Friday, April 20, 2012

Monetary Expansion and the 1%

One-percenter Mark Spitznagel, a California hedge-fund founder, shines an Austrian spotlight on a major source of inequality:

A major issue in this year's presidential campaign is the growing disparity between rich and poor, the 1% versus the 99%.

The source is not runaway entrepreneurial capitalism, which rewards those who best serve the consumer in product and price. (Would we really want it any other way?) There is another force that has turned a natural divide into a chasm: the Federal Reserve. The relentless expansion of credit by the Fed creates artificial disparities based on political privilege and economic power.

Spitz (I'm sure his friends call him that) reviews the Austrian-school economics criticism of the Fed that its methods of providing liquidity are not neutral, as most simple economics models construe them. Instead, lower interest rates or quantitative easing are directly beneficial to a few big-dollar players who have access to the Fed's open market operations. Those with a financial stake in Goldman Sachs, Bank of America, and a few others disproportionately benefit from expanding monetary supply.

Some important qualifications that Spitz leaves out: when the Fed expands the money supply, inflating the currency slightly, those who own a lot of dollars or dollar-denominated assets lose wealth, and those who have a lot of dollar debt see the real value of their debt shrink. So loose money is not just a giveaway to the wealthy, it's also a form of debt forgiveness. In fact, with inflation of about 2% per year, we approximate the Bible's Year of Jubilee: after 50 years, one's entire debt is forgiven.

Secondly, when the Fed has a contractionary policy - high interest rates - won't that have an equal-and-opposite effect, hurting most those who rely directly on short-run Fed loans to play high-finance games?

To me, a bigger issue is overall government indebtedness, which leads to a long-run transfer of wealth to the wealthiest. It's a triviality that in a model economy with patient & impatient individuals, the patient ones will eventually hold all the wealth (this is also Biblical, incidentally). If the government approximates a representation of the entire country, and it consistently borrows from and pays interest to the 1%, why should we be surprised to see wealth inequality growing? If we, as society, want to shift consumption from the future to the present, should we be surprised when we arrive in the future and find ourselves poor?

Tuesday, April 17, 2012

Major Choices

One of the biggest advances in economics in the last decade came courtesy of newly available data on college majors. A spate of papers has examined this data using sophisticated econometrics. In brief: college major matters more than we thought it did.

The WSJ has a handy table summarizing the data. And you won't be surprised to see which major is on top.

Friday, April 13, 2012

Who Said This?

Name the politician who said this:
"The second big problem we have you can see if you look at the front page of USA Today today, which shows a traditional analysis, yesterday's analysis—of the business section—of the economic program. It basically says, "Oh, it will bring unemployment down a little and it will increase economic growth a little if we do this, but not all that much." Now, why is that? That's because traditional economic analysis says that the only way the Government can ever help the economy grow is by spending more money and taxing less. In other words, traditional Keynesian economies: Run a bigger deficit. But we can't do that. The deficit's already so big, I can't run the risk to the long-term stability of this country by going in and doing that."
No Googling!

Secondary question: who was the first president to mention John Maynard Keynes, or use the word 'Keynesian' in a recorded speech or document?

A hint: neither of these is President Obama.

Sunday, April 8, 2012

Why I Opt Out

For the second time this week, I have chosen not to have my picture taken by backscatter x-ray. Why? I'm sure some other passengers wonder - although this time I was the first in a queue of three who opted out in quick succession.

I opt out because I want oppression to look like oppression. I don't want to allow the powerful to mask their control over the weak by hiding behind technology. Like drones in warfare, machine imagining in security dehumanizes and diminishes the subject.

I can't fight every battle, and I need to fly (although longer security lines might lead me to do something dangerous). But given the choice, I would rather be the victim of obvious indignity than of whitewashed indignity.

Tuesday, April 3, 2012

Fixing Health Insurance: Cochrane

Professor John Cochrane joins a theme Global Review has been singing for a while, the Obamacare isn't a solution to the problems of today's healthcare system - it's an enshrinement. The high cost of insurance, Cochrane argues, is due to heavy government regulation, cronyism, and (of course) the moral hazard problem.
The number of new doctors is still restricted, thanks to Congress and the American Medical Association. Congress caps the number of residencies, the AMA has fought the expansion of medical schools, state tests make it difficult for foreign doctors to work here, and on and on... New hospitals? In my home state of Illinois, every new hospital, expansion of an existing facility or major equipment purchase must obtain a "certificate of need" from the Illinois Health Facilities Planning Board. The board does a great job of insulating existing hospitals from competition if they are well connected politically. Imagine the joy United Airlines would feel if Southwest had to get a "certificate of need" before moving in to a new city—or the pleasure Sears would have if Wal-Mart had to do so - and all it took was a small contribution to a well-connected official.
Some might argue that moral hazard is a necessary downside of providing healthcare to a large proportion of the population. But that's not true: a major flaw in our system is that it covers regular, predictable expenses with insurance. People should pay for regular health care out of their pocket - the same way they pay for food.
The [government's] main argument for a mandate before the Supreme Court was that people of modest means can fail to buy insurance, and then rely on charity care in emergency rooms, shifting the cost to the rest of us. But the expenses of emergency room treatment for indigent uninsured people are not health-care's central cost problem. Costs are rising because people who do have insurance, and their doctors, overuse health services and don't shop on price, and because regulations have salted insurance with ever more coverage for them to overuse.

If we had a deregulated, competitive market in individual catastrophic insurance, that market would be so much cheaper than what's offered today that we would likely not even need the mandate.
Why are so many Americans uninsured? Proponents of Obamacare like to point out the pre-existing condition problem and adverse selection. Cochrane proposes a market mechanism to deal with pre-existing conditions, but also points out why even healthy people don't often buy insurance in the private market: it's too expensive. They often can't buy catastrophic-cost insurance, which is their main need, without also buying a host of expensive services they don't want and won't use - but must pay for.

It bears repeating: Obamacare does not solve the current problems; it enshrines them. It doesn't represent a popular victory over the insurance companies, it represents perpetual empowerment of the insurance company over the citizen. In what world is that liberal?

Monday, April 2, 2012


I will be scarce this week - I'll be taking cars, trains, and planes to or through three countries and five states, and I won't spend three consecutive nights in the same bed. The modern hunter is on the trail of the elusive Big Game: a job.