Nostradoofus

There is little actual news on the healthcare debate.  Instead, as with much of modern media, we instead simply see dueling press releases, half repeated verbatim by MSNBC and Huffington Post, and the other half repeated verbatim by Fox News and the National Review.

Lost between the two megaphones are a few simple facts, mentioned by no one.

First, US healthcare is already socialized.  Requiring businesses to provide health insurance to employees is a market-distorting government intervention, functionally identical to a healthcare tax, except that coverage is less universal.  Free marketeers thus have little cause to argue against change — we would merely move from one socialist scheme to another one.  Free markets lost this fight in the 1960’s, so why argue for the status quo now?

Second, the Administration’s argument for a “keep-them-honest” public health insurer is based on the unproven assumption that existing health insurers are not competing.  Is that really true?  Why?  No one has explained this.  If health insurers are already free to compete for business, why are costs rising at quintuple the inflation rate?  Collusion?  That’s a problem we can attack through existing regulatory structures, not a new insurer.

There is no question that the existing system does three things wrong:

• Fails to independently measure and publicize the ROI (return on investment) of preventive medicine and lifestyle changes.
• Fails to provide high-ROI medicine to the uninsured population, which would be cheaper than fixing the same population’s acute problems later at charity hospitals.
• Fails to measure and publicize the ROI (positive or negative) of using expensive patented drugs and devices instead of cheap generic drugs and devices.

In short, the problem is a lack of transparency.  Sound familiar?

The Republican Party has, for the first time in 40 years, an opportunity to remake itself.

In the 1960s, Nixon made a Faustian bargain, essentially exploiting racist frustration in the Deep South over the Civil Rights Act to lure southern Democrats to change sides. Thus began an uncomfortable but enduring coalition between laissez-faire businesspeople and relatively poor, uneducated, conservative magical-thinkers that might euphemistically be called “social issue populists.”

One could argue the Reagan Revolution was no revolution, but an incremental extensions of that same basic alliance to include one more group of social issue populists: Southern Baptists.  Again, it worked, in the short run.

This coalition won elections, but was essentially unholy, combining two completely different political philosophies into one party.  This could not last forever, so it didn’t. The laissez-faire business elite were increasingly outnumbered in their own party by populist ideologues with no interest in government, big or small.  

In the past several years, as Bush Jr.’s GOP turned shrill and spendy, it was itself abandoned by its centrist, non-ideological leaders, leaving behind mostly know-nothings.  Centrist, non-ideological Republican voters naturally followed them out the door, leaving the impotent, free-falling GOP we see today.

But there is an obvious strategic path to their salvation. One type of small government — specifically, high-ROI government, in which economical regulation enforces property rights, growth in median income per work hour, and a level competitive playing field — is still the right answer.  This position constitutes the under-represented center of American politics.  In coming years, there will probably come an opportunity to exploit frustration with a new status quo of high inflation and low ROI on spending.  The question is how long it will take for reason again to take root in GOP leadership, which is currently bush league (no pun intended), after the death or departure of most of the wiser heads.

I say this with all due respect, as a laissez-faire fiscal conservative currently without representation in either party.  Here’s hoping.

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UPDATED 5/25/09:

Hereby retracted.  A reader sent various rebuttals, but the one that resonated is that subsidized loans are not really voluntary, because the unsubsidized rates are so much higher.

I checked, and found this was even more true than he suggested:  unsubsidized loans are now mostly unavailable at any price, due to the credit crisis.  Thus poorer students have no alternative to subsidized loans.  So the above would amount to an unavoidable invasion of privacy unduly targeting poorer students.

The reader posted other arguments.  Another that held some weight with me was that alcohol is far more abused, yet unregulated.

My goal in this proposal was to try to reverse a decades-long descent of American universities from educational institutions into a form of subsidized arrested development, in which late teens party their way through waning adolescence in the absence of either supervision or consequences.  But clearly this isn’t the way.

ORIGINAL:

Require recipients of federally subsidized student loans to take regular drug tests.

This does not violate privacy, because subsidized loans are voluntary.  If you don’t want to take a drug test, get unsubsidized loans instead.

Sometimes a situation arises so slowly, and becomes so established, that we forget how outrageous it is until we state it bluntly:  for decades, we have offered public subsidies for illegal drug use at universities.  Phrased thus, it doesn’t sound like such a good idea, and obviously delivers negative return on investment.

Among many other advantages, testing would be a social leveler:  the poorer students will be less able to afford drugs, putting them at an academic advantage. So we have a rare case where we can equalize opportunity while simultaneously making government more efficient.

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As we launch into the biggest Keynesian stimulus in history, it bears mentioning that its purported efficacy is based on a single historical example, whose success is still debated.

So, as long as we are making unproven assertions about what cures a great depression, here is an alternative. Judge for yourself.

High debt and unknowable exposure don’t mix. You can have one or the other, but not both. If you have low debt, you can tolerate uncertainty about exposure and risk. If you have high debt, you can still take risks, but critically, you need to know exactly where your exposure is, how big it is, or you quickly become insomniac and sensitive to loud noises.

Thus, if you have a debt-driven depression, the first order of business is to massively increase transparency, so that risk can be better quantified by anyone who wants to risk their capital.  Under this model, even bad news would unlock capital, if that news served to quantify exposure.

Repeat:  if you have high debt, unknowns may be OK, but unknowable unknowns are not.

What is a financial panic?  It is the fear of unquantifiable exposure.

“How bad is it right now?” ask investors, consumers and managers. If they can’t answer the question even approximately, then they must assume the worst. When you aggregate those assumptions together, you get a depression.

The obvious policy response is to massively increase the transparency of such exposure. That may bring bad news, but according to Adam Smith (remember him? policymakers sure don’t), individual agents are quite efficient at working around problems, if they know what they are.

This seems to be a forgotten lesson of the Great Depression. “The only thing we have to fear is fear itself.”  What fear? Unknowable unknowns. For example, how safe is your bank?  Are you really getting market price from your broker when you buy a stock? Everyone thought they knew the answers in 1928, but found they could not estimate them even approximately in 1931.

One of the primary policy responses then was to make risks more knowable. For example, consider banking regulation. If a depositor knows his bank must disclose its exposure in great detail to the federal government, his loss exposure is not zero, but it becomes somewhat predictable. Such transparency is much more useful than deposit insurance, because it guides good decisions for both banks and depositors, without moral hazard on either side.

Now investors, managers and consumers are faced again with a sudden tidal wave of unknowable uncertainty.  They thought they knew these basic things, and now realize they know nothing:

• What is the true default risk of a Moody’s AAA rating?
• What is the resale value of this or that mortgage-backed security?
• What is the true financial position of my bank, insurance company or broker?

Throwing money around doesn’t address this problem. No matter what the Fed or Treasury does, the credibility of the credit rating agencies is still suspect. No one knows what certain unregulated securities are worth. Again, high debt is intolerable without transparency.  Until transparency is restored, everyone will still be racing to deleverage, and the ship will keep going down.

Here are some specific actions, which could be taken immediately, that would help restore transparency, permitting all those little rational agents to resume their business:

1. Create a regulatory agency specifically overseeing credit rating agencies.  Enforce limitations on conflict of interest.  Force one more re-rating of all MBS.
2. Create a federal mortgage-backed security information website.  Display the contact info of any entity owning more than 10% of a given issue.  Display the deal terms.  Display the actual individual properties held by each mortgage-backed security, scrubbed of personal info, but  still showing 9-digit zip code, square feet, and so on. This would permit anyone to value any MBS, and to contact major owners to make offers.
3. Several months later (after there has been time to absorb the information), require at least one US exchange to offer a listed market in MBS, displaying bid/ask prices publicly.
4. Several months later (again, for info absorption time), require all banks and all public companies to disclose their specific MBS holdings.  On the balance sheet, they may either mark to market or hold to maturity, but in any event, must disclose all individual holdings.

The above would drain the swamp in MBS and the rating agencies.  Yes, it would be ugly.  Banks would fail.  But, er, at risk of stating the obvious, if they are holding bad assets, they will fail anyway.

These are the sorts of changes that would bring a true solution.

A key function of a head of state is to articulate national goals, reflecting what the populace already wants, but in a focused, actionable way.

Citizens follow that lead. Deng Xiaoping’s famous quote, “To get rich is glorious,” may be apocryphally attributed, but undoubtedly refocused China on capitalism, with results that speak for themselves.

Americans want to advance economically, but don’t know how.  The government is not helping. Unknown to nearly all Americans, there is a vanishingly simple formula:  maximize your net income per work hour.

What?  you may say.  It is not that simple.  What about controlling spending?  Education?  Savings and investment?  Retirement and vacations?  Yes, those matter, but all are contained within the above formula, if you define net income as any business does:  revenue minus expenses.

Controlling spending:  if you earn $100k this year and spend it all, your net income is zero.  To increase net income quickly, spend less.

Saving:  identical to controlling spending.  If you spend 20% less than you make, you have saved 20% of income.  

Investment:  identical to saving.  Bank accounts are an investment, but there are many other, better investments.  More importantly, investment income doesn’t consume your time:  conservative investments yield very high income per work hour.  Thus, spending less than you earn may not quickly increase your total gross income, but the increase per marginal work hour is incredibly high.

Education:  identical to investment.  It is a way of spending time or money to increase net income per work hour.

Retirement and vacations:  the fewer hours you work for a given income, the higher your income per work hour.  Thus, vacations and retirement go hand in hand with maximizing net income per work hour.  Again, all contained within the simple definition above.

In short, everything comes down to net income per work hour.  Economists would call this a measure of productivity.

The ultimate economically empowering statement from an American president would be “To increase productivity is glorious.”

$775 billion — the current proposed fiscal stimulus, aka deliberate deficit spending – is fearsome not for its scale, but for the risk it will be aimed at an unproductive goal.

Jobs are not the goal.  Increasing consumer spending is not the goal.  They are merely happy byproducts of something more important.

The goal — the objective of economic policy — is to permanently increase median GDP per work hour.

Every word of that definition matters.

Why per work hour?  Because no one is better off if GDP increases 10% by working 10% more hours, or by having a 10% larger population.  The measure of economic improvement must be GDP per work hour.

Why median?  Because if Wall Street earns an extra $100 billion, and everyone else stays the same, then GDP per capita went up, but in fact almost no one is better off.  Unlike the average, the median ignores statistical outliers — the best way to increase the median is to improve the productivity of the greatest number of people.

Why permanently?  Because otherwise, after the stimulus money is gone, you’re back where you started.  And anyway, simply handing out checks and keeping people busy is too unambitious. 

One cost effective way to permanently increase median GDP per work hour would be to spend stimulus money optimizing America for productivity and productivity growth.  Some easy examples:

1. Move all government filings to Web forms, eliminating PDF and paper.  Concurrently, teach every adult to type and use a Web browser.
2. Widely teach the benefits of productivity growth, so people know what solutions to look for.
3. Widely teach probability and statistics, and their application to efficient production.
4. Teach 10 million adult Americans to speak German, Japanese and Chinese.
5. Translate all foreign production management publications into English, and republish them here.
6. Eliminate the Big 3 automakers’ existing distribution model, and replace with a build-to-order model like that used for Mini Cooper.  Showroom contains just 1 or 2 of each basic model.  Fixed price.  You order the colors and options via Web form.  Car arrives a couple of weeks later.  This offers greater choice, while eliminating inventory, waste and the deadweight loss of the sales-push model.  Also provides instant product feedback from sales to manufacturer, allowing products to improve more quickly.
7. Force the US military to use commercial platforms for its cars and trucks.  In particular, the Humvee would be replaced by an armored GM/Ford 4×4.  This would help GM/Ford, the Army, and the taxpayer at the same time.  For the Army, mass produced vehicles are not only cheaper, but also more reliable, cheaper to maintain, and better designed because each design sees more total use.  For GM/Ford, increased sales would push factory utilization back up toward breakeven, reducing average cost per vehicle.  For the taxpayer, the cost per Army vehicle would go down.  For the consumer, the price of 4×4’s goes down, because GM/Ford passes on some of its lower cost per vehicle.  Everyone wins.  It’s insane for the Army to use purpose-built designs.  They only do it out of momentum — it’s been that way since World War II.
8. Change the tax structure to encourage production at the expense of consumption.
9. Change the regulation of the media to encourage production-oriented content, and discourage consumption-oriented content.  (To see the pervasiveness of the problem, visit a magazine rack and notice that nearly every publication is essentially consumption-oriented.)
10. Hire 5 times more patent examiners, double their salaries, and cut the small-entity patent filing fee.  Simultaneously, raise the bar on actually obtaining a software patent, particularly in software.
11. Provide tax breaks for how-to publications that focus on exports and production management.

Instead of wasting money on yet more unused light rail lines — which are a nice idea, but wholly incompatible with existing city layouts –we could put $775b to real use.  Productivity-oriented education in particular has astonishingly high ROI compared with alternatives.

Have meant for years to write this.

Freakonomics (Levitt & Dubner, 2005) famously argued that Roe v Wade was the most statistically likely explanation for the dramatic fall in U.S. crime during the 1990s.  The hypothesis was that, after the early 1970s, unwanted babies were less often born, resulting in fewer maladapted folks to commit crimes 20 years later.

This was clever, unexpected and interesting, and did fit the data better than the half dozen alternative explanations the book considered.  However, it did not explain the dramatic rise in crime during the 1960s and 1970s.

Here is an alternative explanation the book did not consider:  post-traumatic stress disorder among returning veterans.  PTSD is well known to be linked to crime and violent behavior.  War-caused PTSD is known to trigger episodes of violent behavior, and over 30% of tested prison populations have PTSD.  

Large numbers of US soldiers began returning from Vietnam in the mid-1960s, about the same time as crime rates dramatically rose.  The rise in crime leveled off a few years after the US withdrew from Vietnam, and began to decline precipitously as the US veteran population aged.

Interestingly, the violent crime rate continued to fall until just a couple of years ago, when it turned back up again — coincidentally, just as large numbers of vets began to return from Iraq.

This idea leaves out a few things — for example, it does not explain why crime rates would not dramatically rise after WWII or Korea.  But for completeness, Levitt and Dubner should cover it.

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In the political debate over how and whether to save GM and Chrysler, microeconomics has been forgotten.

Autos pretend to be a brand-driven industry, but are more like a commodity industry. Under conditions of overcapacity, the highest-cost producers of a commodity shut down, while the lowest-cost continue to make money.  These shutdowns are most efficient if they happen at the plant level, not the firm level.

It’s not clear that union-busting — currently demanded by the Senate minority in return for a rescue — is economically necessary or politically constructive.  Current GM workers are actually paid less than Toyota workers in the US.  GM’s higher costs result not from current staff, but retirement obligations, mainly retiree healthcare.

GM is in an interesting position:  they are uncompetitive mainly due to retiree benefits.  In fact, it barely exaggerates to say that GM is going broke due to the US healthcare system.  The system is not cost effective, and has become less so over time, to the point that it is beginning to bring down even very large firms.  Fixing the cost effectiveness of US healthcare would dramatically improve US competitiveness, profitability, employment — and could by itself save GM.

But that takes time.  In the meantime, if GM is to be saved, logically it should be done as a workout or prepackaged bankruptcy, in which retirement liabilities are nationalized and the oldest, highest-cost plants are shut down.  GM is competitive enough that, with these two changes, they should survive.  Without these changes, they’ll just fail again.  

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American capitalism has been so stable, for so long, that everyone has apparently forgotten what it is.  Capitalism is presumed by both liberals and conservatives to be an ideology of total deregulation.  That’s mistaken.

Capitalism is, and has always been, a game whose rules are designed and enforced by government to maximize the efficiency of capital allocation.  

“What?”  my laissez-faire readers argue.  ”Capitalism has inherent rules?”  No, they argue, capitalism is the totally free, utterly unfettered flow of capital.  The rules are what get in the way.

“What?”  my Bay Area friends argue.  ”Capitalism has inherent rules?”  No, they argue, capitalism is the unrestrained excess of the greedy.  The rules are what keep them at bay.

These positions both misunderstand the history and definition of capitalism.  Basic regulation — the rules that define incentives in the capital allocation game — are central.  Capitalism cannot function without them.  The objective is not to increase or decrease regulation, but rather to design a legal structure that maximizes the efficiency of capital allocation at minimum cost.

Consider:  capitalism depends upon private ownership.  But what does “ownership” mean?  Property is, at its core, a form of monopoly granted and enforced by government.  When you buy a house, what are you paying for?  Exclusive use.  Who protects that exclusivity?  What stops your neighbor from crashing on your couch whenever he wants?  Laws and police, paid for by tax.  Private ownership cannot exist without this government sanction and enforcement.  Thus regulation is inherent to capitalism.

This is a special case of the most general function of government:  to assign individual costs and benefits to externalities, in a way that makes most people better off.

The cost of such assignment can easily exceed the benefits, which is why so much of the regulation of the 1960s and 1970s was wasteful and counterproductive.  This set the stage for a conservative backlash that is only now running out of steam, as it hits the problems that exist at the other end of the regulatory scale.  As posted here years ago, Baja California demonstrates how poorly under-regulated capitalism works.

In the US, wasteful regulation and counterproductive deregulation are both driven mainly by politicians born before 1960, who, as posted here previously, grew up in conditions of essentially unlimited American power, stability and financial resources, and thus never developed the judgment necessary to make decisions under conditions of limited resources.  

With the passing of the torch to a new generation that grew up with declining living standards and American balkanization, we may reasonably hope for better cost/benefit analysis.

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