Tuesday, November 26, 2013

The Economics of Thanksgiving

For those of you who do not live in the USA you might not know about Thanksgiving. Americans celebrate it on the fourth Thursday of each November because apparently it was too complicated to just have it on the 24th of every November. It is okay to have Christmas on the 25th and May Day on the 1st and Cinco de Mayo on the Mayo – but no, Thanksgiving had to be different. So that’s why numerically-challenged Americans appear to be confused in November and often resort to counting on their fingers.

I have to say that I know that Koreans, Kanadians and Kardashians also have Thanksgiving holidays in their countries and while I don’t want to seem small I will say that their celebrations are copycats and should not be confused with the REAL thing here in the USA, eh.

Thanksgiving got started because after the famous Tea Party incident Americans were very happy and thankful that we didn’t have to drink all that tea during the winter. That explains why we never drink tea on Thanksgiving and why most American families drink copious amounts of champagne and JD that day.

The central focus of Thanksgiving is around the cooking of the turkey. Turkeys can be baked, barbq’d, smoked, grilled, or boiled and preferably all this is done after your local Kroger store has removed the feathers, the beak, and Nancy Pelosi. But no turkey is complete and no meal is planned that doesn’t supplement the turkey with enough food to feed an entire turkey farm. Of course on Thanksgiving many of us down a small keg of Wild Turkey (no offense to JD). My family believes that eating copious starches on Thanksgiving gives you good luck for 7 years and that is why we have mashed potatoes, sweet potatoes, dressing from inside the turkey, dressing cooked outside the turkey, three breads, and of course kimchi fried rice.

If the starches don’t kill you there are the sweets. Cranberry sauce accompanies the turkey, the starches and of course grandma. Despite being so full you could explode after all that food, the coup d’etat comes at the end when grandma proudly unveils the pies – of apple, cherry, pecan, pumpkin, rhubarb, and whatever else Marie Calender provided from the shelves at Kroger late on Wednesday night.

Don’t think there aren’t any vegetables on the table. It seems some item in this cornucopia ought to be good for you. But nay even the vegetables have been cooked with fried onion rings, creamy gravies, and God-knows what other toppings designed to make them equally damaging as the rest of the components of the meal. Did I mention that Wild Turkey goes swimmingly on the turkey, the starches, vegetables, grandma, and on most desserts?

My favorite part of the meal is when the crane lifts me to the liquor cabinet where I bring out the cognac. There is something about a nice cognac filtering through the congested digestive tract that brings on a feeling of calm and overall spirituality. That is, cognac makes a nice nap ever so possible and enjoyable.

Of course the meal is just part of the Thanksgiving Celebration. This holiday brings together the entire family including some members who do not seem to be so thankful and some who do not even seem to belong in your family. But let’s not be picky. Every family has those people who seem like they came from outer space. And that is precisely why we drink heavily before, throughout, and then after the meal. Once that nice haze comes over me it is amazing how interesting and funny I am. But then Betty puts an end to that. After several hours of washing the dishes, I am permitted to return to the social part of the day and of course to another round of Wild Turkey shots.

Since it is coming on Thanksgiving, I thought I would tell you that I don’t really have the energy to write about the macro environment or the turkeys in Washington D.C. this week but I did want you to know that Betty and I wish you the very best this week – whether you celebrate Thanksgiving or Chuseok or the Maple Leafs. Translated – you get the week off from the usual blog paranoia. So enjoy! When I recover next week I promise to return to form unless I am captured by aliens.

Tuesday, November 19, 2013

Alan Blinder Gets an F in Healthcare 101

Cartoon by Jim Gibson

On November 2, 2012 I wrote a post titled “Alan Blinder gets an F in Econ 101”. At that time I took issue with his contention that a government deficit of 8.5% of GDP was not a significant economic stimulus. Now Blinder is writing in the Wall Street Journal again about Obama Care (“Despite a Botched Rollout, the Health-Care Law is Worth it”, WSJ, November 12, 2013, page A17.) I have no problem with people making their views known even when their views depart from mine. :-)  But I do take offense when a writer makes a conjecture and comes to a conclusion without any real explanation. It makes one seriously wonder if he is acting as an economist and analyst or is just showing support for his party.
Blinder’s article reads like a condemnation of Obama care but viola near the end he concludes with “America cannot be a humane society if we leave 15% of our population uninsured. America cannot be an efficient society if we spend 50% to 100% more of our incomes on healthcare than other countries." The bottom line is that Blinder says that Obamacare is going to make the US more humane and more efficient. So I hunted and hunted through his 16 paragraph article and I could not find one bit of discussion, analysis, or evidence that would support such a conclusion. For starters the terms “humane” and “efficient” are never defined or discussed in any way.
First consider his condemnation part. These are quotes from his November 12, 2013 article that reflect what he believes,
  • The botched rollout of ACA has been an unmitigated disaster. Choose your favorite adjective: horrible, embarrassing, inexcusable.
  • …virtually no one understands how the new law works….
  • Thus tech “glitches” make the law’s critics look better and make the administration look like the gang that couldn’t shoot straight.
  • Becoming a national laughingstock is worse than getting off to a bad start. It undermines trust in health-care reform and more generally in the government’s ability to solve problems.
  • “If you like your (Health Insurance) plan you can keep it.” Well, it turns out that maybe you can’t.
At this point in the article I was ready to stop reading because it sounded like Blinder had become a card-carrying member of the Tea Party . But then Blinder makes three allegations:

  • But even with all the delays, most of the uninsured will get covered.
  • Millions of people under the age of 26 are already benefiting by being kept on their parent’s policies.
  •  He worries that cost containment might be delayed now but then concluded “But there is at least some reason to think that the “affordable care” part of the act may be working already. The rate of inflation of medical care costs has tumbled in recent years.
At this point I was seeing what Blinder really wanted to say to strongly support Obamacare. But then he adds two more points of concern or worry on his part (and I am assuming that he was not being held hostage by Sara Palin when he wrote them):
  •             If many low risk people stay out of the pool, we have a problem: The insured pool will be less healthy than the total population
  •             So pure self-interest will push firms to drop coverage.
At this point I felt more disoriented than my last night out with JD. Is Alan Blinder against, for, or against Obamacare? Luckily he had not gone beyond his generous article word count when he popped his belief that despite all that other stuff – we need Obamacare to become a humane and efficient country. Thankfully a conclusion. Recall that President Truman always wanted a one-armed economist. I don’t think he would have liked Alan Blinder – who seems more like a multi-headed hydra.
Okay so he flip flops. Who doesn’t? So let’s move on to bigger potatoes. Standing back from the whole article, does Blinder prove or support his conclusions? Let me work on that for the remainder of this piece. So please WAKE UP.
First, he doesn’t make use of one of his key points and that has to do with the influence of the botched rollout on the support and faith people have for government. He said a lot of really nasty things about the rollout. But let’s face it – if they were so negligent in the rollout, are we really so confident that they are going to be able to manage such a new and complicated healthcare program? Can they really educate prospective clients by using people who have not been properly screened for that purpose? Can they really insure that people don’t scam the system and add unnecessarily to the costs? Can they really protect the confidentiality of all that information that goes to so many different government organizations?    
Second, if his two worries are true and low risk people and many firms do not sign up for the program, will we be able to afford it? He says that healthcare costs are already falling but naively attributes that to Obamacare. That is silly. Economists know there are many reasons besides Obamacare for the decline in healthcare costs – including the recession and slow economic growth. A main reason why Obamacare might reduce prices is because they stick it to doctors and other healthcare providers. This is not a political winner and will not likely happen when the plan fully unfolds.  Adding 30-50 million people to healthcare is not going to reduce its costs. Why can’t Blinder spend a paragraph seriously defending these cost reductions?
This thing is getting too long so I better take a nap. Let me end with humane and efficient. Compare the US to many countries and you will conclude that this is a pretty humane and efficient place. Many people do not want insurance and do not want to be coerced into buying it. And while some people will stop going to emergency rooms they will soon find a system wherein they will spend as much or more  time waiting for a private doctor in a nice clean waiting room. Surely as the US healthcare system becomes more like healthcare systems of other countries (ie we can’t afford it) all of us who cannot afford Cadillac plans will find the quality of our care greatly reduced. I seriously doubt the US will make it on the cover of USA today for Obamacare’s great humanitarian contribution.
Now consider efficiency and Obamacare. When did you ever learn that a law composed of thousands and thousands of pages of new regulations that seem to be changing haphazardly over time would lead to the average health practitioner getting more done at a lower cost? Is it possible that there are reasons, perhaps unique to the US, that will keep our healthcare costs as a large percentage of national income even after we impose Obamacare? We in the USA spend more of our income than any other country on American football and JD. We also do most of the drug and device long-term research and development. America is unique in many ways. Maybe we will always spend a large share of our income on healthcare?
But Blinder would rather draw conclusions out of a hat. He can do better than that and we deserve better than that. So I give him another F with the hopes that he will learn from this grade and be more careful with his words in the future.
Note to reader – Alan Blinder is a truly important and gifted economist. I am pretty much a grain of sand on his proverbial beach. As you know I like to sometimes take a humorous approach to some pretty dry issues. I have no personal issue with professor Blinder but I sure do take issue when I think important people take us for granted. High income and status has no monopoly on truth. Larry spouts...

Tuesday, November 12, 2013

Let the Monetary Weaning Begin

Cartoon by Jim Gibson
Janet – hey doc when are you going to get me off this pain medicine? You removed that nasty goiter three months ago and while I cannot leap tall buildings in a single bound, I am back at work as a pole dancer in Peoria. 

Doc – I’d hate to take you off the medicine too soon there is always a chance that you might stub your toe and then – there we go again with all that shrieking and gasping.

Janet -- Okay Doc – you are da man. But I gotta say, you are starting to worry me. My Uncle Charlie told me that drugs can be dangerous and that some people even get hooked on them. My Uncle Pete had his large intestine removed last year and he was off the pain meds by the first Friday night poker game.  How come a mere thyroid-ectomy requires so much pain meds? I am starting to think you are holding out on me. Maybe my Adam’s Apple is rotten to the core? Fess up Doc please.

Janet Yellen might take some of this to heart as the Fed Chief nominee prepares to be grilled in her confirmation hearing. She seems quite intent on helping unemployed persons – but so long as the Fed continues to inject pain medicine into the US national economy some four-plus years after the end of the recession she has to understand what the Fed is doing to the psychology of domestic producers and investors. Every time the Fed announces it will not begin tapering its dose of pain killers it will raise two damaging questions. First, is the economy really so horrible that we can’t even reduce the dosage a tiny bit?

Posing this question raises a cloud of uncertainty that is not good for --- guess what – employment.  It seems that every time the Fed announces it will not begin tapering, the stock market soars. That reaction suggests that more medicine is appreciated by someone. But that doesn’t mean it is good for the patient. As you know, someone hooked on drugs is the last person to recognize what is good and what is bad for them. And the logic is perverse anyway. The government and the Fed perpetuate a myth that the patient is weak and needs more support. The patient appreciates more support. But the truth is that despite unprecedented amounts of Fed policy, the patient is not leaping over tall buildings. Maybe the Fed should understand that the more they tell the patient she is too weak to stand without help, the more the patient believes this is true. It becomes a self-fulfilling prophecy. People wonder why firms have been so slow to return to strong hiring. But why would they want to hire more workers if the Fed tells them the economy is not self-sustaining?

Second, won’t another month or more of medicine have damaging side effects to the economy? Drugs keep the patient going but we all know that drugs can have side-effects. The longer you take drugs the more you raise the chance that these nasty side-effects will occur. Many have already pointed out the bubbles that seem to be forming again in real estate and financial markets. It would be awfully strange and perverse if the solution for the past crisis creates another one with similar characteristics. The message from Washington has to be confusing to the financial markets. On the one hand regulators are telling financial companies to hold more reserves and/or reduce financial leverage and risks. On the other hand the Fed is handing out money like Mars Bars on Halloween. With interest rates held so low – banks and other investors do not want to invest in assets that give no yield – so they are very tempted to buy assets that promise higher returns – and of course more risk.

But the risks associated with a permanently low interest rate environment are broader than these bubbles. China is a great example of a country that has highly unbalanced economic growth. Economic development in China has come mainly through international trade and investment. That sounds pretty good. What could be wrong with that? It’s like saying that since protein creates muscle, you should mostly eat big, juicy ribeye steaks and minimize your portions of vegetables and fruits. It makes sense to have a balanced diet. We all know that. It ALSO makes sense to have a balanced economy. A strong economy capable of withstanding global macroeconomic shocks has balanced growth across sectors. In that balanced country consumers buy more goods and services, firms invest in equipment and research, foreigners want to buy everything for i-phones to mining companies, and the government buys airplanes and tablets for students and teachers.

Current Fed policy is troublesome and needs to be reversed. The USA needs to be weaned or we risk a debilitating addiction to money and low interest rates that just makes us less confident about the future and promises us bubbles and a more unstable economy. If Janet Yellen wants to help the unemployed she needs to distance herself quickly from Bernanke’s risky policies.

Tuesday, November 5, 2013

Japan: A Road Not to be Taken By Guest Blogger Buck Klemkosky

Japan experienced stock market, credit and real estate bubbles in the late 1980s, but with more intensity than the U.S. experienced later. Prior to 1990, the Japanese economy and financial system was considered to be superior to the U.S. as expressed in several books, such as Japan as Number One (1979). Japanese society was considered to be more thrifty and conservative than Western societies. By hindsight Japan was not immune to speculative euphoria and bubbles.

Japanese euphoria was reflected in both stock prices and real estate prices. By the end of 1989, the market value of publicly traded Japanese stocks exceeded those of the U.S. even though the size of their economy was of one-third that of the U.S. Stock valuations were astronomical even compared to the dot.com era in the U.S. While the stock market was soaring, the real action was in the property markets. By the end of 1989, Japanese property was valued four times more than that in the U.S. The grounds of the Imperial Palace in Tokyo were supposedly worth more than all of the real estate in California. Real estate prices in Japan had never declined in the post-WWII period, so investors, including households, corporations and banks, were convinced that property price increases were a certainty.

This increased stock market and real estate wealth eventually fed into the credit markets and the financial system. A massive credit bubble evolved based upon the stock market and real estate bubbles – a nasty combination of corporations, banks and individuals all on a speculative binge. It couldn’t end well and it didn’t.

The Nikkei index peaked at 38,900 in December 1989 and eventually declined more than 80 percent. Property values started to decline in early 1990 and also eventually fell 80 percent. Both have never recovered. The economic consequences of the bursting of the bubbles were catastrophic and long lasting. Banks were technically insolvent and became “zombie” banks. The corporate and household sectors suffered massive losses. Japan has never fully recovered from the collapse of the bubble economy even after two decades. Economic growth has been stagnant and deflation has been a problem. Japan has other issues, such as demographics, but there is no more talk of Japan Number One. In fact, Japan has recently become the third-largest economy in the world after China.

If this all sounds familiar, it should. The U.S. experienced the same phenomena with the stock market, real estate and credit bubbles that collapsed in 2007-2009, but with less intensity and magnitude and also without corporate sector involvement. Japan has been a role model for the U.S. as what not to do when bubbles burst and affect the financial system and real economy. Hopefully Japan’s experience is not a glimpse of the U.S. future after the financial crisis.

Japan has a long-term problem of a declining and aging population and virtually no immigration; the population peaked at about 130 million and is expected to decline to 87 million by 2060, and 40 percent will be over 65 years of age. Since economic growth is a function of population growth and productivity, Japan has to have higher productivity to overcome a declining population just to maintain the same growth as other developed countries. A difficult task. The other major problem has been political leadership; Japan has had 15 prime ministers in the last 20 years. Not a good recipe for making tough economic changes.

Many think, including quite a few Japanese, this may have changed when Shinzo Abe was elected prime minister last year and his political party has taken control of both houses of Parliament, resulting in political stability for several years. He has instituted economic reforms referred to as Abenomics. It may be the last chance Japan has to rid itself of its economic paralysis.

Abenomic economic policy has three main arrows as dubbed by the media. Arrow number one is monetary easing. Because of low or zero economic growth and deflation, Japan has the lowest interest rates in the world, so that tool of monetary policy is not operable. So the Bank of Japan (B of J), like the U.S. Fed, has instigated a massive quantitative easing program. Their goal is to double the monetary base (money supply) in two years. But there are risks associated with this first arrow. The balance sheet of the B of J is already large relative to Gross Domestic Product (GDP); it has doubled in size in 2013 and is the largest relative to GDP among developed countries. At some point, investors may lose confidence in the central bank and then the banking and financial system.

The second arrow is a massive stimulus package. This is nothing new as Japan has had several in the past. They have resulted in recurring government deficits; Japan’s government debt to GDP is 245 percent, one of the highest in the world, especially for a developed country. Again, a risk is bond investors lose confidence in the Japanese economy. Most of the debt is held domestically and denominated in yen, so it will be Japanese investors who may eventually question the credit worthiness of Japanese government debt; some foreign investors already have. No one knows where the tipping point is for the ratio of debt to GDP, but there is one. To alleviate this problem, Japan plans to raise the consumption tax from 5 percent currently to 8 percent in 2014 and possibly 10 percent in 2015.

The third arrow is longer term and involves structural reform of the Japanese economy. This would include industrial revitalization, deregulation, lower trade barriers, new markets for industry and a more global outreach for society. This may be the most difficult of the three arrows to achieve. Japan has world-class multinational corporations and most are doing well, like the auto companies, but some, such as several consumer electronics firms, are faltering. But it is primarily the corporate structure below the large multinationals that needs to be revitalized.

The aim of the three arrows of Abenomics is economic growth. There are signs that it may be working in the short term. Japan has had three quarters of solid economic growth, and consumer confidence has picked up as well as stock and property prices. Like Bernanke and the Fed, the Japanese government and B of J are targeting 2 percent inflation by 2015. With deflation, it pays to delay consumption as goods and services will be cheaper. So a little inflation may help domestic consumption.

Another result of Abenomics is that the yen has depreciated from 78 yen per U.S. dollar to 98 per U.S. dollar. A weaker yen will not only make Japan’s exports more competitive, but imports more expensive, helping foster a little inflation. Recent inflation has been close to 1 percent annually, but most of this is due to higher energy costs due to the weaker yen.

Perhaps Abenomics is the last chance for Japan to reverse more than two decades of stagnant economic growth and deflationary pressures. It may take time and be painful to some in society, but change is needed. Monetary easing and the stimulus may help in the short term, but structural changes of the third arrow are prerequisite to long-term economic growth. Given a declining and aging population, growth in domestic consumption is problematic, especially if base salaries remain stagnant. Exports would help the Japanese economy but slow global economic growth weighs against that. All developed countries would like to export more, including the U.S. but exports and imports are a zero sum game in totality. So the global economy may not be the solution either.

Japan has painted itself into a corner economically. Even though Japan is playing a diminished role in the world economy, it is important to the U.S. to have a strong Japan, given the growth of China, both economically and militarily. If these arrows of economic reform don’t work, especially the third arrow, there may be none left in the quiver. Let’s hope three are enough.