Category: Current Affairs

France and Germany break the rules

The EU fiscal rules, that is. Each country using the euro is supposed to maintain a budget deficit of less than three percent of gdp. Earlier this week France and Germany announced that they had no real intention of meeting the target, here is the full story. What are the implications of this?

1. The euro hit an all-time high against the dollar, clearly the markets were not rattled and largely expected this outcome or some version thereof.

2. Many of the smaller countries in the EU are upset, most of all Netherlands, Austria, Finland and Spain, all of which went through painful fiscal restructuring themselves. It appears there are two sets of EU rules, one for France and Germany, one for everyone else.

3. France in essence has given up on its dream to provide significant leadership for the other EU countries, and can no longer expect to lead by example. Otherwise France and Germany will suffer no real penalties from this.

4. France and Germany have shown that they simply will not make significant spending cuts, no matter what.

5. France and Germany were right not to raise taxes to meet the targets.

6. The three percent rule is effectively dead. The rule was a bad idea in the first place. Rules based on strict targets, with trigger penalties kicking in at a predetermined level, are likely to fail in democracies (remember the Gramm-Rudman Act, first it was to control deficits, then spending, ha-ha?). The boundary lines are arbitrary, and if they start to matter the penalties are seen as arbitrary and unfair by voters. So no penalty is accepted and then the targets fall apart.

7. The old written rule mandating three percent will not be revised. The new system in practice will likely take the form of loose ranges, with penalties of moral suasion applied by other EU members.

8. The real question is what will happen when one of the smaller nations thumbs its nose at France and Germany someday, over some EU agreement, and then claims exemption from the relevant penalties. Until then, stay tuned…

Update on Medicare reform

Several days ago I predicted that the recent Medicare bill would turn out to be largely the prescription drug benefit, with little real institutional reform in the direction of privatization, for better or worse. An article in today’s New York Times provides a closely related argument.

Here is a summary:

The most politically charged feature of the Medicare legislation passed by Congress – its attempt to make the federal Medicare program compete with private managed-care plans – is also the least likely to come to fruition on the seven-year schedule set in the bill, according to health policy experts…Similar plans, the experts say, have failed to find support among patients, doctors and hospitals, or even some insurers. Even people who favor the idea say the potential for trouble this time is formidable…Many people enrolled in Medicare fear that they will end up with less generous benefits in a privately run program…Nor do hospitals and doctors like the idea of health insurers pushing down fees to make a profit for themselves, and health plans have balked at previous projects that threatened to squeeze their profit margins…In addition, many privately run Medicare plans, known as Medicare H.M.O.’s, withdrew from many areas of the country when government payments lagged, forcing millions of patients to scramble to obtain new coverage.

The bill passed by the House and Senate in the last few days calls for six-year demonstration projects in four to six cities, where private health plans would compete with the traditional Medicare program to enroll subscribers by offering a variety of new services with the goal of possibly reducing costs…But four previous attempts at experimenting with competition among Medicare H.M.O.’s were aborted before they began – blocked in Congress after members heard objections from health care providers and elderly voters.

Arguably this kind of “mixed privatization,” with strong public elements, and few real incentives for cost control, was not a good idea in the first place. But in any case it is unlikely to ever see the true light of day.

Thanksgiving thoughts

It is a central point of economics to suggest that people are rewarded for their marginal product, and not for their infra-marginal contributions. Similarly, people have no guarantee of compensation for the external social benefits they produce. In other words, expect less gratitude than you probably deserve.

People who offer gratitude to others, however, tend to be much happier and more productive. This is a recurring theme throughout Gregg Easterbrook’s just published The Progress Paradox: How Life Gets Better While People Feel Worse. So on this Thanksgiving let us put aside the marginal product theory for a day, and feel gratitude for all that we have, which is indeed so very much. Without everyone else’s infra-marginal contributions, our lives would be sorry, short, and sad indeed. Perhaps, if only for a day, we should retitle this blog InfraMarginal Revolution.

Medicare, continued

Debates over the Medicare bill focus on two key aspects. First, it is fiscally irresponsible. Second, will the encouragement of competing private health plans raise or lower costs?

Where is Medicare cost inflation coming from?

The major elements in the Medicare program’s overall rise in costs have been increased enrollment (from 20 million beneficiaries in 1970 to 40 million this year) and the same factors that have led to increases in health care spending in the nation as a whole–most notably, the development and diffusion of new medical technology. Other contributors to cost growth have been program expansions as a result of legislative and administrative changes.

In dollar terms, inpatient hospital care accounts for the largest portion of the Medicare program’s growth. Expenditures for skilled nursing care and home health services, though constituting only 5 percent each of current program spending, have grown particularly rapidly. Real spending for those services increased at an average annual rate of about 12 percent from 1975 to 2001, compared with an average annual rate of about 7 percent for total Medicare spending.

From testimony of Douglas Holtz-Eakin, former head of the Congressional Budget Office, a well-respected economist.

It is not obvious that private insurance companies will lower these costs, at least not under current institutional structures. Here is one balanced analysis:

Whatever its faults as a heavily regulated program, Medicare is efficient at holding down costs because it can set prices, has unmatched purchasing and negotiating power because of its size and virtually no overhead. Its administrative costs are about 2 percent.

Administrative, marketing and overhead costs for private insurers were 16 percent last year, according to the government’s Centers for Medicare and Medicaid Services. They also have to set aside reserves and still make a profit.

Reischauer said private insurers can make up a great deal of those costs through market efficiencies and innovations — such as preventive care and disease management, which could be particularly important with chronically ill Medicare patients. But even then, if costs are not far below traditional Medicare or slightly above, seniors are unlikely to be attracted, he said.

This problem is what led the nonpartisan Congressional Budget Office to project that only 10 percent more seniors would enroll in managed care plans by 2010 — which would constitute an abject failure in moving seniors into a supposedly more efficient managed care plan. That figure is in stark contrast to projections by the administration of 43 percent.

In other words, the bill may not mean the end of Medicare as we know it, as some critics have charged. Here is another estimate that switches to private plans will be modest. In this regard the bill may matter less than many people think. I’ll go out on a limb and predict that we have voted in prescription drug benefits, but without fundamentally changing the system as a whole or doing anything to control costs.

What is the key problem on the cost side? Medicare, however low its overhead, serves political constituencies and cannot be expected to cut people off from emergency measures in their last year or so of life. And given the existence of the Medicare option, private health plans cannot get tough on these costs either and still draw customers. Right now, for better or worse, we have no institutional option to stop people from spending large sums of money on health care in the last year of their lives.

As for prescription drugs, the new bill will displace private alternatives over time, read this analysis:

Of the just over 40 million Medicare beneficiaries, almost half (46 percent) already have fairly comprehensive drug coverage through an employer-sponsored retirement plan. Another 29 percent of Medicare beneficiaries have some drug coverage from another private or public source. It is only the remaining 25 percent of Medicare beneficiaries (about 10 million) who have no drug coverage at all.

I will also predict that employers, seeking to cut health care costs, will withdraw these benefits over time, making the bill an even worse fiscal nightmare than has been expected.

The bottom line: Ugh. But unless we are willing to be mean and nasty to dying old people, in the interests of drastically lowering costs, we have no one to blame but ourselves for the current problems. We can, however, in addition still blame the Bush administration for political pandering and lack of fiscal discipline.

Addendum: Read this article on whether the new bill will stick, thanks to David Levy for the pointer.

The Medicare bill

Daniel Drezner offers an excellent analysis, replete with useful links. His bottom line: it is poorly designed and a fiscal catastrophe. He reproduces a Heritage graph with the rather tragic heading: “A Drug Benefit Will Add $2 Trillion to Medicare’s $5 Trillion Shortfall by 2030,” see the link for the visual. Drezner, who describes himself as a “pragmatic libertarian,” is, like myself, depressed at the current political climate and the willingness of the Republicans to abandon principle and fiscal discipline.

Equality within black communities

The gap between rich and poor blacks is smaller in Maryland than in almost any other state, click here for the full story. Black households in Maryland scored a Gini coefficient of .430, only in Alaska is within-black inequality lower, counting only the states with a black population of three percent or higher. Most of the middle class black communities are concentrated around Washington D.C., much of the black poverty in Maryland comes from Baltimore.

David Dishneau notes the following: “The numbers reflect a relatively large black middle class, supported by good-paying, stable jobs in government, biotechnology and related industries, social scientists say.” In other words, the government as employer has done more for black communities than the government as purveyor of affirmative action. Yes our government has played a heroic role in helping stamp out unjust racial inequalities, but let us assign the credit to the policies that deserve it. When it comes to Alaska, seventeen percent of adults are veterans, the highest percentage of any state. Once again government employment, in this case mostly through the military, may play a significant role in reducing inequality and helping to create a black middle class.

The economics of on-line dating

Yesterday’s New York Times Magazine offers a lengthy look at on-line dating. This article is longer than most links I offer, it is not full of economic reasoning though the interesting and salacious content may keep you reading.

The bottom line, however, is simple. On-line dating seems to serve (at least) two major constituencies. First, many people use it to marry or otherwise find a monogamous relationship. claims to have lost 140,000 members, by enabling those people to find partners. Second, many people use internet dating to find casual sex or serial partners. The article quotes a “Greg,” who enjoys a first date with quickie sex at the end, and then offers the following remark: “I liked her, but not enough to merit fireworks. Given the seemingly endless selectoin, I get to be a little less forgiving.”

Since I suspect that on-line dating is more effective than not, people will increasingly choose one category or the other. Those people who are willing and able to marry, will find their partners and marry. After some period of time, the stock of marriageable people will be smaller. (Note: I believe that some decent chunk of the unmarried are simply emotionally incapable of marrying, for whatever reason.) The remaining unmarried will then find relatively higher returns from the serial dating and casual sex routes. So the distribution of the number of sexual partners will become more bimodal over time.

Furthermore, the last two years have been an especially good time to marry through on-line dating. The new technology is being applied to a large stock of unmarried people who could marry and be happy, but who otherwise could not find the right partner. Yes, an ongoing flow will replenish the stock but arguably the stock has been at a peak in recent times, given that on-line dating has just taken off. So if you want to marry, hurry up and get on-line. If you are just looking for casual sex, well, you have a greater luxury of waiting and in fact your options will likely improve with time.

The new medicare bill

This is one debate I simply have not had time to follow. Brad DeLong, however, offers two posts, the first notes that the prescription drug benefit has no funding source. The second, drawing on Henry Aaron, notes that the insurance component of the bill is far from ideal, here is one excerpt, Brad quoting Henry Aaron:

The design of the bill’s drug insurance makes little sense. Any plan that covers the three-hundredth dollar a person spends on drugs in a year, but provides no coverage for that person’s three thousandth dollar of spending has to be regarded as a bit wacky. Yet that is what this bill would do. It would end federal support for Medicaid drug benefits if patients are also eligible for Medicare, even where the new Medicare coverage would be narrower than existing Medicaid coverage. At the same time, it does nothing to remedy Medicare’s other major failings. It does not cap out-of-pocket costs, even though almost all policies covering the nonelderly provide this essential “stop-loss” protection. It provides no additional help to pay crippling nursing home costs, which are poorly covered under the current program. And it does nothing to help the half of the poor elderly and disabled who now receive no help with premiums and cost sharing they can ill afford.

Even worse, the conference committee bill could single out Medicare for unfair benefit cuts or payroll tax increases in the future. Currently, Medicare hospital benefits (part A) are covered by a dedicated payroll tax. Revenues from this tax now exceed costs and, together with the excess collections from past years (which are deposited in the Hospital Insurance trust fund), are sufficient to cover benefits through 2026. Under current law, three-fourths of the cost of Medicare’s Supplemental Medical Insurance (SMI or part B), which covers doctors bills, durable medical equipment, and certain other expenses, are paid from general revenues and the balance by beneficiary premiums.

I’m still a bit baffled by the whole issue, but it appears we have to write down yet another case (e.g., profligate domestic spending increases, various protectionist measures, the stalled energy bill, etc.) of bad economic policy from the people downtown.

Why are we fascinated by celebrities?

Michael Jackson and Kobe Bryant make the front pages for their possible misdeeds. The tabloids are full of news about Reese Witherspoon’s baby boy. Why do we care? Here is one account:

On the surface, the celebrity rags seem to be about sex. But their real subject is reproduction and the future of the human tribe. On the savannah, we needed to monitor how our clan was faring, and given our small populations we could do the job by ourselves, gossiping about how Gronk had left Zumba and that last night she slipped into Uggah’s cave to make a baby, and what our chance might be to steal one of them as a mate. But in a country of 290 million people, where even our next-door neighbors are strangers, we still need to flex those savannah needs for gossip and information in order to measure our species’ prospect. What better proxy than the young, wealthy, handsome, and visible alpha-male and -female breeding stock that Hollywood employs?

So writes Jack Shafer on, see his full analysis. I agree, though I would be reluctant to write with such a reductionist tone myself. Furthermore I think we use celebrities for more prosaic reasons as well. We are fascinated by what produces relative status, something we all seek. We also use celebrities as a topic of social conversation, a means of showing that we are in touch, a way of signaling our views on various issues, and as a vicarious outlet for our hopes and fears. For more, see my What Price Fame?, also shown on the right bar on this blog.

How to outfox terrorists and other pursuers

You might try, they offer a two-day anti-terrorist driving school, which includes surveillance and 180-degree spins. You can even give your loved ones a gift certificate for the camp.

Why stop at driving? A three-day anti-terrorist camp in Arizona also teaches espionage and combat pistol techniques, for only $3800, try They offer a special course on Russian martial arts, promising “If you do spend time in a hotel, it won’t be a five-star.” You learn the “Systema” method of self-defense, enabling you to strike from virtually any position, dating from the Russian cossacks. Oddly, the course promises only two hours a day, I suppose you spend the rest of the time sunning yourself at the hotel pool. Their driving adventures include a course in Southern truck racing.

Many Hollywood movies, by the way, suggest that you overtake a car in pursuit by bumping it in the rear. Anti-terrorist driving instructors assure us this is the wrong way to go. Bump them from the back side, cause their car to spin around, and then pin them against a wall. Warning: do not try this on your own.

From this month’s issue of Popular Science. Oh, yes, if any of those anti-terrorist courses are beyond your means, consider a simple computer game for $50 or less, or perhaps the new John Woo movie, due out Christmas day, for $8.50 or so. That will be my pick of the lot.

What is the hot Christmas toy this year?

Just click here to see it. It is called “Lunar Stunt Car.” I can’t for the life of me imagine what is special about it, though of course I am not the typical buyer in this market. It is already hard to get in stores, but of course they are not raising the price, creating yet another puzzle in price theory, in fact they are advertising that it is on sale.

My best guess: They keep the prices low to generate publicity, to drive a fad, and the artificial scarcity makes it an especially sought-after item. Furthermore it may generate trips to the toy store, leading parents to buy other toys, although whether these gains rebound to the Lunar Stunt Car manufacturer is unclear. That all being said, once the toy takes off, I still don’t see why they don’t raise the price to capture higher profits.

Joe Lieberman vs. Howard Dean

Score one for Lieberman, read Jacob Levy’s comparison of the two on economic policy. Dean recently called for the “re-regulation of business”, Lieberman countered with the following:

“Howard Dean doesn’t understand how Bill Clinton created 22 million jobs in 8 years. By responsibly deregulating markets, Bill Clinton allowed exporters to sell more American products to foreign markets and brought competition to existing monopolies.

“Howard Dean would usher in a new era of big government with his re-regulation proposal. He would give us a treacherous trifecta of policies that turn back the economic clock: new trade barriers, a larger tax burden on our middle class, and now bigger bureaucracy. Either he doesn’t know how to turn the economy around, or this is another reckless mistake.

“We need to toughen the integrity of our marketplace, put real enforcers in regulatory posts, and put wrongdoers in jail. We don’t need to cripple the economy with a whole new set of broad re-regulation as Howard Dean proposes.”

It is a shame that Lieberman has no chance within the Democratic party.

The forthcoming energy bill

Here is Andrew Sullivan, quoting John McCain and commenting on him:

“I’m not saying that this bill won’t generate some energy. It will certainly fuel the coffers of big oil and gas corporations. It will propel the wealthy special interests. And it will boost the deficit into the stratosphere. Indeed, this legislation can be fairly called the Leave no Lobbyist Behind Act of 2003.
There are also four proposals known as ‘green bonds’ for construction of commercial buildings that will cost taxpayers $227 million to finance approximately $2 billion in private bonds. One of my favorite green bond proposals is a $150 million riverfront area in Shreveport, Louisiana. This river walk has about 50 stores, a movie theater and a bowling alley. One of the new tenants in this Louisiana Riverwalk is a Hooters restaurant. Yes my friends. Here we have an energy bill subsidizing both hooters and polluters.” – Senator John McCain, on the monstrosity otherwise known as the Energy Bill. How any principled, small-government, free-market Republican could vote for this vast waste of public money is beyond me. But we’re beginning to realize that GOP has nothing to do with small government or fiscal sobriety. It’s a vehicle for massive debt and catering to the worst forms of corporate welfare. Thank God for McCain. Bush should veto this bill, until it is de-porked. He won’t, of course. He has yet to veto a single big-spending bill. He doesn’t seem to give a damn about what is happening to the fiscal health of this country.

For a less polemical assessment, but ultimately a similar evaluation of the substance, see the ever-reliable Lynne Kiesling, start at this permalink and scroll downwards for running commentary and links.

Addendum: Senators from both parties criticize the bill as well, read here.