Detailed Abstractions

This is one of those cases where it’s almost as if the planets aligned perfectly to show anyone willing to see the complete idiocy of our current economic policies.  In the midst of a recovery that is anything other than certain, a time when the US government, its citizens, and indeed larges swaths of the world are simply broke, yet we keep on spending.

The Federal Reserve Chairman has stated directly (here via Reason.com):

Today may be terrible, but tomorrow is going to be much worse, at least as measured by such metrics as deficits, debt, and entitlement spending. In an April speech, Federal Reserve Chairman Ben Bernanke laid out the misery that awaits us. “The arithmetic is, unfortunately, quite clear,” he said. “To avoid large and unsustainable budget deficits, the nation will ultimately have to choose among higher taxes, modifications to entitlement programs such as Social Security and Medicare, less spending on everything else from education to defense, or some combination of the above.”…

Yet just yesterday, the committee to reduce budget deficits is joining a long line of other government employees in asking for more.  Over @ Cato (here):

It’s rather symbolic of what’s wrong with Washington that a commission ostensibly created to promote deficit reduction is seeking a bigger budget….

Yep, that’s correct.  As private businesses have continued to contract to meet decreased demands, the federal government continues to grow.  This happens when the federal government is allowed to print money, but that’s a side note.

Simple fact is, we have no money, yet we are still spending like drunken sailors and it seems we don’t understand.  When the governor of New Jersey is forced to tell people directly:  unlike the US government, the state of New Jersey can’t print money, we’ve run into a major problem.

& like most problems, the federal government will not help.  They are the enemy of spending policy as we can easily see, but for those that think maybe they can help here… please watch their latest commercials for the census count and ask yourself what is they underlying theme?  On the government’s own website propoganda, what is the underlying theme?

What is the main thing they want you to take away from this?  That government is the answer.  Our leaders are telling us, in no uncertain terms the same unsustainable and morally questionable hypothesis:  Make sure you get counted…. so you too can get paid.

Maybe it’s time to start asking:  exactly where are they leading us?

Over @ HBR Blogs, Jeff Goldsmith asks the following question: Has the U.S. Health Technology Sector Run Out of Gas?.  Looking historically, he notes the amazing progress since the 1970s, but a decline in that growth since 2000:

…Technological innovation — in pharmaceuticals, biotechnology, medical devices including imaging, and enterprise IT — exploded in the thirty year period 1970 to 2000…

…Then about a decade ago, the US medical technology sector entered a prolonged innovation drought. In pharmaceuticals, new drug introductions declined by almost two thirds, while drugs patented in the latter part of the boom period lost protection, this despite a near tripling in R+D outlays. (New drug introductions rebounded modestly in 2008 and 2009, but still haven’t regained their 2004 levels)….

He goes further to note that this dip in activity wasn’t just about new drugs:

…The drought wasn’t confined to pharmaceuticals and biotechnology. Imaging, a dazzling success story for three decades, has seemingly run out of gas. Imaging equipment sales collapsed precipitously in the US, by roughly 40%…

…Enterprise clinical information technology seems to have hit a similar flat spot. The major commercial IT platforms for hospitals and health systems are more than a decade old.

& all of that makes complete sense based upon what we know about the last couple of decades.

Since the mid-1990s (well really, since the 1960′s), we have increased regulation on the medical industry on a constant basis.  From minor changes in who qualifies, to new regulations such as HIPA, to very large new regulatory pressures such as the Medicare Prescription Drug Benefit, resulting in an explosive growth in government expenditures of health care:

There have also been additional pressures.  Increases in financial and IT regulations through SOX and other legislation have increased companies’ weariness to put themselves at risk and increased costs of doing business.

These pressures in increasing the costs of doing business, combined with the federal government expenditures crowding out private spending, has resulted in higher costs for businesses and therefore consumers as well.  The new heath care and financial overhaul bills will continue this pressure.

The big cost however is what the author notes:  the lack on innovation.  When the government seeks to consistently erect new and more costly barriers to entry, competition will naturally decline.  The correlation to that behavior is that costs will grow more rapidly as we know competition in the long-term generates downward pressure on prices.

As we see now – prices are increasing, availability is decreasing, as the government decreases the availability of future competition in industries the government tightly controls such as health care.  Conversely with those industries with fewer barriers to entry have downward pressure on prices, such as cell phone or internet providers.

While I consider this failure of centralized control as a major factor, Mr. Goldsmith posits three contributing factors, risk aversion from management, size and increasing bureaucracy, and the fact that we are losing out globally for scientific talent:

1. Firms that used to be run by scientists and engineers are now run by attorneys and marketing executives….
2. Their ability to foster innovation has succumbed to a bureaucratic management culture….
3. Bright young foreign science and technology graduates are returning to India or China instead of staying here and creating new products or companies….

While I agree with all of these things, I think reasons 1 & 3 can be combined easily to a more basic point about government interference and centralized control.  Indeed they are symptoms of the problem and not necessarily the disease.

Having said that, I think it’s also important to note that reason number 2 exists due to the same thinking reasons 1 & 3 do – the belief that centralized control is a nominal good (DA post on business trends here).

The author seems remiss in not making the connection, even if he did eloquently, maybe unwittingly, stumble across it when writing about global competition:

…If they have more freedom to innovate in their home countries, that’s where they’ll go….

For as long as we continue to discuss symptoms and not the actual disease, we will continue to miss the point.

Under the title, Unnecessary Court Decisions, FIRE has won a victory for free speech rights on college campuses (here):

FORT WORTH, Texas, March 16, 2010—Late yesterday, in a striking victory for the First Amendment on campus, a federal district court in Texas ruled that a number of restrictions on students’ speech at Tarrant County College (TCC) are unconstitutional. In his decision, U.S. District Judge Terry R. Means found that TCC’s reliance on a policy prohibiting “disruptive activities” to restrict students Clayton Smith and John Schwertz from holding an “empty holster” protest violated the First Amendment….

Congrats to FIRE once again for trying to teach society what free speech actually means, just wish a court wasn’t required to force “educators” to understand freedom.

More “When I say what others should be allowed to do, that doesn’t apply to me” politicians.  This time via Reason Foundation discussing Arne Duncan, the current US Secretary on Education has prevented poor people in one district from having vouchers while maintaining a system for the well connected in other parts of the country (here):

US Education Secretary Arne Duncan has been unwilling to support the DC Opportunity Scholarship program that allows disadvantaged students to attend higher-quality DC private schools and even rescinded the scholarships of 216 children that had already been accepted into the program this year. This becomes even more ironic in light of the fact that Duncan maintained an exclusive list of well-connected folks that he helped exercise school choice in Chicago’s highest quality public schools….

What they call ironic, I consider extreme arrogance, but to-may-to, to-mah-to…

CATO shows us an interesting chart about the level of government spending in health care.  Hopefully with straight forward facts we can start to disabuse others of the notion that the current state of health care is due to private industry (whole thing here):

via Mercury News, CA, with major budget issues (via KNX 1070 News), but should that stop them from further propping up home sales during a correction in the market cycle?  Well, if you’d think yes, then you give too much credit (here):

…The deal reached Monday provides $200 million in new tax credits for homebuyers…

Which is stupid enough, but politicians can’t be held back by things such as economics.  So while more sellers exist than buyers, they also want to spur construction:

…to be split evenly among those buying a home for the first time and anyone buying a newly constructed home. Anyone qualified who makes a purchase between this May and August 2011 will receive a credit for 5 percent of the home’s purchase price, up to $10,000 over three years….

DA has several posts on the governments’ continuing actions which are understood to have been part of the problem in the first economic crisis (here, here, & here), but attempting to add new inventory to a market under correction is grossly irresponsible.

In a great piece over @ The Christian Science Monitor, Arnold Kling & Nick Schultz argue well that Markets fail. That’s why we need markets:

…This seemingly paradoxical view is based on several overlapping strands of research in economics as it pertains to development, history, technology, business expansion, and new-firm formation. According to this view, entrepreneurs at work in the economy – in finance, high tech, manufacturing, services, and beyond – are constantly experimenting, creating new business models, techniques, and technologies that upend the established order of things.

Some new technologies and innovations are genuine improvements and are long-lasting welfare enhancers. But others are the basketball equivalent of pump fakes – they look like the real deal and prompt market actors to leap hastily into action, only to realize later that their bets were wrong.

Given this dynamic, markets are unpredictable, prone to booms and busts, characterized by bouts of exuberance that are rational or irrational only in hindsight.  But markets are also the only reliable mechanism for sorting out this messy process quickly. In spite of the booms and busts, markets drive genuine long-run innovation and wealth creation.

Not as eloquently as they did, I wrote about this earlier in the year (here):

…the dynamic system of the United States might have felt more pain that other countries during this crisis, but due to the mostly decentralized economic model, we will recover more quickly than most…

It then seems for most people to become a question of risk adversity.  Do we allow for individual freedom and understand that sometimes failure is a part of the process?  Or do we constantly attempt to control individual behavior for fear of potential negative consequences?

Only if we first believe in the premise that by trading freedom for stability, we actually get stability.  The CSMonitor article continues:

…When governments attempt to impose order on this chaotic and inherently risky process, they immediately run up against two serious dangers.

The first is that they strangle new innovations before they can emerge. Thus proposals for a Consumer Financial Protection Agency, a systemic risk regulator, a public health insurance plan, a green jobs policy, or any attempt at top-down planning may do more harm than good.

The second danger has to do with the nature of political economy. Politics creates its own kind of innovators who can be as destabilizing to markets as market actors themselves – but in far more pernicious ways.

Economists call these political entrepreneurs “rent-seekers.”…

…This gets to the key difference between markets and governments. When innovation-driven excesses and imbalances are recognized in the marketplace, the system can correct itself quickly. This is less the case when government policy failure occurs.

Because political failure is less publicly tolerable than market failure, the temptation becomes for policymakers to avoid acknowledging their role in creating or perpetuating problems.  Or they double down on bad bets. So rather than recognize the government’s central role in the housing boom and bust and quickly changing its ways, we see the federal policy apparatus continuing to throw good money after bad in the mortgage market and on Wall Street….

I wrote about this “doubling down”  (here):

…For those playing the home game, this means we are taking a problem caused by excessive credit and government incentives and trying to fix it by:

1. Preventing the normal contraction that needs to happen by artificially propping up failed business and bad home purchasing decisions.
2. Keep money cheap by keeping interest rates very low.
3. Then, repeat the same process that got you to the recession in the first place by incentivizing the market to buy a commodity (housing) which is still overvalued in some places….

…I’m not really into prediction making as it’s obviously fraught with so many problems, but I’ll never understand how the solution to cheap money and an over investment of housing, is to keep money cheap and incentivize home buying…

As historically known, the vast majority of centralized government intrusions into free markets and free people has led to disastrous consequences.  NBER research suggests that two of the reasons for the current global economic crisis are due to unfree markets:

…The inability of emerging economies to absorb savings through domestic investment and consumption due to inadequate national financial markets and difficulties in enforcing financial contracts; the currency controls motivated by immediate national objectives;…

Everywhere we look objectively, freedom gives us more of everything.  Do you want to fix healthcare?  Using the government will likely lead to higher rates and more control, using individual freedom however doesn’t cost much as has been proven in other avenues such as food.  Something I think is just as important as healthcare, but been left to the market unlike health care.

& the market has responded.  Food costs as a percentage of disposable income has decreased from 23.4% in 1929, to just 9.6% in 2009 (here).

Meanwhile health care costs continue to increase with government regulation.  In just the past 5 years spending on health care as a percentage of GDP has continue to go up and is projected on that trend still.  In 2005 spending was 15.9% of GDP whereas in 2009 is it 16.9% and projected to be 19.5% in 2017  (here).

It seems that the overwhelming majority of evidence suggests to honestly help the most needy, freedom is not only a moral good, but a requirement for anything approaching success…. yet what seems to be an irrational fear of “economic crisis” many people can’t see the forest for the trees.

Over @Rueters Blog, Felix Salmon has a recent post titled, Why the Plutocrats will return where he makes an interesting point:

…Remember too that when you have a progressive tax system, especially when there are surcharges on people making seven-figure incomes, you also have a system where for any given level of national income, the greater the inequality, the greater the government’s tax revenues. And indeed federal revenues have been rising faster than median wages for decades now, thanks to the rich getting ever richer….

Now I don’t believe in a big conspiracy, but I do pretty much believe in the selectorate theory… I say pretty much only because I’m still digesting all the information as well as the proofs, but basically the theory utilizes game theory and historical data to model political institutions, governments, leaders, etc, etc & their behaviors.  It has also been used as a predictive tool for the CIA, DOD, and others through one of the primary author’s (Bruce Bruce Bueno de Mesquita) work with amazing accuracy (here).

As one who loves understanding critical thinking, I was at first very skeptical towards the idea that math could model international predictions well.   Which isn’t to say I think math is limited, I do not.  For instance, I firmly believe that if we could ever measure all the variables in a dice throw, we could accurately predict the outcome.  Therefore the issue isn’t one of math, but of the ability to model such complex systems.

For the die throw, it’s an issue of accuracy.  Sure, we know the air pressure to the thousandth degree, but why not the millionth?  Billionth?  For predictions through modeling behavior, the complexity is not only accuracy since people’s motives aren’t always clear, but in the interactions with additional groups of people as well.    The number of interactions which might be analyzed in a group of only 5 people is 120, with 6 – 720, with 535 people in congress…. 535!

With computers of course we can crunch very large data sets these days in smaller and smaller amounts of time, but the theory is also powerful due to its simplicity.  It states that leaders will pay back those people that helped them become leaders in order to stay leaders.  This seems fairly intuitive and agrees with most understanding of incentives, but from here they can make predictions based upon the ratio between what they call W, the Winning Coalition, and S, the selectorate or those who can affect who the leader is.

To start with, we assume the leaders real ability to incentivize those in the winning coalition is to tax and spend.  They bring in revenues and use those revenues in such a way as to stay in power.  The have only two ways to allocate those resources, either through private expenditures or public spending.

The corollary with W/S is that when W is small as compared to S, the revenues spent will be mainly private and conversely if W is large compared to S, expenditures will be mostly public.

So if we take mainly free societies of today, where the selectorate is made up of the voting population which is usually only constrained by age, the winning coalition is theoretically 50% + 1 voter of the selectorate.  Due to the shear size of W in this case, the leaders incentives line up with public spending because she would be unable to to spend enough on each member of the coalition privately to ensure re-election.

Conversely in more closed systems, where the selectorate is controlled to a great deal (Iran, China, etc) and even if you are a member of the selectorate, the winning coalition is controlled and smaller, spending private money can keep the smaller coalition in tact.

Following the model and Mr. Salmon’s post on returning to a plutocracy, it makes sense that putting people into poverty can actually align with the incentives of our government.  The more people in need of assistance means keeping power is easier as more people are in need of the public expenditures.

I’m not saying I agree with all of this it total just yet, but at first glance Mr. Salmon’s intuitive thoughts seem to be backed up by known game theory modeling to present a interesting conclusion which I think goes to further underscore the idea that limited government is required for long term societal health.

Some weeks ago, Judge Richard Posner wrote two policy analysis pieces on Harvard Law School Forum on Corporate Governance and Financial Regulations (part 1 & part 2).  They addressed a government report discussing the financial crisis along with legislative solutions.

One of his main points, was that due to the recency of the events,  we likely don’t know all the mechanisms which helped put is into the current mess (from part 1):

The Report is premature in two respects. The first is that it advocates a specific course of treatment for a disease the cause or causes of which have not been determined. Now it is not always necessary to understand the cause of something you don’t like in order to be able to eliminate the effect. If you have typical allergy symptoms you may get complete relief by taking an antihistamine; it is not necessary to find out what you’re allergic to. But generally, and in the case of the current economic crisis, unless the causes of a problem are understood, it will be impossible to come up with a good solution. The causes of the crisis have not been studied systematically, and are not obvious though they are treated as such in the Report. (Remember, the Great Depression of the 1930s ended 68 years ago and economists are still debating its causes.) We need some counterpart to the 9/11 Commission’s investigation of an earlier unforeseen disaster.  The Report asserts without evidence or references that the near collapse of the banking industry last September was due to a combination of folly—a kind of collective madness—on the part of bankers (in part reflected in their compensation practices), of credit-rating agencies, and of consumers (duped into taking on debt, particularly mortgage debt, that they could not afford), and to defects in the regulatory structure. This leaves out many potential causes that other students of the crisis have emphasized….

The Report is premature in a second sense, one illustrated by the proposals (discussed in greater detail in the second part of this two-part article) for limiting the provision of credit to high-risk borrowers. In an economic boom, thrift (restraint in consumption) reduces the amplitude of the business cycle by reducing consumption and increasing savings, savings that can be reallocated to consumption at the bottom of the cycle. Thus thrift makes the peak of the cycle lower and the trough higher. But in the trough of the cycle, thrift, by reducing consumption, retards economic recovery, because the less that people spend on consumption goods the less production there is and therefore the higher the unemployment rate, which by reducing incomes further depresses spending, which further depresses production, and so on. To tighten credit at the bottom of the cycle is therefore bad timing. And while the Report creates the impression that high-risk borrowers are feckless consumers unable to curb their greed for material goods, many high-risk borrowers are small businesses dependent on credit-card debt to finance their business….

Additionally, there should be little fear that businesses and investors are going to make the same set of mistakes before the recovery has even begun in full force (in part 2):

…For a time at least, the world’s central bankers, and the financial industry itself, will be hyper?alert for another housing or credit bubble. The wisdom of delay is confirmed, in my eyes at least, by the proposals in the Report….

What Mr. Posner failed to see (as did I) is that the government would, in less than a microsecond,  decide to continue the same policies which helped cause the current mess.  Reported by WSJ:

WASHINGTON — The Obama administration is close to committing as much as $35 billion to help beleaguered state and local housing agencies continue to provide mortgages to low- and moderate-income families, according to administration officials.

The move would further cement the government’s role in propping up the housing market even as some lawmakers push to curb spending at a time of rising debt.

The effort, which could be announced as early as this week, is aimed at relieving pressure on government-operated housing finance agencies, which have been struggling to find funding amid the downturn….

For those playing the home game, this means we are taking a problem caused by excessive credit and government incentives and trying to fix it by:

1. Preventing the normal contraction that needs to happen by artificially propping up failed business and bad home purchasing decisions.
2. Keep money cheap by keeping interest rates very low.
3. Then, repeat the same process that got you to the recession in the first place by incentivizing the market to buy a commodity (housing) which is still overvalued in some places.

As Einstein was once quoted saying, “The definition of insanity is doing the same thing over and over again, but expecting different results.”  With all due respect to Mr. Einstein, I’m beginning to think that “insanity” is too nice of a moniker as the word connotes misunderstanding due to ignorance or failure to be able to understand.

In this case, I’m not sure what word or phrase will have encompass the idiocy of our government, but I’m thinking this is willful stupidity combined with a big helping of arrogance.

Of course if voters refuse to punish those people responsible, we’ll continue to have the same government.

As we continue to watch the health care debate go around you might have noticed many politicians perplexed at the idea that the public might not want a public option.

I submit, that it has nothing to do with President Obama, the current Congress, the Current House, nor the prior President, Congress & House.

The reasoning is analogous to the Sorites Paradox.  The paradox states it’s impossible to know exactly how many grains of sand it takes to become a heap, or once a heap, how many grains of sand must be removed to become a non-heap.  I submit we have finally built a heap.

With the bailouts, stimulus packages, rampant spending of the prior President and continued fiscal irresponsibility of this administration, combined with fiscal irresponsibility at state & local levels, people are rightfully frustrated.

& thanks to Cato, within a week, they have two brilliant demonstrations as to why:

Federal Pay Continues Rapid Ascent:

…Figure 1 looks at average wages. In 2008, the average wage for 1.9 million federal civilian workers was $79,197, which compared to an average $49,935 for the nation’s 108 million private sector workers (measured in full-time equivalents). The figure shows that the federal pay advantage (the gap between the lines) is steadily increasing….

Figure 2 shows that the federal advantage is even more pronounced when worker benefits are included. In 2008, federal worker compensation averaged a remarkable $119,982, which was more than double the private sector average of $59,909….

& this, State and Local Government Employment Up Since Recession’s Start:

…With a prolonged recession now forcing state and local governments to actually cut or furlough some employees, it’s important to remember that they were adding government jobs at a time when it was clear to the rest of the country that the air was out of the economic bubble. ..

It seems the age old question about what business is truly recession proof finally has an answer.