Intended Consequences

[FRED]

Intended Consequences
August 15, 2006 (Weekly Standard)
How the Fed, the economy, terrorism, and Ned Lamont are changing the political scene.

IF WE NEEDED ANY REMINDING that our world can change with nerve-rattling speed, we got it last week when the security services uncovered a plot by Islamofascists to slaughter innocent air travelers. Suddenly, a cup of coffee looks suspiciously like a terror weapon, an iPod like an explosives device, and a plane trip becomes even more of a hassle than it has been.

Other changes, less potentially lethal than the latest scare, are in store. The most obvious one underlies the decision of the Federal Reserve Board's monetary policy gurus to pause in their two-year program of ratcheting up interest rates.

Now, a decision by the Fed to wait for incoming data before deciding whether to continue tightening, taken alone, is hardly earth-shaking. But the reasons underlying the Fed's move mean that the lives of many Americans, and by extension many workers and consumers in other countries, are about to change. Uppermost in the Fed's mind is the fact that the U.S. housing market is coming off the boil. Not collapsing, but cooling sufficiently to deprive American consumers of one source of funding for their trips to the malls.

AntiSpin: The most interesting aspect of this article is its source: the neocon Weekly Standard. It's especially surprising to see this point noted in this publication, "Add to the effect of the Fed's policy shift another change that is likely to affect Americans more than they now realize: Something has been happening to the way the benefits of economic growth are being distributed in the United States. For reasons not fully understood, America's highest earners are garnering the largest share of the rise in the nation's income. At the same time, the relatively benign overall inflation figures mask the fact that the cost of living is rising more rapidly for the elderly (the price of drugs), than for the affluent young (think computers and flat-screen television sets). Result: a middle class that is beginning to question the American Dream that has done so much to ensure social stability, and that has typically rejected appeals of leftish class warriors."

What's this we hear? Neocons noting that unequal distribution of income gains might have negative long term political consequences? We've been preaching that for years. Our message is: Want to turn back the clock on all the progress that's been made to liberalize capitalism in the US to make the nation more innovative, competitive and able to generate more wealth for all? Just keep up policies that funnel more and more money into fewer and fewer hands, concentrate privilege, fail to take care of public goods like the environment, and ignore the needs -- such as healthcare -- of those who were not born on third base and have to work to hit a triple.

Keep it up and we're going back to an earlier time when wealth was better distributed, but there was a whole lot less of it to distribute. Greed is good, but only to a point, the point where we correctly do not attempt to guarantee equal opportunity of result for all participants in the economy, but no longer even attempt to create the conditions of equal opportunity, either. The single party Democratic/Republican state, with their Greenspan and now Bernanke Fed, with policies that promote ever higher levels of indebteness for the poor and middle class to compensate for declining real incomes to maintain living standards, passed that point a long time ago.

[Charles Mackay]

Re: Intended Consequences

Not only are the filthy rich getting even filthier, but after extracting $40 billion a piece from the American economy Buffett and Gates have decided to give it to Africa rather than contributing to fixing the enormous problems here in America.

When Buffett was asked about the disparity of income his offhand remark was "At the moment we appear to be winning" ... a bankhanded slap to all working class people.

With this kind of leadership from the richest of the rich we are headed to some sort of revolution. It's not that hard to take over a country when it's been abused by the rich... there are dozens of examples just in the 20th century alone.

[EJ]

Re: Intended Consequences

Not only are the filthy rich getting even filthier, but after extracting $40 billion a piece from the American economy Buffett and Gates have decided to give it to Africa rather than contributing to fixing the enormous problems here in America.

When Buffett was asked about the disparity of income his offhand remark was "At the moment we appear to be winning" ... a bankhanded slap to all working class people.

With this kind of leadership from the richest of the rich we are headed to some sort of revolution. It's not that hard to take over a country when it's been abused by the rich... there are dozens of examples just in the 20th century alone.

The point I've tried to make consistently is that any system, if it's abused and neglected, will reach an extreme and eventually fail. There is no guarantee of justice or fairness in any system, but without making these goals for a society, there is no hope of achieving them.

I doubt many people in the US will argue against the benefits to US society of compulsory K-12 education, but in the same breath some form of national health care is derided as socialistic. Everyone knows what happens if government does not intervene to protect the environment, yet discussion of what consitutes a fair and sound credit and money ecosystem, cared for as a public good, is off limits.

Our society is out of political, economic and moral balance. It can be restored via crisis, as I hypothesize in The Big Bet, but if economic conditions get bad enough -- and history tends to show that systemic crises tend to exaggerate the causes, and snowball -- very bad ideas start to look like good ideas, e.g., Communism in China, Socialism in Russia, and National Socialism in Germany, all the result either directly or indirectly of political crises that followed the last great global credit collapse.

[WDCRob]

Re: Intended Consequences

"For reasons not fully understood..."

Well, if fully is the operative word I suppose this is true. But I think only someone willfully blind could claim that the trend in income disparity isn't understood. Unfortunately it's one of the few policies in recent times that seems to have worked pretty much as advertised.

People look at the prosecution of the war in Iraq, the ham-handed diplomacy around the globe and the domestic bungling of Katrina and etc, and say the current band of idiots is incompetent.

But I think you can make a pretty strong case that they've done a fair bit of what they actually came into office to do: rewrite the tax code and de facto deregulate every industry to further enrich the rich; move the country towards theocracy; and destroy the very idea of the common good.

All enabled by well-meaning Libertarians, geniunely Christian Christians, a corporate media that doesn't even bother to ask hard questions, let alone have the standing to demand answers and a general populace that's fat, dumb and happy on easy money.

Maybe that's not a full accounting, but it's close enough.

[Christoph von Gamm]

Re: Intended Consequences

WDCRob - the problem is not too much deregulation but rather too much regulation... i.e. Import Taxes, a still protected steel industry, making cars more expensive to manufacture and lower in quality, a well regulated big defense industry - why not i.e. globally tendering the next generation aircraft and see who's best?? - a highly regulated finance industry especially if things turn bad for the borrower. On the other hand, where information asymmetry does exist things are highly un-regulated or the individual is unprotected against a group of experts knowing. Example: Real estate - appraisers cannot be held liable for overstated appraisals, working together with lenders knowing and feeling that the appraises are overstated but hoping everything will go ok to repay the debt or being caught up by inflation...

So in essence the regulation currently protects information asymmetries to an extent not economically making sense any more.

[BK]

Re: Compulsory K-12 and National Healthcare..

The over emphasis on compulsory education K-12 /leave no child behind is leading this country to financial ruin. My grandfather left school when he was 15 to get a job - education for education sake does not lead all folks to higher paying jobs. Many Kids be taught a vocational skill at an earlier age and be out working at 15 or 16 years old (and be happier). Sorry we have created a monster education system that tells kids how mature and prepared they are for the World based on their birthdate.

Currently, most home owners are seeing their property taxes increase at double digit rates because of political focus on education (resultant over spending). The full scope of the crisis won't become apparent until a state pension plan files for bankruptcy protection because of over generous pay packages.
When the Feds get involved with a solution it leads to Massive over spending - the positive results are never proportional to the over investment.

National healthcare will lead to a new kind of healthcare crisis. I have good friends in the UK, when they need hospitalization they opt out of the National Healthcare and pay for a Private Hospital.

Sorry but I thought I-Tulip was the one place that people would understand the insanity of the over spending by School Boards is crippling the country. To use the USA educational model/educational financial model to argue for National Healthcare is idiotic.

[jk]

Re: Compulsory K-12 and National Healthcare..

The over emphasis on compulsory education K-12 /leave no child behind is leading this country to financial ruin. My grandfather left school when he was 15 to get a job - education for education sake does not lead all folks to higher paying jobs. Many Kids be taught a vocational skill at an earlier age and be out working at 15 or 16 years old (and be happier). Sorry we have created a monster education system that tells kids how mature and prepared they are for the World based on their birthdate.

Currently, most home owners are seeing their property taxes increase at double digit rates because of political focus on education (resultant over spending). The full scope of the crisis won't become apparent until a state pension plan files for bankruptcy protection because of over generous pay packages.
When the Feds get involved with a solution it leads to Massive over spending - the positive results are never proportional to the over investment.

National healthcare will lead to a new kind of healthcare crisis. I have good friends in the UK, when they need hospitalization they opt out of the National Healthcare and pay for a Private Hospital.

Sorry but I thought I-Tulip was the one place that people would understand the insanity of the over spending by School Boards is crippling the country. To use the USA educational model/educational financial model to argue for National Healthcare is idiotic.

it's been a while, but, bk, you've made in very clear in numerous earlier posts what you think of the public education system. the fact that your parents were teachers is only germane if we know how you feel about your parents, and how they felt about their jobs. not that i'm inquiring. i'm not.

within the last 2 decades i experienced the public education system for a while as my kids went to public school until i got unhappy enough that i sent them to private school. [as a public school graduate, i never in a million years would have guessed that i'd ever want to send my kids to a private secondary school.] i also experience it through my interaction via patients of mine [i'm a psychiatrist] who happen to be adolescents in school. i also have patients who are teachers and from whom i hear a bit about what's going on. on the whole, the trends are bad. most of the deterioration is secondary to a combination of political correctness and government mandates, like the so-called "no child left behind" act. [this was like the loosening of pollution standards called the "clear skies act." our government is becoming increasingly orwellian.] special education mandates, in particular, are enormously expensive and drain resources which might make public education more productive in terms of academic achievement. there is a significant moral issue raised by these mandates, and i am NOT trying to debate the morality one way or the other. i'm just saying they have consequences. i went to a public h.s. and by graduation had had calculus, college level chemistry, 5 years of french and 2 years of russian. that doesn't happen these days. the public school will offer calculus ab, not bc - good for 1 semester credit, not 2. the offerings are more limited. tracking in middle school is politically incorrect.

on the whole, i nonetheless think we are much better off with a public education system and a mandatory one at that. a lot could be done to make it better. it basically is a boot camp for future industrial workers- on time, by the bell, rote work. that's not so relevant these days. we need something different, including a better apprentice system as they have in europe for those who want to pursue a trade instead of taking academic classes. so it should be made better, but i do not think it should be discarded.

i have practiced medicine for 30 years, in a private practice by myself for 15 years, and then in a small group practice for 15 years. i have borne witness to the managed care revolution. it succeeded in holding down medical cost increases for a few years. one time savings. now costs are rising as ever. the system has been set up in a regulatory fashion so as to produce profits for healthcare companies. 25% of all medical costs are now spent on administrative expenses - red tape. the "health maintenance company" pays people to inspect claims and try to limit care, the service providers - me- pay people to dun the hmo's so that they pay us, which they somehow find ways not to do.

i have reluctantly, and only in the last few years, concluded that a single payer system, warts and all, would be an improvement. the baby boom generation is beginning to turn 60, so we can look forward to skyrocketing medical expenses. we already spend the greatest proportion of gdp in the world on healthcare, and we're not that healthy. that's what really gets me. i used to think "oh, our statistics are screwed up because we really have 2 healthcare systems. a lousy system for people without money and a great system for people who have money." what shocked me, though, are recent studies showing that even lower-income people in britain were healthier than higher-income people in the u.s.!

real efficiencies will only arise when we somehow control end-of-life expenses - the last 90 days are really costly, and more importantly when we REALLY get interested in health instead of illness. and when we somehow construct a system that incentivizes both patients and medical service providers to promote health. current reimbursement is built around the idea that doing procedures [placing stents, removing gall bladders, doing a colonoscopy] is far more valuable than cognitive work - taking a really good history. and talking about how to be healthy is basically worthless in the eyes of our medical system.

so if you're sick, yes, your friends in britain want to opt out of the national system and go private. but the remarkable fact is that even poorer people there are less likely than americans to get sick in the first place.

i think there's a lot to be said for markets, but i am not a free-market fundamentalist. here's my favorite, true, hmo story: there is an anti-depressant with the generic name bupropion, originally sold as "wellbutrin." glaxo smith kline, which owns wellbutrin, did some studies showing that bupropion could help people stop smoking. the got fda approval to market the drug for that purpose, under the name "zyban." a few of the hmo's wouldn't pay for zyban. and they so much didn't want to pay for zyban, that they forbade their doctors from prescribing wellbutrin, because they figured that the doctors would prescribe it for smoking cessation but under the guise of using it as an antidepressant. now you might ask "wouldn't they WANT their members to stop smoking? what about all the bad health effects of smoking?" i knew someone on the pharmacy committee of one of the hmo's which wouldn't pay for the drug. the reasoning was that because people on average change health insurance plans every 2 years, they would no longer be on their membership rolls by the time they developed emphysema, heart disease, or cancer. makes sense for their bottom line, huh? this is called sub-optimization and is a market failure. regulations [in theory] exist to deal with market failures. our health system is full of market failures, but the beneficiaries of those failures own our politicians.