Weekend Round-Up

What did we learn this week?

• That unemployment is going to be an intractable and long term problem. The free-fall phase of job losses seems to be ending, but the outlook for re-creating the lost jobs is very bleak. Frankly the sources of new jobs are still shrouded in mystery: the two strongest employers of recent years were construction and finance, neither of which appear likely to be generating huge demand for employees over the next few years. As long as employment lingers in the doldrums there is no way a recovery could be sustained. A ‘jobless’ recovery would be a very difficult problem to resolve because the political will to stimulate growth may be absent, yet the discontent amongst voters would be high.
• Banking profits were generally stronger, but the details revealed near term difficulties. The administration has taken a very passive approach towards dealing with our banking problems. Yes they has spent a fortune on bailouts, but they have done very little to prevent a recurrence of the problems – just look at the Goldman Sachs bonus pool and you can see the source of our next bubble: the traders are on the loose again stacking up private gain knowing that the taxpayer will bail them out. Worse: buried in those bank earnings reports were the first signs of the commercial real estate debacle about to unfold. Our banks are not fixed yet by any means.
• Ben Bernanke went to Congress to report on his ‘exit strategy’ from the extraordinary monetary stimulus the Fed has been providing. The bond market appears to have been soothed by his words. But he promptly ran into a political ambush: the Republicans all wanted to question him about the fiscal stimulus. They obviously were trying to get him to say it wasn’t working, and he was forced to be obscure in his responses, which, of course satisfied no one. As if that wasn’t bad enough his own position comes up for renewal next year so the rumor mongers are hard at it talking up possible replacements. Which has the effect of undermining his credibility right when we need him to be viewed as safe for the long term – those bond markets like continuity. He also managed to get into an open spat with Tim Geithner over financial reform: Geithner wants to be a little more aggressive and wants a new regulator to oversee consumer finance. Since such a new regulator would imply the Fed screwed up on mortgage oversight, Bernanke pushed back saying we didn’t need such a thing. Hey guys: there’s an economy to fix, just stop the bureaucratic infighting. Oh, and by the way: Geithner is right on this one.
• Real estate perked up slightly. But it was a very ‘iffy’ report that suggested there was an improvement. The weight of foreclosures still hangs over home prices and will exert downward pressure for a while. The upward blip in sales reported this week can be explained by first time buyers exploiting one-off tax credits and ‘bottom feeders’ snapping up foreclosed houses at bargain prices. The vast middle and upper prices market is still in the tank and will remain there while sellers refuse to adjust to the new reality of lower prices. Plus, as I have mentioned, unemployment will keep many buyers off the market while they wait for more secure times to return.
• To reinforce this point: consumer confidence slipped last month after having shown improvement in both of the prior two months. Clearly the notion that this is a long slog is beginning to settle in. Consumers are, at last, getting the message that there is no ‘silver bullet’ to resolve our crisis. The media reporting of ‘green shoots’ may have created an illusion that we were about to burst back sprinting: the bank crisis had faded from the front pages and the stimulus had been passed, so there was an expectation that a recovery and thus the ‘good times’ were just around the corner. No one viewing the data with a sobriety would have thought that, but the media has a short term focus. My fear is that the wrongheaded upbeat tone of May and June is not supplanted by an equally unnecessarily gloomy tone in July and August. This was always going to be a long fight. And its only just started.
• Finally: it was a very bad week for economists. The internal fighting over the future of economic theory has burst onto the front pages. Several influential articles were printed this week, e.g. in the Economist and the Financial Times, over the collapse of consensus in economic theory. Some of us have been saying for years that there was no consensus, but now the ‘free marketeers’ have taken it on the chin even their friends in the media are chiming in and saying that free market theory sucks. From my point of view this is a welcome turn of events. But from a policy makers point of view the timing couldn’t be worse: with the ‘free market’ extremists of neo-classical economics now exposed as ideologically motivated and theoretically flawed the source of sound economic policy advice seems to be Keynesian. That incites the neo-classicists into apoplectic fits and forces them to write ridiculous op-ed pieces as a form of rebuttal. All of which causes even more confusion for both the public and politicians. But it’s great fun for those of us in the discussion.

Meanwhile the health care debate chugs on. I will leave you with a reference to today’s Financial Times, hardly a bastion of left wing or socialist thought, which argues that reform is not just necessary but vital. I couldn’t agree more. There are two issues that could cause the collapse of the economy in the medium term:

1. The financial industry’s power and lack of control; and
2. The huge cost and massive inefficiency of health care.

Ultimately we will be forced to reform both, because the status quo is simply unaffordable. Neither sector is serving us well. Both are making excessive profits and therefore extracting economic ‘rents’ which burden us all. Neither is remotely efficient. And either could destroy us.

To me health care is both a moral problem to be solved: I find it an abomination that the world’s richest country blithely ignores the health care issues of its poor; and a practical problem to be solved: we simply cannot afford the current system.

Either way reform is an imperative.

From where I sit any opposition to reform has to be based on a self-interest that is willing to jeopardize the economic welfare of the country. Those who oppose on the grounds of cost have yet to justify their support of the Bush tax cuts which cost us a lot more. Or they have to explain why every other country can afford something we cannot – are those foreigners simply better managers than we are? Or they have to justify why society should bear the costs of an immense and duplicative bureaucracy, one which offers, apparently, no offsetting advantage in terms of output.

It is a simple fact that our system is in the process of failing – wages are much lower, and the cost is out of control as a result of it.

It is also a simple fact that the free market cannot fix this problem. For the ‘market’ to work the incentive structure has to be transparent and obvious to all. This is not the case with our health care system: consumers of services do not bear the cost, so they have no incentive to demand better or cheaper service. So the producers of the service have no incentive to improve. On the contrary producers have every incentive to extract excessive profits by over-charging and over-prescribing, safe in the knowledge that their customers are not bearing the true costs of the service. Nor is there any pressure to improve outcomes or incentive to link costs with those outcomes.

In short health care in this country is a textbook example of the failure of a market.

For those of you who are aghast at the notion of a government run system, look at it this way: if you truly believe in free markets then pay the full cost of your care. All of it. Not a tax affected rate. Nor a subsidized rate. Pay the full cost. Right now that’s in the range of $15,000 per person per year. That’s before any service of course. Buy the insurance the way you buy car insurance: directly, not through an employer who masks the cost from you because they get a tax deduction [ By the way that tax deduction costs the taxpayers about $1.3 trillion a year or more than the cost of public health care for all]. Plus: accept the full consequences of a free market style insurance regime that will necessarily, for purely and sensible, profit motivated reasons, exclude anyone with a known illness or the aging since both those groups are loss makers for the profit system. Plus: accept that a free market system rations the sale of goods via a price mechanism, so there will always be some people who are too poor to afford coverage. Plus ask yourselves why it is that we as a nation do not ‘care’ about those who could not access a free market system.

Ultimately we have to learn that health care, like fresh air and clean water, are a ‘public’ good not a ‘private’ good. We all need to know that our fellow citizens are healthy so that we are not exposed to risk of disease from the uninsured. A sick person can impose a cost on you, so you may be forced to bear the cost of that fact that sick person had no health care. That disconnect between cause and effect is what makes health care a public good. The economic theories of the free market cannot deal with such public goods: they call things where the cost of something is borne by someone other than those consuming the goods or services ‘externalities’. The free market system is known to fail for externalities. Which is why the government has to step in.

But that’s enough for one week!

Enjoy the weekend everyone.