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.

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."

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.

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.

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.