naked capitalism

Stress will bring out an organism’s or an organization’s defenses, and the beleagured Obama administration is looking mighty defensive these days. The great unwashed public isn’t buying its PR about its supposed accomplishments, such as the disgrace that it misbrands as financial reform (which 80% are skeptical will prevent a future crisis) and health care reform (which a recent poll shows disapproval v. approval in a 4:3 ratio).

Yet this is an Administration that, ironically, seems to think its Faustian pacts with corporate interests can be sold to a presumed-to-be-clueless public with artful PR. But this supposedly media savvy bunch has persistently violated a fundamental rule of marketing: you don’t misrepresent your product. While politicians all oversell what they can accomplish, the Team Obama campaign has become increasingly desperate as the inconsistency between the Adminstration’s “product positioning” and observable reality become increasingly evident. As we noted in March:

The widespread, vocal opposition to the TARP was evidence that a once complacent populace had been roused. Reform, if proposed with energy and confidence, wasn’t a risk; not only was it badly needed, it was just what voters wanted.

But incoming president Obama failed to act. Whether he failed to see the opportunity, didn’t understand it, or was simply not interested is moot. Rather than bring vested banking interests to heel, the Obama administration instead chose to reconstitute, as much as possible, the very same industry whose reckless pursuit of profit had thrown the world economy off the cliff. There would be no Nixon goes to China moment from the architects of the policies that created the crisis, namely Treasury Secretary Timothy Geithner, Federal Reserve Chairman Ben Bernanke, and Director of the National Economic Council Larry Summers.

Defenders of the administration no doubt will content that the public was not ready for measures like the putting large banks like Citigroup into receivership. Even if that were true (and the current widespread outrage against banks says otherwise), that view assumes that the executive branch is a mere spectator, when it has the most powerful bully pulpit in the nation. Other leaders have taken unpopular moves and still maintained public support.

Obama’s repudiation of his campaign promise of change, by turning his back on meaningful reform of the financial services industry, in turn locked his Administration into a course of action. The new administration would have no choice other that working fist in glove with the banksters, supporting and amplifying their own, well established, propaganda efforts.

Thus Obama’s incentives are to come up with “solutions” that paper over problems, avoid meaningful conflict with the industry, minimize complaints, and restore the old practice of using leverage and investment gains to cover up stagnation in worker incomes. Potemkin reforms dovetail with the financial service industry’s goal of forestalling any measures that would interfere with its looting. So the only problem with this picture was how to fool the now-impoverished public into thinking a program of Mussolini-style corporatism represented progress.

To put it more simply, “it’s the policies, stupid.” The Obama Administration appears pathologically unable to see that its flagging poll numbers and the high odds of credibility-sapping Democrat losses in the mid-term elections are the result of errors in judgment. But instead, it is now reduced to trying to shift blame for its flagging fortunes onto….evil pinkos! This would be comical if it weren’t utterly pathetic.

What passes for the left in this country has been so marginalized that it has limited sway to begin with (although the public is strongly supportive of some positions they defend, such as preserving Social Security and Medicare). And Team Obama would have to have a badly distorted self image to think its centrist (at best) policies qualify as progressive. A more logical explanation is that the Administration presumed it could either co-opt or corral enough liberals so that any salvos from that flank would be limited to those deemed so extreme that their opposition might actually be a plus (think the controversial Noam Chomsky). Jane Hamsher has chronicled the aggressive Obama efforts to shackle liberal groups :

Someone asked me over the weekend to be more explicit about what the term “veal pen” means:

The veal crate is a wooden restraining device that is the veal calf’s permanent home. It is so small (22″ x 54″) that the calves cannot turn around or even lie down and stretch and is the ultimate in high-profit, confinement animal agriculture.(1) Designed to prevent movement (exercise), the crate does its job of atrophying the calves’ muscles, thus producing tender “gourmet” veal.

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About 14 weeks after their birth, the calves are slaughtered. The quality of this “food,” laden with chemicals, lacking in fiber and other nutrients, diseased and processed, is another matter. The real issue is the calves’ experience. During their brief lives, they never see the sun or touch the Earth. They never see or taste the grass. Their anemic bodies crave proper sustenance. Their muscles ache for freedom and exercise. They long for maternal care. They are kept in darkness except to be fed two to three times a day for 20 minutes…..

I heard it over and over again — if you wanted to criticize the White House on financial issues, your institutional funding would dry up instantly. The Obama campaign successfully telegraphed to donors that they should cut off Fund for America, which famously led to its demise. It wasn’t the last time something like that happened — just ask those who were receiving institutional money who criticized the White House and saw their funding cut, at the specific request of liberal institutional leaders who now principally occupy their time by brown nosing friends and former co-workers in the White House.

And so the groups in the DC veal pen stay silent. They leadership gets gets bought off by cocktail parties at the White House while the interests of their members get sold out….

Where are they on health care? Why aren’t they running ads against the AMA, the hospitals, the insurance industry barons who have $700 million in stock options, PhRMA, the device manufacturers and the White House for doing back room deals with all of the above?

Why are they not calling for the White House to release the details of those secret deals?

Because they are participating in those deals, instead of trying to destroy them. Well, that and funneling millions of dollars in pass-throughs to their consultant friends that they are supposed to be spending on the health care fight.

The truth is — they’ve all been sucked into insulating the White House from liberal critique, and protecting the administration’s ability to carry out a neoliberal agenda that does not serve the interests of their members. They spend their time calculating how to do the absolute minimum to retain their progressive street cred and still walk the line of never criticizing the White House.

Yves here. With this as background, the impotent White House tongue-lashing reported yesterday in The Hill is particularly revealing:

The White House is simmering with anger at criticism from liberals who say President Obama is more concerned with deal-making than ideological purity.

During an interview with The Hill in his West Wing office, White House press secretary Robert Gibbs blasted liberal naysayers, whom he said would never regard anything the president did as good enough.

“I hear these people saying he’s like George Bush. Those people ought to be drug tested,” Gibbs said. “I mean, it’s crazy.”

The press secretary dismissed the “professional left” in terms very similar to those used by their opponents on the ideological right, saying, “They will be satisfied when we have Canadian healthcare and we’ve eliminated the Pentagon. That’s not reality.”

Of those who complain that Obama caved to centrists on issues such as healthcare reform, Gibbs said: “They wouldn’t be satisfied if Dennis Kucinich was president.”…..

Progressives, Gibbs said, are the liberals outside of Washington “in America,” and they are grateful for what Obama has accomplished in a shattered economy with uniform Republican opposition and a short amount of time.

Yves here. I suspect most readers will take issue with Gibbs’ straw manning and claim that “progressives” are solidly behind Obama. What interests me is his attempt to discredit via branding a group the Administration sees as enemies.

“Professional left” evokes images of union members drummed up to come out and join protests, all carrying the same mass manufactured placards. Yet the irony here is the Administration’s frustration results from the fact that the people that are real thorns in its side are the antithesis of career political foot soldiers of the left of center persuasion. Per Hamsher, that’s the sort they’ve been able to neutralize.

Instead, the ones that have annoyed them are those who have followings not because they are paid operatives of leftie groups, as Gibbs intimates, but effective, charismatic commentators on TV, such as Jon Stewart, Rachel Maddow, and Dylan Ratigan. So the “professional,” which should be a compliment, is instead a slur, implying they make their money by (per Gibbs’ rant) hewing to an ideological line, as opposed to simply calling out obvious and persistent Obama Administration hypocrisy.

To the extent any of the members of these professional lefties’ fanbases even take notice of Gibbs’ peculiar attack, it’s certain to engender more loyalty. The fact he’d resort to a stunt like this indicates not simply desperation, but also detachment from reality.

Don’t expect this updated assessment, that Medicare now is expected to be viable till 2029, to stem the expected push to gut Social Security and Medicare. From Bloomberg:

Medicare will gain an extra 12 years of fiscal life as a result of the health law signed in March by President Barack Obama, a government report said, supporting the administration’s claims about the value of the overhaul….

A report issued by Medicare on Aug 2 predicted the overhaul may more than double the time before the program ran out of funds. Under the health law, $145 billion is scheduled to be saved over a decade as a result of payment cuts to Medicare Advantage while $205 billion in savings will come from as a result of lower payments to Medicare providers, according to an administration report released Monday.

Note the story recites a common mischaracterization: that the stresses on Medicare are due to both demographics and rising health care cost assumptions. The cause is fact is almost solely the rising health care cost projections. We cannot harp on this issue enough: the US has grotesquely costly health care which produces no better results than that of other advanced economies. And the differences, in terms of rationing and queuing, are exaggerated. What are insurer denials of coverage for costly treatments if not rationing? And delays in seeing a specialist are pretty common (indeed, in NYC, it’s hard to find a GP any more).

Obama, as with the banking industry, blew his opportunity to have a real impact on the underlying problems of health care that lead to high costs, including its fee for service model and perverse incentives.

This post first appeared on April 16, 2007

I always take note when a writer takes a position that is contrary to his usual stance. Tyler Cowen of Marginal Revolution is an intelligent and thoughtful commentator, but hews too closely to free market orthodoxy for my taste. But his review of Maggie Mahar’s Money- Driven Medicine, a hard-hitting critique of health care, American style, is positive, insightful, and implicitly acknowledges that health care reformers have a point.

The reason that Cowen supports Mahar’s assessment is that she explains why health care has failed in terms an economist can appreciate: she shows why the market has failed. One big culprit is information asymmetry. One of the conditions for a market to function well is that buyers and sellers have perfect information. In the medical arena, there is often a lack of good data as to what constitutes optimal practice. Among the many examples are the backing and forthing on hormone replacement therapy and mammograms. Now condiser: these treatments have been the subject of multiple large scale studies. Most protocols haven’t been investigated this intensely. And even when there is good information, the patient is at the mercy of his medical providers, the drug companies, and device makers. He can’t challenge their views; his best hope is to shop for a better practitioner, which is a costly, time consuming, and deeply flawed process (how can he judge whether a doctor is making sound recommendations?).

The other major element of market failure is the considerable disparity in buyer and seller power. If you are very sick, you will do anything to get better, which includes spending a lot of money. And our can-do, technology-loving culture favors doing more, whether beneficial or not.

From Cowen:

The book has the most coherent, supportable, and fleshed out anti-market story I’ve seen. It both tries to explain why the current system works as it does, and historically how it evolved from more modest and less expensive ways of doing business. It’s not just a rehash of the usual stories about the VA system or France. The discussions of the growth of for-profit hospitals, the increasing specialization of medicine, the problems with pay for performance, and markets for medical devices are all full of interesting tales.

I interpret the basic story as this: the American health care cost spiral comes from suppliers and their entrepreneurial abilities to market expensive and highly specialized services of dubious medical efficacy. Medical care starts off as ambiguous in value and hard to measure in quality. Customers are cowed by doctors and other family members into accepting or even demanding what is offered to them. Third-party payments make the problem worse, and government intervention has stoked rather than checked the basic dynamic. You end up with massive expenses, lots of stupidity, and – because of its expense — radically incomplete coverage. Every now and then the extra services do pay off, but not frequently enough to boost American stats on health care quality.

Ezra Klein also has an excellent review in Washington Monthly. He gives more of a feel of the book itself (and makes clear it’s a bit too heavy on anecdote for his taste). He concludes with an urgent plea:

It is up to us to decide if the ultimate goal of care should be cash, if our system of insurance should incentivize identifying those most in need of care so they can be denied access to it, if our hospitals should fret over the bottom line or the flat line, if our physicians should practice in a context that leaves them desperate to confide in the unknown reporter who leaves an unexpected message on their voicemail.

Finally, an article by Mahar, “The State of the Nation’s Health,” in Dartmouth Medicine, discusses inefficiency and variations in regional practice (which reflects a lack of consensus on what “good practice” is).

Reader Francois T highlighted a story at Washington Monthly that I recommend highly to readers. It illustrates how the intersection of corporate pursuit of profit and regulatory backfires can produce tidy oligopolies that pursue rent-seeking behavior with impunity. From his e-mail:

A well-intentioned move by Congress in 1986, followed by another one in 1996 converted Group Purchases Organizations (non-profit collectives formed by medical facilities that hoped to keep a lid on prices by banding together to make bulk purchases of supplies and devices at a discount) in for profit quasi-monopolies that now has a near total stranglehold on the medical device market in the USA.

Needless to say that all the negative consequences of such a state of affairs (stifling of innovation, reduced competition, impossibility to access the hospital markets for smaller players, excessive prices paid by…us!, avoidable pain and mortality) has happened and is still happening, despite congressional inquiries and court cases.

It is a long, but very illuminating article about the inner workings of an oligopoly that is out there to stick it to all of us, make health care costs even more egregious than they are now, and harm patients by choking life-saving innovations. Of course, the fuckheads in Congress cannot be bothered to reverse their mistakes, since there is money for them too, in the form of this legalized bribery called campaign contributions.

An extract:

GPOs started to come under scrutiny. The New York Times ran an investigative series on their business practices in 2002, and Congress followed suit with a string of hearings. One of the first witnesses was California entrepreneur Joe Kiani, who had invented a machine to monitor blood-oxygen levels. Unlike other similar devices, Kiani’s worked even when patients moved around or had little blood flowing to their extremities, a crucial innovation for treating sickly, premature infants, who tend to squirm and need to be monitored constantly for oxygen saturation—too little and they suffocate, too much and they go blind. But most hospitals couldn’t buy Kiani’s product because his larger rival, Nellcor, had cut a deal with the GPOs.

You can find the story here.

For those who did not catch wind of it, the Peterson Foundation, which has long had Social Security and Medicare in its crosshairs, held a bizarre set of 19 faux town hall meetings over the previous weekend to scare participants into compliance and then collect the resulting distorted survey data, presumably to use in a wider PR campaign. It’s important to keep tabs on this propaganda effort, since its big budget (the Foundation has a billion dollars to its name), means it will keep hammering away on this topic. But it appears that they overestimated how much public opinion expensively produced and stage-managed presentations can buy.

The brazenness and ham handedness of these so-called “America Speaks” sessions, which have garnered well deserved criticism on the Internet, is probably due to at least two factors: deluded confidence that the average person will fall into line when a confident and well-credentialed presenter makes a pitch and a stunningly naive belief that aggressive efforts to manipulate opinion and mislabel it as polling would not be called out.

Anyone who has come within hailing distance of any kind of polling or survey development or implementation knows well how susceptible the results are to subtle, much the less overt, influence. People are extremely suggestible; that’s why drug trials are double-blind, placebo controlled: the mere knowledge by a researcher that a study participant is getting real meds instead of a placebo is too often signaled to the patient, and the placebo effect (which varies tremendously, but seems to average around 30%) greatly distorts findings. For surveys, a small change in question wording can a surprisingly large impact on results. For instance, “How do you rate the job Obama is doing” will elicit markedly lower marks than “How do you rate the job Obama is doing as President.” Apparently, the second version of the question elevates Obama’s status and reminds respondents of the difficulty of his role. No doubt the “AmericaSpeaks” designers were confident they could use this suggestibility to their advantage.

Several Web accounts by participants have discussed the format of the meetings and the various ways the Peterson crowd tried to stack the deck : David Dayen at FireDogLake (hat tip reader Doug Smith), letsgetitdone at Corrente (here, here, here, and here), and Suzie Madrak. But the most serious salvo came from Benjamin Page and Lawrence Jacobs, who produced a working paper discussing the considerable shortcomings of “deliberative forums” like AmericaSpeaks. From its abstract:

Deliberative forums – including the America Speaks version — are subject to serious pitfalls that make them unreliable as measures of “true” public opinion or as guides to future opinion. Expert analysis of evidence from many sources makes clear that large majorities of Americans strongly support Social Security, oppose benefit cuts (even for the sake of deficit reduction), and prefer to strengthen Social Security finances by raising the payroll tax “cap” or otherwise using progressive taxes. Officials who ignore these views will do so at their peril.

I suggest you read some of these posts, but to give you a flavor, some excerpts, first from FireDogLake:

The entire event was absolutely designed to create a panic about the deficit among the participants.

Slickly produced scare videos talking about the dire straits of the budget were prevalent. Multiple charts and graphs without precise numbers or percentages were handed out. Speakers discussed how “most Americans are concerned about the deficits and debt,” and how we cannot grow our way out of the problem. The current state of the economy, which needs an increase in aggregate demand, mostly in the form of government spending, to avoid a relapse into recession, got a short mention at the beginning of the discussion, an inclusion which seemed forced and tacked-on. Overall, there was about 15 minutes of discussion of the current economic problems, and 5 hours on the deficit. Organizers stressed that their solutions are designed to kick in after the country hits recovery, but the compounded effect of stressing deficits over and over is undeniable. There was no slick video about the need for economic recovery, put it that way….

“Everything must be on the table,” …But all the solutions were very prescribed and very narrow. An authoritative “Options Workbook” sets out potential budget solutions, on the spending and revenue side. 28 pages cover spending cuts, 15 pages cover revenue solutions. And the very first pages of the workbook talk about cuts to Medicare, Medicaid and Social Security.

While the workbook has pages and pages describing the health care system, the final menu of solutions simply list amounts of percentage cuts to Medicare and Medicaid, without mentioning how to achieve those cuts. The options to “achieve savings” in the program include means-testing, raising deductibles and co-pays, increasing the Medicare eligibility age, limiting Medicaid eligibility and voucher-izing Medicare. There are no progressive solutions nor is there anything close to the potential savings achieved in the Affordable Care Act, things like health IT and bundled payments and increased efficiency.

Letsgetitdone pointed to bias at all levels of the process:

The framing of exercises in the decision process continually restricted choices to ones that bring participants back to the supposed problem of a deficit and debt crisis. The web-streamed talks about national conference proceedings and orientations, and the brief constricted discussions of major values issues all worked to fit participants’ thinking to the ideas and frames presented in worksheets and the Federal Budget 101 presentations. Lines of discussion that would have led outside of the intended framing were politely aborted by the facilitators, pleading limited time, and the need to get through the agenda, and give everyone a chance to speak, so that any person developing counter-themes to the major narrative did not have a chance to develop these counter-themes and counter-narratives in the context of the supposedly unbiased process.

He also described them in detail. For instance:

The meeting began in earnest with the facilitator asking the participants:

”Share your name, where you are from, and complete the phrase: And in a sentence, I’d like you to share your greatest hope for the future of the country that your children, grandchildren and future generations will inherit.”

….The question served to orient everyone to think in terms of the future, and also to think of others and the country rather than of themselves. The bias in the question toward collective rather than individual concerns is palpable. But also the question connects up easily to one of the favorite arguments of deficit hawkism, namely that deficits lead to accumulating debts that our children and grandchildren will have to pay off. This proposition is a myth, but clearly, AmericaSpeaks, was trying to connect up to it here.

The amusing part is that the event moderators had trouble force feeding the geese they had thought to stuff with their message. For instance, from Letsgetitdone:

When the primary facilitator stated the agenda and explained its purpose, a number of people immediately called for a discussion of the purpose of the event and questioned whether there really was a fiscal crisis. I pointed to the Government’s option to deficit spend without issuing debt and pointed out that doing this would save nearly $1.4 Trillion in interest costs in 2025, alone, and that, the cumulative effect of a no debt issuance policy would be to eliminate a good part of the deficits projected between now and then. Another participant, active, in the DC non-profit world, mentioned the continuing recession and high levels of unemployment. She pointed out that SS had no immediate fiscal problems, and that the “crisis” was caused by people in the financial industry, who are not the ones being asked to sacrifice, but who are now asking others to do so. Yet another, an economist at the Bureau of Labor Statistics, talked about most of the difficulties being due to health care cost increases and the current recession. He denied that there was any long-term fiscal problem. Still others also questioned whether the topic of the meeting was appropriate.

From Suzie Madrak:

For the first time in a long time, I might have some faith in America. Because no matter how many times the facilitators of this event (which was funded heavily by Pete Peterson, the conservative billionaire who wants to cut Social Security) tried to steer us toward cutting Social Security and Medicare, the 3500 or so people who took part in this national town hall weren’t buying it. Sure, there were Fox News junkies here and there, and some cautious, low-information voters who kinda-sorta disagreed, but the majority who attended seemed to have their own ideas about how to solve the deficit “problem.”

You know what most of them wanted to do? Soak the rich — and cut defense spending. (Are you listening, President Obama?)

A post by Page and Jacobs made clear that any objective research on the questions of Social Security and Medicare would find rock-solid support among Americans:

Remarkably, however, AmericaSpeaks got lucky (or perhaps, from Peterson’s point of view, unlucky.) Despite all the biases, on several issues town hall participants came up with opinions not very different from those that have been expressed by majorities of Americans in dozens of well-designed national surveys. Participants opposed cuts in Social Security benefits, insisting that benefits must be preserved when balancing the budget. They wanted to strengthen the economy, favoring the current stimulus bill (stalled in the Senate) by a margin of 51% to 38%. In order to reduce budget deficits, most favored cutting defense spending and enacting progressive tax measures: raising the payroll tax “cap” so that incomes over $106,800 are subject to the tax (85% in favor); raising high-end corporate and personal income taxes; and imposing new taxes on carbon and on securities transactions. Only on the Social Security retirement age did the results conspicuously stray from actual public opinion…

Support for Social Security is found in virtually all segments of the American population. The opinion that “too little” is being spent on Social Security is shared by majorities of Republicans, Democrats, and Independents; by majorities of men as well as women; by whites as well as African Americans or Latinos; by people with a lot of formal education as well as people with little. Most important, support is very strong among young (age 18-29) Americans, fully 63% of whom told the most recent GSS that we are spending “too little” on Social Security. The supposed generation gap on Social Security is mostly a myth. There is no intergenerational war between “greedy geezers” and the young.

Yves here. It is refreshing that this effort failed, but it is a given that the Peterson crowd will go back to the drawing board and figure out a way to credibly produce the answer it wants.

Readers may know I have perilous little sympathy for Big Pharma. The industry too often wraps itself in the mantle of science, in particular, claiming its needs its high profits and hence high prices to support its research and development efforts. In fact, it spends more on marketing than on R&D (and perilous few industries sell products with fat enough margins to support the cost of frequent sales calls to small businesses, let alone prime time TV ads). And it is a given that it allocates as much overhead as its accountants will tolerate to its reported R&D levels.

A new and interesting line of attack has been opened against Big Pharma’s defense of its high US prices and its ongoing attacks on Europe and other countries that negotiate discounts. US drugmakers have contended that the rest of the world is effectively free-riding on US research, and that its inability to charge higher prices outside the US limits funding of R&D (ahem, have we forgotten the fact that most really big ailments already have treatments of some sort, making it much less likely that anyone will find a new blockbuster drug?).

But a more granular look at drug pricing within the US shows that drugmakers offer enough discounts here to undermine their attacks on non-US health schemes. And the foreign drug regimes at least assure that everyone in the population is on the same footing, while here, the highest prices fall on those either outside health care plans or in ones without favorable drug pricing, so the burden of higher prices falls disproportionately on lower income people.

From the Financial Times:

Claims by the US drugs industry that the US disproportionately funds research and development of new drugs by paying higher prices than Europe for its medicines have been undermined by a new study to be published soon.

Panos Kanavos and Sotiri Vandoros at the London School of Economics argue in their report that a rigorous like-for-like comparison shows that transatlantic differences in patented medicine prices are modest and declining over time.

In a forthcoming article in Health Economics, Policy and Law, the co-authors conclude that “public prices for branded prescription medicines in the US are comparable to those in key European and other OECD countries”.

Their findings are an embarrassment for the industry, and notably PhRMA, its powerful Washington, DC-based trade body. In the past PhRMA has argued that Europe’s ill-conceived public policies, including price controls and sluggish regulatory decision-making, have chilled innovation and raised doubts among private investors who help to underwrite research.

But the study confirms data released recently by several pharmaceutical groups, including AstraZeneca and GlaxoSmithKline. This data – confirmed informally by senior industry executives – suggests profits in the US are only marginally greater than in Europe.

Yves here. There is one area of difference:

His study concludes that Europe remains a relatively attractive market by volume and price, even though budget deficits have forced through aggressive price cuts in several EU states in recent weeks.

But Mr Kanavos demonstrates that manufacturers of branded drugs do not significantly cut prices to compete with lower cost generic rivals once patents expire. Governments typically have to ensure that prescribers switch to generic alternatives to save money.

Yves here. I am waiting for this study with baited breath. I wonder if they also adjusted for the differences in marketing costs.

The first section of this post is by Warren Mosler, the President of Valance Co. who writes for New Deal 2.0

Deficit doves are doing more harm than the hawks — here’s what they need to know.

The deficit hawks are prevailing. The economy remains an economic and social disaster. Medicare has already been cut by the Democratic majority in the new health care bill. Social security is now under attack by the new bipartisan Congressional Commission on Fiscal Sustainability and Reform. Meanwhile, the media tries to present a balanced approach, pairing deficit hawks with deficit doves.

But the deficit hawks aren’t the problem. They do the best they can with arguments that feature empty rhetoric supported by the underlying assumption that deficits are ‘bad.’

Actually, it’s the well-intentioned but misinformed deficit doves featured by the media that may be doing the most harm. They don’t understand actual monetary operations and reserve accounting, and therefore incorporate the same fundamentally incorrect assumptions as the deficit hawks. They agree deficits are ‘bad,’ but try to argue that’s the case only in the long term. They agree that deficits can be too high, but try to argue they have been higher, particularly in World War II, and therefore larger deficits should be easily manageable, while agreeing there is a level that could not be manageable. They agree markets could be ‘unfriendly’ and a lack of confidence could translate into far higher interest rates, but argue that the current low rates for Treasury securities are the markets telling us that at least for now confidence is high indicating markets are eager to fund current deficits. And they agree that ‘bang for the buck’ matters and support tax cuts and spending increases based on higher multipliers.

The problem is that the two sides of the story are in fact fundamentally on the same side. The media does not feature the true deficit dove story. Nor do any of the true doves have even a small piece of the administration’s ear, or the ear of anyone in Congress willing to speak out. There are maybe a hundred true doves, including many senior economics professors. The problem is this professional, highly educated, highly experienced collection of true doves does not get a fair hearing.

The true deficit dove positions include:

1. Since government spending is merely a matter of changing numbers in bank accounts on its own spread sheet, there is no solvency issue or sustainability issue
2. The right size deficit is the one that coincides with our stated goals of full employment and price stability.
3. Interest rates for government are set by the government, and not by the market place.
4. Bang for the buck considerations are moot as the size of the deficit per se is not an issue.

The answer to why the true doves capable of articulating the above points don’t’ get a fair hearing may be credentials. My BA in Economics from the University of Connecticut in 1971 doesn’t cut it, nor the fact that the very large fund I managed was the highest rated firm for the time I ran it. And my net worth never getting anywhere near a billion hasn’t helped either. Seems billionaires get celebrity status and lots of airtime for just about anything they want to say.

The same is true of the economics professors who’ve got it right. Without being from and at the usual ‘top tier’ schools, none can even get published in main stream economics journals, where submissions featuring obvious accounting realities are routinely rejected. In fact, any economist who states accounting identities and operational realities such as ‘deficits = savings’ or ‘loans create deposits’ or ‘Federal spending is not constrained by revenues’ is immediately labeled ‘heterodox’ and unworthy of serious mainstream consideration. Even the late Wynne Godley, who did have reasonable credentials as head of Cambridge Economics, and was the number one UK economics forecaster, was labeled ‘unorthodox’ because his mathematical models featured the deficits = savings accounting identity.

My three proposals that can immediately turn the tide and get us back to full employment and prosperity remain:

1. A full payroll tax (fica) holiday
2. $150 billion of Federal revenue sharing to the States on a per capita basis
3. An $8/hr Federally funded job for anyone willing and able to work to facilitate the transition from unemployment to private sector employment.

The only thing between today’s state of the economy and unimagined prosperity is the space between the ears of policy makers that’s filled with the deficit hawk rhetoric, and unfortunately further supported by the rhetoric of the deficit doves the media selects to present the ‘opposing view.’

Yves here. Mosler wrote this piece to address the debate over the federal budget deficits in the US, which meant he could skip over some important caveats.

Modern Monetary Theory does describe how the world works in a fiat currency regime, meaning the “government” is the issuer of sovereign currency. Despite all the hyperventilating about default, governments that issue their own currency will never be forced to default (note that Greece, Spain, Ireland, and California are not in this position). They can create a lot of inflation, but that is a separate issue.

The times in the modern era when sovereign states have defaulted is:

1. Under a gold standard

2. When they either are not currency issuers OR have adopted a currency they do not control (eg. countries like Argentina that dollarized their economies)

3. Countries that have overly large banking sectors relative to GDP AND those banks have large liabilities in foreign currencies AND those banks have major solvency problems (Iceland, this would also be the reason for a UK default)

The lone exception is the Russia default of 1998, which remains a bizarre, opportunistic incident. Russia’s sovereign debt was under 20% of GDP, and there was no reason for it to have defaulted, even if its debt levels had been higher.

Now to a general point about MMT. The negative responses to it are almost reflexive, shoot the messenger: deficit = bad, we aren’t prepared to listen to anyone who says otherwise.

Sorry, gang, it IS more complicated than that. We’ve provided this formula before:

Domestic Private Sector Financial Balance + Fiscal Balance – Current Account Balance = 0

Now let’s consider what has happened in the US, and some other advanced economies. Our corporations, in their infinite wisdom, have decided increasingly to offshore and outsource, which means move operations outside the US and to turn big chunks of their operations over to other companies, again often foreign ones.

Let’s go back to the formula. First result is that we have a current account deficit. So that means that the sum of the other two parts of the economy, the private sector plus the public sector will run deficits, as in borrow more than they spend. Maybe one is a net saver, the other a bigger net borrower, or both are net borrowers. But at least one sector will be a net borrower.

But let’s consider another set of issues. The fixation of public companies on quarterly earnings plus the offshoring/outsourcing phenomena have led them to become net savers, even in expansions (see here for a long-form discussion). Normally, the household sector is a net saver (households generally try to save for retirement and for emergencies). Most readers appear to implicitly assume that those funds should be used by business, that government borrowing crowds out private sector borrowing. But while INDIVIDUAL businesses do borrow, recall they also generate cash. The trend, even in periods of growth, when businesses as a whole ought to be borrowing and investing in growth, is instead that they are net savers.

In that scenario, even if the US had no trade deficit, the government would need to run a deficit to accommodate the desire of the private sector to save. The alternative would be that the US would need to go from its assumed trade balance to a trade surplus. That would happen through a fall in prices and wages in its tradeable goods sector (which can happen via domestic deflation, which will make debt burdens worse in real terms, or a fall in the dollar) and/or an increase in productivity so that our exports gained market share.

Now the private sector in the US is deleveraging, which and reducing debt is tantamount to saving. We have pointed out that the euro would likely have to fall to 60 to 80 cents to the dollar to prevent the eurozone from falling into deflation (which will make debt levels in real terms worse and almost certainly precipitate the defaults that the austerity programs being implemented are meant to avoid.

The certain continued fall in the euro (the trajectory is a given, the open questions are how far and how fast), and China’s signaling that it is likely to devalue its currency if the euro falls materially means the dollar is likely to remain strong, Right now, every country with overly high debt levels wants to break glass, weaken currency, and use exports to provide it with some lift to offset the contractionary impact of deleveraging. It appears unlikely that the US will be able to play that game. Odds are high that we will continue to be a net importer.

So, if we decide to run government surpluses now, the result is almost certain to be deflation, at best a Japan-type stagnation with high unemployment (and the US has far less social cohesion than Japan does), at worst a deflationary downspiral. But in either case, austerity becomes self-defeating. The value of outstanding debt rises as prices fall and GDP contracts. Default becomes more likely, and as defaults rise, banks become more impaired, investors more cautious, and the downturn can easily accelerate and become self-reinforcing.

Now some readers are correctly concerned about the wisdom of letting the cohort in DC spend more, given our misadventures in the Middle East, and healthcare “reform” serving as a Trojan horse for further entrenchment and enrichment of Big Pharma and the heath insurers. I am certainly not keen about handing a blank check to the likes of Geithner (oh wait, we did that already, it was called the TARP). We also need to keep pressure high on the need to reform governing structures.

As much as the logic of continued government spending is unpalatable to many, be careful what you wish for. If you think the economy now is not so hot, just wait to see what happens if deflation takes hold.

In case you have any doubts, not only does the US rank badly on health care metrics, the US has ranked at or next to the bottom of this survey in past years. But be careful in pressing these findings too hard on unreceptive audiences; I lost a friend who insisted the US had the best care in the world when I brought the results from 2007 to her.

From the Commonwealth Fund (hat tip reader Paul S):

Despite having the most expensive health care system, the United States ranks last overall compared to six other industrialized countries—Australia, Canada, Germany, the Netherlands, New Zealand, and the United Kingdom—on measures of health system performance in five areas: quality, efficiency, access to care, equity and the ability to lead long, healthy, productive lives, according to a new Commonwealth Fund report. While there is room for improvement in every country, the U.S. stands out for not getting good value for its health care dollars, ranking last despite spending $7,290 per capita on health care in 2007 compared to the $3,837 spent per capita in the Netherlands, which ranked first overall…

Earlier editions of the report, produced in 2004, 2006, and 2007, showed similar results. This year’s version incorporates data from patient and physician surveys conducted in seven countries in 2007, 2008, and 2009.

Key findings include:

On measures of quality the United States ranked 6th out of 7 countries. On two of four measures of quality—effective care and patient-centered care—the U.S. ranks in the middle (4th out of 7 countries). However, the U.S. ranks last when it comes to providing safe care, and next to last on coordinated care. U.S. patients with chronic conditions are the most likely to report being given the wrong medication or the wrong dose of their medication, and experiencing delays in being notified about an abnormal test result.

On measures of efficiency, the U.S ranked last due to low marks when it comes to spending on administrative costs, use of information technology, re-hospitalization, and duplicative medical testing. Nineteen percent of U.S. adults with chronic conditions reported they visited an emergency department for a condition that could have been treated by a regular doctor, had one been available, more than three times the rate of patients in Germany or the Netherlands (6%).

On measures of access to care, people in the U.S. have the hardest time affording the health care they need—with the U.S. ranking last on every measure of cost-related access problems. For example, 54 percent of adults with chronic conditions reported problems getting a recommended test, treatment or follow-up care because of cost. In the Netherlands, which ranked first on this measure, only 7 percent of adults with chronic conditions reported this problem.

On measures of healthy lives, the U.S. does poorly, ranking last when it comes to infant mortality and deaths before age 75 that were potentially preventable with timely access to effective health care, and second to last on healthy life expectancy at age 60.

On measures of equity, the U.S. ranks last. Among adults with chronic conditions almost half (45%) with below average incomes in the U.S. reported they went without needed care in the past year because of costs, compared with just 4 percent in the Netherlands. Lower-income U.S. adults with chronic conditions were significantly more likely than those in the six other countries surveyed to report not going to the doctor when they’re sick, not filling a prescription, or not getting recommended follow-up care because of costs.

Yves here. In theory, ObamaCare will improve some of these metrics, particularly equity, but it is entirely conceivable given the effectiveness of the other health care systems in this survey that the US’s relative standing will not improve. I was extremely impressed with the caliber of the care I received when I lived in Australia, particularly given how inexpensive it was (and I was not a participant in the official health care scheme).

A fresh Gallup poll reports that Americans are most worried about….federal debts (hat tip Marshall Auerback via the Atlantic):

Gallup also provided a tally of how members of each party view the issue:

It would appear the ground has been laid rather effectively for (among other things) an assault on Social Security and Medicare. As we have pointed out before, Social Security is not under any immediate stress, and it would take only some minor tweaks to alleviate the (well off in the future) strains. And contrary to popular perception, the reason Medicare spending will get out of hand is due to projected medical cost escalation, not demographics. In other words, the “crisis” in Medicare is a symptom of our broken health care system, and not an entitlements problem per se. But in addition to the continued ability of Big Pharma and the health insurance industry’s ability to make a bad situation worse, as witness our healthcare “reform,” consumers have also been deeply conditioned to see more treatment as better. From both a cost and side effects perspective, this is simply not often the case. As reader Francois T stated apropos a New York Times article that caused consternation among people who know the terrain:

My oh my! One could write a volume or two about that. I’ll limit myself to the obvious, at the expense of the details.

Their [Abelson and Harris] article and the saga surrounding its writing:

http://www.healthbeatblog.com/2010/06/the-new-york-times-attacks-the-dartmouth-research-part-1.html

http://www.healthbeatblog.com/2010/06/yet-another-source-distressed-by-how-the-nyts-presented-its-data-in-a-story-about-the-dartmouth-rese.html

is a prime example of, when it comes to health care, Americans in general harbor very deeply rooted preconceived notions that pretty much preclude any meaningful and long-lasting reform.

The one operating in the minds of Abelson and Harris is the most toxic: More is always better. They cannot possibly bring themselves to admit, despite the overwhelming evidence of 30 years (!!) of solid, peer-reviewed research demonstrating there are ways to provide better health care outcomes while doing less, but in a SMARTER way. The evidence is crystal clear, but so are the prejudices. Since this is politics, prejudices win, hands down. Being journalists for the NYT, Abelson and Harris seem incapable of going beyond the vulgus populus.

It is important to note here that the attacks on the Dartmouth research were almost inexistent during the period post Clinton failure to reform health care…until Obama started his own attempt. A cursory Lexis-Nexis search is quite convincing in this respect. Those who stand to lose income or power during a health care reform will first and foremost attack it. Mind you, they have the tremendous advantage of playing on those preconceived notions I alluded to above.

So ingrained are these, that even senators and congresspersons who know the Dartmouth very well (yes, there are some that do) will never, ever tout the evidence publicly. Press them a bit about why they don’t, and one shall witness oratory escape maneuvers that would put Houdini to shame. It is just not (yet) “politically feasible”, as they say.

Apart from the Dartmouth research, there is another irrefutable piece of evidence that, when it comes to health care, smart beats more: The VA system.

http://www.washingtonmonthly.com/features/2005/0501.longman.html

Now, before everyone jump at my throat with the Walter Reed scandal, I would recommend reading Best Care Anywhere, by Philip Longman (updated edition 2010)

As per Maggie Mahar:

In the 2010 edition of Best Care Anywhere Longman also recounts how the Bush administration attempted to dismantle the open-source VistA software culture that Kizer had built, “doing its best to recreate the dysfunctional VA of the 1970s.” Meanwhile, as more vets turned to the VA for care (in part because the care was so much better than it had been in earlier years), the Bush administration failed to provide enough funding, leading to long lines and not a few complaints.

Fortunately for the veterans, the situation has dramatically improved since the change in Administration. (There is still a lot of work to be done, but the trend is toward improvement)

The bottom line is this: Since 1994, the turnaround of the VA system demonstrate it is possible to provide good outcomes with high patient satisfaction (except in psychiatric services, but this is another long and complex story) by following what the evidence provides, instead of being guided by which reimbursement schemes is the flavor du jour.

Similarly, the fear about rising deficits is misplaced right now. As George Soros pointed out in a speech today in Vienna, the action of righting an economy when it faces serious financial stresses is a lot like straightening out a car that has gone into a skid: you need to turn the wheels into the skid, which looks like taking it further off the track where you want it to go, until it regains traction and you can then steer it back to its proper path. In this case, we need an expansion of public debt to offset the needed contraction in private sector debt, and then to (Soros did point out that this was a tricky operation). Otherwise, a resumption of the crisis is in the cards.

There is considerable evidence that the deficit fears in general, and the attack on entitlements in particular, has been marketed actively. Our colleague Tom Ferguson explains below:

From HousingWire:

Of all of the foreclosures in the RealtyTrac online database, less than 50% have mortgages worth less than what is owed, said Rick Sharga, senior vice president at RealtyTrac, during a session at REO Expo, which concludes in Dallas Wednesday….

The overall unemployment rate dropped slightly to 9.7% in May, from 9.9% in April, mainly due to the labor force shrinking by 322,000, according to the US Department of Labor Bureau of Labor Statistics. This has caused foreclosures to increase in places previously thought safe from the crisis, including Provo, Utah and Portland, Ore….

The overall unemployment rate dropped slightly to 9.7% in May, from 9.9% in April, mainly due to the labor force shrinking by 322,000, according to the US Department of Labor Bureau of Labor Statistics. This has caused foreclosures to increase in places previously thought safe from the crisis, including Provo, Utah and Portland, Ore.

Yves here. Note that this may not mean what it seems to mean. The hidden assumption is that the houses being foreclosed upon are representative of the pool of hopeless delinquencies. But we may have selection bias. One possibility is that banks are moving faster to foreclosure in homes that have positive equity. That could be a function of bank reluctance to take further writedowns (which might call their marks on mortgage assets in question) plus the fact that the markets with the steepest real estate price declines (such as the most stresses areas of Florida, California, and Arizona) may also have the most clogged court and bank processing pipelines. From a recent article in the New York Times:

The average borrower in foreclosure has been delinquent for 438 days before actually being evicted, up from 251 days in January 2008, according to LPS Applied Analytics….

More than 650,000 households had not paid in 18 months, LPS calculated earlier this year. With 19 percent of those homes, the lender had not even begun to take action to repossess the property — double the rate of a year earlier.

Yves again. There is another reason this pattern is not a positive development from a bank/investor perspective. Servicers advance interest payments and real estate taxes while a property is in default, and recoup it when the property is sold. So longer time to foreclosure means greater eventual losses. Moreover, as more homeowners are fighting foreclosures, it increases loss severities. For instance, one case I am familiar with will show at least a 400% loss severity.

Tom Adams contributed to this post.