Has The Bank Bailout Hurt The Consumer Market

The Wash Post reports that the bank bailout during this financial collapse has hurt the market for banking as consumer choices are limited and big banks hold to much market power in the United States market.

The Post reports:

"J.P. Morgan Chase, an amalgam of some of Wall Street's most storied institutions, now holds more than $1 of every $10 on deposit in this country. So does Bank of America, scarred by its acquisition of Merrill Lynch and partly government-owned as a result of the crisis, as does Wells Fargo, the biggest West Coast bank. Those three banks, plus government-rescued and -owned Citigroup, now issue one of every two mortgages and about two of every three credit cards, federal data show."

Camden Fine, president of the Independent Community Bankers of America, said:

"'To favor one class of financial institutions over another class skews the market. You don't have a free market; you have a government-favored market,' he said. 'We will never have free markets again if you have the government picking winners and losers.'"

Sphere: Related Content

Seventeen More Minutes Til A Big Mac - Mmmmm

A graph by The Economist illustrating UBS data shows us the purchasing power of people in various cities. How long do you have to work for your Big Mac? I have to work 17 minutes.

Sphere: Related Content

The Length Of Recessions And The Size Of Government, Just A Correlation?

Conor Clarke at The Daily Dish has a good reaction to Alan Reynolds essay in the Wall Street Journal. Reynolds writes:

"To believe Big Government explains why this extremely long recession was not even longer, we need to find some connection between the size of government and the depth and duration of recessions. There is no such connection in U.S. history, or in recent cyclical experience of other countries.

On the contrary, recessions have become longer as the U.S. government (and the Fed) became larger, more expensive, and more involved in the economy. Foreign countries in which government spending accounts for about half of the economy have also suffered the deepest recessions lately, while economic recovery is well established in countries where government spending is a smaller share of GDP than in the U.S."

Clarke writes:

"First, all statistical joykills are fond of pointing out that correlation does not equal causation. Even if it were true that there was a tight historical correlation between the size of governments and the length of recessions, this would not prove that big governments cause (or 'produce' in Reynolds' parlance) longer recessions. It could be the case that longer recessions produce bigger governments. Or it could be the case that some third factor produces both. A statistically significant relationship between the size of government and the length of recession is no more proof that one causes the other than is a statistically significant relationship between global temperature and the number of pirates."

Sphere: Related Content

Stossel's Assumptions On Health care

John Stossel’s analysis of the president’s health care plan is missing some important concerns and his assumptions are incomplete.

I appreciate his acknowledgement of the scarcity of medical care. His basic economics is correct that as demand rises prices will likely rise as well. The assumption misses the possibility that there is already demand for and consumption of medical care by the currently uninsured that helps to drives medical cost up. It is not as if the uninsured will be entering the market for health care for the first time. They will enter it in a more efficient method as opposed to the emergency room door.

As Stossel agrees with most reasonable people that the government is not actively trying to kill people with “death panels” so why is rationing an issue. Why shouldn't scarce resources be rationed or prioritized? We currently try to ration medical resources such as vaccines. We prioritize older people and younger people to be vaccinated for flu primarily because we have a scarcity of vaccines and some people are more vulnerable.

As it has been pointed out before is insurance company rationing more desirable?

The market place for medical services for people with insurance is weird. Stossel is correct that there is a "principal-agent problem." As you enter the doctor’s examination room are you the consumer of the medical services. I don’t think so. You are the consumer of health insurance but the insurance company is the consumer of the health care since they are the ones paying the doctor. Or at least that is what Stossel leads to believe. I think he is correct but why would a government payer make this problem worse.

I now that Stossel’s concern is for self-determination. Does the current health insurance structure give people the opportunity for self-determination after the purchase of the policy? Does a public option do any less? For real self-determinative system we would need to undo all insurance and make health care fee for service. You only get it if you can pay for it.

Sphere: Related Content

Is Mortgage Modification Plan Working

Baseline Scenario says the modification plan is failing and is likely not to succeed at all.
Sphere: Related Content

Google Trends as Economic Indicator Update

A San Francisco Chronicle story about using web based trends as indicators.

Earlier this summer Larry Summers claimed that the economic situation was improving because fewer people were searching for the term economic depression in Google. This a questionable form of economic analysis but fun to talk about.

The SF Chronicle reports:

"R.J. Pittman, director of product management at Google, said it was flattering that Summers cited Google's search data as an informal survey on consumer confidence, but added that the information should not be seen as factual or fully representative. Still, he said, Google sees potential in products like Google Trends."

Sphere: Related Content

The Power Of Your Vote

A new report released by the National Bureau of Economic Research shows that an average individual voter in the United States has one in 60 million chance of casting the deciding vote. Not necessarily surprising. But the authors conclude:

"A probability of 1 in 10 million is tiny but, as discussed by Edlin, Gelman, and Kaplan (2007), can provide a rational reason for voting; in this perspective, a vote is like a lottery ticket with a 1 in 10 million chance of winning, but the payoff is the chance to change national policy and improve (one hopes) the lives of hundreds of millions, compared to the alternative if the other candidate were to win. Different voters have different opinions about which candidate is desirable, but many can feel that their preference is not only better for them personally but for millions of others. (On the other hand, for voters in states such as New York, California, and Texas where the probability of a decisive vote is closer to 1 in a billion, any reasons for voting must go beyond the any instrumental rationality.)"

It makes my lottery ticket purchases seem more rational than my voting in New York. OK, not really.

It is interesting research and worth reading. If you don't have access through a university library you may have to pay for the report. Sphere: Related Content

Are People Surprised By The Economic Gains From Immigration

Well they should not be, The CATO Institute has released a report claiming that their is a large economic benefit in naturalizing illegal immigrants. While xenophobic walls on our border is expensive with little value to economic growth. It is a interesting report and thankfully not very long.

Sphere: Related Content

Reducing Search Costs

Reducing search costs improves the lives of people. Thomas Friedman's column today, The Land of 'No Service' illustrates the need. Sphere: Related Content

Ignoring Scarcity Is Real Scary

Newt Gingrich in today's LA Times has an essay titled "Healthcare rationing: Real scary" exclaiming the failings of the current House health care proposal and the virtues of his own ideas.

I have no doubt that removing the current barriers that prevent consumers from purchasing insurance in a nation wide market will increase competition and will reduce costs for some time. So I can say with confidence that Gingrich is right on this point but unfortunately is he wrong on many others. Mostly due to ignoring the issues and concerns of consumer's and the benefit of the larger community.

As it does seems wrong for a single man to pay for the very unlikely need for pregnancy coverage Gingrich ignores the constraints of purchasing insurance for small businesses, the providers of most insurance in the country. Gingrich writes:

"One key proposal is to mandate an 'essential benefit package' for every private insurance policy sold in the United States. Currently, individuals and employers usually make these coverage decisions. This legislation creates a new federal Health Benefits Advisory Committee that would decide instead. For example, if you are a single male with no children, the legislation still requires you to have maternity benefits and well-baby and well-child care coverage. You don't want or don't need that coverage? Sorry, you have to pay for it anyway."

Currently employers do not cater insurance options to individual employees based on their demographic characteristics. To do so may be unnecessarily expensive. In my previous job I had coverage for pregnancy for ten years and never used it until I got married then had a baby with my wife. So to claim that a man would not have opportunity to utilize child birth coverage is not entirely correct. Perhaps an al a carte option of insurance was available many men would choose to not have this coverage, but products bundling is more efficient for both consumer and the firm.

Gingrich's prescription for health care ignores the unpleasant fact of scarcity. Medical resources are not infinite. The problems of scarcity is a conversation that needs to happen. We have only so many vaccines, beds, organs and pieces of equipment and what is the appropriate way of allocating those resources. A well defined metric for prioritizing the uses of these resources seems very appropriate, but the conversation needs to be frank. It is easy to acknowledge the coldness or even callousness of Ezekiel Emanuel's conclusions of his research but it should be the beginning of the discussion of how much we value life.

The question of how we value of life should not be limited to whether we withhold treatment from an individual but expanded to how we use the resources available. Withholding an organ from one person is only a factor in the equation of what is the value of life, not the answer. That factor is held against the factors of the prognosis and potential quality of life of other people in relation to the person not receiving the organ or other medical resource. To leave this sensitive and emotional decision entirely to market forces or family decisions will create poor outcomes. Government panels should not make these decisions either but doctors should be empowered to calculate the prognosis and potential future quality of life against the value of the resources and life. There is an extreme risk of adverse selection if we don't find acceptable answers to this question. What is the opportunity cost of medical treatment if prognosis is poor? Sphere: Related Content

Talk Of Politics And Economics - Two Things That Don't Mix Well

It is a very accepted idea that President gets credit and blame for the economy. The reality is that the impact of the Presidency on the economy is very small in the short term and in the long term it is pure speculation to say that an action by a president had a defined effect on the economy. The market or markets of the United States, for that matter the world, are too large and incomprehensible for such an assertion to be accurate. But it is fun none the less.

So it is way to early and ludicrous to say, "this is Obama's economy" or the policies of Barack Obama are going to destroy the economy of the United States.

Bruce Bartlett, it is fair to say he is a conservative economist (he is the trickle down guy), says that people protesting the actions of Barack Obama "are less angry about Obama’s policies than they are about having lost the White House in 2008. They are primarily Republican Party hacks trying to overturn the election results, not representatives of a true grassroots revolt against liberal policies."

A well used quote about the economy is that it is really big ocean liner. It does not stop on a dime or make sharp turns. Even the best policies don't stop us from economic coasting and making really wide u-turns.

Bartlett writes:

"I think conservative anger is misplaced. To a large extent, Obama is only cleaning up messes created by Bush. This is not to say Obama hasn’t made mistakes himself, but even they can be blamed on Bush insofar as Bush’s incompetence led to the election of a Democrat. If he had done half as good a job as most Republicans have talked themselves into believing he did, McCain would have won easily."

He continues:

"Finally, conservatives have an absurdly unjustified view that Republicans have a better record on federal finances. It is well-known that Clinton left office with a budget surplus and Bush left with the largest deficit in history. Less well-known is Clinton’s cutting of spending on his watch, reducing federal outlays from 22.1 percent of GDP to 18.4 percent of GDP. Bush, by contrast, increased spending to 20.9 percent of GDP. Clinton abolished a federal entitlement program, Welfare, for the first time in American history, while Bush established a new one for prescription drugs."

Bartlett again:

"In my opinion, conservative activists, who seem to believe that the louder they shout the more correct their beliefs must be, are less angry about Obama’s policies than they are about having lost the White House in 2008. They are primarily Republican Party hacks trying to overturn the election results, not representatives of a true grassroots revolt against liberal policies. If that were the case they would have been out demonstrating against the Medicare drug benefit, the Sarbanes-Oxley bill, and all the pork-barrel spending that Bush refused to veto."

He concludes:

"Until conservatives once again hold Republicans to the same standard they hold Democrats, they will have no credibility and deserve no respect. They can start building some by admitting to themselves that Bush caused many of the problems they are protesting."

Sphere: Related Content

Revisiting Privatization Of Government Services And Products (warning: very dry subject)

I need to rethink my position on privatization of governmental services or at least some types of services.

The Wall Street Journal reports on Indiana's efforts with privatizing social services. In 2007 the state contracted to pay a group of businesses roughly $1.34 billion to run social services programs for ten years. Unfortunately, there were many problems running essential programs. An example in the Journal article, "Naomi Mundy, a 59-year-old homemaker, said it took 15 months after she developed melanoma to get Indiana to pay her health-care benefits under Medicaid because of outsourcing snafus." Also, children were not enrolled in early child health care for up to six months. These are real problems.

There is generally two types of privatization of government services. The first is the one described above where municipalities pay firms to handle the delivery of services or the processing of recording keeping tasks among other functions. A primary benefit of this type of outsourcing is that the governments can't afford to upgrade the technology used to make tasks more efficient therefore missing out on the economies of scale resulting from automation and other technological processing. The cost of upgrading and training of staff to use the new technology is often much greater than the lowest bid price from privatization. The outcomes described in the Indiana experience is too great a problem to be offset by these fiscal savings. Critics of privatization, as the Journal reports, may be correct, these "problems show why government functions, particularly human services, shouldn't be turned over to private contractors."

The second form of privatization provides government with funds from firms that run government services but the firms retain the profit from the operating the service. For example, there has been much debate over the proposed plan to privatize state lotteries. In 2007 California lottery operation privatization could have brought the state nearly $37 billion dollars in exchange for leasing the operations to a private firm for forty years. After the firm pays the state $37 billion any revenue after other operating expense is the firm's to keep (they will be taxed of course). There are proposals to privatize tolls road, airports and other revenue generating government operations. This is an attractive option for state and local governments due to the massive deficits they face in the current economy. There are social problems that could arise from some of these proposals. There are associated social problems that can arise from lottery privatization. For instance, the incidence of lottery participation is highly concentrated in low income communities. The operating firm in its drive to increase revenue can target with advertising and increased number of vendors such communities and thereby create a disproportionate negative impact on that community. But there is also the long term fiscal problems created from this type of privatization. How much revenue is the state giving up over the 40 years. In the California proposal Lehman Brothers was a firm vying for the lease. If the net present value calculation was so advantageous that Lehman was willing to spend $37 billion how much revenue would California not receive over the forty years. I am pretty sure California is glad they did not deal with Lehman, or maybe not?

Privatization can be good and it can be bad. So can government, but we should probably leave vital social services in the hands of the people who may do it bad, but at least do it better. Sphere: Related Content

Cash For Clunkers Environmental Victory?

NY Times reports today:

"'What we ended up with,' said one senior Obama administration official, who would not speak on the record because he was being critical of his own administration’s environmental bona fides, 'is a program in which you trade in old clunkers for new clunkers.' Less discussed is the second critique of the program: It rewards drivers who chose to buy gas guzzlers a few years back, but not those who spent more to buy fuel-sippers (although in recent years those who purchased efficient new hybrids got generous tax credits)."

We should not be fooled, Cash For Clunkers was a program to help the auto industry clear inventory. There will be a environmental benefit but it could have been greater. It has been reported that the under the program trade ins have had 50% benefit in term of MPG. Cash for Clunkers has proved that with an incentive people will buy a more fuel efficient cars. That is great, but why not make threshold hold greater than only five MPG. Why not require consumers to purchase cars with at least a ten MPG improvement? Why not encourage people to purchase used fuel efficient hybrid?

Previous Cash for Clunkers posts here. Sphere: Related Content

Should Employees Be Paid For Off Hours Work?

Reporting by Wall Street Journal about current litigation between T-Mobile and some employees. The suit claims that the employees are owed wages for time spent answering call and messages from managers and customers during off work hours. I hope the employees win. Sphere: Related Content

10% Unemployment, Maybe Not?

Nate Silver thinks that unemployment won't hit 10%. I would agree with his conclusions based on his numbers. As a previous post stated the improvement in unemployment was very much helped by the number of people actively seeking work declined. I think this is the important passage in Silver's prediction:

"In order for unemployment to hit 10 percent, a net of roughly 1 million more people would need to become unemployed, assuming no change in the size of the labor force (which is a big assumption and one we’ll examine in a moment). This almost cetainly won't happen. Last month, 247,000 jobs were lost according to the payroll survey, and 155,000 more people became unemployed according to the household survey. (What’s the difference between these two numbers? We’ll discuss that too in a bit.) Given that the numbers are improving, it’s hard to see how you can squeeze another million or so job losses of 150-300K per month -– you’d need the employment picture to completely flatline for another 4-5 months, or for what now seems to be a fairly robust trend to actually reverse itself.

Note, however, what I stipulated earlier: assuming no change in the size of the labor force. Ordinarily, about 125,000 additional people each month enter the economy. So it’s not enough merely to break even on the job creation numbers; you have to be slightly into positive territory to avoid seeing the unemployment rate go up as a result of these new job-seekers."

Sphere: Related Content

Greed Can Be Good

Megan McArdle at The Atlantic asks why shouldn't people get huge amounts of dollars if they create innovative products or services that improve the quality of people's lives.

I agree with McArdle. My concern with the health care reform proposals is the lack of discussion and understanding of the impact on innovation and research. Perhaps there will be none or a negligible amount, but I intuitively doubt it. McArdle writes:

"The injustice of his demands for profit rankles more deeply than the miracle of his inventions can soothe. If they have to risk some innovation in order to wring this profit out of the system, and distribute the goods he's already produced for us more widely, they're fine with that tradeoff.

I'm not. And I don't think this is a gap we can bridge by discussing the thing. We're doomed to keep getting angry at each other."

I haven't found any research on this subject. If anyone knows of any let me know.

What do you think? Sphere: Related Content

Rebuttal To Conor Friedersdorf On Cash For Clunkers

Alas! A Blog has an excellent rebuttal to Friedersdorf's Clunker's post. The Alas! post uses more sound economic arguments. Going back to the basics. Perhaps I was swayed by nostalgia. Alas actually draws a demand curve bringing me back to my school days.

Sphere: Related Content

Glenn Beck Being Crazy Doesn't Make You Right -- The Debate On $$$ For Clunkers

Conor Friedersdorf offers a sensibility to the debate over the effectiveness and efficiencies of the Cash for Clunkers program. Just becasue the arguments of the loudest critics are crazy and make no sense that does not mean the there are no good arguments against the program. Friedersdorf writes:

"Just because the right includes a lot of people making very bad arguments right now doesn’t make the people they’re arguing against right. It’s a lesson I learned when I saw the behavior of bombastic, juvenile folks on the left translate into support for President Bush’s bid to invade Iraq."

Friedersdorf offers these places as good arguments against Clunkers:

Radley Balko
Challenging Jon Stewart's treatment of Democrats, Balko takes issue with Stewart piece on Clunkers. Balko breaks it down to a mathematical equation:
(all of the energy that went into making the old car) + (the energy it will take to destroy it) + (all of the energy it took to make the new car) + ($3,500)

Rich Lowry
Lowry argues that Clunkers only creates an illusion of demand. Essentially reducing future demand. Also, destruction of the trade in cars is a waste of goods with economic value.

Derek Thompson:
Thompson point is that C4C, as he calls it, incentivizes the purchase of environmentally unfriendly SUVs and has only encouraged auto sales that would have happened soon regardless of C4C. Unlikely to increase the annual auto sales number. Sphere: Related Content

Is Cash For Clunkers Sound Environmental Policy

Gwen Ottinger questions the environmental effects of Cash for Clunkers. Sphere: Related Content

There Should Be More Naughty Words Used

Apparently Tim Geithner's language in a meeting yesterday with financial regulators got a littler more colorful than usual. The writer of a Wall Street Journal story called it an "expletive-laced critique." I think I like the angry Tim Geithner. We should have more cursing.

The WSJ article states:

"Friday's roughly hourlong meeting was described as unusual, not only because of Mr. Geithner's repeated use of obscenities, but because of the aggressive posture he took with officials from federal agencies generally considered independent of the White House. Mr. Geithner reminded attendees that the administration and Congress set policy, not the regulatory agencies."

It continues:

"Government officials said Mr. Geithner had expected regulators to object to parts of the plan that threatened their power or authority, but Treasury officials appeared caught off guard at how much the criticism resonated with lawmakers.
Mr. Geithner wanted to tell the attendees they shouldn't let turf battles get in the way of fixing a system that is clearly broken, Mr. Wolin said. He declined to comment on Mr. Geithner's tone and language."

I have not been able to digest the Financial Regulatory Reform proposal, I probably won't be able to either. Nevertheless, Geithner's primary goal is to create a new regulatory agencies and boards, for example the Financial Services Oversight Council and the National Bank Supervisor. I will read more of the plan and hopefully be able the answer the following question. Is Geithner's proposal going to alleviate the rent seeking tendencies of regulators or is he creating a whole new agencies of rent seekers? Sphere: Related Content