Posted by Marc Hodak on January 9, 2009 under Economics | 
Yesterday, the Commonwealth Fund report was summarized under the headline “Health care overhaul needn’t break bank: study.” OK.
Of course health care overhaul doesn’t need to break the bank. Private sector firms overhaul their operations all the time, and it usually leads to some combination of improved service or lower costs. But the government is not a private sector entity. Social Security didn’t need to break the bank, but it has, several times. After two major overhauls, it’s liabilities still exceed its assets by nearly $9 trillion. We can’t even count that high on every finger and toe of every human that has ever lived. Medicare didn’t need to break the bank, yet it’s liabilities now exceed its assets by over $31 trillion.
If a company kept promising viable businesses, and kept going bankrupt, what weight would an economist accord to the idea that its next business idea did not need to go bankrupt?
The Federal government, of course, is not bankrupt yet. Unlike a bad business, the government can continue to take money from it’s “customers” by bundling bad businesses with social necessities, such as law and order. The government can take away our choice about which services we wish to pay for from this bundle and, in an increasing number of cases, which services we wish to use. If a private company had that kind of power, what would be the odds that it would even try to run its business efficiently? But such considerations are credulously left out of the assessment that a huge new government program “doesn’t need to break the bank.”
The worst part of this study, proffered by a supposedly economically sophisticated firm, is not even its ignorance of public choice constraints, but that it’s just bad economics. It’s not an economic analysis to say that if John pays Karen $90 instead of $100, then Karen will continue to offer the same benefit to John in the future. No health care proposal is complete, or even meaningful, without addressing all three major health care trade-offs: accessibility, cost, and quality.
The Commonwealth Fund’s report only addresses the trade-off between cost and access. The impact on quality is ignored. Personally, I would like to think that cancer treatments will be better as I get older, rather than the same or worse than now. That will almost certainly not be the case when the world’s last bastion of innovation is throttled by mandates that increase access without raising costs. The laws of economics are not subject to legislative amendment.
Posted by Marc Hodak on October 28, 2008 under Economics |
While the presidential election is quickly becoming anti-climactic, the real race is in the Senate, where the Democrats might possibly gain a filibuster-proof majority of 60 seats. A lot of the most economically destructive aspects of an Obama presidency, like implementation of a thoroughly pro-union agenda, or carte blanche on appointing liberal judges, would need to get through a Senate unable to block those initiatives.
Normally, it’s impossible to isolate the impact of political power on economic value. Many studies purporting to find that economic growth is more or less likely to occur under one party or another are hopelessly overwhelmed by noise in the data. But is it possible that yesterday we got a data point that could support the semblance of an event analysis?
Yesterday afternoon, at about 3:30 pm, a jury announced a guilty verdict on Senator Ted Stevens of Alaska. Before the verdict, the Senate race was extremely close. The verdict itself was not able to be predicted. So, the guilty verdict is a bona fide surprise event (statistically speaking), with a certain impact on a close race, which could determine a key threshold composition of the Senate. Shortly after the verdict was read, the stock market dived 2.6 percent. The rest of the world dropped by the same amount, but that is to be expected under current conditions.
That would be about a $350 billion verdict, half the amount set aside for the bailout. Not that I’m blaming the jury for Steven’s misconduct.
Posted by Marc Hodak on September 17, 2008 under Economics |
The next bar on this chart will be below 0.00%, i.e., negative returns:
Yep, if you had invested in the S&P 500 at an average cost of that index over the course of 1998–a year which included the Asian meltdown–the roller coaster ride you would have been on since then–with two years and 32 percent in gains left in the dot com boom, followed by the bust, followed by the strong gains until last year before this credit crunch–would have gotten you right back where you started.
Which is about 35 percent worse off than if you had left that money in a passbook savings account. Which represents very negative real returns.
I know the mantra is “it always comes back,” and I’m still committed to the market for my long-term funds because I believe there is a risk premium for holding equity. It’s times like these that create that premium, by reminding us exactly what the risk looks like. Something to keep in mind when I begin to near retirement.
Posted by Marc Hodak on August 2, 2008 under Economics |
There’s a lot of clucking about GM’s $15.5 billion loss. (That may sound like a lot of golf balls, but it understates the true level of value destruction when one accounts for the opportunity cost of equity.) There seems to be two big questions being debated about all this: (a) whose fault is it? and (b) will GM survive?
Easy one first: GM will fail. It’s not 50% in 10 years. It’s 100% in less than five. In fact, GM has been economically bankrupt for nearly a decade, with liabilities far exceeding productive assets; it simply hasn’t run out of cash yet. Yet.
As to fault, the press seems to be geared entirely as if their readers want to know who to blame. Well, the leading contenders for villain in this game are management and the unions, primarily the UAW. And the correct answer is…
Both. Unions were the irrational response to irrational management in the late 1930s. Once in, the unions steadily undermined GM’s productivity–and their profits–especially, once they were faced with essentially non-union competition. Reduced profits meant cost cutting. Cost cutting meant reduced quality. No, I don’t mean just “Monday morning cars,” although that didn’t help. I mean lower quality everything, including management. GM eventually reached a point where it wasn’t exactly attracting the best and the brightest. Their retarded management was constrained by their retarding union, and the problem became self-reinforcing. GM became an idiocracy.
What we are seeing today is the logical end of a union that didn’t give a damn about the future of the company that hired them. Management, who was charged with fighting for the shareholders, had their weapons taken away from them by the Wagner Act, and replaced with squirt guns and rubber knives. At a point, management simply said, “Screw it. It ain’t worth it.” What became a pointless fight with shareholders in the cross-hairs ended up as a murder-suicide. Once the trajectory became clear, the shareholders bailed out. There was no one left to hurt but future managers and workers. Incumbents on both sides agreed on all kinds of promises that couldn’t be met.
Here we are.
Posted by Marc Hodak on July 18, 2008 under Economics |
I often wonder what is going through the heads of auto executives. It’s a habit gained from my years of working with them. I don’t think they’re idiots. Idiocy can’t be that widespread or that sustained over such a prolonged period as the decline of U.S. auto companies. I have to think they are intelligent, educated people operating under perverse incentives. And then I see decisions like these:
1) Cutting revenues without due regard for what happens to costs. GM and Ford each tried to cutting sales to fleets in the late ’80s and early ’90s because those sales weren’t “profitable.” How did they know they weren’t? Because their cost accountants told them. They looked at the average revenues they got for the vehicles and subtracted the average costs and, voila, losses. What the cost accountants didn’t tell them was how many of those costs would remain after those revenues disappeared–the fixed costs of plant operations is remarkably high. Both companies reversed their decisions within a year after suffering what were then record losses. Now, the U.S. (but not Japanese) auto makers are again trying this management by the numbers experiment, led by Chrysler and their by-the-numbers chief. This time, the excuse is resale price maintenance, but the cash flow end will be the same. I guess sometimes the only way to know the stove is hot is to actually touch it.
2) Cutting costs without due regard for what happens to revenues. American manufacturers are the master of this. GM recently announced that they will cut $10 billion from their cost structure. That’s a lot of paper clips. The logical question, at least to a consultant with some finance savvy, is: “Why now?” If the $10 billion was there to cut, why wasn’t, say, three or four billion there to be cut last year? Or a few billion the year before? I’d be concerned about two possibilities. First, I’d wonder how much worse the cars will be after these cuts. GM cars have always seemed a little tinnier than Toyotas or Hondas. Even if the cuts don’t show up in the cars themselves, how much of this $10 billion is fat rather than muscle? Second, maybe the fat was there, but the attitude was “hey, we’re so screwed, what’s another few billion.” I’ve met many managers, and more than a few individuals outside of the business world, like this. Most of them met a bad end.
Posted by Marc Hodak on July 8, 2008 under Economics |
Congress is big on legislating based on speculation, particularly against speculators. Academics almost universally agree that speculation generally increases liquidity, and therefore decreases volatility in markets. But populist politicians continue to ignore that consensus, more recently with accusations that speculators are responsible for the recent volatility in oil prices. In this case “volatility” is read as “increase” since we never hear concern about sudden, significant decreases in commodity prices, except for land.
Fortune writer John Birger has done some real journalism rooting around to find this story about onion speculation: There isn’t any. It was banned in 1958 by a law pushed by a young Michigan congressman, Gerald Ford.
And yet even with no traders to blame, the volatility in onion prices makes the swings in oil and corn look tame, reinforcing academics’ belief that futures trading diminishes extreme price swings.
We hate it when we’re right. Actually, we just hate it when we’re right an no one is listening.
HT: Alex T.
Posted by Marc Hodak on May 22, 2008 under Economics |
Buffet says he likes Obama. Icahn says he doesn’t trust him on the economics.
“I personally think he would be a terrible president,” Icahn said, arguing that Obama would probably go on a “huge spending spree” that “the country can’t afford right now.”
It’s always difficult to comment on political opinions about economics because politics is so opposed to economics. Economics is about decision-making at the margin, where trade-offs are easy to discern, and decisions about trade-offs are easy to evaluate. Politics is about bundling decisions with the express purpose of making such trade-offs impossible. You don’t want that extra tax dollar to fund the war rather than children’s health care? Tough. Your taxes pay for the bundle, and you don’t have any choice about the bundle or about paying for it.
So, the economic bundle that goes with Republicans versus Democrats is too unwieldy to provide any clear comparison between the two. For example, Icahn presumably would have felt more comfortable about Bush than he does about Obama on economics (so would I), yet Bush oversaw a huge spending spree that this government couldn’t afford. That’s not damning to either Bush or Icahn; the spending spree is a built-in fact of life for any president given the powerful incentives toward irresponsibility that drive Congress.
On the other hand, if Buffet is so sanguine about the higher taxes and the capabilities of his Democratic buddies promising to bring them on, then he has a choice at the margin about that. So, why isn’t he giving any of his surplus wealth to the government instead of to a place like the Gates Foundation? Another billionaire offers a good answer to that.
Posted by Marc Hodak on May 5, 2008 under Economics |
Barbara Corcoran wrote two books subtitled “…and other business lessons I learned from my mom.”
The lessons themselves are interesting and useful, but Corcoran, who boasts straight D’s in high school and college demonstrated that there were some important economics lessons that were missing or forgotten. The other morning on the Today Show, she gave her take on the current crisis of foreclosures: the big financial institutions lured poor suckers to buy homes they couldn’t afford in order to make a buck, and the government wasn’t doing enough to help these poor people. Some of you might recall that real estate brokers were involved somewhere in the this process…hmm, what was that? Oh, yea brokering the transactions. Hey, Corcoran is a broker!
Apparently, one of the lessons her mom taught her was, “always cast blame in every direction but yours.”
Corcoran established her credibility on economics, as it were, beginning in November 2005, when she was pooh-poohing economists who were warning about the unsustainability of the housing boom:
It’s funny what’s happening right now – there’s so much uncertainty in the market, and everybody’s been spooked by all the media coverage that’s out there that it really is a great time to buy. It’s a great opportunity right now, and I don’t think it’s going to last very long…This ‘bubble babble’ is baloney, and it’s scaring people away and making buyers “think about it”, and while they’re “thinking about it”, the house prices are going to go up, and I truly believe that.
By next Fall, Corcoran was singing a different tune…about why people should be buying:
If you look at the actual sale prices, the deals that are happening now, prices have already come down, and they’ve come down by a lot.
Another lesson she learned was, “It’s OK to mislead your customers in order to make a sale.”
Posted by Marc Hodak on March 6, 2008 under Economics |
I’ve been so freakin’ busy this week, I’ve barely been able to get food and sleep, but I heard that NYU was offering a free lunch to hear Robert Frank. The irony alone would have compelled my attendance, but also I needed a break. Yeah, listening to an economist over lunch is what I consider a break.
So Frank gave his spiel on how the arms race for conspicuous consumption, or positional gain as he calls it, is economically inefficient. Everyone trying to keep up with the Joneses leaves everyone at the same place, relatively speaking. Fair enough? Actually, I don’t buy that there are no net societal gains from the dash toward nicer things, but I guess someone does because he’s selling books.
Anyway, during his talk, Frank concluded with his pet policy–a sharply progressive consumption tax. Frank basically believes in the incentive effects of this tax, which makes sense, and that otherwise diverting funds from wasteful consumption to productive infrastructure would be a great economic deal, which I consider a little more hopeful, to say the least. Frank specifically mentioned that he was hoping to hear a good libertarian rebuttal to this idea since, I guess, he hasn’t heard one yet. Well, this sounded like a personal invitation since I am NYU’s resident libertarian, though I couldn’t imagine what I might say that he wouldn’t have already heard from the GMU mafia, which I know he’s encountered.
So, question:
Read more of this article »
Posted by Marc Hodak on January 15, 2008 under Economics |
That was the headline I saw from the WSJ on a story about the Supreme Court’s decision to restrict lawsuits against corporations. The actual article explains that the Supremes decided that:
investors can’t bring private lawsuits against third parties in corporate-fraud cases unless they relied on actions by those parties when making investment decisions.
In other words, if the company suppliers did not contribute to the fraud*, they can’t be sued. Which means that company suppliers can continue to supply companies in good faith without fear that they might be subject to lawsuits when they did not contribute to the fraud, even if the company they’re supplying is otherwise engaging in fraud. Which means that suppliers don’t have price that risk of these nuisance lawsuits into their services to the companies. Which means that shareholders won’t have to bear this pointless cost. Which means, when you look at it through an economic lens, that the Supremes could very well be seen as having ruled in favor of investors.
* Part of the definition of fraud is reliance on information that led to harm. The Supreme court is simply upholding this age-old common law interpretation of what constitutes fraud.
