals and Keynesians state that in normal times monetary stimulus works better. (Friedman received his Nobel for his work on monetary stimulus and even Keynesians today acknowledge that his insights were valuable). That is why, these days, there are a TON of quotes from guys like Krugman stating that under normal circumstances, monetary stimulus is preferable.

Where they differ is in times like these. I'm about to use the D-word, so brace yourselves. Krugman's book The Return Of Depression Economics argues that there comes a tipping point in a recession where traditional monetary stimulus has shot its wad. Lately he's been strongly arguing that when the Fed Rate has reached the zero lower bound, you're probably there. He's also been saying that monetary stimulus is useless in the Liquidity Trap. What the Freshwater types have been reduced to is arguing that their unknown efficacy "non-traditional" monetary stimulus is better than non-traditional fiscal stimulus or that maybe doing nothing is a better option and arguing that if we are in a liquidity trap (and given the behavior of banks these days it takes some major chutzpah to claim otherwise) it will be shortlived rather than lasting, say, a decade.

In short, a lot of what you hear these days regarding stimulus is inspired as much by a desire to have things a certain way politically, or to beat back a nagging feeling that all that time spent studying integral, tensors and matrix algebra may NOT have been necessary as it is inspired by actual analysis. All social sciences suffer from a lack of controlled experimentation. Only economics exerts THIS much influence on policy.

That may not be a good thing, but you go into a social crisis with the academic disciplines you have, not the academic disciplines you wish to have, or might have in the future... Just keep that in mind when you read the news these days.

I'm A COMPLETE Econ Geek

In case you were wondering.

Over at the American Prospect I find this article about what the Nobel Prize winners for Economics have to say to people thinking about dealing with global warming. The quote that caused this post:

A key insight of mechanism design theory is that real-world economic transactions differ from an abstract "market" where a price falls from heaven and trade happens. When engaging in trade in the real world, economic actors (buyers and sellers), must abide by certain rules and/or norms (e.g. Is it ok to negotiate? Can you make more than one counter offer?). Mechanism design shows that the economic outcomes, including market efficiency, can be dependent upon those rules.
Thus all "free-markets" are not equal. In fact a marketplace does not exist independently from its rules and norms -- they one and the same. Saying that "the market works" to allocate resources depends on the specific market design and conditions. Thus (and contrary to much conservative rhetoric) economic theory -- of which mechanism design is a part -- does not say that markets always achieve an efficient outcome. Mechanism design can help us better understand when markets do perform well. And when markets no not reach an efficient outcome, mechanism design theory can suggest mechanisms that might work better.

So basically, the Nobel for Economics went to a bunch of guys who actually admit that markets don't always come up with the best possible answer and then explain WHY.

One of their key public policy insights:

The fact that people have an incentive to not reveal their true preferences has obvious important consequences for public policy. If people are asked if they want a new highway built, they might rightly worry that they will be asked to pick up some of the expense, and so might not fully reveal their true preference, opting instead to try to game the system as a free-rider. Economic research building from the Nobel winners’ work analyzed ways to get around this -- to provide a mechanism by which people would volunteer their true valuation of the highway, and thus better evaluate the merits of a project that would benefit an entire community. (The key of this particular mechanism is to link an individual’s valuation response to the decision to build or not, but to de-link the exact mount they would pay).

So how does this impact a global warming discussion? Again from the article:

This brings us to global warming and cap-and-trade policy. If we -- and by "we" I mean the entire planet -- ever take global warming seriously, we will have to adopt some mechanism for reducing carbon emissions. A real program will require nations to implement some form of regulation and/or market mechanism to reduce carbon. But what kind of mechanism? How do we design a program that reduces carbon across nations? Some nations will be harmed significantly by global warming, while others will be better able to adapt, but in a negotiation, countries will have incentives to hide their true valuations, just like in the used car example above. Can we design a mechanism that is more likely to get nations to commit to reducing global greenhouse gases?

This fits in with my own experience. When I lived in famously libertarian New Hampshire (Official Motto: Live Free Or Die; Unofficial Motto: Fuck Off And Leave Me Alone) everyone religiously recycled everything recyclable. Why? Had they taken leave of their (conservative) senses and embraced nanny state regulation??

Of course not. You paid $1 per 35 pounds of trash that went into the landfill. And for stuff you recycled? Nothing. Even that nominal fee, a buck, probably nowhere near the true societal "cost" of 35 pounds of banana peel laying around rotting, was enough to very powerfully motivate independent Granite Staters to recycle like a Berkeley liberal.