Unwinding Freddie and Fannie

This article in Time makes clear that reforming Fannie and Freddie should be at the heart of any reform proposal, and yet we don't plan on dealing with it till next year. An excerpt:

"What I have seen is that government insurance programs are high-risk," said Lockhart. "It is often difficult in a political environment to calculate or charge an actuarially fair price." It is essentially a moral-hazard argument. Lockhart believes that the government will never be able to accurately price the guarantees that Fannie and Freddie offer mortgage lenders and investors. And as long as the government is offering that insurance too cheap, banks will be encouraged to make loans they shouldn't. And that will lead to more losses for Fannie and Freddie down the road.

Option A: Start unwinding Fannie and Freddie sometime next year, and watch the life get sucked out of the nascent housing recovery.

Option B: Kick the can down the road, and watch the federal government lose its AAA bond rating causing borrowing costs to increase and the now more politically dependent Fed to monetize the debt and destroy the dollar.

I'd go with option A, but I'm thinking the politicians will go with option B.

The big shift

The latest in California:

California Controller John Chiang, a Democrat, warned last week that the state was "less than 50 days away from a meltdown of state government."

While that's music to my ears in many ways, I wonder just how culpable California is in all this. Or for that matter the auto industry, the financial industry, and the housing industry. What if they are all ultimately caused by a fundamental shift in consumer preferences, i.e. a real business cycle? I think we are all aware of the shift in living patterns that has occured over the last decade or two. Sometime in the mid to late 1990s, the seemingly inexorable pattern of rich folks leaving the city for the suburbs started to reverse.

Understandably, this was not widely predicted, indeed it appears unprecendented at least in the US and Brittain. The car companies, domestic and foreign, lost this bet. Suburban homeowners and the suburban housing industry lost this bet. The financial industry, by facilitating these bets, also lost. States with a disproportionate share of suburban development, i.e. the sun belt states, lost this bet. Ultimately, this may the explain the downfall of the US as a car centric economy. Although non-car centric Europe has suffered just as much in the initial crash and aftermath, it remains to be seen who will emerge stronger.

Addendum: Offsetting this trend to some extent is politics. Many southern states, particularly Texas, are growing despite their car-centric infrastucture, because they have lower taxes and regulation.

Theory of the health care firm

This article by Atul Gawande on Medicare abuse in McAllen,TX has been discussed elsewhere, and it's no wonder that it has created such a stir, it is very thourough and mostly right on. One excerpt:

The core tenet of the Mayo Clinic is “The needs of the patient come first”—not the convenience of the doctors, not their revenues. The doctors and nurses, and even the janitors, sat in meetings almost weekly, working on ideas to make the service and the care better, not to get more money out of patients. I asked Cortese how the Mayo Clinic made this possible.

“It’s not easy,” he said. But decades ago Mayo recognized that the first thing it needed to do was eliminate the financial barriers. It pooled all the money the doctors and the hospital system received and began paying everyone a salary, so that the doctors’ goal in patient care couldn’t be increasing their income. Mayo promoted leaders who focussed first on what was best for patients, and then on how to make this financially possible.

No one there actually intends to do fewer expensive scans and procedures than is done elsewhere in the country. The aim is to raise quality and to help doctors and other staff members work as a team. But, almost by happenstance, the result has been lower costs. “When doctors put their heads together in a room, when they share expertise, you get more thinking and less testing,” Cortese told me.

Skeptics saw the Mayo model as a local phenomenon that wouldn’t carry beyond the hay fields of northern Minnesota. But in 1986 the Mayo Clinic opened a campus in Florida, one of our most expensive states for health care, and, in 1987, another one in Arizona. It was difficult to recruit staff members who would accept a salary and the Mayo’s collaborative way of practicing. Leaders were working against the dominant medical culture and incentives. The expansion sites took at least a decade to get properly established. But eventually they achieved the same high-quality, low-cost results as Rochester. Indeed, Cortese says that the Florida site has become, in some respects, the most efficient one in the system.

...

Providing health care is like building a house. The task requires experts, expensive equipment and materials, and a huge amount of coördination. Imagine that, instead of paying a contractor to pull a team together and keep them on track, you paid an electrician for every outlet he recommends, a plumber for every faucet, and a carpenter for every cabinet. Would you be surprised if you got a house with a thousand outlets, faucets, and cabinets, at three times the cost you expected, and the whole thing fell apart a couple of years later? Getting the country’s best electrician on the job (he trained at Harvard, somebody tells you) isn’t going to solve this problem. Nor will changing the person who writes him the check.

What he's talking about here is the well known issue of assymetric information, where the doctor knows technology and the patient knows only that he's in pain. There are many examples of this besides the housing industry, and generally the free market solution is incorporation. Take computers. Most consumers have no idea what's in their computer and would be lost if they had to construct a computer from its components. So the market solution is to put the assembly of these components under one firm, so that the consumer than has an easier informational challenge in which he need only compare and contrast complete computers rather than all the combinations of components. The analogy with health care is that consumers can't easily distinguish and judge individual procedures but they can easily distinguish and judge health care companies based on their reputation and record of performance.

I believe this is what the HMO revolution was about in part, but we all know it ultimately failed when the consumer got pissed off that someone told them "no". My question is why does the Mayo Clinic apparently succeed at this? Not answered.

And he concludes:

Something even more worrisome is going on as well. In the war over the culture of medicine—the war over whether our country’s anchor model will be Mayo or McAllen—the Mayo model is losing. In the sharpest economic downturn that our health system has faced in half a century, many people in medicine don’t see why they should do the hard work of organizing themselves in ways that reduce waste and improve quality if it means sacrificing revenue.

In El Paso, the for-profit health-care executive told me, a few leading physicians recently followed McAllen’s lead and opened their own centers for surgery and imaging. When I was in Tulsa a few months ago, a fellow-surgeon explained how he had made up for lost revenue by shifting his operations for well-insured patients to a specialty hospital that he partially owned while keeping his poor and uninsured patients at a nonprofit hospital in town. Even in Grand Junction, Michael Pramenko told me, “some of the doctors are beginning to complain about ‘leaving money on the table.’ ”

As America struggles to extend health-care coverage while curbing health-care costs, we face a decision that is more important than whether we have a public-insurance option, more important than whether we will have a single-payer system in the long run or a mixture of public and private insurance, as we do now. The decision is whether we are going to reward the leaders who are trying to build a new generation of Mayos and Grand Junctions. If we don’t, McAllen won’t be an outlier. It will be our future.

One clear way to tip the balance in favor of Mayo and other private providers is to eliminate Medicare as the personal piggy bank of profligate doctors.

Addendum: My brother the healthcare exec emailed me an answer to my question about Mayo v. HMO:

HMOs aren't a single concept. They are at least 2 different concepts.

The first one, which is the one that failed pretty significantly over the last 15 years, is the concept of steering patients into a particular group of providers, and the providers have loose to no other affiliation with one another and close to no ability to "manage" the costs, quality, or service of the system they are a part of.

The second concept is similar to the first, except the providers are significantly integrated and have the ability to collaborate to take costs out of the system and improve quality and service. They also generally have a shared financial incentive through capitation and benefit collectively and individually from costs coming down.

Most of the U.S. experience with HMOs was the first concept, and it left a bad taste in people's mouths. Patients felt restricted in their choices of providers and providers felt they had lost control over decisions and blamed someone else for this, mainly HMOs. The delivery system was essentially a group of individuals with individual interests, some of which were competing and most of which were disconnected from one another, both finanically and from an information perspective. This is largely the system we have in the U.S. today.

There are pockets of the second concept across the country. The article refers to these delivery systems as "accountable care organizations," a term coined in the following article (I have a subscription to Health Affairs if you want me to track down the full article):

http://content.healthaffairs.org/cgi/content/abstract/26/1/w44

It's really just a new term for the original concept of HMOs (NOT the sham HMOs in the first concept above), Mayo Clinic, and other organizations that have come together to organize the delivery of care, including sharing information and financial rewards collectively. It's a great concept with proven results as noted in the article in The New Yorker. However, it's going to be difficult to move our current system to this model on a dramatically larger scale because it requires a whole lot more Mayo Clinic-types with an organized approach rather than individual providers providing individual segments of a patient's care. The lack of naturally occuring such organizations is why the good HMO concept slipped into more of a sham HMO reality that most of us think of when we hear "HMO."

Bubbles and banks, the never ending story

Tyler has a new paper in which he deflects blame for the financial crisis away from central banks and towards behavioral biases such as herd behavior and over confidence. See my comments there, but basically I'm wondering why we can't blame both. My dissertation is about trying to sort out the relationship between these factors. I intend to test in the lab and with simulations the idea that free banking better mitigates bubbles, including those arising initially from behavioral biases (what other kind is there?).

Deluded socialists and health care

Tyler Cowen spells it out beautifully:

The "poorest" people are not those with low incomes but rather those with low human capital endowments. That includes the elderly because, even if they are very talented, on average they will die sooner. A typical 23-year-old lower-middle-class immigrant has a higher real endowment than does Warren Buffett.

Through Medicare, the U.S. government subsidizes the health care of the elderly. Given the embedded incentives in the system, the subsidy is especially large for people in the last year of life or so, namely the very poorest.

Western European welfare states may be more efficient, because they do more to expand routine health care access for the relatively young and this may have a higher rate of return. But those same systems are in critical regards less egalitarian. Bravo to them.

Many people do not look at the contrast this way. They wish to think they believe in egalitarianism, they wish to be skeptical of the United States, they wish to condemn the U.S. for its inequality, and they wish to raise the relative status of people who are not very successful under capitalism. When you put all those wishes together, those people will be deeply allergic to my argument.

A few of these people also confuse "high social status" with "well off." Since old, high-bank-account white males have lots of social status and power, these onlookers cannot bring themselves to regard those males as holding very poor overall endowments. They substitute in assessments of social status for assessments of absolute endowments (another sign of the claim that "politics is not about policy" but rather it is about whom we should admire and condemn).

I am amazed (but not surprised) by how frequently people think of egalitarianism in terms of social markers of status rather than actual forward-looking endowments.

It is common for more egalitarian policies to be less efficient.

Tyler is saying that socialists sell nationalized health care as egalitarian when in fact it is efficiency enhancing. Oh, the tangled web we weave. I believe he is right for the most part, but if you look at the dynamics of a policy of nationalized health care I think you will find that, yes, initially it is unegalitarian in that it takes away from the old and feeble and gives to the young and healthy but over time I think it becomes more egalitarian in that it takes from the young and healthy and gives to the young and feeble. However, all of this ignores the role of education, which I believe is the main determinant of health outcomes.

Deluded socialist perhaps reflects the base

This from the WSJ:

Some fear that the inability of many European left-wing parties to attract voters is a cause -- not just a symptom -- of a rise among parties on the far right. "When people fear that they are not protected by their governments, they go back to nationalism," said Anthony Wedgwood Benn, a retired U.K. Socialist lawmaker.

Nationalism is socialism, see for instance the Nazis, i.e. the National Socialists.

What happens when bankruptcy court moves to the White House?

Actually, in this instance it doesn't appear to be that bad, so far. Of course it is a terrible precedent, since we'll not always elect the best bankruptcy judge, but it appears Obama is perhaps as good as the typical bankruptcy judge. And largely the incentives are to look good in the "court of public opinion." But this story about the 31 year old put in charge of some major decisions should remind us all of the knowledge problem, i.e. that central planners' knowledge is always more limited than the market's:

“There was a time between Nov. 4 and mid-February when I was the only full-time member of the auto task force,” Mr. Deese, a special assistant to the president for economic policy, acknowledged recently as he hurried between his desk at the White House and the Treasury building next door. “It was a little scary.”

Tell me about it.

But now, according to those who joined him in the middle of his crash course about the automakers’ downward spiral, he has emerged as one of the most influential voices in what may become President Obama’s biggest experiment yet in federal economic intervention.

While far more prominent members of the administration are making the big decisions about Detroit, it is Mr. Deese who is often narrowing their options.

A month ago, when the administration was divided over whether to support Fiat’s bid to take over much of Chrysler, it was Mr. Deese who spoke out strongly against simply letting the company go into liquidation, according to several people who were present for the debate.

“Brian grasps both the economics and the politics about as quickly as I’ve seen anyone do this,” said Lawrence H. Summers, the head of the National Economic Council who is not known for being patient whenever he believes an analysis is sub-par — or disagrees with his own. “And there he was in the Roosevelt Room, speaking up vigorously to make the point that the costs we were going to incur giving Fiat a chance were no greater than some of the hidden costs of liquidation.”

Mr. Deese was not the only one favoring the Fiat deal, but his lengthy memorandum on how liquidation would increase Medicaid costs, unemployment insurance and municipal bankruptcies ended the debate. The administration supported the deal, and it seems likely to become a reality on Monday, if a federal judge handling the high-speed bankruptcy proceeding approves the sale of Chrysler’s best assets to the Italian carmaker.

Mr. Deese’s role is unusual for someone who is neither a formally trained economist nor a business school graduate, and who never spent much time flipping through the endless studies about the future of the American and Japanese auto industries.

So what is his role? What is the analagous role in bankruptcy court?