jducoeur

It occurs to me that I really haven't talked about this mess. Not to get too deeply into it, but here's an opinion from the armchair economist.

First: the various proposals from the Democrats would all, to greater or lesser degrees (mostly greater), be subject to the Law of Unintended Consequences. There will be lots of problems, and it will take a fair number of years to iron them out. Let's be clear that nobody's got a panacea here.

That said, the current system for health management is very close to the *worst* model I can envision. So I'm pretty strongly pro-reform, because I'm pretty sure that any of the proposals seriously on offer would be improvements. Not perfect -- but improvements.

As for the objections from the Republicans, let's talk briefly about a few of them. (I'm going to ignore Palin's "death panels" idiocy and other distractions, and only talk about the objections that are actually substantive and based on the proposals.)

First, there's the point that this will cost the government more. Absolutely true. Even if it doesn't provide universal coverage, it *will* cost the government more. That said, most of the serious proposals will likely cost the *public* less, at least in the long run. Yes, more of that money will be funneled through taxes, so it will be more obvious, but that money is already coming out of your pocket -- it's just being deducted from your salary now instead. I don't have much respect for the notion that taxes are somehow more evil than other forms of taking my money, and I think having it all be more overt and straightforward is far better (and much less economically distorting) than the slapdash system of hidden subsidies and invisible taxes that we have now.

Then there's the public option, and the notion that it would cause the death of the private insurance industry. Again possibly true, but a far weaker argument than they'd like to make it sound. This argument is predicated on the notion that monopolies are fundamentally less efficient than non-monopolies, so this will in the long run necessarily be a disaster. I'm sorry, but that just ain't true. It's true that it's a statistical danger, but oligopolies (which is more or less what we have now) are also pretty good at being inefficient. We don't actually have a competitive market in health insurance now, because of the indirection between payment and provision of services: nobody has any real *incentive* to be competitive. And a decently-run regulated monopoly (which is approximately what we're talking about) is capable of certain efficiencies that the current model can't get. Put all that together, and I'm afraid that my reaction is mostly, "Yes, it might kill private insurance eventually, because it works better than private insurance does. So?"

Finally, there's the "creeping socialism" argument. This one really is just plain weak. It's economics as religion, and I refuse to play that game. Anyone who fails to grasp that the US *is* a socialist country (as are most developed Western economies), and has been for fifty years, hasn't been paying attention. This is one of the instances where centralization likely works better, based on the evidence we have from pretty much every other country in the developed world. I may prefer markets when they work, but I'm not very interested in the idea that they are *morally* better, which is essentially what the Republicans are predicating their arguments on.

It is possible that there is a market-based solution that would work better than either the current model or what the Democrats have proposed. But the Republicans really haven't offered that: at best, they've offered very slight tinkering, that does nothing to address the underlying economic foulups of the current system. So far, we have the current system (possibly slightly tweaked), and the various Democratic proposals. Of those proposals, the more extreme ones, that include a *strong* public option, are the more plausible ones economically, and they're the ones I would most like to see implemented. They make sense, they're conceptually *far* more straightforward and workable than what we have now, and they're overall much realer than the fantasies that the Republicans have been cooking up.

(And I should be clear here: IMO, simple single-payer *is* probably the best approach of the ones that have been discussed. But I'm not spending a lot of time on it, because I don't think there's politically any chance of it happening any time soon. We make do with what we can get...)

Those who are inexpert but interested in economics may want to take a read through this article in the Economist a few weeks ago. It's a good overview of the evolution of the field over the past few decades, exploring how macroeconomics in particular got to a point where almost everyone was agreeing on a consensus that utterly failed over this past year.

In particular, it's a fascinating exploration of how a field of thought can get dominated by convenience, and how brushing aside the inconvenient details can produce a structure that is tottering without anybody even realizing it. (That is, everyone knew that the standard model was insufficient, but disagreed about *how* it was insufficient, so the consensus and policymaking formed around that insufficient model.) And it gives some hints of the massive arguments occuring within the field right now, and some of the approaches that are being explored.

Really, it's neat stuff. The conclusion of the article is that these are hard times for economics, and respect for the field has plummeted, but is providing an invaluable opportunity to shake up the field and make it better...

As we watch the volatility continue to downright goofy levels, I find myself idly wondering whether economists have started formalizing the madness of crowds yet.

I mean, even if you believe that homo economicus is rational (which I don't really), it's very clear that people en masse are not. Herd mentality is a very powerful force, and tends to overwhelm rational behaviour. Indeed, it's not even 100% irrational: if you expect everyone *else* to be nuts, following along can be the most appropriate course.

Consider: I didn't get involved with the 1998 tech bubble at all, because it was so clearly ridiculous. Which meant that, while I didn't lose anything in the crash, I also didn't gain anything in the runup. (A few people *did* manage to profit quite nicely from the bubble.) And bank panics are very sensible, in a way: the more people pull their money out of a bank, the greater the chance that it will go under, which means that you had probably better pull your money out of the bank.

I'd bet that there are some fairly consistent curves that can be interpolated into the standard economic ones, though: even if you assume human behaviour is irrational, that doesn't mean it is inconsistent. There are almost certainly chaotic feedback effects -- it's a dynamic system, and those are always complicated -- and it's very hard to predict on the small scale, but I'd bet that it is susceptible to smart modeling that can at least make some statistical sense out of the madness...

Those who are nervous about the markets and contemplating pushing their money into gold might do well to take a look at yesterday's article in the Motley Fool. Suffice it to say, they make the point that, while gold tends to look good in the short run, it's generally a poor investment in the longer term. And most people are pretty bad at figuring out when the short term starts turning into the long.

Looking at it, it's pretty clear to me that gold is currently in the middle of a bubble, and getting steadily more over-valued. Piling out of one bubble into another is probably not the best strategy...

You know, I'm really not sure McCain even understands why the current crisis happened. That makes me deeply skeptical that he'll be capable of doing anything about the next one.

I mean, what are McCain and Palin blaming? "Mismanagement and abuses"? Sure, there was a bit of that, but it was, frankly, mostly at the fringes. "Greed"? This is Wall Street -- if you expect Greed to *ever* cease to be the primary motivating factor, you're not even living on the same planet as reality.

Really, the primary cause of the disaster was collective deliberate blindness. I mean, most of the people who caused this problem were not only doing what they thought was right -- they were doing what they thought was *necessary*. In business, your job is to make money for your stockholders, and that's what they were, by and large, doing until a year ago. Was it foolish? Were they making money today by ignoring the fact that they were building a house of cards for tomorrow? Sure -- but when everyone around you, including the government, is being willfully blind, it's very easy to put on a blindfold yourself and pretend it's not there, that the small number of Cassandras are wrong and your peers are right.

The heart of the problem is that the people whose job it was to bring things down to sanity were afraid to do so. It was convenient and easy to do nothing -- to believe that the business people knew what they were doing. That's part of the conservative message, after all: Trust Us, We're Businesspeople. It wasn't about corruption: it was about taking the politically easy route, which was to follow the herd.

And do you really believe McCain would have done *anything* different? All the evidence says otherwise. I mean, first of all, he said *nothing* against any of this when it was building. Hell, he's scarcely saying anything about it now: putting this much emphasis on "greed" and "abuse" just misses the point that this was caused mostly by fairly well-meaning people collectively being stupid. Furthermore, his supposedly maverick reputation has shown itself to be paper-thin over the past year: in general, he follows the party line, with notable but rare exceptions.

(Yes, there are times when his principles get riled and he stands out -- but none of those have *ever* been economic in nature. Everything indicates that he neither knows nor cares much about economics: he just takes the Republican Party line of assuming that the business people know what they are doing, and Washington must stay out of their way at all times.)

So get real: is he really the man who is going to stand up to business and say, "Stop that, and stop it NOW" the next time things look all rosy and it's easy to ignore the looming crisis? Or is he simply going to grab the blindfold that they offer him, and pretend that everything will be fine? Everything he's saying indicates that he wouldn't even put a stop to the *last* problem, much less the next one...

[Expanding on some thoughts I've made in comments elsejournal recently.]

Comcast has just made official what they've been hinting at for quite a while: they will be capping residential monthly bandwidth at 250GB. Needless to say, this is causing some consternation in the blogosphere.

On the positive side, they're actually giving a concrete number, as opposed to being vague about it, which is a real improvement -- there have long been reports of them tapping heavy users on the shoulder and saying, "Too much". If that's going to happen, I'd much rather have them saying publically what the limit is rather than applying it secretly and arbitrarily. And in their defense, 250GB *is* a lot of traffic: I'd be pretty hard-pressed to use that much with current technologies.

More importantly, the economist in me doesn't mind the idea of bandwidth caps. The notion of "all you can eat" is bad economics: by failing to set a price on consumption, it encourages people to be stupidly wasteful, and that will usually lead to bad results. By saying explicitly "this much bandwidth will cost you this much", it allows people to see what their consumption is costing, and to compare plans appropriately. In principle, competition should drive the cost-per-bit down to appropriate levels.

(And perhaps even more importantly, it's a move towards treating Bits As Bits, which is a healthier way to think about the Internet than trying to distinguish one kind of traffic from another, as they've been doing lately.)

OTOH, in practice there's a big snag here -- this isn't a particularly competitive market. It's not *too* bad in the Boston area: we've got three big players (Comcast, RCN and FiOS) duking it out in many towns, which is enough to keep them somewhat honest. But a lot of places have only two, which is dangerously cozy, and many only have one, which typically leads to things being more expensive than they should be. Even with three players, frankly, the market is smaller than I like, especially when those players have shown a tendency towards acting as a block when convenient.

So the situation does make me a bit nervous: in the face of weak competition, Comcast could potentially abuse their pricing power. The only reason I'm not *really* worried is the details of this particular market -- FiOS is the hungry new entrant into this market, and one of their best competitive advantages is bandwidth. (FiOS' network is in some respects much better than Comcast's.) I expect this to keep Comcast honest, lest they hand Verizon a big competitive advantage. But it's worth watching developments in this space closely, and it makes it even more important to fight against the industry's constant attempts to stifle new competition...

[My, I seem talkative today. I can only assume that this is a reaction to feeling like I haven't posted much lately, combined with trying to get my mind off the frustration of bending SQL to my will. Anyway...]

So the slowly-growing news on the money front is that gold is fashionable again. The price is up to fairly silly levels -- around $1000/ounce. Why? Well, everyone is panicking about other places to put their money, and gold always has a certain cachet. And hey -- the price is going up! Why is the price going up? Because everyone is buying gold! Surely that means that it's a great way to make a good return on your money, right? After all, everyone else is doing it!

Basically, this logic is akin to, "Choose Rock. Rock *always* wins." It's another bubble, inflated by the popping of the previous one. For the time being, some people with good timing are going to make a lot of money; in the long run, many people are going to take a bath on it when fundamentals reassert themselves. Caveat emptor...