Free Markets, Free People

Paul Krugman

Health Care – “The Public Plan”

Ezra Klein discusses what has commonly become known as the “public plan” in the emerging “health care reform” legislation. Put simply it is “public insurance” which is supposed to compete with the private insurance industry and, as Paul Krugman claims, keep them “honest”.

Klein lays out the various flavors being floated out there concerning this option:

• The “Trigger” Plan: Olympia Snowe is pushing this compromise, as are some conservative Democrats. The basic idea is that the public plan would act as an invisible threat: It would be “triggered” into existence if the private insurance market was unable to offer, say, enough options in a particular region, or enough cost control. In addition, the public plan would only come into existence in this or that region, or this or that state. It would be effectively useless as an insurer. It could potentially have some competitive effect in that private insurers would still work to avoid its existence. Some have argued, however, that the conditions being mentioned in the “trigger” proposals have already been met.

• The Weak Public Plan: This is what people are talking about when they refer to a “level-playing field.” This incarnation of the public plan — first proposed by Len Nichols at the New America Foundation and later echoed by Peter Harbage and Karen Davenport at the Center for American Progress — would have no special advantages over private insurers. It couldn’t use the low rates that Medicare sets or access taxpayer subsidies. It couldn’t force its way into networks. It would simply be another insurer, albeit with different incentives than traditional insurers.

• The Strong Public Plan: This would be like Medicare for the rest of us. It could throw the federal government’s weight around. It could negotiate deep discounts with providers. It could muscle its way into networks. Outside groups like the Commonwealth Fund estimate that it would save the average consumer 20 percent to 30 percent. That would give it a massive competitive advantage over private insurers, and would probably result in tens of millions of Americans dropping their current coverage and entering the public plan to save money. A variant of this was in the draft of Ted Kennedy’s bill that was leaked last week.

While Blue Dog Democrats have come out in favor of the “trigger” option, liberals such as Klein and Krugman prefer the “Strong Public Plan” for the reasons stated (massive dropping of private insurance for “public” (i.e. government) insurance). And there’s a reason they both prefer that – they see it as a backdoor way to move health insurance to a single payer system.

And that is a distinct possibility with both the “strong public plan”. In fact it is a design feature. The “competition” touted would most likely be in name only as Greg Mankiw explains (quoting Krugman to set up his explanation):

What’s still not settled, however, is whether regulation will be supplemented by competition, in the form of a public plan that Americans can buy into as an alternative to private insurance.Now nobody is proposing that Americans be forced to get their insurance from the government. The “public option,” if it materializes, will be just that — an option Americans can choose. And the reason for providing this option was clearly laid out in Mr. Obama’s letter: It will give Americans “a better range of choices, make the health care market more competitive, and keep the insurance companies honest.”

It seems to me that this passage, like most discussion of the issue, leaves out the answer to the key question: Would the public plan have access to taxpayer funds unavailable to private plans?

If the answer is yes, then the public plan would not offer honest competition to private plans. The taxpayer subsidies would tilt the playing field in favor of the public plan. In this case, the whole idea of a public option seems to be a disingenuous route toward a single-payer system, which many on the left favor but recognize is a political nonstarter.

If the answer is no, then the public plan would need to stand on its own financially and, in essence, would be a private nonprofit plan. But then what’s the point? If advocates of a public plan want to start a nonprofit company offering health insurance on better terms than existing insurance companies, nothing is stopping them from doing so right now. There is free entry into the market for health insurance. If a public plan without taxpayer support would succeed, so would a nonprofit insurance company. The fundamental viability of the enterprise does not depend on whether the employees are called “nonprofit administrators” or “civil servants.”

The bottom line: If the goal is honest competition in the provision of health insurance, the public option cannot do much good but can potentially do much harm.

That is a critical point in this debate – there isn’t an insurer out there that has as deep pockets as the US Treasury. If there is public money backing the public option, then the talk of “competition” is a sham. It is being used to placate and fool those who oppose a government takeover of insurance, the result which would surely happen if what Mankiw’s concerns are true. And if you follow the reasoning process that Mankiw has laid out above, it should be pretty darn obvious what the intent of this “public plan” really is, all the happy talk Klein and Krugman throw out there notwithstanding.

Last, but not least, while the “strong public plan” is an obvious short-cut to single-payer government run health care, the other two plans simply delay that same eventual outcome for a while. While there are certainly reforms that could be made in the insurance industry and health care generally, anyone who believes that government can do it a) better and b) more efficiently has simply not been paying attention to the shape government finances are in right now or how large the deficit has grown as it has mismanaged its entitlement empire to this point.

~McQ

Our Inordinate Fear of Inflation

That’s the subject Paul Krugman addresses in his NYT Op/Ed piece today.  In fact, he implies that even talking up the possibility of inflation comes solely from bad political motives, mostly from people who don’t grasp The Fierce Moral Urgency of Change™.

Why shouldn’t we worry about inflation, according to Prof. Krugman?

Now, it’s true that the Fed has taken unprecedented actions lately. More specifically, it has been buying lots of debt both from the government and from the private sector, and paying for these purchases by crediting banks with extra reserves. And in ordinary times, this would be highly inflationary: banks, flush with reserves, would increase loans, which would drive up demand, which would push up prices.

But these aren’t ordinary times. Banks aren’t lending out their extra reserves. They’re just sitting on them — in effect, they’re sending the money right back to the Fed. So the Fed isn’t really printing money after all.

But, let’s grant that the current monetary moves aren’t immediately inflationary.  What happens when the economy recovers and the banks do begin to spnd those extra reserves?  Krugman attempts some sleight of hand, in an effort to make it appear that he addresses that concern.

Still, don’t such actions have to be inflationary sooner or later? No. The Bank of Japan, faced with economic difficulties not too different from those we face today, purchased debt on a huge scale between 1997 and 2003. What happened to consumer prices? They fell.

Yes, they did.  But since Japan hasn’t had a real economic recovery even today, and is entering its third “Lost Decade”, that really isn’t a compelling argument.  Since 1999, Japan’s rate of GDP growth has averaged 1.31%, which is less than half of the average GDP growth rate of 3% a mature economy should experience.  Indeed, over the last decade, Japan has experienced exactly 5 quarters where GDP growth was at 3% or more. In that same period, there have been 9 quarters when GDP contracted.  The highest annual rate of growth was in 2000, when the annual GDP growth was 2.85%.

So, let’s not pretend we know how the inflationary pressures fall out in Japan once a recovery hits…until there actually is a recovery.

ON the other hand, since our policymakers seem hell-bent on following the same path the Japanese did in the 1990s, the return of inflation when the economy recovers might turn out to be worry we can avoid until sometime in the relatively distant future.

The “Geithner Plan”, Front And Center – Will It Work?

The Geithner Plan for “Bad Bank Assets” has been published in the WSJ under Geithner’s name. It is pretty much that which was leaked and critiqued by Dale here.

James Joyner wonders:

To my non-economist mind, that sounds eerily remniscient of the Troubled Assets Relief Program (TARP), the $700 billion plan passed last October to prop up the frozen financial system by buying, well, troubled assets. Granting, arguendo, that the Bush administration, which ran the first part of TARP, was evil and incompetent and the Obama administration is all sweetness, light, and omniscience, why would this work any better the second time around?

Paul Krugman, as we noted last week, is not impressed by this plan at all:

This is more than disappointing. In fact, it fills me with a sense of despair.

After all, we’ve just been through the firestorm over the A.I.G. bonuses, during which administration officials claimed that they knew nothing, couldn’t do anything, and anyway it was someone else’s fault. Meanwhile, the administration has failed to quell the public’s doubts about what banks are doing with taxpayer money.

And now Mr. Obama has apparently settled on a financial plan that, in essence, assumes that banks are fundamentally sound and that bankers know what they’re doing.

It’s as if the president were determined to confirm the growing perception that he and his economic team are out of touch, that their economic vision is clouded by excessively close ties to Wall Street. And by the time Mr. Obama realizes that he needs to change course, his political capital may be gone.

Krugman goes on to discuss the economics of the situation and a relatively easy way to solve the banking problem. Probably one of the more striking lines in his discussion is:

But the Obama administration, like the Bush administration, apparently wants an easier way out.

This speaks to a theory we’ve all discussed about certain aspects of the job of president in which Barack Obama displays very little interest. From his chuckling though his “punch drunk” interview with Steve Frost yesterday on “60 Minutes” (an invitation to view him as unserious about the crisis) to his seeking an easy and fast solution to the banking crisis, it seems that this is one of those areas which holds little interest for him. He wants it dealt with as quickly as possible (or at least seemingly dealt with so it is at least off of the front pages) so he can move on to his real interest – his costly social agenda.

Anyway, read all of the Krugman critique.

Brad DeLong thinks Krugman may be wrong and lists 3 reasons why:

1. The half empty-half full factor: I see the Geithner Plan as a positive step from where we are. Paul seed it as an embarrassingly inadequate bandaid.

2. Politics: I think Obama has to demonstrate that he has exhausted all other options before he has a prayer of getting Voinovich to vote to close debate on a bank nationalization bill. Paul thinks that the longer Obama delays proposing bank nationalization the lower it’s chances become.

3. I think the private-sector players in financial markets right now are highly risk averse–hence assets are undervalued from the perspective of a society or a government that is less risk averse. Paul judges that assets have low values beceuse they are unlikely to pay out much cash.

While it is nice to be optimistic, it is also important to be realistic. Frankly I think DeLong’s optimism isn’t realistic in the face of this particular crisis and I’m inclined to believe the Krugman critique to be more “spot on”. I have no confidence that this plan will solve the problem.

One of the problems the administration faces which is above and beyond the “workability” of the plan itself is related to the AIG bonus blowup in Congress. Private investors are gunshy about participating – for good reason:

The backlash on Capitol Hill means private firms may think twice about taking part in Geithner’s public-private partnership, even though government financing will limit their risk and increase the potential of earning profits, said David Kotok, chairman and chief investment officer of Cumberland Advisors Inc., in Vineland, New Jersey.

“We expect that the participation in the program to be announced this coming week will be tepid at best” because of “fear that any action which puts them into the federal assistance plan will subject them to the chance of retroactive punishment and taxation,” Kotok said.

A real “chilling effect” given Congressional and adminstration overreaction to the bonus situation. Reports are Obama is cooling to the idea of retroactive taxation, but, right or wrong, there is still going to be a demand for some sort of action. We’ll see what sort of leadership Obama tries to exert concerning those bonuses if any.

~McQ

Zombie Ideas And Moral Hazard

Paul Krugman has seen the new Treasury plan (the “Geithner plan” as he calls it) that addresses the problem with the banks and he finds it wanting:

The Geithner plan has now been leaked in detail. It’s exactly the plan that was widely analyzed — and found wanting — a couple of weeks ago. The zombie ideas have won.

The Obama administration is now completely wedded to the idea that there’s nothing fundamentally wrong with the financial system — that what we’re facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.

The plan itself is a three part plan as described here:

The plan to be announced next week involves three separate approaches. In one, the Federal Deposit Insurance Corporation will set up special-purpose investment partnerships and lend about 85 percent of the money that those partnerships will need to buy up troubled assets that banks want to sell.

In the second, the Treasury will hire four or five investment management firms, matching the private money that each of the firms puts up on a dollar-for-dollar basis with government money.

In the third piece, the Treasury plans to expand lending through the Term Asset-Backed Securities Loan Facility, a joint venture with the Federal Reserve.

The Geithner Plan

The Geithner Plan

The goal of the plan is to leverage the dwindling resources of the Treasury Department’s bailout program with money from private investors to buy up as many of those toxic assets as possible and free the banks to resume more normal lending.

 As noted, Krugman is not impressed. In fact, he suddenly discovers the problem of “skewed incentives” and “massive” moral hazard:

To this end the plan proposes to create funds in which private investors put in a small amount of their own money, and in return get large, non-recourse loans from the taxpayer, with which to buy bad — I mean misunderstood — assets. This is supposed to lead to fair prices because the funds will engage in competitive bidding.

But it’s immediately obvious, if you think about it, that these funds will have skewed incentives. In effect, Treasury will be creating — deliberately! — the functional equivalent of Texas S&Ls in the 1980s: financial operations with very little capital but lots of government-guaranteed liabilities. For the private investors, this is an open invitation to play heads I win, tails the taxpayers lose. So sure, these investors will be ready to pay high prices for toxic waste. After all, the stuff might be worth something; and if it isn’t, that’s someone else’s problem.

Or to put it another way, Treasury has decided that what we have is nothing but a confidence problem, which it proposes to cure by creating massive moral hazard.

How in the world could the level of intrusion contemplated by the government create anything but “skewed incentive” and “massive moral hazard”? But that aside, will it work?

Per Krugman, probably not:

This plan will produce big gains for banks that didn’t actually need any help; it will, however, do little to reassure the public about banks that are seriously undercapitalized. And I fear that when the plan fails, as it almost surely will, the administration will have shot its bolt: it won’t be able to come back to Congress for a plan that might actually work.

What an awful mess.

Indeed. And an amazing admission by Krugman who was as sure as anyone in the tank for Obama that he’d be “the answer” to all of our problems. Instead he’s discovering what a lot of Obama supporters are discovering – Obama’s an empty suit who is more interested in the perks and rewards of the office than the work it entails.

Stray Voltage

Apparently Timothy Geithner isn’t the financial “rock star” he was touted to be if his handling of the Asian crisis 10 years ago is any indication.

While Obama may have “inherited” the financial problems, the bear market is all his.

Speaking of lay-offs, this isn’t going to make our jet jocks feel very secure.

The new slogan of the Democrats – never let a good crisis go to waste.  So this is a “good” crisis?

Take a look at this page and tell me where are the promised tax money from rich folks is going to come from.

Stray Voltage

Stray Voltage

If you don’t believe government is contemplating some pretty heavy care rationing when and if they get control, read this little beauty carefully.

Even George McGovern finds the pending card check legislation desired by unions to be “fundamentally wrong” and undemocratic.

Grey wolves “delisted” from endangered species list.

No time for Gordon Brown, but plenty of time for Brad Pitt.  Wonder if Pitt got a 25 volume DVD set too?

Is Obama preparing the way for a massive defense spending cut?

George W. Obama?

Even Paul Krugman is getting a little antsy about the apparent lack of focus of the Obama administration on the financial crisis.

It appears Hugo Chavez recognizes a kindred spirit when he sees one.

The Senate is one vote short of passing the omnibus spending bill with 9,000 earmarks.  All I wonder is which Republican will cave first?

~McQ