James Pethokoukis

Politics and policy from inside Washington

Wall Street pay continues to be the Great Distraction

Oct 27, 2009 17:05 UTC

Again, all this focus on Wall Street pay distracts from more important issues.  Gary Becker summarizes:

I have not seen convincing evidence that either the level or structure of the pay of top financial executives were important causes of this worldwide financial crash. These executives bought large quantities of mortgage-backed securities and other securitized assets because they expected this to increase the average return on their assets without taking on much additional risk through the better risk management offered by derivatives, credit default swaps, and other newer types of securities. They turned out to be badly wrong, but so too were the many financial economists who had no sizable financial stake in these assets, but supported this approach to risk management.

The experience of other financial crashes also does not indicate that either the level or form of compensation of top financial executives were major factors in precipitating these crashes. Thousands of banks failed during the Great Depression, as did hundreds of American savings and loans institutions during the 1980s, without heads of these institutions in either case getting particularly high pay, or pay that was mainly in the form of bonuses and stock options. My impression is that this same conclusion applies to the Mexican bank crisis of the mid 1990s, and the Asian financial crisis at the end of the 1990s.

The generous bonuses and stock options received by financial executives may often have been unwarranted, but they are being used as a scapegoat for other more crucial factors. Financial institutions underrated the systemic risks of the more exotic assets, and apparently so too did the Fed and other regulators of financial institutions. In addition, large financial institutions may have recognized that they were “too big to fail”, and that they would be rescued by taxpayer monies if they were on the verge of bankruptcy because they took on excessively risky assets.


I think you’re both missing the point. This whole business of Wall Street pay levels and bonuses &c. has been a convenient shield for Mr. Obama and his radical advisors to move into territory previously off-limits. See David Rosenberg’s analysis of the current situation in the subsequent article. Mr. Obama has moved into corporate management (GM, Chrysler, AIG); has demonized insurance companies preparatory to taking over (read: socializing) the healthcare industry; and attempted to delegitimize FOX news and anyone else who would dare differ with his agenda. (Think Jimmy Carter and his criticism = racism remarks) Keeping the ignorant masses occupied watching some hapless Wall Street executives get crucified might have seemed a winning strategy for Mr. Obama’s radical advisors. American voters may be getting wise to this game.

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Riding a downbound train

Oct 27, 2009 16:41 UTC

This has to be a classic piece of analysis by David Rosenberg:

Without either deep spending cuts or tax increases (a dirty three-letter word in the U.S.A. — remember Bush Sr.’s “read my lips” back in the early 90s that cost him the election?) the only way out of this fiscal mess caused perhaps by the prior Administration and now accentuated by the current Administration will be by monetizing the debt. …  In the final analysis, we all should know how this is going to play out. It is going to be somebody else that foots the bill for all this government incursion, and that is very likely the creditors who hold U.S. government paper. Not that the U.S. would ever default; that will never happen. However, there is very likely going to be a stage where this mountain of public sector debt gets monetized, and while gold is inherently difficult to value, what is going to drive the price higher, in the future, to new record highs will be the supply of bullion relative to the supply of dollars. ( …  Let’s face it, the degree of retrenchment that would be needed to bring the deficit-to-GDP ratio down to the 3-4% level that would allow the debt/GDP ratio to stabilize, would simply be too much for the U.S. electorate to put up with.

Nor does think much of the state of the stock market:

In other words, this is not the onset of a sustainable secular bull market as we had coming off the fundamental lows of prior bear phases, such as August 1982, when:

• Dividend yields were 6%, not sub-2%.
• Price-to-earnings multiples were 8x, not 26x.
• The market traded at book value, not over two times book.
• Inflation and bond yields were in double digits and headed down in the future, not near-zero and only headed higher.
• The stock market competed with 18% cash rates, not zero, and as such had a much higher hurdle to clear.
• Sentiment was universally bearish; hardly the case today.
• Global trade flows were in the process of accelerating as barriers were taken down; today, we are seeing trade flows recede as frictions, disputes and tariffs become the order of the day.
• A Reagan-led movement was afoot to reduce the role of government with attendant productivity gains in the future; as opposed to the infiltration by the public sector into the capital markets, union sector, economy and of course, the realm of CEO compensation

Healthcare Reform: The Day After

Oct 27, 2009 16:34 UTC

Paul Krugman takes a look at the impact of  healthcare reform:

Like the bill that will probably emerge from Congress, the Massachusetts reform mainly relies on a combination of regulation and subsidies to chivy a mostly private system into providing near-universal coverage. It is, to be frank, a bit of a Rube Goldberg device — a complicated way of achieving something that could have been done much more simply with a Medicare-type program. Yet it has gone a long way toward achieving the goal of health insurance for all, although it’s not quite there: according to state estimates, only 2.6 percent of residents remain uninsured.

There are, of course, major problems remaining in Massachusetts. In particular, while employers are required to provide a minimum standard of coverage, in a number of cases this standard seems to be too low, with lower-income workers still unable to afford necessary care. And the Massachusetts plan hasn’t yet done anything significant to contain costs.

Me: What? What was that last part? Oh, right. ObamaCare probably won’t do much to stop the explosive rise in healthcare costs. Indeed, the Massachusetts plan didn’t really try to reign in healthcare costs, putting the carrot in front of the stick. So now the system is running out of money, forcing service cuts. Some might even call that rationing. ObamaCare creates the illusion of cost control, but likely will be more carrot than stick in practice.


CBO reports that the House health reform bill will reduce the budget deficit by $100 billion over the next ten years. That sounds like cost containment to me.

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The internal contradictions of ObamaCare

Oct 26, 2009 18:54 UTC

At the heart of the economic case for U.S. healthcare reform is a simple comparison: Whereas America spends 16 percent of GDP on healthcare, the average across OECD countries was 8.9 percent, as of 2007.

So what do these frugal healthcare systems look like from the ground? T.R. Reid tries to find out in his book “The Healing of America: A Global Quest for Better, Cheaper and Fairer Health Care.”

In this health-policy travelogue, Reid visits a number of nations and interacts with their healthcare systems as he seeks help for a bum shoulder.

The main commonality is far from revelatory: lots more government. In one country, government determines the prices for medical treatment, in another it’s running the hospitals and employing the doctors.

So, too, would various Democratic plans for U.S. healthcare reform increase government intervention. Greater subsidies for the purchase of private insurance, new regulations on insurance companies, and, most likely, some sort of new government-run health plan.

But when one imagines what a post-reform American healthcare system might look like, there are two notable aspects in which it would still differ greatly from other OECD nations.

First, American doctors may pay as much as a hundred times more for malpractice insurance than their foreign counterparts, and will likely be sued several times during a career. Democratic healthcare reform would mostly leave this system in place.

But there is reason to believe that medical-liability reform could produce big cost savings. The Congressional Budget Office pegs the savings in overall healthcare spending at $110 billion over 10 years.

Some private estimates are far higher. A new study by the healthcare analytics unit of Thomson Reuters (http://r.reuters.com/nuc85f ) finds that defensive medicine — such as overuse of antibiotics and lab tests — by malpractice-jittery doctors costs the United States as much as $300 billion a year.

Another important difference is in what healthcare providers are paid. Reid’s book is full of examples of spartan medical facilities and doctors compensated more like high-end New York Times reporters than low-end Manhattan hedge fund managers.

Yet seeking to appease the doctors lobby, Democrats recently tried and failed to shield physicians from $250 billion in Medicare reimbursement cuts over the next decade. Expect them to try again.

Can ObamaCare “bend the curve” of rising healthcare costs? Not if it attempts to pay for reform more through higher taxes than by cutting compensation for doctors and trial attorneys.


well OBAMACARE past…
WONDER when they are going to go after the nurses salaries
to see so many strikes, wonder how soon the other
contry nurses will come in and take the jobs for
min wage…
come to the U>S>A and get citizen ship
just have to be a nurse and work for peon wages…

Does anyone know the second country that pays the most
for nurses besides U.S.A.

The deficit’s risk to the dollar

Oct 26, 2009 18:02 UTC

Allan Meltzer on deficits and the dollar:

The administration admits to about $1 trillion budget deficits per year, on average, for the next 10 years. That’s clearly an underestimate, because it counts on the projected $200 billion to $300 billion of projected reductions in Medicare spending that will not be realized. And who can believe that the projected increase in state spending for Medicaid can be paid by the states, or that payments to doctors will be reduced by about 25%?

While Chinese government purchases of U.S. debt may delay a dollar and debt crisis, they also delay any effective program to reduce the size of that crisis. It is far better to begin containing the problem before the U.S. blows a hole in the dollar and starts another downturn.

A weak economy is a poor time to reduce current government spending or raise tax rates, but we don’t require draconian immediate changes. We do need a fully specified, multi-year program to restore fiscal probity by reducing spending, and a budget rule that limits the size and frequency of deficits. The plan should be announced in a rousing speech by the president. The emphasis should be on reducing government spending.

Me: This could be just like in 2004 when President Bush ordered the Marines to take Fallujah right after the election. Maybe right after the 2010 midterms, Obama will announced a VAT.

Scary unemployment in metro areas

Oct 26, 2009 14:50 UTC

An analysis by IHS Global Insight looks at unemployment in major metro areas:

Looking ahead, payrolls will be rising in most metros for consecutive quarters a year from now, but the unemployment rate will have shown little improvement, as employment gains will not be sufficient to absorb enough job seekers.  A third of metro areas will have jobless rates in double digits in the fourth quarter of 2010, with 16 exceeding 15%.  … By the end of 2012, the jobless rate will still be above historic norms, but it will finally slip below 8% in more than half of metro areas.


Oil prices, inflation and a double-dip recession

Oct 26, 2009 14:24 UTC

Andy Xie paints a dire scenario:

Central banks around the world have released massive amounts of money in response to the current financial crisis … But the proposition that a weak economy means low inflation is false. The stagflation of the 1970s proves it.

This round of monetary growth has mainly fed speculation, not credit demand for consumption or investment. Speculation has reached a dangerous point with the oil price threatening to reach triple digits again. Its implications for inflation may spook the central banks to raise interest rates quickly and trigger another crash.The excess money supply has created a new liquidity bubble.

The resulting asset inflation (stocks and bonds in developed markets and everything in emerging markets) has stabilised the global economy. The current equilibrium is one on a pinhead. The hope for strong economic recovery led by emerging economies raises investor optimism – and asset prices. This eases pressure on corporate balance sheets, spurs property production and boosts consumption through the wealth effect, making the hope self-fulfilling in the short term.

A rising oil price threatens to derail this recovery. It can trigger a surge in inflation expectation and a major crash of bond markets. The resulting high bond yields may force the central banks to raise interest rates to cool inflation fears. Another major downturn in asset prices would reignite fears about the balance sheets of global financial institutions, leading to new chaos.

Study: US healthcare system wastes $800 billion a year

Oct 26, 2009 14:11 UTC

This study from the healthcare analysis unit of Thomson Reuters has a high degree of truthiness, it seems to confirm what many Americans intuitively think and believe:

One example — a paper-based system that discourages sharing of medical records accounts for 6 percent of annual overspending.

“It is waste when caregivers duplicate tests because results recorded in a patient’s record with one provider are not available to another or when medical staff provides inappropriate treatment because relevant history of previous treatment cannot be accessed,” the report reads.

Some other findings in the report from Thomson Reuters, the parent company of Reuters:

* Unnecessary care such as the overuse of antibiotics and lab tests to protect against malpractice exposure makes up 37 percent of healthcare waste or $200 to $300 a year.

* Fraud makes up 22 percent of healthcare waste, or up to $200 billion a year in fraudulent Medicare claims, kickbacks for referrals for unnecessary services and other scams.

* Administrative inefficiency and redundant paperwork account for 18 percent of healthcare waste.

* Medical mistakes account for $50 billion to $100 billion in unnecessary spending each year, or 11 percent of the total.

* Preventable conditions such as uncontrolled diabetes cost $30 billion to $50 billion a year.

Me:  In one way this does confirm what Democrats have been saying, that it is possible to cut spending without hurting quality.  Getting at the waste and inefficiency is tough, though. Obamacrats seems to have scant interest in tort reform. And one reason that Medicare has low administrative costs is that it doesn’t make the same effort as private insurance companies to go after fraud. And doing IT reform over such a large and complex system is already proving difficult and is some cases making patient care worse.


On the contrary, the current Health Care legislation does not address the “waste” problems. In fact, these reforms have more potential to acerbate the problems. Tort reform would go a long way towards reducing unnecessary care, if in fact this is about malpractice exposure. How is (current) reform going to change the fraud aspect. Fraud and government programs go hand-in-hand. By adding more government, it will not only increase the fraud, but it will add to the third item, administrative inefficiency and overhead. There are things that can be done to attack these problems, but the “democrats” just want bigger government–not better.

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Popping the China Bubble

Oct 23, 2009 19:27 UTC

Good sense from Michael Auslin in The American:

Just like today with China, pundits, investors, and the media largely proclaimed that the Japanese party would go on forever. Today, the sophisticated management of the Chinese government is offered as proof that China will always experience growth (or if contraction, a soft landing). Back in the 1980s, Japanese companies were assumed to have discovered the secret to hyper-efficient production and thus endless profits, while the country’s bureaucrats were lauded as perfect macro-planners. Inefficiencies, protected industries, poor management, and a sclerotic bureaucracy were all ignored by those who wanted to believe the hype. Yet such weaknesses were exacerbated by a culture of excess that destroyed consumer reality. Once it took root in Japan, expectations changed permanently and traditional restraint was abandoned. The savings rate dropped, and people paid exorbitant amounts for new houses and cars. I remember watching as whole parties in Tokyo restaurants walked away from tables full of food that was ordered and then left to be thrown away. The economics fed and then followed the social disease. Eventually, the asset bubble burst and the whole edifice came crashing down.


Funny how when the Japanese are observed to be wasteful it gets some ink. Here in the states, we’ve been disgracefully wasteful for decades and every system in place encourages it. Never mind those old folk who actually remember the rationing of the 40s and the hunger of the depression. Those are the true conservatives,,not those money mad asses who claim the label these days.

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Is another ‘Perot Moment’ on its way?

Oct 23, 2009 18:57 UTC

I found this to be a very interesting quote from Even Bayh (in the WaPo):

People understand that we’re stealing from future generations …We’re setting the stage for another Perot moment.

Although the common wisdom is that voters don’t care about deficits, I think the word “trillion” changes the political calculus. As do charts like this one (via Megan McArdle):



I certainly hope people have the idea that the deficit is out of control. Most in congress appear totally oblivious to the amount of debt they are racking up. There must be some rules,limits, and definition: on public debt, on current accounts deficits, and of the free market concept. I do intend to vote to try to correct these problems.

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