The Washington Post told readers that the stock of Potbelly, a fast food restaurant chain, rose by 120 percent on the day of its initial public offering (IPO). This rise raises several interesting questions that the piece does not mention.
First, if the extraordinary rise in price is in fact justified by the fundamentals of the market, then the underwriters badly muffed their job. They set a price for the stock that was far too low, costing the company large amounts of money. They should have made their initial offering at a much higher price.
In that case, a main theme of the piece should be identifying the underwriters and asking them how they could have been so far from the mark in assessing the company’s market value. After all, these people are paid big salaries to know things like this. Someone failed badly in their job if the run-up is justified by the fundamentals.
The alternative scenario is that the run-up is not justified by the fundamentals and this just another outbreak of irrational exuberance. If that’s the case, the people who bid up the stock price will end up as big losers. In that case readers might be interesting in finding out what sort of investors were throwing their money away.
In the event that the investors were rich hedge fund types then this would just be a redistribution within the 1 percent. But if the investors were pension funds (either public funds or private funds guaranteed by the taxpayers), then overpaying for Potbelly stock would imply redistribution from the bulk of the population to the insiders who managed to dump their stock near yesterday’s high.
Unfortunately the Post, like other news outlets, covered the Potbelly IPO like a sporting event. It treated the stock price as though it is money from heaven rather than a claim on the economy’s resources.
The Washington Post told readers that the stock of Potbelly, a fast food restaurant chain, rose by 120 percent on the day of its initial public offering (IPO). This rise raises several interesting questions that the piece does not mention.
First, if the extraordinary rise in price is in fact justified by the fundamentals of the market, then the underwriters badly muffed their job. They set a price for the stock that was far too low, costing the company large amounts of money. They should have made their initial offering at a much higher price.
In that case, a main theme of the piece should be identifying the underwriters and asking them how they could have been so far from the mark in assessing the company’s market value. After all, these people are paid big salaries to know things like this. Someone failed badly in their job if the run-up is justified by the fundamentals.
The alternative scenario is that the run-up is not justified by the fundamentals and this just another outbreak of irrational exuberance. If that’s the case, the people who bid up the stock price will end up as big losers. In that case readers might be interesting in finding out what sort of investors were throwing their money away.
In the event that the investors were rich hedge fund types then this would just be a redistribution within the 1 percent. But if the investors were pension funds (either public funds or private funds guaranteed by the taxpayers), then overpaying for Potbelly stock would imply redistribution from the bulk of the population to the insiders who managed to dump their stock near yesterday’s high.
Unfortunately the Post, like other news outlets, covered the Potbelly IPO like a sporting event. It treated the stock price as though it is money from heaven rather than a claim on the economy’s resources.
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Allison Shrager’s Reuter’s column on the problems facing public pensions badly misled readers. It noted the pensions reported funding ratios and then told readers:
“But these estimates rely on the assumption that pension assets will earn at least 7 percent to 8 percent each and every year.”
This is absolutely not true. The estimates only assume an average return in the range of 7-8 percent. If returns fall below this for a year or two, to stay on target the fund will have to achieve higher returns in future years. There is little risk that even a seriously underfunded pension will be forced to sell assets (i.e. stock) at a major loss, since it will almost certainly have plenty of liquid assets that can meet current obligations.
In fact, given the price to earnings in the stock market at present, the return assumption being made by pensions are very reasonable. It would be difficult to construct return projections that are much lower that would still be consistent with the economic growth projections from the Congressional Budget Office, Office of Management and Budget and other public and private forecasters.
This column overlooked what is probably the biggest cause of the pension shortfalls facing state and local governments. In the years of the stock bubble, when price to trend earnings ratios in the stock market rose above 30, pensions still assumed that it would be possible to get 10 percent nominal returns on stock. While some of us did try to point out that such returns would be impossible, those in positions of responsibility did not want to be bothered by arithmetic.
In particular the bond rating agencies, Moody’s and Standard and Poor’s, both gave a green light to an assumption that could be shown absurd by anyone familiar with third grade arithmetic. This astounding failure had two major consequences. Many pension funds granted extra benefits based on these assumptions. This was the case in Detroit as was documented in an article last month.
The other consequence was that many state and local governments grossly under-contributed to their pensions in the stock bubble years because the faulty accounting of the bond rating agencies implied that little or no contribution was necessary. When the stock bubble burst in 2000-2002, the pensions suddenly had big shortfalls, but because governments had not budgeted for larger contributions and the recession was already putting strains on budgets, many neglected to make the required contributions. This pattern became a ritual in places like Chicago, where the city failed to make its required contributions for a decade.
This failure of the regulators, the accountants, and the economists must really be featured front and center in any discussion of the current pension situation. Unfortunately, the same people who are responsible for the problems still dominate the public debate on pension policy. As a result, this simple history rarely appears in public discussions of pension policy.
Allison Shrager’s Reuter’s column on the problems facing public pensions badly misled readers. It noted the pensions reported funding ratios and then told readers:
“But these estimates rely on the assumption that pension assets will earn at least 7 percent to 8 percent each and every year.”
This is absolutely not true. The estimates only assume an average return in the range of 7-8 percent. If returns fall below this for a year or two, to stay on target the fund will have to achieve higher returns in future years. There is little risk that even a seriously underfunded pension will be forced to sell assets (i.e. stock) at a major loss, since it will almost certainly have plenty of liquid assets that can meet current obligations.
In fact, given the price to earnings in the stock market at present, the return assumption being made by pensions are very reasonable. It would be difficult to construct return projections that are much lower that would still be consistent with the economic growth projections from the Congressional Budget Office, Office of Management and Budget and other public and private forecasters.
This column overlooked what is probably the biggest cause of the pension shortfalls facing state and local governments. In the years of the stock bubble, when price to trend earnings ratios in the stock market rose above 30, pensions still assumed that it would be possible to get 10 percent nominal returns on stock. While some of us did try to point out that such returns would be impossible, those in positions of responsibility did not want to be bothered by arithmetic.
In particular the bond rating agencies, Moody’s and Standard and Poor’s, both gave a green light to an assumption that could be shown absurd by anyone familiar with third grade arithmetic. This astounding failure had two major consequences. Many pension funds granted extra benefits based on these assumptions. This was the case in Detroit as was documented in an article last month.
The other consequence was that many state and local governments grossly under-contributed to their pensions in the stock bubble years because the faulty accounting of the bond rating agencies implied that little or no contribution was necessary. When the stock bubble burst in 2000-2002, the pensions suddenly had big shortfalls, but because governments had not budgeted for larger contributions and the recession was already putting strains on budgets, many neglected to make the required contributions. This pattern became a ritual in places like Chicago, where the city failed to make its required contributions for a decade.
This failure of the regulators, the accountants, and the economists must really be featured front and center in any discussion of the current pension situation. Unfortunately, the same people who are responsible for the problems still dominate the public debate on pension policy. As a result, this simple history rarely appears in public discussions of pension policy.
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Give the NYT and the rest of the media a really big “F” for their coverage of the medical device tax. Next to no one knows where it came from and why it was included in the Affordable Care Act (ACA). That means the media have done a terrible job, just as we might think school teachers aren’t doing a very good job educating students if they graduate high school without being able to read.
If you read the NYT cover to cover every day for the last year, you would probably think that the medical device tax was simply a way to dig up an extra $2-3 billion a year to cover the cost of the ACA. That of course is what General Electric and the other medical device manufacturers want you to believe.
In fact, the medical device tax is really a way to take back a windfall that General Electric and other manufacturers expect to get from the ACA. The story is that medical devices, like prescription drugs, are generally relatively cheap to produce. They involve big research costs that their manufacturers expect to recover by selling their devices at large mark-ups.
To take a simple example, suppose General Electric spends $500 million developing a new scanner. General Electric sells the scanners for $1.1 million. Since it costs them $100,000 to manufacture them, they can pocket $1 million for each scanner they sell. Before the passage of the ACA, General Electric had expected to sell 1000 of these scanners, which would net them a total of $1 billion over their production costs. This allows General Electric to recover their $500 million in development costs and pocket $500 million in profit.
However the ACA changes this picture by increasing the demand for scanners, as more people have access to health care. As a result of the ACA, General Electric now expects to sell ten percent more scanners or 1100. The additional 100 scanners will mean an additional $100 million in profits in excess of what General Electric had anticipated. (Remember, its development costs have not changed, this is pure profit.)
General Electric would of course be very happy with situation, just as it is any time the government opts to give the company money. The medical device tax, which is set at 2.3 percent of sales, is an effort to recoup the unexpected windfall that General Electric and other medical device makers would otherwise receive from the ACA.
The fact that almost no one understands the origins of the medical device tax demonstrates an astounding failure on the part of the nation’s media. If budget reporters were school teachers, many of them would be looking for new jobs rights now.
Give the NYT and the rest of the media a really big “F” for their coverage of the medical device tax. Next to no one knows where it came from and why it was included in the Affordable Care Act (ACA). That means the media have done a terrible job, just as we might think school teachers aren’t doing a very good job educating students if they graduate high school without being able to read.
If you read the NYT cover to cover every day for the last year, you would probably think that the medical device tax was simply a way to dig up an extra $2-3 billion a year to cover the cost of the ACA. That of course is what General Electric and the other medical device manufacturers want you to believe.
In fact, the medical device tax is really a way to take back a windfall that General Electric and other manufacturers expect to get from the ACA. The story is that medical devices, like prescription drugs, are generally relatively cheap to produce. They involve big research costs that their manufacturers expect to recover by selling their devices at large mark-ups.
To take a simple example, suppose General Electric spends $500 million developing a new scanner. General Electric sells the scanners for $1.1 million. Since it costs them $100,000 to manufacture them, they can pocket $1 million for each scanner they sell. Before the passage of the ACA, General Electric had expected to sell 1000 of these scanners, which would net them a total of $1 billion over their production costs. This allows General Electric to recover their $500 million in development costs and pocket $500 million in profit.
However the ACA changes this picture by increasing the demand for scanners, as more people have access to health care. As a result of the ACA, General Electric now expects to sell ten percent more scanners or 1100. The additional 100 scanners will mean an additional $100 million in profits in excess of what General Electric had anticipated. (Remember, its development costs have not changed, this is pure profit.)
General Electric would of course be very happy with situation, just as it is any time the government opts to give the company money. The medical device tax, which is set at 2.3 percent of sales, is an effort to recoup the unexpected windfall that General Electric and other medical device makers would otherwise receive from the ACA.
The fact that almost no one understands the origins of the medical device tax demonstrates an astounding failure on the part of the nation’s media. If budget reporters were school teachers, many of them would be looking for new jobs rights now.
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The New York Times committed an astounding blunder when it took at face value a release from the Obama Treasury Department showing how the 2011 debt ceiling standoff hurt the economy. The three pieces of evidence for the standoff imposing a large price is a plunge in the consumer confidence index, a sharp fall in the stock market, and a big rise in an index measuring investors’ expectations of the volatility of the S&P 500.
These measures in fact tell us little about the economy. None of them is a direct measure of economic activity. Any analysis of the actual components of private sector demand (investment and consumption) would show little evidence of any falloff during the period leading up to the crisis.
Instead, these are all measures of perceptions about the future. The consumer confidence measure is especially misleading. It actually has two components, a current conditions index and a future expectations index. The current conditions index is fairly closely correlated with current consumption. The future expectations index is far more volatile and has almost no correlation with current consumption. Most of the plunge in the consumer confidence index during the crisis was in the expectations index.
The other huge problem with the NYT charts is that they actually ignore the main factor moving these indexes. Italy joined the list of euro crisis countries in the week where the debt ceiling crisis hits its climax. Since a default by Italy could have led to a collapse of the euro, this created enormous fear in financial markets. That caused world stock markets to plunge.
Interestingly, the price of U.S. Treasury bonds soared and interest rates plummeted. (Why doesn’t the NYT have a chart showing interest rates on 10-year Treasury bonds for this period?) That is the direct opposite of what we would expect to happen if investors were losing confidence that the U.S. government would pay its debt.
NYT reporters should learn that the Obama administration is not a public information service. It has an agenda. That means that its releases should be scrutinized carefully and not just reprinted without comment. Reporters have the time to evaluate releases from the administration and determine if they are accurate and complete. Readers do not.
The New York Times committed an astounding blunder when it took at face value a release from the Obama Treasury Department showing how the 2011 debt ceiling standoff hurt the economy. The three pieces of evidence for the standoff imposing a large price is a plunge in the consumer confidence index, a sharp fall in the stock market, and a big rise in an index measuring investors’ expectations of the volatility of the S&P 500.
These measures in fact tell us little about the economy. None of them is a direct measure of economic activity. Any analysis of the actual components of private sector demand (investment and consumption) would show little evidence of any falloff during the period leading up to the crisis.
Instead, these are all measures of perceptions about the future. The consumer confidence measure is especially misleading. It actually has two components, a current conditions index and a future expectations index. The current conditions index is fairly closely correlated with current consumption. The future expectations index is far more volatile and has almost no correlation with current consumption. Most of the plunge in the consumer confidence index during the crisis was in the expectations index.
The other huge problem with the NYT charts is that they actually ignore the main factor moving these indexes. Italy joined the list of euro crisis countries in the week where the debt ceiling crisis hits its climax. Since a default by Italy could have led to a collapse of the euro, this created enormous fear in financial markets. That caused world stock markets to plunge.
Interestingly, the price of U.S. Treasury bonds soared and interest rates plummeted. (Why doesn’t the NYT have a chart showing interest rates on 10-year Treasury bonds for this period?) That is the direct opposite of what we would expect to happen if investors were losing confidence that the U.S. government would pay its debt.
NYT reporters should learn that the Obama administration is not a public information service. It has an agenda. That means that its releases should be scrutinized carefully and not just reprinted without comment. Reporters have the time to evaluate releases from the administration and determine if they are accurate and complete. Readers do not.
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The Washington Post apparently finds it impossible to write an article that mentions Social Security without pushing its line about cutting Social Security. In a front page article on the budget standoff the Post told readers:
“Both sides agree that a potential deal could involve replacing deep budget cuts known as the sequester with cost-saving adjustments to Social Security and Medicare, such as using a less generous measure of inflation to calculate cost-of-living changes.”
The “cost-saving adjustments” to Social Security in normal English are known as “cuts.” When a worker gets their pay reduced by 10 percent, it would usually be referred to as a pay “cut,” not a “cost-saving adjustment” to the worker’s salary.
In the same vein, the issue is the size of cost-of-living increases. The only possible cost-of-living changes for Social Security are increases. The law only allows for increases. (We haven’t seen a year over year decline in prices since the program’s inception in any case.) The issue is that beneficiaries will see smaller cost-of-living increases under this plan.
The article also commits two other noteworthy errors. It uncritically presents the misleading material from the White House implying that the 2011 debt standoff had serious negative effects on the economy. The White House material ignores the euro crisis which hit a peak at this time, creating the real possibility of the breakup of the euro.
The article also discusses the medical device tax without explaining that its purpose is to take away a windfall that the Affordable Care Act is giving to the medical device industry.
The Washington Post apparently finds it impossible to write an article that mentions Social Security without pushing its line about cutting Social Security. In a front page article on the budget standoff the Post told readers:
“Both sides agree that a potential deal could involve replacing deep budget cuts known as the sequester with cost-saving adjustments to Social Security and Medicare, such as using a less generous measure of inflation to calculate cost-of-living changes.”
The “cost-saving adjustments” to Social Security in normal English are known as “cuts.” When a worker gets their pay reduced by 10 percent, it would usually be referred to as a pay “cut,” not a “cost-saving adjustment” to the worker’s salary.
In the same vein, the issue is the size of cost-of-living increases. The only possible cost-of-living changes for Social Security are increases. The law only allows for increases. (We haven’t seen a year over year decline in prices since the program’s inception in any case.) The issue is that beneficiaries will see smaller cost-of-living increases under this plan.
The article also commits two other noteworthy errors. It uncritically presents the misleading material from the White House implying that the 2011 debt standoff had serious negative effects on the economy. The White House material ignores the euro crisis which hit a peak at this time, creating the real possibility of the breakup of the euro.
The article also discusses the medical device tax without explaining that its purpose is to take away a windfall that the Affordable Care Act is giving to the medical device industry.
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The Washington Post finds it impossible to write about trade agreements without calling them “free-trade” agreements. It used the term twice in an article on the Trans-Pacific Partnership (TPP).
Of course the TPP is not about free trade, in most cases the formal trade barriers between the countries negotiating the pact are relatively low. The main thrust of the negotiations is to impose a regulator structure in a wide range of areas — health, safety, environmental — which will override national and sub-national rules. This has little to do with trade and in some cases, such as the increased patent protection for prescription drugs being pushed as part of the deal (which is noted in the article), will actually involve increased barriers to trade.
The Washington Post finds it impossible to write about trade agreements without calling them “free-trade” agreements. It used the term twice in an article on the Trans-Pacific Partnership (TPP).
Of course the TPP is not about free trade, in most cases the formal trade barriers between the countries negotiating the pact are relatively low. The main thrust of the negotiations is to impose a regulator structure in a wide range of areas — health, safety, environmental — which will override national and sub-national rules. This has little to do with trade and in some cases, such as the increased patent protection for prescription drugs being pushed as part of the deal (which is noted in the article), will actually involve increased barriers to trade.
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Okay, Politico only said the first part. However it would have been useful to remind readers of the second part since some may not realize that in the current economic environment cutting the budget will hurt the economy.
In an economy that is near full employment, budget cuts can free up resources for the private sector. However in an economy that is operating at close to $1 trillion below its potential, with extraordinary low interest rates, it is implausible that cutting the budget would lead to increased investment or consumption by the private sector. Therefore the effect of the Republican proposals for cutting the budget would be slower growth and higher unemployment.
If it was being responsible, Politico would remind readers of this fact.
Okay, Politico only said the first part. However it would have been useful to remind readers of the second part since some may not realize that in the current economic environment cutting the budget will hurt the economy.
In an economy that is near full employment, budget cuts can free up resources for the private sector. However in an economy that is operating at close to $1 trillion below its potential, with extraordinary low interest rates, it is implausible that cutting the budget would lead to increased investment or consumption by the private sector. Therefore the effect of the Republican proposals for cutting the budget would be slower growth and higher unemployment.
If it was being responsible, Politico would remind readers of this fact.
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We know that the people who conduct and write about economic policy are not very good at economics, otherwise we would not still be mired in this downturn almost six years after the start of the recession. The Washington Post gave us another example of the incredible confusion that dominates Washington debates in its coverage of the budget and debt ceiling standoff.
The piece warns that a debt default could jeopardize the status of the United States as the world’s reserve currency. At one point it quotes Lloyd Blankfein, the CEO of one of the bailed out Wall Street banks, giving a stern warning on the topic.
The implication of course is that the United States benefits from being the world’s reserve currency. This is not obviously true.
The increased demand for dollars as a result of being a reserve currency raises the value of the dollar. Higher demand leads to higher prices. (Sorry for the repetition of simple concepts, but there could be some economists reading.) A higher valued dollar makes our exports more expensive to people living in other countries. This means that we will have fewer exports. A higher dollar means that imports will be cheaper for people living in the United States, which means that we will import more goods.
Fewer exports and more imports mean a larger trade deficit and less demand in the domestic economy. That in turn means lower GDP and higher unemployment. This increase in unemployment hits middle and lower income workers especially hard, since they will not be in a position to achieve wage gains during periods of high unemployment. On the other hand, high unemployment and the resulting low wages could be good for corporate profits and highly paid professionals like doctors and lawyers.
There is not only reason to believe that having the dollar as the major reserve currency is bad for the economy, it is also contrary to stated policy. Ostensibly the Obama administration has been pushing to have China raise the value of its currency against the dollar. (For the directionally challenged, that means a lower valued dollar.) The line coming from the administration is that we always press China to raise the value of its currency, but they are just stubborn and won’t do what we ask.
Of course if the dollar stopped being the world’s major reserve currency then we would likely get what we are ostensibly asking for in our negotiations with China. The dollar would fall in value against China’s currency and against the other currencies where many have suspected “manipulation.” In other words, ending the dollar’s status as the world’s major reserve currency would allow us to achieve a lower valued currency, which has supposedly been a major policy goal in negotiations with China as well as some other countries.
So ending the dollar’s status as the world’s reserve currency could boast growth and create jobs and would be consistent with longstanding goals of both the Obama administration and Bush administration for ending currency manipulation, but we are supposed to be scared that it could be an outcome from a debt default. Like I said, people doing economic policy are not very good at economics.
We know that the people who conduct and write about economic policy are not very good at economics, otherwise we would not still be mired in this downturn almost six years after the start of the recession. The Washington Post gave us another example of the incredible confusion that dominates Washington debates in its coverage of the budget and debt ceiling standoff.
The piece warns that a debt default could jeopardize the status of the United States as the world’s reserve currency. At one point it quotes Lloyd Blankfein, the CEO of one of the bailed out Wall Street banks, giving a stern warning on the topic.
The implication of course is that the United States benefits from being the world’s reserve currency. This is not obviously true.
The increased demand for dollars as a result of being a reserve currency raises the value of the dollar. Higher demand leads to higher prices. (Sorry for the repetition of simple concepts, but there could be some economists reading.) A higher valued dollar makes our exports more expensive to people living in other countries. This means that we will have fewer exports. A higher dollar means that imports will be cheaper for people living in the United States, which means that we will import more goods.
Fewer exports and more imports mean a larger trade deficit and less demand in the domestic economy. That in turn means lower GDP and higher unemployment. This increase in unemployment hits middle and lower income workers especially hard, since they will not be in a position to achieve wage gains during periods of high unemployment. On the other hand, high unemployment and the resulting low wages could be good for corporate profits and highly paid professionals like doctors and lawyers.
There is not only reason to believe that having the dollar as the major reserve currency is bad for the economy, it is also contrary to stated policy. Ostensibly the Obama administration has been pushing to have China raise the value of its currency against the dollar. (For the directionally challenged, that means a lower valued dollar.) The line coming from the administration is that we always press China to raise the value of its currency, but they are just stubborn and won’t do what we ask.
Of course if the dollar stopped being the world’s major reserve currency then we would likely get what we are ostensibly asking for in our negotiations with China. The dollar would fall in value against China’s currency and against the other currencies where many have suspected “manipulation.” In other words, ending the dollar’s status as the world’s major reserve currency would allow us to achieve a lower valued currency, which has supposedly been a major policy goal in negotiations with China as well as some other countries.
So ending the dollar’s status as the world’s reserve currency could boast growth and create jobs and would be consistent with longstanding goals of both the Obama administration and Bush administration for ending currency manipulation, but we are supposed to be scared that it could be an outcome from a debt default. Like I said, people doing economic policy are not very good at economics.
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In a piece that told readers that the financial markets will force Congress and President Obama to resolve the debt ceiling dispute the NYT told readers that such market pressure had forced the passage of the TARP:
“There are precedents for such a denouement. After the House rejected initial legislation authorizing the bank bailout known as the Troubled Asset Relief Program during the financial crisis in late September 2008, the Dow Jones industrial average plunged more than 700 points in one trading session, prompting legislators to reverse course and approve a similar bill within days.”
While the market did plunge in response to the House’s rejection of the TARP, it soon recovered most of its loss with the S&P rising to over 1150. However as the financial crisis continued to send the economy plummeting, the S&P soon resumed its downward trek bottoming out at less than 700 in March of 2009. If the drop in the market following the rejection of the TARP forced the House to take action, then it is hard to see why the much sharper drop in the market over the next five months didn’t also force strong action to counteract the impact of the downturn.
The most obvious difference was that the media openly pushed for passage of the TARP as a measure necessary to prevent a second Great Depression in both its news and opinion sections. It made no comparable push for a major stimulus package.
It is misrepresenting the facts to claim that the markets forced the House to pass the TARP. It was the coverage by the major media outlets that pressured Congress to bail out the Wall Street banks.
In a piece that told readers that the financial markets will force Congress and President Obama to resolve the debt ceiling dispute the NYT told readers that such market pressure had forced the passage of the TARP:
“There are precedents for such a denouement. After the House rejected initial legislation authorizing the bank bailout known as the Troubled Asset Relief Program during the financial crisis in late September 2008, the Dow Jones industrial average plunged more than 700 points in one trading session, prompting legislators to reverse course and approve a similar bill within days.”
While the market did plunge in response to the House’s rejection of the TARP, it soon recovered most of its loss with the S&P rising to over 1150. However as the financial crisis continued to send the economy plummeting, the S&P soon resumed its downward trek bottoming out at less than 700 in March of 2009. If the drop in the market following the rejection of the TARP forced the House to take action, then it is hard to see why the much sharper drop in the market over the next five months didn’t also force strong action to counteract the impact of the downturn.
The most obvious difference was that the media openly pushed for passage of the TARP as a measure necessary to prevent a second Great Depression in both its news and opinion sections. It made no comparable push for a major stimulus package.
It is misrepresenting the facts to claim that the markets forced the House to pass the TARP. It was the coverage by the major media outlets that pressured Congress to bail out the Wall Street banks.
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Macroeconomists knew too little about the macroeconomy to recognize the $8 trillion housing bubble whose collapse gave us the Great Recession. Trade and labor economists show little more understanding of their fields. This is why we routinely hear stories about how trade causes us to lose less-skilled manufacturing jobs to the developing world or that technology is leading to a hollowing out of the distribution of occupations, with middle wage jobs disappearing.
The logic behind these views is nicely challenged by this story about medical travel. Our health care system is incredibly inefficient. If the medical industry were subjected to international competition our doctors would have far less chance of holding their jobs than textile workers or steelworkers. Doctors in the United States can pocket a median wage of well over $200,000 a year not because they are smart and hardworking (which they might be), but because they have the government protect them from foreign competition, unlike textile workers and steelworkers.
In addition to directly providing savings to patients, as illustrated in this piece (the savings will be considerably larger for even more expensive procedures than the ones discussed here), medical travel also has important indirect effects. Insofar as more patients get care elsewhere it reduces demand for medical services in the United States, putting downward pressure on prices here. Also, by allowing people to see other countries that provide health care at a fraction of the cost in the United States, there will be a greater recognition of the inefficiency and corruption of the U.S. health care system, which could lead to more political pressure for reform.
The need to travel obviously limits the extent to which people can take advantage of other countries health care system (although protectionist restrictions on foreign doctors working in the United States are another barrier), but in the case of expensive medical procedures, the potential savings dwarf the cost of travel. If anyone in a policy-making position supported free trade then medical travel would be at the center of trade negotiations, since there are no other areas that offer such large potential gains. The negotiations would focus on setting up international standards and licensing rules to assure quality, liability rules to ensure compensation in the event of medical errors, and ideally a system of taxation to ensure that poorer countries redistribute some of the gain to building up their domestic health care system.
Unfortunately medical travel is likely to be left out of the so-called free trade agreements currently being negotiated. Doctors and other actors in the health care sector are powerful enough to sustain their protection. However anyone who knows more about trade and labor markets than trade and labor economists should be able to recognize that the reason doctors are not subject to international competition and are able to sustain their high pay has little to do with the market and everything to do with their political power. The same is true of most other highly paid professionals in the United States. Only an economist can be sufficiently confused to believe that high wages for such people are natural outcomes of the market.
Addendum:
Trade agreements over the last two decades have been primarily about writing rules and adjudication procedures that make U.S. firms comfortable shipping their operations overseas. That is exactly what is needed for insurers or medical providers who want to take advantage of medical trade in a big way. Our trade negotiators refuse to do this because they don’t want to lower the income of doctors and other powerful actors in the health care industry.
Macroeconomists knew too little about the macroeconomy to recognize the $8 trillion housing bubble whose collapse gave us the Great Recession. Trade and labor economists show little more understanding of their fields. This is why we routinely hear stories about how trade causes us to lose less-skilled manufacturing jobs to the developing world or that technology is leading to a hollowing out of the distribution of occupations, with middle wage jobs disappearing.
The logic behind these views is nicely challenged by this story about medical travel. Our health care system is incredibly inefficient. If the medical industry were subjected to international competition our doctors would have far less chance of holding their jobs than textile workers or steelworkers. Doctors in the United States can pocket a median wage of well over $200,000 a year not because they are smart and hardworking (which they might be), but because they have the government protect them from foreign competition, unlike textile workers and steelworkers.
In addition to directly providing savings to patients, as illustrated in this piece (the savings will be considerably larger for even more expensive procedures than the ones discussed here), medical travel also has important indirect effects. Insofar as more patients get care elsewhere it reduces demand for medical services in the United States, putting downward pressure on prices here. Also, by allowing people to see other countries that provide health care at a fraction of the cost in the United States, there will be a greater recognition of the inefficiency and corruption of the U.S. health care system, which could lead to more political pressure for reform.
The need to travel obviously limits the extent to which people can take advantage of other countries health care system (although protectionist restrictions on foreign doctors working in the United States are another barrier), but in the case of expensive medical procedures, the potential savings dwarf the cost of travel. If anyone in a policy-making position supported free trade then medical travel would be at the center of trade negotiations, since there are no other areas that offer such large potential gains. The negotiations would focus on setting up international standards and licensing rules to assure quality, liability rules to ensure compensation in the event of medical errors, and ideally a system of taxation to ensure that poorer countries redistribute some of the gain to building up their domestic health care system.
Unfortunately medical travel is likely to be left out of the so-called free trade agreements currently being negotiated. Doctors and other actors in the health care sector are powerful enough to sustain their protection. However anyone who knows more about trade and labor markets than trade and labor economists should be able to recognize that the reason doctors are not subject to international competition and are able to sustain their high pay has little to do with the market and everything to do with their political power. The same is true of most other highly paid professionals in the United States. Only an economist can be sufficiently confused to believe that high wages for such people are natural outcomes of the market.
Addendum:
Trade agreements over the last two decades have been primarily about writing rules and adjudication procedures that make U.S. firms comfortable shipping their operations overseas. That is exactly what is needed for insurers or medical providers who want to take advantage of medical trade in a big way. Our trade negotiators refuse to do this because they don’t want to lower the income of doctors and other powerful actors in the health care industry.
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