jducoeur

I call your attention to this fascinating recent article in The Economist. The tl;dr is:

• There's a little-known (and never-used) mechanism in the Constitution whereby state legislatures can demand a constitutional convention.
• A quiet but steady right-wing movement has been slowly steamrolling towards this for a number of years now, and are within striking distance.
• Their explicit goal is to require balanced budgets at the Constitutional level, likely destroying the social safety net.
• If a convention were to happen, there isn't much stopping it from going off-topic and changing the Constitution more broadly, with far lower requirements than the usual process for changes.

This is pretty scary stuff -- not quite "OMG the world's about to end", but an unsettlingly plausible pathway for the right to force through their agenda, relatively permanently, on a much broader basis. (Even if they just stuck to the balanced budget requirement, that is extremely foolish economically unless it is very well-hedged to deal appropriately with downturns.) And they've made good progress towards it, precisely because nobody's been paying much attention to it.

Not a short article, but worth a read...

[Or, How many times can I adjust the meaning of a word by adding suffixes?]

Okay, here's an off-the-cuff theory looking for discussion. The recession is a horror, and is going to have some nasty cultural side-effects, but I am beginning to suspect that there may be a balancing factor. Commentators have talked a lot about the way that it makes people more risk-averse, afraid to take chances that might make life harder for them, and this is probably true. But on the flip side, I've noticed a fair number of people who are starting to take side jobs a lot more seriously than they used to -- things that might once have been viewed as spare-time projects are, necessarily, being treated as potential sources of income, and thus are being treated with a lot of care. More precisely, I'm pleased but slightly surprised by the degree of success that several of my friends are having with their personal side-jobs, largely because they're taking them very seriously *as* jobs.

So the theory is that we may get a small but non-trivial generation of new, more-experienced entrepreneurs of all sorts out of this: people who have learned to set up businesses more carefully, in an environment that doesn't have as much loose money and thus you can't be as careless about what you're doing.

Opinions?

The meme of the day seems to be that the news media have finally noticed that, what with revolution spreading across the Middle East, oil supplies might be threatened. Breathless reports along the lines of, "Oil might hit five dollars a gallon!" are all over. And I confess, my reaction is, "Only five dollars?"

The thing is, the laws of supply and demand are cruel taskmasters. When the issues are simple ones -- it costs more to produce X -- then a rise in those costs simply means that X costs that much more. But when the problem is that the supply of X is only so much, and we're already *using* all of it -- well, then, things get a lot more interesting.

So far, things haven't hit any of the *really* big oil-producing nations yet. But when folks talk about it possibly spreading to Saudi Arabia and the like, I get the feeling that they're engaging in wishful thinking when they talk about $5/gallon, because oil demand doesn't seem all that elastic. That is, demand slackens only fairly slowly when prices go up -- which means that, if supplies are suddenly cut, prices have to go up a *lot* before supply and demand equalize again. Of course, in the long run there's elasticity: lots of things *can* switch to processes other than oil, and it's likely that some countries can ramp their production up further. But it's a slow matter, ranging from months to decades depending on what you're talking about. In the short run, we just plain *depend* on a lot of oil, and prices are likely to stretch until some of those dependencies just plain give way.

Right now, things have spread to Libya -- something like 2% of world oil production according to the ever-reliable Wikipedia. Even that is enough to send speculative ripples through the supply chain. But Saudi Arabia? That's over 10% of world production. If political disruption takes that out, you've got *serious* competition for what's left -- competition that will send prices way up.

Mind, I'm just guessing here, and I'm only an armchair economist. (And I'm not passing judgement on the revolutionary movements, which are clearly well-intentioned and may well turn out quite well in at least some cases.) But prices have been rising for a while simply because of gradually increasing world demand, especially as China modernizes. Suddenly contract supply by that much, and it feels to me like *only* doubling the price of gasoline in the short run is kind of optimistic...

Thanks to mindways for the pointer to this fascinating blog series on the topic of health care, and the real (or at least, apparent) reasons why it is expensive.

It's a bit long -- ten modest-length blog posts, each on the separate topic -- but well worth reading. The underlying principle is that, in almost every other developed country, there is a roughly consistent ratio of medical spending to GDP; based on that, we would expect the US to spend more on health care than everybody else, since we're richer. But in fact, we spend *vastly* more than that curve would indicate -- we're way out of line, and don't appear to get better health care as a result. (The series is very much from an economics POV, but avoids complex jargon: it's pretty easy to understand his points.)

Rather than go after a single easy bogeyman, the series goes into serious, principled detail: it examines where the money is actually going, and how much extra the US is paying compared to other countries in that respect. Towards the end, he spends a post knocking down the usual easy culprits, arguing that they mostly don't appear to be primary contributors to the problem. (Indeed, it's impossible to miss the way that politics is distorting the argument, when you compare his numbers to what gets hyped in the media.) Overall, he eschews easy answers -- indeed, the main point of the series is that the entire system is pretty well screwed up, and there likely is no single easy answer to the problem. The result is an implicit call for serious root-and-branch reform that re-examines the way we do business -- he doesn't say that in quite as many words, but he really doesn't have to.

Refreshing stuff, even if the conclusions are a bit depressing. This area of policy is so dominated by people promoting dogmatic arguments and snake-oil fixes (some of which, I'll admit, I've tended to buy into) that it's rather bracing to see an examination that is driven as strictly as possible by what the actual numbers seem to say. You can validly argue with the interpretation of some of the details -- in particular, I think it's worth deeper examination of how some of the parts interact -- but it at least provides a good basis for that argument...

I think most people can agree on one thing: the current political structure has jumped the shark. Not only is it idiotically contentious, it is *completely* devoid of imagination. Both parties are locked into 40-year-old (or older) mindsets about how economics works, and both tend to favor ridiculously oversimplified answers.

The classic example is how you stimulate the economy. The Democrats still favor highly government-centric stimulus. Sure, it's being doled out to private companies, but the government is still making all the decisions about where it should go. There's a place for that, but it should be focused on infrastructure development (the proper place of government), rather than how to create the most jobs -- basically, it's trying to serve two purposes, so doesn't necessarily do either well. It's a recipe for pointless pork.

The Republicans, OTOH, are wedded to the idea that reducing capital-gains taxes is the answer to all economic ills, which looks increasingly ridiculous. It's quite clear that *simple* tax breaks aren't going to help, because business is already plenty profitable this year. It's just that they aren't plowing those profits into domestic jobs, because that isn't obviously the best use for that money. Giving them more simple profits doesn't change that.

Okay: let's accept the political reality. Due to the breakdown in Washington, not much can actually get *done* aside from reducing taxes. The problem at hand is to increase jobs: almost everyone agrees that that is the central sticking-point in the economy. (There are other severe problems, of course, not least the bust housing market, but unemployment seems to be at the heart of the current economic lockup.)

So here's a not-very-modest proposal:

Starting right now, businesses get a 100% tax break on *payroll increases*. That would be measured against one-year-ago numbers, based on payroll reported to the government: essentially, all new hires get their salary compensated by tax breaks.

Employees wouldn't be quite free -- there are still health-insurance and tax expenses -- but it makes hiring very, very cheap. It specifically gives businesses a reason to expand *now*, by reducing the risk of expansion and providing a reason to believe that that expansion will pay off.

This plan should have aggressive sunsetting built into it. Companies would be compensated at 100% for the first year of a payroll expansion, 66% for the second, 33% for the third. (To discourage a quick hire/fire cycle, and give the recovery enough time for a solid foothold.) The plan would be phased out gradually but efficiently: companies would get 100% of the benefit for anyone hired in the first quarter, 90% the second, and so on, dropping to 0 in 2.5 years. (By which point this plan has either succeeded or failed -- there is no point continuing it any longer than that.) Putting those pieces together: the sooner you expand, the more benefit you get, and those benefits pay out over three years if you maintain that new level of payroll, reducing over those three years. The sunsetting is gradual, to avoid the usual problem of a massive and sudden fall once a program ends. (As happened with the new-mortgage support, for example.)

The idea is that this plan is specifically to kick-start the economy, not support it long-term. We currently have an intractable cycle: unemployment is high because businesses aren't hiring; they aren't hiring because they anticipate unemployment staying high so the economy stays in the doldrums. The country needs to break that cycle, by making clear that employment *will* go up, and providing realistic tools to encourage companies to play along. Frankly, it's all about shifting things back towards "greed".

(A basic of market economics is that things are driven by the tension of "greed" and "fear". We've been *way* too far on the "greed" side for a couple of decades; having gotten our comeuppance, we've swung equally too far towards "fear". The trick is pulling things back towards the center, which is where a healthy and stable economy resides.)

What are the problems with this proposal? Obviously, the deficit hawks will scream bloody murder about it, but it's not obvious to me that they have a valid case. The truth is that the deficit doesn't matter, the debt does, and in the medium term this plan looks likely to be good for the debt. It costs a bunch upfront, but a fair chunk of that comes right back to the government in the form of taxes and reduced unemployment payments. In the longer term, the worst *possible* thing for the debt is an extended period of doldrums: government spending entirely aside, the government's income is shattered by the tax losses. So if this succeeds in its goal of improving medium-term employment, it's probably at least a wash in terms of the debt: basically, it's an investment with a ~3-5 year payoff.

The centralizers will hate it because it provides no government control over *what* those new jobs are. IMO, that's a virtue: it doesn't try to dictate the economy. It just recognizes that the goal is new jobs, and focuses laser-like on that.

It does produce some economic distortions -- growing companies wind up with a definite competitive advantage over established ones, since their costs-per-output are lower. That's probably not too bad a side-effect: that's a normal effect of economic creative destruction. But it would be reasonable for large companies to be just a hair nervous about the effect. (OTOH, if it winds up producing economic growth again, they still probably come out in the plus column.)

And it's sure to produce all kinds of creative fraud. I suspect that even a good bill would wind up more complicated than I'd like, simply to legislate against some of the possible scams. Such is life at this level: it's hard to do *anything* at the federal level that doesn't produce opportunities for fraud. That doesn't worry me too much, although it's important to figure out and rule out ways to game the system legally.

Opinions? This is clearly a scary-big proposal -- but it's frankly less dramatic than many of the proposals that both parties routinely trot out, and seems better-targeted to the problem at hand. It seems to me likely to actually *work* decently well; I'd be interested in arguments about why it wouldn't. If you do think it's a good idea, I encourage you to forward it on...

I know that a number of my friends are periodically curious about the whole Gold thing: whether it's a decent investment, whether they should be buying it or selling it, and so on. This article in the Economist a couple of weeks ago does a better job of probing the details than I could; if you're interested, I recommend reading it.

My take: gold is currently over-priced, and I expect the bubble to at least deflate, if not actively pop, over the next year, so I'd probably sell if I had any. Once the price *does* sink a good ways, it may be worth at least thinking about buying, if and only if you think that inflation will become a serious problem for the US.

(At this point, the evidence of that is weak at best: all the signs are that deflation is a much more serious and immediate problem, which is why most economists with a clue are poo-pooh'ing the overheated worries about government spending. But if the economy recovers *and* the government doesn't *then* rein in spending aggressively, there's a high likelihood of inflation afterwards. At that point, gold becomes a likely-good investment -- not for any reason that makes any sense, but simply due to the mass psychology that says that gold is a good inflation hedge. This is mostly silly -- gold has little intrinsic value, so there's no good reason for it to be good against inflation -- but going with the herd is typically a fine way to make money, so long as you're *ahead* of the herd instead of behind it...)

One of the problems facing the climate-change debate has been the current political shibboleths, and specifically the anti-tax one. Every sensible economist is clear that the *right* way to deal with it is a flat carbon tax: it would address the problem head-on, would probably be least likely to distort markets in unfortunate ways, and would likely be pretty effective. But of course, anything called a "tax" gets peoples' backs up, so we instead wind up with the Democratic leadership creating a classic muddle, in the form of the wildly overcomplex cap-and-trade model. (Which is *probably* better than nothing, but I honestly can't say that with complete confidence.)

So I'm intrigued to read (in last week's Economist) about Maria Cantwell's "cap-and-dividend" proposal. From the description given there (and I need to learn more about the details), it sounds delightfully sensible. Basically, the notion is that any carbon cap will drive up prices: indeed, that's the point of any sensible proposal. So fine: auction off limited permits for all carbon-based fuels, and then bribe everybody with the proceeds. Seriously: take the money from the auctions, and distribute it to the populace. Their back-of-the-napkin kickback calculation is $1000 for a family of four.

It's not perfect, mind -- a carbon-tax system would still be simpler than a cap-based one -- but it's still far simpler than cap-and-trade. If the auction is mandatory and universal, it's likely to succeed in the goal of raising prices and thereby reducing carbon output. And the bribe (which is effectively a progressive redistributive tax, but a very well-disguised one) could be *very* popular if it was marketed properly.

I confess that I'm seesawing between being appalled at the concept, and admiring its elegance. The citizens'-responsibility puritan in me is vaguely unhappy at the notion of bribing the citizens to get them to agree to a system that will help everyone. But the economist in me just loves the way it aligns incentives, and the armchair political quarterback admires the simplicity of the message...

Since folks occasionally ask "how should I invest?" questions on LJ, it seems worthwhile to point out this sobering article from the Economist last week. It's a longish but useful read.

Summary: there are signs all over the place of asset bubbles forming, in all sorts of different asset classes, because of all the cheap money sloshing around the system, including:

• By some measures, the stock market is looking mildly bubbly, although not nearly as insane as two years ago. When the Dow was in the low-to-mid 9000s, I thought we weren't looking *too* bad; now that it's in the mid-10s, I'm starting to get concerned. The article suggests that even 9000 is probably somewhat overvalued.


• Emerging-market stocks are looking even more dangerous, because of the amount of over-optimism surrounding them.


• Some are still talking up gold, and it's hard to evaluate, but when prices have quadrupled you have to suspect a bubble.


• American house prices actually don't look too bad, but worldwide things still look overvalued.

None of which produces any great guidance: the upshot is that the efforts to stabilize the economy, while moderately effective, are causing overshoots in lots of prices, so *everything* looks a bit risky right now. Which implies that things will probably get pretty unstable again before they genuinely steady, because all of these bubbles need to have some air let out.

My guess is that you should probably assume at least a mini-crash sometime in the next year -- probably not the sort of end-of-the-world disaster we had last year, but don't get overly comfortable with current prices. I don't see any obvious investment choices that I would characterize as "safe" at this point.

(Whether it turns into a true economic debacle depends heavily on whether the Republican noise machine convinces enough people to force the government to close the taps too quickly, I suspect. While the debt issue is a real one, and needs to be addressed forcefully in the medium term, it's worth noting that a sudden reduction of government spending was a proximate cause of both the Great Depression and Japan's Lost Decade. Basically, what the Republicans are arguing for would likely pop all the bubbles simultaneously, which could be pretty devastating. I don't think that extreme is likely, but it would be fairly easy to cause a moderate version of that...)

As I finished my workout, an ad came on for one of those companies hawking gold. They made the usual silly claims about gold being a "safe haven" and so on. What really struck me, though, was the big headline: "Gold has tripled in value since 2001!"

This is supposed to make me *want* to buy it?

The first rule of economics is pretty simple: that which goes up too fast, will come down. The faster the rise, the steeper the fall when it comes. An asset class that has tripled in value in only eight years -- well, that's a pretty fast rise.

I've been pretty clear for a while that we're in a gold bubble: this is just another bit of evidence. Just as in real estate and stocks, when people are going around, parroting claims about how an asset class is "safe", while at the same time bragging about how fast its value is rising -- that's practically the textbook definition of a bubble.

I don't know when it will crash -- for all I know, it could rise quite a bit higher yet -- but I don't recommend being invested in it when it does. Unlike real estate or stocks, there's not much fundamental value in there to slow down the crash when it comes...

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...)