Econospeak has the clearest illustration of the basic dynamic behind the financial crisis that I've read:
Suppose somebody wants to make a bet with me that the San Francisco 49ers will win the next two Super Bowls. He gives me $100 today, and I have to give him $100 million in case he's right. The chances of this happening are very small, but just in case the impossible happens I want some backup. I buy insurance from my next-door neighbor. I offer to give him a nickel every week in return for his promise to cover my bet.
My neighbor sees that he has a good thing going -- getting money for nothing. After a while he takes on more and more bets until others follow in his footsteps. Soon, a market develops. In effect, people can bet on bets. Eventually, the total potential amount of money builds up into the billions and trillions of dollars.
Unexpectedly, the San Francisco 49ers win two Super Bowls in a row. My neighbor does not have $100 million on hand to cover my loss. The nickels I have been giving him have been wasted. I don't have $100 million either.
Now imagine that between paragraphs two and three, everyone in the neighborhood started doing the same thing. The man and his neighbor seemed to be making so much money, so everyone got in on the action, and everyone got in on the same bet about the same game. That's the basic shape of the river: All these folks were making the same bet: Basically, that the housing bubble could last forever. Then when it popped, damn near everyone went down at once, because damn near everyone had gotten in on the action. It's sort of amazing to think that we've been paying finance CEOs incredible amounts of money to follow each other off a cliff, but there you have it.
In a world where the the American economy wasn't on the verge of collapse, I'd spend a lot of time hyping Kevin Carey's article detailing how Democrats have lost their momentum on education and fallen into a defensive, uninspiring, posture. The idea that Republicans have been able to wrest the mantle of improvement and reform on an issue as central to the progressive project as education is, frankly, embarrassing. So read Kevin Carey. And then, when you're done, you should read some more Kevin Carey, as he also wrote a great piece on the ways in which the focus on teacher autonomy has limited the space for teacher achievement.
Image used under a Creative Commons license from Inx.
One thing you've got to give to Obama: He's the first Democrat to understand the concept mockery in, well, as long as I can remember. Frankly, his ads would be better if they just played tape of him on the stump.
The strategy being articulated by congressional leadership seems sound. Constructing a new regulatory structure isn't the sort of thing you want to do by morning. So let the Fed and the Treasury Department deal deal with the short-term trauma, and start working towards a major regulatory overhaul that can be passed when the situation calms. The only question is whether Congress can preserve the political will and energy for such a heavy lift after the urgency fades.
"Regulation," as it related to the financial crisis, has become something of a vague buzzword, so I'm happy to link to Bob Kuttner laying out the seven deregulations that enabled Wall Street's implosion and three regulatory moves that could help right the ship.I'll just add that the crisis is, to a substantial degree, a function of the regulatory state freezing up sometime around the 80s as the conservative revolution both deregulated and, ore importantly, prevented new regulations from being enacted. But Wall Street continued to develop new financial instruments and institutions.
As such, it's not so much that we actively deregulated our way into this crisis as that we passively failed to enact the regulatory structure that could have prevented it. The result of the asymmetry was that, by 2008, whole sectors of the financial system were operating outside any oversight, and they did basically what history has shown they do: Got overzealous in pursuit of profits, took on too much risk, allowed too much speculation, and caused a massive catastrophe. It's become something of a cliche, but economies don't work without markets, and markets don't work without regulations and rules.
There's some concern that the government's bailout of AIG (and everyone else who isn't Lehmann Brothers) is disrupting the moderating threat of "moral hazard" on Wall Street. As the idea goes, the government's containment actions will ensure that Wall Street takes these risks again, secure that the Feds will clean up any mess they make. Alas, their may be a kernel of truth to that. But I basically agree with Paul Kedrosky when he says this is an example of economics-types taking theory too far into reality:
I wish people would shut up about "moral hazard". Yes, bridging AIG through its current crisis is not something you want to do; and yes, it would be better if the market solved its own problem. But even a cursory analysts of the serpentine connections between AIG and capital markets tells you that the latter just can't happen, so you have to hold your nose, be an adult, and live with the former.
Moral hazard, while real sometimes and in some places, is vastly overrated as an effect. Granted, it's seductive in the same way that risk homeostasis is -- the notion that, for example, people drive faster and take more risks because they have seatbelts -- but like risk homeostasis, moral hazard is vastly over-diagnosed. People at major financial services outfits don't project five years into the future and say, "Lever up, boys and girls. We'll either make a lot of money now, or be bailed out later." Real people in real markets don't think that way. Matter of fact, if anything, they're short-sighted in that regard to a fault.
Plus, the lessons of the bailouts are complicated, in part because of the Federal Reserve's inconsistency. Do you end up like Bear-Stearns with a total rescue? Like Lehmann Brothers, with total liquidation? Like AIG, with government ownership and an $85 billion loan that has to be paid back at credit card rates? Are you one of the executives who loses their jobs, one of the workers whose department is closed down when the assets are shed, or one of the few who escape unscathed?
And then, on the other side, are you Bank of America, who was subject to regulatory oversight and didn't get caught with a heap of highly leveraged junk investments, and now sees their prudence repaid many times over because they're acquiring failed institutions for a song?
People don't want their businesses to fail. And even if all they feared were personal consequences, there's such an array of outcomes on the table that it would be extremely hard to predict which would befall you. Which is all to say, I'm not too worried about moral hazard here. But that doesn't mean there shouldn't be consequences: I'd start with an immediate push to equalize the tax treatment of incomes derived from private investment. It's an odd quirk of the tax system that simply treating income as income will be judged a punishment, but so be it. These guys have lost any public sympathy they ever had and sacrificed their ability to claim that they're taking advantage of lenient tax treatment to create value for the rest of us. Close the loophole.
Amidst all the other effects of the crisis, you can probably add in a couple hundred billion in bailout money that land atop an already weak Federal Treasury. We're not, after all, going to raise taxes to pay off Wall Street's debts. Hell, we probably won't even raise Wall Street's taxes to pay off Wall Street's debts.
This will not make social investment easy. Particularly when you're dealing with social investment that requires much in the way of new money. To take the health policy perspective on this, this makes it much harder to pass a plan like Obama/Edwards/Clinton, which needs a hundred billion or so to expand access. It makes it easier, at least in theory, to pass a more cost-efficient plan like Wyden-Bennett, which the Congressional Budget Office has estimated as revenue-positive (in other words: It saves us money) but requires us to totally rebuild the health system.
In general, the more cost-effective a plan is, the more disruptive it is, and the riskier a political initiative it is. Less cost-effective plans are easier political initiatives, but become rather tricky if there's no money for them. For more on this dynamic, read "The Elusive Politics of Reform." But the basic takeaway here is that as the government role in the financial crisis grows, the likelihood of serious new social investment diminishes, because you don't have money to grease the bill's way through a rusted system. If we had a functioning political system, maybe we could implement smart, far-reaching reforms that would also save us money. But as of now, I see minimal evidence for that.
I have to imagine the employees of Bear Sterns and Lehman Brothers are currently thinking that they clearly did not take on enough risk over the past several years. Lehman employees, in particular, were fed into the moral hazard grinder that was operational for a scant two days. How unfortunate. Which leads me to my most significant concern about Fed policy over the past year – the inconsistency. Facilitate the liquidation of Bear Sterns by backstopping $29 billion of questionable assets. Then, recognizing the moral hazard created by that move, let Lehman collapse. Then, recognizing the consequences of vanquishing moral hazard, effectively purchasing AIG. At this point, the endgame should be clear to policymakers – a taxpayer bailout. The bad assets need to be consolidated and eliminated. Congress needs to be working on a mechanism to make this happen, a new RTC. Any Congressional action needs to include a reevaluation of the state of financial regulation...I think we are now all realizing where we are headed. We are moving into the endgame, when Congress socializes the losses after privatizing the gains.
You should read his whole post. But the conclusion illuminates a basic unfairness we should recognize: The resolution to the past decade or so of rocketing wealth in the finance sector will be that all those guys remain jaw-droppingly rich while taxpayers pay off hundreds of billions of their bad bets. Making it all the more galling, the very traders who forced us into this mess will escape not only the bill, but they'll be exempted from even paying their portion of the tax bill.
The the tax loophole that allows employees of private investment companies to classify their income as "capital gains" and thus pay 15% in taxes rather than 35% remains unclosed. Maybe one of Congress's policy responses should be to muster some nerve and equalize tax treatment. Forget moral hazard: I'd settle for some simple fairness. If they're going to rely on the tax system as an insurance plan, there's no reason they should be exempted from buying in.
Sarah Palin's main main job as governor was manage the state's energy portfolio, but she doesn't actually know how much energy Alaska produces. John McCain's main job as chairman of the Senate Commerce Committee was to manage the Committee's business, but John McCain doesn't know what the Committee does and does not have jurisdiction over.
Is there really no way to disqualify presidential tickets on grounds of gross incompetence?
As a human being with an instinctive fondness for round numbers, I was a bit puzzled by the government's purchase of a 79.9% equity stake in AIG. But Steven Davidoff explains the situation: "The government purchases 79.9 percent of the company in question. It can’t be more than that, because if it goes over the magical number of 80 percent, the company’s debts are then required to be consolidated onto the federal government’s balance sheet. Keeping it at 79.9 percent allows the government to maintain the fiction that it is still not responsible for the company’s solvency."
Additionally, what the government bought was, in essence, stock-once-removed. They got warrants that can become stock. This preserves the fiction that they don't own AIG, though the difference here is is the difference between me buying your house and moving into it and me buying your house and letting you live there until I change my mind.
Noting that he instinctively shares the optimism that this won't turn into another Great Depression, Atrios writes that his confidence is "largely based on the knowledge that there are smart technocrats who know what they're doing, and not on the reality that while those these people exist they probably aren't actually steering the ship. George Bush, Chris Cox, Dick Cheney, and Henry Paulson are."
Putting aside whether Paulson knows what he's doing -- I think he's acquitted himself well thus far -- one of the odd facts about this crisis is that the elected branches of government have been completely cut out of the response. George W. Bush and Dick Cheney have not, as far as anyone can tell, been steering the ship. According to The Wall Street Journal, Bush was briefed on the rescue after it was in play. And even then, he was only "briefed." There's been no effort on the part of the White House to even advance the idea that Bush is an engaged participant who's actively signing off on these actions, possibly because suggesting his involvement in a crisis of this complexity would cause the stock market to run and hide in a corner.
Congress, too, has been cut totally out of the loop. The AIG bailout -- in fact, all of the bailouts -- have been conceived entirely without their involvement. Indeed, the Federal Reserve and the Treasury Department have been acting, over the course of this crisis, as if they are the sum total of the government. And that may be the correct approach: Neither the president nor the legislative branch possess the expertise or speed to be involved in the real-time crisis management that Bernanke and Paulson are trying to manage. They could, presumably, reverse decisions after the fact or change the contours of the law, but for now, the ship is being steered by the Chairman of the Federal Reserve, the Treasury Secretary, and an informal working group of Wall Street CEOs and banking powerhouses. And the government, as we normally think of it, has basically accepted their temporary authority. You've heard of martial law? We're currently in a state of market law.
David Leonhardt's column today makes a bunch of good points, and a couple odd suggestions. First, it's worth stepping back for a moment to admire the economic normalcy of such an extraordinary moment. The epicenter of American capital is imploding, and though the shockwaves may yet roil the country, most workers aren't feeling much more than a mild recession, and the stock market's drop has been sharp rather than catastrophic. As Leonhardt writes, "For the past two and a half months, I’ve been on a break from column writing, and I’m struck by how much has changed during that time — and yet how little the big picture has changed. Lehman Brothers, Merrill Lynch, Fannie Mae and Freddie Mac have all essentially collapsed. But just as at the start of the summer, economists can’t even agree whether the country is in a recession."
His column goes on to detail one of the government's last major bail-out -- that of Chrysler -- and argue that its lessons suggest we should be playing offense rather than defense. As such, he calls for tax reforms that advantage savings, investment in research and development, and health reform. All good ideas, but none actually count as offense against the financial crisis. Indeed, no one knows how to play offense on modern financial instruments because no one really understands modern financial instruments. That's part of the cause of the collapse: Uncertainty born of insufficient understanding. Mortgage backed securities aren't cars. In fact, they're really not mortgages, either. And few know how many there are, or how severe their downside risk really is. Part of the reason no one seems able to get in front of this crisis is that no one really understands where the front is.
One more note on the Obama ad below: Why Obama? Or, at the least, why only Obama? Why didn't half that ad buy go to a spot where Warren Buffett, a reassuringly wrinkly white dude with unmatched economic credibility, stared into a camera and spoke about a financial crisis so acute that he'd never seen anything to match it and the need for a president who understands that a healthy private market requires a functioning regulatory structure? Associating Obama and Buffett would, at this moment in time, be a huge net gain, and the ad would be all over the news, giving the campaign a free media boost.
For now, the Obama campaign seems to have two types of ads: generic political ads, and ads where Obama talks directly to voters. None of their ads have been particularly effective, or memorable. But they release new ones every single day. Why not try and shake up the formula?
For all the talk of nationalization, the AIG deal is a bit odd. The government didn't "buy" the company. It advanced an $85 billion loan that is collateralized through most all of AIG's assets and includes a 79.9% equity stake -- which is to say, control of the company. This shape of the deal gets to questions about how the Reserve could do this absent congressional authorization. The Federal Reserve doesn't have the power to buy AIG. In general, they don't even have the power to loan to AIG, as it's not a bank. But they do, through Section 13(3) of the Federal Reserve Act, have the power to lend to “any individual, partnership or corporation” in “unusual and exigent circumstance” provided the borrower “is unable to secure adequate credit accommodations from other banking institutions.” (There's an interesting history of that clause here.)
All these standards were met. AIG spent the last few days trying to raise $75 billion through private channels. They failed (which suggests this is not exactly a safe bet for taxpayers). Their collapse would have defined "unusual and exigent" circumstances. And so the Federal Reserve made the loan. And it's not a friendly loan. As the Wall Street Journalsays, "AIG may be able to survive, but it must repay the $85 billion loan at credit-card-like interest rates (8.5 percentage points over Libor, currently about 11%), liquidation even of performing assets is in the cards and top management is on its way out the door." But the Federal Reserve knew that the political system would reject an $85 billion bailout if it didn't come with appropriate oversight and regulations. Congress is already restive at having virtually no role in this crisis and seeing policy dictated by the Federal Reserve. Additionally, there are broad concerns that these bailouts are creating a moral hazard problem, in which insufficient pain is being inflicted on the wounded companies So rather than a simple bailout, the government demanded control of the company. That ends the careers of the executives, gives the government the ability to sell off AIG's assets (which everyone expects to happen, and quickly), and creates full oversight in the absence of any new regulations.
That said, I doubt this state of affairs will remain for long. The loan has a two-year timeframe, and my assumption is that, if it's paid back, the government will divest itself of the company, though I've not seen anyone say that explicitly.
Andrew notes, "what's concerning is that Carly Fiorina thinks neither McCain nor Palin are capable of running a company and yet they want the top jobs in a Government that has just bought several."
Obama's new ad is a very serious, very somber, and very long:
The atmospherics of the ad are probably smart. It's a better fit for the moment than another attack ad, or some announcer uttering bullet points while the camera zooms in on concerned looking parents from Heartland Central Casting. But Obama is still bad at talking about policy. The empathy portion of the spot -- the bit where Obama details the problem -- is fine. But the substance of the ad, the solutions, are a string of disconnected, and fairly unconvincing, sentences. "Reform our tax system to give a $1,000 tax break to the middle class, instead of showering more on oil companies and corporations that outsource our jobs." This woukld be fine if McCain were publicly advocating the "Oil Companies and Outsourcers Tax Cut of 2008," but as he won't admit to favoring these things, it just sounds like Obama is another politician promising Good Stuff, and no one really believes in Good Stuff. In contrast, watch this ad from Clinton in 1992:
This has really been a great couple of years for, well, me. First, Time magazine named me Person of the Year. A deserved honor, to be sure, but one I was humbled by all the same. That, however, was nothing compared to last night, when the Federal Reserve used taxpayer money -- my money! -- to effectively purchase a controlling stake in insurance giant AIG, making me the owner of AIG! Me! Who's never been to business school or ran a company or even managed stocks. And now I'm the owner of the largest insurer in the nation.
There'll be much more to say on this as the day goes on, but it's worth taking a moment for a kind word about Bush. For all the patronage and ideology and inattention that marked the major appointments of his first-term, he elevated some serious and capable individuals to key positions in his second term. Most agree, I think, that Robert Gates has been an able Defense Secretary, Condoleeza Rice has done an extraordinary amount to modulate the administration's foreign policy as Secretary of State, and Ben Bernanke and Hank Paulson have been performing admirably under extraordinarily intense and unpredictable conditions. Their efforts may, in the end, prove insufficient, but if they fail, it won't be because they got hung up by ideology or inexperience. Everyone is out of their depth right now, but Paulson, a former investment banker, and Bernanke, an economist who studied the Great Depression, are about as near to the waterline as anyone.
As the saying goes, a presidency is only vaguely about the president. Various agencies have, in general, a fairly large amount of autonomy, and the individuals chosen to staff those arms of the government are incredibly important. Which makes it something of a shame that presidential candidates aren't supposed to offer a preliminary look at their cabinets. The general way we understand a president's agenda is through policy papers, but just as no plan survives contact with the enemy, no legislation survives contact with the Congress. Nominees, however, generally do -- the Senate can't amend a person -- and it's extremely odd that we don't demand the ability to evaluate their proposed cabinet during the campaign. It's exactly the sort of thing that should figure into electoral decision making. For instance: A few months ago, there was reporting that McCain meant to elevate Phil Gramm as Treasury Secretary if he won. Obviously, the campaign wouldn't admit to any such thing now, but if they had admitted to it then, if they couldn't deny that they had once harbored that impulse, it would be telling.
I know how it is. You woke up this morning and thought, rather than reading Ezra Klein's blog and absorbing his considered commentary at high speed, I'd like to spend 40-or-so minutes watching him express similar opinions far less articulately in a recorded dialogue with Ross Douthat. And, even more amazingly, I anticipated this preference of yours, and recorded a BloggingHeads with Ross, which is now up.
Eric Rauchway brings up a historical parallel I wasn't aware of:
Responding to the collapse of several major investment banks this week, John McCain reassured us, "I think still -- the fundamentals of our economy are strong." That move comes from an old playbook: On Oct. 25, 1929, Herbert Hoover declared, "The fundamental business of the country, that is the production and distribution of commodities, is on a sound and prosperous basis."
Ouch. It's important to note that an aversion to regulation is one of the rare things that's actually older than John McCain. For all his posturing as a sui generis politician, he, like most everyone involved in politics, cannot know about all subjects from all angles and so has fitted himself into an intellectual tradition whose values he likes and whose solutions he broadly agrees with. That tradition is economic conservatism. At times, that may be the right tradition for a president facing the particular array of ills facing the country. It's extremely hard to argue, however, that it's the right tradition for this moment in the economy, when even George W. Bush's Federal Reserve Chairman and Treasury Secretary are having to engineer interventions of unprecedented scale.
McCain may have been an excellent candidate for 2000, and you could even argue he had some real advantages in 2004. But a massive financial crisis brought on by exactly the sort of deregulation he's spent his career advocating is not the sort of moment that he's proven himself suited to managing. This is a guy who has said, proudly, "I'm always for less regulation" and who elevated Phil Gramm -- arguably the politician most responsible for the current crisis -- to a top economic job. This is a guy who, three years ago, wanted to turn Social Security over to Wall Street. It may indeed be that McCain realizes his traditional opinions are unsuited to this moment and will gesture towards some new opinions, but two weeks of rethinking is no substitute for years of engagement with a more appropriate theory of governance. Though the McCain campaign would like to argue otherwise, the presidency is not solely about one person, his character or his honor. President is a big job, and the officeholder tends to fall back on their tradition, intellectual networks, and preexisting policy biases. Changing all that midstream is not easy.
Brad DeLong has a bunch of them. I'd slim the list down to three for each candidate. For McCain:
• McCain's health care plan will increase taxes on employer-based insurance, and kick 20 million people off the rolls.
• McCain's plan will throw you into the individual market, where the same plan your employer offered will cost $2,000 more, and you can be refused care because you were sick 10 years ago.
• McCain's plan will shift costs onto the sick.
For Obama:
• Obama's plan will cover tens of millions of Americans and reform the insurance industry such that everyone gets a fair deal and no one can be discriminated against because they were once sick or unlucky.
• It will create a group market that businesses can buy their employees into so that a small business that paints homes doesn't have to run a tiny insurance company on the side and an entrepreneur can pursue his idea without having to learn about health coverage regulations.
• It will cover all children. And Christ almighty, isn't it time we did at least that?
Frankly, things have been a bit heavy here of late. Stock market collapses and investment banks melting down and charts showing the distributional implications of various tax plans. So here's a pie graph about, well, pie:
Also, in response to the ad the McCain campaign just released, I apologize for implying that Sarah Palin is a baked good. It was out of line.
(Also also: I got this graph from a reader e-mailing it over. Same with today's tax graph, same with yesterday's corn graph. The internet is big and I am small. Good graphs are hard to find. In general, if you come across some, send them on over.)
This morning, I read an unsettling op-ed arguing yeah, sure, the financial crisis has been bad so far, but it's peanuts compared to what happens if insurance-giant AIG collapses. Now it's looking like AIG is collapsing.
I don't think I'm supposed to be raising money for magazines that aren't my own, but Bitch, which I've always really liked, is in pretty dire straits, and folks should throw them some scratch. And when they do, they should also push the magazine to put their articles online. It's telling that the publication has almost no web presence, but is turning to the internet for another lease on life. These small, underfunded, poorly promoted non-profits can do better on the web than in print, and they should embrace that.
I'm a sucker for hack gap arguments. And Brian Beutler -- now back to blogging -- points out, the McCain-invented-the-Blackberry story will never catch on because Democrats don't really have the stomach to repeat it. It's fairly clear that Doug Holtz-Eakin was making a point about McCain's regulatory responsibilities, and though it was amusingly phrased, the best liberals will really be able to do is offer up a bunch of outraged blog posts saying IOKIYAR and bashing the media for treating Al Gore worse than John McCain.
When the Right wants the media to cover something, they make the story "conservative outrage over X." When the Left wants the media to cover something, they make the story "liberals outraged over the media not covering X." As such, the media covers the conservative claim because they can't be biased and ignore right wing arguments that they think are stupid. They don't cover the left wing claim because doing so would admit a bias, and a sensitivity to organized criticism, that they don't think they have. Political conflict is a story they'll cover. Media criticism is not.
Justin Wolfers wrote a great post over at Freakonomics using a couple different charts to show how the tax issue gets distorted. First, he grabbed a Washington Post graph showing the distributional impacts of the two candidate's plans.
You can click on it for a slightly larger version. The basic takeaway is that in this graph, McCain looks to be the clear tax cutter. More brackets benefit under him than under Obama. But notice that little bracket connecting the bottom three lines: Those make up 60 percent of taxpayers, despite being only three of the nine categories on the chart.
Then he snags a graph from chartjunk that offers the same information, but weighted for population. The size of the categories is keyed to the percent of the population. Now who's the taxcutter?
This goes to a point I've made a couple time over the course of the election: The press tends to report tax cuts in terms of aggregate impact on the federal treasury rather than the median impact on taxpayers. But individual taxpayers don't experience tax cuts in terms of the treasury. They experience it in terms of their tax bill. And because Obama weights his tax cut towards the middle class, which is rather a lot larger than the top one percent, he actually provides a much bigger tax cut to many more people than McCain, who managed to center his tax cut on the wealthy such that it costs more but helps fewer taxpayers.
I suspect that Wallace was a genius who happened to be a writer, rather than a writer who happened to be a genius—Hemingway, for instance. You can't imagine Hemingway writing, as Wallace did, a treatise called "Everything and More: A Compact History of Infinity" (2004)...If the endlessly self-analytical Hamlet had been a writer (aside from that "speech of some twelve or fifteen lines" he composes to insert in "The Murder of Gonzago," the play within the play), he would have written far more like Wallace than like Shakespeare. Hamlet says that "I could be bounded in a nutshell and count myself a king of infinite space, were it not that I have bad dreams"; it's a line that the author of "Infinite Jest" must have taken deeply to heart.
You can see that side of Wallace reflected here, in this animated reading from his book Consider the Lobster. These are the words of someone who finds the world a bit cacophonous for his tastes, and can't quite shut down the part of his brain that is quietly repulsed by humanity. He talks, in this passage, about being unable to fulfill his dream of floating outside and above this loud and dirty realm. The pity is that what made his writing rare is that his genius did remain outside and above, even as he shouldered his way down city streets like the rest of us. Had he lived totally off the grid, he would have had nothing to say. Had he simply accepted civilization, as most of us do, he would have had little to write. But he did neither. And that made him a voice worth hearing.
Earlier today, I wrote about the Health Affairs' critique of John McCain's health care plan. There's also a skeptical examination of Obama's proposal, and it makes a number of fair points. The main argument is cost: The Obama plan does not include much in the way of serious cost control.
The authors take on the campaign's treasured data point. "According to the campaign, the average family would save up to $2,500 a year as a result of new federal subsidies and proposals intended to slow the growth of health spending...The savings estimates and the resulting impact on federal outlays from the Obama plan are controversial. Savings proposals include familiar ideas, many of which are embraced by both candidates: greater use of information technology (IT), improved disease management and care coordination, clinical effectiveness research, and better payment methods. Although many policymakers and experts agree that such policies would improve health system performance, there is little evidence that they can be implemented quickly or effectively and little proof that implementing the policies would yield net reductions in health spending."
Agreed. I've never been able to make the $2,500 add up, and it's not a sum I take seriously. Health IT is hard to implement, there's contrasting evidence on whether disease management reduces costs, and effectiveness data would take years to produce and even longer to use. The authors are similarly skeptical about the National Health Plan's ability to bargain down prices. "Those advantages already exist for the Medicare program, which has not had notable success controlling its spending. Increasing the share of health spending paid for through federal programs does not automatically confer a greater ability to negotiate prices or buy smarter, as Medicare has found in its durable medical equipment spending...Most important, prices are only part of the spending equation. As Medicare has demonstrated repeatedly, increases in the quantity and mix of services can cause spending to increase even when prices remain flat."
I sort of buried this in a previous post, but it's worth drawing out. Today, John McCain said, "Wall Street has betrayed us. They've broken the social contract between capitalism and the average citizen and the worker. And workers are paying a very heavy price while a lot of them are not only emerging unscathed but some of them are left with packages of a hundred million dollars or so. This is a result of excess and greed and corruption. And that's exactly what is plaguing Americans today. And we got to fix it and we've got to update our regulatory system. We have to have a 9/11 commission to find out what went wrong and to fix what's going to happen in the future so this never ever happens again. And as president, I guarantee you, it will never happen again."
"The first thing you do is you address this issue of the alphabet soup of regulatory agencies. It was designed for the 1930s. Now we have an instantaneous financial system that's global in nature and it's not compartmentalized. Look at the Stock Exchange today as to what it was even 20 or 30 years ago. So you've got to fix that and also, very frankly, people were asleep at the switch. I don't think there's any doubt about that."
John McCain's contention is that Wall Street has, for years, been rotting in a toxic mixture of greed and overreach and corruption. Simultaneously, a 70-year-old regulatory structure has proven inadequate at checking the institution's excesses. This is, in other words, a crisis composed of trends, rather than a singular, unpredictable, catastrophe.
Three years ago, John McCain signed on to George W. Bush's efforts to privatize Social Security. He surveyed Wall Street and decided that it was a stable enough institution to entrust with the nation's pension funds. Three years ago. And this wasn't just an attempt to cozy up to Bush: McCain was arguing for privatization in 1999. So McCain's argument is that Wall Street is built atop an unstable regulatory foundation and is shot through with most of the seven deadly sins. That the situation has been allowed to fester so long is evidence that "people were asleep at the switch." Even so, McCain has consistently argued that much of Social Security should be turned over to...Wall Street. Either he wanted to tank the nation's pensions funds or he was one of the people asleep at the switch. But those are really the only two options here.
Ezra Klein is an associate editor at The American Prospect. His work has appeared in the LA Times, The Guardian, The Washington Monthly, The New Republic, Slate, The Columbia Journalism Review, and other outlets. He's been a commentator on MSNBC, CNN, NPR, and more. He cooks a mean kung pao, and likes to talk about health care policy.
An archive of his articles for The American Prospectcan be found here.
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Ezra Klein is an associate editor at The American Prospect. His work has appeared in the LA Times, The Guardian, The Washington Monthly, The New Republic, Slate, The Columbia Journalism Review, and other outlets. He's been a commentator on MSNBC, CNN, NPR, and more. He cooks a mean kung pao, and likes to talk about health care policy.
