So apparently a deal over the debt limit was reached today. This is better than the alternative in the same way that giving yourself AIDS is better than shooting yourself in the head. Sure, markets like that something happened (there won't be an immediate default, which is better than the alternative), but the deal struck is going to make our economy worse, it is going to damage our quality of life, AND (the most ironic part), in all likelihood, it will make our fiscal problem worse. I say this not because I think I'm super smart-- I don't know anything your average person shouldn't-- but because it seems like a whole lot of people have gotten really, really stupid.
So, the simple reason the deal will make things worse is simple- cutting spending in a depressed economy is contractionary. It's not a difficult principle. Somehow, Congress doesn't understand that. The worst comes from the Republican Party. They rail about how we can't afford tax hikes "in this economy," but in the same breath swear that we need to cut spending NOW. Tax hikes are "job-killing"; spending cuts are "confidence-restoring." It's not just a wrong but debatable claim-- it's just complete nonsense on its own terms. Yes, hiking taxes takes money out of people's pockets and puts it in the hands of the government. Some of that money would have been spent (demand that we forego), some of it would have been saved (demand that we don't forego), and some of the drop in income is replaced by spending from savings. So there's a contractionary effect, but every dollar in tax hikes does not contract the economy by a dollar. On the contrary, spending cuts ARE contractionary in just that way. If you pay a dollar less for MediCare, that's a dollar less in someone's pocket. If you fire a worker in the federal government, you have to pay them unemployment benefits, and lose the tax revenue you'd get from their salary. They also have to consume less because they don't have a job, so everyone with whom they do business is also impacted. It's not a hard concept, but people in Washington seem to have forgotten it. In normal times, government spending can crowd out private sector spending. We're not in normal times. Unemployment is over 9% and interest rates are at 0. In this case, government spending can crowd in private spending by spurring demand that signals to businesses that they should expand and hire to meet that demand.
Opponents of this idea argue that businesses are far-sighted and know taxes will be raised on them in the future if the government runs a deficit. That's baloney. Businesses respond to market conditions, not long-run guesses about the state of the economy in 15 years. If you own 20 taxis that operate in New York, and slack demand from the recession has led you to sideline half of them, but suddenly your 10 operating taxis are booked non-stop, you're going to send some of the taxis that have been standing idle back out on the road. You're not going to care if that demand comes from 2000 new attorneys hired by the SEC, or 2000 new analysts hired by Goldman Sachs. On top of that, depressed demand now makes our fiscal outlook in the future weaker. The longer the economy is depressed, the less tax receipts the government will take in, meaning that even if spending is cut, the shrinking economy and drop in tax receipts will actually likely make the deficit problem WORSE. But this is what we got, and it's depressing.
But the real reason I'm writing this post is to address the scaremongering coming from the "respectable" mainstream media. I have a subscription to Bloomberg Business Week, and I think it's normally a pretty good magazine. It provides a decent pulse of the market. But I came back to New York from my summer internship this evening and found that Peter Coy had written the worst article I've read in the magazine since I started getting it a year ago. It talks about our "long-term fiscal condition" and claims that we have hundreds of trillions of dollars in unfunded liabilities stretching into the future. That sounds scary. In a way it's true. But take the claim apart, and it's a profoundly stupid statement meant to mislead gullible people. There are so many things wrong with the article, I don't really know where to start, but this one's as good as any.
First, it readily concedes that it's making a present value calculation without explaining the implication. So here's the implication: a big number has to be divided by a time period for it to matter. In a present value calculation, it's discounted to forever into the future. In straightforward terms, it says two very different things to say that I owe $10 million to be paid back tomorrow, or I owe $10 million to be paid back over the course of a hundred-year period. If it's the former, I'm bankrupt. If it's the latter, depending on my salary and inflation, it could be very little. What the present-value calculation does is assume that expenditures grow the same way in the future as they did in the past, while tax revenues also follow the past course. It conveniently ignores the impact of adjustment. For instance, if you raise the retirement age by a year or two OR raise the maximum salary at which payroll taxes are deducted (currently a little over $100,000), OR means-test the program, OR tweak benefits, depending on how much you changed each, you could easily turn a program projected to run massive deficits into a program projected to run massive surpluses. Magic.
Then Coy pretends that the way deficits in programs like Social Security are calculated is an accounting trick. He says that if today's workers were required to buy X amount of bonds that they could redeem when they retired, our debt would look much worse than it does. That's nonsense. Social security is NOT a retirement account, nor is it an obligation. It's an insurance fund. It guarantees you a certain bare-bones level of income if you reach a certain age. If you die, you don't collect anything. Plug that into Coy's example, and you realize what baloney he's spouting. Imagine for a second that your bonds disappear if you die. Instead of being sold into the open market, they just up and evaporate. That's the equivalent. There are plenty of things we can do to fund programs like Social Security that wouldn't substantively change too much about how those programs work.
Medicare and Medicaid are a different story (as is all health care spending)-- we spend way too much at all levels, as I discussed in this post, but that doesn't mean that cutting indiscriminately or passing costs to the private sector is the way to go. Frankly, the scaremongering just frustrates me because the supposedly respectable media is pushing lies on people.
Sunday, July 31, 2011
Friday, July 29, 2011
Inequality is Bad
Talk about inequality today, and the immediate response will be that you're a socialist who likes class warfare. So long as everyone's life is getting better, they say, it doesn't matter that the richest people's lives are getting relatively better than the poorest's. And that would be fine... if it were true. But Jared Bernstein points us to this graph indicating that, starting in 1973, while real wages (adjusted for inflation) were more or less stagnant up until 1980 (interestingly, they dipped for the super-rich top 5%, but rose a bit for the upper-middle class and the bottom 10%), once Reagan took office, a strange thing happened. The wages of the rich took off like a rocket. From 1981 to 1989, the wages of the top 5% went from about 95% of their real 1973 level to about 107% of that level in 8 years. Meanwhile, in those 8 years, wages for the poorest 10% dropped by more than 10%, a shocking decline. And it wasn't just the poor that got shafted- the median wage stayed essentially stagnant through Reagan's presidency. Coinciding with the beginning of Bill Clinton's presidency, a curous thing happened. Wages of the rich took off, and kept rising. Since 1993, the real wages of the top 5% have increased by about 1/3. It was nearly as dramatic for the next 5%, and slightly less dramatic, but still significant for the 10% after that. Then, a bit later, the wages of the middle and lower classes took off, too. From 1995 to 2003, they grew by about 8-10%; nowhere near as much as the super-rich, but definitely a significant across-the-board improvement. Then, in 2003, while the wages of the rich kept exploding, the wages of the middle- and lower-middle classes stagnated, and the wages of the poor fell. So, since 1973, real wages have grown by under 5% over the course of almost 40 years, and all of that growth came during a 5-year window in Bill Clinton's second term. Meanwhile, the wages of the richest 5% have grown by about a third, the next 5% by slightly less than that, and the next 10% by about 20% (not bad, but far from great). In other words, the average American earns no more now than they did 40 years ago. That's a terrible track record.
And here's why it matters. Inequality isn't just about feeling good and having class-consciousness. Reading Marx is important for cultural reasons for the same reason reading Hayek and Schumpeter is, but none of them tell us anything useful about the macroeconomy. But inequality, besides being inherently bad, is also a drag on growth. Think of it this way. What the economy produces is largely dictated by aggregate demand. If someone wants something and has the cash to buy it, someone else will likely come along and produce it. Demand is generated by someone having something valuable to exchange for the required good or service, whether it's currency or another good or service. And the amount of that product that is demanded depends on how much currency (whether referred to as the literaly medium of exchange or a different valuable good or service) others have to exchange for it. And what matters then isn't just the amount of currency in the system-- it's the distribution of that currency.
This makes intuitive sense if you think about it. Here's a stylized example that's pretty straightforward. Say the only good in a community is food. Everyone demands food because we're hungry and we get the munchies on the reg. But there's a cap to how much food we demand. Whether I'm Bill Gates or Joe Factory Worker, or Homeless Bob, I demand between 2000 and 3000 calories of food a day. If Bill Gates were a giant prick (not saying he is, but let's imagine) who wanted to eat caviar for every meal... he still wouldn't demand all that much more food than Joe or Bob. Now let's turn this example to the grocery store owner's perspective. She sells food to a community of, say, 10 people. Let's further assume that there are 100 currency units in the community. Nominally, we shouldn't care if one person has 91 currency units, while the other 9 have 1 each-- the size of the economy is the same. Practically, the store owner is very concerned about just that. If each member of the community has 10 currency units, each might spend 3 of those on food, which gets the grocery store owner 30 currency units of revenue. Now imagine 9 people have 2 units each, and the last person has 82 units. The first 9 spend all of their currency on food because otherwise they'd starve. Now, even if one person can afford to spend double what they might otherwise spend on food if the distribution were equal (say they want to eat more and eat better food), the store owner still ends up with 24 units of revenue instead of the 30 they would have, for a 20% decline in total revenue. The example is stylized, but the point is the same-- the more equal the distribution of wealth, the more aggregate demand you end up with in markets for mass-produced consumer goods.
This discovery is nothing new-- Henry Ford figured out that he could generate huge demand for automobiles by hiking his workers' wages so that they could afford to buy his cars. So it's not just for feel-good reasons that closing income gaps is good-- it also makes for a stronger economy and more demand for businesses.
And here's why it matters. Inequality isn't just about feeling good and having class-consciousness. Reading Marx is important for cultural reasons for the same reason reading Hayek and Schumpeter is, but none of them tell us anything useful about the macroeconomy. But inequality, besides being inherently bad, is also a drag on growth. Think of it this way. What the economy produces is largely dictated by aggregate demand. If someone wants something and has the cash to buy it, someone else will likely come along and produce it. Demand is generated by someone having something valuable to exchange for the required good or service, whether it's currency or another good or service. And the amount of that product that is demanded depends on how much currency (whether referred to as the literaly medium of exchange or a different valuable good or service) others have to exchange for it. And what matters then isn't just the amount of currency in the system-- it's the distribution of that currency.
This makes intuitive sense if you think about it. Here's a stylized example that's pretty straightforward. Say the only good in a community is food. Everyone demands food because we're hungry and we get the munchies on the reg. But there's a cap to how much food we demand. Whether I'm Bill Gates or Joe Factory Worker, or Homeless Bob, I demand between 2000 and 3000 calories of food a day. If Bill Gates were a giant prick (not saying he is, but let's imagine) who wanted to eat caviar for every meal... he still wouldn't demand all that much more food than Joe or Bob. Now let's turn this example to the grocery store owner's perspective. She sells food to a community of, say, 10 people. Let's further assume that there are 100 currency units in the community. Nominally, we shouldn't care if one person has 91 currency units, while the other 9 have 1 each-- the size of the economy is the same. Practically, the store owner is very concerned about just that. If each member of the community has 10 currency units, each might spend 3 of those on food, which gets the grocery store owner 30 currency units of revenue. Now imagine 9 people have 2 units each, and the last person has 82 units. The first 9 spend all of their currency on food because otherwise they'd starve. Now, even if one person can afford to spend double what they might otherwise spend on food if the distribution were equal (say they want to eat more and eat better food), the store owner still ends up with 24 units of revenue instead of the 30 they would have, for a 20% decline in total revenue. The example is stylized, but the point is the same-- the more equal the distribution of wealth, the more aggregate demand you end up with in markets for mass-produced consumer goods.
This discovery is nothing new-- Henry Ford figured out that he could generate huge demand for automobiles by hiking his workers' wages so that they could afford to buy his cars. So it's not just for feel-good reasons that closing income gaps is good-- it also makes for a stronger economy and more demand for businesses.
Klinsmann It Is
This morning, the US men's team officially announced the hiring of Jurgen Klinsmann to replace Bob Bradley. A lot of people think this is a good move. US Soccer head Sunil Gulati's been trying to get Klinsmann for a good five years now. Personally, I'm... skeptical. And here's why.
First the pros: Klinsmann is not a random big-name foreigner plucked out of thin air. He lives in Southern California (he took a lot of flak when he was coaching Germany because he commuted from LA), he know the US game (he played in semi-pro men's leagues in California under an alias after formally retiring), he speaks very good English (he announces games for ESPN), and it's obvious from those analyses that he really understands the game (which isn't a given for a former great player; Pele was the best player of his generation, and arguably of all time, but anyone who's heard him talk about soccer knows that his predictions are... pretty much always wrong). He's also got innovative ideas for the youth setup which, as Dylan and another college friend of mine, Kei Saotome, have pointed out is crucial to developing top talent.
But I think those pros are outweighed by the cons. The reality is that, for a coach with a big reputation, Klinsmann hasn't actually accomplished much at all. As I pointed out in an earlier post, finishing 3rd at the World Cup on your own turf when you're Germany is, at best, par for the course. And his results outside the World Cup weren't exactly stellar (a big part of the reason that World Cup was regarded as such a succses is that the team played like such garbage in the run-up to the tournament). Then he took over Bayern Munich and was fired before he even finished his only (pretty disastrous) season. Although he understands the game, he hasn't shown me much to suggest that he's a great tactician. And, obviously, being a great player is no guarantee of success as a coach. For every Johan Cruyff or Pep Guardiola, there are five Diego Maradonas who fail as coaches. And some of the best coaches in the modern game either had completely unremarkable professional careers (Guus Hiddink, Alex Ferguson) or barely had pro careers at all (Jose Mourinho). Frankly, I'm worried that Klinsmann will struggle tactically, and the team will regress.
Now, here's the tricky part. Usually, when I'm critical of some idea, I have what I think is a better plan in mind. Here, I really don't. I can't think of anyone I'd necessarily rather have at the helm right now, and while I don't think firing Bob Bradley was the wrong move (even though I do think he was fine as a coach), I'm not sure of who I think should take over. Part of me would prefer Jason Kreis, but he's a gamble for different reasons than Klinsmann. And I think Marcelo Lippi (another name being floated) would have been a huge mistake. So, while I'm not impressed with the Klinsmann hire, I'm not upset about it either. I guess I'm skeptical, but will wait and see...
First the pros: Klinsmann is not a random big-name foreigner plucked out of thin air. He lives in Southern California (he took a lot of flak when he was coaching Germany because he commuted from LA), he know the US game (he played in semi-pro men's leagues in California under an alias after formally retiring), he speaks very good English (he announces games for ESPN), and it's obvious from those analyses that he really understands the game (which isn't a given for a former great player; Pele was the best player of his generation, and arguably of all time, but anyone who's heard him talk about soccer knows that his predictions are... pretty much always wrong). He's also got innovative ideas for the youth setup which, as Dylan and another college friend of mine, Kei Saotome, have pointed out is crucial to developing top talent.
But I think those pros are outweighed by the cons. The reality is that, for a coach with a big reputation, Klinsmann hasn't actually accomplished much at all. As I pointed out in an earlier post, finishing 3rd at the World Cup on your own turf when you're Germany is, at best, par for the course. And his results outside the World Cup weren't exactly stellar (a big part of the reason that World Cup was regarded as such a succses is that the team played like such garbage in the run-up to the tournament). Then he took over Bayern Munich and was fired before he even finished his only (pretty disastrous) season. Although he understands the game, he hasn't shown me much to suggest that he's a great tactician. And, obviously, being a great player is no guarantee of success as a coach. For every Johan Cruyff or Pep Guardiola, there are five Diego Maradonas who fail as coaches. And some of the best coaches in the modern game either had completely unremarkable professional careers (Guus Hiddink, Alex Ferguson) or barely had pro careers at all (Jose Mourinho). Frankly, I'm worried that Klinsmann will struggle tactically, and the team will regress.
Now, here's the tricky part. Usually, when I'm critical of some idea, I have what I think is a better plan in mind. Here, I really don't. I can't think of anyone I'd necessarily rather have at the helm right now, and while I don't think firing Bob Bradley was the wrong move (even though I do think he was fine as a coach), I'm not sure of who I think should take over. Part of me would prefer Jason Kreis, but he's a gamble for different reasons than Klinsmann. And I think Marcelo Lippi (another name being floated) would have been a huge mistake. So, while I'm not impressed with the Klinsmann hire, I'm not upset about it either. I guess I'm skeptical, but will wait and see...
Citizen Kane. The Godfather. Cowboys and Aliens.
For the first time since I started work this summer, I went to the movies at midnight on a Thursday night to see the opening of a newly released movie. There have been a good number of really good movies this summer-- Harry Potter was disappointing, but the new X-Men was very good, I really enjoyed Super 8, and Horrible Bosses was hilarious. But last night, right before my last day of work, I went to see Cowboys and Aliens. Why? Because Cowboys and Aliens are awesome. Individually, they're awesome. Combined, they're... more awesome than if you add them together. If Cowboys have 10 awesome points, and Aliens have another 10 awesome points, Cowboys AND Aliens have 25 awesome points.
So I guess the first place to start is with some plot points. There are some SPOILERS HERE just in case someone would get upset about it. But really, this is Cowboys and Aliens, not an M. Night Shyamalan movie. There are a lot of cowboys and aliens and explosions, just like you see in the previews, plus some things that are also awesome but aren't advertised in the trailer (Native Americans!). So the plot: James Bond wakes up in the desert a few years after the Civil War in the Wild Wild West with a metal bracelet strapped to his arm. He doesn't remember anything (besides how to speak English). He rolls up to town, where Han Solo has a son who is being a giant prick. Also, his son is the preacher who Daniel Day-Lewis lays out to dry in There Will Be Blood, except now he's taller and has the kind of facial hair semi-pubescent 13-year olds who don't know how to shave grow. James Bond proceeds to repeatedly kick him in the nuts for the next half of the movie. It's awesome.
When he gets to town, it's full of posters of James Bond, who is apparently wanted for everything. So the sheriff and his boys come after him and want to send him away. They also want to send away Han's son because, again, no one likes 26-year-old pricks who can't grow real facial hair. The only other person interested in James Bond is Olivia Wilde. You don't really have any clue who she is, what she does, or why the baddest woman in 19th century America (or 20th century America. Or of all time, really) is chasing James Bond around like a hound dog. Especially when he spends the first half of the movie telling her to bounce. I spent the first half of the movie thinking they were both aliens, her because, even though Bond beat up on all of the town's police, she cold-cocked him with one punch, and him because he had without a doubt the most beautiful woman in America chasing him around, but acted like he just wasn't interested at all. It might've made sense if he was gay, but flashbacks made clear that he wasn't. But, just as Bond and Han's useless prick son are about to get carted away, the aliens show up. They shoot a few people, snatch a few others (including Han's son and the bartender's mail-order bride) and bolt. In the process we figure out that Bond's metal bracelet is actually a super-gat that can take out the alien spaceships. At which point I'm definitely kind of thinking he's a different kind of alien. But the rest of the movie is more or less spent figuring out who he is, who Olivia Wilde is, and why she's so desperate to kick it with him.
We would be figuring out what the aliens want, but (and this is the best part), it's really not that complicated at all. They're desperate for gold. Yeah, the big bad scary aliens are a bunch of Glenn Becks who scour the universe snatching everyone's gold because alien Ben Bernanke is apparently printing too much alien money for the aliens' good. Long story short, there's a bunch of fighting (where the cowboys really don't bring much to the table, bu the Native Americans do serious work), and everything ends.
Long story short, it's a cinematic masterpiece because: 1) Cowboys, 2) Aliens, 3) Native Americans, 4-25) Olivia Wilde.
So I guess the first place to start is with some plot points. There are some SPOILERS HERE just in case someone would get upset about it. But really, this is Cowboys and Aliens, not an M. Night Shyamalan movie. There are a lot of cowboys and aliens and explosions, just like you see in the previews, plus some things that are also awesome but aren't advertised in the trailer (Native Americans!). So the plot: James Bond wakes up in the desert a few years after the Civil War in the Wild Wild West with a metal bracelet strapped to his arm. He doesn't remember anything (besides how to speak English). He rolls up to town, where Han Solo has a son who is being a giant prick. Also, his son is the preacher who Daniel Day-Lewis lays out to dry in There Will Be Blood, except now he's taller and has the kind of facial hair semi-pubescent 13-year olds who don't know how to shave grow. James Bond proceeds to repeatedly kick him in the nuts for the next half of the movie. It's awesome.
When he gets to town, it's full of posters of James Bond, who is apparently wanted for everything. So the sheriff and his boys come after him and want to send him away. They also want to send away Han's son because, again, no one likes 26-year-old pricks who can't grow real facial hair. The only other person interested in James Bond is Olivia Wilde. You don't really have any clue who she is, what she does, or why the baddest woman in 19th century America (or 20th century America. Or of all time, really) is chasing James Bond around like a hound dog. Especially when he spends the first half of the movie telling her to bounce. I spent the first half of the movie thinking they were both aliens, her because, even though Bond beat up on all of the town's police, she cold-cocked him with one punch, and him because he had without a doubt the most beautiful woman in America chasing him around, but acted like he just wasn't interested at all. It might've made sense if he was gay, but flashbacks made clear that he wasn't. But, just as Bond and Han's useless prick son are about to get carted away, the aliens show up. They shoot a few people, snatch a few others (including Han's son and the bartender's mail-order bride) and bolt. In the process we figure out that Bond's metal bracelet is actually a super-gat that can take out the alien spaceships. At which point I'm definitely kind of thinking he's a different kind of alien. But the rest of the movie is more or less spent figuring out who he is, who Olivia Wilde is, and why she's so desperate to kick it with him.
We would be figuring out what the aliens want, but (and this is the best part), it's really not that complicated at all. They're desperate for gold. Yeah, the big bad scary aliens are a bunch of Glenn Becks who scour the universe snatching everyone's gold because alien Ben Bernanke is apparently printing too much alien money for the aliens' good. Long story short, there's a bunch of fighting (where the cowboys really don't bring much to the table, bu the Native Americans do serious work), and everything ends.
Long story short, it's a cinematic masterpiece because: 1) Cowboys, 2) Aliens, 3) Native Americans, 4-25) Olivia Wilde.
The Economy... Still Stinks
The GDP numbers for the second quarter are out today. Shocker, they're ugly. Annualized growth was at 1.3%. Better than 0.4% first quarter, but still far below the rate we need to keep the unemployment rate from rising. Why did the stagnation happen? Well, part of it was probably a shock to fuel prices in May that impacted growth, and part was the lingering effects of the Japanese tsunami ravaging the global economy. But if you look at the BEA numbers, the biggest drop in GDP has come from a drop in government spending. The first thing anyone learns in Macro is the accounting identity that GDP= Consumption + Investment + Government Spending + Net Exports. The drop is largely in the "government spending" part of the identity as the effect of 2009's stimulus dries up. So, for those who thought that our problems could be fixed if the government would just cut spending and "boost confidence", take a look at the numbers- we cut spending, and the economy did exactly what the models said it would do: it shrank.
Thursday, July 28, 2011
More Bob Bradley Thoughts- How To Develop Talent
So my good friend from college, Dylan Langley, brought up a good point in response to my earlier post about the Bob Bradley firing-- I pointed out that the US doesn't have the players to play a possession game, but didn't really address why. I think Dylan had it right when he argued that our youth development system in the US lags behind those of the best soccer countries, and that, with 300 million people, we should be able to compete for a World Cup. The US has definitely made remarkable progress over the last 20 years. In 1990, our national team was complete garbage. In 1994, we got out of the group stage, but we were still not very talented (playing at home helps). Our best players were in and out of the worst teams in Europe's best leagues. Cobi Jones, Alexi Lalas and John Harkes made teams that were on the fringe of the English Premier League and Serie A, but they all went off and joined MLS within a few years. Eric Wynalda was on a fringe German club, but none of them were any better than marginal out there. As late as 1998, the only position where the US was producing top-notch players was in net (where Brad Friedel and Kasey Keller were two of the better goalies in Europe). Fast forward to today, and Clint Dempsey is a standout in England's top league (nowhere near the league's best players, but he's a regular for a decent team, and arguably their best attacking player), Stuart Holden was named the player of the year for another decent team in England's top league, and Oguchi Onyewu and Jozy Altidore have even spent time under contract at Champions League clubs (though neither made an impression). Talent-wise, we're still nowhere near Spain, but we're miles ahead of where we were a decade ago.
Dylan's argument is that we should overhaul the youth setup so that we develop real star players. I agree with that part. I think where we disagree is over whose responsibility that is. I think the national coach has a pretty specific job- get the squad prepared to play at every tournament, manage egos and personalities, and choose effective tactics. The coach doesn't get enough practice time with the players to develop them, and I'm not sure a centralized youth setup controlled by the national coach is the way to go. If you look at the countries that produce the best talent, pretty much all of them do so through their club youth systems. Brazilian and Argentinian teams have traditionally had less money than the big European teams (though the Brazilian league especially has taken HUGE steps lately), but the pipeline of top talent coming out of their academies is absurd. Every year or two, a new "next big thing" comes out of there. Just since 2000, Ronaldinho, Robinho, Pato, and Kaka have come out of the Brazilian pipeline. Now, they have Neymar and Ganso. And what's even more remarkable is how many of those players fill up rosters in second-tier European leagues-- there are Brazilians who don't get in the national team, but play central roles at Russian clubs, Turkish clubs, Portuguese clubs, and even Japanese clubs. Obviously, the US has a long way to go to get to that level-- in Brazilian barrios, the kids all play soccer exclusively, while in the US basketball is still king. But there's not a limited supply of athletes, and many of the best soccer players couldn't play anything else (can you imagine Messi trying his hand at basketball? Xavi playing football?), so that's really not an excuse.
So I think the solution is for MLS clubs to start producing star players at their academies, who move up the pipeline to MLS, and then eventually head over to Europe. A lot of them already have academies producing promising young players. There's no Messi or Cristiano Ronaldo, but Juan Agudelo came through the Red Bulls academy and is a promising prospect; Andy Najar is going to play for Honduras, but he came through the DC United academy, and his development is a promising sign that MLS academies are starting to churn out players. Of course, building a proper youth setup is hard. Chelsea's thrown money at their youth system for years, and haven't produced a first-teamer from their academy since John Terry, and he's 30 (though Josh McEachran has promise). But that doesn't mean that it's not worth trying, and when an academy works properly, it's a thing of magic (Barcelona's academy just in the last decade-plus has produced Messi, Xavi, Iniesta, Fabregas, Pique, Pedro, Busquets, Puyol, and Victor Valdes. That list includes 2 of the 3 best players in the world, and at least 3 of the top 10. That's absurd. So I think it's those academies that are the future of US soccer. But I'm not sure that the national team coach's job is to develop that youth setup. I think that part is on the clubs.
Having said all of that, I don't think letting Bob Bradley go was the wrong move. I'm inclined to think that national coaches grow stale after one World Cup cycle. For whatever reason, players stop responding to them, and new coaches are needed to take the next step. Part of that, in my view, is that each cycle requires quite a bit of change to the core of the squad. Occasionally, a player will start two World Cups in a row. If he's really exceptional, he can make it 3. But the core of the team has to change, and national coaches, especially ones who have had some success with one group, tend to cling to that core for too long. It happened with Mario Lippi, who won the World Cup with Italy in 2006, retired, came back in 2008, and then steered the team to a disastrous performance in 2010 with the same core that had won him the title four years before. I think the US needs new blood, and it needs a fresh face to introduce it. The back four needs a total revamp- Steve Cherundolo is still (for now) the best option at RB, though Timothy Chandler looks like the pick for the near future, while Eric Lichaj may be an answer at left back. But new center backs need to be plugged in. And by the next World Cup, Landon Donovan will be 32 (old for a wide attacker), while Clint Dempsey will be 31 (a little easier since he can play centrally and doesn't rely as much on his speed as Donovan). Jozy Altidore will have to be replaced or get squeezed out, and the central midfield situation will need to be sorted out. I'd like a fresh pair of eyes behind the bench to do that.
Dylan's argument is that we should overhaul the youth setup so that we develop real star players. I agree with that part. I think where we disagree is over whose responsibility that is. I think the national coach has a pretty specific job- get the squad prepared to play at every tournament, manage egos and personalities, and choose effective tactics. The coach doesn't get enough practice time with the players to develop them, and I'm not sure a centralized youth setup controlled by the national coach is the way to go. If you look at the countries that produce the best talent, pretty much all of them do so through their club youth systems. Brazilian and Argentinian teams have traditionally had less money than the big European teams (though the Brazilian league especially has taken HUGE steps lately), but the pipeline of top talent coming out of their academies is absurd. Every year or two, a new "next big thing" comes out of there. Just since 2000, Ronaldinho, Robinho, Pato, and Kaka have come out of the Brazilian pipeline. Now, they have Neymar and Ganso. And what's even more remarkable is how many of those players fill up rosters in second-tier European leagues-- there are Brazilians who don't get in the national team, but play central roles at Russian clubs, Turkish clubs, Portuguese clubs, and even Japanese clubs. Obviously, the US has a long way to go to get to that level-- in Brazilian barrios, the kids all play soccer exclusively, while in the US basketball is still king. But there's not a limited supply of athletes, and many of the best soccer players couldn't play anything else (can you imagine Messi trying his hand at basketball? Xavi playing football?), so that's really not an excuse.
So I think the solution is for MLS clubs to start producing star players at their academies, who move up the pipeline to MLS, and then eventually head over to Europe. A lot of them already have academies producing promising young players. There's no Messi or Cristiano Ronaldo, but Juan Agudelo came through the Red Bulls academy and is a promising prospect; Andy Najar is going to play for Honduras, but he came through the DC United academy, and his development is a promising sign that MLS academies are starting to churn out players. Of course, building a proper youth setup is hard. Chelsea's thrown money at their youth system for years, and haven't produced a first-teamer from their academy since John Terry, and he's 30 (though Josh McEachran has promise). But that doesn't mean that it's not worth trying, and when an academy works properly, it's a thing of magic (Barcelona's academy just in the last decade-plus has produced Messi, Xavi, Iniesta, Fabregas, Pique, Pedro, Busquets, Puyol, and Victor Valdes. That list includes 2 of the 3 best players in the world, and at least 3 of the top 10. That's absurd. So I think it's those academies that are the future of US soccer. But I'm not sure that the national team coach's job is to develop that youth setup. I think that part is on the clubs.
Having said all of that, I don't think letting Bob Bradley go was the wrong move. I'm inclined to think that national coaches grow stale after one World Cup cycle. For whatever reason, players stop responding to them, and new coaches are needed to take the next step. Part of that, in my view, is that each cycle requires quite a bit of change to the core of the squad. Occasionally, a player will start two World Cups in a row. If he's really exceptional, he can make it 3. But the core of the team has to change, and national coaches, especially ones who have had some success with one group, tend to cling to that core for too long. It happened with Mario Lippi, who won the World Cup with Italy in 2006, retired, came back in 2008, and then steered the team to a disastrous performance in 2010 with the same core that had won him the title four years before. I think the US needs new blood, and it needs a fresh face to introduce it. The back four needs a total revamp- Steve Cherundolo is still (for now) the best option at RB, though Timothy Chandler looks like the pick for the near future, while Eric Lichaj may be an answer at left back. But new center backs need to be plugged in. And by the next World Cup, Landon Donovan will be 32 (old for a wide attacker), while Clint Dempsey will be 31 (a little easier since he can play centrally and doesn't rely as much on his speed as Donovan). Jozy Altidore will have to be replaced or get squeezed out, and the central midfield situation will need to be sorted out. I'd like a fresh pair of eyes behind the bench to do that.
USA vs. Europe: Who's Worse?
Simon Johnson, who used to be chief economist at the IMF and now teaches at MIT and has a pretty good blog, has a good post comparing the US's problems to Europe's. I agree with the crux of his argument: that Europe has a near-term problem rooted in its disaster of a common currency which both keeps the afflicted countries from growing their way out of trouble, and leave the core economies with the tab for either their fiscal profligacy (Greece) or their disastrous, deregulated banking sector (Ireland). The worst part of their problem is the contagion-- Greece's growth AND fiscal problems are so bad that it needs regular bailouts just to stay above ground, and the jitters that the market feels about Greece are bleeding over into Italy and Spain, both of which have their own problems (albeit nowhere near as bad as Greece's), but whose collapse would be disastrous not just for Europe but for the whole world.
The US's problems, on paper, are nowhere near as bad. Contrary to what scaremongers in Washington might say, the US's budget picture isn't particularly bad. In other words, we look NOTHING like Greece-- we're more like Ireland. We had a fairly small debt load and manageable deficits (Ireland actually ran a surplus in the mid-2000's...), but our runaway deregulated financial sectors and subsequent housing bubbles caused big economic problems that depressed revenues, necessitated bigger government expenditures, and made our finances look much, much worse than they really are, at least in the short term. To be sure, we do have a significant health care cost problem (as I've acknowledged in this post, we need to deal with health care cost), but that's a problem for the long run, not right now.
So why is the US in crisis? Well, the answer is bad politics. We've got scaremongers who insist that we have to cut spending NOW NOW NOW (but, funny enough, won't say the same about raising taxes because, well, we can't afford to raise taxes modestly "in this economic climate", though apparently we can afford to cut spending by a whole lot more), and are willing to risk a default on the government's obligations to get their draconian cuts. In a way, the problem we have may be worse. Europe does have flexible politicians doing their best to get out from a policy straitjacket caused by a terrible decision to adopt a common currency. The US has a bunch of crayz politicians who don't understand the consequences of their actions. To put the analogy another way, if the US and Europe are cars driving along a highway to a destination, Europe has a broken car that it can't control, while the US has a functioning car, but a crazy drunk in the passenger seat grabbing at the steering wheel and doing his best to run the car over a cliff. That crazy drunk is the Tea Party nonsense that's taken over the Republican Party and is threatening to destroy the country's fiscal situation.
The US's problems, on paper, are nowhere near as bad. Contrary to what scaremongers in Washington might say, the US's budget picture isn't particularly bad. In other words, we look NOTHING like Greece-- we're more like Ireland. We had a fairly small debt load and manageable deficits (Ireland actually ran a surplus in the mid-2000's...), but our runaway deregulated financial sectors and subsequent housing bubbles caused big economic problems that depressed revenues, necessitated bigger government expenditures, and made our finances look much, much worse than they really are, at least in the short term. To be sure, we do have a significant health care cost problem (as I've acknowledged in this post, we need to deal with health care cost), but that's a problem for the long run, not right now.
So why is the US in crisis? Well, the answer is bad politics. We've got scaremongers who insist that we have to cut spending NOW NOW NOW (but, funny enough, won't say the same about raising taxes because, well, we can't afford to raise taxes modestly "in this economic climate", though apparently we can afford to cut spending by a whole lot more), and are willing to risk a default on the government's obligations to get their draconian cuts. In a way, the problem we have may be worse. Europe does have flexible politicians doing their best to get out from a policy straitjacket caused by a terrible decision to adopt a common currency. The US has a bunch of crayz politicians who don't understand the consequences of their actions. To put the analogy another way, if the US and Europe are cars driving along a highway to a destination, Europe has a broken car that it can't control, while the US has a functioning car, but a crazy drunk in the passenger seat grabbing at the steering wheel and doing his best to run the car over a cliff. That crazy drunk is the Tea Party nonsense that's taken over the Republican Party and is threatening to destroy the country's fiscal situation.
Was US Soccer Right to Fire Bob Bradley?
So the big news out of the sports world today is that the US Men's soccer team fired its coach, Bob Bradley. I think people generally fall into two polar camps when it comes to Bradley. There are those who think he does a very good job and understands the American player exceptionally well, and others who think he's a doofus who can't do anything right. The second camp has two primary lines of criticism- one is that the US isn't creative in the attack and plays an ugly "boot the ball up the field and pray" style, while the other is that Bradley is inflexible in his player selections and formation choices. I think the first line of criticism is completely wrong, while the second has some merit. In this post, I think I'm going to sum up what I thought of Bradley's tenure as a whole, and then talk about what I think he did right and wrong.
As a whole, I think Bradley did a good job. The results kind of speak for themselves. He won a Gold Cup. He took the team to the final of the Confederations Cup, beating Spain along the way. He qualified for the World Cup easily. And he won his group at the World Cup. That makes him easily the most successful coach in US soccer history. Did he have some luck along the way? Sure. He also had some bad luck (refereeing decisions against Algeria and Slovenia in particular at the last World Cup tended to go against the US). But he put the team in a position to succeed. And they did a pretty decent job. I think what was ultimately behind that is that he understood the players he had, and put them in a position to be successful. He didn't try to turn Michael Bradley (a holding midfielder by nature) into a playmaker, or try to make Landon Donovan a central playmaker when his best spot was on the wing. The team played a compact, counterattacking style, and it played that style pretty well.
Which is why the first line of criticism that you hear is so misguided. The US plays boring soccer under Bradley, they would say. The midfielders don't possess the ball. There's no creativity in the attack. All of that is true. But that's 100% not on Bradley. Could the US play possession and score exciting goals against, say, Belize? Sure. It'd be a lot of fun and we'd all love it. Now imagine if they tried to do the same thing against Brazil. The result would be an epic disaster. Like when the MLS All-Stars played Man United last night, but probably an order of magnitude worse. But why is that the case, one might ask. Spain plays beautiful, flowing possession soccer and scores boatloads of goals. Well, the difference is that Spain has David Villa and Fernando Torres scoring those goals, and Xavi, Andres Iniesta and Xabi Alonso setting them up. The US has... Jozy Altidore up top, supported by Clint Dempsey and Landon Donovan. If they're lucky, Stu Holden isn't injured. The big difference between Spain and the US is simple: Xavi and Iniesta are brilliant passers who go full games without giving the ball away. The US has... Mike Bradley, Maurice Edu and Jermaine Jones. Who give the ball away on half of their passes, and aren't creative. So, where Xavi can make defenders pressuring him look foolish, the US's center mids are prone to cough the ball up if they try to possess under pressure. And if that happens even against a team like Mexico (to say nothing of Brazil or Spain), the results are going to be devastating. Especially when your center backs are Clarence Goodson and Carlos Bocanegra instead of Lucio and Thiago Silva. The US under Bradley played a system that fit its personnel. Players were disciplined, defended diligently, and attacked opportunistically. We packed the midfield and created opportunities on counter-attacks and set pieces. And, for the most part, it worked in a way that trying to pretend we had creative midfielders wouldn't have.
On the other hand, Bradley did have a tendency to trust the same players game in and game out. Everyone watching knew that Jonathan Bornstein was a disaster at left back. To a slightly lesser degree, so was Jonathan Spector. If those were really his least bad options (and quite possibly they were; post-Patella tear Oguchi Onyewu isn't good in the middle, and Jay DeMerit is over the hill, so Carlos Bocanegra might actually be desperately needed at CB), he needed to adjust his lineup; either shift a holding mid out to cover the left back, or have the left midfielder (usually Dempsey) track back and support him. If they were supposed to do that, I didn't see it, since every time one of Bornstein or Spector was in the game, they ended up getting beaten like a drum by any half-decent winger (the latest example was against Mexico in the Gold Cup final; once Steve Cherundolo got hurt and Eric Lichaj had to shift to right back, Mexico had a field day funneling its attacks up the right side, taking advantage of Bornstein. And it wasn't a single game-- it was something that has been happening since Bradley took over, but he really hasn't solved.
So the question is, what can we really hope for from a new coach? Well, a coach can only do so much. The key is players. And even having a guy who's great at developing talent isn't all that much of an advantage, since national team coaches don't get enough time with their teams to do a lot of player development. So the next coach has to be, first and foremost, a tactician who can motivate players to do great things. Unfortunately, the best tacticians are super expensive, and aren't too desperate to come to the US. Guus Hiddink is happy in Europe. Jose Mourinho has no reason to coach any national side at this point, and especially the US. And other top tacticians are either unavailable, not interested, or both.
So where does that leave us? Well, the only realistic options are bringing in a young foreign coach who has some interest in managing here, or bringing in another American who knows the American players and their strengths. I definitely lean toward the latter, and here's why. The prototype for the former approach is Jurgen Klinsmann. He was a legend for Germany, but since retiring, has come to the US, even playing in men's leagues in Southern California under an assumed name. He's still young (turns 47 in two days), and has had some coaching success. Well, at least on the surface. All of that falls apart under some scrutiny. Klinsmann's tenure as Germany coach is actually completely unremarkable. His reputation is built solely on the fact that he took Germany to a third-place finish at the 2006 World Cup. But that "success" falls apart under scrutiny. Germany actually played really badly in the run-up to the World Cup. The complaint was that they lacked talent. But the reality is that the German national team is ALWAYS better than the sum of its parts (heck, before the 2010 World Cup, who thought Mesut Ozil and Thomas Muller were top-quality players?). Just look at their World Cup history-- they finished 3rd in 2010, 3rd in 2006, runners-up in 2002, quarterfinalists in 1998 and 1994, and champions in 1990. In that context, 3rd place is about par for the course. Or at least it would be before you consider that the 2006 World Cup was held in Germany. Just so it's clear how much of an advantage that is, hosting any international event is HUGE. You don't have to travel to another country. The crowd is overwhelmingly in your corner in every game. And you're familiar with the stadium. Until 2010, a World Cup host had NEVER failed to get out of the group stage. In 2002, South Korea got to the semifinals as hosts (and even a down Germany is MILES more talented than South Korea, whether Guus Hiddink is coaching or not). France never won a World Cup until they hosted it. Conclusion: Hosting is HUGE. In that context, Germany's performance doesn't look all that impressive. Then, in his next managerial job, he took over Bayern Munich (by far Germany's biggest, most prestigious club, and always one of the best in Europe), and was run out before he could finish one season. At Bayern, if you don't win the league, you're a failure. Klinsmann bombed out of the Champions League at the quarterfinal stage, and his squad was in third place in the Bundesliga when he was sacked. So why do we want Klinsmann? Because he likes America, speaks good English, is famous, and his Germany squad didn't implode playing at home in 2006? Doesn't sound like much of a foundation for success...
I say bring in some fresh blood-- someone who understands American players and is an innovative tactician. I think it's our best bet for the next cycle.
As a whole, I think Bradley did a good job. The results kind of speak for themselves. He won a Gold Cup. He took the team to the final of the Confederations Cup, beating Spain along the way. He qualified for the World Cup easily. And he won his group at the World Cup. That makes him easily the most successful coach in US soccer history. Did he have some luck along the way? Sure. He also had some bad luck (refereeing decisions against Algeria and Slovenia in particular at the last World Cup tended to go against the US). But he put the team in a position to succeed. And they did a pretty decent job. I think what was ultimately behind that is that he understood the players he had, and put them in a position to be successful. He didn't try to turn Michael Bradley (a holding midfielder by nature) into a playmaker, or try to make Landon Donovan a central playmaker when his best spot was on the wing. The team played a compact, counterattacking style, and it played that style pretty well.
Which is why the first line of criticism that you hear is so misguided. The US plays boring soccer under Bradley, they would say. The midfielders don't possess the ball. There's no creativity in the attack. All of that is true. But that's 100% not on Bradley. Could the US play possession and score exciting goals against, say, Belize? Sure. It'd be a lot of fun and we'd all love it. Now imagine if they tried to do the same thing against Brazil. The result would be an epic disaster. Like when the MLS All-Stars played Man United last night, but probably an order of magnitude worse. But why is that the case, one might ask. Spain plays beautiful, flowing possession soccer and scores boatloads of goals. Well, the difference is that Spain has David Villa and Fernando Torres scoring those goals, and Xavi, Andres Iniesta and Xabi Alonso setting them up. The US has... Jozy Altidore up top, supported by Clint Dempsey and Landon Donovan. If they're lucky, Stu Holden isn't injured. The big difference between Spain and the US is simple: Xavi and Iniesta are brilliant passers who go full games without giving the ball away. The US has... Mike Bradley, Maurice Edu and Jermaine Jones. Who give the ball away on half of their passes, and aren't creative. So, where Xavi can make defenders pressuring him look foolish, the US's center mids are prone to cough the ball up if they try to possess under pressure. And if that happens even against a team like Mexico (to say nothing of Brazil or Spain), the results are going to be devastating. Especially when your center backs are Clarence Goodson and Carlos Bocanegra instead of Lucio and Thiago Silva. The US under Bradley played a system that fit its personnel. Players were disciplined, defended diligently, and attacked opportunistically. We packed the midfield and created opportunities on counter-attacks and set pieces. And, for the most part, it worked in a way that trying to pretend we had creative midfielders wouldn't have.
On the other hand, Bradley did have a tendency to trust the same players game in and game out. Everyone watching knew that Jonathan Bornstein was a disaster at left back. To a slightly lesser degree, so was Jonathan Spector. If those were really his least bad options (and quite possibly they were; post-Patella tear Oguchi Onyewu isn't good in the middle, and Jay DeMerit is over the hill, so Carlos Bocanegra might actually be desperately needed at CB), he needed to adjust his lineup; either shift a holding mid out to cover the left back, or have the left midfielder (usually Dempsey) track back and support him. If they were supposed to do that, I didn't see it, since every time one of Bornstein or Spector was in the game, they ended up getting beaten like a drum by any half-decent winger (the latest example was against Mexico in the Gold Cup final; once Steve Cherundolo got hurt and Eric Lichaj had to shift to right back, Mexico had a field day funneling its attacks up the right side, taking advantage of Bornstein. And it wasn't a single game-- it was something that has been happening since Bradley took over, but he really hasn't solved.
So the question is, what can we really hope for from a new coach? Well, a coach can only do so much. The key is players. And even having a guy who's great at developing talent isn't all that much of an advantage, since national team coaches don't get enough time with their teams to do a lot of player development. So the next coach has to be, first and foremost, a tactician who can motivate players to do great things. Unfortunately, the best tacticians are super expensive, and aren't too desperate to come to the US. Guus Hiddink is happy in Europe. Jose Mourinho has no reason to coach any national side at this point, and especially the US. And other top tacticians are either unavailable, not interested, or both.
So where does that leave us? Well, the only realistic options are bringing in a young foreign coach who has some interest in managing here, or bringing in another American who knows the American players and their strengths. I definitely lean toward the latter, and here's why. The prototype for the former approach is Jurgen Klinsmann. He was a legend for Germany, but since retiring, has come to the US, even playing in men's leagues in Southern California under an assumed name. He's still young (turns 47 in two days), and has had some coaching success. Well, at least on the surface. All of that falls apart under some scrutiny. Klinsmann's tenure as Germany coach is actually completely unremarkable. His reputation is built solely on the fact that he took Germany to a third-place finish at the 2006 World Cup. But that "success" falls apart under scrutiny. Germany actually played really badly in the run-up to the World Cup. The complaint was that they lacked talent. But the reality is that the German national team is ALWAYS better than the sum of its parts (heck, before the 2010 World Cup, who thought Mesut Ozil and Thomas Muller were top-quality players?). Just look at their World Cup history-- they finished 3rd in 2010, 3rd in 2006, runners-up in 2002, quarterfinalists in 1998 and 1994, and champions in 1990. In that context, 3rd place is about par for the course. Or at least it would be before you consider that the 2006 World Cup was held in Germany. Just so it's clear how much of an advantage that is, hosting any international event is HUGE. You don't have to travel to another country. The crowd is overwhelmingly in your corner in every game. And you're familiar with the stadium. Until 2010, a World Cup host had NEVER failed to get out of the group stage. In 2002, South Korea got to the semifinals as hosts (and even a down Germany is MILES more talented than South Korea, whether Guus Hiddink is coaching or not). France never won a World Cup until they hosted it. Conclusion: Hosting is HUGE. In that context, Germany's performance doesn't look all that impressive. Then, in his next managerial job, he took over Bayern Munich (by far Germany's biggest, most prestigious club, and always one of the best in Europe), and was run out before he could finish one season. At Bayern, if you don't win the league, you're a failure. Klinsmann bombed out of the Champions League at the quarterfinal stage, and his squad was in third place in the Bundesliga when he was sacked. So why do we want Klinsmann? Because he likes America, speaks good English, is famous, and his Germany squad didn't implode playing at home in 2006? Doesn't sound like much of a foundation for success...
I say bring in some fresh blood-- someone who understands American players and is an innovative tactician. I think it's our best bet for the next cycle.
The Financial Times Asks for Bad Policy
Yesterday, I wrote a post about what a failure Britain's effort to expand its economy through contractionary deficit reduction was. Shockingly, cutting demand by limiting government spending, and cutting demand again by hiking taxes, isn't exactly a formula for gettin out of a mess that's caused by... lack of demand. Realizing that contraction wasn't expansionary, Conservative London Mayor Boris Johnson and Ed Balls, Labour's Shadow Chancellor, proposed a cut in the Value Added Tax (VAT) to stimulate demand and get their economy off its knees.
In an opinion piece published last night in the Financial Times, Chris Giles writes a criticism of the policy, claiming that Britain's caught the voodoo economic bug conservatives in the US have. Giles is completely off base. First, there's a big difference between American Republicans, who have a fetish for tax cuts, and will reach for any justification for why cutting taxes is necessary, never mind that those reasons don't follow any reality or coherent logic (I can't tell you how many times I've heard, "We can't afford to raise taxes in this economy! But we have to cut spending... in this economy. Nonsense."), and Tories in the UK, who have a coherent (if very misguided) belief in the need for fiscal rectitude, even in a severely depressed economy. Giles is wrong because the justification for the tax cut is NOT the Reagan-era supply-side claim (thoroughly debunked by the data over and over) that tax cuts increase revenue. Rather, it's based on the very reasonable claim that policies that stimulate demand in the short run can alleviate short-run demand problems, and allow for fiscal adjustment in normal times. Giles, on the other hand, is invoking the confidence fairy. Britain HAS to show the world that it's serious about deficit reduction NOW, he claims, and that will spur credibility. Never mind that his serious deficit reduction has, predictably, stalled the recovery ("It was the Royal Wedding! I swear! And the Olympics!" he says), all while the UK continues to borrow at extremely low rates.
Now, do I think a cut in the VAT is the most efficient way to stimulate demand? Honestly, probably not. Giles IS right that a significant chunk of that will be saved, which helps the saver at the expense of everyone else. But it IS a form of stimulus that the depressed UK economy could definitely use. Obviously, I'm no proponent of the tax cut fetish in the US. But Giles is using it as a boogeyman to promote the nonsensical confidence fairy idea (the idea that consolidating the budget will somehow magically improve confidence enough to spur recovery, never mind that there's still a demand shortfall), a policy that isn't quite equally bad, but is close.
It's ridiculous how bad ideas have somehow taken hold on both sides of the Atlantic. Different species of bad policies, to be sure, but still bad policies. It's depressing, really, how we go through crises exacerbated by bad policies, write a bunch of books about those bad policies, and then, the next time a similar crisis hits, dig them up, reuse them, and expect different results.
In an opinion piece published last night in the Financial Times, Chris Giles writes a criticism of the policy, claiming that Britain's caught the voodoo economic bug conservatives in the US have. Giles is completely off base. First, there's a big difference between American Republicans, who have a fetish for tax cuts, and will reach for any justification for why cutting taxes is necessary, never mind that those reasons don't follow any reality or coherent logic (I can't tell you how many times I've heard, "We can't afford to raise taxes in this economy! But we have to cut spending... in this economy. Nonsense."), and Tories in the UK, who have a coherent (if very misguided) belief in the need for fiscal rectitude, even in a severely depressed economy. Giles is wrong because the justification for the tax cut is NOT the Reagan-era supply-side claim (thoroughly debunked by the data over and over) that tax cuts increase revenue. Rather, it's based on the very reasonable claim that policies that stimulate demand in the short run can alleviate short-run demand problems, and allow for fiscal adjustment in normal times. Giles, on the other hand, is invoking the confidence fairy. Britain HAS to show the world that it's serious about deficit reduction NOW, he claims, and that will spur credibility. Never mind that his serious deficit reduction has, predictably, stalled the recovery ("It was the Royal Wedding! I swear! And the Olympics!" he says), all while the UK continues to borrow at extremely low rates.
Now, do I think a cut in the VAT is the most efficient way to stimulate demand? Honestly, probably not. Giles IS right that a significant chunk of that will be saved, which helps the saver at the expense of everyone else. But it IS a form of stimulus that the depressed UK economy could definitely use. Obviously, I'm no proponent of the tax cut fetish in the US. But Giles is using it as a boogeyman to promote the nonsensical confidence fairy idea (the idea that consolidating the budget will somehow magically improve confidence enough to spur recovery, never mind that there's still a demand shortfall), a policy that isn't quite equally bad, but is close.
It's ridiculous how bad ideas have somehow taken hold on both sides of the Atlantic. Different species of bad policies, to be sure, but still bad policies. It's depressing, really, how we go through crises exacerbated by bad policies, write a bunch of books about those bad policies, and then, the next time a similar crisis hits, dig them up, reuse them, and expect different results.
Wednesday, July 27, 2011
We Need Fewer Markets in Health Care
A common refrain that you hear from plenty of Republicans on the health care debate is that we need a free market for health care. Deregulate the sector and open it to the "magic of the market", they claim, and health care costs will fall while the quality of service will rise. Steve Forbes ranted for awhile about this at a "motivational" seminar I went to with my office yesterday. Look how well the markets for couches and haircuts and computers work, they say. You can get a nice leather couch for $5000, or a crummy Ikea version for $300. You have plenty of options, and you can choose the one that suits your needs. Same with haircuts. John Edwards can get a presidential haircut for $400, and someone who wants to cut costs can go to Chinatown and get a trim for $8. Magic.
The irony, though, is that none of the people claiming that markets will fix health care understand how markets work at all. Their argument falls apart more or less instantly. The first thing they don't understand is that markets aren't inherently efficient. The argument isn't even technical-- it's intuitive. Think about the market for couches I describe above. Why is that market efficient? You can divide it into a few crucial points. The first crucial point is symmetry of information. The couch seller knows what he's selling, and you know what you're buying. If you want information about how other people found the couch, you can get online and look up people's reviews. You can sit in the couch and test it. You know what your needs are, and how much you're willing to pay for a couch that meets those needs. And you know when you're satisfied with what you got.
Now think about the health care market. Say you've got a stomachache. The doctor puts you through 5 different tests and gives you a diagnosis, prescribes you medicine, and a week later you feel better. Great. Your insurer gets a bill for 5 procedures and your prescription drug plan picks up the bill for your medicine, with you paying $50 out of pocket for the whole thing. What do you really know? That your stomach hurt before and it doesn't hurt now. What's more crucial is what you don't know. Were those 5 tests necessary? Were they redundant? Did you need the medicine? Would you have felt better even if the doctor hadn't done anything? If a second doctor had ha a different opinion about your condition, how do you decide which doctor was right and which doctor was wrong?
The answer to all of these is that consumers DON'T know. When it comes to medicine, the doctor has all the information and the patient has none. Which means that there isn't the kind of quality control that you have in a functioning market. If your Ikea couch falls apart, you return it to the store. If it's uncomfortable, you don't buy a couch from there again. With medicine, how do you know if you got unnecessary or harmful procedures? Unless the doctor visibly screwed up, again, you don't. So, unless doctors have an incentive to control costs, they won't (and right now, doctors get paid not holistically, but per procedure. And the more expensive the procedure, the bigger the payout, regardless of whether the procedure is necessary or more effective than a cheaper alternative).
A second crucial point is that health care is a market in which everyone participates all the time, whether they like it or not. A Constitutional issue arising out of the recent health care reform asks how Congress can force Americans to participate in a market. Well, the answer is that health care is the one market in which everyone participates no matter what. Say, hypothetically, I don't take medicine and I don't buy health insurance. Say I'm 23 years old and healthy and don't think I need it. But, true story, last Saturday I was riding my bike, popped a tire, and tore up my hands pretty badly. My wrist took a knock, and I was lucky I didn't break it (I've broken that wrist before). Had I broken my wrist, if I didn't have insurance, I would have had to go to the hospital. When I got there, I would have gotten my wrist X-rayed, they would have put it into a cast, and I would have gotten some Vicodin. Without insurance, they would have handed me a bill for a few hundred dollars. Maybe more. Now, I'm 23 and haven't held a full-time job in my life. I have... less than a few hundred dollars in my bank account right now. There's no way I could pay for that treatment without insurance. I'm also pretty much judgment-proof: without a job or any assets, there's no way the hospital is going to end up collecting on that bill until I finish school (read: ever). So who picks up the tab? Well, you do, if you pay taxes. My refusal to buy health insurance is subsidized by your tax dollars, and costs are passed on to those who do have coverage by higher rates for those who are able to pay. Put simply, here's another difference between the health care market and the couch market: if you don't like any couch, you don't have to buy a couch. If you don't want health insurance, your participation in the health care market is subsidized by others. And your refusal to participate drives up everyone else's rates
The third crucial point about the health care market is that it's necessarily an insurance-based market. Last year, I was 22 years old. My health care consisted of a checkup with the doctor and a trip to see the dentist. I consumed maybe $300 of health care services that year. My health insurance made good money treating me. But say I'd gotten into a car wreck and needed 3 surgeries and six months of rehab. I would have consumed $300,000 of health insurance, which is almost $300,000 more than I have in the bank. I would have been one of the brokest people of all time (alright not really, but I would have been SUPER broke). That kind of accident is an inherent risk that everyone faces. And there are two potential solutions. Every person in America could put aside $500,000 to hedge against the risk of getting cancer, getting in a car wreck, or any number of tragic catastrophes. Now multiply that $500,000 by 300 million Americans. That's $150,000,000,000,000. $150 trillion dollars. Ten times the size of the economy. And that's dead money-- if it's reinvested somewhere other than in the safest investments (cash or Treasuries), there's a risk of losing it. And it's also ten times the number of outstanding Treasuries in the market. So what do we do instead of suggesting that all Americans save twelve times the country's median pre-tax income so they have it around for a rainy day? Well, you have them buy insurance. That way, insurance companies will make a profit on healthy 23 year olds, lose money on those who have tragic accidents, but come out relatively ahead in the end. So there's really no practical way for Americans to buy health care outside of insurance. And, if relatively healthy young people aren't forced to buy insurance, it drives up rates for others. Which brings me to the next point.
The fourth crucial point is that the health care market has a huge adverse selection problem. Insurance companies are eager to pick up customers. But not all customers are created equal. Health insurers love signing up people like me who consume $300 of health insurance a year, pay out $500-1000 in premiums, and sign up again. But people like me are also the ones most likely to forego that health insurance altogether and skip their appointments. So who IS in the market? The answer is sick people and old people. It's a sad reality, but old people are sicker and need more health care than young people. If you're blessed enough to have grandparents who are around, you know that they take an alphabet soup of pills with every meal. They go to the doctor pretty regularly. If I fall down, I dust myself off, put on a band-aid, and curse. If a 75-year old falls down, he breaks his hip. Insurers aren't interested in insuring those people at prices that aren't astronomical because they know that those people are going to be consuming a whole lot of health care services. But old people are also retired. They might have some disposable income, but even with a paid-off house and car, chances are they're consuming more in health care than they have in cash coming in. So if one of those people is lucky enough to convince an insurer to cover them, either their premiums will be through the roof, or insurance that agrees to cover them will cover two trips to the doctor and a tooth cleaning at the dentist's. Unleash the magic of the market, and the market will run screaming away from old people. Health insurers are about as eager to provide old people with comprehensive health insurance as fire insurers are to provide someone living in Hell with fire insurance- it's not a winning proposition.
So how do we make that market work? Well, short of the government providing health insurance itself, doing research on what does and doesn't work, and restricting what it will and won't cover, there are really only a few possible steps. First, you have to make health insurance available to old and sick people. In effect, that means not rejecting people on the basis of pre-existing conditions. But if people can't afford health insurance, you can't force them to buy it. That leads to the next step. So second, you provide old and poor people with subsidies to buy insurance. But if insurers can't discriminate on the basis of pre-existing conditions, people are going to wait until they get sick, then run to the insurers and say, "Give me insurance!" Which inevitably gets you to the third prong. Third, you mandate that everyone buy health insurance. That way, people pay premiums while they're healthy, and their premiums subsidize the higher cost of treating the old, which drives down those old people's rates.
So, essentially, we end up with a three-legged stool. If everyone gets health care, we have to make sure they pay something into it and aren't freeloading. So we end up with a restriction from discriminating against those with pre-existing conditions. To make it affordable, we get subsidies for those people. And to prevent people from signing up only when they get sick, we get a mandate for everyone to buy insurance. And that looks... a lot like the Affordable Care Act.
Of course, there are still the cost-control issues, but those are likely best resolved by doing studies on which procedures are effective and which are not, paying doctors who get better results more (in any single case, it's hard to determine whether a doctor did a good job; in the aggregate, it's easier to track a pattern), and allowing those who can save money in the process to keep their savings. Once doctors are paid for results and not for procedures, their incentives shift, and they start focusing on controlling costs rather than on doing lots of profitable procedures. This part of the argument is actually borne out by the evidence. The reason we pay more than any other country for health care (without getting better results) is that we consume more health care than any other country. Obviously without getting much bang for the buck.
So I wrote this pretty much stream-of-conscious, so I doubt it all makes perfect sense, but I think it reflects my thoughts on the issue.
The irony, though, is that none of the people claiming that markets will fix health care understand how markets work at all. Their argument falls apart more or less instantly. The first thing they don't understand is that markets aren't inherently efficient. The argument isn't even technical-- it's intuitive. Think about the market for couches I describe above. Why is that market efficient? You can divide it into a few crucial points. The first crucial point is symmetry of information. The couch seller knows what he's selling, and you know what you're buying. If you want information about how other people found the couch, you can get online and look up people's reviews. You can sit in the couch and test it. You know what your needs are, and how much you're willing to pay for a couch that meets those needs. And you know when you're satisfied with what you got.
Now think about the health care market. Say you've got a stomachache. The doctor puts you through 5 different tests and gives you a diagnosis, prescribes you medicine, and a week later you feel better. Great. Your insurer gets a bill for 5 procedures and your prescription drug plan picks up the bill for your medicine, with you paying $50 out of pocket for the whole thing. What do you really know? That your stomach hurt before and it doesn't hurt now. What's more crucial is what you don't know. Were those 5 tests necessary? Were they redundant? Did you need the medicine? Would you have felt better even if the doctor hadn't done anything? If a second doctor had ha a different opinion about your condition, how do you decide which doctor was right and which doctor was wrong?
The answer to all of these is that consumers DON'T know. When it comes to medicine, the doctor has all the information and the patient has none. Which means that there isn't the kind of quality control that you have in a functioning market. If your Ikea couch falls apart, you return it to the store. If it's uncomfortable, you don't buy a couch from there again. With medicine, how do you know if you got unnecessary or harmful procedures? Unless the doctor visibly screwed up, again, you don't. So, unless doctors have an incentive to control costs, they won't (and right now, doctors get paid not holistically, but per procedure. And the more expensive the procedure, the bigger the payout, regardless of whether the procedure is necessary or more effective than a cheaper alternative).
A second crucial point is that health care is a market in which everyone participates all the time, whether they like it or not. A Constitutional issue arising out of the recent health care reform asks how Congress can force Americans to participate in a market. Well, the answer is that health care is the one market in which everyone participates no matter what. Say, hypothetically, I don't take medicine and I don't buy health insurance. Say I'm 23 years old and healthy and don't think I need it. But, true story, last Saturday I was riding my bike, popped a tire, and tore up my hands pretty badly. My wrist took a knock, and I was lucky I didn't break it (I've broken that wrist before). Had I broken my wrist, if I didn't have insurance, I would have had to go to the hospital. When I got there, I would have gotten my wrist X-rayed, they would have put it into a cast, and I would have gotten some Vicodin. Without insurance, they would have handed me a bill for a few hundred dollars. Maybe more. Now, I'm 23 and haven't held a full-time job in my life. I have... less than a few hundred dollars in my bank account right now. There's no way I could pay for that treatment without insurance. I'm also pretty much judgment-proof: without a job or any assets, there's no way the hospital is going to end up collecting on that bill until I finish school (read: ever). So who picks up the tab? Well, you do, if you pay taxes. My refusal to buy health insurance is subsidized by your tax dollars, and costs are passed on to those who do have coverage by higher rates for those who are able to pay. Put simply, here's another difference between the health care market and the couch market: if you don't like any couch, you don't have to buy a couch. If you don't want health insurance, your participation in the health care market is subsidized by others. And your refusal to participate drives up everyone else's rates
The third crucial point about the health care market is that it's necessarily an insurance-based market. Last year, I was 22 years old. My health care consisted of a checkup with the doctor and a trip to see the dentist. I consumed maybe $300 of health care services that year. My health insurance made good money treating me. But say I'd gotten into a car wreck and needed 3 surgeries and six months of rehab. I would have consumed $300,000 of health insurance, which is almost $300,000 more than I have in the bank. I would have been one of the brokest people of all time (alright not really, but I would have been SUPER broke). That kind of accident is an inherent risk that everyone faces. And there are two potential solutions. Every person in America could put aside $500,000 to hedge against the risk of getting cancer, getting in a car wreck, or any number of tragic catastrophes. Now multiply that $500,000 by 300 million Americans. That's $150,000,000,000,000. $150 trillion dollars. Ten times the size of the economy. And that's dead money-- if it's reinvested somewhere other than in the safest investments (cash or Treasuries), there's a risk of losing it. And it's also ten times the number of outstanding Treasuries in the market. So what do we do instead of suggesting that all Americans save twelve times the country's median pre-tax income so they have it around for a rainy day? Well, you have them buy insurance. That way, insurance companies will make a profit on healthy 23 year olds, lose money on those who have tragic accidents, but come out relatively ahead in the end. So there's really no practical way for Americans to buy health care outside of insurance. And, if relatively healthy young people aren't forced to buy insurance, it drives up rates for others. Which brings me to the next point.
The fourth crucial point is that the health care market has a huge adverse selection problem. Insurance companies are eager to pick up customers. But not all customers are created equal. Health insurers love signing up people like me who consume $300 of health insurance a year, pay out $500-1000 in premiums, and sign up again. But people like me are also the ones most likely to forego that health insurance altogether and skip their appointments. So who IS in the market? The answer is sick people and old people. It's a sad reality, but old people are sicker and need more health care than young people. If you're blessed enough to have grandparents who are around, you know that they take an alphabet soup of pills with every meal. They go to the doctor pretty regularly. If I fall down, I dust myself off, put on a band-aid, and curse. If a 75-year old falls down, he breaks his hip. Insurers aren't interested in insuring those people at prices that aren't astronomical because they know that those people are going to be consuming a whole lot of health care services. But old people are also retired. They might have some disposable income, but even with a paid-off house and car, chances are they're consuming more in health care than they have in cash coming in. So if one of those people is lucky enough to convince an insurer to cover them, either their premiums will be through the roof, or insurance that agrees to cover them will cover two trips to the doctor and a tooth cleaning at the dentist's. Unleash the magic of the market, and the market will run screaming away from old people. Health insurers are about as eager to provide old people with comprehensive health insurance as fire insurers are to provide someone living in Hell with fire insurance- it's not a winning proposition.
So how do we make that market work? Well, short of the government providing health insurance itself, doing research on what does and doesn't work, and restricting what it will and won't cover, there are really only a few possible steps. First, you have to make health insurance available to old and sick people. In effect, that means not rejecting people on the basis of pre-existing conditions. But if people can't afford health insurance, you can't force them to buy it. That leads to the next step. So second, you provide old and poor people with subsidies to buy insurance. But if insurers can't discriminate on the basis of pre-existing conditions, people are going to wait until they get sick, then run to the insurers and say, "Give me insurance!" Which inevitably gets you to the third prong. Third, you mandate that everyone buy health insurance. That way, people pay premiums while they're healthy, and their premiums subsidize the higher cost of treating the old, which drives down those old people's rates.
So, essentially, we end up with a three-legged stool. If everyone gets health care, we have to make sure they pay something into it and aren't freeloading. So we end up with a restriction from discriminating against those with pre-existing conditions. To make it affordable, we get subsidies for those people. And to prevent people from signing up only when they get sick, we get a mandate for everyone to buy insurance. And that looks... a lot like the Affordable Care Act.
Of course, there are still the cost-control issues, but those are likely best resolved by doing studies on which procedures are effective and which are not, paying doctors who get better results more (in any single case, it's hard to determine whether a doctor did a good job; in the aggregate, it's easier to track a pattern), and allowing those who can save money in the process to keep their savings. Once doctors are paid for results and not for procedures, their incentives shift, and they start focusing on controlling costs rather than on doing lots of profitable procedures. This part of the argument is actually borne out by the evidence. The reason we pay more than any other country for health care (without getting better results) is that we consume more health care than any other country. Obviously without getting much bang for the buck.
So I wrote this pretty much stream-of-conscious, so I doubt it all makes perfect sense, but I think it reflects my thoughts on the issue.
Taking Another Look at the US-Europe Gap
Conventional wisdom has long been that the US and the advanced European economies represented different models of capitalism. Not better or worse, necessarily, but divergent in the choices they made about how to construct their society. America had higher wages, lower unemployment, and more jobs. It was easier to start a career after college, and easier to make enough money at a young age to move out of the parents' house. Europe had better job security, a stronger social safety net, and better benefits. Unions protected workers, which had the effect of making companies more cautious in hiring. Older workers weren't unceremoniously dumped out of work, but young workers had trouble getting into the labor market, and unemployment was naturally higher. Each side was convinced its model was better: American politicians warned about European "big government", high taxes, and "Eurosclerosis". Europeans equally warned about the dismal American safety net, unceremonious dumping of workers, and meager support for the poor. Ultimately, both sides' claims were rooted in a reality-- to get the benefits of job security, a high minimum wage, and a strong safety net, you sacrifice take-home pay, ease in getting hired, and social services.
The New York Fed's Liberty Street blog, though, has an interesting post about that phenomenon. Namely, it's been closing. Europeans decided that rigid labor markets weren't all that great after all, and started loosening labor market restrictions and weakening their unions. The US, meanwhile, went even further in the deregulatory direction. As a result, Europe has closed the gap in employment-population ratio pretty dramatically. While the gap hovered right around 10% between 1980 and 2000, it spent the last decade converging, and has almost closed entirely. It was over 10% in 2000, under 5% by 2007, and under 2% now. The trend has been pretty clear-- Europe's employment to population ratio has been on an upward trajectory since about 1992 (likely a rsesult of them loosening their labor market), while the US's has been falling since 2000 (I don't really have a hypothesis for why it's happened here; poring through those statistics is above my pay grade..), but either way the ratio has more or less converged at this point.
The piece of the puzzle I'm trying to piece together is why the US employment to population ratio started dropping in 2000.
The New York Fed's Liberty Street blog, though, has an interesting post about that phenomenon. Namely, it's been closing. Europeans decided that rigid labor markets weren't all that great after all, and started loosening labor market restrictions and weakening their unions. The US, meanwhile, went even further in the deregulatory direction. As a result, Europe has closed the gap in employment-population ratio pretty dramatically. While the gap hovered right around 10% between 1980 and 2000, it spent the last decade converging, and has almost closed entirely. It was over 10% in 2000, under 5% by 2007, and under 2% now. The trend has been pretty clear-- Europe's employment to population ratio has been on an upward trajectory since about 1992 (likely a rsesult of them loosening their labor market), while the US's has been falling since 2000 (I don't really have a hypothesis for why it's happened here; poring through those statistics is above my pay grade..), but either way the ratio has more or less converged at this point.
The piece of the puzzle I'm trying to piece together is why the US employment to population ratio started dropping in 2000.
Experiments in Austerity
The big economic policy debate over the last couple of years has been the proper way to respond to the recession, and the budget issues that it has created in advanced economies. On the one hand, the New Keynesians have argued that, if the country entered the crisis with a relatively low debt burden, could borrow at reasonable rates because of that, and could conduct its own monetary policy, the best way out of recession AND the best fix for its fiscal issues was to use fiscal policy to stimulate growth in the economy. The other view, which isn't really built on any coherent model that I've seen, is that the government should seek to get its fiscal house in order in the middle of a depressed economy because... that would somehow boost "confidence" so much that the newfound confidence would overwhelm the contractionary effects of cutting demand in a downturn. It's also worth noting that these same people make the intellectually incoherent argument that we can't afford to raise taxes in a recession... but we can afford to cut spending (really, if anything, we can afford to raise taxes but NOT cut spending, though it's also coherent to say that we can't afford either).
In our case, the US has been following a policy of muddling along. The Fed was properly aggressive in cutting rates at the outset of the crisis, did another round of monetary expansion (QE2), and since then has been standing pat. The government passed a small (relative to the size of the economy) dose of stimulus (the net effect wasn't stimulative at all, as much of it went to provide relief for cash-strapped states and a further chunk was tax cuts that weren't spent) and has done a bit of fiscal contraction (contrary to nonsense spouted by a lot of Tea Party people, the number of federal workers has actually SHRANK in the downturn), but nothing dramatic was done.
The best test of the austerity hypothesis came in the UK. Their situation was quite similar to ours- relatively low debt, their own monetary policy, and low interest rates being demanded by investors to hold their debt. But when the recession came and administered a shock to their public finances, the Conservative government under David Cameron was elected on a mandate to fix the budget picture. The Tories have been way more sensible than the American GOP (which is completely nuts at this point). They were consistent, in the sense that their deficit hawks were actual deficit hawks and not anti-government crusaders. So they approached the issue by raising some revenue and cutting some spending. If the New Keynesian view is correct, this would not only harm the economy, but also do nothing at all for the fiscal picture. If the austerity view is correct, this would have restored "confidence" to the English economy and spurred growth. So what happened?
Well, Berkeley economist Brad DeLong directs us to David Dayen's post, which reveals that, surprise, England's recovery has stalled. Less than 1% annualized GDP growth since the year started. Even worse than the US's performance, and our initial shock was way bigger than theirs. This should put the silly view that budget consolidation in a downturn is a good idea. Unfortunately, it won't. Instead, we'll here a new reason why austerity is good, it will be proved wrong again, and the cycle will start over.
In our case, the US has been following a policy of muddling along. The Fed was properly aggressive in cutting rates at the outset of the crisis, did another round of monetary expansion (QE2), and since then has been standing pat. The government passed a small (relative to the size of the economy) dose of stimulus (the net effect wasn't stimulative at all, as much of it went to provide relief for cash-strapped states and a further chunk was tax cuts that weren't spent) and has done a bit of fiscal contraction (contrary to nonsense spouted by a lot of Tea Party people, the number of federal workers has actually SHRANK in the downturn), but nothing dramatic was done.
The best test of the austerity hypothesis came in the UK. Their situation was quite similar to ours- relatively low debt, their own monetary policy, and low interest rates being demanded by investors to hold their debt. But when the recession came and administered a shock to their public finances, the Conservative government under David Cameron was elected on a mandate to fix the budget picture. The Tories have been way more sensible than the American GOP (which is completely nuts at this point). They were consistent, in the sense that their deficit hawks were actual deficit hawks and not anti-government crusaders. So they approached the issue by raising some revenue and cutting some spending. If the New Keynesian view is correct, this would not only harm the economy, but also do nothing at all for the fiscal picture. If the austerity view is correct, this would have restored "confidence" to the English economy and spurred growth. So what happened?
Well, Berkeley economist Brad DeLong directs us to David Dayen's post, which reveals that, surprise, England's recovery has stalled. Less than 1% annualized GDP growth since the year started. Even worse than the US's performance, and our initial shock was way bigger than theirs. This should put the silly view that budget consolidation in a downturn is a good idea. Unfortunately, it won't. Instead, we'll here a new reason why austerity is good, it will be proved wrong again, and the cycle will start over.
Health Care Debate
Paul Krugman points us to this link outlining the origins of health care reform. What it tells us is that Obama's big, bad, socialist, job-killing health care reform with a freedom-killing individual mandate... was suggested by the Heritage Foundation in 1989. But somehow, the Republican alternative to single-payer 20 years ago (which was adopted by Congressional Republicans as an alternative to Hillary Clinton's plan during her husband's first term) has morphed into a Marxist fantasy. Interesting.
I tend to disagree with Krugman on health care- he thinks single-payer is the best option. I think the numbers back him, but he ignores the frictions that come with transitioning to one kind of system when we've built an entire health care edifice on private insurance. I think our best bet is to take what we've got, create incentives to provide cheaper, more effective care by aligning the incentives of providers with the incentives of patients. It's hard to do in a market like health care, where market fundamentalists can't get it through their head that markets for health care aren't like markets for couches and markets for lattes-- if your latte tastes bad or makes you fat, or your couch is uncomfortable, you know it right away. If you get sick, you don't know what procedures you need, and you don't really know if your doctor is doing a good job or a bad job unless they really screw up. So just stepping back and letting the market work won't do to the health care market what it does to the couch market. So the best we can hope for, I think, is to reward doctors whose patients get better results at cheaper rates after the fact. It's imperfect, but I think realistically it's easier and less chaotic than blowing up the system we have right now and starting over from the ground up.
I tend to disagree with Krugman on health care- he thinks single-payer is the best option. I think the numbers back him, but he ignores the frictions that come with transitioning to one kind of system when we've built an entire health care edifice on private insurance. I think our best bet is to take what we've got, create incentives to provide cheaper, more effective care by aligning the incentives of providers with the incentives of patients. It's hard to do in a market like health care, where market fundamentalists can't get it through their head that markets for health care aren't like markets for couches and markets for lattes-- if your latte tastes bad or makes you fat, or your couch is uncomfortable, you know it right away. If you get sick, you don't know what procedures you need, and you don't really know if your doctor is doing a good job or a bad job unless they really screw up. So just stepping back and letting the market work won't do to the health care market what it does to the couch market. So the best we can hope for, I think, is to reward doctors whose patients get better results at cheaper rates after the fact. It's imperfect, but I think realistically it's easier and less chaotic than blowing up the system we have right now and starting over from the ground up.
Tuesday, July 26, 2011
Motivational Speeches
Today, my summer internship went to a motivational speaking event at the local arena. I feel like everyone's seen these advertised-- a bunch of famous people get together and talk about... I think it's supposed to be success, but really it ends up being whatever they feel like. This one had a pretty interesting mix of people- ex-Notre Dame football coach Lou Holtz, Fox NFL broadcaster (and former Steelers QB) Terry Bradshaw, Kansas basketball coach Bill Self, Forbes magazine owner Steve Forbes, Bill Cosby, and a bunch of people I'd never heard of.
Pretty quickly, I figured out that, at events like this, speakers fall into two categories-- people who want to make the audience laugh, and people who want to sell the audience something. The first category is infinitely better than the second. Lou Holtz was surprisingly funny. He and Terry Bradshaw spent their time talking about how stupid they were. Holtz talked about how much he loved his wife. Bradshaw talked about how much he loved his mom. Bradshaw also spent a lot of time talking about how much gas his center had during games. And he did pretty great impressions of Franco Harris and John Stallworth. Bill Cosby was also funny, if you like Bill Cosby.
But people who hawk ways to get rich suck. Steve Forbes wasn't selling anything, per se, but he was telling everyone to buy gold, complaining about the Fed, and generally showing that he has no clue what he's talking about. The guy's Dad handed him a cash cow. He'd be better off shutting up and sitting by his pool. Then there were a couple of guys hawking market research software. One was selling a class to figure out how to sell covered calls. Snooze. The other guy was selling a class to... figure out how to buy rental properties. That business is a winner these days. I'm not one of the "markets are perfectly efficient" crowd, but... you're not going to consistently beat the market with a two-day class and a $99 piece of software. Sure, you COULD get rich doing it. You also COULD win the lottery. I feel bad for the people who hear these pitches, pay for these classes, waste two days at them, and then waste some more money trying to beat the market.
I guess the conclusion is motivational speaking seminars are worth it for the cheap, pretty funny stand-up routines half of the speakers do.
Pretty quickly, I figured out that, at events like this, speakers fall into two categories-- people who want to make the audience laugh, and people who want to sell the audience something. The first category is infinitely better than the second. Lou Holtz was surprisingly funny. He and Terry Bradshaw spent their time talking about how stupid they were. Holtz talked about how much he loved his wife. Bradshaw talked about how much he loved his mom. Bradshaw also spent a lot of time talking about how much gas his center had during games. And he did pretty great impressions of Franco Harris and John Stallworth. Bill Cosby was also funny, if you like Bill Cosby.
But people who hawk ways to get rich suck. Steve Forbes wasn't selling anything, per se, but he was telling everyone to buy gold, complaining about the Fed, and generally showing that he has no clue what he's talking about. The guy's Dad handed him a cash cow. He'd be better off shutting up and sitting by his pool. Then there were a couple of guys hawking market research software. One was selling a class to figure out how to sell covered calls. Snooze. The other guy was selling a class to... figure out how to buy rental properties. That business is a winner these days. I'm not one of the "markets are perfectly efficient" crowd, but... you're not going to consistently beat the market with a two-day class and a $99 piece of software. Sure, you COULD get rich doing it. You also COULD win the lottery. I feel bad for the people who hear these pitches, pay for these classes, waste two days at them, and then waste some more money trying to beat the market.
I guess the conclusion is motivational speaking seminars are worth it for the cheap, pretty funny stand-up routines half of the speakers do.
Monday, July 25, 2011
Would a Downgrade be Expansionary?
As anyone who's been following the news knows, S&P is threatening to downgrade the US government if Congress doesn't come up with a budget plan that they like. Even though S&P is full of crap generally, and especially when it comes to rating sovereign debt, Nick Rowe has an interesting post about what happens if the US gets downgraded in a liquidity trap (when short-term debt pays 0 interest, essentially making it a cash equivalent) and markets believe the ratings agencies. Rowe suggests that the standard IS-LM model tells us that a 1% annual chance of default (as represented by a downgrade) would be the same as generating 1% more expected inflation (the analysis is in Rowe's post, which I linked). And that would actually be good for the economy in the short run, as people holding cash who thought the purchasing power of their cash would erode in the future would reinvest it into higher-yielding assets or spend it on consumer goods, which in turn would stimulate the economy by getting cash-rich corporations spending. So Rowe suggests that the IS-LM model, given these assumptions, says that a default would actually help get us out of recession in the short run.
I've been thinking about this all day, and I think I agree with Paul Krugman on this one. The assumption where the analysis begins to fall apart is that the Fed will be able to keep interest rates at 0 in this situation. Right now, they can keep interest rates where they are simply because investors don't see any default risk in US Treasuries. If they believe a ratings downgrade, they will always take cash in exchange for Treasuries that have that default risk, since cash doesn't have any "default risk". It might carry inflation risk, but Treasuries carry the same inflation risk, since they're denominated in the same dollars as cash. So IF the market were to believe the downgrade, the Fed would literally have to buy all the Treasuries in order to keep the rate on them at 0. So, where does that leave us? Well, as Krugman notes, there's still a rate at which investors would be willing to buy Treasuries in exchange for cash, and that rate is higher than it was pre-downgrade, and that higher rate is also reflected in longer-term debt, which means that borrowing costs rise across the economy. since plenty of other borrowing costs are still linked to Treasuries (Fannie/Freddie borrowing rates being one, so the housing market would be impacted).
The crucial detail here though, I think, is that, even though the real value of Treasuries is eroding, the purchasing power of the dollar isn't (because, as established in the last paragraph, the Fed can no longer turn Treasuries into a cash equivalent without buying ALL of the short-term Treasuries outstanding). So there isn't the kind of pressure to reinvest dollars in higher-yielding assets the way there is if expected inflation rises. I think all that would really happen is a flight to cash instead of Treasuries, and some higher borrowing costs throughout the economy that would actually choke off recovery even more. Especially in the long run, when the cost of servicing the debt is higher than it would be without the downgrade.
So I think my conclusion is that Rowe's stylized scenario falls apart in two places. First, experience tells us investors don't care about what S&P has to say (they downgraded Japan in 2002 and nothing happened, though, as I wrote before, US debt may be different), but second, it's virtually impossible for the Fed to hold interest rates on government bonds constant in this scenario without buying ALL outstanding bonds. So the scenario is effectively impossible.
I've been thinking about this all day, and I think I agree with Paul Krugman on this one. The assumption where the analysis begins to fall apart is that the Fed will be able to keep interest rates at 0 in this situation. Right now, they can keep interest rates where they are simply because investors don't see any default risk in US Treasuries. If they believe a ratings downgrade, they will always take cash in exchange for Treasuries that have that default risk, since cash doesn't have any "default risk". It might carry inflation risk, but Treasuries carry the same inflation risk, since they're denominated in the same dollars as cash. So IF the market were to believe the downgrade, the Fed would literally have to buy all the Treasuries in order to keep the rate on them at 0. So, where does that leave us? Well, as Krugman notes, there's still a rate at which investors would be willing to buy Treasuries in exchange for cash, and that rate is higher than it was pre-downgrade, and that higher rate is also reflected in longer-term debt, which means that borrowing costs rise across the economy. since plenty of other borrowing costs are still linked to Treasuries (Fannie/Freddie borrowing rates being one, so the housing market would be impacted).
The crucial detail here though, I think, is that, even though the real value of Treasuries is eroding, the purchasing power of the dollar isn't (because, as established in the last paragraph, the Fed can no longer turn Treasuries into a cash equivalent without buying ALL of the short-term Treasuries outstanding). So there isn't the kind of pressure to reinvest dollars in higher-yielding assets the way there is if expected inflation rises. I think all that would really happen is a flight to cash instead of Treasuries, and some higher borrowing costs throughout the economy that would actually choke off recovery even more. Especially in the long run, when the cost of servicing the debt is higher than it would be without the downgrade.
So I think my conclusion is that Rowe's stylized scenario falls apart in two places. First, experience tells us investors don't care about what S&P has to say (they downgraded Japan in 2002 and nothing happened, though, as I wrote before, US debt may be different), but second, it's virtually impossible for the Fed to hold interest rates on government bonds constant in this scenario without buying ALL outstanding bonds. So the scenario is effectively impossible.
Football's Back! The Redskins... We'll See
There are three sports I enjoy watching even when I don't necessarily care who wins or loses: NBA basketball, European soccer, and NFL football. So for me, this summer was pretty nightmarish. Watching European soccer from the US is a chore (and the games are only on once a week), and, until this morning, both the NFL and the NBA were locked out. Which would have made this Fall miserable. Luckily, as of this morning, the NFL is no longer locked out. Which means it's time to start thinking about my favorite team, the Redskins.
Now, being a Redskins fan is hard. Since I've been old enough to really follow the Skins (in elementary school), the team's best performances have been a pair of 10-6 seasons. There have been three playoff appearances and two playoff wins in the last 15 years (really longer, but I can't really claim to have been a diehard Skins fan as a 4 year old). In other words, unless you're a Browns, Bengals, or Lions fan, my team's sucked more than yours, and sucked longer.
The only real upside (or really, you can call it a downside. Actually, it's definitely just a downside) to being a Skins fan is the offseason. As bad as the Skins are at playing football, the front office is even better at fantasy football. Every year, the NFL has a few big-name free agents on the market. And every year, the Skins sign all of them. And the most impressive part is that, as good as they are before joining the Skins, they get worse when they get here. It's like there's a bad case of Ebola at Redskins Park that causes all players to decline once they get to Washington. Just since Dan Snyder took over the team in 1999, we've brought in Bruce Smith (who proceeded to forget how to sack the quarterback), Mark Carrier (who was good at getting fined, but not much else), Jeff George (who sucked before we got him and, shockingly, still sucked after we got him; also, we chased away the only good quarterback we had in my years as a fan, Brad Johnson, in favor of George), Deion Sanders (who was 184 years old at the time), Albert Haynesworth (who ate everything in sight), and Donovan McNabb (who magically forgot how to play football somewhere on the trip down from Philly. And that's just off the top of my head. In there, we also had a stretch where Snyder paid ex-University of Florida coach Steve Spurrier $5 million a year to take over. Plenty of us were scratching our heads when Spurrier brought a bunch of his old Florida players to Washington and declared that he was going to recreate his UF success. Some people actually even believed him when we tore up the preseason. Then the regular season started, and Spurrier's legendary Florida brigade of Danny Wuerffel (Wawful to Skins fans), Sugar Shane Matthews, Jacquez Green and Reidel Anthony, who had sucked before they got to Washington, sucked again. Spurrier's offense tanked, his press conferences were legendary for him mumbling something about pitching and catching and not knowing the names of half of his team, he won 12 games in 2 seasons, and then got himself sacked.
This offseason, the buzz is that we're going to be doing the same thing. Rumor has it, the Skins will be going after ex-Packer Cullen Jenkins, ex-Raider Nnamdi Asomugha, ex-Jet and Steeler Santonio Holmes, and then possibly ex-Viking Sydney Rice and ex-Jet and Brown Braylon Edwards. That haul would be roughly par for the course-- a bunch of pieces who don't fit, and nothing addressing the team's real concerns.
So here's how I see the season going forward. On offense, we stunk last season, and we'll probably stink again. Shanahan is actually a good coach, and we've got some good pieces. Ryan Torrain fits what Shanahan wants to do with the running game, Chris Cooley is a very good tight end, Santana Moss is still productive in his thirties, and Anthony Armstrong is actually pretty good (as a third receiver). But we're still going to stink on offense for two reasons. First, as anyone who's ever played football knows, if your line stinks, your offense will too. And our O-line stinks. Trent Williams is a nice piece for the future, and if we bring back Jammal Brown, he can be serviceable at right tackle. But at this point, Kory Lichtensteiger, Casey Rabach, and Will Montgomery stink, and Artis Hicks is a backup. We've got 6 serviceable linemen and, at best, one who's above average. That means running the ball wouldn't be easy even if we had a passing game. But that brings me to the other problem. It's not exactly a secret that by far the single most important position in football is quarterback. And it's also not exactly a secret that we've got the worst quarterbacks in the league. Donovan McNabb is out the door (and wasn't good last season), but he would be Joe Montana and Dan Marino put together compared to the dynamic duo of Rex Grossman and John Beck that we've got going into the season. Now, Sexy Rexy is a guy who you can win games with if you have the league's best defense and you let him throw 5 times a game. We don't have the league's best defense. Nor do we have Randy Moss in his prime at wideout, so odds are Sexy Rexy's deep balls are going to get picked on the regular this fall. And as bad as he is, he's a hall of famer compared to John Beck. Beck is legendary for sucking. He turns 30 in a few weeks and has been below major NFL stars like Cleo Lemon and Josh McCown. The Ravens traded him to us for Doug Dutch, a cornerback who couldn't get on the field. Word to the wise: if a QB is traded for a guy who can't get on the field as a dime corner, he REALLY sucks. So, now that we've established that the offense will suck, let's go to the defense.
The most talented player on the defense by far is Albert Haynesworth. Unfortunately, Haynesworth would rather kiss his sister than play for the Skins. But, given that all he's done since getting to DC is hang out at McDonald's, pound cheeseburgers, and not play football, I'm writing him off and assuming he won't be in DC. That means that our starting three-man front is going to be some combination of Ma'ake Kemoeatu (who's coming off a knee injury) and Anthony Bryant (who's coming off I-can't-play-football-itis) at the nose and some combination of Adam Carriker, Phillip Daniels, Vonnie Holliday and Jarvis Jenkins at the ends. A decade ago, Daniels and Holliday were real NFL players. Now they're real fossils. Carriker is a draft bust who I guess was serviceable last year. And Jenkins is a rookie. That makes our line, collectively, a disaster. Luckily, since the NFL is a passing league, teams won't realize that this line wouldn't be able to stop the run if Walter Payton was carrying the ball. And I don't means 1985 Walter Payton, I mean Walter Payton's corpse. At linebacker, we're slightly better. Brian Orakpo's been a good pro on the outside, and Ryan Kerrigan was a pretty safe pick at the other outside spot. If either of them gets hurt, our top backup is Lorenzo Alexander, but we're not awful there. Inside, on the other hand, we may have issues. London Fletcher is indestructible. Unfortunately, he was also in my grandpa's World War II platoon. He's magically avoided getting really, really bad to this point, but we've been playing with fire long enough that it may be coming. And what we've got next to him isn't great either. Rocky McIntosh is OK, but he's really not a natural fit at inside backer, so he'll probably leave as a free agent. That leaves... probably Perry Riley partnering Fletcher. Needless to say, I'm not impressed. In the secondary, we've got some pieces. OJ Atogwe and LaRon Landry are actually a very good safety tandem (Landry, after being a bust for his first few seasons, was actually a beast before he got hurt last year), but DeAngelo Hall isn't a real #1 corner (he's not bad, and he picks off a lot of passes, but that's mostly because opposing QBs aren't scared to pick on him), Kevin Barnes is a nickel corner at best, and Phillip Buchanon is a free agent and also best as a nickel corner (or a dime corner in a good secondary). Atogwe may keep us from giving up long touchdown passes, but we'll be vulnerable underneath. And that's if opposing teams don't realize running all over us shouldn't be hard either. Which is probably what they'll do if 1) we sign Nnamdi Asomugha and 2) he magically decides not to suck after getting here.
My biggest source of hope for this coming season is... the season after. See, with the magical tandem of Sexy Rexy/John Beck at QB, we pretty much have no choice but to be really terrible. And the next NFL draft will likely feature Andrew Luck. Luck is the quarterback at Stanford who pretty much everyone knows would have been the first overall pick over Cam Newton had he come out this year, and who is, for my money, the best QB prospect to come out since Peyton Manning. If we get Luck, we may actually make the playoffs more than twice in the next 10 years. So, for half of the league, the quest to the Super Bowl begins in September. For us, Skins fans, the quest to the Luck Bowl begins that same weekend. So, on the 10th anniversary of 9/11, I'm going to park myself at the Pourhouse on 109th and Amsterdam and hope the Skins get pounded by the Giants on our way to a 2-14 season (with two wins over Dallas, of course) and the privilege of drafting Andrew Luck.
LET'S GO!!!
Now, being a Redskins fan is hard. Since I've been old enough to really follow the Skins (in elementary school), the team's best performances have been a pair of 10-6 seasons. There have been three playoff appearances and two playoff wins in the last 15 years (really longer, but I can't really claim to have been a diehard Skins fan as a 4 year old). In other words, unless you're a Browns, Bengals, or Lions fan, my team's sucked more than yours, and sucked longer.
The only real upside (or really, you can call it a downside. Actually, it's definitely just a downside) to being a Skins fan is the offseason. As bad as the Skins are at playing football, the front office is even better at fantasy football. Every year, the NFL has a few big-name free agents on the market. And every year, the Skins sign all of them. And the most impressive part is that, as good as they are before joining the Skins, they get worse when they get here. It's like there's a bad case of Ebola at Redskins Park that causes all players to decline once they get to Washington. Just since Dan Snyder took over the team in 1999, we've brought in Bruce Smith (who proceeded to forget how to sack the quarterback), Mark Carrier (who was good at getting fined, but not much else), Jeff George (who sucked before we got him and, shockingly, still sucked after we got him; also, we chased away the only good quarterback we had in my years as a fan, Brad Johnson, in favor of George), Deion Sanders (who was 184 years old at the time), Albert Haynesworth (who ate everything in sight), and Donovan McNabb (who magically forgot how to play football somewhere on the trip down from Philly. And that's just off the top of my head. In there, we also had a stretch where Snyder paid ex-University of Florida coach Steve Spurrier $5 million a year to take over. Plenty of us were scratching our heads when Spurrier brought a bunch of his old Florida players to Washington and declared that he was going to recreate his UF success. Some people actually even believed him when we tore up the preseason. Then the regular season started, and Spurrier's legendary Florida brigade of Danny Wuerffel (Wawful to Skins fans), Sugar Shane Matthews, Jacquez Green and Reidel Anthony, who had sucked before they got to Washington, sucked again. Spurrier's offense tanked, his press conferences were legendary for him mumbling something about pitching and catching and not knowing the names of half of his team, he won 12 games in 2 seasons, and then got himself sacked.
This offseason, the buzz is that we're going to be doing the same thing. Rumor has it, the Skins will be going after ex-Packer Cullen Jenkins, ex-Raider Nnamdi Asomugha, ex-Jet and Steeler Santonio Holmes, and then possibly ex-Viking Sydney Rice and ex-Jet and Brown Braylon Edwards. That haul would be roughly par for the course-- a bunch of pieces who don't fit, and nothing addressing the team's real concerns.
So here's how I see the season going forward. On offense, we stunk last season, and we'll probably stink again. Shanahan is actually a good coach, and we've got some good pieces. Ryan Torrain fits what Shanahan wants to do with the running game, Chris Cooley is a very good tight end, Santana Moss is still productive in his thirties, and Anthony Armstrong is actually pretty good (as a third receiver). But we're still going to stink on offense for two reasons. First, as anyone who's ever played football knows, if your line stinks, your offense will too. And our O-line stinks. Trent Williams is a nice piece for the future, and if we bring back Jammal Brown, he can be serviceable at right tackle. But at this point, Kory Lichtensteiger, Casey Rabach, and Will Montgomery stink, and Artis Hicks is a backup. We've got 6 serviceable linemen and, at best, one who's above average. That means running the ball wouldn't be easy even if we had a passing game. But that brings me to the other problem. It's not exactly a secret that by far the single most important position in football is quarterback. And it's also not exactly a secret that we've got the worst quarterbacks in the league. Donovan McNabb is out the door (and wasn't good last season), but he would be Joe Montana and Dan Marino put together compared to the dynamic duo of Rex Grossman and John Beck that we've got going into the season. Now, Sexy Rexy is a guy who you can win games with if you have the league's best defense and you let him throw 5 times a game. We don't have the league's best defense. Nor do we have Randy Moss in his prime at wideout, so odds are Sexy Rexy's deep balls are going to get picked on the regular this fall. And as bad as he is, he's a hall of famer compared to John Beck. Beck is legendary for sucking. He turns 30 in a few weeks and has been below major NFL stars like Cleo Lemon and Josh McCown. The Ravens traded him to us for Doug Dutch, a cornerback who couldn't get on the field. Word to the wise: if a QB is traded for a guy who can't get on the field as a dime corner, he REALLY sucks. So, now that we've established that the offense will suck, let's go to the defense.
The most talented player on the defense by far is Albert Haynesworth. Unfortunately, Haynesworth would rather kiss his sister than play for the Skins. But, given that all he's done since getting to DC is hang out at McDonald's, pound cheeseburgers, and not play football, I'm writing him off and assuming he won't be in DC. That means that our starting three-man front is going to be some combination of Ma'ake Kemoeatu (who's coming off a knee injury) and Anthony Bryant (who's coming off I-can't-play-football-itis) at the nose and some combination of Adam Carriker, Phillip Daniels, Vonnie Holliday and Jarvis Jenkins at the ends. A decade ago, Daniels and Holliday were real NFL players. Now they're real fossils. Carriker is a draft bust who I guess was serviceable last year. And Jenkins is a rookie. That makes our line, collectively, a disaster. Luckily, since the NFL is a passing league, teams won't realize that this line wouldn't be able to stop the run if Walter Payton was carrying the ball. And I don't means 1985 Walter Payton, I mean Walter Payton's corpse. At linebacker, we're slightly better. Brian Orakpo's been a good pro on the outside, and Ryan Kerrigan was a pretty safe pick at the other outside spot. If either of them gets hurt, our top backup is Lorenzo Alexander, but we're not awful there. Inside, on the other hand, we may have issues. London Fletcher is indestructible. Unfortunately, he was also in my grandpa's World War II platoon. He's magically avoided getting really, really bad to this point, but we've been playing with fire long enough that it may be coming. And what we've got next to him isn't great either. Rocky McIntosh is OK, but he's really not a natural fit at inside backer, so he'll probably leave as a free agent. That leaves... probably Perry Riley partnering Fletcher. Needless to say, I'm not impressed. In the secondary, we've got some pieces. OJ Atogwe and LaRon Landry are actually a very good safety tandem (Landry, after being a bust for his first few seasons, was actually a beast before he got hurt last year), but DeAngelo Hall isn't a real #1 corner (he's not bad, and he picks off a lot of passes, but that's mostly because opposing QBs aren't scared to pick on him), Kevin Barnes is a nickel corner at best, and Phillip Buchanon is a free agent and also best as a nickel corner (or a dime corner in a good secondary). Atogwe may keep us from giving up long touchdown passes, but we'll be vulnerable underneath. And that's if opposing teams don't realize running all over us shouldn't be hard either. Which is probably what they'll do if 1) we sign Nnamdi Asomugha and 2) he magically decides not to suck after getting here.
My biggest source of hope for this coming season is... the season after. See, with the magical tandem of Sexy Rexy/John Beck at QB, we pretty much have no choice but to be really terrible. And the next NFL draft will likely feature Andrew Luck. Luck is the quarterback at Stanford who pretty much everyone knows would have been the first overall pick over Cam Newton had he come out this year, and who is, for my money, the best QB prospect to come out since Peyton Manning. If we get Luck, we may actually make the playoffs more than twice in the next 10 years. So, for half of the league, the quest to the Super Bowl begins in September. For us, Skins fans, the quest to the Luck Bowl begins that same weekend. So, on the 10th anniversary of 9/11, I'm going to park myself at the Pourhouse on 109th and Amsterdam and hope the Skins get pounded by the Giants on our way to a 2-14 season (with two wins over Dallas, of course) and the privilege of drafting Andrew Luck.
LET'S GO!!!
Greece: Strike... Five
So Moody's downgraded Greece again this morning. They're now down to Ca, which is Moody's lowest rating, one notch above default. Of course, for all intents and purposes, Greece is in default already- bondholders are going to have to take haircuts sooner or later- but I think this shows the ratings agencies aren't impressed with the latest "rescue" plan. Of course, the ratings agencies' opinions aren't necessarily useful. Especially, as Mike Konczal pointed out in the link I posted yesterday, when it comes to rating sovereign debt. But they tend to be useful as gauges of conventional wisdom. And conventional wisdom says that Greece is screwed.
I think saying Greece isn't in default right now is just semantics-- right now participation in the latest rescue plan is, as I mentioned earlier, voluntary. So really, the only thing that keeps Greece technically out of default is the fact that bondholders don't HAVE to restructure their debt. But sooner or later, pretty much everyone agrees, they will have to. So we might as well call a spade a spade...
I think saying Greece isn't in default right now is just semantics-- right now participation in the latest rescue plan is, as I mentioned earlier, voluntary. So really, the only thing that keeps Greece technically out of default is the fact that bondholders don't HAVE to restructure their debt. But sooner or later, pretty much everyone agrees, they will have to. So we might as well call a spade a spade...
Sunday, July 24, 2011
Credit Downgrade Consequences
The Nobel-winning economist Paul Krugman cites Mike Konczal for the proposition that the ratings agencies are really bad at rating government debt. The context for this is that S&P is now claiming that it's ready to downgrade the US's debt if Congress passes a clean debt ceiling hike without a budget plan. Moody's is taking the opposite tack, saying that the US should get rid of the debt ceiling (a proposition I agree with-- it's redundant and really serves no purpose but to create gridlock).
I actually agree with Konczal. Really, it's hard not to. The ratings agencies have been pretty terrible at their job, especially in recent years. But Krugman extrapolates that to mean that it doesn't matter if the US gets downgraded. And I have a harder time agreeing with that. Krugman's argument isn't illogical-- he points us to Japan, which was downgraded by S&P and Moody's in 2002, but whose interest rates have hardly changed since. This, Krugman argues, means ratings don't matter.
Now, Paul Krugman is way, way smarter and way, way more knowledgeable about these issues than I am. But one thing I'd like to see him address is this. First, Japanese bonds are held by different investors than US Treasuries. As I understand it, Japanese bonds are held largely by Japanese citizens, who are big savers. Americans, on the other hand, have long been big dissavers. Our bonds are held by foreign governments (China especially), all kinds of investors seeking an investment as safe as cash, but yielding something rather than nothing, and institutional investors like pension funds and university endowments. Second, and this is related, Japan was downgraded from AA to AA- by S&P, and from AA3 to A2 by Moody's. The US, on the other hand, is rated AAA. And that's significant. Third, the US has a lot more outstanding debt than Japan does. Japan's economy is about a third the size of the US's, and it has less outstanding debt as a result.
I'm not entirely positive of the mechanics of this rule, but I know that there are plenty of institutional investors that are only allowed to hold AAA-rated bonds. And the safest of the AAA investments has long been US Treasuries. Now, institutional investors alone aren't enough to generate the demand that has driven the massive quantity of Treasuries in the market down to the interest rates that Treasuries pay out today. Investors have genuine faith in the creditworthiness of the US government. But these investors dumping US Treasuries if the US got downgraded almost certainly WOULD drive up the US's borrowing costs. And that would be a big deal, as our future budgets would have to pay significantly more toward servicing the debt. And every dollar we spend servicing the debt is a dollar that isn't spent on education, health care, infrastructure, or any number of worthwhile uses.
And if that's the case, then we SHOULD be worried about a US debt default, contrary to what Krugman tells us. Not because we should trust Moody's and S&P's opinions, but because of the cascade effect that those opinions could have on institutional investors.
I actually agree with Konczal. Really, it's hard not to. The ratings agencies have been pretty terrible at their job, especially in recent years. But Krugman extrapolates that to mean that it doesn't matter if the US gets downgraded. And I have a harder time agreeing with that. Krugman's argument isn't illogical-- he points us to Japan, which was downgraded by S&P and Moody's in 2002, but whose interest rates have hardly changed since. This, Krugman argues, means ratings don't matter.
Now, Paul Krugman is way, way smarter and way, way more knowledgeable about these issues than I am. But one thing I'd like to see him address is this. First, Japanese bonds are held by different investors than US Treasuries. As I understand it, Japanese bonds are held largely by Japanese citizens, who are big savers. Americans, on the other hand, have long been big dissavers. Our bonds are held by foreign governments (China especially), all kinds of investors seeking an investment as safe as cash, but yielding something rather than nothing, and institutional investors like pension funds and university endowments. Second, and this is related, Japan was downgraded from AA to AA- by S&P, and from AA3 to A2 by Moody's. The US, on the other hand, is rated AAA. And that's significant. Third, the US has a lot more outstanding debt than Japan does. Japan's economy is about a third the size of the US's, and it has less outstanding debt as a result.
I'm not entirely positive of the mechanics of this rule, but I know that there are plenty of institutional investors that are only allowed to hold AAA-rated bonds. And the safest of the AAA investments has long been US Treasuries. Now, institutional investors alone aren't enough to generate the demand that has driven the massive quantity of Treasuries in the market down to the interest rates that Treasuries pay out today. Investors have genuine faith in the creditworthiness of the US government. But these investors dumping US Treasuries if the US got downgraded almost certainly WOULD drive up the US's borrowing costs. And that would be a big deal, as our future budgets would have to pay significantly more toward servicing the debt. And every dollar we spend servicing the debt is a dollar that isn't spent on education, health care, infrastructure, or any number of worthwhile uses.
And if that's the case, then we SHOULD be worried about a US debt default, contrary to what Krugman tells us. Not because we should trust Moody's and S&P's opinions, but because of the cascade effect that those opinions could have on institutional investors.
Inflation
Just one of the many things Ron Paul acolytes have spent the last 3 years getting completely wrong is inflation. They KNEW that lowering interest rates (they call it "printing money" would cause inflation. People who read John Hicks knew that, as long as the economy stayed depressed, no such thing would happen. Unsurprisingly, Hicksian models were proved right, and the hard money crowd was proved wrong. But instead of accepting that their worldview was wrong, they came up with a series of new explanations. First, it was that core inflation (essentially, inflation minus volatile food and energy prices driven by supply and demand shifts in global markets) was a bad measure, since food and energy prices are what REALLY matters to most people (which is true but irrelevant; if "printing money" is causing inflation, we should expect to see prices go up across the board, not just in food and energy markets; also, we'd expect these prices to rise more in the US than in other countries- that's also not the case).
Once food and fuel prices also tanked (probably temporarily; again, these prices respond significantly to global markets and not what the Fed decides to do with interest rate policy), the hard money crowd needed to move the goalposts again. Their new explanation is that the way inflation is measured changed since the Carter Administration. If we still measured inflation the way we did under Carter, inflation would be measured at around 10%. Which is, again, true. And again, it's, completely unsurprisingly given these people's ignorance, completely irrelevant. The way we measure inflation since 1970 has changed because we buy different things in 2011 than we did in 1979. So we need a different way to measure inflation that fits the things we buy today.
Now, I know as well as everyone else that this explanation won't convince the hard money crowd, so there's another way to do the analysis that's more intuitive. Simply put, it's by analyzing the relationship between unemployment, inflation, and GDP growth. While measuring economic growth is done in nominal terms, real growth is discounted by the rate of inflation. Put simply, if the economy grows by 10%, but wages and prices also rise by 10%, there isn't any real economic growth at all. The extra 10% in wages doesn't buy any more goods and services, so the real size of the economy is constant. And if the population is rising during that period, unemployment will actually rise, since there will be more people looking for jobs, but the growth in wages will match the growth rate of the economy, so there won't actually be any more jobs created. Which brings us to the present situation. If the hard money crowd is right, and we should be measuring inflation the way we did during the Carter years, then roughly 2% annual economic growth combined with 10% inflation means the economy has shrank by 8% annually over the last 2 years, in real terms. Applying Okun's law (the historical relationship between economic growth and unemployment), we'd have expected the unemployment rate to grow by 4% per year each of the last two years, and for the economy to shed millions of jobs. So what's happened? Well, job growth has been disappointing, but jobs have been created. In fact, unemployment has behaved about as we'd expect given the measures of inflation currently being used-- the economy has grown slowly, and has created jobs slowly. It hasn't been shedding jobs rapidly the way it would have had inflation been anywhere close to 10%. Or even 5%.
So, again unsurprisingly, Ron Paul and company have been proven completely wrong by the facts. Though that's not going to stop them from making up another explanation when things still don't go as they expect.
The Source of the Deficit
The New York Times has a pretty informative editorial today about where our deficit comes from. When Bill Clinton left office, the budget was running a surplus, and surpluses were predicted to get bigger. Under Bush, the budget fell into deficit, and the deficit grew as the Administration went along. There were four different drivers of this shift, one of which isn't a long-term problem, two of which (TAX CUTS and RECESSION) don't have to be long term problems, and one of which is a long-term problem.
The four are, 1) The wars in Iraq and Afghanistan, 2) The Bush tax cuts, 3) Two different recessions, and 4) Exploding health care costs.
The war in Afghanistan, at least, was pretty much accepted by both Democrats and Republicans as a justified response to the 9/11 attacks. The war in Iraq was not, and was sold on false pretenses, but that discussion is irrelevant to the budget debate. While wars are generally expensive (and there are no exception), they're not unaffordable. Sooner or later, they'll wind down, which in turn erases them from the books. So they're really not a drag on the long-term budget picture.
The Bush tax cuts, on the other hand, were neither necessary nor unaffordable. They were initially sold as a way to spend the surplus accumulated during the Clinton years. Then, when the tech bubble burst at the beginning of the Bush Administration, they were sold as a way to stimulate the economy back to growth (a very Keynesian prescription, given that the Fed had plenty of traction to lower interest rates in the economy). On the surface, those tax cuts looked affordable, simply because the CBO scored them as if they would expire on schedule instead of being extended indefinitely. Letting them expire in 2012, as they're scheduled to do, roughly cuts the structural deficit in half. The issue is convincing anti-tax nuts in Congress to let that happen.
Recessions were another major part. By definition, recessions have significant adverse effects on budget conditions. They cut tax receipts (as GDP falls), but hike auto-stabilization spending through unemployment benefits and Medicaid, creating bigger budget deficits. It's this factor that is primarily responsible for the big deficits during the Obama administration. The size of government, contrary to BS claims to the contrary, has not grown under Obama. But the economy has shrank. The reason this doesn't have to be a long-term issue, though, is that the government COULD still take steps to fight the downturn. Fiscal policy to stimulate the economy and get it back to full employment and jump-start a self-sustaining recovery would fill a significant part of the budget gap that currently exists as a result of the depressed economy. Sure, that would hike the deficit in the short-term, but the longer the economy stays depressed, the bigger the long-term debt picture will be anyway, so you end up with a healthier budget picture, despite more spending by the government, since that spending is smaller as a portion of the bigger economy.
The last major part of the budget picture is health-care spending. For a long time, the rate of growth of health care spending has been faster than the rate of growth of the economy. This is unsustainable, and needs to be addressed. We'll see if Congress is willing to address this issue, but it's the biggest and hardest to resolve issue plaguing our budget.
The four are, 1) The wars in Iraq and Afghanistan, 2) The Bush tax cuts, 3) Two different recessions, and 4) Exploding health care costs.
The war in Afghanistan, at least, was pretty much accepted by both Democrats and Republicans as a justified response to the 9/11 attacks. The war in Iraq was not, and was sold on false pretenses, but that discussion is irrelevant to the budget debate. While wars are generally expensive (and there are no exception), they're not unaffordable. Sooner or later, they'll wind down, which in turn erases them from the books. So they're really not a drag on the long-term budget picture.
The Bush tax cuts, on the other hand, were neither necessary nor unaffordable. They were initially sold as a way to spend the surplus accumulated during the Clinton years. Then, when the tech bubble burst at the beginning of the Bush Administration, they were sold as a way to stimulate the economy back to growth (a very Keynesian prescription, given that the Fed had plenty of traction to lower interest rates in the economy). On the surface, those tax cuts looked affordable, simply because the CBO scored them as if they would expire on schedule instead of being extended indefinitely. Letting them expire in 2012, as they're scheduled to do, roughly cuts the structural deficit in half. The issue is convincing anti-tax nuts in Congress to let that happen.
Recessions were another major part. By definition, recessions have significant adverse effects on budget conditions. They cut tax receipts (as GDP falls), but hike auto-stabilization spending through unemployment benefits and Medicaid, creating bigger budget deficits. It's this factor that is primarily responsible for the big deficits during the Obama administration. The size of government, contrary to BS claims to the contrary, has not grown under Obama. But the economy has shrank. The reason this doesn't have to be a long-term issue, though, is that the government COULD still take steps to fight the downturn. Fiscal policy to stimulate the economy and get it back to full employment and jump-start a self-sustaining recovery would fill a significant part of the budget gap that currently exists as a result of the depressed economy. Sure, that would hike the deficit in the short-term, but the longer the economy stays depressed, the bigger the long-term debt picture will be anyway, so you end up with a healthier budget picture, despite more spending by the government, since that spending is smaller as a portion of the bigger economy.
The last major part of the budget picture is health-care spending. For a long time, the rate of growth of health care spending has been faster than the rate of growth of the economy. This is unsustainable, and needs to be addressed. We'll see if Congress is willing to address this issue, but it's the biggest and hardest to resolve issue plaguing our budget.
Saturday, July 23, 2011
Progress? in Greece
The Financial Times provided this analysis of the latest Greece deal a couple of days ago. I've delayed writing about it because, to be perfectly honest, the details stretch my competency in this area. I'm not entirely sure I'm getting the intricacies. But I figure I'll take a crack anyway. To understand this solution, I think the first step is to identify the issue.
Briefly, Greece is basically insolvent. Going into the financial crisis, they had large debts, a hugely wasteful public sector, didn't collect taxes, and papered over it with creative accounting and through the fact that bond markets either weren't distinguishing between more and less creditworthy Euro zone nations, or were assuming that the EU would bail out its weaker members in the event of a crisis. Or maybe it was both.
Either way, when the economy melted down, borrowing dried up, and you had a country with a lot of debt, a massive primary account deficit, and a bloated public sector full of workers who didn't have too many real skills. In normal circumstances, this would be a good time for a central bank to lower interest rates to 0 to get workers working while the government got its fiscal house in order. If the problem was really severe, you could default on the debt, forcing bondholders to take a haircut, devalue the currency to make exports competitive, and export your economy back to growth. Citizens' standard of living would be cut (exports would get way more expensive), but at least people would be working.
But Greece's situation is complicated by the fact that has neither its own currency nor, as a result, its own monetary policy. That means lowering interest rates unilaterally is impossible, as interest rate cuts for Greece would likely spur significant inflation in Germany (a much stronger, and also much bigger, economy). Additionally, Greece has essentially been frozen out of credit markets (for obvious reasons, investors aren't excited to buy Greek bonds at anything but sky-high coupons that Greece can't really afford to pay anyway). So Greece has no monetary policy levers for softening its landing and allowing it to grow its way out of the crisis, nor can it borrow its way back to full employment through productive public works projects.
So Greece is stuck between a rock and a hard place. It has a massive debt that it has to service, and a fat deficit that it has to mitigate. At the same time, given the severe imbalances in its economy at the time of the crisis, raising taxes and cutting spending actually reduces demand, which in turn lowers tax receipts further. And the burden of the debt isn't going anywhere. And borrowing any more at today's rates just digs Greece into a deeper hole. It's collapsing, and there's no way out without extraordinary measures.
That's the context in which the latest European rescue plan should be looked at. I won't get into the details of the four options for investors, in part because I'm not confident I can really explain how each would really help in a way that makes all that much sense to me, much less to someone else. But the general proposition is that there are two essentially different approaches, each of which can be structured in two different ways. The first maintains the principal of the bonds, but lowers the coupon (interest rate), while extending the maturity. This provides Greece liquidity relief in the short term. In other words, Greece will owe less money up front, but will owe more on the back end, the idea being that if Greece can get its economy into a self-sustaining growth trajectory (with the help of the liquidity relief), it will be able to pay off the bonds in full on the back end. The bonds are collateralized with AAA-rated bonds bought by the European Stability Fund that the EU put together. If I understand it right, Greece is essentially borrowing the stronger EU countries' creditworthiness so that it doesn't have to borrow in credit markets at its own unaffordable rate.
The second set of options involves a write-down of the principal. Simply put, the bonds are written down (by 20% in each case), but the coupon is raised. In the second option under this category, further losses to the principal are collateralized by funds provided by an EU rescue fund. The idea behind these options is that the write-down in principal provides solvency relief on the balance sheet-- without having to pay back the full cost of the bond, the Greeks get some relief.
Frankly, the biggest difficulty for me is understanding how these options interact (and I don't even fully understand the last option, even after reading over it a bunch and trying to think it through), and understanding how they might expect to get relief under these scenarios. All of the liquidity relief is only useful if Greece can stimulate growth that lets it collect enough in taxes to pay off its debts, even with the lowered coupons/principal. I think a useful metaphor is that Greece is floating out at sea, trying to get to land. The rescue plan is a life vest, but the vest only keeps them above water-- it doesn't get them any closer to the destination. And, ultimately, I think that's the problem. Greece can't solve its debt problem without economic growth. And the debt problem is a drag on growth. And, without its own monetary policy, and with its fiscal policy crippled by its debt overhang, Greece really has no way to stimulate growth.
And a problem both FT and Paul Krugman pointed out is that the debt relief measures are all voluntary for bondholders. In other words, they don't HAVE to take any of them. Which makes me think they're not going to amount to anything. The incentive is for every bondholder to let the others participate, but hold off on participating themselves. That way, they don't have to lower the principal or the coupon, and get paid in full on the back of everyone else taking haircuts. But that incentive applies to every bondholder, so I think the most likely result is just that no one chooses to participate, in which case the ideas are a moot point. Or, alternately, a few participate in good will, but their participation doesn't make a difference as not enough bondholders take part. In which case, Greece not only doesn't get its debt relief, but participants also get burned compared to those who held out.
In short, my impression is that this plan, to the extent that I understand it, probably isn't going to do much good.
Briefly, Greece is basically insolvent. Going into the financial crisis, they had large debts, a hugely wasteful public sector, didn't collect taxes, and papered over it with creative accounting and through the fact that bond markets either weren't distinguishing between more and less creditworthy Euro zone nations, or were assuming that the EU would bail out its weaker members in the event of a crisis. Or maybe it was both.
Either way, when the economy melted down, borrowing dried up, and you had a country with a lot of debt, a massive primary account deficit, and a bloated public sector full of workers who didn't have too many real skills. In normal circumstances, this would be a good time for a central bank to lower interest rates to 0 to get workers working while the government got its fiscal house in order. If the problem was really severe, you could default on the debt, forcing bondholders to take a haircut, devalue the currency to make exports competitive, and export your economy back to growth. Citizens' standard of living would be cut (exports would get way more expensive), but at least people would be working.
But Greece's situation is complicated by the fact that has neither its own currency nor, as a result, its own monetary policy. That means lowering interest rates unilaterally is impossible, as interest rate cuts for Greece would likely spur significant inflation in Germany (a much stronger, and also much bigger, economy). Additionally, Greece has essentially been frozen out of credit markets (for obvious reasons, investors aren't excited to buy Greek bonds at anything but sky-high coupons that Greece can't really afford to pay anyway). So Greece has no monetary policy levers for softening its landing and allowing it to grow its way out of the crisis, nor can it borrow its way back to full employment through productive public works projects.
So Greece is stuck between a rock and a hard place. It has a massive debt that it has to service, and a fat deficit that it has to mitigate. At the same time, given the severe imbalances in its economy at the time of the crisis, raising taxes and cutting spending actually reduces demand, which in turn lowers tax receipts further. And the burden of the debt isn't going anywhere. And borrowing any more at today's rates just digs Greece into a deeper hole. It's collapsing, and there's no way out without extraordinary measures.
That's the context in which the latest European rescue plan should be looked at. I won't get into the details of the four options for investors, in part because I'm not confident I can really explain how each would really help in a way that makes all that much sense to me, much less to someone else. But the general proposition is that there are two essentially different approaches, each of which can be structured in two different ways. The first maintains the principal of the bonds, but lowers the coupon (interest rate), while extending the maturity. This provides Greece liquidity relief in the short term. In other words, Greece will owe less money up front, but will owe more on the back end, the idea being that if Greece can get its economy into a self-sustaining growth trajectory (with the help of the liquidity relief), it will be able to pay off the bonds in full on the back end. The bonds are collateralized with AAA-rated bonds bought by the European Stability Fund that the EU put together. If I understand it right, Greece is essentially borrowing the stronger EU countries' creditworthiness so that it doesn't have to borrow in credit markets at its own unaffordable rate.
The second set of options involves a write-down of the principal. Simply put, the bonds are written down (by 20% in each case), but the coupon is raised. In the second option under this category, further losses to the principal are collateralized by funds provided by an EU rescue fund. The idea behind these options is that the write-down in principal provides solvency relief on the balance sheet-- without having to pay back the full cost of the bond, the Greeks get some relief.
Frankly, the biggest difficulty for me is understanding how these options interact (and I don't even fully understand the last option, even after reading over it a bunch and trying to think it through), and understanding how they might expect to get relief under these scenarios. All of the liquidity relief is only useful if Greece can stimulate growth that lets it collect enough in taxes to pay off its debts, even with the lowered coupons/principal. I think a useful metaphor is that Greece is floating out at sea, trying to get to land. The rescue plan is a life vest, but the vest only keeps them above water-- it doesn't get them any closer to the destination. And, ultimately, I think that's the problem. Greece can't solve its debt problem without economic growth. And the debt problem is a drag on growth. And, without its own monetary policy, and with its fiscal policy crippled by its debt overhang, Greece really has no way to stimulate growth.
And a problem both FT and Paul Krugman pointed out is that the debt relief measures are all voluntary for bondholders. In other words, they don't HAVE to take any of them. Which makes me think they're not going to amount to anything. The incentive is for every bondholder to let the others participate, but hold off on participating themselves. That way, they don't have to lower the principal or the coupon, and get paid in full on the back of everyone else taking haircuts. But that incentive applies to every bondholder, so I think the most likely result is just that no one chooses to participate, in which case the ideas are a moot point. Or, alternately, a few participate in good will, but their participation doesn't make a difference as not enough bondholders take part. In which case, Greece not only doesn't get its debt relief, but participants also get burned compared to those who held out.
In short, my impression is that this plan, to the extent that I understand it, probably isn't going to do much good.
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