Holiday Wrap up

With the holidays upon us and with the monumental event of health care reform behind us I think is time to wrap up this week’s news before taking the weekend off.

Obviously the big news has been the long and painful procession towards this morning’s historic vote in the Senate. I will eschew any comment in depth simply because the real news was in the theatrics and Senatorial machinations rather than in the actual content of the legislation.

Am I happy with the bill that emerged from the Senate? No. Not by a long shot. However, given the undemocratic procedures and hide bound rules of the Senate what we now have is probably the best we could have hoped for. Some people are arguing that the ‘political’ landscape is the ultimate reason we ended up with a half-hearted reform. I disagree. Political landscapes can be shaped. They can be altered by two things: a crisis that unmoors traditional sources of opposition; and by leadership that advocates for change. Combined these two have, historically, been the cause of most of the inflection points in social trajectories – think France circa 1789.

The problem in health care is that many people, and particularly many entrenched people, deny that a problem exists. They do not offer alternatives to reform because they see no need for any action at all. They are content that we over consume health care. This is largely due to their ideology denying the possibility of over consumption: true believers in market magic accept any market outcome as being ‘correct’ simply by virtue of being the product of a market. By denying any normative content to economics they are forced into this acceptance as a matter of ideological consistency. They look at people such as myself who make claims about ‘over consumption’ as placing a burden on an economic process that cannot be there. To them the fact that we are headed towards allocating 25% of our annual income on health care as a choice we have collectively made. The only alternative, in their model of an economy, is that we change our minds and consume less.

This interpretation of of economic outcomes is a passive one. Economists who follow to this path prefer to call their subject ‘positive’ economics to distinguish it from the ‘normative’, and less ‘scientific’, kind that suggests interference in the marketplace in order to direct outcomes towards a socially more balanced outcome.

I have never though of economics as being truly scientific the way, say, physics is: it will forever be tainted by ideology. Besides my background in history informs my view and imbues me with a pragmatism not to be found in the text books.

So my position is that no sector of the economy can absorb 25% of our wealth without having a deleterious impact on other sectors. For every dollar we spend on health care we have one less to spend on something else. This would be fine if the social benefit from that cost justifies the expense and was a superior return that that available elsewhere. Traditional economic theory, because it presumes efficiency, is thus forced to presume this superiority. It can make no comment on our allocation towards health care because, a priori, it regards the outcome as correct. Inefficiency cannot exist, it is waved aside by the existence of market magic. But if the sector in question is wasteful, then our much of our allocated wealth to it is being consumed unwisely: and may have been better consumed elsewhere.

In the real world our health care system is riven through with inefficiency. To take one example: its fragmented nature means that its office technology is woeful. There is no national system to make the transference of records easy because there is no market discipline – i.e. profit – to enforce it into being. It would have to be imposed on the market via regulation. Doctors moan about having to absorb the cost of moving into the modern era of record keeping because there is no return to them from the effort or cost. Patients benefit, but since the causation between cost and benefit is difficult to tease apart they are not inclines to shoulder the cost either. So, contrary to economic theory, the set of selfish local decisions do not sum into a social optimum. The hidden hand fails.

Health care is riven through with such instances which is why market processes do not work well, if at all, for it.

Ultimately this is why reform became so urgent.

The current legislation falls well short of curing all the system’s problems. But, given the corruption and endemic inertia in the American political system it is the best we can do.

It is this systemic failure we should all be concerned about. Countries who cannot govern themselves without corruption, or whose political system becomes so rigid it cannot respond to economic or social problems, are doomed to suffer a loss of power and a slide into cycles of ever increasing internal division.

So my lesson from the health care debate is not so much that the legislation is flawed, but that we are faced with a much deeper and more profound issue: our political process is now a liability and needs an overhaul.

The news this week has been disappointing. The revised data on the overall economy chopped nearly 0.7% from the growth rate for the third quarter – GDP is now calculated to have grown only at an annual rate of 2.2% in those three months. While this is no surprise to those of us who have preaching caution, it is nonetheless a setback. It implies that the outlook for 2010 is equally that much weaker. We are a very long way from being on safe ground which means that it is way too early for us to begin a discussion about undoing any of the stimulative policies that continue to be our biggest source of growth. Were we to take away those policies – as some hardliners are advocating – we would assuredly fall back into a very deep and protracted recession. Given the immense social cost of such a collapse we have to maintain our current support for a much longer period than many of us envisaged at the beginning of the decline.

There are a pile of studies to tell us that recessions that have origins in financial excess are worse and longer than those that stem from manufacturing cycles. History is replete with bank failures that lead to or are associated with an economic downturn. Each such downturn is far more painful than ‘regular’ recession. We will need to keep our focus well into the new year if we are to avoid collapse.

This is supported by today’s unemployment news.

The numbers for new claims for unemployment assistance dropped smartly – by 28,000 – last week. This tells us that job ‘destruction’ is slowly ebbing and that we are stabilizing at long last. We are now back roughly to where we were in September 2008. Our problem is the job creation is still negligible. We know this from the stickiness of the claims for ongoing assistance, which are still above the 5 million mark despite a drop of 127,000 last week. This persistence of long term unemployment remains a blight on our prospects for the new year and is a measure of the huge adjustment we need to make in order to expunge the imbalances that built up during the decades of illusion. We are paying the price now for a very long period of denying that our economy had growing problems. It is ever thus when Pangloss gives way to reality.

The years ahead will be choppy and possibly tumultuous. Next year definitely looks to be a mixed bag, with much hanging on the outcome of this holiday season’s consumption numbers.

• Bernanke:

The confirmation hearings have gone pretty much as expected. I do not want to dwell on them, since they have revealed little new information and seem to have been perfunctory. My take: there must be, somewhere, someone more capable than Bernanke. His tenure looks like a simple extension of the Greenspan era. In the past I have gone back and forth over whether I support his return at the helm of the Fed. Right now I am opposed. That may be more a reflection of my general frustration with policy, particularly financial reform, as it is to do with him personally. This frustration is reinforced by some of his glib responses to what few penetrating questions he was faced with during the Senate hearings. We are no nearer a resolution of the banking crisis than we were months ago. The recent spate of good earnings simply add a veneer over the continued precarious nature of our banks.

If there is anything that we should all be concerned with it is that we have failed to sort out the big banks. This failure will rebound on us sooner than any of us wish. We would be fools to let that happen, yet I see little evidence of urgency or courage in Washington.

I wonder whether, like the difficulties that beset health care reform, our seeming inability to take strong action to ‘fix’ the banks will be viewed by future generations of historians as a watershed moment in our national decline.

Nations really do rise and fall in lock step with the ability of their leadership to confront problems. We cannot forever bargain and compromise away our difficulties. Nor must we emulate Charles Dickens stinging rebuke of bureaucracy in his character of Podsnap. Recall that a Podsnapian response to a problem was to sweep it away with a wave of his hands – to dismiss it as not relevant to the great issues of his day.

Great issues demand action not paperwork. We seem to be very good at the latter. Health care reform being a salient example. Let’s hope we are able to act in 2010. Otherwise the outlook dims even more.

With that I will sign off for the holidays.

Enjoy the break.