Archive for the ‘Structural Reform’ Category

Digging in the Wrong Place

Tuesday, December 17th, 2013

[Raiders of the Lost Ark]

… The old wise man reveals writing on the back of the medallion for the Staff of Ra, which states that part of the staff must be removed before using it to locate the Lost Ark …

Indiana: Belloq’s medallion only had writing on one side? You sure about that?

Sallah: Positive!

Indiana: Belloq’s staff is too long.

IndianaSallah: They’re digging in the wrong place!

 

It seems to me that today’s Economics profession is “digging in the wrong place” – misreading the data and pursuing the wrong solutions.

Rather than print credit and deficit spend, what if we just enforced the laws governing competition a bit more strongly?

The Sherman Antitrust Act and related pro-competition laws need to be better enforced across large sections of the U.S. economy.  While there appears to this author to be enough price competition among the various international auto manufacturers (at least for the U.S. market), and also in computers/electronics, the same is not true of the majority of the economy. For many other major durable goods, for telecom services, for a wide variety of nondurable products and services (including TV, Radio and paper-based news!) there are really only a few corporate providers in any given market. (Did you know that just 3 companies control 9/10 of the market in soft drinks? That only 4 Pet Store chains have nearly 2/3 of the market share? And don’t even get me started on healthcare…)  Utilities are already regulated as local monopolies — but is the regulation truly pro-consumer?

A closer look is needed at consumer products, particularly in foods, and even including restaurant chains. A relatively small number of corporations are hiding behind myriad brand names. When one pulls back the veil of brand-name marketing and takes a close look at the corporate ownership and cross-linkages, the true picture is pretty grim. (My kids have earned my respect as good consumers by carefully reading the labels on the packages in the fridge, and saying words to the effect of “Oh no, it’s Kraft again!”) Furthermore, it’s clear from price trends (despite 5 years of very difficult economic conditions) that pricing power is being exploited. There’s also a lot of evidence of corporate titans buying up young upstarts, ostensibly to acquire new capabilities, but also having the net effect of suppressing new competition.

So perhaps economists should reconsider the idea that the U.S. economy might be suffering from a “shortage of competition”, with too many sectors dominated by “pricing cartels”. That idea has tremendous explanatory power to describe the overall economic situation.

Even without explicit cartel or monopoly power, it’s possible for corporations to act cooperatively against the national or consumer interest. (One can look at their industry-based lobbying outfits in Washington for more examples…) When corporations in less-than-competitive industries all push for higher prices (and lower wage expenses) and the result is maximum profits industry-wide, the consequence is that fewer goods (and services) are produced and sold. Supply is constrained by the high prices, and demand constrained by low wages, particularly when large swathes of the economy are affected.

This “high-price/low-demand equilibrium” has many observable consequences. With supply and demand both constrained, total output is below capacity, which means fewer workers are needed and unemployment stays elevated while median income lags. Corporate profits are at record highs as a share of GDP, yet household incomes are not improving. The same economic power which produces high prices and record profits/GDP also produces favorable tax laws for the corporations. With corporations and the very wealthy avoiding taxes, and households earning less federal tax receipts are reduced. The non-rich, suffering from declining standards of living, demand help. So the government deficit-spends to provide that help, and also to bridge the demand and employment gaps. All of these consequences are observed today.

If this is right, then the cure for the economy as a whole is not to be found in monetary or fiscal policy, but simply in nonfinancial policies aimed at increasing competition!

Increasing competition leads to lower cartel profits in the short term, but leads to increased employment and a healthier, more prosperous economy overall. When more companies compete to provide goods and services in a given market, they must provide the goods at lower cost and higher quality. With prices being lower, sales rise, and to produce the increased quantities being sold, more people must be employed. The workers can then afford to purchase more, creating a virtuous loop which results in much greater output and in fact much greater profits in the long run. Those would be Sustainable Gains!

This sort of argument is well-known from classical economics. There is a good explanation (in a historical context) in one of J.K. Galbraith’s books or essays, although I don’t recall which one. The concept goes back at least to Adam Smith, according to the treatment on Wikipedia. It is unfortunate that modern economists appear to neglect the issue. Do they think there is no need for economic policymakers to deliberately foster ample competition among producers?  Or do they simply assume that corporations will find ways to compete effectively without government intervention?  The evidence suggests that corporations, left to their own devices, concentrate more pricing power than is in the national interest.

Housing Bubble Pain Continues for Most Americans

Monday, November 18th, 2013

Here’s a table, compiled by former Fed Governor Larry Lindsey and circulated by Marc Faber, that explains much of the pain from the housing-bubble collapse. The lower 75% of households (by wealth) have still not recovered their peak wealth.

HouseholdNetWorthImpactByWealth-2007-2013-Lindsey

http://www.portphillippublishing.com.au/DR20131118c.jpg

This is exactly what I was getting at in a recent comment on Macroblog; copied below. I’m glad to see more folks are looking into this.

But I fear that now it’s too late; the next bubble is already upon us now, and no one in a position of authority was willing to take away the punchbowl early enough.

 

MacroBlog Comment by Sustainable Gains on 10/24/2013:

Don’t forget the fraudulent nature of the house price increases in much of the country.

In many many places, loans were issued and properties flipped because lenders and/or borrowers were blatantly writing fraudulent loan paperwork. Prices were inflated above sustainable economic value as a result. Those who sold received ill-gotten gains; those who bought and held were forced to pay higher prices than they should have – they were robbed. Those who flipped paper received ill-gotten gains; those who bought the AAA-rated bonds and didn’t get their interest or principal back were robbed. Those who borrowed against the higher, fraudulent prices, thinking that rising prosperity and declining rates would make refinancing later affordable, were tricked too. In fact, never in the course of human events have so many been robbed so badly, by so few.

Wondering why the eventual collapse was so painful is a ludicrous pastime for “economists”. The net worth of the overwhelming majority of Americans is entirely in their home equity. Or was. Many folks lost their entire net worth. Rebuilding that takes time in the best of circumstances, and even more so now, given the structural problems in the economy. Furthermore, many of these folks were burned so badly that they will refuse to partake in a repeat.

The Federal Reserve, among many other institutions, was AWOL when it should have been regulating to prevent all of this. Greenspan is recently on record claiming that fraud is a law-enforcement issue, not a Federal Reserve issue. That is nonfeasance [by Greenspan and the Fed]. The Fed has regulatory powers, and anything that leads to “bezzle” on the balance sheets (to borrow a term from J.K. Galbraith) is also a regulatory issue, because it means banks haven’t got the capital base they claim to have. There was plenty of evidence available to those willing to look for it.

I suspect that 100 years from now, History is not going to look kindly on anything the Fed did from about 2002-present.

 

“We owe it to ourselves” is not a solution to the debt crisis

Saturday, October 12th, 2013

One problem with the argument that “we owe the skyrocketing debt to ourselves, so we can limit the impact”: each of those debts represents a promise to pay someone. If we can’t pay as agreed, the impact is severe. For example, if we don’t pay Grandma the $20K/year in Social Security because we can’t, and instead we only pay her $10K, that creates a problem. Alternatively, if we pay her $20K but we’ve driven monetary inflation (and skimped on the COLAs) so that it only buys $10K worth of goods, that still creates a problem. Piling on more promises now won’t change what Grandma’s going to get in real long-term value. The only thing that’s going to save Grandma is if someone else doesn’t get what they were promised… Now we have to repeat the same argument for everyone who was promised something — bottom line, we face a political vicious cycle for years to come.

Adding more to the debt without generating real GDP improvements will only aggravate the vicious cycle. And the data shows that the debt piled on since 2000 or so has done precious little to boost GDP, but represents an enormous number of promises relative to that GDP.

It is true that there are ways to break promises gently, rather than defaulting brutally, but the root problem is that our governments (at all levels) have, in aggregate, made far more promises than can realistically be kept. Politically it makes a big difference how you do it, but in practical terms the outcome is bad no matter what. There will be massive financial haircuts and broken expectations.

Furthermore, a political process, rather than a rational process, is going to decide who gets the worst cuts. This is not a recipe for peace and prosperity in a vicious-cycle political climate.

Even worse, the exaggerated promises are now so blatant that the government is losing credibility. As the promises lose credibility that creates all kinds of political and economic issues, because people here, and worldwide, will modify their behavior if they don’t think we can deliver.

Putting it all together, the problem is here and now, and aside from the immediate crises the risk of something catastrophically bad happening is rising exponentially. Papering the problem over with politically palatable platitudes isn’t a panacea.

There needs to be structural economic reform. The government needs to prioritize wants vs. needs, and we as a nation need to find better ways to direct labor to where it can generate genuine improvements in well-being.

The real Fiscal Fiasco is the debt per taxpayer

Friday, August 30th, 2013

Over at Capital Gains and Games, Stan Collender reports that the FY14 planning in Washington has gone from “Budget Bedlam to Fiscal Fiasco“.

Although he’s right, I’d like to add that the real fiasco here is that our elected leaders persistently fail to address the fundamental problem: the government’s debt cannot continue to increase forever in real, inflation-adjusted, hours-of-workers-pay terms.

Instead, we have over $100,000 in national debt per taxpayer (not counting state debt, underfunded pensions and so on). And we have neither a rational budgeting process nor a rational debt-limitation plan.  Following the methodology of the “Congressional Budget Office” and adding some sanity per Cyniconomics, we can expect in 20 years to have $300,000 in debt per taxpayer (after adjusting for inflation! in 2013 dollars!), and it just gets worse from there. Something’s gotta give. And screwing over Social Security recipients (who are funded by a dedicated tax) isn’t an option. Neither is taking away grandma’s medical care.

The problems is that people want to apply accounting cuts, when what is needed is a deeper rethinking of the structure of the U.S. economy. How can we make America more efficient and more productive?  What can we do to create a stronger tax base, with lower wasted effort, and maintain a carefully prioritized set of vital government functions?

One proposal: It’s entirely possible to have an effective government that is substantially more affordable than what we currently suffer, but it does require goring some sacred cows, primarily in the medical-waste sector. That sector is normally referred to as “healthcare”. But the cost per outcome is at least twice what other nations pay, and arguably as much as 10 times what is reasonable. So most of the expenditure is indeed wasted. Therefore we must indeed call it the medical-waste sector, pending future reforms.

Now, I’m not talking about cutting Medicare outcomes, or destroying the quality of life of senior citizens. We all know from personal experience that healthcare in this country is a bureaucratic and financial disaster. Hospitals, exempt from antitrust laws and often facing no competition, waste money and overcharge everyone. The insurance system creates deluges of time- and money-wasting paperwork for no benefit other than shifting costs in Byzantine ways.  And medications cost far more here than overseas, even for identical quality.  This has all been thoroughly documented (e.g. by Steven Brill in Time). Furthermore, there is a lot of emerging evidence that many medical procedures, with modern technology, can actually be purchased directly by consumers, from competitive providers for a small fraction of the hospital/insurance system’s sticker price. Given all that, it ought to be possible to deliver the same quality of life at much lower cost.

So I’m proposing that we change the laws regulating the medical sector. The medical industry should eliminate the B.S. pricing, live with the same antitrust laws as the rest of the business world (which need to be properly enforced, but that’s another article). We need to eliminate confidential price-fixing agreements. Pills and procedures of equivalent quality should have only one price worldwide (modulo taxes), and be subject to competition among different providers – not arbitrary “chargemasters”. And the whole structure of “insurance” is wrong, leading to endless, needless paperwork that adds no value to anyone’s life.

If we thoroughly restructured that industry, it would enable (over perhaps a decade) millions of workers to gradually shift into new occupations, ones which actually increase human well-being at reasonable cost, and thus add true economic value rather than merely “GDP”. And we’d have both a more-affordable government and greater overall wealth in society.

This isn’t the only sacred cow that ought to be slaughtered, it’s just the largest.  The Giant Squid has many tentacles, and not all of them are on Wall Street.

It’s not as though there’s a choice here. Our alternative as taxpayers and citizens, if we fail to meet the clear need to reform the government and the economy, is to toil away under that ever-increasing federal mortgage, and pray the bill never comes due. But it will. And even in the meantime, we will all suffer a reduced standard of living, because our nation is run with horrifically low efficiency.