A Better Choice

The subtitle is Healthcare Solutions for America and the author is John Goodman (2015). It represents a super-slimmed down version of the author’s earlier book, with some updates to reflect upon the few years since the Affordable Care Act became a reality. His overall view, that the policy regime is terribly flawed, has not changed. Mostly because the anticipated problems were not misdiagnosed or just simply outgrown.

The place to start is that there is a difference between health insurance and actual health care. While the demand for coverage may exist, the supply is not going to increase in tandem unless incentives exist. That alone puts upward pressure on pricing. But, add to that, the government subsidies are capped to grow with GDP, while the actual anticipated costs of healthcare are expected to grow at nearly twice that rate. Over time, the burden shifts to ordinary citizens, making it very expensive.

In addition, when one looks at the quality of insurance that can be purchased through the health care exchanges, what the new cohort of insured will get largely resembles Medicaid or Medicaid Plus. But, recent studies have shown that there are no differences in outcomes for those covered by Medicaid versus the uninsured who simply show up at an emergency room. The mandate, though, means more people will sign up, and that largely means demand will grow from the newly insured, but not necessarily the quality that they will be getting.

As far as the impact on employment, it should shock no one that there is far greater job growth for part-timers over full-timers since ACA implementation, mostly because of the rules around workers who are above or below 30 hours per week having to be covered by employers. Moreover, the ACA also impacts businesses above a certain number of employees, and will aggregate several different businesses for purposes of a head count where there is a common owner – talk about dis-incentivizing entrepreneurs. All of these phenomena were corroborated by surveys conducted by regional Fed banks of the businesses within their jurisdictions.

The requirements around community rating also impact the quality of health plans. Specifically, because the government does not allow insurance companies to underwrite for actuarial risk in the plans that they can offer on the exchanges, they have no choice but to create plans that attract the healthy over the sick, whether through a narrow network of doctors included, or simply making the costs of non-discretionary health measures higher (meaning the healthy are less sensitive than the sick to the potential economic costs). So, yes, people may tout that premiums are lower, but that’s in large part because plans are skimpy.

Goodman continues to believe that a more market-based and transparent approach to the pricing of health care would be a major step in improving it. He is also a big believer in tax credits and portability.

Anyway, the problems are what they are. We will see what El Presidente does in his effort to overhaul and repeal.

Fed Up

The subtitle is An Insider's Take On Why The Federal Reserve Is Bad For America and the author is Danielle DiMartino Booth (2017).

If you always thought that PhD economists at the Fed were extremely full of themselves, highly dependent on their econometric models, largely unaware of and incapable of understanding the actual events in financial markets, unable to do a re-think on theory when their forecasts and expectations turned out to be horribly wrong, and that the Fed itself suffers from regulatory capture...well, then, this book is good for you.  It is an insider's look, and speaks to the fact that contrary opinions in this fourth branch of government are largely pushed aside and ignored, even as they do actually exist within pockets of the institution.  Interestingly, as much as Alan Greenspan is the original sin, it does seem like each successive chairperson has been even more staunch in his/her views, and progressively more duplicitous in molding the data to fit a desired narrative.  The proposal in the book is not to end the Fed, but it definitely provides more evidence that the Fed is at the heart of a system which benefits very few and creates perpetual boom/bust cycles.

Books

(1)         The Alchemy of Finance.  The author is George Soros (1987, 2003).

Nearly 30 years old, this book introduces Soros’ concept of reflexivity, which he uses as a manner of understanding financials markets and beyond.  As it pertains to markets, the basic idea is that we are constantly in boom/bust sequences, and the trend is driven by a prevailing bias amongst the players that creates a self-reinforcing process between prices and trend/expectations – only to reach a final unsustainable level that marks the ultimate inflection point.  As the prevailing trend persists, markets grow increasingly unstable because the driving force is simply the bias of the moment.  His theory, therefore, is driven by the underlying assumption that there is nothing inherent to markets that leads them towards an equilibrium with respect to fundamentals.  To put it succinctly, he is not someone who is a strong proponent of the efficiency of markets and of related wholesale deregulation – mostly because he believes that some form of policy measure is the only variable that might introduce some needed stability to markets.

Simultaneously, he appreciates that the authorities typically are not as knowledgeable as the players themselves, responding late to the changing dynamics in markets, and usually addressing the last problem instead of anticipating the next one.  Moreover, while he seems to be Keynesian in his attitude about markets, there is something Austrian in the way that he appreciates how low interest rates and leverage are integral to the boom/bust cycle, and that the manner of response from government to the bust is problematic in that bad debts are allowed to remain.  He sees too much regulation as a form of rigidity that hinders innovation, and seems to appreciate the role of gold as a type of commodity standard to be considered, even way back in the mid-1980s.

So, to summarize, he believes that markets are the worst at allocating resources, except for all the other options.

(2)         I Know Best.  The subtitle is How Moral Narcissism is Destroying Our Republic, If it Hasn’t Already and the author is Roger Simon (2016).

Another book that looks at the hypocrisy of liberals.  The term of art to describe it is “moral narcissism” – and it reflects the phenomenon amongst progressives of declaring allegiance to a set of politically correct ideals, thereby announcing themselves as “good”, even as there is no follow-through or rational policy implemented that actually supports the beliefs or leads to practical solutions.  To re-formulate it in a way that I have stated before, all that matters are good intentions.  To wit:

-Senator Sanders declaring the economic success and social justice of Scandinavian countries, even as they are turning their back on socialism for capitalism because their economies take a nose dive.

-Declaring climate change settled science, even as it can only be proven with statistical inference and computer modeling – not with actual experimental reproduction.  And dare we point out that those computer models are similar to the ones that constantly screw up predicting the weather a day in advance, much less years.  And forget about all those hacked emails that point to collusion and fixing of numbers to support the climate change argument.

-The convenient overlook of correlation between increased gun ownership and lower murder rates.

-The priceless interview between Charlie Gibson and presidential candidate Barack Obama in 2008, as Obama campaigned on a promise of higher capital gains tax rates, where it was pointed out that lower rates had actually led to higher revenues for the government to spend elsewhere – to which Obama said the rationale was “fairness”.  Each according to his need…

-A very valid point: “Any time you downplay racism (which usually improves the situation), you are accused of racism.  Every time you make an accusation of racism, you exacerbate it further, often out of line with the level of crime.”

-Emphasizing the dangers of domestic Islamophobia while simultaneously ignoring the greater prevalence of anti-Semitic acts in the United States.

The moral of the story is that there is a class of people in this country who believe that they have moral authority on their side, regardless of the facts (or lack thereof) that back them up.  In other words, “moral narcissism is the enemy of moral clarity”.

More Tells

I am kind of shooting from the hip with this post, having not fully thought through potential causes, but...

In the last book that I read by Richard Koo, and really totally consistent with all the well-known Keynesians out there, there is a belief that a balance sheet recession prevents huge amounts of QE from causing inflation.  And, according to most "experts", Europe is in the midst of a balance sheet recession.  So, why then are inflation rates spiking up from Germany to Belgium to Spain?  Add to that, bond rates for weaker issuers (and I am throwing French OATs in there) are starting to flash out relative to Bunds.

I'm suspecting that what everyone thinks they know is about to be thrown on its head.

Sign Posts

Courtesy of Geopolitical Futures:

"According to the German Shipowners’ Association, German banks and investors own about 29 percent of the world’s container ship capacity. German lenders have been the biggest issuers of shipping loans. Based on Petrofin Global Bank Research statistics, German banks own one-fourth of all outstanding shipping loans made by large banks (about $90 billion). That makes them vulnerable to the shipping malaise."

The Energy World is Flat

The subtitle is Opportunities From the End of Peak Oil and the authors are Daniel Lacalle and Diego Parrilla (2015).

To put forth the thesis of the book directly, the last barrel of oil left will be worth zero, not millions. In other words, for all the fears of depleting energy resources, the notion of peak oil and a return to the stone age is not realistic. There will always be enough oil, and eventually the economics of alternatives will evolve in a way that allows fossil fuels to be replaced entirely.

Thus, where peak oil forecasters continually get it wrong is in underestimating the possibility for new discoveries, new additions and new technologies that enable conservation, substitution and demand destruction. So, as if I needed another reminder, economics invariably drive us to solutions that are at one time unthinkable.

The Revolt Against the Masses

The subtitle is How Liberalism Has Undermined the Middle Class and the author is Fred Siegel (2013).

There are times when I read books to challenge my beliefs. This time is not one of them. Given the current political environment, and my sense that liberal outrage is an exercise in hypocrisy, I sought out a well-regarded argument that might confirm my understanding. Such is this book, as it takes us back in time to the roots of today’s liberal progressive agenda, and elucidates how it has always sought to impose the will of the elite on the perceived philistines and hoi polloi.

The progenitors are people like H.G. Wells, H.L. Mencken, Sinclair Lewis, Randolph Bourne, and Herbert Croly. Let’s start out by noting that all were believers in eugenics, which wasn’t deemed a bad thing until it became integral to Nazism. Moreover, all were big believers in the disinterested technocrat guiding the morally unsophisticated and unintelligent masses. They also all admired the Bolsheviks and frowned upon the economic motive. To wit: “We were all sworn foes of capitalism, not because we knew it would not work, but because we judged it, even in success, to be lethal to the human spirit.” This strand of ideology was very much at the heart of the New Deal and influenced its creation, as it drew on the same circle of professionals and professors who thought so much of Moscow. As such, it was a manifestation of the perceived solution to class conflict, more than just an answer to the Great Depression – not surprisingly, it was the genesis of so many social welfare programs that still exist today.

As a general observation, liberalism was an expression of “European Socialist parties rewritten in the language of rights”. Whether the New Deal programs earlier on, or the legal changes that came out of the ‘60s, it was an attempt to have the central power administer how humans should interact. Don’t get me wrong, as I have no objection to civil rights and personal liberties, but when all too often such decisions come out of the Supreme Court rather than majoritarian-ism, there is a disconnect between what the Democratic process is supposed to be and how morals and ideals are actually being implemented.

So, if I were to take anything away from this book, it is that good intentions matter more than outcomes in looking at the progression of this movement. Proving the point that not every problem can have a solution.

As an interesting tangent, the response to the 1980 presidential election might be useful. Over the course of that campaign, Democrats sought to turn the Republicans into populists, as Reagan was the outsider candidate trying to bring morning back to America after the turbulent 1970s of stagflation and high unemployment. While claiming the moral high ground, unfortunately for liberals their policy regime had left a country that was teetering – and in winning, Reagan engendered unexpected support from white working class Democrats (sound familiar?). The response from the losing side was vitriol (sigh) and nothing that resembled a re-think on ideas. The social programs were failures, as poverty continued to rise, but were now re-imagined as rights and racial justice (did they march the day after the inauguration also?). I would remind everyone that this book was written years before the Trump phenomena. And maybe what we are seeing yet again from the resistance – actually what I believe is going on in earnest – is the easy pivot that liberals make between acceptance and rejection depending upon who is in power.

More on Koo Recessions

As referenced the other day, I read another book by Richard Koo entitled The Escape From Balance Sheet Recession and the QE Trap (2015). As with his earlier work, much time is spent looking at the idea of the balance sheet recession and how it is applicable to, and offers explanatory power for, the current economic malaise in the U.S., Japan and Europe. So, in a sense, it is a bit repetitive with the other book, but with an opportunity for the author to assess his views based on the passage of time – and, to the extent that he said that monetary policy would not be potent after a significant asset bubble burst, he seems to be right.

One idea that Mr. Koo spends more time examining is the “QE Trap”, which he thinks was exemplified by the U.S. experience in 2013. At that time, the Fed started to talk about dialing back its bond purchases, leading to a significant rise in interest rates – a rise that Mr. Koo does not believe was warranted given the state of the economy. In other words, anticipating the change in policy, investors were trying to front-run the Fed, causing rates to rise and weakening all interest rate sensitive sectors as a result. Thus, whatever wealth effect had been created by lower rates stood to be wiped out and any nascent recovery would take a hit. I just don’t see that phenomena ever not being a problem. The Fed balance sheet is going to remain bloated for a long time.

Another topic that he tackles is the idea that the rise in asset values following QE, such as with stocks and real estate, is the result of a liquidity-driven market. But, whereas the Fed machinations would have led to an increase in the money supply with a vanilla recession, in a balance sheet recession, it is liquidity driven merely in the sense that investors and speculators are expecting the money supply to expand once the balance sheet recession has passed. I don’t place much value on that distinction, as it still leads to valuations that are not supported by DCF analysis – i.e., a bubble. And it is also still triggered by reckless monetary policy that leaves rates too low for too long.

As compared to other public economists, I think the author is more honest about the distortions that develop over time with market interventions by governments and central bankers. But, he still speaks to an idea that, in the case of extreme recessions, so as to avoid suffering for the masses, it is important to take steps that very much contravene market principles. That may sound reasonable on its face to save the world and minimize human suffering, but I think it sets up an endless cycle where these busts and crises happen more and more often. At some point, to end that cycle, there has to be some pain.

Immigration

I don’t think that the immigration ban is about racism at its core. And, to that end, as usual, George Friedman offers up useful insights:

“The issue is not whether Trump and his followers are generally anti-immigrant. The question is why they are so hostile toward Muslims, who roughly total the same number as the Chinese and Indians, and to Mexicans, who vastly outnumber these groups. I wish the explanation were more complex, but it is actually quite simple in both cases.

The United States has been at war with Muslim groups since Sept. 11, 2001. When the U.S. has gone to war with foreign powers, there has been a surge of hostility toward immigrants from that foreign power’s country. During World War I, German immigrants in the United States who still spoke German came under suspicion and were pressured to adopt English. During World War II, Germans who had maintained close and cordial ties to Germany prior to the war were harassed, and in some cases, arrested under suspicion of espionage and subversion. Japanese citizens of the United States were arrested and sent to detention camps out of fear that they might be conducting espionage or sabotage for the Japanese. During the Cold War, post-war émigrés from Soviet satellite nations were distrusted by the FBI, which feared they were sent by the Soviets as spies and saboteurs.

When there is war, there is suspicion of the enemy. When there is suspicion of the enemy, there is fear that émigrés might be in the United States on false pretenses. Historically, émigrés have been caught in the middle to some extent because their loyalty is questioned. In war, there is rage as the casualties mount, particularly if sabotage and terrorism are carried out in the homeland. This is hardly new or difficult to understand. If those of us old enough to recall the terror after 9/11 will do so, we can remember the fear and uncertainty not only about what comes next, but also whether the next terror team already was present in the United States. After 15 years of war and many Americans dead, this has congealed into a framework of distrust that may well go beyond the rational. The detention of the entire Japanese community was not rational. Nor was it something that cannot be understood. It is hard to calibrate what you ought to be afraid of in war, but you know that something dreadful might happen. Are all Muslims warriors against the United States? No. Do you know who is or isn’t? Also no. Wars, therefore, create fears. There is nothing new in the American fear of Muslims in the context of war.

The Mexican situation is different. There was a war, but it was long ago, and fear of war is not the driving issue. Rather, the driving issue is illegal Mexican immigration. There is a great deal of homage paid to the rule of law. Congress passed a law specifying the mechanics of legal migration. Some 5 million Mexicans broke the law. Whether this has harmed the U.S. economy or not, the indifference to enforcing the law by people who are normally most insistent on the rule of law has created a sense of hypocrisy. At the same time that the middle and lower-middle classes feel as though their interests are being ignored, the presentation of illegal aliens as “undocumented immigrants” reveals a linguistic maneuver. The “illegals” are transformed into the merely “undocumented,” implying a minor bureaucratic foul-up.

The anger is not only directed at the Mexicans. It is part of the rage against those living in the bubble, who present themselves as humanitarians, but who will encounter the illegal aliens, if at all, as their servants. And rightly or wrongly, some suspect that open support for breaking the law is designed to bring cheap labor to support the lifestyles of the wealthy at the expense of the declining middle class. The fact that the well-to-do tend to be defenders of illegal aliens while also demanding the rule of law increases suspicions.

There is a somewhat deeper layer. As long as illegal immigration is permitted, the foundations of American culture are at risk. It is not simply immigration, but the illegality that is frightening, because it not only can’t be controlled, but also the law is under attack by those who claim to uphold it. The fear that a person’s livelihood is being undermined and his cultural foundation is being overwhelmed creates deep fear of the intentions of the more powerful. The issue appears to have little to do with NAFTA and other economic concerns. The U.S. and China have equally intense economic issues, but there is minimal tension over Chinese immigration. The economic and immigration issues seem only tenuously connected.

It is rare that an issue of such emotional impact as Muslims during a war with Muslims, or immigration in violation of the law, would not cause tension. As we saw with President Franklin D. Roosevelt and the Japanese, things that are obvious to those living decades later are not obvious at the time. Indeed, it is a failure of imagination to be unable to empathize with the fear felt after Pearl Harbor. In our time, the failure to empathize comes from those who feel immune to illegal immigration or the 15-year war. It is part of the growing fragmentation of American society that different classes and regions should experience these things so differently, and that each side has so little understanding of the other.”