But I thought . . .
1. I thought the weak Chinese yuan was stealing business from American firms:
Here’s today’s report on the rising US stock market.
NEW YORK (Reuters) – Blue chips rose for a sixth day, capping their longest winning streak since August on Wednesday, as an upbeat forecast from a top homebuilder and data from China pointed to a strengthening global economy.
BTW, the US stock rally started in March. And the Chinese recovery? It also began in March.
2. I thought only right-wing Neanderthals opposed Medicare and Medicaid:
Here’s a report from Paul Krugman’s newspaper on a visit by the Dutch health minister to the US:
His first official visit to the United States as health minister came in 2007, and he came with the usual European preconceptions that this country had a wide open and fiercely competitive health insurance market with a myriad choices.
“And what struck me,” he said, “is actually the lack of competition you have.”
Mr. Klink pointed out that nearly 40 percent of the nation’s population gets care from Medicare, Medicaid and Veterans Affairs, all of which have significant restrictions on the choices available to patients. “We don’t have these kind of public insurance groups in our country,” he said.
And even among those in the United States who get insurance from their work, he went on, “it’s the employer who is making the choices of the health plans from which you can choose.”
Yes, some conservatives oppose any form of universal health care. But at this point would any conservatives/pragmatic libertarians prefer the US health care system we will have 5 years from now over the Dutch, Swiss, or especially Singaporean universal health care plans? And our “universal” plan will still have 20 million uninsured. So for how much longer can progressives claim that universal coverage is the issue separating the left and right?
3. I thought that high gold prices signaled US inflation:
This is from Britain’s Telegraph:
“There is a strong case to be made that we are already at ‘peak gold’,” he told The Daily Telegraph at the RBC’s annual gold conference in London.
“Production peaked around 2000 and it has been in decline ever since, and we forecast that decline to continue. It is increasingly difficult to find ore,” he said.
Ore grades have fallen from around 12 grams per tonne in 1950 to nearer 3 grams in the US, Canada, and Australia. South Africa’s output has halved since peaking in 1970.
The supply crunch has helped push gold to an all-time high, reaching $1,118 an ounce at one stage yesterday. The key driver over recent days has been the move by India’s central bank to soak up half of the gold being sold by the International Monetary Fund. It is the latest sign that the rising powers of Asia and the commodity bloc are growing wary of Western paper money and debt.
China has quietly doubled holdings to 1,054 tonnes and is thought to be adding gradually on price dips, creating a market floor. Gold remains a tiny fraction of its $2.3 trillion in foreign reserves.
Gold exchange-traded funds (ETFs) – dubbed the “People’s Central Bank” – have accumulated 1,778 tonnes, making them the fifth biggest holder after the US, Germany, France, and Italy.
Ross Norman, director of theBullionDesk.com, said exploration budgets had tripled since the start of the decade with stubbornly disappointing results so far.
Output fell a further 14pc in South Africa last year as companies were forced to dig ever deeper – at greater cost – to replace depleted reserves, not helped by “social uplift” rules and power cuts. Harmony Gold said yesterday that it may close two more mines over coming months due to poor ore grades.
Mr Norman said the “false mine of central banks” had been the only new source of gold supply this decade as they auction off reserves, but they are switching sides to become net buyers.
So western central banks have little more to sell, mines are almost tapped out, rapidly developing Asian countries want their share, and oh yes, there is some private demand for gold as an inflation hedge. Thanks, but if I want US inflation expectations I’ll take CPI futures contracts or TIPS spreads over that highly complex global market.
Tags:
11. November 2009 at 16:33
“Thanks, but if I want US inflation expectations I’ll take CPI futures contracts or TIPS spreads over that highly complex global market.”
My thoughts on TIPS/CPI futures:
It doesn’t measure actual inflation expectations. It measures at best, relative inflation expectations. I.E.: It measures the inflation expectations in the US with respect to the inflation expectations in our trading partners. Under the dollar peg in Breton woods, this was a good measure of inflation expectations, but due to floating exchanges its now a better measure of relative inflation expectation.
This is because CPI doesn’t measure inflation directly but measures relative inflation. PPI does a better job of measuring inflation, but has similar a similar flaw.
If you want to look at inflation expectations within a country, I say its best to look at the price of a commodity that changes in supply very slowly. Gold isn’t perfect in this regard, but I expect its better than CPI futures.
Wrt China increasing gold demand: If they thought that dollars would retain their value better than gold, they would be buying dollars, this suggests high inflation expectations for dollars.
11. November 2009 at 16:44
Doc Merlin, I really don’t understand this argument at all. By your logic the Japanese should also be worried about inflation, after all, the yen price of gold has risen sharply in recent years. But they are looking forward to more years of deflation, or at best zero inflation. Again, gold is a global market, there is no way it could be forecasting inflation in every country, as the only difference in gold prices from one country to the next is due to exchange rates.
But I’m not complaining, when I said “but I thought” that meant I was attacking three widely held views. So I expected a response.
11. November 2009 at 18:03
Lol – “Paul Krugman’s newspaper”
What an idiot you are.
You’ll do anything for attention.
11. November 2009 at 18:53
Just to balance out the above comment – I thought that “Paul Krugman’s newspaper” was clever. Keep it up!
11. November 2009 at 19:13
Ok I see the problem, you are assuming that CPI/PPI tells us inflation, and this being the same kind of inflation that gold price tells us.
Ok, here is the full argument:
There are two ways to define inflation/deflation (from now on just referred to as inflation)
(Inflation type 1) One definition of inflation is the increases in prices due purely changes in the money/credit supply, not just changes in prices. Absent monetary effects we would expect to see prices on goods decrease as efficiency increases, but we don’t, they typically go up in price. This is the type of inflation that commodities that grow in supply very slowly, help hedge against. If other countries believed that dollars would retain value more than gold, they would be guying dollars and adding deflationary pressure to the dollar.
(Inflation type 2) The other definition of inflation has to do with nominal increases in price for a basket of consumer goods within a country. Because of the global nature of consumer goods but the nominal stickiness of wages, financing costs, etc, and the very low stickiness of currency exchanges, countries can play the beggar thy neighbor game. Each country increases the quantity of their currency in an attempt to get competitive advantage in exports over the other countries. CPI just sees the prices of the goods (Inflation type 2), in the short run, it doesn’t see the overall global effect of monetary supply increasing (Inflation type 1).
“Again, gold is a global market, there is no way it could be forecasting inflation in every country, as the only difference in gold prices from one country to the next is due to exchange rates.”
Gold isn’t forecasting inflation (type 2) in every country, it was forecasting inflation (type 1) as an aggregate over the whole globe.
TIPS/CPI were on the other hand forecasting deflation (type 2) because our monetary expansion wasn’t as large as many other countries’ (england and china come to mind as extreme examples) and because aggregate demand was expected to drop.
To summarize, both views of inflation are correct, but as usual the economists espousing them are talking past each other due to different basic paradigms.
11. November 2009 at 19:18
Correction:
The first sentence in the second to last paragraph should read: “TIPS were, on the other hand, forecasting deflation… blah blah blah”
11. November 2009 at 20:26
1) Chinese Yuan/concurrent stock market increases
These are not at all inconsistent, and in no way even suggest that the undervalued Yuan is not harming US exports. If China is dependent on exports to the US (due to fixed capital for plant and distribution networks), then any expected resurgence in US demand would spur a rise in Chinese stocks. If anything, the concurrence proves the counterpoint to your argument here.
IF, however, the Yuan was de-linked from the US dollar, and the dollar was devalued (by the Fed), and the Yuan rose while the Chinese export sector stocks also rose, and we weren’t in a situation with underutilized specific capital, you’d have a point.
2) Many on the center-left dislike the proposed plan, NOT because they are against universal coverage, but because the Senate sold its soul to achieve that goal. That is, they are compelling everyone to buy a product from an anti-competitive industry, and making only modest effort to “bend the cost curve”. The list of market failures in US medicine is huge, but rather than fixing them, we’re subsidizing them.
11. November 2009 at 20:51
I suspect progressives will continue to claim that universal coverage is the issue separating the left and right until the right starts electing people to congress willing to vote for plans that increase health care coverage. You’re right that conservatives/pragmatic libertarians ought to prefer the Dutch, Swiss, or Singaporean systems over anything that’s on the table, but you haven’t managed to elect any of them to congress. If your theory of conservatism has no practical effects …
11. November 2009 at 22:04
Actually, Jeff, the Republican counter-plan isn’t too bad. It taxes coverage like income (includes benefits as income) and gives people a tax deduction for buying their own medical insurance. It also allows medical insurance to be bought across state lines and caps pain and suffering damages in medical torts.
This would actually bend the cost curve and reintroduce some market discipline into medicine. Overall, i’d prefer free market medicine, but the republican plan is better than what we have now and the dem plan is a lot worse.
11. November 2009 at 22:21
I got home today and turned on CNBC and everyone was screaming about how the dollar needs to be stronger… (like every other night) Several people made the claim that “everyone” is shorting the dollar as a carry trade and investing in anything and everything with it, creating more, presumably malevolent, bubbles. My question is: are people actually arriving at this theory independently, or are they all just parroting Roubini? My guess is they are parroting… How would one go about analyzing the market such that one could tell that the dollar carry trade is so predominant? Are hedge fund managers talking about this at their morning breakfast?
11. November 2009 at 22:32
RE healthcare: this is just proof that both parties are stupid and mendacious. I don’t understand why this issue should break down clearly along left-right wing lines, yet it breaks clearly down PARTY lines. I consider myself a moderate, which means I am currently in favor of a reign of bloody terror in which all members of congress find themselves against the wall. Then, with the air clear, we can have another election. But I’m a moderate.
11. November 2009 at 22:48
The Swiss Franc is a very good reference currency. There is a strong correlation between CHF and GOLD, but I believe that the rally since October is a false one–for whatever reason–it isn’t reflective of inflation, and the correlation has broken with GOLD surging well ahead of CHF.
11. November 2009 at 23:02
@Jon, the Swiss launched a very large series of stimulus packages.
They totaled up about ~11B USD as of June (this includes the national stimulus as well as local plans). In a country thats 40 times smaller than the US with similar per capita GDP it works out to a large stimulus.
While I am not willing to state that gold isn’t in a bubble (I’m not sure at this point), a large part of the discrepancy you mention could be as a result of this stimulus. While gold production actually decreased slightly last year.
Financial Disclaimer: I do have stake in silver and just moved out of gold taking some profits with me.
12. November 2009 at 06:21
RN, Glad to see I got your attention.
Naval R. Thanks
Doc Merlin, Gold is certainly more closely linked to global inflation than US inflation. But I am concerned with finding indicators for US inflation, not Zimbabwe inflation. I would add that gold may not even be a very good proxy for global inflation, as the article indicated there are many other powerful forces affecting the gold market.
Statsguy. You said;
“1) Chinese Yuan/concurrent stock market increases
These are not at all inconsistent, and in no way even suggest that the undervalued Yuan is not harming US exports.”
You must of misunderstood my argument, because it is not how you characterized it. I am arguing a weak yuan helps boost AD in the US. I am essentially arguing that the income effect is far more important than the substitution effect, which many others have also argued. And the US stock market seems to agree.
I agree with you about health care. One of the best ways to make the industry more competitive is to allow consumers to by health insurance from companies in other states. Democrats are strongly opposed to this idea. As a result in some state consumers only have a couple choices. In a truly national market they would have many more choices. Eventually I think we will follow the Europeans who are now making their health care industry more competitive, but only when the pain from this system gets so bad that people demand change. BTW, the House also sold its soul, they have no plan for controlling costs either. And the House plan proposes raising MTRS up to Nordic levels, without Nordic quality services. If we have to have those tax rates, I’d rather live in Denmark, which at least has freer markets and better public services than the US
JeffreyY, You said;
“I suspect progressives will continue to claim that universal coverage is the issue separating the left and right until the right starts electing people to congress willing to vote for plans that increase health care coverage. You’re right that conservatives/pragmatic libertarians ought to prefer the Dutch, Swiss, or Singaporean systems over anything that’s on the table, but you haven’t managed to elect any of them to congress. If your theory of conservatism has no practical effects …”
Was Bush a right winger? I would say not. But the left seems to regard him as a right-winger. And he signed a 1.2 trillion dollar expansion of health care benefits (for drugs.) Mitt Romney, who may well be the next Republican president, pushed through the only state level universal coverage plan. I am not defending these plans, they are both bad policy. Just indicating that Republicans will support universal coverage if they think the plan will work. Unfortunately in this political climate any truly sound plan (such as Singapore has) is politically impossible to get through Congress, so the Republicans often end up opposing the plans that do get put on the House floor, as they should.
Doc Merlin, I agree, and the Republican plan for health saving accounts is also a great idea. Indeed I favor making HSAs mandatory and much larger. I believe Singapore has a 6% payroll tax dedicated to HSAs.
rob, Yes, I see that too. Saying the dollar needs to be stronger is exactly equivalent to saying unemployment needs to be higher. 10.2% isn’t enough. The Fed has only one way of making the dollar stronger, tight money. Sure, if we did sensible supply side reforms that would also strengthen the dollar, but that’s not what people mean when they call for a stronger dollar right now. They want tighter money, which is madness.
It so ironic that for 50 years we’ve been writing books describing how clueless people were in the Great Depression (many favored tighter money) and now we face the same situation, and we find out we haven’t advanced at all since the Great Depression, even many professional economists are making exactly the same 1930s-style mistakes we used to mock in these histories of the GD, or the same mistakes as Japan made, for that matter.
Jon, I agree, and I think the article I linked to helps explain why this delinkage occurred.
Doc Merlin, You said;
“Financial Disclaimer: I do have stake in silver and just moved out of gold taking some profits with me.”
So are you recommending my blog readers follow you into silver, since your gold investment worked out well? 🙂
Seriously, in the 1970s I was too poor to buy gold, but I was just as much of an inflation hawk as any Austrian who comments here. So I invested in collectable silver dollars, and paid for my last year of grad school by selling in 1980, when it peaked. I just want to indicate that I know where you guys are coming from on the precious metals/inflation issue—I’ve been there.
12. November 2009 at 07:16
On Health Care:
I think insurers and other health care agents (MDs, Med Device Cos, Pharma) have no interets in a competitive market for health insurance. That competition would drive prices down (ok there would be some signalling collusion, but if entry were easy enough a new firm could coem in with lower costs and steal business). This would actually force a rationing of care to control costs…numerous policies that cover different levels of care would have differeing prices, so consumers could decide what level they wanted to buy; this price discrimintion would crimp the margins of MDs/Med Device/Pharma, or at least push them to show that their interventions made economic sense. Combine with a catostrophic care clause (do you have any idea how expensive med care after a car accident is) with tort reform (negligence is negligence, but mistakes happen, and medicine is still very much an art and a science), an dthen we may have a system that covers more people and allows indivduals to ration care themselves. And I am a very liberal New Yorker…
As for Gold, like any investment, past performance is no guarantee of future performance. You still need to transfer the asset to $/Yen/Euro to buy anything. If we are in a Gold, Guns, and Butter Society, we are in a deep load of ****.
12. November 2009 at 08:16
ssumner:
OK, I see a bit clearer what you are saying. You are arguing that, if positive data coming out of China moves the US stock market up, then this shows an income effect dominating the substitution effect.
While consistent, it is not at all conclusive:
– The Chinese data could be interpreted merely as a signal of the strength of US consumer demand overall (which would positively influence US stock market results), rather than an indication of future demand for US products from China
– It’s important not to confuse short term effects with long term effects. In the short term, the US has a lot of specific capital dedicated to processing and selling Chinese imports (ports, retail outlets, trucking, etc.). In an environment with lots of unused capacity and an economic structure that is import-dependent (and import-linked industries with amazing political power), strong demand for Chinese goods improves profits for many import-linked industries in the US, dwarfing losses to export or import-competing industries.
The “hollowing out” argument is a long term argument, not a short term one. It is about externalities and uncaptured benefits of producing/export linked firms vs. consuming/import linked firms.
On Health Care and cross-state purchasing:
The Democratic fear is of pressure for a Race to the Bottom, as many would argue exists in international trade and environmental/labor regulation, or in municipal bidding for production sites by offering tax credits or free/subsidized services, or state incorporation laws (e.g. Delaware).
When Federal law creates asymmetries (forcing states to recognize other states rules) this can occur. Pro-market folks might think this is great, but it’s actually an anti-competitive behavior. (Conservatives face the same issue with gay marriage – if the Federal government were to compel states to recognize marriage in another jurisdiction, any one state could legislate gay marriage for all other states.) State incorporation law is a great example. Environmental folks also point to California’s attempt to regulate car emissions, and businesses which sued based on the doctrine of Pre-Emption (that EPA rules, originating from the Bush Administration, implicitly overrode state rules).
I’m cynical about conservative views on states rights – they seem to trounce on states rights whenever it serves their agenda.
But clearly we have a problem with regional monopolies and state-level capture (state governments are generally the most corrupt of all – lacking the participatory nature of small city government, but lacking the attention of national government). The solution is probably to adopt Federal legislation that allows states to set STANDARDS and practices, but requires states to allow any insurance company meeting those standards to sell in the state. The courts would need to decide if standards were so specific that they constitute specific mandates on companies (and would be illegal). I’m not sure about the details of the Republican plan (or, even, if there is a single Republican plan with concrete details…) Do you have a link?
12. November 2009 at 08:17
In Thursday’s WSJ, Judy Shelton gives the lie to the notion that U.S. monetary policy is tight. It’s not, by a long shot.
12. November 2009 at 08:35
Scott, I asked this on the econtalk website, but I figure it makes more sense to do it here:
When you say interest on reserve requirements, you mean that the problem is that banks are holding money lent to them by the Fed or by depositors, as reserves with the Fed (to earn risk free interest), instead of lending them out–basically a policy equivalent to increasing the reserve requirements… Am I getting this right? So there should have been a large increase in reserves and a concomitant effect on loans. Can we see this?
I’m trying to understand what the effect of paying interest on reserves was / is. I can see that it might change expectations (i.e. make the Fed look hawkish, which it likes, and so reduce expected inflation), but I want to understand what it’s real effects on lending were / are.
Where do I go to read about the effect of paying interest on reserves?
12. November 2009 at 09:02
Bill Stepp, what would you expect her to say? She has been saying the same thing for 20 plus years on those same pages; she would prefer a debt deflation spiral so the moneyed class can buy more assets and concentrate their wealth even further, kind of like feudalism…
Scott,
Does removing interest on reserves encourage lending, even when the number of borrowers is decreasing? Would a fed financed tax refund be a better way to move cash into society? That would definitely spur inflation, but would it change AD in the long term?
Joe
12. November 2009 at 09:23
@StatsGuy
“The Democratic fear is of pressure for a Race to the Bottom, as many would argue exists in international trade and environmental/labor regulation, or in municipal bidding for production sites by offering tax credits or free/subsidized services, or state incorporation laws (e.g. Delaware).”
I think the republicans see that as a feature, not a bug.
@Scott:
I’m not sure I would recommend silver to other people. Silver has changed since the 70’s. Now-a-days it part currency (due to mexican banks giving the option to denominate assets in silver) and part industrial metal. Its more my bet on an inflationary recovery with some hedging for the possibility of us not recovering for some time.
My main investment right now is transportation stocks again, betting on recovery in trade.
12. November 2009 at 10:12
Hi Scott,
There´s a recent NBER working paper that shed some light on Argentina´s past problems. Perhaps this could be of interest:
http://www.nber.org/papers/w15478
Cheers
12. November 2009 at 13:36
On a somewhat related note, this interesting blog post from the Financial Times refers to gold as a six-thousand-year-old bubble:
http://blogs.ft.com/maverecon/2009/11/gold-a-six-thousand-year-old-bubble/
12. November 2009 at 13:52
OT, but newsworthy for a macro blog, the Northwestern Juggernaut rolls on:
http://www.dailynorthwestern.com/campus/nu-s-fed-challenge-team-makes-it-to-nationals-1.2062721
————quote————–
Northwestern University’s Fed Challenge team will represent the Seventh Federal Reserve District for the sixth consecutive year at the national competition, to be held Dec. 1-2 in Washington, D.C.
The team, led by Senior Economics Lecturer Mark Witte, is composed of five undergraduate students who participate in macroeconomic theory competitions sponsored by the Federal Reserve.
Fed Challenge competitions require students to debate on a current economic issue, role-playing as members of the Fed.
The NU team won Monday’s regional competition, beating out 17 other Midwestern teams, with their presentation on quantitative easing.
————-endquote————
They’ll be seeking NU’s 4th national title.
12. November 2009 at 17:00
Our health care system is a complete bureaucratic nightmare, in my estimation. So yeah, I would definitely prefer a Dutch or Singaporean model.
12. November 2009 at 18:10
Joe, I am all for competition, and for catastrophic coverage. And tort reform.
Statsguy, You said;
“- The Chinese data could be interpreted merely as a signal of the strength of US consumer demand overall (which would positively influence US stock market results), rather than an indication of future demand for US products from China”
I don’t think it is a sign of strong consumer demand in the US. It is the Chinese economy that has been strong, the US economy has lagged. The higher industrial production in China (which is what US equities reacted to), is mostly aimed at the Chinese market. I still don’t think you follow my argument. It isn’t necessary for China to buy one additional item from US exporters for their recovery to help us. Additional growth in Asia raises the world Walrasian natural rate, which makes our monetary policy more expansionary than otherwise. That boosts US NGDP regardless of whether we sell anything to China.
I agree with the next part of your comment. I am making a short term cyclical argument, and am not addressing the hollowing out argument. (I disagree with that view for other reasons.)
You said:
“The Democratic fear is of pressure for a Race to the Bottom, as many would argue exists in international trade and environmental/labor regulation, or in municipal bidding for production sites by offering tax credits or free/subsidized services, or state incorporation laws (e.g. Delaware).
When Federal law creates asymmetries (forcing states to recognize other states rules) this can occur. Pro-market folks might think this is great, but it’s actually an anti-competitive behavior. (Conservatives face the same issue with gay marriage – if the Federal government were to compel states to recognize marriage in another jurisdiction, any one state could legislate gay marriage for all other states.)”
First of all there is no contradiction here. Conservatives support the ban on restraints on interstate commerce. If my state says it is illegal for me to buy insurance from a neighboring state, that is a ban on interstate commerce, and should have been declared unconstitutional long ago. I see no parallel to gay marriage. (BTW, I am opposed to all marriage laws.)
Second of all, if there was ever an industry that needs a race to the bottom it is health care. We spend twice as much as other countries, and there is no evidence that the extra spending produces anything of value. So I would love to see a race to the bottom. Isn’t that what Obama means by “bending the curve?” I’d like to produce a Great Depression in the health care industry, a reallocation problem that would dwarf what happened in housing. 16% of GDP is 10% too much, in my view. It should be about 6%, and would be if people paid out of pocket.
I have no idea if there is a Republican plan. In the past they’ve favored HSAs, which are a good idea, but nowhere near enough. Both parties are captured by the industry.
Bill Stepp, Does she give any evidence? If she relies on the foreign exchange value of the dollar, does she acknowledge that policy was ultra-tight last fall when the dollar was soaring against the euro? (I say that because the WSJ is usually obsessed with the dollar, and/or with gold.)
vimothy, If you go to the St Louis Fred database, they have all the data. Excess reserves rose massively after interest started being paid in Oct. 2008. So the money has not been lent out.
Joe, I prefer an expansionary monetary policy because the budget deficit is already too big.
Eliminating the interest rate on reserves might or might not have a big effect. A large penalty rate on reserves would definitely increase the money multiplier. But nothing will work for certain unless the Fed commits to a more expansionary policy.
Doc Merlin You said;
“My main investment right now is transportation stocks again, betting on recovery in trade.”
You and Warren Buffett
12. November 2009 at 18:20
Rafael, Thanks but they lost me at the abstract. I’m just not a fan of VAR studies. I agree that the fall in output was the proximate cause of the devaluation in 2001-02. But the deeper cause was that the peso had become overvalued because it was tied to a strong currency. They should have let it float, like the Chileans do.
I think it is odd that the Chilean economic model is far more successful than the other Latin American models, but other governments seem to have little interest in copying the successful features of the model
johnleemk. I agree with him about silver. If the two metals were of equal rarity, I think silver would be worth more.
I don’t make 6000 year predictions, so I won’t speculate as to whether gold is a bubble.
Patrick, Bentley also has a Fed challenge team. I wonder what the Fed’s reaction would be if one of the teams appeared their with my critique.
12. November 2009 at 18:55
@Scott:
“I think it is odd that the Chilean economic model is far more successful than the other Latin American models, but other governments seem to have little interest in copying the successful features of the model”
Its not odd at all. The Chilean model doesn’t leave much room for graft and corruption. Modeling politicians as self interested parties with the option to use force to achieve ends and to spend other people’s money, makes Chile seem an anomaly.
13. November 2009 at 07:00
ssumner:
“… no contradiction here. Conservatives support the ban on restraints on interstate commerce.”
I think you may be confusing economic libertarians and modern conservatives. The specific legal issue is the Commerce Clause. Do a search on google for “conservative” and “commerce clause” and I guarantee you will get a large number of contradictory sites.
For example:
http://www.hslda.org/docs/GetDoc.asp?DocID=50&FormatTypeID=PDF
(opposing the commerce clause because of religious implications)
http://www.campaignforliberty.com/article.php?view=338
(opposing the commerce clause, especially in relationship to trade in firearms)
However, there’s another group of conservatives who find the Commerce Clause advantageous in areas like health care. For example:
http://www.lonelyconservative.com/2009/09/15/health-care-and-the-commerce-clause/
(advocating use of commerce clause to force states to remove insurance regulation)
13. November 2009 at 07:01
[second part of comment…]
The notions of “state’s rights” and “unrestricted interstate commerce” are absolutely contradictory, and many conservatives pick and choose which ideological tool to use to support the substantive outcome they wish to achieve. Conservatives can’t even get their act together when it comes to free trade in general. They’re against giving states the power to regulate their own health care sector, but are also against giving states and individuals the power to purchase drugs from Canada.
Libertarians are much more ideologically consistent than Conservatives, but they aren’t running the Republican Party right now…
But as I noted earlier – there’s a difference between regulating specific companies and regulating based on compliance with rules. If the Federal Law were to state that states must specify a set of rules, and allow any firm meeting those rules to sell insurance from out of state, then most Dems would have no problem.
But, if the Federal Government mandates a single system and forces all states to abide, then inter-state regulatory competition is destroyed. In the words of Louis Brandeis:
“To stay experimentation in things social and economic is a grave responsibility. Denial of the right to experiment may be fraught with serious consequences to the Nation. It is one of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.”
Would you deny this right of states to experiment – a right which has historically helped the Libertarian cause far more often than it’s hurt it?
OH, and if you think the “laboratory of the states” is bad because it let’s states like Massachusetts do anti-libertarian things that raise costs, consider:
http://voices.washingtonpost.com/ezra-klein/2009/11/massachusetts_provides_evidenc.html
“The average individual premium in the state fell from $8,537 at the end of 2006 to $5,143 in mid-2009, a 40 percent reduction, while the rest of the nation was seeing a 14 percent increase.”
13. November 2009 at 10:23
“It isn’t necessary for China to buy one additional item from US exporters for their recovery to help us. Additional growth in Asia raises the world Walrasian natural rate, which makes our monetary policy more expansionary than otherwise.”
Well, yes, I did miss that argument… (previous post?) But now I’m truly confused. Can you explain the mechanism whereby Chinese industrial output raises the world Walrasian rate (and, likewise, how that impacts the US rate) without relying on a mechanism that ultimately traces back to trade in capital/goods/services (or expectation thereof)?
13. November 2009 at 13:31
Doc Merlin, Good point.
Statsguy, I’m no conservative, so I’ll take your word for it.
Statsguy#2; You said:
“They’re against giving states the power to regulate their own health care sector, but are also against giving states and individuals the power to purchase drugs from Canada.”
I think they are OK with giving states the right to regulate companies within that state. What they (or at least I) oppose is regulations that say consumers cannot legally buy a perfectly legal product from another state, in addition to any within state plan they are required to buy. That’s simply an outrage. Suppose a “dry” state also made it illegal to drive to California in order to buy wine? If a New Jersey resident drives to Delaware to buy health insurance, that is none of the New Jersey government’s business.
Under our Constitution, the Federal government controls tariffs and quotas on imports from outside the US. Having said that, I am against tariffs and quotas, so I sympathize with people who want Canadian drugs.
I am all for Massachusetts being able to pass laws requiring everyone to buy health insurance. I suppose they even have the right to order every person to buy a specific kind of life insurance (although I think such a law is very foolish. But they do not have the right to prevent me from buying health insurance in another state. Remember that the other 49 states do not have any health insurance mandate, and still make it illegal to buy health insurance in neighboring states. Suppose you were too poor to buy health insurance in your state, but could afford a Delaware plan. Unless you live in Massachusetts (where you get a government subsidy if you can’t afford the local plan) the state government’s attitude is that you are out of luck–it is illegal for you to buy the only kind of health insurance that you can afford.
In my earlier “American Union” post I argued that we should follow the EU model, and have 50 separate health care plans. (They have 27 separate plans) So I have been very consistent on that. It is the Democrats who favor the Federal approach. And by the way, Brandeis did not really believe in states rights, except when the states produced outcomes that he supported.
Your Massachusetts figures are misleading; we have very expensive health insurance in this state. Massachusetts’ experience with universal care (which has cost much more than expected) does not bode well for the national plan. In a sense, Massachusetts has outlawed ALL HEALTH INSURANCE, and required everyone to buy not “health insurance” but rather “prepaid health plans.” It would be like the state requiring everyone to buy car insurance with coverage for fender benders, theft, oil changes, flat tires, tune ups, etc. If they did, I have a lot of minor scratches that I’d like made good as new. Can you imagine how much auto insurance would cost? There is a reason why US health care costs twice as much as the rest of the world. And the Massachusetts plan does nothing to address that issue.
Statsguy#3, I said we didn’t need to export more to China. Obviously in a general economic model there will be some impact on each sector of every economy in the world. If world economic growth rises, the real interest rate will rise. This increases the velocity of circulation and makes monetary policy effectively more expansionary. In an earlier post I showed how the steep dollar devaluation in 1933 made the US trade balance much “worse.” But it also increased inflation expectations, increased NGDP, and led to rapid growth in the US. The macro effects almost always dominate the terms of trade effects.
13. November 2009 at 14:31
Well, you should have noted the inherent deception in Ezra Klein’s datapoint. The average can will fall simply because more cheap plans are added to the pool, but that does not mean the cost for existing insured have decreased by 40%. Even so, aggregation does not account for all of that reduction in average cost growth (relative to other states).
ssumner – “…in addition to any within state plan they are required to buy.”
If the “Delaware plan” does not replace the within-state requirements, it’s not as dramatic – but still has an effect. Notably, out-of-state plans can cherry-pick healthy in-state consumers. So what you get is excellent pooling for the minimum plan (which might be subsidized), but risk discrimination at higher levels. Recognize that perfect pooling will always devolve to the minimum required levels… States cannot force pooling for higher level plans without raising the minimum level for everyone (individuals will defect out of state as companies refine their risk discrimination, and separating equillibria will decay).
Now, I personally think this is fine – and have advocated minimum level plans combined with getting rid of things like recission (when large companies can renege on contracts with sick people, and tie them up in court for 2 years while they are dying, there’s no way you can argue that the market is efficient).
But the situation is worse if you mandate that companies cannot charge more for pre-existing conditions for plans above the minimum-required-tier. In this situation, people will purchase the least expensive (possibly out of state) plans, and then upgrade only after developing risks. The adverse selection cycle will drive the price for higher-end plans through the roof, and decrease consumption below ideal levels. This type of outcome is precisely what I worry about with the current bills.
13. November 2009 at 15:35
Now that Yglesias is attacking you,
http://yglesias.thinkprogress.org/archives/2009/11/a-good-while-longer-i-think.php
I’m concerned the blogs I read are becoming increasingly correlated and thus the VAR of my blog portfolio is increasing. Should I diversify into Rupert Murdoch’s new business model in case the mother of all info bubbles bursts?
14. November 2009 at 08:15
OK, so are there any pragmatic conservatives actually in elective office in the US? If not, you should perhaps rethink your political strategy and tribal alliances. Romney’s cowardly silence in this whole debate speaks volumes about where the actual Republican party is on this.
So China builds an unsustainable investment bubble based on misallocated capital for investment in the production of goods with no final end demand, ghost cities and infrastructure that can never pay backs its investment in increased production, and the US stock market rallies. And this proves? I don’t think even Eugene Fama believes in EMH that strongly anymore.
14. November 2009 at 08:17
Also, I would hope you know better than the follow the CNBC school of stock caus-allation
14. November 2009 at 08:55
Bush was a right-winger, but not a conservative. The medicare prescription drug benefit, consistent with my claim, expanded benefits to people who already had something (medicare) but didn’t give any extra people a minimal level of care. Romney is a counter-example, although his action constitutes a betrayal of right-wing principles that may hurt him on the national level.
@Doc: A counter-plan that shifts the health insurance tax deduction from employers to individuals, without providing an additional subsidy to individuals, doesn’t increase the number of people with minimal coverage. Even if republicans are negotiating in good faith (which, from their shenanigans over the summer it appears they aren’t) their proposal is only likely to make things worse in the short term, even if components of it are a good idea in the long term.
14. November 2009 at 10:28
ssumner:
“I showed how the steep dollar devaluation in 1933 made the US trade balance much “worse.” But it also increased inflation expectations, increased NGDP, and led to rapid growth in the US.”
You write above:
“I am arguing a weak yuan helps boost AD in the US… the income effect is far more important than the substitution effect.”
I am more confused than ever, and suddenly feeling very dumb.
The weak Yuan comes directly at the expense of a strong dollar. Certainly the 1933 devaluation in the _US_ would have resulted in short (perhaps even medium) term increases in the trade deficit in the _US_, because of the J-curve effect, but in the long term there was an expectation of surpluses and even more importantly nominal price revaluation.
But above, you are arguing that a devaluation in _China_ increases AD in the _US_ by itself (without the US responding with further devaluation). Which would be fine except the way China is devaluing is by allowing the Yuan to be forced down by the dollar. In short to medium term equillibrium, this means the dollar will be above the natural rate and the yuan below.
In arguing that the Peg is helping the US (via the income effect), you seem to be arguing that the current situation is better than one in which there was no Peg, the US devalued fully, and China devalued as needed…
OR, are you merely arguing that the current situation is better than one without the Peg in which the US devalued but China kept the Yuan overvalued? If so, sure, but no one on the other side is arguing that…
14. November 2009 at 11:18
Scott,
You said above somewhere that the folks on CNBC arguing for a strong dollar are arguing for tight monetary policy and not supply side changes. I think that might be true of some of them but not for the reasons you think. Most of the investment industry people I know understand that the Treasury department and non monetary economic policy is the greater influence on the value of the dollar. However, in the absence of good policy in the non monetary realm, their argument is that loose monetary lets the administration off the hook for bad policy. So when some of these guys argue for tighter monetary policy to support the dollar they are saying that because they don’t expect the dollar to get support from any other source. And as you’ve pointed out before a lot of them believe that if monetary policy is able to generate 5% nominal GDP growth it will be mostly inflation. If you believe that it makes sense to argue for tighter monetary policy to force the administration to adopt more pro growth non monetary economic policies.
15. November 2009 at 08:52
statsguy, Just a couple brief comments:
Bryan Caplan says the adverse selection problem is overrated. In auto insurance it is precisely the higher risk drivers who are least likely to buy auto insurance, even though most states cross subsidize to some extent.
Even so, much of what you say is true, but that just means I’d like to blow up the entire system, replace US-style “health insurance” with true health insurance; catastrophic plus HSAs. My wife told me that if we have a $20,000 dental bill, the insurance company pays the first $2500 and we pay the other $17,500. I almost broke out laughing. Isn’t insurance supposed to be the exact opposite? We pay the first $2500 and they pay the rest? Just blow up the entire system and start over. (Yes, I know it won’t happen, but that’s what we need.)
rob. Thanks, another reply needed.
OGT, You are probably right about Republican politicians. I was thinking more in terms of right wing intellectuals. Obviously politicians in both parties are cowards, you don’t see either taking on the powerful health care-industrial complex.
You are completely wrong about China. Yes, I’ve seen the “ghost city” footage. That is very atypical. China’s “unsustainable” investment orgy has been going on for 30 years, and will continue for another 30 years, regardless of what the Austrian economists say. Yes, a lot of money is being wasted (it is still half communist after all) but almost all the housing being built is desperately needed. China still needs to increase its housing stock 4-fold, so it will be a long time before China needs to worry about building too much housing.
I’ve been to China many times, and traveled all over the country. Press reports on China are highly misleading. They create the image of a country spinning out of control. that’s not what I see. I see a country gradually getting its act together.
OGT#2, I have seen too many examples of the Dow responding to China (since March) to write it off. Asian markets open before the US, and often positive news out of Asia was the only plausible reason for a Dow rally, especially in the spring when the US economy was still so weak.
Jeffrey, Didn’t Bush also push HSAs? But I agree with your general point that Republicans have not been very good on this issue.
Statsguy, Devaluations have no long term impact on trade balances, short and medium term effects are the only effects.
You said;
“In arguing that the Peg is helping the US (via the income effect), you seem to be arguing that the current situation is better than one in which there was no Peg, the US devalued fully, and China devalued as needed…”
No, I am doing a ceteris paribus comparison. I am saying things would have been worse if the Chinese yuan had been revalued this year. Had that occurred, China might not have recovered. Asia then might not have recovered, and the entire world might still be mired in deflationary expectations (especially in asset markets.) I don’t want to overplay this point, because obviously it is a matter of degree. China is recovering not just because of a weak yuan, but also banking stimulus. Still, I think China’s actions had a net positive impact on the world economy. It made world monetary policy more expansionary. The easiest way to visualize the importance of world AD is to think about the policy dilemma of a small country like Sweden. They could have devalued their currency almost without limit, but their big problem was that the world collapse in investment hurt their export sector, almost regardless of the value of their currency. Germany started recovering as soon as their exports of machines to Asia revived. These effects are less strong for the US, but they are still there.
Joe, I understand that view but I think it is wrong. Both in the 1930s and today, deflationary monetary policies did not lead to needed market reforms, they led to left wing governments that produced policies that further eroded the supply-side of the economy, such as massive fiscal stimulus. I’d rather have monetary stimulus. Plus there is the problem of 10.2% unemployment that shouldn’t be held hostage to fights over what type of reforms are best.
16. November 2009 at 07:10
Sumner- Was it Stalin who asked how many divisions does the Pope have? I guess it’s the same quesiton for intellectuals of any stripe, how many representatives do they have?
At this point the image of the terms conservative/liberal are too closely associated politicians running under those banners. They’ve been so defiled by them it seems one’s ideas would be better standing on their own without the labels.
Funny that you thought I was coming at China from an Austrian
perspective. My views on China are most strongly shaped by Andy Xie and Michael Pettis, neither of whom are Austrians and both of whom live in China, though I suppose the term ‘misallocated capital’ is under copy right at the Mises Inst. somewhere.
I don’t see where you come up with the 4 fold number, China is nearing the end of her demographic dividend, so housing formation is not set to take off. I am sure the destruction rate of out dated housing stock is relatively high, but 75% obsolete seems unrealisticly high.
16. November 2009 at 12:02
The Singapore system involves active regulation of the price and supply of health services. In exactly what way are conservatives OK with this kind of public intervention into the private sector? Isn’t that socialism?
The Dutch and Singapore systems are similar in that purchasing health insurance is compulsory. In both countries the health insurance policies for sale are heavily regulated as to what must be covered under the policies that are sold to the public. Both countries also offer subsidies for lower income people to defray the cost of insurance mandates.
Isn’t this exactly what the Democratic plan sets up? Compulory obligation to buy insurance along with regulations governing how that insurance is administered (they can’t rescind your policy or deny you a policy based on preexisting conditions).
I’m sure if the Republicans made a good faith effort to introduce a bill that would acheive universal coverage a la the Dutch or Singaporan model, the Democrats would be happy to tweak their plan. So far all the Republicans have proposed is reverse-regulation by allowing sale of insurance policies across state lines. This proposal would actually make it harder for consumers to get good quality coverage because insurance companies could locate in the State with the most favorable regulations, and use those lax regulations to more easily recind policies when policyholders get sick. The Republican plan does next to nothing to help out those who cannot afford insurance, nor for those who have preexisting conditions.
Could someone here point out to me how the democratic proposals are so different from the Dutch and Singaporan models? I just don’t see a big difference.
16. November 2009 at 14:28
Actually you’ve no idea how many will be uninsured in five years time if the Obama bill passes. The problem is we are where we are with healthcare and the US political system is just not conducive to a lunge to the “ideal” type of system that most other societies that have uni-cameral political systems have been able to achieve. These sort of comments are entirely specious in that they ignore reality.
17. November 2009 at 09:10
OGT, Last time I looked the average urban housing unit was less than 300 square feet. Modern apartments are 4 times that size. Plus most of the population lives in tiny rural housing that will soon be completely obsolete. I think in the next 30 years China will massively increase its housing stock.
I had coffee with Michael Pettis in Beijing a few months ago–he certainly knows a lot about China. I agree with him that the current policy regime is pretty bad, but am more optimistic about China’s ability to reform. It has already dome a lot of reforms, I don’t see why it can’t do a lot more. Michael is pessimistic about the prospects for further reforms.
Mark, You said;
“Isn’t this exactly what the Democratic plan sets up?”
No!
Are the Dems proposing that we reduce government spending on health care from the current level of over 6% of GDP, to 1.2%? No, they want to increase it further.
Are the Dems proposing any sort of effective cost controls like Singapore has? No.
Are the Dems proposing HSAs plus catastrophic insurance like Singapore has? I have heard they want to ban HSAs.
Are the Dems proposing that we abolish Medicare, Medicaid and the VA system? No.
So I really don’t see much similarity between the proposals being kicked around Congress, and what these other countries do. BTW, In Switzerland the people pay an average of about $1350 out of pocket each year for health care. In the US it is $800, and the Dems want to reduce it further.
John2, I’m not sure what your comment refers to. Certainly nothing in my post contradicted anything you say here. I agree Congress isn’t good at doing health care reform, and would prefer they left it to the states.