On the way to the airport

by  Tyler Cowen in

Here are my tips for how to survive a trip to or from NYC’s LaGuardia airport, always a daunting experience.  You will notice the piece is on Mark Bittman’s new New York Times food blog, which you should be reading anyway.  Don’t forget these words of mine:

Just think how much you are saving: what’s really scarce in life is your time and the mere willingness to get up and go. Just do it.

Elsewhere in the world of food blogging, there is a new blog on the economics of food and wine.

The realignment of the regulatory powers

by  Tyler Cowen in

Two thoughts: First, the very active role of the Fed in the Bear Stearns crisis must,
in the long run, give rise to a fundamental revaluation of the role and
powers of the SEC, the entity technically responsible for investment
banks.  The SEC now appears relatively toothless.

Second, the more commitments made by the Fed, the more we lose the
(quasi) independence of our central bank; for a large commitment
Treasury sign-off is needed.  The realignment of the regulatory
universe will eventually emerge as a big story from the current crisis,
though it is hardly commanding much attention right now.

Paul Volcker comments.

Sherry Glied’s new health care paper

by  Tyler Cowen in

It is one of the best health care papers in recent times, it is here, I cannot find an ungated version.  Glied reminds us that only about 1/3 of American health care spending comes from private insurance.  Moving to international comparisons, the more general point is that:

…there is no persistent and regular relationship between the structure of system financing and the rate of growth in per capita health expenditures in a health system…the efficiency of operation of the health care system itself appears to depend much more on how providers are paid and how the delivery of care is organized than on the method used to raise the funds.

In other words, as I’ve stressed before, the health care cost problem comes from immediate suppliers, namely doctors and hospitals, and not from health insurance companies.

The best parts of the paper concern equity.  It is GPs which help the poor, not additional spending on technology or surgery; see p.18 for other comparisons along these lines.  Furthermore, and this you should scream from the rooftops, consider this:

…patterns of health service utilization in developed countries suggest that the marginal dollar of health care spending — money used to purchase high tech equipment or specialist services — is less progressively spent than the average dollar.

In other words, egalitarians should not allocate marginal government spending to health care.  And there is evidence that the more a government spends on health care, the less it spends helping people in money ways.  That is, there is crowding out. 

Finally, Glied offers a summary comparison:

Putting $1 of tax funds into the public health insurance system
effectively channels between $0.23 and $0.26 toward the lowest income
quintile people, and about $0.50 to the bottom two income quintiles.
Finally, a review of the literature across the OECD suggests that the
progressivity of financing of the health insurance system has limited
implications for overall income inequality, particularly over time.

Highly recommended.

The economics of “bailouts”

by  Tyler Cowen in

Paul Krugman writes:

…(according to Reinhart and Rogoff) the resolution of Sweden’s financial crisis imposed a fiscal burden – that is, required a taxpayer-financed bailout – equal to 6 percent of GDP. That would be $850 billion in America today. Just saying.

It’s worth noting that such costs consist mostly of transfers rather than real resource costs.  Most of the costs of overinvestment in housing already have been borne in the form of lower living standards, namely we have fewer non-housing goods and services.  Making debt obligations whole again does involve higher taxes but most of the money is sloshed around; the government doesn’t dynamite any factories or homes.  It should bother you if you think taxes are already too high but of course that doesn’t describe everyone.  Furthermore if the destruction of the debt claim would otherwise have been deflationary, some of that debt can be monetized (thus, taxes don’t go up) without raising the risk of inflation.  (TC: the Swedish number seems to be wrong, see the first comment.)

Here are a few other points about bailouts, or non-bailouts, as the case may be:

1. Most plans for Fed assistance aren’t bailouts at all.  It is pretty easy for the Fed or Treasury to virtually wipe out shareholders.  The real "bailouts" come when the institutions are allowed to stay open and continue taking risks.

2. The Fed’s regulatory powers make crisis deals less than fair.  If you, as a bank, don’t accept the Fed’s terms, you can be prosecuted or thrown in jail or at least ruined by your friendly regulator.  Being an advocate of the rule of law, I’m not entirely comfortable with this arrangement, but it does mean that the Fed has a much easier time managing crises. Keep in mind also that the failing banks are indeed the most likely ones to have been criminal, so the unfairness is not usually being applied to the innocent.

3. If you think the managers were in charge, and will remain in charge, the real moral hazard problem is the severance pay for the failed managers, not the so-called bailouts.

4. If you’re a critic of bailouts, you can’t have it both ways.  If the Fed or Treasury is guaranteeing loans, yes that does put taxpayer dollars on the line.  But if you think the system can hold up, as do most bailout critics, those guarantees are unlikely to cost very much.  The Fed or Treasury may even turn a profit.  If you think the system cannot hold up, the bailout is probably necessary even if costly.  So you can’t claim: "The bailout isn’t needed" and also "The bailout will burden taxpayers." 

Addendum: By the way, do read David Leonhardt on "what really happened."

How bad news can be good news

by  Tyler Cowen in

This is from an old MR post, summarizing Bernanke’s contributions to economics:

1. The theory of irreversible investment, circa 1983.
Before Bernanke, Dixit, and Pindyck, models often assumed that
investments could be reversed or "taken back."  Bernanke outlined how
the irreversibility of investment might matter.  Often individuals will
choose to wait and sample more information, rather than make an
immediate decision.  Small changes in information could lead to big
fluctuations in investment.  Large changes in interest rates might have
little effect.  Bad news can hurt you more than good news helps you.  This was Bernanke’s first major contribution to economics [and I believe part of his doctoral dissertation].

In this model it is also the case that bad news can cause equity prices to rise.  If the bad news resolves outstanding uncertainty, people may be willing to go ahead and invest, rather than continue to play wait and see.  One way to think about it is that the news could always have been even worse, so bad news can in effect be good news.  Another way to think about it is even truly bad news gets the waiting over with and spurs investors to cross a "do something" threshold.  Now I’m not saying that is what happened today, I’m just saying that maybe this thought crossed Bernanke’s mind…

Addendum: Elsewhere in the wonderful world of finance, here is why Bear Stearns is selling for more than $2 a share…

Fear

by  Alex Tabarrok in

We have nothing to fear but fear itself, but
fear itself can be pretty scary.

…Fear is ruling the
financial markets. Billions of dollars have been lost in mortgage-related
investments. The Federal Reserve worked madly over the weekend to
engineer a takeover of Bear Stearns and avert a systemic meltdown. But
the big fear remains. How low will house prices go?

If prices continue to fall, mortgage defaults will move well beyond the
subprime sector. Trillions of dollars in losses for investors are not
impossible. But that doesn’t mean they are inevitable.

That’s me in today’s New York Times.  Believe it or not, my piece is one of the more optimistic pieces you are likely to read on the housing crisis.

I think that housing prices went beyond the fundamentals sometime around 2004 (and I said so in 2005, see here and also note my warning that prices could fall dramatically here).   But 2004 levels are still well above long run trend.  Thus my optimism stems from thinking that unlike Japan, our housing prices need not fall back to long run trend (see my piece for graphs).

But the problem is that we can overshoot the fundamentals going down as well as going up and the United States now faces two potentially
self-fulfilling prophecies.


If the financial markets can predict where and when house prices will
stabilize, then credit conditions can quickly return to normal, the
economy can expand and house prices will indeed stabilize.


But if the financial markets remain uncertain about when the decline in
house prices will end, then fear will tighten credit even further, which
would strangle the housing market and generate even more fear.

Unfortunately, I do not know what will push us into the right prophecy (but read my piece, that will help!)  Thus, I am more optimistic than Paul Krugman, who thinks that we may have slipped into the state where no prophecy can bring us back to a good equilibrium, but I’m not that much more optimistic.

Claims about Spanish banks

by  Tyler Cowen in

…perhaps the most important reason why the Spanish financial system is
unlikely to suffer a meltdown is the virtual absence of Special
Investment Vehicles (SIV) and conduits. These animals allow banks to
move mortgage-backed securities off their balance sheets, thus
obscuring the exposure of individual institutions and escaping capital
requirements.

There is much more here.  Note also that Spanish originators keep a share of each mortgage they securitize.  In case you didn’t know it, Spain too has had a bursting of its real estate bubble, although so far they have not had comparable troubles with their banks.

gdp vs. gdp per capita

by  Tyler Cowen in

Using growth in GDP per head rather than crude GDP growth reveals a strikingly different picture of other countries’ economic health. For example, Australian politicians often boast that their economy has had one of the fastest growth rates among the major developed nations–an average of 3.3% over the past five years. But Australia has also had one of the biggest increases in population; its GDP per head has grown no faster than Japan’s over this period. Likewise, Spain has been one of the euro area’s star performers in terms of GDP growth, but over the past three years output per person has grown more slowly than in Germany, which like Japan, has a shrinking population.

Some emerging economies also look less impressive when growth is compared on a per-person basis. One of the supposedly booming BRIC countries, Brazil, has seen its GDP per head increase by only 2.3% per year since 2003, barely any faster than Japan’s. Russia, by contrast, enjoyed annual average growth in GDP per head of 7.4% because the population is falling faster than in any other large country (by 0.5% a year). Indians love to boast that their economy’s growth rate has almost caught up with China’s, but its population is also expanding much faster. Over the past five years, the 10.2% average increase in China’s income per head dwarfed India’s 6.8% gain.

Here is more.  Of course it is wrong to think that one measure is necessarily better than the other.  And immigration and more births both raise absolute gdp though you may not view the gdp gains in each case as having the same moral status.  One simple adjustment that could be made is to subtract the income an immigrant would have earned, had he or she not moved to a new country.

My podcast on macro and monetary policy

by  Tyler Cowen in

It is with Russ Roberts and it covers the roots of our current crisis, why things are far more troublesome than most people expected (and that is the really tough question; real estate bubbles have burst before), why monetary policy matters at all, the tricky balancing act played by the Fed, why a gold standard isn’t the answer, and many other macroeconomic topics.  My core attitude, in case you don’t already know it, is that monetary policy is both an art and a science and there are no secret ways of getting it right, understood by only a few.  The podcast is here. 

Addendum: Arnold Kling summarizes.

Surely you all wondered the same

by  Tyler Cowen in

Not all investors are expected to be pleased with the deal. A
conference call with investors and analysts on Sunday night was broken
up when a Bear Stearns shareholder sought an explanation of why he
would be better off approving this transaction rather than seeing Bear
Stearns file for a Chapter 11 bankruptcy.

The JPMorgan executives
demurred, instead referring the investor to Bear Stearns executives for
an explanation. The shareholder declared that he would vote against the
deal.

Afterward, Mr. Cavanaugh said JPMorgan felt comfortable in
pulling the trigger despite the short due-diligence process. “We’ve
known Bear Stearns for a long time,” Mr. Cavanaugh said.

Vis-a-vis that last sentence, last year the stock price was $170, late Friday it was $30 a share, yesterday the deal was done at about $2.  Here is the story.  From published accounts, the nature and extent of the Fed and Treasury obligations is not yet clear.

Common Wealth: Economics for a Crowded Planet

by  Tyler Cowen in

That’s the new Jeff Sachs book.  It promotes resource pessimism, Nordic-style social democracy, foreign aid, and a fundamental rethinking of U.S. foreign policy.  Most of all it expresses a faith in global cooperation.  Sachs is very smart and, though I do not agree with him, there is often more to his views than his critics admit.  But my browsing of this book never gave me the feeling that I had access to the mind of Jeffrey Sachs.  It doesn’t even read like a popularization.  Imagine a smart and diligent but not insightful or self-reflective person doing a "color by numbers" version of what a Jeffrey Sachs book should read like.