So Happy "Together"

Pardon the chain of attributions, but Jim Geraghty has today quoted Governor Deval Patrick quoting U.S. Representative Barney Frank as saying:

"Government is simply the name we give to the things we choose to do together."

This is a logical fallacy. Government is one of the things we choose to do together, but not everything that we choose to do together is government. America has long been known as a nation that does a lot of non-government things together: everything from churches to Boys and Girls Clubs to bowling leagues are things we do together that are not "government." For that matter, when you or I engage in a market exchange, it is not something we are doing something by ourselves. When I bought a rug online, it isn't as though the rug sprang fully formed out of some primitive goo. There was a seller, and we both thought we were better off because of that exchange.

What You Are Worth (An Economists Perspective)

Economists will tell you that something is worth what somebody is willing to pay for it. If a person walks into Starbucks and purchases a high cost specialty drink but gripes about being ripped off we would simply say, "Nobody was twisting your arm to buy it." If there wasn't any confusion over the price they must have believed the specialty drink was worth it. But, it seems like many Christians believe that we are not worthy or "worth it".

Like the economist says, "We are worth what somebody is willing to pay." We did not determine our own worth, but, when Jesus died upon the cross the Father determined our value and worth. The Father was saying that we are worth the sacrifice of his only son. What is more is that He does not have buyer's remorse. We may not be able to fathom the sentiment that produces such grace . . . and that is exactly what makes it so scandalous. We do not merit such grace and that makes us believe that we are not worth it; but, if you come to a place of stillness with the Father you will hear the voice of God calling you His beloved.

The truth is that we are His beloved and also that we did nothing to merit that title. It is by grace alone that we heard the call of eternity and inherited such a position. Remember, we did not determine our value, the Father did, and there is no higher price He could have paid.

Quantum of What?

Doug has performed a great service over the summer by organizing a readings group on the Economics of Moral Sentiments in which the first reading was, not surprisingly, the entire Theory of Moral Sentiments by Adam Smith.

As we reached a particularly meaty section near the end of the book, and over lunch discussed areas for future study such as corporate governance and "social" versus "fiduciary" responsibility, we had a lively discussion over how the concept of "equality" enters into economic policy. With apologies to the other members of the group for any over-simplifications or omissions, here's a laundry list of interesting ideas that catapulted around the room.

1 ) Is there or should there be any difference on how we view corporate executives who earn large compensation because the company they manage is doing very well (through, for example, incentives aligned through stock ownership) versus corporate executives who are paid large bonuses when the company they manage is going into the tank?

2 ) While question number 1 ) above has apparently entered the political radar screen from both political parties, why is this viewed a political issue instead of, above all, a shareholder issue? If I'm upset as a voter about Mr. or Ms. X getting a fat golden parachute to leave a company that's been run into the ground, why shouldn't I be even more upset as a shareholder? Corporations are, after all, voluntary associations of capital providers, operating under a great deal of government oversight in return for various liability limitations. As someone who has helped to incorporate a non-profit corporation, I know that the bylaws of a corporation --- the rules of governance --- aren't just incidental trivia to the incorporation process. Why don't we have more discussions about the public choice issues to shareholders of corporate bylaws?

3 ) "Equality" is by itself a loosely defined and extremely fluid concept. Equality between whom, and upon what dimensions?

4 ) Following up on 3 ) how many Americans actually believe in equality of either income or wealth as something that has a prior claim in it's own right? To make this concrete, what proportion of Americans would favor the force power of government being used to take either income or wealth from the "wealthy" and destroy it, simply for the purpose of making the gap between the "rich" and the "poor" smaller? Before you, the reader, argue that this is a silly scenario, consider the ongoing debate over the appropriate level of the tax on capital gains tax. The tax on capital gains appears to be one of the best examples of a tax that can actually provide less income to the government when the tax rate is raised by a modest amount. The reason is that it is relatively easy for stockholders to avoid making positive capital gains by rearranging their decisions about when to sell stock. One of the two major party Presidential candidates has already indicated that, for fairness reasons, he might favor an increase in the capital gains tax rate even if it meant that the government received less money.

5 ) Do Americans' views on this issue change when the abstract idea of "the rich" is replaced with a specific person from the world of sports or entertainment (Tiger Woods, Michael Phelps, Christian Bale, Brett Favre, Buster Posey)? We apparently crave inequality on the field and on the screen. No one seriously has argued that Michael Phelps ought to swim with weights attached. What about when these talented individuals earn CEO-like salaries, signing bonuses, or endorsement contracts?

6 ) Do the views of Europeans on questions 4 ) and 5 ) differ from the views of Americans?

7 ) Is there any support for an alignment of the Biblical concepts of justice with an outcomes-based rule of equality if it is the government that is supposed to (attempt) to enforce the required redistribution? I can't find a lot of support for that proposition. I just went to BibleGateway and searched on "equality" in several different translations. The only resource-based reference that repeatedly arose was Paul's exhortation for private assistance between the more well and less well off churches, with the explicit idea that the flow would reverse if the situations were reversed. "Then there will be equality" (2 Corinthians 8:14, NIV).

What I see in the Bible is a whole lot of discussion of:

A ) Unjust means of acquiring wealth, with particular emphasis on deceit, cheating, stealing, and corruption of legal and religious institutions.

B ) Unjust insensitivity of those who have wealth in ignoring those "marker" members of society who need assistance: orphans, widows, invalids, prisoners, aliens, those living through natural disasters, and so forth.

(I will leave for a future post a discussion of what the Biblical authors meant when they used the term "the poor". The original language words translated as "poor" apparently have meaning beyond "very low income individuals".)

A Good Word in a Foreign Land

My conjecture from the previous post was that successful boycotts possessed the common strand of sacrifice. In the history of boycotts often times banding together and enduring extended periods of suffering was necessary to push the opposition to the point of fatigue. Boycotts that did not do accomplish this likely did not accomplish their objectives (counter examples are welcome). Martin Luther King once said that he was sure that his capacity for suffering was greater than the ability of others to inflict pain upon him.

About a year ago my Grandmother sent me a package that contained a photo album of some boyhood pictures. It was filled with aunts and uncles in their youth and other relatives that had since passed into eternity. And, among those pictures my Grandma included a World War Two ration book that belonged to my Great Grandmother. Holding this small slice of history I was somewhat in awe. But, I’ll never forget what a friend of mine said about the ration book that really troubled me, “That will never happen again.” What he was saying was that sacrifice is a foreign word and/or action to our generation. Nobody likes to hear “sacrifice”, it is politically unpopular and so it made me wonder if Americans could bring themselves to sacrifice or if my small slice of history was really just that –history.

Then again, it is not likely that Americans are the only strangers to the word. Europeans often champion nonviolent action; but, dialogue often does not lead to the desired outcome. Only two weeks ago Nicolas Sarkozy, Prime Minister of France, waved a truce agreement between Russia and Georgia. Alas, Russia has now invaded Georgia and does not show signs of ceasing. Like my locksmith told me, “Locks keep honest thieves honest” and so I believe that truces keep peaceful countries peaceful. But now some plan of action must be drawn up. And, because Europe is involved this will likely include long and tiring discussion that will not be costly for the Russians but much more anxious and ineffective for the Europeans.

Eventually something will need to happen and it will require some kind of sacrifice. The nature of that sacrifice is still in question. Will it be non violent, perhaps a boycott of Russia’s natural gas of which Europe is a big demander? Or will action eventually escalate into violence? It is unclear. But, the Europeans may be much like the Americans in their regard for sacrifice.

Sure it is easy to talk about boycotting the opening ceremonies of the Olympics; but, when human rights violations are happening via conquest in your backyard reluctance grows. In such a situation real cost is involved and those without the resolve to endure suffering wilt and allow injustice to persist.

Boycott Follow Up

One major area overlooked when I previously wrote about reasons behind the Chinese boycott was their alleged involvement in selling small arms to Sudanese rebel groups. They are linked to supplying these rebel groups with weapons that have been used to massacre and maim hundreds of thousands in the war torn country of Sudan. People were and still are outraged about the prevalence of human rights violations (and the relationship to other such violations) by the Chinese government; but, the tune of many government officials and superstar athletes changed leading up to the Olympics.

Despite the possibility for a platform opposed to China’s treatment of their citizens (most visibly in Tibet) and their alleged supply of weapons to Darfur in exchange for oil many are viewing the Olympics less for social change and more for sport.

Recall that when I last posted, EU Vice President stated that the very least the EU would do was to protest the opening ceremonies. However, when looking for news reports about who boycotted the opening ceremonies the only major world leader absent from the opening ceremonies for the purpose of boycott was the Prime Minister of Poland, Donald Tusk. Something must have happened because Mr. Tusk was not the only world leader talking boycott.

Similarly, an excellent piece was done recently on Outside the Lines piece where Lebron James and Kobe Bryant were questioned about their sudden retreat from a previously position of no-toleration with respect to China’s human rights record. And, the consensus was, “This is sport –not politics.” That sentiment was echoed by the recent release of Boycott: Stolen Dreams of the 1980 Moscow Olympics that profiles 21 athletes that had once-in-a-lifetime dreams slip from their hands because the US government thought a boycott would be effective in our opposition to the crawl of Communism. In hindsight the boycott was not effective. And, the author claims that the people that hurt the most were those athletes not the USSR.

Returning to Mr. Tusk, did his being absent have a significant effect on China’s decisions? (The question of whether a singular Christian’s actions though not effective on earth are celebrated in heaven may be a different story and other perspectives are welcome). Or, was his decision based upon the dissatisfaction with China’s lack of compassion towards its people? Some may even say that he could extend his protest. Poland allows Chinese goods to be imported and consumed by its citizens. Should Poland boycott China, not with their mere absence from the opening ceremonies, but really hit them in the wallet with embargo? That is a decision with broader implications. While the Polish people may say, “That’s okay, Donald can do whatever he wants,” because it does not affect them, in the case of embargo it actually will affect them. (We may want to talk about embargo later, so stay tuned)

The reason this post was such a long time coming is that I could not find any literature regarding boycotts and their historical effectiveness. However, if I am to play armchair historian it seems that the only protests that were impactful were those joined with sacrifice and suffering on the part of the protesters. Even then this conjecture is weak. Consider the Civil Rights Movement and Apartheid where both groups of protesters were subject to brutal police beatings that stirred the fence riders around them and throughout their country. But, the question of whether somebody else opting not to go the Olympic ceremonies has an impact --- the answer seems to be no.

Fourth-Party Payer Problems

Two of the core concepts in analyzing health insurance reform are 1 ) the so-called "third payer" problem and 2 ) the historical accident in the United States which has tended to tie group health insurance to the employment relationship. Each of these factors has its own attendant distortions. What I want to argue here is that they interact in a particularly perverse fashion.

The "third payer" problem is not unique to health insurance. It occurs with other kinds of insurance, and even other types of economic activity. Consider automobile insurance. If you are rear-ended, suppose the payment for repairs falls to the other person's insurance. What typically occurs in the negotiations over the repairs? Because you are not paying the bill for the repair, you have every incentive to instruct the paint and body shop to provide for essentially a gold-plated repair job, perhaps even beyond what is needed to return your car to its pre-crash condition: brand new own-brand replacement parts, possibly repairing damage or wear that existed before the accident, and so forth. The insurance company which is footing the bill naturally has an incentive to resist at every turn. Anyone who has ever been involved in one of these disputes knows they can be unpleasant. For a more mundane non-insurance example, suppose you told your teenager "I will buy you five new shirts for back-to-school." If nothing else transpires, the person who chooses the clothes is not the person who pays the bill. This "third party payment problem" is endemic in health care, where the people who choose the level of services are typically not the ones who pay the bill.

But this is where the tie to the employer comes in, with what I call the "fourth party payment problem." In the automobile insurance example, the consumer does have some long-run choices to be made. If it is your insurance company that is balking, you can shop around for companies with better reputations. Some even advertise how they help you get what you are entitled to from the other companies. Certainly through advertisements, word of mouth reputations, and well-respected independent ratings sources (such as Consumer Reports) a consumer may obtain information that allows him to exercise competitive pressure before the "third party" problem is an issue. In health care, however, even that minimal level of competitive pressure is distorted because we employees often don't have any choice (or only very limited choices) over our health carriers. Very few employers offer a full "cafeteria" plan of all available health insurers and HMOs, many provide a small set, some simply make a single choice for all employees. And, the criteria that employers use to choose health plans may not be the ones that employees would wish. Taken at the limit, an insurance or HMO plan that held down costs by being aggressive in fighting health-customer wishes might be the one favored by a cost-conscious employer. Many times, employers use their employer contributions to distort the underlying rate structure. How many automobile insurance companies that you know of simply have two rate levels: one for individuals, and one for "family" coverage, where "family coverage" could mean anything from you plus one spouse, or you and one non-spouse partner, or you and one spouse and four teenage drivers? Furthermore, if you don't like those rate classifications, you can always go shop around. That's almost never the case with employee-provided health insurance. With the fourth party payment problem, at best you incur the incredible transactions costs of switching employers, and that supposes that your new employer doesn't alter its plan after one year. Trying to argue with your human resources department that you and your spouse shouldn't pay the same "family" premium as a family of eight is just spitting in the wind. Can you imagine if we paid for restaurant food under this same system? (In Florida, the system is even worse. As an employee of Florida State University, I pay money to Florida State, Florida State has its own rules and bureaucracy and pays money to an independent contractor for the State of Florida, the independent contractor for the State of Florida has its own rules and bureaucracy and then pays the insurance company, which has its own rules and bureaucracy. I effectively have "fifth party" payer problems! I have three different health care ID numbers: one at Florida State, another for the State of Florida, and a third for the insurance company. I can't threaten even to move to a different employer if that other university is also a part of the Florida system. And, when as has happened to me repeatedly, a computer error threatens to cancel my health insurance, I end up with three bureaucracies pointing fingers at one another.)

All of this is a reason that I believe that the most important part of health insurance reform is to pry apart the welding of the employment relationship and the individual's decisions about health insurance coverage. This involves moving the tax deduction for health insurance away from the employer and to return some competitive pressure to the employee.* Employees could buy individual policies, or, for favorable group ratings, continue to associate with the other employees of their current firms. We might see a return to non-employee based group ratings that existed long before our current system. Group ratings could be available for fraternal organizations, affiliation groups (AARP hosts various types of independent insurance plans), churches, trade associations (the American Economics Associational already hosts group rates from outside life insurance companies for its members) and so forth. Something very much like this was the model for many years for membership in credit unions. With this reform, I believe that a major anxiety about health insurance ("If I lose my job, I lose my employer-provided health benefits") would be significantly attenuated.

Please do not misunderstand me. Moving health care choices to individuals and away from employers is not a win-win situation. Employee-provided health care insurance packages have served as a social vehicle to force comprehensive ratings pools that avoid, to a large but not complete degree, the problem of "individual rating." In car insurance, we tend to accept individual rating. Young male drivers with a lot of speeding tickets tend to pay much higher premiums, and sometimes getting any insurance may be a problem. I believe that we accept this because many of the rate disparities are tied either directly to individual behavior (lots of crashes and tickets) or indirectly to unseen attributes that have obvious basis in statistical reality. Every parent may believe that their 16 year old son drives more safely than 95 percent of the 16 year old girls they see around town, but the aggregate statistics are pretty compelling. With health care, if we re-boot the system to tie health insurer choice to individuals, what do we do with the people who already have cancer, heart disease, MS, Cystic Fibrosis, and so forth? How do we handle the incredible advances for genetic screening, even probabilistic genetic screening? This is the Achilee's Heel of such a switchover, and I will consider some possible solutions in a later post.

*Because about half of all American pay very little in income tax, we might have to move to a refundable tax credit system.

When Is A Market Not a Market?

I've been hearing and seeing a lot about markets recently. People wonder if I am a "free market" economist, whatever that is. And there's been a lot of discussion about the "subprime mortgage market" and whether that debacle indicates some kind of boundary of the usefulness of markets. This is going to be the first of a couple of posts on this general topic, and I want to start by teasing apart the not-so-obvious question "What is a market?"

In particular, I think it is necessary to distinguish between the concepts of voluntary action and markets. For one thing, both "liberals" and "conservatives" sometimes launch a government vs. markets debate that can be both incomplete and inaccurate. In the 1960s, Richard Cornuelle popularized the term the "independent sector" in his book Reclaiming the American Dream. The important point he made was that a lot goes on in American society that is not summed up by an artificial polarity of government action versus for-profit-enterprises. In this indepedent realm we find religious, charitable, philanthropic, and non-profit activity. Furthermore, this important sector need not be insulated from the concepts of government and/or markets. Doug is really the expert on this area, so I hope he can expand on this in the future.

Instead I'd like to consider the discussion of the sub-prime mortgage market. It's important to remember that this is a particular economic institution with particular economic features. Just because it is a "market" does not mean it should be immune from criticism by economists who recognize that government, also, can fail, nor is our choice simply between this market and some undefined "government" alternative that might or might not have made things better. Consider, for example, how most consumer loans, including many mortgages, used to be made. The customer would approach a bank loan officer, fill out some forms, and have a discussion with the loan officer. The loan officer either could make the decision regarding the loan or had, at the very least, a great deal of input in that decision. Banks kept track of the performance history of loans made by their loan officers. A loan officer could be rated down for a portfolio of loans that was either a ) so cautious that there were few problems but not enough returns, or b) a history of making too many bad loans.

The process I've just described may or may not look like a modern definition of a "market." There is no organized central location, nor a thick shelf of formal bids and offers. The loan officer may or may not have much leeway over some of the loan's terms, but might have some flexibility on others. A good loan officer might be one who relied upon everything from instinct to long-term experiences to refinement of those parts of the loan agreement over which she had some control. Nevertheless, I consider this system a "market" system, or, more specfically, one of private, voluntary exchange. (Of course, the mortgage could have been an FHA mortgage, and thus the entire transaction might have simultaneously been a market transaction in the context of government activity).

As has been widely discussed, the changes in the mortgage "markets" over the last several years include the significant increase in practices such as re-selling and bundling mortgages into mortgage backed securities traded in national and even international markets. ALL OTHER THINGS BEING EQUAL, these advancements had the theoretically advantageous properties of increasing liquidity and diversifying risk. A portfolio of one-ten-thousandth of 10,000 loans diversifies risk more than a full share of a single one of the loans.

But, are ALL OTHER THINGS EQUAL? One obvious change was that loans were typically originated and processed differently. The importance of the local loan officer down at the local branch diminished considerably. I have a colleague in financial economics who, in addition to calling the housing market a bubble long before anyone else I know, has plausibly argued that all other things were not equal. Specifically, he points out that the older practice of individual loan officers having responsibility for the performance for a small group of loans with "their names on them" is very different than when 10,000 people each share in 10,000 loans. Namely, the old system created an evaluation process with a loan officer having a strong incentive to balance all available information in making a decision about the loan and to keep watch on the loan as it was being paid. Much of this may have been lost in a "Here, fill out this form" mentality in which mortgages were quickly resold and then bundled and resold again as diversified securities.

If we have found that there are advantages to moving back to the older system, and if the older system seems less "market-like" in some kind of Bonfire of the Vanities sense, then so be it. Not all forms of private, decentralized, voluntary exchange look like eBay auctions or trade-sports markets. Of course, the real kicker to the sub-prime mortgage mess is that the newer, more sophisticated "markets" had a Big-Government six-ton elephant in the living room anyway: Fannie Mae and Freddie Mac were creatures of the federal government designed to look like private entities with a maybe-we-do-and-maybe-we-don't role for the U.S. taxpayer. Many officials of these firms had resumes that were more political than financial. That doesn't exactly look like a "free market" in any sense that I'm used to talking about.

Let me close with another example. My wife and I many years ago used a heating and air-conditioning contractor I'll call "Company E." Over the years, we have found Company E to perform high quality work and to provide exceptional customer service. When we decided that it was time to replace a unit, we had Company E secure bids across manufacturers, but we did not ourselves structure a formal competition between Company E and other contractors. Company E had won our trust and our loyalty. Our decision to go directly to Company E may not have looked much like a market-based decision. But I think that it is a good example about why economists should talk in terms of the whole scope of voluntary actions. I think our decision is just as much a "free-market" decision as a formal and highly centralized market that is whirring away under some vague assumption that the government will step in if the outcomes get too uncomfortable. Too many people think that notions of trust, commitment, loyalty, reciprocity, discernment of intentions, monitoring and so forth are concepts that exist in opposition to markets. I believe, instead, that they are integral to the notion of markets as voluntary action. Too many people also believe that government intervention somehow is a perfect antidote to bad faith dealings and moral hazard problems, when as we have seen they can actually make things worse. I think it's instructive how much the prophets of the Old Testament disliked the hybrid of economic and political power acting together for unjust purposes.

The universe of voluntary exchange structures is vast, and no economist should confuse that universe with any specific manifestation. Human society is capable of vast feats of physical engineering, but we still have bridges that collapse and door handles that break and computers that overheat. The subprime mortgage market may not have worked well, but we may yet decide that it worked better than the current hysteria suggests that it did. (I can make an argument that a lot of responsible people were able to purchase homes under this system that might have been shut out by our hypothetical local loan officer.) But we can also talk about other market processes that might do things better. We can talk about whether the fact that there was an active role of government influence made things better or made things worse