On the similarity between weight loss and balancing the budget

I've been meaning to restart this blog for some time now, but I've been pretty busy between finding a new job, moving, etc. Why now? Sometime thought has to give way to action. This is just that time.

It occurred to me today that the Republican approach to balancing the budget is not unlike to my approach to losing weight. I've been refusing any exercise increases and insisting on accomplishing everything through eating cuts. Since I've started I've put on somewhere between 5 and 10 pounds. The Republicans would fare no better trying to close the budget deficit without tax increases. The fundamental problem is that taking one side of the equation off the table means you have to show amazing levels of restraint on the other.

Just as I can't find too many empty calories I'm willing to part with there just isn't that much spending that's easy to cut out there. The bulk of the federal budget goes to pay for Social Security, Medicare, and defense. Cutting the first two would antagonize the average GOP voter who tends to be older. The latter has been a sacred cow of the right for a long time. Even if savage cuts are made to the remaining spending, that still leaves no plan in place for dealing with medical costs, which are increasing faster than GDP. This means that in the long-run this strategy will require either refusing to cover much of senior's medical costs (like Paul Ryan would like to) or it means getting the government completely out of pretty much everything that isn't Medicare, Social Security, and defense.

The good news is that in thinking about all this I've resolved to do exercise more. I somehow doubt we'll even see a letup in the anti-tax increase rhetoric, much less actual action.

Learning from the 1930s

With all the talk about the 1930s: comparing the Great Depression to the current one, wingnuts trying to compare Obama to Hitler, etc. something struck me as I was reading Ezra Klein's recent post on the public option:

Letting [the public option go] go will smooth the path to victory. But will it? The co-op plans, which were supposed to be the compromise to the public option, endured a blistering attack from the GOP yesterday. When Republicans are attacking the compromise of a compromise, it's worth wondering whether their opposition is based on a dislike of particular provisions or a desire to doom the whole bill. I'd say the evidence increasingly favors the latter.

Loudly letting go of the public option wouldn't necessarily secure additional votes so much as it would increase the confidence of opponents and depress supporters. If the forces arrayed against health-care reform could spend two weeks assailing end-of-life counseling, they can find another provision in the bill, too. Maybe the exchanges, Or the subsidies. Or MedPAC. They're committed to defeating Barack Obama and the Democrats, not erasing a particular section of the bill. Reform's advocates, however, are substantially -- maybe overly -- committed to the public option. Dropping it from the effort is likely to wound them while emboldening the opposition.

It struck me how similar the public option is to the Sudetenland in that giving it up gets the Democrats nothing from the Republicans, but it undermines the will of the left to fight for the rest of the health reform bill. The Democrats need to absorb the lessons of the 1938 Munich Agreement as far as dealing with implacable opponents goes. Appeasement doesn't work, and it's a very stupid idea when you have the upper hand.

If the Republicans aren't willing to negotiate in good faith then shut them out of the process until they're willing to start. Grassley said a couple days ago that he'd vote against the bill even if it contained everything he was asking for. How much more obvious does it need to get that there's no point in trying to talk to these people? It's time to focus on people who would conceivably vote for the bill like "moderate" democrats or the senators from Maine. At least there, concessions might actually buy you the votes you need to pass something mildly effective.

An unhealthy attachment to the status quo

It seems that as time goes on more and more people turn against health reform. Although many people sense that the system as a whole is getting out of control and sympathize with the uninsured, they're not willing to pay the cost of reform or risk their own current coverage. They disbelieve the president's assurances that they can keep their coverage if they're happy with it. What they may not realize is that they might not be able to keep the coverage they have now even if no health reform passes.

Health insurance premiums are rising steadily. Every day additional businesses and individuals are priced out of the market. If costs are allowed to continue increasing, there's no guarantee that the benefits being promised today will be affordable or even available in a few years. Granted there's some debate over whether the proposals currently in Congress will achieve the sort of cost savings, which will be required. That's a reason to advocate for the proposals which do, not to reject all reform out of hand.

Besides the questionable overall capacity to sustain the current system, at an individual level good coverage nowadays is depended on one's employer. If you lose your job, you also lose your medical coverage. Even if their job is relatively secure, few people seem to realize that the medical conditions, for which they most need insurance, might also incapacitate them to the point of losing their job and therefore their insurance. Insurance that isn't there for you when you need it isn’t insurance.

Finally, a disturbing trend over the last few years has surfaced: faced with the decision whether or not to pay out large claims, many insurance companies are deciding to terminate people's coverage instead. (See this post.) While this does not really apply to employer-based coverage, it means that those of us with no access to such coverage may not really be able to purchase insurance at all, even if we can purchase "insurance."

Thus, it's unfair to compare potential healthcare proposals with the best insurance plans currently available, because they are not representing the majority of cases and they are and not sustainable. If we do nothing, it will get much worse for all of us.

Who’s afraid of a little inflation?

Recently a number of prominent, mostly conservative economists have begun publicly worrying that the Fed’s unorthodox monetary policy will lead to inflation at some point in the not so distant future. Some alarmists in the media have picked up on this and warned publicly about the danger of hyper-inflation. Apparently they cannot distinguish between 5-8% inflation and what is happening in Zimbabwe right now.

Unfortunately, a lot of sane people are wasting a lot of time and a bit of credibility arguing that we won’t actually see any inflation as a result of what essentially amounts to printing a lot of money. Of course there will be some inflation when the economy picks up again, that's normal.

One of the most important pieces of advice that was given to me back when I was a member of the Debating Union at the university was that the question that most frequently needs to be asked is: "So what?"

Far too often, someone will spend most of their time demonstrating how your side's plan of action leads to some consequence. In this case, conservative economists have established a fairly strong case that there will be some inflation in the future as a result of the Fed's current actions. What has not happened, however, is that they have not told us why 5-8% inflation is more harmful than strangling a nascent recovery by tightening monetary policy too early.

At this point, I'm not entirely convinced that such a rate of inflation would be harmful in the short-run. With governments and consumers deeply in debt and unwilling to spend because of their debt obligations, inflating some of those away may actually be part of what is necessary to end the current crisis.

Our Toxic Legacy

I was starting to think that the Obama administration lacked the will to impose tough solutions when they are necessary. Their recent treatment of the auto industry restored that hope. It does, however, raise the question: Why is Wall Street not being treated the same? Instead of cleaning up the banks, the administration seems intent on throwing money in their general direction until their health improves.

The latest scheme to drive up the the price of toxic legacy assets is probably the worst possible type of solution. It's less efficient than simply giving the troubled banks more money for free, but essentially amounts to the same thing otherwise. You can see recent posts by Paul Krugman, Willem Buiter, and others: Geithner Plan Arithmetic , The new toxic and bad legacy assets programs of the US Treasury: surreptitiously squeezing the tax payer and the Fed until the PPIPs squeak , etc.)). It's simply a terrible idea to reward failure in this way.

Fairness considerations aside, the consequences for rewarding spectacular failure with loads of bailout money are dire. The lesson banking executives would learn from that is that they should continue taking enormous unnecessary risks, because the downsides are born by someone else.

Luckily for us, there are alternatives. Although the economy certainly depends on the availability of credit and a healthy financial sector, there is nothing that says the individuals who failed so miserably last time are indispensable, nor does it really matter which banks survive relatively intact as long as there is enough of a financial sector left at the end. Even if we commit to saving the current banks, there is nothing that says we have to save their executives, shareholders, and unsecured creditors.

There is a myth going around that the people who failed the first time around are the most knowledgeable and able to fix the situation. Why? This assertion is usually made without any supporting evidence, let alone proof. If someone in 2005 had suggested that Michael "heckuva job" Brown was the best person to fix FEMA after its disastrous mishandling of Hurricane Katrina, they would have been laughed at. Why aren't we laughing now?

On reducing carbon emissions

With control of the White House and Congress both in the hands of Democrats, combating climate change is on the agenda. The Obama administration seems likely to attempt to set up some sort of Cap and Trade scheme for carbon emissions, but while, I fully support the goal or reducing emissions, I hope they will reconsider their approach.

Cap and trade introduces unnecessary uncertainty and government interference in reducing greenhouse emissions. Not only does it require that the government choose a suitable level of emissions for the country, it introduces the possibility of wild price fluctuations due to speculation and a lack of responsiveness of the total available quantity of emissions to external economic shocks. Businesses may suddenly face massive increases in costs, or conversely investments in emissions-reducing technologies may prove unprofitable as the price of emitting a tonne of CO2 falls. A carbon tax solves all these problems.

Ultimately the decision comes down to one thing: The government must establish either a price or quantity of emissions and let businesses respond by choosing the other. If the government sets up a cap and trade scheme, it is choosing the quantity and allowing the price to fluctuate (possibly wildly) even though the environmental damage done by a tonne of CO2 does not change regardless of whether its emitter paid $2 or $100 for the privilege. On the other hand, if scientists can get a rough estimate of the damage done, the tax can be set that lets businesses and consumers decide which activities and products are worth it and which aren't, and thus set a level of overall emissions that balances environmental protection with its economic impact. Even if the exact damage can't be quantified the tax could be gradually increased in a predictible way up to a level that does not impose undue burden on the economy.

A carbon tax best allows businesses to decide how much CO2 they should emit, by weighing the potential profits against the environmental consequences (conveyed to them in tax form). It also allows for a stable price for those emissions so that businesses can adequately make future plans and investments without facing yet another layer of uncertainty, and it is almost certainly easier to administer for all parties involved.

Hazardous Bailouts

Normally, in a capitalist society when companies make good decisions, their investors profit, and when they make bad decisions, their investors suffer. Investors have an incentive to be careful with their money and to not finance foolish or reckless ideas. In bailing out the financial industry the government is threatening to create moral hazard by reducing or eliminating the potential downsides for making poor choices. Not only is a “Heads you win, tails we lose” solution to the current crisis grossly unfair to the American taxpayer, it encourages repeat offenses.

For many economists and politicians considering various bailout plans, moral hazard has become a secondary issue. They argue we can’t worry about long-term problems when the whole system is about to implode. While I tend to subscribe to that philosophy in my own personal life, there is a very important group of people to whom the issue is an immediate concern: potential investors and creditors. As long as there is a great deal of uncertainty about what the government intends to do, potential investors and lenders are going to be wary of sinking money into the financial system. No one wants to get in if there’s a good chance the government will nationalize.

If the government intends to give existing shareholders and unsecured creditors a “haircut” or wipe them out, now’s the time to do it. If it intends to just throw money at the banks without a meaningful downside, it needs to make that clear. Also any Congressman who votes for that particular bailout might also want to take the opportunity to announce that he will not be running for re-election in 2010. Given the popular anger directed at Wall Street at the moment, a pledge not to nationalize or impose stiff restrictions may not even be credible. Ultimately, the solution doesn’t just need to be able to fix the credit crunch; it also needs to be politically viable.

Willem Buiter offers an interesting “Good Bank” solution that includes a certain degree of nationalization. The government (possibly together with some private capital) would set up a “good bank” for every insolvent bank. It would transfer the bulk of the employees to the “good bank,” purchase all the assets that can be priced in the market on its behalf, then withdraw the banking license of the old bank. This would leave the old bank, with its old shareholders and creditors and bad assets, while the new bank is healthy and ready to operate like a normal bank. If the toxic assets of the bad bank turn out to be worth something in a few years when the economy has sorted itself out, the old bank’s creditors and shareholders regain some of their money, if not, that means the bank was worthless anyway; meanwhile, the new bank, unfettered by unnecessary restrictions or bad debts goes about its business, and is eventually privatized, helping taxpayers recoup their investment. This gets credit flowing immediately and leaves the messy attempts to price illiquid assets for later when there is no time pressure.