Tuesday, June 3, 2008

Economic Policy Institute's Health Plan

Sometime during the Democratic Primary's Health Care Mandate food fight the Economic Policy Institute (EPI) released a health care plan authored by Jacob Hacker. So, as the Democratic primary winds to an end, let's spend a minute reviewing a little of the substantive policy we missed during the madness and compare it to the Wyden-Bennett/Committee for Economic Development plan that I have already written about fairly extensively.

The Health Care for America Plan is made up of three central elements:

1. An extension of Medicare to every legal U.S. resident who is not covered by their workplace.

2. All employers will be required to provide their workers with coverage equivalent or better than the Health Care for America plan or pay 6% of payroll to fund coverage for their employees.

3. A requirement (the good old mandate) that all Americans buy into Health Care for America Plan or purchase private coverage.

Of course, there is a lot more to it than that. But those are the basics and who has time for nuance anymore? So let's get into some analysis.

To begin, both plans have mandates. So, not much to compare here. If you still aren't sure what these are about and why there was such a food fight about them, feel free to leave a comment asking for a briefing and I will oblige. So both come down on the side of universality and guarantee (and require) that every American have a health plan.

The more interesting differences come in how each tries to cut costs. Both believe that there is substantial waste in the current system and tries to create incentives to reduce it. Wyden-Bennett does this through competition, requiring that insurance companies compete to offer a basic plan that is risk adjusted for the type of people who enter their plan. (I.e they get paid extra to cover people at higher risk of getting sick.) This will presumably reduce administrative costs of insurers as they compete to be leaner and hopefully make consumers price conscious as they will be able to select a plan to cover their specific medical needs. The hope will also be that insurers will form long term relationships with customers and so will be incentivized to provide preventative care.

EPI's plan uses the bargaining power of the government to negotiate for lower prices with drug companies and providers and the administrative efficiencies of having a single large insurer to further reduce costs. Furthermore, as the government will necessarily have a long term relationship with many of its customers, it will encourage preventative care to reduce its costs.

How will these different approaches to cost cutting succeed? It is impossible to say with an certainty, but I will point to the difficulties that each will face which hopefully will give the reader some guidance on which one he or she sees as more plausible.

Wyden-Bennett plan counts on the government being able to properly price the cost of various health risks in populations across the U.S. Given how many types of health conditions there are, and how much regional variation there is when it comes to intervention this is a very difficult problem. If you don't get it right, you will have insurers either making over-sized profits or going out of business at an alarming rate leading to substandard care. Either scenario could be very expensive. Yes the "Dutch" model that Wyden-Bennett has seen some success in the Netherlands, but we are dealing with a far more heterogeneous population here. I think the argument that would be advanced by the EPI folks would be that many of the insurers under this system would be too small to negotiated significant price concessions from drug companies and providers.

The big problem EPI's plan will face will be the rationing of health care through mechanisms other than prices. As has happened in single payer countries, consumers will not be price conscious and so will demand more of certain types of coverage than the government's reimbursement schedule will supply. So it is likely that health care will be rationed by systems such as wait lists, mechanisms that will increase the cost of overall care.

Which of these problems one finds the most intractable, will go a long way to deciding which health care plan one prefers.

Tuesday, May 13, 2008

Universal Health Care for Free!

The Congressional Budget Office has scored the Healthy Americans Act as budget neutral. Politically speaking, this is a very exciting development and bound to get a lot of attention if publicized properly. No matter how much money we throw down the drain in the current system, it's very difficult to get Congress to invest in a policy with a large up front price tag no matter how much it saves in the long term. But who can turn down free universal coverage?

Unfortunately, this positive calculation comes partly because of a cap on government spending. After a certain year (2014 I believe) Federal spending will be capped at GDP growth. This cap may very well scare a number of groups that are concerned that a cap will lead to a decline in overall care or the particular disease or medical technique they advocate for. As I covered in a previous post that focuses mostly on a similar policy from the Committee for Economic Development, cost cutting should come from increased competition between insurance companies and preventative care. The Healthy Americans Act is similar enough to the Committee for Economic Development plan that the cap is probably unnecessary.

Still, I think this is an overall win for the Healthy Americans Act. From what I've seen Sen. Wyden is a savvy political player and probably knew what he was doing when he put in the cap on Federal expenditures. Without the cap, the CBO would not be able to issue an estimate so soon because of the complexities involved in seeing whether the incentives generated by the bill will create true cost cutting. This estimate generate a lot of publicity, and even if it gets people quibbling over details, at the very least they'll be talking about it as a new president enters the White House.

Wednesday, April 30, 2008

Prof. Larry Bartels on Unequal Democracy

Larry Bartels of Princeton delivered a talk on his new book Unequal Democracy: The Political Economy of the New Gilded Age on Monday. The talk was interesting in that a respected academic came to a data driven but very partisan conclusion: if you're concerned about income inequality, elect Democrats.

You can see his most startling graph on the right. It clearly states that income growth is higher for all groups under Democratic presidencies than under Republican presidencies and that this growth is much more equal. A number of objections immediately jump to mind but from what I've seen so far this conclusion is robust, Prof. Bartels provides a response to some of the criticisms at Dani Rodrik's blog.

Why would voter's continue to vote for Republican presidents against their own economic interests? Prof. Bartels believes that they do vote with their economic interests, but only for the last year. The structure of Republican policies Bartels finds is that they lead to lower growth in earlier years of the presidency as spending and programs are cut. But this leads to higher growth towards the end of the term (and the upcoming election) as the economy rebounds from its bitter medicine. Democrats, however, unleash spending and new programs at the beginning of their term. By the time the end of their term has rolled around, the economy has begun to slow as the effects of the stimulus wear out and inflation kicks in.

Unfortunately for Democrats, according to Bartels (with support from Brookings' William Galston and Thomas Mann and over the objections of someone from Pew) voters only really remember the last year when assessing their economic fortunes. Thus, Democrats lose and Republicans win.

A couple of other interesting facts and figures:

1. Low income voters are more likely to support Democrats. It's high income voters in "red" states that swing them to Republicans.

2. Information matters: the more information self-identified liberal voters consume the more likely they are to correctly identify that it has increased in the United States.

3. Information distorts: the more information self-identified conservative voters consume the more likely they are to incorrectly deny that income inequality has increase in the United States.

4. Information doesn't matter: No matter ideological preference and amount of information consumed and preferences regarding income inequality, about 2/3rds of Americans oppose the inheritance tax.

Thursday, April 17, 2008

Thursday, April 10, 2008

"Predictably Irrational"

I've been meaning to link to this review
of a couple of books on behavioral economics. "Predictably Irrational," a new book by Dan Ariely at MIT sounds like it has some particularly interesting experiments.

In one study, he asked students to look at the last two digits of their social security numbers and then bid on various items. Their social security numbers had marked effects on their bids.

The students whose Social Security number ended with the lowest figures—00 to 19—were the lowest bidders. For all the items combined, they were willing to offer, on average, sixty-seven dollars. The students in the second-lowest group—20 to 39—were somewhat more free-spending, offering, on average, a hundred and two dollars. The pattern continued up to the highest group—80 to 99—whose members were willing to spend an average of a hundred and ninety-eight dollars, or three times as much as those in the lowest group, for the same items.

This effect, which Ariely calls "anchoring," and which retailers such as Tiffany's have been acquainted with for decades (and probably longer) blows conventional economics out of the water. Clean downward sloping demand curves a la Econ. 101 assume rationality on the part of consumers, that they trade off the benefit of consuming the good against the benefit of the other goods they could consume for the same price. If they aren't cold calculators all the time, companies can rely on tricks such as putting other high numbers in the store to set the customer's "anchor" and engine of the free market economy is reduced to a sputter.

This is, however, more of a problem for a lot of academic economists than anyone else. The big money today isn't made on trying to produce commodities that consumers examine with steely eyes and then make a decision based on price. The game is to find a niche demographic and tailor your product to fit their needs. I didn't buy my Mac based on processing power, I bought it because my wife has one, sleek marketing, and because it doesn't feel (and perform) like a hunk of junk.

The key is differentiation, a good businessman doesn't just compete on price. That means that all those pretty supply and demand curves that we were all taught in Econ. 101 are virtually non-existent (they're also pretty damn hard to examine empirically too.) Perhaps this is why economists don't run the world but rather tell others how to?

Wednesday, March 26, 2008

Faith Based Economics

From Dani Rodrik:

Kevin Hassett, economics advisor to John McCain, is quoted today as saying:

What really happens is that the economy grows more vigorously when you lower tax rates... It is beyond the reach of economic science to explain precisely why that happens, but it does.

Now you can be excused for thinking that the first of these statements is true, if you have an economically sound reason for it. But if you don't, you shouldn't.

Let's call it no longer supply-side economics. It is faith-based economics.

Tuesday, March 11, 2008

Health Care Humor

The Committee for Economic Development (CED) held a briefing on the Hill yesterday to promote its healthcare plan. As I have written on the plan previously I will not rehash the details but rather share with you the comic stylings of Dr. Alain Enthoven.

For those of you unfamiliar with Dr. Enthoven, (I certainly was before I started tracking healthcare issues) he is a professor emeritus at Stanford and a very respected figure in health policy. He was integral in formulating CED's health plan and his support is equally integral to promoting it to a wide audience.

Dr. Enthoven got his start in public policy as the leader of Robert McNamara's "Whiz Kids," doing quantitative heavy lifting on nuclear proliferation and the war in
Vietnam. He spent a year pushing his conclusion, based on body counts, that the U.S.
could not win the war through attrition.

Despite his incredible stature (but reputation and physically too, he must be 6'3") he is incredible down to earth. Following the talk yesterday, he stuck around for a serious and engaged conversation with the youthful members of the CED, this blogger and the 23 year old American Prospect superstar Ezra Klein. Given this context, I would like to share a couple of his jokes dryly inserted into a very serious policy discussion. The humor of course, is bitter-sweet, given these problems have some very tragic consequences for the people dealing with them.

A Bad Pun:

Because people switch doctors so frequently because switching jobs means switching health plans and because medical information technology is nowhere where it should be, doctors often aren't aware of their patients' full medical history. This, Dr. Enthoven says with a straight face as his colleagues cringe, is "connectile disfunction." He uses this joke at every presentation and from what I hear, even in meetings with U.S. Senators.

Another Bad Pun:

Economists have a term "job lock" that refers to the case where people are prevented from leaving a position because of some sort of market failure. In the case of healthcare, because their plan isn't portable they are unable to be entrepreneurial
or take another job if the new employer doesn't offer the same plan. As many people get their health plan through their spouse's employer, there is another case to be considered. Dr. Enthoven spoke of a woman who was unable to leave her husband because she needed his healthcare insurance. "It brings new meaning to the term wedlock," he deadpanned.

Thursday, February 28, 2008

Brick by Brick

I saw an interesting documentary on the desegregation battle in Yonkers New York tonight. It's easy to get lulled into the sense that the battles for civil rights were something fought and won long ago. Brick by Brick is a fresh reminder that these fights go on to this very day.

This fight started in the 1980s and the city council is dragging its feet on a Supreme Court ordered housing desegregation plan and undermining school integration to this day. But the truly insane thing to watch is how rabidly the anti-integration forces fought. The yelling mobs, a city council willing to bankrupt the city by keeping it in contempt of court over 200 low-income townhomes in a city of 200,000.

Truly a spectacle to behold and a striking reminder that high-minded national policies are very difficult to put into practice without engaged local-level support.

Thursday, February 14, 2008

Rise of the Lions

I know I'm not the only one who finds the overwhelming majority of election analysis to be stultifyingly shallow. Beyond the polls, the deepest concept we deal with is "momentum," an amorphous concept that implies that a candidate will keep winning until he/she doesn't in which case the "momentum" has been lost. Basically, momentum can stand in for any number of other explanatory variables but it saves us all from the difficult task of defining them or being wrong when they fail to predict an election.

So, in honor of my first intellectual love (after a fling with psychology and a torrid affair with philosophy) I would like to recount a bit of political theory for my readers.

Vilfredo Pareto (for you economists, yes the efficient one), introduced a theory of political cycles in his 1901 work "An Application of Sociological Theory," which outlines a theory of the circulation of political elites. He sees the political elite as composed of a mix of two types of individuals, "lions" and "foxes."

The "lions" are strong-willed and rule in a forthright manner, relying on tradition and "group persistence." The "foxes" are devious and chip away at the "lions'" power through cunning and deceit. Eventually rule by the lions gives way to rule by the foxes who outmaneuver and undercut the traditions that gird the lions power. Eventually, however, the foxes in all their maneuvering end up in a position so far away from the underlying traditions, that they are exposed and upended by resurgent lions who bring the political culture back to its underpinning traditions in a direct manner.

The qualified application of this theory to this election would be this. The two "fox" candidates who maneuvered through positions, votes, and transactional politics to take their respective party nominations, Romney and Clinton, have fallen (or are falling) by the wayside. This is not because of their intrinsic failings, but rather after 15 years of Clinton I's triangulation followed by Tony Snow style press conferences, forthrightness is favored over political cunning.

The corollary to this, is that the "lions," Obama and McCain, have overcome a politically inevitable opponent and shown that predictions of their political death were "greatly exaggerated." Obama, a far-sighted cub, offers to renew the tradition of "communitarianism," while McCain, wizened member of the pride, offers us a return to pre-Conservative Republicanism.

Ironically, an election focused on change may really be about bringing us back to long-held traditions.

Wednesday, February 13, 2008

Rethinking Development Through Bashing Thomas Friedman

There has a been a bit of buzz about a talk given by award winning Cambridge economist and CEPR fellow Ha-Joong Chong, at the New America Foundation on his new book Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism.

He begins with an example of a small cheap car introduced by Toyota to the U.S. in 1958, essentially an “ashtray on four wheels.” The car bombed and was pulled from the market as critics chided Toyota for trying to go against Japan’s comparative advantage. Japan had lots of labor and not much capital in 1958 so it should have stuck to producing silk. Toyota could not complain that it hadn't gotten help, it had already had 25 years of protection and government subsidies. But the subsidies and protection continued.

Toyota’s Lexus now has been made an icon of free market development by Thomas Friedman who argues that developing countries should put on neo-liberal (privatization, deregulation, reducing trade barriers) “golden straight-jacket,” in his view, the only model of development available. If they would only don the straightjacket they developing countries could produced similar products. (Mr. Friedman seems to find himself in the position of being a punching bag for many an academic.) Mr. Chang believes that using the Lexus as a model for development by free trade is “like writing book on self made man and having the first chapter on Henry Ford II.”

He goes on to point out that Alexander Hamilton applied the idea of protecting small economies before opening to free trade to the U.S. Hamilton was in direct opposition to Adam Smith who argued against the U.S. developing manufacturing in The Wealth of Nations.

By the 1830s U.S. was most protectionist economy in world, it heavily regulated foreign investment and had virtually no intellectual property protections. But the U.S. wasn’t the first to use this model, in fact, Hamilton got his model from Britain’s economic development during the 1700s. Chang believes this model this model has been pursued by all other developed countries with only Netherlands and Switzerland pursuing development through free trade.

This goes to the most fundamental disagreement between the economists of developing and developed countries. This debate raged over the drivers of East Asian growth and causes of the East Asian financial crises in the late 90s. Did East Asia grow because of its governments’ industrial policies or despite of them? And was the crisis cause by imbalances created by these policies or because of the ‘herd mentality’ of investors?

The truth is, macro-issues such as this are impossible to test in any kind of rigorous scientific manner. But Mr. Chang levels a very powerful charge at the supporters of the Washington Consensus and the structural adjustment (i.e. pro-liberalization) programs from the IMF, the charge of hypocrisy.

Saturday, January 26, 2008

Internet Effect in '08?

The internet was supposed to transform the political landscape in '04 after it propelled Howard Dean to the front of the Democratic Primary pack through small donations and passionately organized young people. As Dean imploded in Iowa and his volunteer army melted away or was absorbed by the Kerry campaign, the internet failed did not transform the general election. The most remarkable media event of the campaign was the Swift Boat Veterans for truth, which was more of a comment on campaign finance reform than changes in media.

According to MSNBC, of the top tier candidates McCain, Obama and Edwards are the biggest beneficiaries of donations under $200 with 31% of their total coming from the types of donors candidates most hope to reach online. Clinton, along with Romney and Giuliani has received less than 15% of her donations in amounts smaller than $200. That makes Obama the biggest winner in raw dollars, not even counting the alleged $500k he took in in one hour on the night of his SC win.

The most telling test of the internet's supposed transformative power may come in the next week. The big question, as put forward by a posting
on the Coldheartedtruth blog is will the Clintons' latest round of tactics pay off on Super-Duper Tuesday or are they playing with an outdated playbook which does not take into account a new demographic of high-information voters? That is, are we going go find out that the "Clintons still a step ahead, or have they fallen a step behind?"

Pew MediaSources has a very good study on the role of the internet in this election. 24% of Americans now say that the regularly learn something about the campaign from the internet, as compared to 13% in 2004. This growing participation is particularly significant when matched with Nielsen/Netratings data from the 2000 election which found that 86% of the online audience is registered to vote as compared to 70% of the U.S. population.

Perhaps unsurprisingly, young people are particularly active online with 42% of those 18-29 using the internet for campaign related information. The Obama campaign has shown eagerness to tap this demographic by setting up its own social networking software and given that almost 50% of 18-29 year olds voted for him in SC, his investment in this demographic is paying off.

But does it give him a chance at cracking new demographics given that internet usage is much lower among older demographics? Clearly, this is a problem particularly given that he trails significantly among both men and women over 65 (see below post.) A study from the University of Maryland tells us that women are also less likely to use the internet than men and usage declines with income which will make it particularly difficult to get to low income women where he trails significantly.

That said, there is room for expansion beyond his current base through the internet. While 18-24 year olds are very pro-Obama there is still significant support fo Clinton in the 25-29 demographic. Also according to the University of Maryland Latinos use the internet at a higher rate than all whites. Finally, women use the internet for communication (email) almost as much as men.

So despite some major blindspots (the over 65 set and low income women) the internet could offer a change of the rules that could eat into major Clinton constituencies. The next week may offer a test of whether they have taken it into their calculations.

Muddling the "Gender Gap"

Margie Omero at pollster.com has interesting analysis on how the "gender gap" between Obama and Clinton is muddled by other demographic variables. Her analysis is based on a recent Pew poll that finds that Clinton leads among all voters over 50 (+26 among older women and +21 among older men) but the gender gap only really shows among younger voters where she leads by +17 among women and trails by -9 among younger men.

But the far more important predictors of support for Clinton are socioeconomic status and ideology. Men and women in households earning over $50,000 a year both favor Clinton to Obama by 41% to 36%. Clinton among all educated voters, by -3 among women and -9 among men.

Obama leads by +5 with liberal women but trails by -15 among liberal men. Clinton leads by +37 among non-liberal women but ties with Obama among non-liberal men.

So the picture is definitely too muddled to be simply summed up with "gender gap." But some of the sub-narratives do hold up. Hillary is strongest among women in households with less than $50,000 a year (+36) and is stronger among older voters. Meanwhile, youth, higher income, and higher education all play in Obama's favor. I can't say that I can make sense of the interaction between ideology and gender.

Tuesday, January 22, 2008

Wild and Woolly

The $145 billion stimulus plan Bush announced on Friday has failed to impress says the Washington Post:

Most world markets were digesting for the first time the Bush administration's proposal to try to stimulate the U.S. economy with tax benefits. (It was announced Friday, after Asian and European markets had already closed.)

Traders around the world seemed to have little faith that the plan would arrest the slowdown in the U.S. economy, even if some version of it is passed by Congress.

"Foreign markets are doubtful about the ability of Congress to move quickly, and foreign markets have watched the Federal Reserve move slowly in August, September, October and November," Kotok said. "So the concern from abroad is that the U.S. has been too slow and done too little and is now playing catch-up."

We'll see if a rate cut of 75 basis by the Federal Reserve, the largest in 18 years, will help. At any rate, the Fed is taking this seriously now.

I'm not sure how fair it is to declare this yesterday's declines to be a referendum on Bush's stimulus plan (which I have yet to thoroughly review) given that investors seeing a lot of risk out there. With Bank of America and Wachovia reporting very large declines in fourth quarter profits, and the Bank of China reporting exposure to U.S. subprime mortgage loans, investors are going into full panic mode.

Thursday, January 17, 2008

Bernanke on Board

Bernanke is backing a fiscal stimulus plan and President Bush is as well. That's as green a light as we're going to get. Now let's see if everyone can agree on what the package is going to look like.

Wednesday, January 16, 2008

New Perspectives on the Fiscal Stimulus

Everyone is getting in on the fiscal stimulus game. A brief survey...

The Congressional Budget Office (CBO) has weighed in with a well balanced and researched primer. Many of its conclusions are similar to the Brookings primer reviewed below so I will refrain from commenting further.

The Economic Policy Institute (EPI) provides an interesting reason to favor increased government spending over tax cuts in its plan. (Emphasis added)

Government spending is more effective than tax cuts in stimulating domestic demand for two reasons: a portion of the tax cut will be saved rather than spent immediately, and consumers are more likely than the government to spend on imports (rather than domestically produced goods). Approximately 10 cents per dollar of consumer expenditures will be spent abroad, while virtually every penny of investments in public infrastructure will be spent domestically.

The EPI also believes that this spending should satisfy unmet social needs. I think everyone agrees that this is a good principle but whether government or individuals best make this decision is a pretty fundamental ideological divide.

The Center on Budget and Policy Priorities (CBPP) subscribes to the timely, targeted and temporary goals for a stimulus pushed by Brookings. They do, however, cite work by Stiglitz and Orszag pointing to government spending being more effective than tax cuts, probably because the spending is direct as opposed to transfers to taxpayers who may end up saving.

Still, the CBPP points to broad-based tax cuts as an effective measure because they are easy and quick to implement. They also support state fiscal relief, strengthened unemployment insurance, and temporary increases in food stamp payments as effective measures.

In contrast to EPI, CBPP opposes new infrastructure investment as projects usually take months to get off the ground.

The Center for Economic and Policy Research (CEPR) is pushing a $600 tax cut for all taxpayers, $20 billion in tax credits for energy-conserving homes and businesses, $7 billion in public transit use subsidies, $3 billion in heating subsidies for low and moderate income families, and $25 billion in temporary relief for states and localities.

So that's quite a mix of options for you. Notably, with the exception of the EPI/CBPP differences on infrastructure spending, there appears to be pretty widespread agreement on what makes up an effective stimulus package.

Tuesday, January 15, 2008

Krugman and DeLong Enter the Ring

Paul Krugman wrote a piece for yesterday's NYTimes praising the stimulus plans of Edwards and Clinton and criticizing Obama's plan. As Obama's plan contains no alternative energy plan and includes cross the board tax cuts, he sees it as further to the right than the plans proposed by the other candidates.

That may be the case, but considering that this is a fairly technical economic issue "further to the right" does not constitute legitimate criticism of the policy. As I said in an earlier post (Fiscal Stimulus Showdown) alternative energy programs, while laudable in their goals, have yet to be shown to be an effective stimulus tool, read, they're probably going to take a while to implement. Broad-based tax cuts, while not as targeted as one would like, get money into people's pockets much more quickly.

Delong takes the same tack in attacking Krugman's rather shallow analysis of the stimulus plans in his blog. To be fair, he uses the same Elmendorf and Furman briefing I used as a jumping off point so perhaps this fight is really Krugman versus Brookings.

Universal Health Care Mandates

Theoretically speaking, the case for universal health care mandates is very strong. But as Robert Reich argues they are a silly thing to quibble over at this point in the campaign as the bickering takes the steam out of the common push for universal health care insurance. His most striking example is Massachusetts where 20% of the population is currently exempted from the mandate as the insurance is still too expensive for them.

Public's Agenda

In a new Washington Post-ABC Newspoll respondents think the country is on the wrong track. The Post attributes this and the presidents low approval rating of 32% to the fact that only 28% of respondents approve of his handling of the economy.

Monday, January 14, 2008

Clinton versus Obama, Stimulus Package Showdown

With the Democratic primary in full swing Senators Clinton and Obama have served up competing fiscal stimulus plans. Given my posting last week on fiscal stimuli, I thought a rough and ready analysis of their plans might be in order.

To begin, both their plans are roughly the same size, $70 billion and $75 billion for Clinton and Obama respectively. On the scale of things, $5 billion is not going to make a huge difference but it should be noted that they are both short of the $100 billion target proposed by Brookings panelist, on Wednesday (see below).

Round 1. Both the plans also contain $10 billion for an extension for unemployment insurance, an issue that the Brookings panelists were split on. Zandi of Moody's Economy.com advocated the extension as a way to put money in the pockets of the unemployed (and thus support consumer spending) and Feldstein of Harvard opposed it because most workers tend to get a job of some sort when their benefits are close to running out. The real issue is whether the extension goes into a recovering economy, thus disincentivizing the unemployed from looking for available jobs. So, a debatable policy, depending on where you think the economy is going, but since they both
support it let's call it a tie.

Round 2. Both also take aim at the housing crisis. Clinton with a $30 billion fund to forestall foreclosures and help states and cities with associated costs, and Obama with a $10 billion fund for foreclosures and $10 billion to offset revenue lost by cities and states. Both emphasize helping the "respectable" people facing foreclosure but in practice it will be difficult to find the respectable ones, particularly in a timely enough manner to forestall an impending recession. Basically you have to choose between a bailout that helps everyone, or help for the respectable which ends up being a lot less of a stimulus.

The money to cities and states does make sense in that it prevents them from cutting programs and resources during a recession. So my guess is that the foreclosure fund is mainly a political move to show concern for people in mortgage trouble in swing states, not a technical economic one. As Clinton seems to focus on the foreclosure side, while Obama only places $10 billion in this category, I believe that Obama wins round two of the fiscal stimulus showdown.

Round 3. Clinton provides $25 billion in heating assistance for use by needy families this winter. If implemented quickly this would fulfill the necessary conditions (see post below) of timely and targeted. These people will quickly spend the money they previously used on heating on other essentials, thus stimulating the economy.

She also proposes $5 billion for efficiency and alternative energy. While a good idea, this does stray from the focus of a stimulus. While retrofitting public schools with more insulation might be a good investment it is not nearly as timely or targeted as giving directly to needy people who will spend every penny they get.

Obama's alternative is a $250 immediate credit to all workers and through offsetting the payroll tax another $250 supplement to low to mid-income seniors on Social Security. These programs would cost $35 billion and $10 billion respectively. The tax credit would be very timely in that it would go immediately into workers pockets and very closely matches the program proposed by Jason Furman at Brookings. Where it varies is that it would go to all workers who pay payroll tax, making it less than perfectly targeted.

The $250 Social Security supplement would be a very good stimulus. Low income seniors are highly unlikely to save, so this money will go straight back into the economy almost immediately.

So I think Obama slighty edges Clinton in round 3 as well. Obama wins the stimulus showdown in three rounds by a split decision!

Change versus Experience

I received my California absentee ballot and noticed that one of the myriad ballot initiatives would alter term limits. I would allow maximum of 12 total years in both chamber as opposed to the current limits of six years in the Assembly and eight in the Senate.

The whole point of term limits is to kick experienced people out, the underlying assumption being that long term exposure to power eventually corrupts. In California, term limits now mean that the Assembly acts as a training ground where legislators cut their teeth before going on to the Senate. But what is the right formula? Where do constituents get the most bang for buck with experience without being stuck with bad apples who have sold out to the status quo?

Obviously, California is still deciding, but I think this debate shines some light on the current change versus experience, Obama versus Clinton debate. We like our politicians to know what they're doing but when do they start to know too much? Do we need someone who knows the ways of Washington or someone who knows the ways of Washington must change?

An interesting experiment may be to look at the vote totals for each in term-limited states versus states without term-limits. Presumably the former will lean in favor of "citizen leaders" while the latter will lean in favor of "professional politicians."

Friday, January 11, 2008

A Stimulating Discussion, Fiscally Speaking

In response to growing interest in a fiscal stimulus by both the President and Congress, this Wednesday the Hamilton Project released a paper framing the "If, When, How" of fiscal stimuli and organized a high-powered discussion panel. The panel, moderated by former Treasury Secretary Robert Rubin, included the very respected Prof. Martin Feldstein of Harvard, Hamilton Project Director Jason Furman, former Office of Management and Budget Director Alice Rivlin, and Moody's Economy.com Chief Economist Mark Zandi.

To get to the meat of the matter all of the panelists agreed that, if properly implemented, a stimulus in the range of $100 billion would be beneficial to the economy. (Furman would go a little lower than the others at $50-$75 billion, closer to Larry Summers' figures.) To justify this intervention, Feldstein and Rivlin pointed to falling home prices, rising foreclosures, the credit crunch, and financial institutions' general lack of confidence in current valuations because of their previous bad bets.

Zandi pointed to the fact that CA, AZ, FL, MI, and WI are already in recession and that these together make of 35% of U.S. GDP. Combine this with the fact that financial institutions have only written off one third of the $250 billion they are expected to lose and that rising gas taxes will effectively act as a $100 billion tax, and ouch!

While the loosening of monetary policy will be of assistance, Zandi contends that it will be less effective than usual as its primary conduit to the economy at large is through the currently turbulent housing market.

There was also agreement among the panelists over the rough outlines of how the stimulus should be delivered. The policy should be timely, targeted, and temporary. That is, implement it in time to forestall the depression, target those who will spend (generally the poor, but Feldstein contends that all Americans have such a marginal propensity to consume that it really doesn't matter who you give it to), and make sure that the stimulus doesn't become permanent policy. Feldstein and Furman agreed that a temporary growth in the food stamp program would give a quick and targeted kick to the economy (about 1% in annualized growth.)

So are we going to do this? Economists are always skeptical of the politics of fiscal stimuli since they are often implemented late and often hard to end. Well, Feldstein the economist was optimistic that a package could be arranged and Rubin the former political appointee was skeptical. I don't know the last time I saw an economist playing the optimist regarding a political situation. Can't say I know quite what to think.

Thursday, January 10, 2008

Who decides? A view from the trenches.

E.J. Dionne (pictured above with this blogger and his wife both of whom think he's wonderful) wonders whether the surprising Democratic primary results in NH where really so surprising.

Maybe the signs pointing to Hillary Clinton's victory in the New Hampshire primary were there all along, hidden in plain sight by the blur of Obamamania and a stack of flawed polls...

Just to be straight up about it, I have never been so certain and so wrong in many years of watching elections, anticipating as I did a solid Obama victory here. It's little comfort that the Clinton camp was surprised, too, as some in its ranks candidly acknowledged...

The campaigns -- and, yes, the media -- need to go back to the drawing board...

There are a lot of theories flying around about how Hillary pulled it off, but here's my take, built on rough theorizing among the foot soldiers of the ground campaign. It was not Hillary who pulled it off (otherwise wouldn't she have some explanation of what happened?) but rather New Hampshire voters who made a decision based on a number of complicated factors but most significantly the new polls. Some went over to vote for McCain, a lot of undecideds (of which there were loads) balked at deciding for the nation.

So it isn't back to the drawing board. Obama will keep with his message of unity that has finally paid off after six months of stagnation. Hillary will continue to try to cobble together ways to bank on her familiarity and technical knowledge of policies. And the press will continue to peddle silly theories. We've gone from the inevitable Clinton to the inevitable Obama to the comeback Clinton in a little over a month.

In the end, America is going to make a decision, and none of us, least of all this humble blogger, have any idea what it is going to be.

Tuesday, January 1, 2008

Behavioral Finance and Cultural Arbitrage

I have been reviewing materials from a seminar attended by one of my colleagues in the finance industry. It begins with an attack on the rational investor and goes on to discuss how trends can be used to predict market behavior. Not the stuff of a conventional economics education.

It throws away the myth that investors have great predictive powers over financial markets. In fact, most investors make winning trades a little over half the time. If this isn't bad enough (seeing as these people manage the funds that you plan to retire with) they often tend to be profit adverse and risk seeking.

The explanations for investors running away from profits lie in human psychology. People are more than happy to take profits wherever they come. After all, "You can't lose money by taking profits, can you?" Well yes, you can. If you sell your investment after a 10% gain yes you make money. But if your investment goes up another 20% after you sell you are giving up that money.

The psychology of losing is more interesting. For various reasons, loss of self respect, status, or even your job, people just don't like to admit when they've made a mistake. So they compound it and stick with their losses, hoping to turn them around. In the process they end up losing a lot more money than if they sold early at a small loss. The moral of the story: pick a trading strategy (trend, mathematical, or discretionary), set targets before you trade, and stick with 'em.

A last note which may or may not be relevant for those of you concerned with profits more than overt wonkiness. This paper holds that high and low prices, resistance and support levels, are fixed in investors minds by past trading patterns. It takes a minimum of THREE troughs or peaks to set these prices. Why three!?!

Well as my former anthro professor, the late Alan Dundes, would hold, this is for the exact same reason that God has a tripartite nature, everyone makes three points in their speeches, and every joke has three guys walking into a bar. For us, three is a 'native category' a basic cultural reference point. It's unit of measure that we all have agreed can size up all manner of otherwise noisy information. Why did we pass a 'Three Strikes and You're Out' law in California? Because we've all agreed that that is enough chances.

But go to China and you'll find a native category of five. So five people in the jokes, etc. This would suggest that Chinese traders would require more troughs and peaks before support and resistance levels are set. This points to a possibility of potentially identifiable widespread trading biases.