02/12/2020 2010 March 17 - The Conscience of a Liberal - The New York Times

Posts published in March 17th, 2010

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Mar 17, 2010

Dances With Wolf

Martin Wolf apparently shares my views about the trouble with Chinese
currency policy — and throws Germany into the mix. The difference is that he
uses stronger language!

As I read this debate, one thing that’s truly amazing is the way China
defenders are recapitulating some old fallacies from, of all places, Latin America.
Back in the 50s it was common for Latin economists to insist that getting realistic
exchange rates wouldn’t solve their persistent balance of payments problems
because imbalances were “structural” — now we’re hearing the same thing about
China, with the only difference being that this time it’s a surplus, not a deficit,
that is supposedly immune from the usual rules of supply and demand.

I’d also point out, without having time to track down the references, that the
global macro aspects of the situation are reminiscent of the late 1920s, when the
US was simultaneously insisting that European nations repay their dollar debts
and that they not be allowed to export more to earn the dollars. That didn’t end
well.

Mar 17, 2010

Credit Where It Isn’t Due

I’m not usually interested in White House intrigue, and I’m no
Kremlinologist, but it does seem bizarre to claim that Democratic consolidation
behind Obamacare is a vindication for Rahm Emanuel, of all people.

The story as everyone reported it was that after the Massachusetts election,
Emanuel wanted Obama to go small, basically give up on comprehensive health

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reform — and that Emanuel lost out when Obama decided to go big instead. Now
the fact that going big looks likely to get through Congress — not in the bag yet, of
course — and that if it does, it will almost surely be good for the Democrats,
confirms that … Emanuel was right?

Actually, does anyone remember the 2006 midterms? As I recall it, Emanuel
wanted Dems to stay quiet about Iraq, and run on the economy — but was
overruled. And then when Dems pulled out a historic victory, he claimed credit.

I kind of like this approach. When Obama switches to harsh fiscal austerity,
and the Fed sharply raises rates — and despite everything I’ve been saying, the
economy prospers — I’m going to call it a vindication of my economic wisdom.

Mar 17, 2010

Waiting for CBO

Vladimir and Estragon are getting pretty antsy waiting for the CBO score on
the reconciliation package …

Mar 17, 2010

Demons and Demonization

The usual suspects have been attacking Obama for “demonizing” insurance
companies; but saying that people do terrible things isn’t demonization if they do,
in fact, do terrible things.

And health insurers do, because they have huge financial incentives to act in
an inhumane way — most obviously, by revoking coverage when people get sick,
using whatever rationale they can devise.

Read this report by Murray Waas on Assurant Health (previously called

Fortis), which used a computer algorithm to identify every client with HIV, then
systematically revoked coverage on the flimsiest of grounds — and appears to
have systematically hidden any paper trail showing how it made its decisions:

The South Carolina Supreme Court, in upholding the jury’s verdict in

the case in a unanimous 5-0 opinion, said that it agreed with the lower

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court’s finding that Fortis destroyed records to hide the corporation’s

misconduct. Supreme Court Chief Justice Jean Hoefer Toal wrote: “The
lack of written rescission policies, the lack of information available
regarding appealing rights or procedures, the separate policies for
rescission documents” as well as the “omission” of other records
regarding the decision to revoke Mitchell’s insurance, constituted
“evidence that Fortis tried to conceal the actions it took in rescinding his
policy.”

And what basis did the company use for revoking coverage?

Fortis canceled Mitchell’s health insurance based on a single

erroneous note from a nurse in his medical records that indicated that he
might have been diagnosed prior to his obtaining his insurance policy.
When the company’s investigators discovered the note, they ceased
further review of Mitchell’s records for evidence to the contrary,
including the records containing the doctor’s diagnosis.

Still, this must have been an outlier, a scuzzy company that wasn’t at all
typical, right? But in that case, why was the CEO one of the people who testified
on behalf of the insurance industry?

On June 16, 2009, the House Energy and Commerce Committee,

held a hearing on the practice of rescission by health insurance
companies, and among the industry executives who testified was Don
Hamm, the CEO and President of Assurant Health.

Hamm insisted before the committee that rescission was a necessary

tool for Assurant and other health insurance companies to hold the cost
of premiums down for other policyholders. Hamm asserted that
rescission was “one of many protections supporting the affordability and
viability of individual health insurance in the United States under our
present system.”

And as the story points out, the evidence is that the overwhelming majority
of rescissions, not just at Assurant but across the board, are, in fact, without

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justification.

The crucial thing to understand is that depending on how a few Democrats

vote sometime soon, stories like this will either cease happening — or continue,
and get much worse. The proposed health care reform would end discrimination
based on pre-existing conditions, and therefore end the threat of rescission as
well.

And to repeat what I and other have repeatedly explained, you need the
whole package to make this work. You can’t end discrimination based on medical
history unless you require that health as well as sick people have insurance, to
broaden the risk pool. And you can’t mandate coverage unless you provide aid to
those who otherwise couldn’t afford it.

Right now, we have a system that creates huge incentives for bad, one might
say demonic, behavior: Assurant made $150 million by revoking coverage, almost
always without cause. We can end all of that — not in some indefinite future, but
with a single vote right now.

Just do it.

Mar 17, 2010

Chinese Currency Discussion

Mark Thoma has the video of Fred Bergsten, yours truly, and Robert Scott
discussing the renminbi.

I explain there the magnitude of the impact: by running an artificial current

account surplus that is 1 percent of the combined GDPs of liquidity-trap
countries, China is in effect imposing an anti-stimulus of that magnitude — which
plausibly means 1.5 percent of GDP. This is not a small issue.

Mar 17, 2010

How Much Of The World Is In a Liquidity

Trap?

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As I’ve written many times in various contexts since the crisis began, being in
a liquidity trap reverses many of the usual rules of economic policy. Virtue
becomes vice: attempts to save more actually make us poorer, in both the short
and the long run. Prudence becomes folly: a stern determination to balance
budgets and avoid any risk of inflation is the road to disaster. Mercantilism
works: countries that subsidize exports and restrict imports actually do gain at
their trading partners’ expense. For the moment — or more likely for the next
several years — we’re living in a world in which none of what you learned in Econ
101 applies.

But what’s the definition of a liquidity trap? How much of the world is in
one? There’s a lot of confusion on that point; here’s how I see it.

In my analysis, you’re in a liquidity trap when conventional open-market

operations — purchases of short-term government debt by the central bank —
have lost traction, because short-term rates are close to zero.

Now, you may object that there are other things central banks can do, and
that they actually do these things to some extent: they can purchase longer-term
government securities or other assets, they can try to raise their inflation targets
in a credible way. And I very much want the Fed to do more of these things.

But the reality is that unconventional monetary policy is difficult, perceived

as risky, and never pursued with the vigor of conventional monetary policy.

Consider the Fed, which under Bernanke is more adventurous than it would
have been under anyone else. Even so, it has gone nowhere near engaging in
enough unconventional expansion to offset the limitations created by the zero
lower bound.

A while back Goldman estimated that if it weren’t for the lower bound, the
current Fed funds rate would be minus 5 percent, and that to achieve the same
effect as a further 5 points of Fed funds cuts the Fed would have to expand its
balance sheet to $10 trillion; I wouldn’t stake my life on those estimates, but they
seem in the right ballpark. Obviously, the Fed isn’t doing that.

Or put it a different way: suppose the real economic outlook were the same
as it is — with all indications being that unemployment will stay very high for
years to come — but that the current Fed funds rate were, say, 4 percent. Clearly

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the Fed would feel obliged to engage in a lot more expansion, cutting rates
sharply and rapidly. But with short-term rates at zero, the Fed is instead merely
on hold — it is not expanding its quantitative easing, and is in fact in the process
of pulling back.

The point is that while you can think of things the Fed can do even at the zero
lower bound, that lower bound is in practice a major constraint on policy. By all
means let’s yell at the Fed to do more, but when you’re considering other issues —
like the effects of fiscal policy or the effects of renminbi undervaluation — you
have to assess them in terms of the central bank you have, not the central bank
you wish you had.

And by that criterion, how much of the world is currently in a liquidity trap?
Almost all advanced countries. The US, obviously; Japan, even more obviously;
the eurozone, because the ECB probably couldn’t engage in Fed-style quantitative
easing even if it wanted to, given the lack of a single backing government; Britain.
Not Australia, I guess. But still: essentially the whole advanced world, accounting
for 70 percent of world GDP at market prices, is in a liquidity trap.

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