hard heads soft hearts

a scratch pad for half-formed thoughts by a liberal political junkie who's nobody special. ''Hard Heads, Soft Hearts'' is the title of a book by Princeton economist Alan Blinder, and tends to be a favorite motto of neoliberals, especially liberal economists.

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Tuesday, July 21, 2009
I'm rather suprised how much economics scribbling I've done lately.

The Real American Economic Metaphor Real Americans Have Been Waiting For

With all the talk of green shoots, glimmers,etc. the metaphor I come back to when thinking about the downturn is the old NASCAR phenomenon of "racing back to the caution flag"


i.e. the old economic model of asset bubbles, leverage, rising inequality, stagnant wages, union-busting and salvation through stock-market seems to have run its course, and no one knows what will replace it (inflation? deflation? punitive taxes? higher taxes? lower taxes caused by tax backlash? etc.).

It's a good bet that that things are really going to change, but at this time it's not at all clear what that change will consist of, or when it will occur. In other words, there's been an accident, but the caution flag has not yet come out. So people are semi-desperately trying to accumulate cash/ secure their place before the caution flag comes out, and the rules change.

Racing back to the caution is tempting but anti-social and dangerous behavior, which is why NASCAR eventually banned it. I don't think merely cutting back/trying to accumulate cash counts as being anti-social, but if you're simultaneously cutting back *and* opposing government programs for people who need a paycheck and can't get one, I think that qualifies you as a Robby Gordon-style asshole, because you're setting up a game of musical chairs which is inevitably going to leave some people out in the cold.

. . .Lester Thurow wrote a book in the seventies, in which he hypothesized that there might be a trade-off between static and dynamic efficiency. e.g. tenure, you tolerate the static inefficiencies of tenure, in order to get other advantages you can't get without tenure. Lately, when looking at real-world situations, it seems to me that the trade-off between static and dynamic efficiency is a very relevant concept, which people don't really seem to talk about. Eg. Circuit City's decision to fire its experienced workers, pursuing static efficiency, not realizing they were harming their dynamic efficiency.

IIRC, the book was: "Generating inequality : mechanisms of distribution in the U.S. economy" written in 1975.

. . .So I was wondering, when it comes to health insurance, whether there's any evidence that "mutual insurance" companies work any better than publicly-held insurance companies. To quote Wikipedia,

"Mutual insurance is a type of insurance where those protected by the insurance (policyholders) also have certain "ownership" rights in the organization. . .Historically, insurance began in the USA through a mutual (or cooperative) structure. Recently, some insurance companies have gone through demutualization and become public companies in an effort, among other things, to improve their ability to acquire capital. . ."



. . .as opposed to publicly held insurers which are normal joint-stock companies.The reason I ask, is that it seems to me that, in theory, health insurance would be a good fit for mutual insurance, since if health care costs decrease, policy-holders should, in theory, see an immediate difference in their premiums.

But is there any truth in practice? Are there any mutual-insurance health-care plans which have a reputation for working well?

A quick google search turned up this paper on the subject:


Pure Versus Mutual Health Insurance: Evidence from Swedish Historical Data
Journal of Risk and Insurance, March 2004
Lena Nekby

. . .re: Gordon Brown, I think one big difference between Canada and the US/UK is that Canada has a perceived abundance of natural resources, while the US/UK don't, which made a difference to the asset bubble, and I think made a difference to the political fallout of the bubble bursting. Also I think one thing you might have mentioned is that Brown is one of the world leaders most committed to fighting global poverty, and global warming.

Frankly I find the parallels between David Cameron and Bush, who both rose to popularity by proposing big cuts in the inheritance tax, to be eerie, and wonder why more people don't make the comparison. To elaborate, the same compassionate conservatism, the same promise to "restore" values, character, leadership, common sense, the same massive chip on their shoulder about book-learning & intellectual snobbery, the same promise to preserve all the popular middle-class programs whilst cutting taxes, the same desire to make national politics more like high-school politics, the same lack of coherent thought, the same Uriah Heepish sentimentality, etc. etc.

. . .So I'm listening to Krugman's first Robbins lecture and it seems to me the key concept of a recession is the fallacy of composition, or as Krugman has written before, the difference between a closed system and an open system. That is, people want to increase their economic security by accumulating cash, but while an individual person can do that, society as a whole cannot increase its economic security merely by accumulating cash, it can only do so by producing real economic output.

Perhaps one of the causes of a recession is cash suddenly becomes much more attractive as a store of value, because other stores of value have suddenly become much less attractive?

And it seems to me that one important phenomenon of the late 20-th century is the perception that land & other natural resources are going to become scarcer over time, and therefore the important thing to do to become an economic winner is to position yourself to be a rentier, rather than a renter/worker.

So it seems to me that one of the automatic stabilizers that might be worth considering is to sort of tip the scales in the other direction, to make being a rentier less desirable, and to make being a renter/worker more desirable, especially during a down economy.

So suppose you had a "modest wealth tax", as Edward Wolff once proposed & you wrote about. Has any economist discussed linking a George-ist style wealth tax to the unemployment rate/ employment performance of an economy?

So in boom times of low unemployment, the wealth tax goes down, to reward the wealthy for doing a good job of employing people. While in times of high unemployment, the wealth tax goes up, to give the wealthy an incentive to bring unemployment down as quickly as possible?

For other taxes, you don't want to raise them during a recession, but it seems to me that the situation might be different for a wealth tax. It seems to me that low wealth tax rates during boom times and higher taxes during bust might actually be stabilizing, as the wealthy might accept that it's not possible to escape economic pain by beggaring thy neighbor.

. . .So I'm listening to Krugman's second Robbins lecture, and the question that comes to my mind is if all these people were wrecking their balance sheets with excessive consumption, how come that didn't result in more inflation?

One possible answer is that it did result in inflation, but not inflation of things measured under the CPI. In this vein, I'm sort of intrigued by Kevin Drum's post about the The 6th Street Viaduct, adjusted for inflation, costing 10 times more than in 1932.


Is William Baumol still around? I'd be interested in his analysis of the economic crisis, and where the recovery comes from.

. . .In Chris Hayes's article "The Compensation Hustle", he wrote:

"Bloated CEO salaries aren't exactly new, but why they persist is harder to explain than you might think. Every dollar paid to an executive above his or her actual worth comes from the pockets of the shareholders. And while workers may be too beaten down to fight back, investors aren't exactly a powerless class in America. Why, then, do they allow clubby compensation committees and consultants to pick their pockets? "

It's a good question, and the answer that makes sense to me is that most small shareholders don't seem to buy stocks for the dividends, they buy them for the rise in the stock price. And it seems to me that management encourages this, encouraging shareholders to view their company's stock *not* as a stream of dividends but as a "rapid grower".

There was an interesting little illustration of this recently, it seems to me. GE's stock was getting hammered, and was so low that, if the company kept it's annual dividend, it represented a really good deal. Instead of saying "well, we think the stock price is too low, but paying dividends is what we're here for" the CEO cut the dividend, not on grounds that GE couldn't afford to pay the dividend, but simply because he preferred not to give common stockholders that rich a deal. I found it illuminating: clearly management does not view the purpose of their jobs as earning dividends, but views a dividend as a necessary evil, something that has to be managed, like ordinary worker wages. And the CEO was Jeff Immelt, someone who I think is more honest and honorable than most CEOs.

Kevin Drum recently ran two comment threads, with the questions

1) Why is the modern financial system so profitable? Shouldn't it actually be getting less profitable over time?


2) So what has financial innovation gotten us, aside from massive profits for clever bankers?


The whole threads are probably worth reading, but here where my guesses:

1)Decline in interest rates

I'd second the people who are fingering the decline in interest rates. In the long term lower-interest rates should reduce the income of the wealthy. And in the long-term interest rates should decrease in first-world countries, as capital becomes more and more abundant. But it turns out that in the short-term (i.e. since 1982) , the decline in interest rates has been great for the wealthy, as an asset yielding the same amount of interest or dividend or rental income has doubled or tripled or quadrupled in price. And rising asset values triggered a bubble mentality, leading to people investing based on the greater-fool theory, rather than for the underlying interest or dividends or rent.

2) When did we start to ignore old-fashioned belief in dividends?

Actually, I think the main problem re:the asset bubbles is not financial innovation per se, but the widespread belief that stocks have some mystical ability to be worth much more than the dividends that they pay out. Somewhere along the line, management managed to convince investors that dividends are nasty, filthy things; you have to pay taxes on them, management can reinvest your money much better for you than you can do for yourself, etc. Those things are often true, nevertheless the only fundamental point of owning a stock is to collect dividends. Without dividends, a stock is just a worthless piece of paper.

I was skimming a book on Buffett & acounting, and read one point that seemed true to me. There is one day a year where you can get an accurate number for a company's profits: the day they pay taxes. So the lesson was to be careful of a company that has large reported profits, for which it pays little in taxes. If a company pays little in taxes, it's possible that its real profits are also little, and that it's reported profits are a mirage.

Similarly, it seems to me that the small investor needs to be careful of a richly valued stock that pays little in dividends. Especially keep in mind that most corporations have a lifecycle, so if a company doesn't pay out dividends when its profits and growth are fat, there's a non-remote possibility that those profits will never be distributed to shareholders - rather, they will be eaten up if/when the company enters its period of decline, overtaken by new competitors/technologies.

Google and Microsoft, for example, are great *companies*, to be sure, great organizations, run by honest and good managements, for the most part. But is there any reason to believe Google and Microsoft are good stocks?

. . .Evil thought: mark-to-tax mortgaging. Was thinking about Prop. 13, and had a thought about one way California might have prevented the worst of the bubble burst - to not allow homeowners to assess their house, for morgage purposes, for any more than they assess their house for property-tax purposes. Too late now, but it does indicate that, in general, allowing people to borrow against rapidly appreciating assets should be something policymakers keep an eye on.

. . .Is there any data on how much of their reported profits publicly traded corporations were retaining, and how much they were paying out in dividends, and whether the retained-profits number increased during the bubble years?

. . .Thinking about this crisis, I think a key phenemenon was that as the bubble went on, we were increasingly counting our chickens before they hatched. Of course we have do this to value financial streams of payments, but it seems to me that not only we did it, but we did it to a greater and greater extent, e.g. the rotten idea to privatize the state lottery, getting a one time payment for the state in exchange for 20 years of lottery profits.

There was even a cant financial industry phrase that justified this increased chicken-counting: "debts are easy to manage, but be careful about liabilities". That piece of wisdom implied that you should take an organization, fire as many employees as possible(reducing liabilities, and accounting for future savings immediately), then load it with debt (because "debt is easy to manage").

. . .I've been thinking about the Bastiat quote:

"Everyone wants to live off the state. They forget that the state lives off of everyone."

It seems to me the statement is true & important, but a converse statement is also true & important:

"Everyone wants to live off investments. They forget that investments live off of everyone."

That is, a socialist economy is bad for economic performance, but a rentier economy is *also* bad for performance, and it seems to me there is less awareness/appreciation of this among mainstream economists.

Delong once pointed to Vickrey-Mirlees as the originators of this kind of "sweet-spot" thinking, where policy tries to find the optimal middle ground between socialism and rentierism. Who are the the current economists who carrying on the Vickrey-Mirlees ideas?

. . .I have a question on the 1982 recession, which seems to me a good example of a recession which had a strong, fast, reasonably sustained recovery.

My question is, what were the total levels of combined stimulus for that recession, especially in the key years 1982-1984? That is, if you add the fiscal stimulus, plus the monetary stimulus, plus maybe the implicit stimulus of a falling dollar, plus maybe the implicit stimulus of asset prices which had hit rock bottom and had nowhere to go but up, what does that combined number come to, in terms of GDP or constant dollars?

In general, I have seen lots of discussion of the size of fiscal stimulus in terms of GDP, but I have not seen many attempts to equate monetary stimulus with fiscal stimulus, by discussing historical episodes of monetary stimulus in terms of their size in GDP.

The other question I have on stimulus is how to analyze whether passing guaranteed affordable health care, and other economic security-type programs, will have any effect on people's willingness to spend.


Reading Ezra's chat transcript, and was struck by the person who says "Sorry I don't care about the 45 million Americans without health insurance".

One response, ala the Simpsons, is "Oh I know, despite your protestations, that you really do care for the uninsured, you big softie."

But even assuming genuine indifference, I think a self-interested voter is still better off voting for a politician who cares at least a bit about the uninsured. After all, electing a politician who claims not to care for the uninsured is a good way, if you think about it, to elect a corrupt sociopath who will have no qualms denying health care to the uninsured, and also no qualms stealing your taxes, raiding your IRA, outsourcing your job for kickbacks, etc. etc.

It's a real dilemna for the purely self-interested voter. If you vote for a politician with the platform "I'll benefit you by screwing over someone else", how do you stop that politican from screwing you over, at the first opportunity? As American voters have learnt the hard way over the last few years, you can't.

And no, a 5% tax increase on someone making a $1 million a year does not count as screwing over someone, certainly not compared to denying someone basic health care.

This is related to a point John Quiggin made about the problem with buying stock in a company run by management that claims to be interested soley in maximizing profits for shareholders:


". . .So, more than in the past, it makes sense for corporations to cultivate diffuse goodwill. . .Richard Posner recognises much of this but argues that corporate managers should instead adopt a hypocritical pose of general concern. . .then exploit it to maximise profits. . .[But] if the managers of a company are chosen to be capable of successfully conning the public in the interests of shareholders, why would anyone expect them to forgo the chance to enrich themselves at shareholders’ expense?"

And this is the Simpsons quote I was referring to:


"Bart: Hey, how come Lisa gets a pony?

Homer: Because she stopped loving me.

Bart: I don't love you either, so give me a moped.

Homer: Too bad, boy, I can see the love in your eyes, so you don't get squat. Hee hee hee.

Bart: [looks depressed] Dohh. . ."

In other words, I think most people claiming not to love the uninsured are doing so not because they're sociopaths, but because they think it will get them a moped. Or a pony.