Thursday, August 30, 2007

 

David Frum Makes Sense ...

(after all, what he says isn't exactly incorrect, for once) ... or maybe not.

What does he mean by, e.g., "huge security costs" in talking about our economy as a whole? If we are talking about the bottom line of one or other company, I could see his point, but in the grand scheme of things ... is anybody having to go without food or drink, clothing or shelter, or whatever because of security costs per se? Now specifically one could argue that, e.g., our commitment of National Guardsfolk in Iraq is what allowed Katrina to cause such a problem, but in general, do we really see that, because we're employing so many more guards at airports, we now no longer have enough people to build homes, harvest crops, make clothes, etc? Of course not.

So how are all these security costs hurting the economy as a whole? If we still can manage to produce enough goods and services to provide for all of us, even with diverting some people into the security field, it's clear that this diversion doesn't hurt our economy. And perhaps some of the people in security were un/under-employed, so you have more participation in the economy and it has grown.

In general, this is what's missing from our discussions of debt. We seem to view the economy as being made of money. But money is mearly a medium of exchange -- if we are producing enough goods and services, in reality, we are not collectively in debt. The problem is that we somehow are short, in key sectors, either that medium of exchange or capital to leverage to obtain that medium. This is what you see on a large scale in poor countries, where "you can feed a starving family for $1 a day" -- what does that mean? Does it mean that the country has so few resources it cannot feed itself? Maybe, but what it more likely means is that money is so un-available in that country people don't have $1 a day to get the food that others are willing to sell them for that cheap because they too lack the money -- the countries have effectively deflated their economies out of existence (as nearly happened to us in the 1930s -- and what got us out, pray tell Mr. Frum? the government spending about which you so worry) ... and even if they get a cash injection, well then, the inflation required to make their money internally worth what it fetches in the international market would kill those on fixed incomes.

The problem is not a lack of resources, but an economic imbalance. Some segments are awash in capital due to those demanding good investment vehicles (e.g. to save for retirement), and that demand distorts markets creating IPO bubbles and demand for dividends creates an incentive for companies to downsize, etc. Meanwhile other segments of society are lacking capitalization.

And a good safety net (as well as incentives for good, old fashioned savings which allows banks to ... wait a minute, y'all should know this ... they play It's a Wonderful Life on the TeeVee every year!) would go along way to helping the economy run in a more elastic and efficient manner. Even David Frum's argument of "oh noes, how will we pay for medical care and the rest of the safety net without breaking the bank" is off-base: if we can produce enough polo shirts, mini-yaughts, McMansions and over-priced cabernets and whatever else physicians require without other people starving because we cannot produce over-priced cabernets and enough food for the tables of the rest of us, then we do have the economic resources to fund socialized medicine ...

the issue is distribution of money, not the economy not having the resources per se. Yet the same people who have done much to squander our resources on un-necessary wars, etc. (and deny that what they have urged on is causing economic problems), now are complaining we don't have enough money to pay for things we actually could use? Methinks there is a pattern here ... hmmm ... I think maybe Grover Norquist or someone talked about this being a strategy once ... to over-extend government so their wouldn't be money for New Deal programs, etc ...

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Anyway, as to credit card defaults, maybe I'm saying this 'cause I'm a debtor not a creditor, but cry me a river. Loan companies will gladly let you rack up tens of thousands of dollars in credit card debt, but then not allow you to take out a personal loan to consolidate that debt -- although they'll happily loan you money to pay off another company's credit card debts and happily let you slowly pay off the debt on your card. If they really wanted to prevent defaults, they could negotiate a personal loan with you to pay off your card (and cut your limit while you're paying things off): instead the company wants you to pay the minimum payment which insures you are paying them essentially a permanent annuity rather than paying pretty much the same monthly payment at rates typical for unsecured loans which would allow you to pay off the debt in 5-10 years, or even less.

They don't care -- they, like the health care industry or what have you, are willing to cut off their noses just to eke out a little bit more profit where they can. I bet these people can't even calculate expected utility right! How many people defaulting on ARMs would have been able to pay off a regular mortgage? It's reasonable (if not fair) enough to say "I want to have the same expected profit from any borrower, so if the borrower is higher risk, I'll charge him more interest". It's not reasonable to assume that a customer has the same likelihood of default regardless of interest rate -- at some point (and you'd think people who lurve themselves some laffer curves would understand this as it's the same principle), you charge more interest and the borrower is more likely to default so your expected profit decreases! If lenders are in this regime, they ought not to get any sympathy for defaults!

C.f. Reich's arguments, businesses should welcome regulation (and many in fact do) because it forces them to do what really is the best thing for them to have done in the first place. The market doesn't work miracles folks! There is no market fairy magic ... and marketolatry is just a form of idolatry (c.f. Francis Bacon).

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Bonus Marketplace silliness (didn't this show used to be a good show -- and very balanced considering its name and target audience -- at one point?):

Glenn Melnick teaches health care finance at the University of Southern California:

Glenn Melnick: The market does work. It works in general, and it works in health care as well.


Um, this is actually what we mean sometimes when discussing a "market failure" -- this is certainly not a success unless you believe it's better that dermatologists spend their time giving botox over treating cancer (certainly no dermatologist believes this -- all the ones I know would rather be actually practicing medicine than pampering rich folk with overweaning senses of privalege -- but they gotta pay back their med school loans, as well as for polo shirts, etc). The point is that the market induces dermatologists to spend more time giving botox injections than treating cancer. That dermatologists respond to such market pressure is a failure of the market-place to achieve desirable goals. It's only an indication that the market is working if you define the market working as "the market actually induces people to respond to it" -- which is a rather silly definition if you ask me. Is it a market success if people sell more crack if the price of crack goes up?

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