Today, the US federal government shut down. Obviously, that's not ideal-- working federal infrastructure is kind of a good thing. But it's not the end of the world; the long-term impact is mostly that we look like a banana republic. Functioning countries don't shut down their governments. And withholding funding to the entire government because you don't like a law that was democratically passed isn't adult behavior and shouldn't be condoned. But this post is about consequences, and the consequences of shutdown are annoying but not catastrophic-- the real fear for me is the coming fight over the debt limit. Because I honestly get the sense that the Tea Party people don't understand the implications of defaulting on the debt, and that's a terrifying proposition.
The issue, I think, is that the Tea Party neanderthals don't understand the basics of the banking system. In not just American, but global, finance, US government debt is the ultimate safe asset. It's used to collateralize all manner of loans, and is essentially as liquid as cash: the market for auto loans, credit card receivables, mortgage-backed securities, or corporate debt might dry up, but the US government has always been a perfectly safe credit risk. This makes a lot of sense-- when you borrow in a currency that you can print, you can't exactly default (which doesn't mean that deficits never matter, but that's another story), unless you deliberately stop paying your bills. Which is essentially what the Republicans are threatening at this point if they don't get their way on sabotaging the health care law. And if banks, companies, and every single entity that holds Treasury bills on their books finds that their safest asset isn't liquid anymore, that's a catastrophe with consequences that we can't foresee. Just for comparison's sake, subprime loans were a smallish portion of a sizable but not enormous market. Treasuries, by contrast, are almost a $17 trillion market, over 10 times the size of the subprime market in the US in 2007.
But the Tea Party doesn't seem to get this. When he was confronted with the consequences of a default, Rep. John Fleming of Louisiana had this gem, "Economists, what have they been doing? They make all sorts of predictions. Many times they're wrong, so I don't think we should run government based on economists' predictions." No, if you believe Fleming, we should run government based on the whims of the nut fringe that he's a part of. But the comment is really scary for what it implies about the mindset of the Tea Party-- like suicide bombers, they don't fear death, and that makes negotiating with them impossible. The terrifying thing about suicide bombers and kamikaze pilots is that normal deterrents don't work on them; when death is the endgame, either because they think it's desirable or because they think their God will love them in the afterlife, they'll never lose a game of chicken. And that's terrifying in this case because backing down lets them get their way by default. If normal people realize default is an unacceptable consequence, the crazies will always get their way because they're willing to take down the entire global economy if they don't get what they want; it amounts to rule by suicide vest.
So, at this point, I'm not even sure what the endgame is. The story was supposed to be that Wall Street rode in to save the day; banks throw enough money at Republicans (and Democrats) that when they talk, both sides at least listen. And even if my views aren't aligned with Wall Street's in a lot of cases, the best thing you can say about them is that they're rational; there are bankers that like the ACA, there are bankers that dislike it, but there aren't any bankers that think that defaulting on the debt to get rid of the ACA is an acceptable action. But the Tea Party won't even listen to Wall Street; their constituency is the real fringe, and those people don't like Wall Street much more than the Occupy Wall Street types do. In this case, that's REALLY terrifying because there's no one to talk sense into these people; they look legitimately ready to collapse the world economy to get what they want. And giving in to their gambit might be even worse.
Tuesday, October 1, 2013
Wednesday, June 26, 2013
Victims of our own success?
Over the last two days, the Supreme Court has handed down its biggest decisions from the last term. Some were a really big deal (section 4 of the Voting Rights Act was struck down). Others, I would argue, won't make all that much of a difference in people's actual lives in the medium run. Since I haven't gotten to read any of the decisions yet (thanks, Bar Bri), I don't have an opinion yet about whether I agree with the legal reasoning. But from a practical perspective, after a highly scientific glance at my Facebook feed, I'm pretty sure 95% of people don't really know what DOMA actually did, or realize that the decisions didn't expand the institution of gay marriage outside of California; the ability for a couple to file taxes jointly actually results in less take-home pay if both spouses have similar incomes. Mostly I'm complacent about that one because, given how far gay rights have come just in the last decade, codified anti-gay discrimination will be just about dead by the end of the decade anyway; in other words, the war is pretty much over, and these are the final shots.
But the case that I found really interesting was the one that gutted the Civil Rights Act. Section 4 used to require certain states (basically, the old Confederacy) to pre-clear changes to their voting procedures with the Department of Justice to ensure that they don't discriminate against minorities. The reason for that is that, historically, the old Confederacy has been really really racist and done its best to keep black and brown people from voting (and, until a generation or so ago, drinking from the same water fountains or going to the same schools). Every so often, Congress has to re-authorize the Civil Rights Act. Last time it did this was in 2006. This passed overwhelmingly because voting against a law called the Civil Rights Act is really really bad PR. So the challenge that came down essentially argued that, since the Civil Rights Act was passed, it's gotten a lot easier for black and brown people to vote, so we don't need the law anymore. Paul Campos from CU-Boulder law makes a somewhat disingenuous case at Salon for why the logic behind this is circular.
The argument is essentially that conservatives' logic behind repealing the Voting Rights Act (and really a lot of other legislation) is fatally flawed. In this case, the argument is that the VRA did such a great job of enfranchising minorities that... we don't need it anymore. But this isn't the only place where this logic applies. The modern right wing is built around the idea that government is always bad and any regulation is bad regulation. Get rid of all regulations and the economy will take off, the financial system will become more stable, unemployment will disappear, etc. etc. It's all baloney, of course, but that's the theory. But their case for it is always built on contorted logic that, at its root, is based on the reality that regulation in plenty of areas HAS worked effectively. To take a couple of pointed case, pollution and financial regulation. Rand Paul's argued in the past that we don't need to regulate carbon emissions because... we've been improving the quality of our air over the past few decades. Without realizing that our air quality is improving because, you know, we've regulated it in the past. So the logic is that, because air quality has improved with regulation, we need to do away with the regulation because air quality has improved?
The same thing took place over the course of decades with the financial system. After the stock market crash that started the Great Depression, the modern financial regulatory infrastructure was erected in the US. We got, among other things, deposit insurance to stop bank runs, a separation of commercial and investment banking to limit risk at banks, the SEC to police the securities industry and promote disclosure, and other changes. Some of these changes were hugely successful. Others were probably superfluous (the argument that repealing Glass-Steagall in 1999 led in some direct way to the financial crisis of 2008 is... very weak at best). But, for the most part, the regulatory infrastructure of the 1930's got us probably the most stable, prosperous few decades in modern economic history. And that worked so well that, around the mid-1970's, we got a push back from the industry arguing that regulation was unnecessary. Because there hadn't been a financial crisis in a generation, they argued, industry had gotten so good at policing itself that government wasn't needed. And, steadily, they got some of what they wanted. Some of that was probably good policy (interest rate caps were never a great idea), some was bad policy, but the general movement was definitely toward deregulation. And we had a few small-scale meltdowns; the S&L crisis in Texas came more or less directly out of deregulation, and the collapse of the hedge fund Long Term Capital Management required a private sector bailout. While the regulatory framework of the 1930s was woefully inadequate for handling a meltdown of the 21st century financial system, the general movement was in the wrong direction-- instead of realizing that the framework of the 1930's worked exceptionally well for decades and needed to be updated to accommodate the new reality of the 1990's and 2000's, the framework of the 1930's was dismantled because, well, didn't financial stability mean that it was unnecessary? As it happened, the answer was obviously not. But then, when you think about it, it really doesn't make any sense as a worldview. It's like a farmer arguing that, since he started watering his fields, his crop yields have been great, so he doesn't need to water his fields anymore.
The Civil Rights case is slightly different, sure. The reason I wasn't compelled by Campos's argument comparing a higher drinking age with incidences of alcohol-related death is that alcohol will always impair drivers. Laws to remedy racism are necessary so long as people are still racist. But the answer, in this case, is pretty clear. Right after the Supreme Court struck down Section 4, the same old Confederate states (I'm looking at you, Texas) rushed out to pass Voter ID laws and other legislation that they wouldn't have been allowed to implement under Section 4. And it's painfully obvious that the point of Voter ID isn't to prevent voter fraud (which literally just about never happens), but to keep people who are unlikely to have IDs (poor black and brown people, who happen to vote Democrat) from voting. That very rush to pass legislation should be viewed as egg on the Supreme Court's face. The instant they came out and declared that we don't need the VRA because people aren't racist anymore... the same states it applied to went out and told the Supreme Court (and America), "Yeah, we're still definitely racist."
I guess the lesson to take from this is... don't pass regulations that work too well. Because then we'll decide that we don't need regulations anymore. As an argument, it's just a little bit questionable.
Monday, June 10, 2013
On Expectations-based policy
I haven't written anything in a long time. Mostly because I've been doing my last semester of law school. Which is the best time of anyone's life. It's like your birthday between ages 5 and 10. Except that instead of once a year, it's your birthday every day. It's great. But that's over now, and I've gotta devote my energy to studying for the bar. Which, of course, means putting that off by writing about things that I find more interesting than personal jurisdiction in New York. Also, unlike personal jurisdiction in New York, I choose the things I write here, so I might actually know something about them.
Today's topic is really two parallel topics with a single theme: the ways economic policymakers have used (and abused) the idea of expectations-based policy to push different approaches to fixing the economy. Unsurprisingly, one of these approaches is much much better than the other. On the one side, we've had the expansionary austerity types. Standard economic theory is pretty clear about the effect of austerity-- contractionary fiscal policy (meaning spending cuts or tax hikes) by the government is, on net, contractionary. Of course, it doesn't have to be contractionary overall-- an economy can cut spending but still grow if the central bank counteracts that with looser fiscal policy. Which, under present conditions, is more or less unavailable in advanced economies in which, more or less across the board, interest rates are close to as low as they can go.
The idea behind expansionary austerity is that what's really holding back economies is... budget deficits. Ignoring the reality that budget problems across more or less all of Europe (Greece being a notable exception) and the US were caused by a collapse in tax revenues due to the economic crisis, expansionary austerity types decided that people and businesses aren't spending or investing because they're afraid that, someday, when the economy recovers, they'll have to pay higher taxes to service their nations' debt. The logic is as convoluted as it sounds. And just as wrong. The reality is that people aren't spending because they either don't have income (or their income comes in the form of unemployment benefits) or they're afraid of losing their source of income. And businesses aren't hiring because they aren't moving products. They're still immensely profitable (the surge in the stock market is a pretty good indicator of that, especially since P/E ratios are pretty close to historical averages, unlike those of the bubble years in the late 90's), but that's largely because big public companies both have access to overseas markets and have disproportionate power in the labor market-- workers don't have much space to demand higher wages when a big chunk of the workforce is still out of work and would gladly take the job.
But expansionary austerity, on the basis of the magic idea of "confidence" has been plenty influential on the American and especially the European right, mostly because I think people like to think of economics as a morality play where we need to repent for past sins by punishing the undeserving (read: poor people). So we get fiscal contraction in a depressed economy, with the justification that it will all pay off when "confidence" returns. So Europe tried it. Spoiler alert: confidence didn't return. Instead, they got a Depression that's been worse, for the most part, than the Great Depression for most of the continent. With no intellectual edifice for this disaster (Expansionary austerity folks loved to point to a paper by Alesina/Ardagna that seemed to say that austerity could be expansionary; it was hugely clear to anyone that actually read the paper that they didn't, you know, control for monetary policy, which made the whole exercise worse than useless. Reinhart/Rogoff 2010 was also briefly used for this purpose; I never put much stock in the causal story in that one, but everyone knows what happened to that one), hopefully expansionary austerity will finally go into the desk drawer where policymakers put the rest of their worst ideas.
On the other hand, a group of economists ranging from the Keynesian left (like Paul Krugman) to the right (Scott, Sumner, Greg Mankiw, Ken Rogoff) to the center (Ben Bernanke, Michael Woodford) has suggested that a concerted effort by the central bank to commit to a slightly higher rate of inflation (say, 4% instead of the unofficial 2% target) or a nominal GDP number, which essentially have the same effect, would induce a change in market expectations and stimulate spending. The idea is that, with inflation expectations well-anchored now, and indeed running persistently below target, people aren't sufficiently induced to spend. In particular, corporations sitting on cash (and American corporations have a LOT of cash on hand) would need to spend that cash on something or risk the value of the cash eroding, since inflation reduces the nominal buying power of cash. The trick to this is that inflation is somewhat self-fulfilling. When people expect prices to rise, they demand higher wages. When they demand higher wages, they tend to get those higher wages and can spend more of them on the same products. At the same time, savers have to move their cash into some higher-yielding use. That might mean stocks, but it frequently means investments with positive net-present value that boost employment and other productive activities. At the same time, higher wages mean that the real value of outstanding debt falls, since the same nominal debt is less of a burden for someone whose income is rising. Given that our collective debt (mostly still private debt that came out of the mortgage collapse, where people found that their homes were worth less than their mortgage debt) is still a drag on the economy, higher inflation makes paying down that debt easier and quicker.
So how is this second approach different from the first? Well, to start with, if it fails, the worst-case scenario, absent a complete bungling of policy on the part of the central bank, is that nothing happens. Under present conditions (short-term interest rates at close to 0 and unemployment persistently high), expansionary monetary policy by itself doesn't do anything (since you can't have a nominal interest rate below 0; people will just hold cash). So, if monetary stimulus doesn't stimulate, you're in the same place that you started. The idea behind unconventional monetary stimulus at this point is to move expectations so that monetary stimulus essentially becomes self-fulfilling (there's also a real element to it; it doesn't matter how much inflation people expect, if there isn't enough money circulating to get them pay raises, there won't be any pay raises, just higher unemployment). If inflation does take off, well, central banks have tools to deal with that. If it doesn't, you're in the same place you started. In fact, the people I listed have different levels of confidence in how effective inflation targeting actually will or can be. Scott Sumner is very confident. Paul Krugman isn't so confident, but his position amounts to "It might not work, but we might as well try this, along with fiscal policy." ( As a card-carrying Keynesian, Krugman has a lot more faith in fiscal policy to do the job with interest rates at zero.) In other words, it's a hope with pretty limited downside. Inflation targeting also has the added benefit of not being the exact opposite of what textbook economics says you should do when the economy suffers from insufficient demand (like, you know, contractionary fiscal policy).
Shockingly, I come down in the second camp. I have no clue how effective NGDP/inflation targeting can be, but I figure, as long as the economy is depressed, there's no reason not to try. It's a hope, but it's a hope that we might as well try. On the other hand, summoning confidence through expansionary austerity, for a lot of people, was a plan. And it was a plan that, predictably, was a very human disaster. And for that, those who pushed it should be ashamed.
Today's topic is really two parallel topics with a single theme: the ways economic policymakers have used (and abused) the idea of expectations-based policy to push different approaches to fixing the economy. Unsurprisingly, one of these approaches is much much better than the other. On the one side, we've had the expansionary austerity types. Standard economic theory is pretty clear about the effect of austerity-- contractionary fiscal policy (meaning spending cuts or tax hikes) by the government is, on net, contractionary. Of course, it doesn't have to be contractionary overall-- an economy can cut spending but still grow if the central bank counteracts that with looser fiscal policy. Which, under present conditions, is more or less unavailable in advanced economies in which, more or less across the board, interest rates are close to as low as they can go.
The idea behind expansionary austerity is that what's really holding back economies is... budget deficits. Ignoring the reality that budget problems across more or less all of Europe (Greece being a notable exception) and the US were caused by a collapse in tax revenues due to the economic crisis, expansionary austerity types decided that people and businesses aren't spending or investing because they're afraid that, someday, when the economy recovers, they'll have to pay higher taxes to service their nations' debt. The logic is as convoluted as it sounds. And just as wrong. The reality is that people aren't spending because they either don't have income (or their income comes in the form of unemployment benefits) or they're afraid of losing their source of income. And businesses aren't hiring because they aren't moving products. They're still immensely profitable (the surge in the stock market is a pretty good indicator of that, especially since P/E ratios are pretty close to historical averages, unlike those of the bubble years in the late 90's), but that's largely because big public companies both have access to overseas markets and have disproportionate power in the labor market-- workers don't have much space to demand higher wages when a big chunk of the workforce is still out of work and would gladly take the job.
But expansionary austerity, on the basis of the magic idea of "confidence" has been plenty influential on the American and especially the European right, mostly because I think people like to think of economics as a morality play where we need to repent for past sins by punishing the undeserving (read: poor people). So we get fiscal contraction in a depressed economy, with the justification that it will all pay off when "confidence" returns. So Europe tried it. Spoiler alert: confidence didn't return. Instead, they got a Depression that's been worse, for the most part, than the Great Depression for most of the continent. With no intellectual edifice for this disaster (Expansionary austerity folks loved to point to a paper by Alesina/Ardagna that seemed to say that austerity could be expansionary; it was hugely clear to anyone that actually read the paper that they didn't, you know, control for monetary policy, which made the whole exercise worse than useless. Reinhart/Rogoff 2010 was also briefly used for this purpose; I never put much stock in the causal story in that one, but everyone knows what happened to that one), hopefully expansionary austerity will finally go into the desk drawer where policymakers put the rest of their worst ideas.
On the other hand, a group of economists ranging from the Keynesian left (like Paul Krugman) to the right (Scott, Sumner, Greg Mankiw, Ken Rogoff) to the center (Ben Bernanke, Michael Woodford) has suggested that a concerted effort by the central bank to commit to a slightly higher rate of inflation (say, 4% instead of the unofficial 2% target) or a nominal GDP number, which essentially have the same effect, would induce a change in market expectations and stimulate spending. The idea is that, with inflation expectations well-anchored now, and indeed running persistently below target, people aren't sufficiently induced to spend. In particular, corporations sitting on cash (and American corporations have a LOT of cash on hand) would need to spend that cash on something or risk the value of the cash eroding, since inflation reduces the nominal buying power of cash. The trick to this is that inflation is somewhat self-fulfilling. When people expect prices to rise, they demand higher wages. When they demand higher wages, they tend to get those higher wages and can spend more of them on the same products. At the same time, savers have to move their cash into some higher-yielding use. That might mean stocks, but it frequently means investments with positive net-present value that boost employment and other productive activities. At the same time, higher wages mean that the real value of outstanding debt falls, since the same nominal debt is less of a burden for someone whose income is rising. Given that our collective debt (mostly still private debt that came out of the mortgage collapse, where people found that their homes were worth less than their mortgage debt) is still a drag on the economy, higher inflation makes paying down that debt easier and quicker.
So how is this second approach different from the first? Well, to start with, if it fails, the worst-case scenario, absent a complete bungling of policy on the part of the central bank, is that nothing happens. Under present conditions (short-term interest rates at close to 0 and unemployment persistently high), expansionary monetary policy by itself doesn't do anything (since you can't have a nominal interest rate below 0; people will just hold cash). So, if monetary stimulus doesn't stimulate, you're in the same place that you started. The idea behind unconventional monetary stimulus at this point is to move expectations so that monetary stimulus essentially becomes self-fulfilling (there's also a real element to it; it doesn't matter how much inflation people expect, if there isn't enough money circulating to get them pay raises, there won't be any pay raises, just higher unemployment). If inflation does take off, well, central banks have tools to deal with that. If it doesn't, you're in the same place you started. In fact, the people I listed have different levels of confidence in how effective inflation targeting actually will or can be. Scott Sumner is very confident. Paul Krugman isn't so confident, but his position amounts to "It might not work, but we might as well try this, along with fiscal policy." ( As a card-carrying Keynesian, Krugman has a lot more faith in fiscal policy to do the job with interest rates at zero.) In other words, it's a hope with pretty limited downside. Inflation targeting also has the added benefit of not being the exact opposite of what textbook economics says you should do when the economy suffers from insufficient demand (like, you know, contractionary fiscal policy).
Shockingly, I come down in the second camp. I have no clue how effective NGDP/inflation targeting can be, but I figure, as long as the economy is depressed, there's no reason not to try. It's a hope, but it's a hope that we might as well try. On the other hand, summoning confidence through expansionary austerity, for a lot of people, was a plan. And it was a plan that, predictably, was a very human disaster. And for that, those who pushed it should be ashamed.
Tuesday, March 5, 2013
Kobe beats aging
I'm not old, but I've been an NBA fan since forever. I first got into the league right before Michael Jordan came back (the first time he came back, not the time he crawled back onto the floor, barely made it up and down the court, but still averaged 20 by (re) inventing the pump fake).
The game's changed some since then, but one thing's remained pretty constant: players age, their athleticism wears away, and they have to reinvent themselves. It happened to Jordan, who came into the league as one of the best athletes the game had ever seen, then turned himself into the best all-around player of all time, so much so that people hardly noticed that, by the end of the Bulls' second three-peat, he was barely an average (by NBA standards) athlete. And a lot of other guys who were dominant late in their careers were similarly athletic. Remember when Shaq used to run the break?
Then Shaq got old and fat, became a Phoenix Sun, and the rest was history. One thing that hasn't changed about aging, though, is that it tends to run one way. Sure, a guy like Grant Hill can come back from 4 years of ankle purgatory and become a serviceable player again, but the Grant Hill of the last few years looks nothing like the super-athletic Scottie Pippen clone who came into the league way back in the day. Even in the best cases (like Jordan's), guys who lose some athleticism find ways to compensate in other ways. Typically, by age 32 or 33, if a shooting guard is effective, it's because he's got amazing balance, a lights-out stroke, and a ton of smarts. Which is what makes what Kobe Bryant's been doing this year so ridiculous.
Now, when Kobe came into the league, he was an athletic specimen. Still raw at that point, but he was a Jordan-Vince Carter-level athlete. Remember this?
Well, over the years, Kobe got older. Coming into the league at 18, he had even more tread on his tires than guys like Jordan who spent 3 years playing 30-game seasons in college. So when Kobe hit his 30s, it was inevitable that he'd slow down. And he did. Instead of dunking over guys, he got his shot punched by Darko Milicic. And when you get your shot punched by Darko, you know you're over the hill athletically.
So, like every NBA fan, I expected Kobe to turn into a lite version of mid-30s Jordan (just like Kobe in the last decade was a lite version of late-20s Jordan). He'd pump fake his way to 25 points a night, struggle to elevate at the rim (if he even tried) and eventually find his body failing him. Which is what happened for awhile.
Then this season happened. At first Kobe just looked like he was having a super-efficient season. He was dropping close to 30 points a night, shooting near 50%, and carrying a shallow Lakers team on his back (at least offensively). Then, slowly, it became clear that this wasn't a typical 34-year old superstar type of efficiency. This was Kobe somehow reversing the aging process, and the highlight videos started to show it. First, he turned the corner and threw it down over Gerald Wallace and Kris Humphries (nee Kardashian) in Brooklyn.
But Wallace is getting older (and has clearly been fading as an athlete) and Kardashian stinks. So I took it with a grain of salt until this happened.
Now, Kobe didn't exactly go over him, but that's Josh Smith he went by for the dunk. Josh Smith isn't old (27) and he's still one of the best athletes in the NBA. Simply, he gets up HIGH. And Kobe, at 34, managed to throw down after going by him. That's impressive for a 24 year old, much less a 34 year old.
So what's going on with Kobe? How did he manage to reverse the aging process? Well, part of it is no doubt that he works hard. But that's not unique-- Jordan worked at least as hard, and he wasn't dunking on Kevin Garnett in 98. And part of it is probably that platelet-rich therapy treatment he got for his knee that's supposedly done wonders for him. But he's not the only one that's had that treatment, and Tiger Woods and A-Rod haven't exactly returned to peak form after getting the treatment, despite playing FAR less physically demanding sports. So is Kobe just a genetic freak like Adrian Peterson; a guy whose body works differently from yours and mine and can absorb a pounding infinitely better? Maybe.
But the return of Kobe's athleticism strikes me as possibly the vanguard of a new age of sports, where guys can perform at an elite level physically for much longer than guys of the previous generation. That possibility at least deserves consideration.
The game's changed some since then, but one thing's remained pretty constant: players age, their athleticism wears away, and they have to reinvent themselves. It happened to Jordan, who came into the league as one of the best athletes the game had ever seen, then turned himself into the best all-around player of all time, so much so that people hardly noticed that, by the end of the Bulls' second three-peat, he was barely an average (by NBA standards) athlete. And a lot of other guys who were dominant late in their careers were similarly athletic. Remember when Shaq used to run the break?
Then Shaq got old and fat, became a Phoenix Sun, and the rest was history. One thing that hasn't changed about aging, though, is that it tends to run one way. Sure, a guy like Grant Hill can come back from 4 years of ankle purgatory and become a serviceable player again, but the Grant Hill of the last few years looks nothing like the super-athletic Scottie Pippen clone who came into the league way back in the day. Even in the best cases (like Jordan's), guys who lose some athleticism find ways to compensate in other ways. Typically, by age 32 or 33, if a shooting guard is effective, it's because he's got amazing balance, a lights-out stroke, and a ton of smarts. Which is what makes what Kobe Bryant's been doing this year so ridiculous.
Now, when Kobe came into the league, he was an athletic specimen. Still raw at that point, but he was a Jordan-Vince Carter-level athlete. Remember this?
Well, over the years, Kobe got older. Coming into the league at 18, he had even more tread on his tires than guys like Jordan who spent 3 years playing 30-game seasons in college. So when Kobe hit his 30s, it was inevitable that he'd slow down. And he did. Instead of dunking over guys, he got his shot punched by Darko Milicic. And when you get your shot punched by Darko, you know you're over the hill athletically.
So, like every NBA fan, I expected Kobe to turn into a lite version of mid-30s Jordan (just like Kobe in the last decade was a lite version of late-20s Jordan). He'd pump fake his way to 25 points a night, struggle to elevate at the rim (if he even tried) and eventually find his body failing him. Which is what happened for awhile.
Then this season happened. At first Kobe just looked like he was having a super-efficient season. He was dropping close to 30 points a night, shooting near 50%, and carrying a shallow Lakers team on his back (at least offensively). Then, slowly, it became clear that this wasn't a typical 34-year old superstar type of efficiency. This was Kobe somehow reversing the aging process, and the highlight videos started to show it. First, he turned the corner and threw it down over Gerald Wallace and Kris Humphries (nee Kardashian) in Brooklyn.
But Wallace is getting older (and has clearly been fading as an athlete) and Kardashian stinks. So I took it with a grain of salt until this happened.
Now, Kobe didn't exactly go over him, but that's Josh Smith he went by for the dunk. Josh Smith isn't old (27) and he's still one of the best athletes in the NBA. Simply, he gets up HIGH. And Kobe, at 34, managed to throw down after going by him. That's impressive for a 24 year old, much less a 34 year old.
So what's going on with Kobe? How did he manage to reverse the aging process? Well, part of it is no doubt that he works hard. But that's not unique-- Jordan worked at least as hard, and he wasn't dunking on Kevin Garnett in 98. And part of it is probably that platelet-rich therapy treatment he got for his knee that's supposedly done wonders for him. But he's not the only one that's had that treatment, and Tiger Woods and A-Rod haven't exactly returned to peak form after getting the treatment, despite playing FAR less physically demanding sports. So is Kobe just a genetic freak like Adrian Peterson; a guy whose body works differently from yours and mine and can absorb a pounding infinitely better? Maybe.
But the return of Kobe's athleticism strikes me as possibly the vanguard of a new age of sports, where guys can perform at an elite level physically for much longer than guys of the previous generation. That possibility at least deserves consideration.
Tuesday, December 4, 2012
RG3 and "System Quarterbacks"
For the third week in a row, the Redskins pulled out a divisional win, and this one was the biggest of them all: 17-16 against the defending Super Bowl champ Giants. The Skins' amazing rookie quarterback Robert Griffin III didn't quite put up the numbers he did in the previous wins against the Cowboys and the Eagles-- he only threw for 163 yards and, though he ran for another 72 and didn't turn the ball over, the Skins only put up 17 points, compared to 38 against Dallas and 31 against Philly.
But one part of the commentary that irritated me was the announcers' insistence that RGIII is a "system" quarterback who is only succeeding because Mike Shanahan put him in the right circumstances to succeed. The implication is that, if you stick him in the Colts system or the Giants system, he wouldn't be as effective. That perspective, to me, screams not just ignorance but a kind of subtle racism-- that RGIII is a gimmick, like Tim Tebow, who succeeds because teams aren't prepared for the skill set he brings to the table.
By that standard, there literally isn't a single quarterback in NFL history who wasn't a system quarterback. It's true that Griffin, at this point, can't call his own plays and make adjustments at the line like Peyton Manning. But let's be honest: no one can. What those same critics never mention is that I can more or less guarantee that Griffin would perform much better in the Colts or Broncos systems than Manning would running the West Coast offense the skins run. Yet somehow what Manning does is "real" quarterbacking while what RGIII does is "system" quarterbacking. Now, it's true that there are certain styles or systems that have a surprise element that throws teams off-- the Wildcat worked for a bit a few seasons ago, and now no one uses it. Tim Tebow won a bunch of games last year, but has been utterly useless when he's gotten to see the field for the Jets. And there's a good reason no team in the NFL runs a Navy-style triple option offense. But quarterbacks all have different strengths, and every single system in the NFL is designed to play to those strengths.
And it's not like Griffin is a beneficiary of great talent around him; Alfred Morris was a great find in the 6th round of the draft, but the talent on offense is, across the board, below average. The offensive line stinks (just watch how quickly the pocket collapses on Griffin, which explains why Shanahan rolls him out so often), the best target in the passing game is out for the season with a torn Achilles, and the receivers are mediocre at best. Yet, somehow, the Skins are 8th in the league in total offense, and Griffin has a better passer rating than anyone not named Peyton Manning and Aaron Rodgers (and he's barely a half-point off Rodgers for the league lead). The best comparison for Griffin isn't Tebow, who is obviously not an NFL passer, or Michael Vick, who completed more than 60% of his passes exactly twice and had notable issues with his work ethic, but Steve Young, who was both a great athlete and a great quarterback. But (and here's the racial element) has anyone ever called Young a system quarterback because he played in the West Coast offense?
There's no doubt that RG3's had a great rookie year, but it's not because he's some kind of novelty who Mike Shanahan masterfully turned into a respectable quarterback. It's because he has, in his own way, an elite skill set, and was put in a position to be successful (despite having a mediocre, at best, supporting cast around him!) by the coaching staff. Calling him a system quarterback is like calling Wes Welker a system receiver because he runs primarily short routes and doesn't catch jump balls-- it's silly. Griffin is performing because he's smart, he's got a live, accurate arm, and, yes, because he's a great athlete. But claiming that he's some kind of "system" player because he doesn't throw deep 10 times a game (To who? Aldrick Robinson?) is mind-numbing.
But one part of the commentary that irritated me was the announcers' insistence that RGIII is a "system" quarterback who is only succeeding because Mike Shanahan put him in the right circumstances to succeed. The implication is that, if you stick him in the Colts system or the Giants system, he wouldn't be as effective. That perspective, to me, screams not just ignorance but a kind of subtle racism-- that RGIII is a gimmick, like Tim Tebow, who succeeds because teams aren't prepared for the skill set he brings to the table.
By that standard, there literally isn't a single quarterback in NFL history who wasn't a system quarterback. It's true that Griffin, at this point, can't call his own plays and make adjustments at the line like Peyton Manning. But let's be honest: no one can. What those same critics never mention is that I can more or less guarantee that Griffin would perform much better in the Colts or Broncos systems than Manning would running the West Coast offense the skins run. Yet somehow what Manning does is "real" quarterbacking while what RGIII does is "system" quarterbacking. Now, it's true that there are certain styles or systems that have a surprise element that throws teams off-- the Wildcat worked for a bit a few seasons ago, and now no one uses it. Tim Tebow won a bunch of games last year, but has been utterly useless when he's gotten to see the field for the Jets. And there's a good reason no team in the NFL runs a Navy-style triple option offense. But quarterbacks all have different strengths, and every single system in the NFL is designed to play to those strengths.
And it's not like Griffin is a beneficiary of great talent around him; Alfred Morris was a great find in the 6th round of the draft, but the talent on offense is, across the board, below average. The offensive line stinks (just watch how quickly the pocket collapses on Griffin, which explains why Shanahan rolls him out so often), the best target in the passing game is out for the season with a torn Achilles, and the receivers are mediocre at best. Yet, somehow, the Skins are 8th in the league in total offense, and Griffin has a better passer rating than anyone not named Peyton Manning and Aaron Rodgers (and he's barely a half-point off Rodgers for the league lead). The best comparison for Griffin isn't Tebow, who is obviously not an NFL passer, or Michael Vick, who completed more than 60% of his passes exactly twice and had notable issues with his work ethic, but Steve Young, who was both a great athlete and a great quarterback. But (and here's the racial element) has anyone ever called Young a system quarterback because he played in the West Coast offense?
There's no doubt that RG3's had a great rookie year, but it's not because he's some kind of novelty who Mike Shanahan masterfully turned into a respectable quarterback. It's because he has, in his own way, an elite skill set, and was put in a position to be successful (despite having a mediocre, at best, supporting cast around him!) by the coaching staff. Calling him a system quarterback is like calling Wes Welker a system receiver because he runs primarily short routes and doesn't catch jump balls-- it's silly. Griffin is performing because he's smart, he's got a live, accurate arm, and, yes, because he's a great athlete. But claiming that he's some kind of "system" player because he doesn't throw deep 10 times a game (To who? Aldrick Robinson?) is mind-numbing.
Thursday, November 8, 2012
Markets hate Obama right? Nope
As the really serious news followers might know, President Obama was re-elected on Tuesday. Shockingly, some people who voted against Obama weren't too happy. Facebook intellectuals yelled about socialism, America going down the toilet, etc. A few fratstars at the University of Mississippi sobered up long enough to realize that Obama was re-elected president of the South too. So they went to their student union and started dropping N-bombs (bad look, Mississippi fratstars). Ted Nugent wrote something on Twitter about the tears of blood he was crying, or something like that. Needless to say, the really intellectual media was more serious. They focused on the next day, when markets experienced their biggest one-day drop of the year. "See! Obama is bad for the economy!", they yelled. Or, at the least, they took for granted the idea that markets tanked in response to Obama's re-election. This wasn't just a right-wing or mainstream-media meme; the left's typical response to markets moving in a way they don't like is either that markets don't benefit the working class anyway (not really true) or that we shouldn't care what Wall Street thinks because finance and bankers are evil. The problem with this narrative is that it's as badly wrong as it is prevalent.
The first thing to note is that markets participants aren't stupid. Markets can be, and often are, systemically inefficient. An entire sector of the economy (real estate) was overpriced for years. Right after another (tech stocks) was also overpriced for years. The Ron Paul followers will yell that the market was efficient and it was all the Federal Reserve's fault because interest rates were too low. That's wrong. But the point is that markets aren't dumber than the rest of us-- they can look at movements in markets and economic indicators, calculate probabilities, and price the impact that events might have into what they'll pay for an asset, or the amount for which they'll sell an asset. Now, that doesn't mean markets are right-- if markets shoot up in response to a particular policy or crater in response to another policy (or a likelihood of someone being elected), it doesn't mean that they're right; it just reflects their expectations, which may well be wrong. But the question isn't whether markets are right to love or hate Obama-- it's whether markets reacted yesterday to Obama's election on Tuesday. And the answer to that is pretty clearly "no".
The second thing to note is that the election wasn't that close. Sure, Obama won a somewhat narrow popular vote victory, but the media's obsession with "momentum" and particular polls largely obscured what anyone who can read data (and that most certainly includes Wall Street traders and hedge fund managers) already knew-- that anything but an Obama victory on Tuesday would have been a major surprise. As hard as the National Review, Fox, George Will and Dick Morris tried to pretend it was otherwise, the odds of Obama winning the election haven't dipped below 60% in a long time. Going into election day, all of the relevant number crunchers (statisticians at universities, bloggers like Nate Silver, etc.) put the odds of an Obama electoral victory at well over 90%. The main stream media, not to mention the right-wing echo chamber, liked to pretend that, because most of these number crunchers are personally left-leaning, their poll numbers must be biased. Which (again) is wrong. The wishful-thinkers yelled that Romney was winning independents (ignoring that "independents" in this election were, in large part, Tea Party folks who called themselves independents, then voted straight Republican, while a lot of previous independents became Democrats) and that turnout would be lower than it was in 2008 (as if Silver's turnout model was wishful thinking). In reality, though, liberal members of the media aren't like the Fox News folks-- they think of tabulating numbers as an exercise in math, not partisanship. Because, really, what good does believing your guy will win do? It might make it easier to sleep at night, but then you still have to confront reality. And then, when that reality looks different from what you predicted, you end up looking like a fool. Like George Will, Dick Morris and Michael Barone, who all predicted a Romney victory with over 300 electoral votes and came out with egg on their faces. Most interestingly, if you look at that link, left-leaning predictions mostly skewed toward the low end-- the ones who got the electoral math precisely right weren't Democratic pundits-- they were number-crunchers like Silver, Davidson College's Josh Putnam, and Princeton's Sam Wang. (Incidentally, a lot of people on the left like to pretend that Silver is some kind of wizard; he's not-- he just has a rather good, but far from unique, model for crunching poll data compiled by others).
So anyone looking at the numbers realized that anything but an Obama victory on Tuesday was unlikely (though, obviously, not impossible). And Wall Street types who have money on the line in the market don't much care who they hope wins the election when it comes to putting money in the market-- they care about who WILL win the election. And they knew as well as Nate Silver that it was almost definitely going to be Obama. Another useful way to think of it is as a probability. Say you can bet on a roll of a 10-sided die; any number 1-9 pays you $1000, and a 10 means you get nothing. Mathematically, you should pay $900 for a roll. Now imagine the game changes and a 9 becomes a losing roll. Now, you should pay $800. In electoral terms, Obama winning the election meant a move from a 90% probability of getting paid to a 100% probability. But the price of the roll only changed by 10%. In that scenario, a 2.5% swing in the stock market by reason of an event with 95% probability occurring is completely irrational. Yet that's what happened when Obama went from 95% certain to win the election to 100% certain-- Wall Street knew perfectly well that he was almost certainly going to win the election on Monday, so any change after the election would reflect only the cementing of a highly likely outcome.
Which begs the question: what DID move the market on Wednesday? It's probably not noise trading; one-day swings can and do happen, but the likelihood of that big a swing coming on the day after the election, especially when no particularly ground-breaking news came out of Europe means that markets were likely reacting to something that happened on election day. And my best guess is that they were reacting to the impact of the balance of power on negotiations over January's fiscal cliff. And I think that has something to do with the outcome of the House vote. Now, it's important to note that it's a lot easier to call a presidential race than an aggregated balance of power in a whole bunch of House races; if the margin of error in one or two states swings from one candidate to another, it will rarely decide the entire election. Put another way, Nate Silver was about 95% sure Obama would win the election, but he was only about 52% sure that Obama would win Florida. In the grand picture, though, that would be irrelevant. Obama will almost certainly win Florida... but even if he loses Florida, he will still be president. Meanwhile, in a particular House race, a 52% chance of a particular candidate winning actually means that a different person will represent the district. Combine that with the fact that people generally spend less time thinking about who they'll vote for in the House compared to the presidency or even the Senate, and you've got polling data that's substantially less reliable and less certain. So pollsters and markets knew with a high degree of confidence that Obama would almost certainly be President, and that the Senate would stay narrowly democratic (while the balance is probably slightly more favorable to Democrats than might have been expected, there's not a substantive difference in policy between a 54-46 Democratic majority and a 52-48 Democratic majority.
Which leaves the House. It was always highly likely that Republicans would keep control of the House. The question was what kind of majority they would enjoy. A bigger majority would be interpreted as a mandate to resist hiking top marginal rates at all costs and keep playing the obstructionist game. A narrower majority would have handed power to those who are interested in compromising on tax rates, while a majority that looked like the previous one would be interpreted by the Tea Party fringe as a sign that no tax hikes are ever acceptable (and yes, that's a fringe position that makes no sense). What further complicates it is that the President is actually in a rather strong bargaining position. If the country DOES go over the fiscal cliff, the uncertainty that creates will jar markets (and, later, if the tax hikes and spending cuts actually take place, contract the economy), but it will also put the Tea Party in an odd negotiating position. If the country does go over the fiscal cliff, and the President proposes a tax cut for all incomes under $250,000, the Tea Party will find itself either having to go along or holding up a tax cut for everyone just because they won't also get tax cuts for the wealthy. Politically, that's an ugly position to take. And it puts the President in a powerful bargaining position.
So I think it's the (still rather extreme) makeup of the House, and the Tea Party's ability (and possible willingness) to hold a deal hostage in order to get the tax cuts they want that drove markets down. That's more amateur political science than anything else, so it may just be a stab in the dark. But what is certain is that, if someone declares that markets tanked yesterday because Obama was re-elected, they're wrong.
The first thing to note is that markets participants aren't stupid. Markets can be, and often are, systemically inefficient. An entire sector of the economy (real estate) was overpriced for years. Right after another (tech stocks) was also overpriced for years. The Ron Paul followers will yell that the market was efficient and it was all the Federal Reserve's fault because interest rates were too low. That's wrong. But the point is that markets aren't dumber than the rest of us-- they can look at movements in markets and economic indicators, calculate probabilities, and price the impact that events might have into what they'll pay for an asset, or the amount for which they'll sell an asset. Now, that doesn't mean markets are right-- if markets shoot up in response to a particular policy or crater in response to another policy (or a likelihood of someone being elected), it doesn't mean that they're right; it just reflects their expectations, which may well be wrong. But the question isn't whether markets are right to love or hate Obama-- it's whether markets reacted yesterday to Obama's election on Tuesday. And the answer to that is pretty clearly "no".
The second thing to note is that the election wasn't that close. Sure, Obama won a somewhat narrow popular vote victory, but the media's obsession with "momentum" and particular polls largely obscured what anyone who can read data (and that most certainly includes Wall Street traders and hedge fund managers) already knew-- that anything but an Obama victory on Tuesday would have been a major surprise. As hard as the National Review, Fox, George Will and Dick Morris tried to pretend it was otherwise, the odds of Obama winning the election haven't dipped below 60% in a long time. Going into election day, all of the relevant number crunchers (statisticians at universities, bloggers like Nate Silver, etc.) put the odds of an Obama electoral victory at well over 90%. The main stream media, not to mention the right-wing echo chamber, liked to pretend that, because most of these number crunchers are personally left-leaning, their poll numbers must be biased. Which (again) is wrong. The wishful-thinkers yelled that Romney was winning independents (ignoring that "independents" in this election were, in large part, Tea Party folks who called themselves independents, then voted straight Republican, while a lot of previous independents became Democrats) and that turnout would be lower than it was in 2008 (as if Silver's turnout model was wishful thinking). In reality, though, liberal members of the media aren't like the Fox News folks-- they think of tabulating numbers as an exercise in math, not partisanship. Because, really, what good does believing your guy will win do? It might make it easier to sleep at night, but then you still have to confront reality. And then, when that reality looks different from what you predicted, you end up looking like a fool. Like George Will, Dick Morris and Michael Barone, who all predicted a Romney victory with over 300 electoral votes and came out with egg on their faces. Most interestingly, if you look at that link, left-leaning predictions mostly skewed toward the low end-- the ones who got the electoral math precisely right weren't Democratic pundits-- they were number-crunchers like Silver, Davidson College's Josh Putnam, and Princeton's Sam Wang. (Incidentally, a lot of people on the left like to pretend that Silver is some kind of wizard; he's not-- he just has a rather good, but far from unique, model for crunching poll data compiled by others).
So anyone looking at the numbers realized that anything but an Obama victory on Tuesday was unlikely (though, obviously, not impossible). And Wall Street types who have money on the line in the market don't much care who they hope wins the election when it comes to putting money in the market-- they care about who WILL win the election. And they knew as well as Nate Silver that it was almost definitely going to be Obama. Another useful way to think of it is as a probability. Say you can bet on a roll of a 10-sided die; any number 1-9 pays you $1000, and a 10 means you get nothing. Mathematically, you should pay $900 for a roll. Now imagine the game changes and a 9 becomes a losing roll. Now, you should pay $800. In electoral terms, Obama winning the election meant a move from a 90% probability of getting paid to a 100% probability. But the price of the roll only changed by 10%. In that scenario, a 2.5% swing in the stock market by reason of an event with 95% probability occurring is completely irrational. Yet that's what happened when Obama went from 95% certain to win the election to 100% certain-- Wall Street knew perfectly well that he was almost certainly going to win the election on Monday, so any change after the election would reflect only the cementing of a highly likely outcome.
Which begs the question: what DID move the market on Wednesday? It's probably not noise trading; one-day swings can and do happen, but the likelihood of that big a swing coming on the day after the election, especially when no particularly ground-breaking news came out of Europe means that markets were likely reacting to something that happened on election day. And my best guess is that they were reacting to the impact of the balance of power on negotiations over January's fiscal cliff. And I think that has something to do with the outcome of the House vote. Now, it's important to note that it's a lot easier to call a presidential race than an aggregated balance of power in a whole bunch of House races; if the margin of error in one or two states swings from one candidate to another, it will rarely decide the entire election. Put another way, Nate Silver was about 95% sure Obama would win the election, but he was only about 52% sure that Obama would win Florida. In the grand picture, though, that would be irrelevant. Obama will almost certainly win Florida... but even if he loses Florida, he will still be president. Meanwhile, in a particular House race, a 52% chance of a particular candidate winning actually means that a different person will represent the district. Combine that with the fact that people generally spend less time thinking about who they'll vote for in the House compared to the presidency or even the Senate, and you've got polling data that's substantially less reliable and less certain. So pollsters and markets knew with a high degree of confidence that Obama would almost certainly be President, and that the Senate would stay narrowly democratic (while the balance is probably slightly more favorable to Democrats than might have been expected, there's not a substantive difference in policy between a 54-46 Democratic majority and a 52-48 Democratic majority.
Which leaves the House. It was always highly likely that Republicans would keep control of the House. The question was what kind of majority they would enjoy. A bigger majority would be interpreted as a mandate to resist hiking top marginal rates at all costs and keep playing the obstructionist game. A narrower majority would have handed power to those who are interested in compromising on tax rates, while a majority that looked like the previous one would be interpreted by the Tea Party fringe as a sign that no tax hikes are ever acceptable (and yes, that's a fringe position that makes no sense). What further complicates it is that the President is actually in a rather strong bargaining position. If the country DOES go over the fiscal cliff, the uncertainty that creates will jar markets (and, later, if the tax hikes and spending cuts actually take place, contract the economy), but it will also put the Tea Party in an odd negotiating position. If the country does go over the fiscal cliff, and the President proposes a tax cut for all incomes under $250,000, the Tea Party will find itself either having to go along or holding up a tax cut for everyone just because they won't also get tax cuts for the wealthy. Politically, that's an ugly position to take. And it puts the President in a powerful bargaining position.
So I think it's the (still rather extreme) makeup of the House, and the Tea Party's ability (and possible willingness) to hold a deal hostage in order to get the tax cuts they want that drove markets down. That's more amateur political science than anything else, so it may just be a stab in the dark. But what is certain is that, if someone declares that markets tanked yesterday because Obama was re-elected, they're wrong.
Sunday, November 4, 2012
The case against Mitt Romney
With an election in two days away, just about everyone has made up their mind about who they'll vote for. While the case for re-electing the President would take up a whole different post, I think one thing that's important to look at is the alternative. The question isn't whether Barack Obama has been a great president, or whether he's lived up to the hopes a lot of people had for him in 2008 (which were unrealistic to start with), but whether we'll be better off with him in office than the alternative. And I strongly believe that we will be.
There are a lot of different lines of attack that the Obama campaign has used against the Romney camp. Some I've found persuasive. Others, less so. In all honesty, as far as the Republican primary candidates go, Romney was about as well as the Republican electorate could have done. Unlike his rivals for the nomination, he's not some combination of stupid, crazy, and inept (or, really, all three; Newt Gingrich has a wildly undeserved reputation for being an "idea man"-- he counts if you include the caveat that all of his ideas are really really bad). He's been a hugely effective manager in the past. And he's surrounded himself with people who have, at some point, been very competent thinkers (though Glenn Hubbard, John Taylor and, to a lesser extent, Greg Mankiw have, at points, done their best to play dumb to advance "the cause").
As the Washington Post's very good blogger Ezra Klein notes, Romney is data-driven and analytical-- he's not a fire-breathing true believer like Gingrich or Paul Ryan, and he tends to change his mind about just about everything (which is how his Massachusetts health care reform went from being a model for the nation in 2007 to a government takeover of the economy in 2012). Some people call that flip-flopping, and that's certainly a valid case when it comes to questions of values, but I'd argue that someone who doesn't change their mind if their views turn out to be wrong is dogmatic, not principled. And I'd even believe that his choice of an ideologue for a running mate was a reflection not of Romney suddenly going nuts, but of him looking at the polls and figuring out that he needed to appeal to the hard right to have a chance in the election.
So I've argued that I think Romney is smart and competent and an effective problem-solver. But I still think he's the wrong person to lead the country. Here's why. Being an effective problem solver is great. But the presidency is less of a problem solving exercise than people like to think. A whole lot of what the president does is set an agenda. And setting that agenda requires someone who can figure out what the nation's problems are. While Romney may be an especially competent manager, I also think he's almost uniquely out of touch from people's concerns. And that's reflected pretty clearly when he speaks off the cuff. From talking about 47% of the nation being "dependent on handouts" to talking offhand about how anyone can start a business by "getting a loan from their parents", Romney has a deeply warped view of the reality that most people face.
This view comes, in large part, from Romney's extraordinarily privileged background. This recent piece in the New Republic from Noam Scheiber does a very good job getting to the heart of the Romneys' family mythology. Mitt genuinely seems to believe that he earned everything he has from scratch. And while he certainly deserves credit for building a hugely successful private equity firm, Romney is the quintessential example of someone who was born on third base but believes that he hit a homerun. He was born to a chief executive who ran for president. He attended an elite private high school in Michigan, had not just his college education, but also his joint JD/MBA from Harvard and all of his expenses paid for. He certainly deserves credit for apparently giving away the rest of his inheritance and building his own fortune. But he wants to ignore the advantages he was born with. As children of the 1% go, Romney certainly did more on his own than most. But that doesn't take away from the simple fact that, as a child of the 1%, he had opportunities most Americans can only dream of.
Scheiber's piece about Romney's son reflects a similar perspective. Tagg Romney is convinced that he built a private equity firm from scratch. The reality is that what Tagg Romney runs is a fund of funds-- while the elder Romney's Bain Capital is a traditional private equity firm that invests in and sometimes acquires companies, Tagg Romney's Solamere invests in other private equity firms. While firms like Blackstone, KKR and Bain Capital sell expertise, Solamere sells access. The average person, for instance, can't plant their money with these elite firms, no matter how much they might want to (and they would absolutely want to-- during Romney's tenure at Bain, the firm returned almost 90% annually to investors); the overhead required for these firms to take in investors who have $10,000 or $100,000 or even $1 million isn't worth the money. So Solamere pools these smaller investors' money and places it with these bigger firms; the result is that investors who otherwise wouldn't be able to invest in KKR or Bain otherwise have a way to do so. But this strategy rests on... Tagg Romney's connections. Which come from his father.
So the best reason to vote against Mitt Romney that I can think of, more than him being the nominee of a reactionary, extremist party, is that he's running for president of an America that doesn't exist-- an America where struggling college grads who want to start a business can borrow from their parents. Where "struggling" means selling off your inheritance after finishing a grad degree. Where fantastic success is hard... but living comfortably is a default. Governing the country Romney imagines, where people's biggest problem is a president who might hike their taxes or not appreciate them enough for their wealth, would be easy. Governing the one we have is hard. Because I think Barack Obama understands the country we have, I'll be casting my ballot for him on Tuesday.
There are a lot of different lines of attack that the Obama campaign has used against the Romney camp. Some I've found persuasive. Others, less so. In all honesty, as far as the Republican primary candidates go, Romney was about as well as the Republican electorate could have done. Unlike his rivals for the nomination, he's not some combination of stupid, crazy, and inept (or, really, all three; Newt Gingrich has a wildly undeserved reputation for being an "idea man"-- he counts if you include the caveat that all of his ideas are really really bad). He's been a hugely effective manager in the past. And he's surrounded himself with people who have, at some point, been very competent thinkers (though Glenn Hubbard, John Taylor and, to a lesser extent, Greg Mankiw have, at points, done their best to play dumb to advance "the cause").
As the Washington Post's very good blogger Ezra Klein notes, Romney is data-driven and analytical-- he's not a fire-breathing true believer like Gingrich or Paul Ryan, and he tends to change his mind about just about everything (which is how his Massachusetts health care reform went from being a model for the nation in 2007 to a government takeover of the economy in 2012). Some people call that flip-flopping, and that's certainly a valid case when it comes to questions of values, but I'd argue that someone who doesn't change their mind if their views turn out to be wrong is dogmatic, not principled. And I'd even believe that his choice of an ideologue for a running mate was a reflection not of Romney suddenly going nuts, but of him looking at the polls and figuring out that he needed to appeal to the hard right to have a chance in the election.
So I've argued that I think Romney is smart and competent and an effective problem-solver. But I still think he's the wrong person to lead the country. Here's why. Being an effective problem solver is great. But the presidency is less of a problem solving exercise than people like to think. A whole lot of what the president does is set an agenda. And setting that agenda requires someone who can figure out what the nation's problems are. While Romney may be an especially competent manager, I also think he's almost uniquely out of touch from people's concerns. And that's reflected pretty clearly when he speaks off the cuff. From talking about 47% of the nation being "dependent on handouts" to talking offhand about how anyone can start a business by "getting a loan from their parents", Romney has a deeply warped view of the reality that most people face.
This view comes, in large part, from Romney's extraordinarily privileged background. This recent piece in the New Republic from Noam Scheiber does a very good job getting to the heart of the Romneys' family mythology. Mitt genuinely seems to believe that he earned everything he has from scratch. And while he certainly deserves credit for building a hugely successful private equity firm, Romney is the quintessential example of someone who was born on third base but believes that he hit a homerun. He was born to a chief executive who ran for president. He attended an elite private high school in Michigan, had not just his college education, but also his joint JD/MBA from Harvard and all of his expenses paid for. He certainly deserves credit for apparently giving away the rest of his inheritance and building his own fortune. But he wants to ignore the advantages he was born with. As children of the 1% go, Romney certainly did more on his own than most. But that doesn't take away from the simple fact that, as a child of the 1%, he had opportunities most Americans can only dream of.
Scheiber's piece about Romney's son reflects a similar perspective. Tagg Romney is convinced that he built a private equity firm from scratch. The reality is that what Tagg Romney runs is a fund of funds-- while the elder Romney's Bain Capital is a traditional private equity firm that invests in and sometimes acquires companies, Tagg Romney's Solamere invests in other private equity firms. While firms like Blackstone, KKR and Bain Capital sell expertise, Solamere sells access. The average person, for instance, can't plant their money with these elite firms, no matter how much they might want to (and they would absolutely want to-- during Romney's tenure at Bain, the firm returned almost 90% annually to investors); the overhead required for these firms to take in investors who have $10,000 or $100,000 or even $1 million isn't worth the money. So Solamere pools these smaller investors' money and places it with these bigger firms; the result is that investors who otherwise wouldn't be able to invest in KKR or Bain otherwise have a way to do so. But this strategy rests on... Tagg Romney's connections. Which come from his father.
So the best reason to vote against Mitt Romney that I can think of, more than him being the nominee of a reactionary, extremist party, is that he's running for president of an America that doesn't exist-- an America where struggling college grads who want to start a business can borrow from their parents. Where "struggling" means selling off your inheritance after finishing a grad degree. Where fantastic success is hard... but living comfortably is a default. Governing the country Romney imagines, where people's biggest problem is a president who might hike their taxes or not appreciate them enough for their wealth, would be easy. Governing the one we have is hard. Because I think Barack Obama understands the country we have, I'll be casting my ballot for him on Tuesday.
Tuesday, August 28, 2012
Two kinds of stupid
It's almost fall, which means election season is fully in gear. Which is too bad-- I hate election season. Instead of Bud Light ads, the TV's looping ads with messages approved by Barack Obama and Mitt Romney. When they come on, I change the channel.
But the press has been filled with the typical cycle of politicians putting their feet in their collective mouths. The theme this time around is Tea Party representatives'... questionable grasp of female anatomy. You've got Todd Akin declaring that women who are "legitimately raped" don't get pregnant (apparently, he learned everything he knows about women from this documentary). Then there's Stephen King (the representative, not the Cujo author), who says women can't get pregnant from statutory rape or incest (Rep. King needs to catch up on his Game of Thrones; then he'd know that one's also not very true). And that's the core of the 55-year-old virgin wing of the Republican Party. They're kinda crazy. And kinda ignorant. But everyone knew that already.
The contrast to that end of the party is supposed to be what the media likes to dub the "serious" end. The supposed leaders of that faction are people like Chris Christie and Paul Ryan, who claim to be fiscally responsible, and who the media loves. The existence of the Akin-King axis lets the media play the balanced card-- some Republicans are nuts, they declare, but there are plenty who aren't. And Romney's choice of Paul Ryan is a sign, they say, that we're going to have a "serious" campaign between "competing ideas". Because, you know, Ryan has a serious vision that we should pay attention to. The problem with this narrative, of course, is that it's complete nonsense. In their own way, Romney and Christie are just as nuts and just as un-serious as Akin and King. Here's why.
To start with, the distinction the media likes to draw isn't as clean as they tend to like to pretend. For starters, Ryan is a card-carrying member of the "Sperm Are People Too" club. But that's not what makes his ideas nutty. It's the very ideas that the media likes to trumpet as "serious" that are a complete house of cards. The reason behind that, I think, has to do with the people who become journalists. By and large, journalists are reasonably smart people. But they're journalists because they like words. Throw numbers are them, and their eyes glaze over, they get chills, and their brain shuts down. Which is why they swoon any time a politician throws numbers at them, assuming that the politician must know what s/he's talking about because there are a lot of digits on that spreadsheet, and that must mean that they're smart.
This is what happened with Paul Ryan's "budget". It gets quotation marks because calling it a budget is a joke. Normally, when you put together a long-term budget, you specify changes to certain programs; you expand or contract different parts of the government, raise some taxes, cut others, and create an approximation of how you see the federal budget going forward. The further out you go, of course, the less accurate it is, but it provides something of a vision for a big picture. Ryan's "budget" makes a mockery of all that. It's got numbers, sure. But the way you normally get those numbers is to make specific policy recommendations and then apply those to the numbers.
Ryan budgeting works the other way around-- make up numbers, without specifying how you get there. Yes, it's as deeply stupid as it sounds. It's the equivalent of asking a basketball coach how he plans to win a game, and getting "We plan to score more points than the other team" in response. It's true, maybe, but it's not a response-- it's an insult to the reader's intelligence. Ryan got the CBO to "score" his budget, to give it an air of legitimacy. But this, too, was an exercise in deception. Normal CBO procedure is to give them policies, whose budget impact they project. Ryan gave them numbers and told them to calculate those. In essence, he told them, "If we raise X revenue and spend Y dollars, will we have a balanced budget?" And so long as X was equal to Y, the answer would be yes. Problem is, that's useless without a plan for getting to X or Y.
So what is in Ryan's budget(s)? Well, there's the specifics-- lots and lots of tax cuts, concentrated at the top. He would eliminate the estate tax and capital gains taxes and create two tax brackets-- 10% and 25%. If this sounds like a massive tax cut, that's because it is. But he says he'd offset those revenue losses by closing loopholes in the tax code. Which loopholes? He won't say. And, given that he's CUTTING capital gains taxes, it's safe to say that there won't be enough in loopholes to keep the tax code from either becoming WAY more regressive than it already is, or massively reducing the amount of revenue the government takes in. When the nonpartisan Tax Policy Centered analyzed all the loopholes in the tax code and constructed a maximally favorable scenario for the Ryan plan (closing the loopholes that were most regressive first). It determined that, even in that scenario, the budget amounted to a further tax cut for the mega-rich, and a tax hike for the poor and middle class.
Ryan, of course, complained about that analysis by... calling the TPC a patrisan organization run by a "former Obama Administration official" (it's actually directed by officials from both the Obama and Bush Administrations, and they weren't in political positions). So that's the plan on taxes. But it gets worse. Ryan makes a bunch of absurd assumptions about the federal government-- he claims he'll be able to cut the federal government to a third of its present size in... unspecified ways (this is, of course, ridiculous, and it doesn't address the problem; the federal government is small already-- social security, health care, defense, and interest on the debt make up over 3/4 of the federal budget; everything else the government does, from running the federal courts to managing national parks, conducting diplomacy, and regulating the financial system take up under a fifth of the budget; somehow, Ryan proposes to cut that by 2/3). It won't happen, and it shouldn't happen-- it's more hand-waving and magic asterisks.
But what's really terrifying is Ryan's vision for health care. The Romney campaign has been attacking the Obama people for "cutting Medicare to pay for Obamacare". Which is untrue, and especially egregious when compared to Ryan's plan. While cost control is a priority, there's a smart way to do it, and a dumb way to do it. Ryan, unsurprisingly, opts for the latter. Health care costs have been rising faster than GDP for awhile (though they've slowed down in the last few years), so controlling them is clearly a priority. The smarter way to do that is to find efficiencies on the demand side-- by determining what does and doesn't work, we can try to cut down on superfluous procedures and consume fewer health care services; in essence, we cut demand for superfluous and expensive procedures without (hopefully) compromising quality. We know that can work because just about the entire developed world spends less on health care than we do, yet has better health care outcomes. The Affordable Care Act takes steps to compile data on the effectiveness of various procedures to make positive steps toward that goal. Then there's the Ryan plan, which involves capping what seniors get for Medicare by placing a cap on the supply side. In essence, it tells them that they can spend a fixed amount on health insurance. And if that insurance doesn't cover all the health care they need, they can pay out of pocket. And if they can't afford it, well, tough luck, they get to die. In other words, according to the Ryan Plan, we can't make cuts to superfluous procedures because that's "rationing", but we can hand people a check, then go to the market and find out that it won't buy them health insurance that actually insures them. But I guess that's "fiscal discipline"-- financing massive tax cuts for the Romneys and the Buffetts, while throwing granny off a cliff. That's not a scare story-- scare stories aren't true.
So no, the Ryans in the Republican Party aren't serious, and they're no more principled than the anti-abortion crusaders-- they are, in their own way, just as nuts as the Akins, and are not to be taken any more seriously. If only the media would try looking at the numbers long enough to figure that out...
But the press has been filled with the typical cycle of politicians putting their feet in their collective mouths. The theme this time around is Tea Party representatives'... questionable grasp of female anatomy. You've got Todd Akin declaring that women who are "legitimately raped" don't get pregnant (apparently, he learned everything he knows about women from this documentary). Then there's Stephen King (the representative, not the Cujo author), who says women can't get pregnant from statutory rape or incest (Rep. King needs to catch up on his Game of Thrones; then he'd know that one's also not very true). And that's the core of the 55-year-old virgin wing of the Republican Party. They're kinda crazy. And kinda ignorant. But everyone knew that already.
The contrast to that end of the party is supposed to be what the media likes to dub the "serious" end. The supposed leaders of that faction are people like Chris Christie and Paul Ryan, who claim to be fiscally responsible, and who the media loves. The existence of the Akin-King axis lets the media play the balanced card-- some Republicans are nuts, they declare, but there are plenty who aren't. And Romney's choice of Paul Ryan is a sign, they say, that we're going to have a "serious" campaign between "competing ideas". Because, you know, Ryan has a serious vision that we should pay attention to. The problem with this narrative, of course, is that it's complete nonsense. In their own way, Romney and Christie are just as nuts and just as un-serious as Akin and King. Here's why.
To start with, the distinction the media likes to draw isn't as clean as they tend to like to pretend. For starters, Ryan is a card-carrying member of the "Sperm Are People Too" club. But that's not what makes his ideas nutty. It's the very ideas that the media likes to trumpet as "serious" that are a complete house of cards. The reason behind that, I think, has to do with the people who become journalists. By and large, journalists are reasonably smart people. But they're journalists because they like words. Throw numbers are them, and their eyes glaze over, they get chills, and their brain shuts down. Which is why they swoon any time a politician throws numbers at them, assuming that the politician must know what s/he's talking about because there are a lot of digits on that spreadsheet, and that must mean that they're smart.
This is what happened with Paul Ryan's "budget". It gets quotation marks because calling it a budget is a joke. Normally, when you put together a long-term budget, you specify changes to certain programs; you expand or contract different parts of the government, raise some taxes, cut others, and create an approximation of how you see the federal budget going forward. The further out you go, of course, the less accurate it is, but it provides something of a vision for a big picture. Ryan's "budget" makes a mockery of all that. It's got numbers, sure. But the way you normally get those numbers is to make specific policy recommendations and then apply those to the numbers.
Ryan budgeting works the other way around-- make up numbers, without specifying how you get there. Yes, it's as deeply stupid as it sounds. It's the equivalent of asking a basketball coach how he plans to win a game, and getting "We plan to score more points than the other team" in response. It's true, maybe, but it's not a response-- it's an insult to the reader's intelligence. Ryan got the CBO to "score" his budget, to give it an air of legitimacy. But this, too, was an exercise in deception. Normal CBO procedure is to give them policies, whose budget impact they project. Ryan gave them numbers and told them to calculate those. In essence, he told them, "If we raise X revenue and spend Y dollars, will we have a balanced budget?" And so long as X was equal to Y, the answer would be yes. Problem is, that's useless without a plan for getting to X or Y.
So what is in Ryan's budget(s)? Well, there's the specifics-- lots and lots of tax cuts, concentrated at the top. He would eliminate the estate tax and capital gains taxes and create two tax brackets-- 10% and 25%. If this sounds like a massive tax cut, that's because it is. But he says he'd offset those revenue losses by closing loopholes in the tax code. Which loopholes? He won't say. And, given that he's CUTTING capital gains taxes, it's safe to say that there won't be enough in loopholes to keep the tax code from either becoming WAY more regressive than it already is, or massively reducing the amount of revenue the government takes in. When the nonpartisan Tax Policy Centered analyzed all the loopholes in the tax code and constructed a maximally favorable scenario for the Ryan plan (closing the loopholes that were most regressive first). It determined that, even in that scenario, the budget amounted to a further tax cut for the mega-rich, and a tax hike for the poor and middle class.
Ryan, of course, complained about that analysis by... calling the TPC a patrisan organization run by a "former Obama Administration official" (it's actually directed by officials from both the Obama and Bush Administrations, and they weren't in political positions). So that's the plan on taxes. But it gets worse. Ryan makes a bunch of absurd assumptions about the federal government-- he claims he'll be able to cut the federal government to a third of its present size in... unspecified ways (this is, of course, ridiculous, and it doesn't address the problem; the federal government is small already-- social security, health care, defense, and interest on the debt make up over 3/4 of the federal budget; everything else the government does, from running the federal courts to managing national parks, conducting diplomacy, and regulating the financial system take up under a fifth of the budget; somehow, Ryan proposes to cut that by 2/3). It won't happen, and it shouldn't happen-- it's more hand-waving and magic asterisks.
But what's really terrifying is Ryan's vision for health care. The Romney campaign has been attacking the Obama people for "cutting Medicare to pay for Obamacare". Which is untrue, and especially egregious when compared to Ryan's plan. While cost control is a priority, there's a smart way to do it, and a dumb way to do it. Ryan, unsurprisingly, opts for the latter. Health care costs have been rising faster than GDP for awhile (though they've slowed down in the last few years), so controlling them is clearly a priority. The smarter way to do that is to find efficiencies on the demand side-- by determining what does and doesn't work, we can try to cut down on superfluous procedures and consume fewer health care services; in essence, we cut demand for superfluous and expensive procedures without (hopefully) compromising quality. We know that can work because just about the entire developed world spends less on health care than we do, yet has better health care outcomes. The Affordable Care Act takes steps to compile data on the effectiveness of various procedures to make positive steps toward that goal. Then there's the Ryan plan, which involves capping what seniors get for Medicare by placing a cap on the supply side. In essence, it tells them that they can spend a fixed amount on health insurance. And if that insurance doesn't cover all the health care they need, they can pay out of pocket. And if they can't afford it, well, tough luck, they get to die. In other words, according to the Ryan Plan, we can't make cuts to superfluous procedures because that's "rationing", but we can hand people a check, then go to the market and find out that it won't buy them health insurance that actually insures them. But I guess that's "fiscal discipline"-- financing massive tax cuts for the Romneys and the Buffetts, while throwing granny off a cliff. That's not a scare story-- scare stories aren't true.
So no, the Ryans in the Republican Party aren't serious, and they're no more principled than the anti-abortion crusaders-- they are, in their own way, just as nuts as the Akins, and are not to be taken any more seriously. If only the media would try looking at the numbers long enough to figure that out...
Monday, July 23, 2012
Punishment at Penn State
This morning, the NCAA handed down a punishment for Penn State for the Jerry Sandusky cover up. It doesn't look pretty for Penn State football. They have to donate $60 million to an endowment to protect children, give up 10 scholarships a year for 4 years, have their total scholarships reduced from 85 to 65, and are banned from playing in bowls for 4 years. On top of that, Joe Paterno had to vacate all of his coaching wins after 1998. The response from much of the Penn State community has been... sadly predictable. They're calling their new university president (who signed a consent decree acquiescing to the punishment) a coward. They've got some ridiculous conspiracy theory about Louis Freeh, their Board of Trustees, and ESPN all conspiring against them to soil Saint Paterno's legacy. They claim the punishment doesn't do anything for the victims and unnecessarily punishes their players and community for something they had nothing to do with. And, besides the players part, this completely misses the picture.
Their most common claim is that the Freeh Report made inferences regarding certain facts, and came to conclusions based on circumstantial evidence. Because of that, Paterno is somehow being crucified without being granted due process. Which is an entirely banal and stupid argument. Due process rights are granted to people in criminal trials. They have a different standard of proof because we think that criminal penalties for innocent people are really, really bad. This isn't a criminal case. It's not even a civil case (where the standard of proof is a preponderance of the evidence). It's a private governing body's investigation. The Freeh Report is damning in what it says about Joe Paterno. Plainly, it makes a strong case that, amid multiple reports that his former top assistant was raping young boys, he actively engaged in a cover-up, lobbied against suggestions that university administrators go to the police, and concerned himself with what was good for his football program at the expense of past, present, and future victims of a seriously horrific crime. In a way, Paterno and the others were just as bad as Sandusky-- true, they didn't rape young boys themselves. But they were more calculating and deliberate. Sandusky is a sick, sick person-- you almost have to be to do what he did. That doesn't excuse or justify his horrific crimes, but it does mean that he has serious delusions about them; people who don't have those delusions and have reason to suspect that they're occurring have a moral duty to make sure that those things can't happen, especially when they're happening on their watch (and yes, Sandusky did it on their watch, even after he formally retired).
It's certainly true that the punishment does some damage to those who don't deserve it; players who want to play at Penn State will either have to resign themselves to never playing in a bowl, or they'll have to transfer (though the NCAA has made that easier in this case). But what the penalties do, in a blunt way, is absolutely what should be done-- cut the football program at the school down to size. Because that was really the heart of the institutional problem there. Paterno wasn't just the football coach at Penn State-- he was the face of the university. Before this incident broke, 99.99% of Americans outside of Penn State students and alumni had no clue who the president and athletic director were. And, while that's the case at a lot of major D-I schools, Paterno wielded a power at Penn State that was almost unprecedented.
Mike Krzyzewski is by far the best-known employee of Duke University. You could say the same for a whole lot of big-time college football and basketball coaches. Bob Knight was a legend at Indiana. But what seems unique about Penn State was that Joe Paterno was no one's employee. When Bob Knight got himself into trouble at Indiana, he got some leeway. Then he was forced out. If Krzyzewski at Duke were found to have likely covered up a single rape (or, for that matter, any number of less egregious crimes), you can bet the university would dump him, no questions asked. And I don't even like Krzyzewski or Duke. When Penn State tried to push Paterno out the door in 2004, he laughed, told them he wasn't going anywhere, and that was that. His players were exempted from incoming freshman sexual assault education at Penn State. Paterno fought (successfully) to keep them out of the university's disciplinary procedure. The football program was its own fiefdom, and Paterno was the top dog. When the child abuse allegations came to light, it was ultimately Paterno who had the last word. There was an exchange in the Freeh Report where I believe the AD and a top VP agreed to go to child welfare with the 2001 allegations. Then, a subsequent e-mail from the AD said that after speaking with "Joe", he was no longer "comfortable" with that course of action. It's clear that Paterno was at least his ostensible superiors' equal. In all likelihood, they answered to him just as much as, if not more than, he answered to them.
It was this dynamic that needed to be fixed. Joe Paterno ostensibly did some very good things at Penn State-- he graduated a lot of players, he donated a good chunk of money to build a library, and I'm sure plenty of his players have great things to say about him. But, as a person, he was an enormous moral failure. Covering up child rape isn't "one mistake"-- shoplifting is one mistake. Getting into a fight is one mistake. Cheating on a test is one mistake. Even robbing the bank is one mistake. Doing nothing when you have ANY reason to believe a child predator is not just loose, but making use of your facilities to commit his crimes is an enormous moral failure that defines you. The lives of many, possibly tens, of people have been ruined because Paterno stood by and did nothing.
And, in large part, it was the devotion to Paterno and to football that allowed it to happen. Because Paterno talked a lot about honor (though he turned out to have none), graduated more players than most college football coaches, and donated some money to the library, the assumption was that he should get leeway to run his football programs as he sees fit. He was beyond the reach of the administration. In an important sense, he was the most powerful person on Penn State's campus. And he turned out to be a moral coward. But he couldn't have done that on his own. To become that powerful, he needed a campus culture that acceded to it. He needed administrators who wouldn't, or couldn't, push him. He needed students and alumni who saw him as a god. And he got that. The punishment of the football program lashes out at Penn State football because, in an important regard, Penn State football is the problem. Not the players or Bill O'Brien (the current coach), or those people, but the mindset that Penn State football is "above the law" at the university. Crippling that program will hopefully break that hold-- it will put football into a proper perspective. It's a lot of fun, it's a community event for students and alumni, and it's a source of pride. In plenty of cases, it's an incubator of future pros. But, even if football players at Penn State are separate from the rest of the campus (as they are at most high D-I schools), they can't be above reproach-- they should have to attend campus safety workshops with other students; when they do something wrong, they should be punished like other students; and, if something goes wrong that necessitates a response from the administration, they should be subject to sanctions, same as any other students.
At Penn State, the myth of Saint Joe is, in large part, what allowed a child predator to continue raping kids for well over a decade, even though there was smoke out there indicating that he was a problem. Dismantling that mentality is what the sanctions aim to do. And Penn State students and alumni who cry about the "lynching" of Paterno and the victimization of the football program are prime evidence of why that program needs to be sanctioned in that way-- hopefully losing some games will put football and the coach's role in its proper perspective at a place where it was horribly, tragically out of whack.
Their most common claim is that the Freeh Report made inferences regarding certain facts, and came to conclusions based on circumstantial evidence. Because of that, Paterno is somehow being crucified without being granted due process. Which is an entirely banal and stupid argument. Due process rights are granted to people in criminal trials. They have a different standard of proof because we think that criminal penalties for innocent people are really, really bad. This isn't a criminal case. It's not even a civil case (where the standard of proof is a preponderance of the evidence). It's a private governing body's investigation. The Freeh Report is damning in what it says about Joe Paterno. Plainly, it makes a strong case that, amid multiple reports that his former top assistant was raping young boys, he actively engaged in a cover-up, lobbied against suggestions that university administrators go to the police, and concerned himself with what was good for his football program at the expense of past, present, and future victims of a seriously horrific crime. In a way, Paterno and the others were just as bad as Sandusky-- true, they didn't rape young boys themselves. But they were more calculating and deliberate. Sandusky is a sick, sick person-- you almost have to be to do what he did. That doesn't excuse or justify his horrific crimes, but it does mean that he has serious delusions about them; people who don't have those delusions and have reason to suspect that they're occurring have a moral duty to make sure that those things can't happen, especially when they're happening on their watch (and yes, Sandusky did it on their watch, even after he formally retired).
It's certainly true that the punishment does some damage to those who don't deserve it; players who want to play at Penn State will either have to resign themselves to never playing in a bowl, or they'll have to transfer (though the NCAA has made that easier in this case). But what the penalties do, in a blunt way, is absolutely what should be done-- cut the football program at the school down to size. Because that was really the heart of the institutional problem there. Paterno wasn't just the football coach at Penn State-- he was the face of the university. Before this incident broke, 99.99% of Americans outside of Penn State students and alumni had no clue who the president and athletic director were. And, while that's the case at a lot of major D-I schools, Paterno wielded a power at Penn State that was almost unprecedented.
Mike Krzyzewski is by far the best-known employee of Duke University. You could say the same for a whole lot of big-time college football and basketball coaches. Bob Knight was a legend at Indiana. But what seems unique about Penn State was that Joe Paterno was no one's employee. When Bob Knight got himself into trouble at Indiana, he got some leeway. Then he was forced out. If Krzyzewski at Duke were found to have likely covered up a single rape (or, for that matter, any number of less egregious crimes), you can bet the university would dump him, no questions asked. And I don't even like Krzyzewski or Duke. When Penn State tried to push Paterno out the door in 2004, he laughed, told them he wasn't going anywhere, and that was that. His players were exempted from incoming freshman sexual assault education at Penn State. Paterno fought (successfully) to keep them out of the university's disciplinary procedure. The football program was its own fiefdom, and Paterno was the top dog. When the child abuse allegations came to light, it was ultimately Paterno who had the last word. There was an exchange in the Freeh Report where I believe the AD and a top VP agreed to go to child welfare with the 2001 allegations. Then, a subsequent e-mail from the AD said that after speaking with "Joe", he was no longer "comfortable" with that course of action. It's clear that Paterno was at least his ostensible superiors' equal. In all likelihood, they answered to him just as much as, if not more than, he answered to them.
It was this dynamic that needed to be fixed. Joe Paterno ostensibly did some very good things at Penn State-- he graduated a lot of players, he donated a good chunk of money to build a library, and I'm sure plenty of his players have great things to say about him. But, as a person, he was an enormous moral failure. Covering up child rape isn't "one mistake"-- shoplifting is one mistake. Getting into a fight is one mistake. Cheating on a test is one mistake. Even robbing the bank is one mistake. Doing nothing when you have ANY reason to believe a child predator is not just loose, but making use of your facilities to commit his crimes is an enormous moral failure that defines you. The lives of many, possibly tens, of people have been ruined because Paterno stood by and did nothing.
And, in large part, it was the devotion to Paterno and to football that allowed it to happen. Because Paterno talked a lot about honor (though he turned out to have none), graduated more players than most college football coaches, and donated some money to the library, the assumption was that he should get leeway to run his football programs as he sees fit. He was beyond the reach of the administration. In an important sense, he was the most powerful person on Penn State's campus. And he turned out to be a moral coward. But he couldn't have done that on his own. To become that powerful, he needed a campus culture that acceded to it. He needed administrators who wouldn't, or couldn't, push him. He needed students and alumni who saw him as a god. And he got that. The punishment of the football program lashes out at Penn State football because, in an important regard, Penn State football is the problem. Not the players or Bill O'Brien (the current coach), or those people, but the mindset that Penn State football is "above the law" at the university. Crippling that program will hopefully break that hold-- it will put football into a proper perspective. It's a lot of fun, it's a community event for students and alumni, and it's a source of pride. In plenty of cases, it's an incubator of future pros. But, even if football players at Penn State are separate from the rest of the campus (as they are at most high D-I schools), they can't be above reproach-- they should have to attend campus safety workshops with other students; when they do something wrong, they should be punished like other students; and, if something goes wrong that necessitates a response from the administration, they should be subject to sanctions, same as any other students.
At Penn State, the myth of Saint Joe is, in large part, what allowed a child predator to continue raping kids for well over a decade, even though there was smoke out there indicating that he was a problem. Dismantling that mentality is what the sanctions aim to do. And Penn State students and alumni who cry about the "lynching" of Paterno and the victimization of the football program are prime evidence of why that program needs to be sanctioned in that way-- hopefully losing some games will put football and the coach's role in its proper perspective at a place where it was horribly, tragically out of whack.
Wednesday, July 18, 2012
Romney at Bain, and Romney's taxes
The past few weeks haven't been good to Mitt Romney. He's been hit with two body shots, one after the other, relating to his character. There was also something about a horse, but I didn't bother to read about that one-- it might be a nice punchline, but not much more. Of the bigger stories, the first came when the Boston Globe uncovered SEC filings that listed Romney as CEO, President, Chairman of the Board, and sole stockholder of Bain Capital entities as late as 2002, seemingly contradicting his claim that he left Bain in 1999 to run the Olympics and shouldn't be held responsible for offshoring decisions the firm made in regards to certain portfolio companies in the time between Romney's departure and the time when he ceased to be listed in SEC filings. The second came when Romney continually stonewalled efforts to get him to release tax returns. To date, Romney's released the returns from 2010, and those were incomplete (an addition requiring disclosures about offshore accounts is missing). He hasn't released anything else. By comparison, John McCain released 2 years in 2008 (and those weren't particularly interesting; McCain is rich, in conventional terms, but he's solidly middle class compared to the mega-wealthy Romney). John Kerry released 20 years in 2004. Romney's own father, George, released 12 years when he ran for the Republican nomination in 1968. Romney's continually stonewalled any efforts to get additional taxes, which has predictably stirred up a firestorm over what's in his returns. One of those attacks, I think, has merit. The other doesn't.
The first attack is, I think, almost entirely baseless. Lying in SEC filings is certainly a felony. And Romney has been claiming that he left Bain in 1999 to run the Olympics. But my understanding of the filings is that Romney is listed in that capacity for particular Bain entities, rather than the Bain Capital partnership itself (which, of course, makes sense; a partnership the size of Bain Capital doesn't have just one partner, especially one like Bain where there is no charismatic founder or pair of founders inextricably tied to the company a la Henry Kravis and George Roberts at KKR or Pete Peterson and Steve Schwartzman at Blackstone). And, if you really think about it, the story doesn't pass the smell test. Unless you think Romney set up a remote office in Utah and was letting others run the Olympics while he ran Bain from Salt Lake City, there aren't enough hours in a day for anyone to manage two projects of that size.
My bet is this: Romney figured he would be going back to Bain when he left in 1999. He kept some formal authority, but his partners effectively ran the company day to day, while he came back on occasion in more or less a part-time advisory role. They continued to list him as "chairman, president, CEO and sole shareholder" of pass-through entities that distribute payroll and the like (PE funds are set up as a pyramid of different entities for limited liability and tax purposes), but which didn't actually make business decisions or earn profits. It certainly looks bad to a layperson, but it makes perfect sense. And, when you come right down to it, trying to run with it is a waste of time that could be spent looking at more important issues. Now, that doesn't mean that everything that happened after 1999 should be off-limits to attackers; if you buy the anti-Bain line from 1999-2002 hook, line and sinker, it's pretty disingenuous to think that the company somehow transformed when Romney left to run the Olympics, from "job creator" to "job destroyer". A company builds a particular culture. Romney was at the forefront of founding Bain, and he was there for almost two decades. It's not very credible to suggest that the company started doing things in 2000 that it wouldn't have done in 1999 just because Romney left. Whether offshoring is a problem is a separate issue altogether, but if you believe that it is, the "I left in 1999" defense doesn't pass the smell test, even if it's true that he wasn't running the company day to day.
The tax issue, on the other hand, is much more problematic for Romney. There's a long tradition of candidates for president releasing tax returns to the press. While private citizens' returns are certainly their own business, politicians' returns can be very relevant. They present a window into how the candidates conducted their financial affairs in the past. They demonstrate the candidate's values, how far they'll go to avoid taxes, and what kinds of investments they make. Romney's been historically difficult in withholding his returns. And that's a giant red flag. Now, the reality is this. There's a lot of speculation about what this means. But much of the speculation is pretty mundane. I would think releasing it would get media buzz for 3-4 days, and then people would get sick of it. If that's the case, I have to think the Romney political team would bite the bullet, release 4-6 years of returns, take the hit, and move on. But his aggressive refusal to do so doesn't pass the smell test-- it seems that there's something there, and chances are pretty good that it's something that would resonate, and not in a positive way.
I've seen a couple of plausible theories about what this is. One is that Romney paid no tax at all in 2009. This could have happened if he'd taken a hefty long-term capital loss that he could use to offset income. A man worth $250-500 million paying 0 in taxes in a given year isn't exactly a winning proposition to sell the public. It's something I would note, but, to me, it wouldn't be fatal. Though I'm not an election watcher, so the way I'd react may be different from the way others would react. Another possibility is that Romney took advantage of the 2009 IRS amnesty on Swiss bank accounts. Swiss bank accounts are useful to mega-rich people in that they used to provide substantial secrecy, which could be used to shield foreign holdings from scrutiny, play clever games with the tax code to adjust the basis of asset sales, or evade US taxes. The amnesty provision allowed offenders to pay limited penalties upon closing the accounts while remaining anonymous. If Romney took advantage, it would indicate that he was a tax cheat. And that definitely doesn't look so good for someone worth as much as him. A final theory that seems possible is that Romney has substantial holdings in China, and is bullish on the Chinese. That one's pretty mundane-- he's entitled to believe in China's economy. The issue that raises, though, is about honesty, since Romney talks bluntly about how harmful China's currency manipulation is to the US (which is actually something he's not wrong about, though I think China's slowdown is hardly the time to start waving a sword at the Chinese). That would look bad politically, and just confirm how disingenuous a politician Romney is, but it wouldn't be fatal. I tend to think that that's the best-case scenario for him. Though I guess we'll never know unless he caves to the pressure and releases his returns...
The first attack is, I think, almost entirely baseless. Lying in SEC filings is certainly a felony. And Romney has been claiming that he left Bain in 1999 to run the Olympics. But my understanding of the filings is that Romney is listed in that capacity for particular Bain entities, rather than the Bain Capital partnership itself (which, of course, makes sense; a partnership the size of Bain Capital doesn't have just one partner, especially one like Bain where there is no charismatic founder or pair of founders inextricably tied to the company a la Henry Kravis and George Roberts at KKR or Pete Peterson and Steve Schwartzman at Blackstone). And, if you really think about it, the story doesn't pass the smell test. Unless you think Romney set up a remote office in Utah and was letting others run the Olympics while he ran Bain from Salt Lake City, there aren't enough hours in a day for anyone to manage two projects of that size.
My bet is this: Romney figured he would be going back to Bain when he left in 1999. He kept some formal authority, but his partners effectively ran the company day to day, while he came back on occasion in more or less a part-time advisory role. They continued to list him as "chairman, president, CEO and sole shareholder" of pass-through entities that distribute payroll and the like (PE funds are set up as a pyramid of different entities for limited liability and tax purposes), but which didn't actually make business decisions or earn profits. It certainly looks bad to a layperson, but it makes perfect sense. And, when you come right down to it, trying to run with it is a waste of time that could be spent looking at more important issues. Now, that doesn't mean that everything that happened after 1999 should be off-limits to attackers; if you buy the anti-Bain line from 1999-2002 hook, line and sinker, it's pretty disingenuous to think that the company somehow transformed when Romney left to run the Olympics, from "job creator" to "job destroyer". A company builds a particular culture. Romney was at the forefront of founding Bain, and he was there for almost two decades. It's not very credible to suggest that the company started doing things in 2000 that it wouldn't have done in 1999 just because Romney left. Whether offshoring is a problem is a separate issue altogether, but if you believe that it is, the "I left in 1999" defense doesn't pass the smell test, even if it's true that he wasn't running the company day to day.
The tax issue, on the other hand, is much more problematic for Romney. There's a long tradition of candidates for president releasing tax returns to the press. While private citizens' returns are certainly their own business, politicians' returns can be very relevant. They present a window into how the candidates conducted their financial affairs in the past. They demonstrate the candidate's values, how far they'll go to avoid taxes, and what kinds of investments they make. Romney's been historically difficult in withholding his returns. And that's a giant red flag. Now, the reality is this. There's a lot of speculation about what this means. But much of the speculation is pretty mundane. I would think releasing it would get media buzz for 3-4 days, and then people would get sick of it. If that's the case, I have to think the Romney political team would bite the bullet, release 4-6 years of returns, take the hit, and move on. But his aggressive refusal to do so doesn't pass the smell test-- it seems that there's something there, and chances are pretty good that it's something that would resonate, and not in a positive way.
I've seen a couple of plausible theories about what this is. One is that Romney paid no tax at all in 2009. This could have happened if he'd taken a hefty long-term capital loss that he could use to offset income. A man worth $250-500 million paying 0 in taxes in a given year isn't exactly a winning proposition to sell the public. It's something I would note, but, to me, it wouldn't be fatal. Though I'm not an election watcher, so the way I'd react may be different from the way others would react. Another possibility is that Romney took advantage of the 2009 IRS amnesty on Swiss bank accounts. Swiss bank accounts are useful to mega-rich people in that they used to provide substantial secrecy, which could be used to shield foreign holdings from scrutiny, play clever games with the tax code to adjust the basis of asset sales, or evade US taxes. The amnesty provision allowed offenders to pay limited penalties upon closing the accounts while remaining anonymous. If Romney took advantage, it would indicate that he was a tax cheat. And that definitely doesn't look so good for someone worth as much as him. A final theory that seems possible is that Romney has substantial holdings in China, and is bullish on the Chinese. That one's pretty mundane-- he's entitled to believe in China's economy. The issue that raises, though, is about honesty, since Romney talks bluntly about how harmful China's currency manipulation is to the US (which is actually something he's not wrong about, though I think China's slowdown is hardly the time to start waving a sword at the Chinese). That would look bad politically, and just confirm how disingenuous a politician Romney is, but it wouldn't be fatal. I tend to think that that's the best-case scenario for him. Though I guess we'll never know unless he caves to the pressure and releases his returns...
Tuesday, July 10, 2012
The inanity of presidential campaigns
What's struck me about this presidential campaign is just how inane politicians' election platforms are. They're inane in the way that they promote their own candidates, and they're inane in the way that they attack other candidates. Even if they pick the right issues, I feel like the campaigns draw all the wrong conclusions in the way that they sell themselves on those issues. Two cases in point: the Obama campaign's attack on Romney's taxes, and the Romney campaign's promotion of his time as the chief of Bain Capital and what it means.
The gist of the Obama campaign's attacks on Romney's taxes seems to be that 1) Romney is rich, 2) Romney doesn't pay much in taxes, and 3) Romney holds assets in foreign accounts for tax purposes. Which are (or have recently been) all true. But, in a very substantial sense, they're entirely beyond the point. The link the attacks want viewers to draw is that Romney is dodging taxes, and this makes him "ruthless", and "out of touch", or something along those lines. And if you extrapolate from that that he's doing something illegal, that's a plus for them. Now, to be clear, I don't think there's anyone outside of the fringe who thinks Romney is engaging in tax fraud. At the least, there's no evidence of it. What he's doing is what every rich person (or really every person who bothers to do their own taxes) does-- structuring his investments in such a way that he ends up keeping as much after-tax money as possible to use as he sees fit, whether to buy himself another yacht, or to give more money to a charity or church that he likes. And more power to him for that-- rich liberals do the exact same thing.
For me, all that line of attack does is demonstrate that Mitt Romney made a whole lot of money and engages in tax planning. Shoot him. The more effective line of attack, I think, is to tie the amount of taxes Romney pays to the amount of taxes he supports. There are plenty of rich people in the US. There are plenty of rich people who pay very little in taxes. Warren Buffett has a bigger tax bill than Romney, percentage-wise, but not by all that much. But the difference between Romney and Buffett is that Buffett sees this state of affairs as problematic, while Romney sees it as good and natural. Buyout barons aren't dishing out $50,000 a plate to go to the Hamptons and feed the Romney campaign because they think Obama's policies are destroying the economy-- half of them know a lot about buying companies and very little about anything else. They're out there because they're afraid that, under President Obama, they might have to hand over an extra $5 million of next year's $50 million. And if there's one thing buyout barons think, it's that they earn every penny of those millions. But I'd guess that Barbara the Office Manager making $45,000 a year isn't all that amused that she's paying as much of her income in taxes to the government as Steve Schwarzman at Blackstone. A persuasive implication of the Romney tax bill for me isn't, "Look how out of touch Mitt Romney is, he doesn't pay much in taxes." It's "Look how little Mitt Romney pays in taxes; he thinks this is the natural way things should be; President Obama thinks people who have built their wealth in America, have used America's resources to do it, have workers educated in America's public schools, whose parents' health care is paid for by America's government should give a bit more back to keep America great than people who have been less fortunate." The attack shouldn't be that we need to soak the rich; it should be that we're all in it together, and that means the rich as well as the middle class should pay their fair share.
Then there's the Romney campaign's promotion of his record at Bain Capital. And there's no doubt that his time there was extraordinarily successful. His first fund averaged annual returns of over 80%, which is extraordinary even in the rarefied air of private equity. He earned a whole lot of money, and is now worth somewhere between a quarter and half a billion dollars, which makes him mega-rich. The Romney campaign claims that his time at Bain makes him uniquely well-equipped to create jobs, and that attacks on his time there amount to an attack on success. The second claim is hogwash-- being rich or successful doesn't qualify someone to be president. George Soros is arguably the most successful hedge fund manager of all time-- if wealth equates to success, he's got Romney trumped. Romney counts as mega-wealthy with a net worth of up to half a billion. Soros is worth about 40 times that, $20 billion. And he's given away another $8-10 billion or so. Despite this sterling career, I don't know of anyone who thinks that being a great hedge fund manager somehow qualifies Soros to run a country. Heck, I wouldn't hire him to run the Treasury or the Fed either. While he's a unique investor with a legendary understanding of markets, he's not a policymaker, and pretending that knowing how to make money in one way makes him good at everything is completely backward thinking.
The other claim Romney makes is that his time at Bain taught him how to create jobs. This is also nonsense. To begin with, private equity is NOT in the job creation business-- it's in the return on investment business. If this means adding jobs, great. If it means slashing jobs, no problem. If it means cutting company employees and outsourcing their work, well, that's the price of business. This isn't the "wrong" thing to do-- they're a business, not a charity. But that analogy runs another way-- business isn't a charity, but government isn't a business. This is a line of attack that the Obama campaign hasn't mentioned, but it's one that is profoundly true, and should be hammered home. Even in business areas that are more closely in the innovation rather than financial engineering business, like technology and manufacturing, running a big company has very little in common with running a country. While laying out the differences between a business and a country would take a whole post, it suffices to say that a business 1) doesn't sell 80% of its product to its own employees, 2) seeks to maximize a single metric, such as return on equity or stock price, rather than balance competing social goals that are often in tension, and 3) is, unlike a country, in direct competition with others in its industry. Lost profit opportunities for Bain will be picked up by KKR. A bad fund performance for KKR means client money will run to Blackstone. By contrast, if China goes into recession, the US doesn't "win"; it loses a huge potential market for things it produces. Running a private equity firm doesn't make Romney a job creator. It doesn't qualify him to run a country. And it doesn't mean he has a secret formula from his time at Bain that he can apply to restore America's success.
But here's what Romney CAN claim his time at Bain means-- that he knows how to manage an organization. While a government runs nothing like a company, the West Wing of the White House DOES operate somewhat like a company unit. The President is, in a very real sense, the CEO of the west wing. He needs to synthesize advice coming at him from a number of different advisers. He needs to deploy those advisers to their most productive uses, taking advantage of their skills. And he needs to combine their input to make good political and policy decisions. This is, I think, President Obama's biggest weakness. I don't think he's been a particularly effective manager as president, and the result has been a first term that's lacked focus and has too often seemed afflicted with terrible ADD. He's had exceptionally talented people advising him on all different kinds of policy matters, but he can't seem to come to any kind of conclusion about who's right. The result has been a first term that's lacked vision. This is where Romney can draw a contrast. As head of a buyout firm, while he was managing an organization that looked nothing like a government, the skills he can claim to have cultivated may well be very transferable. If he can argue that he can parlay his time as an executive into the ability to quickly and effectively synthesize information, develop a strategy, and execute that strategy, he can draw a contrast between his own focus and the disjointedness that's seemed to plague the Obama administration.
What might really be a compelling line from Romney would sound something like this: I'm not going to claim to be a job creator, but I will claim that I can manage this government more effectively than the President has. Of course, for campaigns, sound bites and polling trump true arguments and sound logic, but it might be refreshing to see the campaigns change tack just a little bit.
The gist of the Obama campaign's attacks on Romney's taxes seems to be that 1) Romney is rich, 2) Romney doesn't pay much in taxes, and 3) Romney holds assets in foreign accounts for tax purposes. Which are (or have recently been) all true. But, in a very substantial sense, they're entirely beyond the point. The link the attacks want viewers to draw is that Romney is dodging taxes, and this makes him "ruthless", and "out of touch", or something along those lines. And if you extrapolate from that that he's doing something illegal, that's a plus for them. Now, to be clear, I don't think there's anyone outside of the fringe who thinks Romney is engaging in tax fraud. At the least, there's no evidence of it. What he's doing is what every rich person (or really every person who bothers to do their own taxes) does-- structuring his investments in such a way that he ends up keeping as much after-tax money as possible to use as he sees fit, whether to buy himself another yacht, or to give more money to a charity or church that he likes. And more power to him for that-- rich liberals do the exact same thing.
For me, all that line of attack does is demonstrate that Mitt Romney made a whole lot of money and engages in tax planning. Shoot him. The more effective line of attack, I think, is to tie the amount of taxes Romney pays to the amount of taxes he supports. There are plenty of rich people in the US. There are plenty of rich people who pay very little in taxes. Warren Buffett has a bigger tax bill than Romney, percentage-wise, but not by all that much. But the difference between Romney and Buffett is that Buffett sees this state of affairs as problematic, while Romney sees it as good and natural. Buyout barons aren't dishing out $50,000 a plate to go to the Hamptons and feed the Romney campaign because they think Obama's policies are destroying the economy-- half of them know a lot about buying companies and very little about anything else. They're out there because they're afraid that, under President Obama, they might have to hand over an extra $5 million of next year's $50 million. And if there's one thing buyout barons think, it's that they earn every penny of those millions. But I'd guess that Barbara the Office Manager making $45,000 a year isn't all that amused that she's paying as much of her income in taxes to the government as Steve Schwarzman at Blackstone. A persuasive implication of the Romney tax bill for me isn't, "Look how out of touch Mitt Romney is, he doesn't pay much in taxes." It's "Look how little Mitt Romney pays in taxes; he thinks this is the natural way things should be; President Obama thinks people who have built their wealth in America, have used America's resources to do it, have workers educated in America's public schools, whose parents' health care is paid for by America's government should give a bit more back to keep America great than people who have been less fortunate." The attack shouldn't be that we need to soak the rich; it should be that we're all in it together, and that means the rich as well as the middle class should pay their fair share.
Then there's the Romney campaign's promotion of his record at Bain Capital. And there's no doubt that his time there was extraordinarily successful. His first fund averaged annual returns of over 80%, which is extraordinary even in the rarefied air of private equity. He earned a whole lot of money, and is now worth somewhere between a quarter and half a billion dollars, which makes him mega-rich. The Romney campaign claims that his time at Bain makes him uniquely well-equipped to create jobs, and that attacks on his time there amount to an attack on success. The second claim is hogwash-- being rich or successful doesn't qualify someone to be president. George Soros is arguably the most successful hedge fund manager of all time-- if wealth equates to success, he's got Romney trumped. Romney counts as mega-wealthy with a net worth of up to half a billion. Soros is worth about 40 times that, $20 billion. And he's given away another $8-10 billion or so. Despite this sterling career, I don't know of anyone who thinks that being a great hedge fund manager somehow qualifies Soros to run a country. Heck, I wouldn't hire him to run the Treasury or the Fed either. While he's a unique investor with a legendary understanding of markets, he's not a policymaker, and pretending that knowing how to make money in one way makes him good at everything is completely backward thinking.
The other claim Romney makes is that his time at Bain taught him how to create jobs. This is also nonsense. To begin with, private equity is NOT in the job creation business-- it's in the return on investment business. If this means adding jobs, great. If it means slashing jobs, no problem. If it means cutting company employees and outsourcing their work, well, that's the price of business. This isn't the "wrong" thing to do-- they're a business, not a charity. But that analogy runs another way-- business isn't a charity, but government isn't a business. This is a line of attack that the Obama campaign hasn't mentioned, but it's one that is profoundly true, and should be hammered home. Even in business areas that are more closely in the innovation rather than financial engineering business, like technology and manufacturing, running a big company has very little in common with running a country. While laying out the differences between a business and a country would take a whole post, it suffices to say that a business 1) doesn't sell 80% of its product to its own employees, 2) seeks to maximize a single metric, such as return on equity or stock price, rather than balance competing social goals that are often in tension, and 3) is, unlike a country, in direct competition with others in its industry. Lost profit opportunities for Bain will be picked up by KKR. A bad fund performance for KKR means client money will run to Blackstone. By contrast, if China goes into recession, the US doesn't "win"; it loses a huge potential market for things it produces. Running a private equity firm doesn't make Romney a job creator. It doesn't qualify him to run a country. And it doesn't mean he has a secret formula from his time at Bain that he can apply to restore America's success.
But here's what Romney CAN claim his time at Bain means-- that he knows how to manage an organization. While a government runs nothing like a company, the West Wing of the White House DOES operate somewhat like a company unit. The President is, in a very real sense, the CEO of the west wing. He needs to synthesize advice coming at him from a number of different advisers. He needs to deploy those advisers to their most productive uses, taking advantage of their skills. And he needs to combine their input to make good political and policy decisions. This is, I think, President Obama's biggest weakness. I don't think he's been a particularly effective manager as president, and the result has been a first term that's lacked focus and has too often seemed afflicted with terrible ADD. He's had exceptionally talented people advising him on all different kinds of policy matters, but he can't seem to come to any kind of conclusion about who's right. The result has been a first term that's lacked vision. This is where Romney can draw a contrast. As head of a buyout firm, while he was managing an organization that looked nothing like a government, the skills he can claim to have cultivated may well be very transferable. If he can argue that he can parlay his time as an executive into the ability to quickly and effectively synthesize information, develop a strategy, and execute that strategy, he can draw a contrast between his own focus and the disjointedness that's seemed to plague the Obama administration.
What might really be a compelling line from Romney would sound something like this: I'm not going to claim to be a job creator, but I will claim that I can manage this government more effectively than the President has. Of course, for campaigns, sound bites and polling trump true arguments and sound logic, but it might be refreshing to see the campaigns change tack just a little bit.
Monday, July 9, 2012
Tax policy, Mitt Romney and "job creators"
Tax policy is, without a doubt, one of the biggest issues dividing Democrats and Republicans. The left argues that the mega-rich are under-taxed, while the right loves to claim that taking money out of the pockets of these "job creators" means everyone else's jobs disappear, too. Now, the Republican argument about taxes at this point is convoluted and hard to disentangle. Rhetorically, it's a mess, but there are elements of logic to it that are useful to untangle. The first issue is that they conflate short-run arguments with long-run arguments, so that's probably the place to begin.
The argument goes that raising taxes on anyone (including the "job creators") is contractionary fiscal policy-- it takes money that consumers could be spending out of the economy and puts it into the government's coffers. In the present circumstances, strictly speaking, this is true so long as tax cuts are paid for by borrowing rather than by cutting government spending. Although they like to pretend that private spending is somehow qualitatively better than government spending, the reality is that the government buying a Volvo for $30,000 and Bob from Jersey buying a Volvo for $30,000 is economically identical in terms of GDP, so a $30,000 tax cut matched with a $30,000 government spending cut is growth-neutral if you assume away secondary effects. What's interesting about that argument is just how vehemently Republicans reject the same exact logic when it applies to cuts to government spending. The position that contractionary fiscal policy is only contractionary when it involves tax hikes and not when it involves spending cuts is not only economically incoherent, but more than likely completely backward-- there's considerable evidence of a multiplier effect that applies to government spending more than tax cuts (because tax cuts can be saved while a dollar spent by the government goes directly into the economy). This incoherence aside, what's really interesting is the long-run argument for low tax rates on the Romneys and the Kochs.
Paul Krugman tackles this issue in a very interesting post on his blog. Krugman points out the absurdity of the talk about tax hikes on rich people as some kind of horrible job killer. The usual defense of the right to paying people like Steve Schwarzman, Henry Kravis, Bill Gates, and Mark Zuckerberg tens of millions of dollars annually is that they create a whole lot of value. Let's assume for a second that this is true (though I think Gates and Zuckerberg create a lot more value than Schwarzman or Kravis, but that's a separate issue). The argument is that we can pay Kravis $50 million next year because he's produced $50 million worth of GDP. This is, in fact, the Microeconomics 1 explanation; as Krugman notes, in a perfectly competitive market, workers are paid their marginal product (this assumption is problematic, but for the time being, let's assume this away too). This assumption justifies massive paydays for buyout execs. But it simultaneously destroys the argument that taxing "job creators" at high rates somehow degrades the lives of everyone because they take their magic job creating sauce out of the economy, and the jobs disappear.
But the implication of the labor market model used to justify huge paydays for the mega-wealthy is that their withdrawal from the economy is harmful... only to them. It's useful to illustrate this with an example. Let's assume for a second that Mark Zuckerberg really does contribute $40 million worth of GDP to the economy in a given year, and his paycheck reflects that (this is a much more plausible scenario than the assertion that hedge fund manager John Paulson generated a few billion in GDP shorting the housing market in 2009, but we can set that aside). Let's further assume that Zuckerberg has been reading Ayn Rand novels, which has turned him into a loony sociopath, and he's decided that the government is snatching too much of his hard-earned cash. So he's going to go on "capital strike" like the Randian hero John Galt and go sit in a valley in Utah and deny the economy his skills. The economy is $40 million poorer because Mark Zuckerberg isn't participating... and the economy is also paying $40 million less to Mark Zuckerberg to add $40 million to the economy. To believe that Mark Zuckerberg leaving the economy in this scenario is a net loss to more than just Mark Zuckerberg, you have to believe that there's a market failure in the executive compensation market, and Zuckerberg is actually being underpaid for his services. I kind of doubt that even they would be audacious enough to make that claim.
As Krugman points out, though, the only real net benefit to an efficiently compensated CEO working rather than going on capital strike is... the taxes they pay to the government coffers, which provides services to others. The socially optimal tax rate for the mega-rich, then, isn't the 14% that Romney pays on his dividends and investments, but the rate that maximizes government tax revenue; in short, the point at the top of the Laffer Curve. In just a few easy steps, then, it becomes apparent that believing in efficient labor markets supports keeping tax rates on the wealthy at the level at which tax revenue is maximized. The inevitable counter-argument will ask why the revenue-maximizing rate shouldn't apply to all earners. And the simple reason is that, where markets exist, it's only the mega-wealthy that can afford to go on "capital strike". Strictly speaking, if the labor market is efficient, a clerk at Wal-Mart earning $7 an hour leaving the labor force will cost the economy only the amount that she earns; the same logic that applies to the CEO applies to the rank and file. However, the unemployed clerk also won't be earning any income to pay for her needs. What this means is that, while the economy only values her up to the value of her salary, if she isn't working, she can't spend that nonexistent salary to support herself. As a result, she starves (or lives off of charity). The economy produces things, in short, because everyone needs things to live. But, for someone who has accumulated enough money to live on forever, assuming an efficient labor market, the only loss to society comes from the lost tax revenue. Otherwise... enjoy the leisure time, John Galt.
Now, I think the most interesting question here is the assumption involving efficient labor markets, and it's something that Krugman doesn't tackle in his post. It's no secret that inequality has exploded in the US-- the rich have gotten REALLY rich, and the poor and middle class have been left behind. In the 1960s, a CEO earned a few tens of times what an average employee earned-- maybe 20 or 30. Today, a CEO earns a few hundred times what an average employee earns-- 400 or so. This means one of two things must be true: either chief executives today are roughly 20 times more skilled now than they were 50 years ago, or the labor market is inefficient. And if the latter is true (which I think is a pretty safe assumption), the movement of income from labor to management and capital means one of two things is true. Either our compensation system used to redistribute wealth from management and capital to labor (in other words, CEOs and investors used to be wildly underpaid, and this subsidized rising wages for workers and the middle class; moreover, they also paid more in taxes then, so being upper-income must have been REALLY hard then...), or our compensation system now redistributes wealth from labor to management and capital.
I think the last statement rings most true, and the reasoning is pretty simple: workers productivity has been rising in the US pretty steadily. We're a technologically superior nation now to what we were when middle class wages stagnated, around 1980 (our communication systems are infinitely faster and more complex). We're a better-educated nation now than we were then. But somehow, in real terms, the gains have flowed almost entirely to the wealthiest 1%, and even more precisely to the wealthiest .1%. To believe that rising inequality is justified by market signals, you have to believe that the only Americans who have improved at what they do in about 30 years are executives, lawyers, doctors, and financiers. To me, that's a pretty hard case to make.
Where all this brings us is to Mitt Romney; both to his tax rate, and to his career at Bain Capital. The Democratic attacks on Romney's taxes have tended to go in the wrong direction. They've focused on how unfair it is that he has offshore accounts and imply that he's done something illegal. Let's be frank: I don't think there's any reason to believe that Romney's done anything illegal or untoward with his taxes. Like anyone, he's minimized his tax revenue under legal constraints. That's all well and good. But the question shouldn't be whether Romney pays an illegally low tax rate, but whether Romney and people like him, in the long run, pay a tax rate that's optimal from a social perspective. The answer to that, I think, is a clear no. Rather, I think our tax code provides a windfall to the mega-rich like Romney, and we should change that policy so that, instead of paying 15 or 20% of his income in taxes, Romney and people like him pay 30 or 35 or, God forbid, 40% of his income in taxes. If that sounds extravagant, it's useful to note that the implication of the efficient labor market postulate says the optimal top marginal tax rate for Romney and high earners like him is over 70% (the rate at which revenue is maximized). No one proposes that... but it should be in the discussion.
A last point concerns Romney's time at Bain Capital. Romney boasted of his work "creating jobs". The reality, though, is that private equity is not in the business of creating jobs. At its best, it's in the business of accelerating "creative destruction" by putting yesterday's companies out of business and paving the way for tomorrow's companies. But there's substantial evidence that what companies like Bain do in part is transfer wealth from labor to management and capital. Previously unionized labor is outsourced to contractors, whose workers receive lower pay and worse benefits. Tenured workers are laid off in favor of younger workers who are cheaper (there are market-based arguments for this, though there are also counter-arguments that workers start at these companies at sub-market wages due to the promise of advancement that used to come with making a career at a particular company). And the windfall goes to... managers, Bain executives, and Bain investors. Now, it's true that those investors aren't just rich folks-- they're pension funds and mutual funds and other retail investors. But it's equally true that a chunk of the gains represent a simple redistribution-- a transfer of wealth from workers to managers and investors that allows them to capture a chunk of society's wealth that is disproportionate to the value of their work.
So I think, in a narrow sense, there is class warfare. And, looking from the sidelines, I get the distinct sense that what we've got is a society in which the very richest are overcompensated, and are overcompensated at the expense of their workers. At the least, this makes a case for taxing them at a substantially higher rate, so that those workers can enjoy more of the benefits that they create, but which don't show up in their paychecks, and hasn't in decades. That, for me, is the way to think about how to make America the middle-class country we used to be, rather than one in which any and all social gains go toward making the rich super-rich instead of making the poor slightly less poor, or the middle class better off. That's not class warfare-- it's economics.
The argument goes that raising taxes on anyone (including the "job creators") is contractionary fiscal policy-- it takes money that consumers could be spending out of the economy and puts it into the government's coffers. In the present circumstances, strictly speaking, this is true so long as tax cuts are paid for by borrowing rather than by cutting government spending. Although they like to pretend that private spending is somehow qualitatively better than government spending, the reality is that the government buying a Volvo for $30,000 and Bob from Jersey buying a Volvo for $30,000 is economically identical in terms of GDP, so a $30,000 tax cut matched with a $30,000 government spending cut is growth-neutral if you assume away secondary effects. What's interesting about that argument is just how vehemently Republicans reject the same exact logic when it applies to cuts to government spending. The position that contractionary fiscal policy is only contractionary when it involves tax hikes and not when it involves spending cuts is not only economically incoherent, but more than likely completely backward-- there's considerable evidence of a multiplier effect that applies to government spending more than tax cuts (because tax cuts can be saved while a dollar spent by the government goes directly into the economy). This incoherence aside, what's really interesting is the long-run argument for low tax rates on the Romneys and the Kochs.
Paul Krugman tackles this issue in a very interesting post on his blog. Krugman points out the absurdity of the talk about tax hikes on rich people as some kind of horrible job killer. The usual defense of the right to paying people like Steve Schwarzman, Henry Kravis, Bill Gates, and Mark Zuckerberg tens of millions of dollars annually is that they create a whole lot of value. Let's assume for a second that this is true (though I think Gates and Zuckerberg create a lot more value than Schwarzman or Kravis, but that's a separate issue). The argument is that we can pay Kravis $50 million next year because he's produced $50 million worth of GDP. This is, in fact, the Microeconomics 1 explanation; as Krugman notes, in a perfectly competitive market, workers are paid their marginal product (this assumption is problematic, but for the time being, let's assume this away too). This assumption justifies massive paydays for buyout execs. But it simultaneously destroys the argument that taxing "job creators" at high rates somehow degrades the lives of everyone because they take their magic job creating sauce out of the economy, and the jobs disappear.
But the implication of the labor market model used to justify huge paydays for the mega-wealthy is that their withdrawal from the economy is harmful... only to them. It's useful to illustrate this with an example. Let's assume for a second that Mark Zuckerberg really does contribute $40 million worth of GDP to the economy in a given year, and his paycheck reflects that (this is a much more plausible scenario than the assertion that hedge fund manager John Paulson generated a few billion in GDP shorting the housing market in 2009, but we can set that aside). Let's further assume that Zuckerberg has been reading Ayn Rand novels, which has turned him into a loony sociopath, and he's decided that the government is snatching too much of his hard-earned cash. So he's going to go on "capital strike" like the Randian hero John Galt and go sit in a valley in Utah and deny the economy his skills. The economy is $40 million poorer because Mark Zuckerberg isn't participating... and the economy is also paying $40 million less to Mark Zuckerberg to add $40 million to the economy. To believe that Mark Zuckerberg leaving the economy in this scenario is a net loss to more than just Mark Zuckerberg, you have to believe that there's a market failure in the executive compensation market, and Zuckerberg is actually being underpaid for his services. I kind of doubt that even they would be audacious enough to make that claim.
As Krugman points out, though, the only real net benefit to an efficiently compensated CEO working rather than going on capital strike is... the taxes they pay to the government coffers, which provides services to others. The socially optimal tax rate for the mega-rich, then, isn't the 14% that Romney pays on his dividends and investments, but the rate that maximizes government tax revenue; in short, the point at the top of the Laffer Curve. In just a few easy steps, then, it becomes apparent that believing in efficient labor markets supports keeping tax rates on the wealthy at the level at which tax revenue is maximized. The inevitable counter-argument will ask why the revenue-maximizing rate shouldn't apply to all earners. And the simple reason is that, where markets exist, it's only the mega-wealthy that can afford to go on "capital strike". Strictly speaking, if the labor market is efficient, a clerk at Wal-Mart earning $7 an hour leaving the labor force will cost the economy only the amount that she earns; the same logic that applies to the CEO applies to the rank and file. However, the unemployed clerk also won't be earning any income to pay for her needs. What this means is that, while the economy only values her up to the value of her salary, if she isn't working, she can't spend that nonexistent salary to support herself. As a result, she starves (or lives off of charity). The economy produces things, in short, because everyone needs things to live. But, for someone who has accumulated enough money to live on forever, assuming an efficient labor market, the only loss to society comes from the lost tax revenue. Otherwise... enjoy the leisure time, John Galt.
Now, I think the most interesting question here is the assumption involving efficient labor markets, and it's something that Krugman doesn't tackle in his post. It's no secret that inequality has exploded in the US-- the rich have gotten REALLY rich, and the poor and middle class have been left behind. In the 1960s, a CEO earned a few tens of times what an average employee earned-- maybe 20 or 30. Today, a CEO earns a few hundred times what an average employee earns-- 400 or so. This means one of two things must be true: either chief executives today are roughly 20 times more skilled now than they were 50 years ago, or the labor market is inefficient. And if the latter is true (which I think is a pretty safe assumption), the movement of income from labor to management and capital means one of two things is true. Either our compensation system used to redistribute wealth from management and capital to labor (in other words, CEOs and investors used to be wildly underpaid, and this subsidized rising wages for workers and the middle class; moreover, they also paid more in taxes then, so being upper-income must have been REALLY hard then...), or our compensation system now redistributes wealth from labor to management and capital.
I think the last statement rings most true, and the reasoning is pretty simple: workers productivity has been rising in the US pretty steadily. We're a technologically superior nation now to what we were when middle class wages stagnated, around 1980 (our communication systems are infinitely faster and more complex). We're a better-educated nation now than we were then. But somehow, in real terms, the gains have flowed almost entirely to the wealthiest 1%, and even more precisely to the wealthiest .1%. To believe that rising inequality is justified by market signals, you have to believe that the only Americans who have improved at what they do in about 30 years are executives, lawyers, doctors, and financiers. To me, that's a pretty hard case to make.
Where all this brings us is to Mitt Romney; both to his tax rate, and to his career at Bain Capital. The Democratic attacks on Romney's taxes have tended to go in the wrong direction. They've focused on how unfair it is that he has offshore accounts and imply that he's done something illegal. Let's be frank: I don't think there's any reason to believe that Romney's done anything illegal or untoward with his taxes. Like anyone, he's minimized his tax revenue under legal constraints. That's all well and good. But the question shouldn't be whether Romney pays an illegally low tax rate, but whether Romney and people like him, in the long run, pay a tax rate that's optimal from a social perspective. The answer to that, I think, is a clear no. Rather, I think our tax code provides a windfall to the mega-rich like Romney, and we should change that policy so that, instead of paying 15 or 20% of his income in taxes, Romney and people like him pay 30 or 35 or, God forbid, 40% of his income in taxes. If that sounds extravagant, it's useful to note that the implication of the efficient labor market postulate says the optimal top marginal tax rate for Romney and high earners like him is over 70% (the rate at which revenue is maximized). No one proposes that... but it should be in the discussion.
A last point concerns Romney's time at Bain Capital. Romney boasted of his work "creating jobs". The reality, though, is that private equity is not in the business of creating jobs. At its best, it's in the business of accelerating "creative destruction" by putting yesterday's companies out of business and paving the way for tomorrow's companies. But there's substantial evidence that what companies like Bain do in part is transfer wealth from labor to management and capital. Previously unionized labor is outsourced to contractors, whose workers receive lower pay and worse benefits. Tenured workers are laid off in favor of younger workers who are cheaper (there are market-based arguments for this, though there are also counter-arguments that workers start at these companies at sub-market wages due to the promise of advancement that used to come with making a career at a particular company). And the windfall goes to... managers, Bain executives, and Bain investors. Now, it's true that those investors aren't just rich folks-- they're pension funds and mutual funds and other retail investors. But it's equally true that a chunk of the gains represent a simple redistribution-- a transfer of wealth from workers to managers and investors that allows them to capture a chunk of society's wealth that is disproportionate to the value of their work.
So I think, in a narrow sense, there is class warfare. And, looking from the sidelines, I get the distinct sense that what we've got is a society in which the very richest are overcompensated, and are overcompensated at the expense of their workers. At the least, this makes a case for taxing them at a substantially higher rate, so that those workers can enjoy more of the benefits that they create, but which don't show up in their paychecks, and hasn't in decades. That, for me, is the way to think about how to make America the middle-class country we used to be, rather than one in which any and all social gains go toward making the rich super-rich instead of making the poor slightly less poor, or the middle class better off. That's not class warfare-- it's economics.
Sunday, July 8, 2012
Economists and health care
One of the things that strikes me most about the health care policy debate is just how little of it is focused on thinking about the actual policy implications of health care reform, and how much of it is rooted in misconceptions that people pass off as fact. A case in point, which I think is kind of relevant to the debate is a discussion I had with a co-worker last week. He brought up alternatives to the ACA, and I mentioned in passing that it drove me nuts that people talked about the solution to reform being "more markets". Which led him to respond that "virtually all" economists disagree. Of course, I called him out on this. The reality, of course, is that economists rather strongly lean the other direction, and have for years. Needless to say, when I brought up this being an issue in which the most prominent paper is almost 50 years old (the Kenneth Arrow piece), he dismissed it as "one paper by one economist" (never mind that it's still widely regarded as the pre-eminent paper in the field, and Arrow is a little more than "just some economist", but that's beside the point.
Although he wasn't much interested in hearing about 50 years of health care economics papers (and, let's be real, very few people are. Most people aren't big enough nerds and have better things to do than read academic papers for fun...), my colleague told me we'd "never agree" before we could start having a discussion. Fair enough. But he highlighted another flaw in the thinking of those who advocate for "market-oriented" approaches. When we got to talking about comparative-effectiveness research, he argued that, if this was an effective strategy, insurers would do it to cut payouts. But that's where his logic broke down. Just because doctors in a pay-for-procedure model have incentives in place to do more procedures, and do more expensive procedures rather than cheaper ones doesn't mean that they're always wrong to choose the more costly approach. While it might be that something like an X-Ray can catch 90% of what a CAT Scan can at a fraction of the cost, it doesn't follow that CAT Scans are redundant (this is entirely hypothetical; I hardly know the difference between the two, but this is assumed for argument's sake). Rather, there are good reasons why particular procedures are done at particular times, and why doctors can prefer one over the other. These vary not just based on the condition, but also based on the particular patient and their medical history. The reason doctors spend years in school and get paid big money is because they're highly skilled professionals, and their decisions can't be boiled down to a flowchart based on a few yes or no questions.
A big health insurer certainly has the breadth of patients to do comparative-effectiveness research. What it lacks is the capacity to monitor doctors that it oversees. It can't (and we don't want it to) tell doctors that they're doing superfluous procedures on patients simply because their view from 20,000 feet is insufficient to tell a particular patient what the best course of action is. As a result, insurers have controlled costs in other, even blunter ways. Along with rising premiums, driven by a lockstep rise in the cost of care, they use tools such as annual and lifetime caps to limit how much medical care they will cover. The problem with this, of course, is that there are plenty of patients who require more care than their annual or lifetime cap will permit. But doing away with these caps without broader just puts the health insurance industry out of business or puts health insurance out of reach for an even bigger chunk of Americans. If doctors are compensated for more expensive procedures, and insurers have to cover those procedures, there's really no incentive to cut costs. And then the problem just gets worse.
It should be clear that, as much as some people might rail against the government making health care decisions for people, allowing insurers to make health care decisions for people is even worse. This isn't to say that the insurance industry is "evil", per se-- just that, like any corporation, it's a profit-maximizing entity that makes more money when it pays for less. This creates a bit of a conflict if we accept that the social goal is to get people quality medical coverage. While cost control is really hard (as the prominent MIT health care economist Jonathan Gruber, who designed both RomneyCare and ObamaCare noted, it's not a problem that we'll ever solve, just one that we can hope to manage), we have some preliminary evidence that particular ways of paying for health care can cut costs without diminishing (and, in fact, while often enhancing) quality. The encouraging evidence is in comparing doctors who participate in the traditional pay-per-procedure model with those in integrated systems like the Mayo Clinic and Kaiser Permanente. The big difference in the latter model is that doctors, rather than being paid for procedures, are salaried. This means that, regardless of how much care they order, they are paid the same amount (likely with some incentives for good outcomes, but those are very different from incentives to do more procedures). Theoretically, such an approach would allow the provider itself to pressure the physicians to do fewer procedures, but in practice this doesn't seem to be the case. Doctors have an easier time ordering procedures and then finding out that insurance won't pay for some of them after the fact than being told by their employer that they shouldn't do procedure X, Y, or Z because it's too expensive. The former puts paying for care in someone else's (the patient's) court. The latter is an assault on their professional dignity.
I think, as a start, moving toward salaried physicians is a step in the right direction. By making the doctor strictly a doctor and not a businessperson providing medical services, this model strips away the incentive to overmedicate people and enables doctors to focus on treating patients.
Although he wasn't much interested in hearing about 50 years of health care economics papers (and, let's be real, very few people are. Most people aren't big enough nerds and have better things to do than read academic papers for fun...), my colleague told me we'd "never agree" before we could start having a discussion. Fair enough. But he highlighted another flaw in the thinking of those who advocate for "market-oriented" approaches. When we got to talking about comparative-effectiveness research, he argued that, if this was an effective strategy, insurers would do it to cut payouts. But that's where his logic broke down. Just because doctors in a pay-for-procedure model have incentives in place to do more procedures, and do more expensive procedures rather than cheaper ones doesn't mean that they're always wrong to choose the more costly approach. While it might be that something like an X-Ray can catch 90% of what a CAT Scan can at a fraction of the cost, it doesn't follow that CAT Scans are redundant (this is entirely hypothetical; I hardly know the difference between the two, but this is assumed for argument's sake). Rather, there are good reasons why particular procedures are done at particular times, and why doctors can prefer one over the other. These vary not just based on the condition, but also based on the particular patient and their medical history. The reason doctors spend years in school and get paid big money is because they're highly skilled professionals, and their decisions can't be boiled down to a flowchart based on a few yes or no questions.
A big health insurer certainly has the breadth of patients to do comparative-effectiveness research. What it lacks is the capacity to monitor doctors that it oversees. It can't (and we don't want it to) tell doctors that they're doing superfluous procedures on patients simply because their view from 20,000 feet is insufficient to tell a particular patient what the best course of action is. As a result, insurers have controlled costs in other, even blunter ways. Along with rising premiums, driven by a lockstep rise in the cost of care, they use tools such as annual and lifetime caps to limit how much medical care they will cover. The problem with this, of course, is that there are plenty of patients who require more care than their annual or lifetime cap will permit. But doing away with these caps without broader just puts the health insurance industry out of business or puts health insurance out of reach for an even bigger chunk of Americans. If doctors are compensated for more expensive procedures, and insurers have to cover those procedures, there's really no incentive to cut costs. And then the problem just gets worse.
It should be clear that, as much as some people might rail against the government making health care decisions for people, allowing insurers to make health care decisions for people is even worse. This isn't to say that the insurance industry is "evil", per se-- just that, like any corporation, it's a profit-maximizing entity that makes more money when it pays for less. This creates a bit of a conflict if we accept that the social goal is to get people quality medical coverage. While cost control is really hard (as the prominent MIT health care economist Jonathan Gruber, who designed both RomneyCare and ObamaCare noted, it's not a problem that we'll ever solve, just one that we can hope to manage), we have some preliminary evidence that particular ways of paying for health care can cut costs without diminishing (and, in fact, while often enhancing) quality. The encouraging evidence is in comparing doctors who participate in the traditional pay-per-procedure model with those in integrated systems like the Mayo Clinic and Kaiser Permanente. The big difference in the latter model is that doctors, rather than being paid for procedures, are salaried. This means that, regardless of how much care they order, they are paid the same amount (likely with some incentives for good outcomes, but those are very different from incentives to do more procedures). Theoretically, such an approach would allow the provider itself to pressure the physicians to do fewer procedures, but in practice this doesn't seem to be the case. Doctors have an easier time ordering procedures and then finding out that insurance won't pay for some of them after the fact than being told by their employer that they shouldn't do procedure X, Y, or Z because it's too expensive. The former puts paying for care in someone else's (the patient's) court. The latter is an assault on their professional dignity.
I think, as a start, moving toward salaried physicians is a step in the right direction. By making the doctor strictly a doctor and not a businessperson providing medical services, this model strips away the incentive to overmedicate people and enables doctors to focus on treating patients.
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