Sunday, September 21, 2008
Alexander Hamilton Was Wright
Yes, the Wall Street Journal correctly reported yesterday (September 20, A3 "Government Bailouts: A U.S. Tradition Dating to Hamilton") that I named one of my sons Alexander Hamilton Was Wright. I just couldn't resist the play on my last name, which sounds like "right" (correct) but actually means "maker" (as in wheelwright, cartwright, etc.) . So, yes, Hamilton was both correct and one of America's makers. For details, see Financial Founding Fathers (with David J. Cowen), The First Wall Street, and, of course, One Nation Under Debt. (Hamilton Unbound, by contrast, is actually a Hamiltonian interpretation of early U.S. history rather than a biography. It's a pun too.)
Saturday, August 30, 2008
Fannie, Freddie, the National Debt, and the Federal Loan Office (FLO)
In an article entitled "Fire the bazooka," The Economist, that unbelievably witty British weekly news mag, says it is "time to nationalise [i.e., nationalize] America's mortgage giants," namely Fannie Mae and Freddie Mac. The mag realizes that a government takeover would "technically add huge liabilities to the government's balance sheet" but quickly notes that "these would be offset by mortgage assets that are almost as large." What it doesn't say is that nobody wants those assets and that is why ole Freddie and Fannie are in such a pickle in the first place.
It IS possible for a government to run a mortgage office successfully. Before the American Revolution, several colonies, most notably Pennsylvania, sponsored "loan offices" or "land banks" that lent what were then large sums for long periods on the collateral of improved land and other hard assets. The loan offices were far from perfect. They usually lent for less than the going market rate so the quantity of mortgages demanded exceeded the quantity the government was willing to supply. In some places, like Massachusetts, some nasty political non-price rationing closed the gap. (Read corruption.) Also, if times were tough the government did not foreclose as vigorously as private lenders did. But maybe that was a virtue and that interest on the loans made other forms of taxation almost completely unnecessary in colonial Pennsylvania certainly was a good thing!
The Fed has always lent to member banks. Recently, in response to the subprime mess, it began lending to other types of financial institutions as well, in the name of financial system stability. The message it has sent is loud and clear and consistent with earlier pronouncements: get as big and risky as you want because we have your back. And so Fannie, Freddie, Indy, Bear, and many others did, and we and our kids are going to be asked to pay for it. Some people consider this arrangement unfair and it is difficult to argue with them.
Perhaps what we need is a Federal Loan Office (FLO) that will make mortgage loans to any bona fide American citizen for any 1 to 4 unit residential building that s/he can afford. (The IRS can help out with that one.)* The government's cost of funds is zero so it can set the interest rate where it pleases, higher to slow the economy down and lower to speed it up. The Fed would still control monetary policy, sterilizing mortgage flows with open market purchases or sales of Treasury bonds when necessary. All interest payments would be credited to the Treasury and the mortgage interest tax deduction would be eliminated. Like the Fed, the FLO would be a quasi-independent government "profit center" rather than an additional burden on the federal budget.
It could also be used to provide effective fiscal stimulus. Instead of sending out stimulus checks 6 times too small and 6 months too late, the government could use the mortgage loans to stimulate the economy quickly by telling borrowers, to wit most American families, that they need pay only half or some other fraction of their usual payments for the next x months. It could even pass a moratorium on all payments to combat particularly large shocks, postpone payments in disaster areas, and so forth. We'll have to think carefully, however, about how to spot and stop potential political abuses of these powers and there will be some tricky issues during the transition period.
*Mortgage loans should have two bases, the value of the mortgaged property and the borrower's income. The IRS knows Americans' income history better than anyone; perhaps people will think twice about cheating on their taxes if it affects their ability to obtain a mortgage. Assessments should be done by at least three randomly chosen local assessors.
It IS possible for a government to run a mortgage office successfully. Before the American Revolution, several colonies, most notably Pennsylvania, sponsored "loan offices" or "land banks" that lent what were then large sums for long periods on the collateral of improved land and other hard assets. The loan offices were far from perfect. They usually lent for less than the going market rate so the quantity of mortgages demanded exceeded the quantity the government was willing to supply. In some places, like Massachusetts, some nasty political non-price rationing closed the gap. (Read corruption.) Also, if times were tough the government did not foreclose as vigorously as private lenders did. But maybe that was a virtue and that interest on the loans made other forms of taxation almost completely unnecessary in colonial Pennsylvania certainly was a good thing!
The Fed has always lent to member banks. Recently, in response to the subprime mess, it began lending to other types of financial institutions as well, in the name of financial system stability. The message it has sent is loud and clear and consistent with earlier pronouncements: get as big and risky as you want because we have your back. And so Fannie, Freddie, Indy, Bear, and many others did, and we and our kids are going to be asked to pay for it. Some people consider this arrangement unfair and it is difficult to argue with them.
Perhaps what we need is a Federal Loan Office (FLO) that will make mortgage loans to any bona fide American citizen for any 1 to 4 unit residential building that s/he can afford. (The IRS can help out with that one.)* The government's cost of funds is zero so it can set the interest rate where it pleases, higher to slow the economy down and lower to speed it up. The Fed would still control monetary policy, sterilizing mortgage flows with open market purchases or sales of Treasury bonds when necessary. All interest payments would be credited to the Treasury and the mortgage interest tax deduction would be eliminated. Like the Fed, the FLO would be a quasi-independent government "profit center" rather than an additional burden on the federal budget.
It could also be used to provide effective fiscal stimulus. Instead of sending out stimulus checks 6 times too small and 6 months too late, the government could use the mortgage loans to stimulate the economy quickly by telling borrowers, to wit most American families, that they need pay only half or some other fraction of their usual payments for the next x months. It could even pass a moratorium on all payments to combat particularly large shocks, postpone payments in disaster areas, and so forth. We'll have to think carefully, however, about how to spot and stop potential political abuses of these powers and there will be some tricky issues during the transition period.
*Mortgage loans should have two bases, the value of the mortgaged property and the borrower's income. The IRS knows Americans' income history better than anyone; perhaps people will think twice about cheating on their taxes if it affects their ability to obtain a mortgage. Assessments should be done by at least three randomly chosen local assessors.
Thursday, August 14, 2008
Fixing healthcare with pay for performance
Even if our national government somehow gets its fiscal act together and pays the funded national debt down, or at least slows its rate of increase below that of real economic growth, the American people will still face two other daunting financial problems, Social Security and healthcare entitlements. I'll tackle S.S. in a future post and concentrate on healthcare in today's installment.
The debate over healthcare tends to revolve around insurance. I think that emphasis is misplaced. Insurance is an issue only because healthcare has become so expensive. In the 19th and early 20th centuries, people wanted reimbursement for lost wages due to illness, not for healthcare costs. That changed as the cost of doctor visits, surgery, hospitalization, and medication soared faster than inflation year after year in the last three quarters of the 20th century.
But the real problem is not simply the cost of healthcare, it is the value proposition. People would happily pay high prices for medical treatment if they actually worked to alleviate suffering, stop further damage, and so forth. Modern medicine does some things very well and the doctors, nurses, and other specialists who provide those services ought to be well compensated for them.
Unfortunately, however, modern medicine is far from flawless. Many diseases and disorders continue to flummox it. My parents, brother, and wife, as well as several colleagues, suffer from chronic medical problems that doctors can't, or won't, fix. Here is where the value proposition comes in. Why do we pay doctors (etc.) even when they don't make us better? Would we pay an auto mechanic who looked at our car, maybe changed out a part, but didn't fix the rattle? Would an accountant expect payment for just looking at your taxes? Why should we pay our doctors just for seeing us?
I recently suffered from a viral infection in my throat that led to acute pharyngitis. I couldn't even swallow my own spit. The ER staff got the swelling down but sent me home without trying to ascertain the cause. Unsurprisingly, I ended up going back to the ER two days later. This time the docs did not even alleviate my pain, sending me home with a concoction I suspect was a placebo. Whatever it was, it didn't work. A week later, I recovered thanks to my own immune system but the ENT insisted that I pay him an office visit anyway. He actually had the nerve to request that I come back 2 weeks later, even though he admitted he could do nothing to help me or to prevent another bout of this nasty ailment. All told, I shelled out almost $200 in co-pays for this "treatment." Lord knows how much my insurer will pay, and all for nothing.
If the government said patients only had to pay when doctors actually helped them our national healthcare bill would be slashed, perhaps by as much as half. That would go a long way toward alleviating the entitlement burden and decreasing health insurance premiums. Some smart egg would have to create a system that would minimize abuse (doctors claiming to do more than they did; patients claiming that they were not helped when in fact they were); entry into the healthcare professions would have to be opened to more people (which in and of itself would be ameliorative); our tort/medmal system would need to be revamped (it needs it anyway).
Imagine, though, how differently doctors would behave if they only got paid based on proven results. Unnecessary office visits and long waits would vanish, doctors would specialize around symptoms/diseases rather than body systems, and referrals to doctors better equipped to handle particular problems would come more rapidly. As long as the rewards matched the risks, doctors could be found who would take on any medical problem, including gunshot wounds and advanced cancer. Overall, doctors would have to work harder and smarter.
Healthcare professionals will therefore come up with all sorts of reasons why this proposal is dumb. As they mumble and bumble, just ask yourself if you would believe the same sort of story from any other professional services provider.
The debate over healthcare tends to revolve around insurance. I think that emphasis is misplaced. Insurance is an issue only because healthcare has become so expensive. In the 19th and early 20th centuries, people wanted reimbursement for lost wages due to illness, not for healthcare costs. That changed as the cost of doctor visits, surgery, hospitalization, and medication soared faster than inflation year after year in the last three quarters of the 20th century.
But the real problem is not simply the cost of healthcare, it is the value proposition. People would happily pay high prices for medical treatment if they actually worked to alleviate suffering, stop further damage, and so forth. Modern medicine does some things very well and the doctors, nurses, and other specialists who provide those services ought to be well compensated for them.
Unfortunately, however, modern medicine is far from flawless. Many diseases and disorders continue to flummox it. My parents, brother, and wife, as well as several colleagues, suffer from chronic medical problems that doctors can't, or won't, fix. Here is where the value proposition comes in. Why do we pay doctors (etc.) even when they don't make us better? Would we pay an auto mechanic who looked at our car, maybe changed out a part, but didn't fix the rattle? Would an accountant expect payment for just looking at your taxes? Why should we pay our doctors just for seeing us?
I recently suffered from a viral infection in my throat that led to acute pharyngitis. I couldn't even swallow my own spit. The ER staff got the swelling down but sent me home without trying to ascertain the cause. Unsurprisingly, I ended up going back to the ER two days later. This time the docs did not even alleviate my pain, sending me home with a concoction I suspect was a placebo. Whatever it was, it didn't work. A week later, I recovered thanks to my own immune system but the ENT insisted that I pay him an office visit anyway. He actually had the nerve to request that I come back 2 weeks later, even though he admitted he could do nothing to help me or to prevent another bout of this nasty ailment. All told, I shelled out almost $200 in co-pays for this "treatment." Lord knows how much my insurer will pay, and all for nothing.
If the government said patients only had to pay when doctors actually helped them our national healthcare bill would be slashed, perhaps by as much as half. That would go a long way toward alleviating the entitlement burden and decreasing health insurance premiums. Some smart egg would have to create a system that would minimize abuse (doctors claiming to do more than they did; patients claiming that they were not helped when in fact they were); entry into the healthcare professions would have to be opened to more people (which in and of itself would be ameliorative); our tort/medmal system would need to be revamped (it needs it anyway).
Imagine, though, how differently doctors would behave if they only got paid based on proven results. Unnecessary office visits and long waits would vanish, doctors would specialize around symptoms/diseases rather than body systems, and referrals to doctors better equipped to handle particular problems would come more rapidly. As long as the rewards matched the risks, doctors could be found who would take on any medical problem, including gunshot wounds and advanced cancer. Overall, doctors would have to work harder and smarter.
Healthcare professionals will therefore come up with all sorts of reasons why this proposal is dumb. As they mumble and bumble, just ask yourself if you would believe the same sort of story from any other professional services provider.
Wednesday, July 30, 2008
The Trouble with Balance Sheet Analysis
In my never ending quest to alert the American people to the avalanche of debt about to befall them (and sell a few books at the same time), I sometimes stumble across otherwise rational looking and sounding people who claim that the national debt is no big deal. Such folks sloughed off this week's increase in the debt ceiling (to over $10 TRILLION) and the announcement of a $.5 TRILLION annual federal deficit, the largest in nominal terms in U.S. history. Their main line of counterattack is that while we OWE a lot we also OWN a lot so the debt is no big deal. Our assets exceed our liabilities (at least they claim) so the country is basically sound.
That sounds a lot like Bear Stearns and Fannie Mae thinking. The trouble with balance sheet analysis of the national debt is that the value of assets can change, and usually much more quickly than the value of liabilities. If interest rates were to spike, due to some shock and/or high levels of inflation, the value of most assets would drop (yet more) but the government would still owe $9.5 TRILLION (and growing). And of course most government assets are not liquid.
Cash flow issues loom large as well. Say we borrowed another $10 TRILLION to fix our aging bridge and highway infrastructure. For the balance sheet types, there is no problem here because our nation's assets will increase by the same amount of the debt. (Implausibly assuming, of course, that the public gets $10 TRILLION worth of construction for its money. See http://search.barnesandnoble.com/booksearch/results.asp?WRD=busted+budgets for a counter view.) But the interest due on the debt would double. To pay that additional interest the government could always print more money, but that would further fuel inflation, which is already getting to scary levels. It could also increase tax revenues but that seems unlikely, at least this election cycle.
I'm increasingly convinced we need major changes to the way our government gets and spends our money. Unfortunately, we'll probably have to suffer through a major crisis to get reforms passed and then they will be rushed and grossly suboptimal.
That sounds a lot like Bear Stearns and Fannie Mae thinking. The trouble with balance sheet analysis of the national debt is that the value of assets can change, and usually much more quickly than the value of liabilities. If interest rates were to spike, due to some shock and/or high levels of inflation, the value of most assets would drop (yet more) but the government would still owe $9.5 TRILLION (and growing). And of course most government assets are not liquid.
Cash flow issues loom large as well. Say we borrowed another $10 TRILLION to fix our aging bridge and highway infrastructure. For the balance sheet types, there is no problem here because our nation's assets will increase by the same amount of the debt. (Implausibly assuming, of course, that the public gets $10 TRILLION worth of construction for its money. See http://search.barnesandnoble.com/booksearch/results.asp?WRD=busted+budgets for a counter view.) But the interest due on the debt would double. To pay that additional interest the government could always print more money, but that would further fuel inflation, which is already getting to scary levels. It could also increase tax revenues but that seems unlikely, at least this election cycle.
I'm increasingly convinced we need major changes to the way our government gets and spends our money. Unfortunately, we'll probably have to suffer through a major crisis to get reforms passed and then they will be rushed and grossly suboptimal.
Monday, July 07, 2008
Walking the Walk: Can McCain Do It?
I caught a bit of a John McCain speech today. He is certainly "talking the talk" regarding fiscal responsibility. But can he really walk the walk? A message I received today from a government budget bureaucrat in response to my op-ed in the Free Lance-Star suggests not.
My correspondent, who I shall call Shallow Throat, says that our budgeting system is broken because at the unit level it builds in automatic yearly increases and fails to create incentives to cut back spending. If McCain wants my vote, he should address this important issue in a concrete way.
I suggested to Shallow Throat that what we need to do is to build in the expectation of annual budget decreases, at least in real (inflation-adjusted) terms. That way, front line government managers will have incentives to cut fat because the money that pays for it will disappear soon, and automatically.
My correspondent, who I shall call Shallow Throat, says that our budgeting system is broken because at the unit level it builds in automatic yearly increases and fails to create incentives to cut back spending. If McCain wants my vote, he should address this important issue in a concrete way.
I suggested to Shallow Throat that what we need to do is to build in the expectation of annual budget decreases, at least in real (inflation-adjusted) terms. That way, front line government managers will have incentives to cut fat because the money that pays for it will disappear soon, and automatically.
Sunday, June 08, 2008
Eminent Domain in Reverse
One reason the national debt is so damn big is that the federal government owns and operates assets that it shouldn't, like Amtrak.
What we need is a sort of eminent domain in reverse, a right vested in the American people to purchase government-owned assets at fair market prices. If the government wants to put a road through your property, or thinks a corporation would do more for the economy than you're doing, it can force you to sell it. Why can't We the People do the same for government assets? I'd exempt military bases and national parks but everything else should be on the table, especially businesses like Amtrak.
This would force the government to run their business interest profitably or lose them to the highest bidder. The proceeds of sales should be used to pay down the debt; the subsidies saved in future years will of course reduce the budget deficit.
What we need is a sort of eminent domain in reverse, a right vested in the American people to purchase government-owned assets at fair market prices. If the government wants to put a road through your property, or thinks a corporation would do more for the economy than you're doing, it can force you to sell it. Why can't We the People do the same for government assets? I'd exempt military bases and national parks but everything else should be on the table, especially businesses like Amtrak.
This would force the government to run their business interest profitably or lose them to the highest bidder. The proceeds of sales should be used to pay down the debt; the subsidies saved in future years will of course reduce the budget deficit.
Saturday, June 07, 2008
The Poor Person's Inflation Hedge
I taped my June 22, 9:30 PM appearance on Larry Kane's Voice of Reason show here in Philly yesterday. (CN8 in the Philly market; if you get Comcast, check your local listings). The subject of consumer debt came up and I pointed out that inflation expectations are such that Americans act rationally when they run into debt, especially if they can reasonably expect their wages to keep up with price increases. Borrowing is of course the poor person's hedge against inflation: there's little better investment than having a big fat mortgage inflated away in real terms.
Say you have a $100,000 mortgage (perhaps on what today is a $75,000 house) and earn $20,000 per year -- the debt is 5x your earnings. If inflation runs at 10% per year for a few years and your wages keep up, or eventually catch up, you'll still owe $100,000 (minus any principal repaid, which is minimal at first on a 30 year mortgage) but make say $25 or $30k per year -- only 3 or 4x your earnings. The higher inflation is, the easier it is to repay the debt. Why do you think the government isn't quaking in its boots about the cheap dollar and high prices for everything from oil to bread? It's $9.4 plus perhaps $99 TRILLION in hock. (See the counters on this page and Thursday's post.)
Running up credit card debt is not such a good hedge against inflation because the interest rates on consumer revolving credit are, and likely to remain, well above the rate of inflation (even the actual rate the government is hiding). But cc debt offers a second type of hedge, one against falling real wages (when wages lag inflation). Bankruptcy laws are more stringent than they were a few years ago but until they bring back debtors' prisons ...
So if you don't like what is going on in the economy, watch the show, and buy the book!
Say you have a $100,000 mortgage (perhaps on what today is a $75,000 house) and earn $20,000 per year -- the debt is 5x your earnings. If inflation runs at 10% per year for a few years and your wages keep up, or eventually catch up, you'll still owe $100,000 (minus any principal repaid, which is minimal at first on a 30 year mortgage) but make say $25 or $30k per year -- only 3 or 4x your earnings. The higher inflation is, the easier it is to repay the debt. Why do you think the government isn't quaking in its boots about the cheap dollar and high prices for everything from oil to bread? It's $9.4 plus perhaps $99 TRILLION in hock. (See the counters on this page and Thursday's post.)
Running up credit card debt is not such a good hedge against inflation because the interest rates on consumer revolving credit are, and likely to remain, well above the rate of inflation (even the actual rate the government is hiding). But cc debt offers a second type of hedge, one against falling real wages (when wages lag inflation). Bankruptcy laws are more stringent than they were a few years ago but until they bring back debtors' prisons ...
So if you don't like what is going on in the economy, watch the show, and buy the book!
Friday, June 06, 2008
99 Trillion! and I know why.
Richard Fisher, top dog at the Dallas Fed, says that the present value of the cost of Medicare, the new drug benefit, and Social Security is $99.2 TRILLION, or about 10 times the funded national debt (see the counters on this page):
http://www.dallasfed.org/news/speeches/fisher/2008/fs080528.cfm
Holy Moose!
The saddest thing about this figure is that it is completely unnecessary. American's would save more if our financial securities firms, markets, and regulations were not so completely screwed up.
Personal story: Today, I closed a small 401k account with Ameriprise Financial. Why? Because they were sucking me dry with fees (to which they tacked on an extra fiddy bucks today). After taxes, I will actually lost money on this "investment." No wonder Americans spend every dime they make, borrow to the hilt, and hope the government will bail them out when they get old and sick.
http://www.dallasfed.org/news/speeches/fisher/2008/fs080528.cfm
Holy Moose!
The saddest thing about this figure is that it is completely unnecessary. American's would save more if our financial securities firms, markets, and regulations were not so completely screwed up.
Personal story: Today, I closed a small 401k account with Ameriprise Financial. Why? Because they were sucking me dry with fees (to which they tacked on an extra fiddy bucks today). After taxes, I will actually lost money on this "investment." No wonder Americans spend every dime they make, borrow to the hilt, and hope the government will bail them out when they get old and sick.
Monday, May 12, 2008
Returning to the Path of Fiscal Responsibility
What do John McCain, PATH (Port Authority Trans-Hudson), and the national debt have in common, besides all being very old? More than you might think!
PATH responded reasonably well to the fiasco -- nobody was hurt and service was restored the next morning. But as I waited for the E train to take me to the
The real story is more complex. Myriad government regulations pushed the H&M, and many other fine American railroads, into bankruptcy. Even with the fare increase, the PATH system is indeed cheap. Anyone who has used it, however, knows that the stations are oppressively hot and dank and the rides slow, herky jerky, and crowded. The system is in the middle of getting a long overdue facelift but the improvements made thus far have been marginal at best. And much of the money for those improvements, and indeed the system’s day-to-day operations, originate in cross subsidies from the Port Authority’s more lucrative assets, like its bridges. Were the Port Authority a for-profit company, it would have long since sold PATH to an entity better able to run it. If
Tuesday, May 06, 2008
What We Really Need Is A Bigger Gasoline Tax
Our presidential candidates have hit new lows calling for a federal gas tax holiday. What a real leader, a good old-fashioned statesman (statesperson today I guess) would call for would be increases in the gasoline tax. Here's why:
1. The federal budget deficit (and subsequent national debt) is rapidly getting out of control. Check out the counters on this page for details. We certainly do not need further tax cuts at this juncture.
2. The current fossil fuel based system may be destroying the environment and is certainly a strategic risk to U.S. security. We therefore need to cut down on fossil fuel use, not encourage it.
3. Investment in alternative fuels is relatively low (and hence slow) because of the uncertainty of future oil/gas prices.
The government could solve, or at least mitigate, all three problems by imposing an escalating gasoline tax and committing to it. A quarter a quarter would probably be sufficient to spur investors to back hydrogen and battery service stations, breaking the chicken-egg problem. (I want a car that runs on X but there are no places to buy X because nobody owns cars than run on X.) And a buck a year would probably not shock the economy too much. Reasonable people would realize that in a decade gasoline would be well north of $10/gallon and make their next vehicle purchase accordingly.
In the meantime, the feds would collect large sums that they could use to pay down
the national debt. We paid off our first national debt thanks to a similar combination of statesmanship and a powerful source of revenue (customs). But let's not learn from the past, let's just talk about people's pastors and flag pins.
1. The federal budget deficit (and subsequent national debt) is rapidly getting out of control. Check out the counters on this page for details. We certainly do not need further tax cuts at this juncture.
2. The current fossil fuel based system may be destroying the environment and is certainly a strategic risk to U.S. security. We therefore need to cut down on fossil fuel use, not encourage it.
3. Investment in alternative fuels is relatively low (and hence slow) because of the uncertainty of future oil/gas prices.
The government could solve, or at least mitigate, all three problems by imposing an escalating gasoline tax and committing to it. A quarter a quarter would probably be sufficient to spur investors to back hydrogen and battery service stations, breaking the chicken-egg problem. (I want a car that runs on X but there are no places to buy X because nobody owns cars than run on X.) And a buck a year would probably not shock the economy too much. Reasonable people would realize that in a decade gasoline would be well north of $10/gallon and make their next vehicle purchase accordingly.
In the meantime, the feds would collect large sums that they could use to pay down
the national debt. We paid off our first national debt thanks to a similar combination of statesmanship and a powerful source of revenue (customs). But let's not learn from the past, let's just talk about people's pastors and flag pins.
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