The Road to Socorro

Friday we left Colorado Springs and drove through a snow-covered landscape down to New Mexico. (The section south of Pueblo down to Raton Pass really was snow-covered.) We were aiming to stay in Socorro, so we could make an early start at birding at Bosque del Apache NWR. But south of Isleta Pueblo, and five miles north of Las Lunas, we were brought to a halt. A convention of law enforcers stopped southbound traffic on I-25 and turned us back to Albuquerque. We never did find out the cause or nature of the accident.

But we found a room at the Best Western Inn & Suites near the Albuquerque airport, and we wandered down to Central Avenue near the University of New Mexico for dinner that night. The Olympia Cafe, it turns out, has a very nice Greek combination plate. So, a very nice experience achieved through happenstance.

Don't Sell Obama Short

Those of you who aren't into the stock market (not that I am, really) may not be perfectly clear on the term "to short." This used to be expressed as "to sell short," and what it means is to bet that a stock, a bond, or another security or commodity will go down in price. The short seller makes money by promising to sell someone a stock at some point in the future at a specified price, hoping that the market price will be even lower when the time comes to deliver the stock.

In this article, Daniel Gross talks about people who have been "shorting" Obama, both literally and figuratively, and how that has not been a good bet. Enjoy!

Happy Birthday, Bobby

It's Robert Frost's birthday. The poet of New England was born on this date in 1876 in (Are you ready for this?) San Francisco. My source says that Frost didn't see a New England state until he was ten.

The Road Not Taken

Two roads diverged in a yellow wood,
And sorry I could not travel both
And be one traveler, long I stood
And looked down one as far as I could
To where it bent in the undergrowth;

Then took the other, as just as fair,
And having perhaps the better claim,
Because it was grassy and wanted wear;
Though as for that, the passing there
Had worn them really about the same,

And both that morning equally lay
In leaves no step had trodden black.
Oh, I kept the first for another day!
Yet knowing how way leads on to way,
I doubted if I should ever come back.

I shall be telling this with a sigh
Somewhere ages and ages hence:
Two roads diverged in a wood, and I -
I took the one less traveled by,
And that has made all the difference.

There are two bits in this poems that I don't think I really picked up on in earlier readings. First, there's the "And be one traveler, ... " line. It never hit me before that Frost was writing about integrity. One can't be one person and take two divergent roads, not just in the physical sense, but in other, deeper, senses as well.

Second, the ambiguity introduced into the last stanza by the introductory "I shall be telling this ... " In other words, he isn't saying now that this choice has made all the difference. Rather, he's saying that he will, at some point in the future, attribute the way his life has turned out to this single choice.

I sometimes think that way about my life. For example, from time to time I look back to my decision to join the Foreign Service, and I might well say with a sigh, "And that has made all the difference." But has it really!

Happy 134th Robert Frost!

The Illusion of Cost Control

Just as people are starting to notice that both the Republicans and the Democrats are off in never-never land about the fiscal deficit, so Robert Samuelson thinks that the Obama administration is dealing in illusions about cost savings in the health care reform package.

Here's the thing, and I've said this before (and I'll probably say it again), you can't reduce prices by increasing demand. According to the fundamental rules of economics, increasing demand (all other things being equal) causes increased prices. One of the reasons that health cares costs are as high as they are is that Medicare, Medicaid, and various employer-paid insurance plans have increased the demand for medical services. Providing another 30 million people with health insurance will increase demand that much more, and that means higher prices. Samuelson goes into this at a more detailed level.

In an article in the Atlantic I recently read (November 2009 issue, I believe), the author pointed out that the insured and the uninsured spent about the same amount of their own money on health care each year. The insured, however, spent about three times as much of other peoples' money than the uninsured. So, you can expect spending by those 30 million to quadruple once they have insurance, and that, together with the provisions disallowing "pre-existing conditions" clauses is going to push up costs.

AIG May Pay Back Much of What We Lent It

I've listened to a couple of radio interviews lately with the author of The Big Short. Michael Levin wrote Liar's Poker a few years ago about the peccadilloes of investment bankers. He has a real talent for breaking down arcane (and sometimes deliberately obscure) financial operations into language normal people can understand. In The Big Short he goes at the myth that no one saw the financial crises of 2007 and 2008 coming. There were people who saw that the emperor had no clothes, and they made a lot of money betting against the boom.

The bottom line was that banks and insurers radically underestimated the risk inherent in certain securitized mortgage instruments and their derivatives. The premiums paid by purchasers of credit default swaps were absurdly low; when they went bust, the insurers didn't have the cash to cover the claims. That's the AIG story in a nutshell. They didn't charge enough in premiums to make up for the risk of the financial instruments they were insuring.

One could note that, by charging more for premiums, AIG would have protected itself in two ways: 1) It would have taken in enough money to cover the likely claims, and 2) it would have diminished the number of claims it would have had to cover. The latter effect would have come about because either investors would have chosen not to buy the expensive insurance, or they would have had second thoughts about buying securities that were so obviously risky. Premiums are a signal to the market of the degree of risk.

In this column, Daniel Gross estimates that the government bailout of AIG may wind up costing us only $12 or $15 billion. If we get some effective financial regulation out of the deal, that may be a small price to pay.

David Broder on Discipline in the States

I agree with David Broder that the states are showing more fiscal discipline than Washington. I even agree that it's crazy to extend the Bush tax cuts, for anyone, at any income level, in the face of this deficit.

But I do have a couple of quibbles with his column.

For one thing, he notes that all of the states, with the exception of Vermont, have constitutional requirements to balance their budgets. That's true, but it's not as important as you might think. These requirements only apply to the operating budget. The states are also allowed to borrow money for their capital budgets, and so they can run very substantial consolidated deficits. And they do. The way the requirements come together is that, in order to balance the operating budget, you have to keep your debt service to a manageable level. That, in turn, limits the total amount of debt a state can take on.

Second, while the states may be free to cut spending, fire state workers, and so on, the Federal government is responsible for trying to fire up the economy and get us back to full employment. So the Federal government needs to run deficits. Actually, in many cases, those balanced-budget clauses cause the states to impose unnecessary pain and suffering on their residents, cutting budget just when private spending is also lagging.

I get very tired of governors running for president with the slogan: "I balanced my budget." Well, so what? First, you were required by law to do so. Second, it's a lie.

Another Voice on Dealing with the Deficit

E. J. Dionne is a pretty good political analyst. He comes from the port side of the political spectrum, but he can be thoughtful and, sometimes, insightful. This column makes a couple of points.

First, we shouldn't be crying so much about this year's deficit, or even next year's deficit. In the time-honored tradition of Lord Keynes, we're supposed to run a deficit during bad times. I like to think of the Keynesian principles as similar to those found toward the end of the book of Genesis. Pharoah has a dream in which seven fat cows are gobbled up by seven gaunt and starving cows. The prophet Joseph interprets this as meaning that seven prosperous years will be followed by seven years of famine. Joseph's prescription: Save up as much as possible of the produce of the good years as a provision against starvation in the lean years.

Second, we need to face the fact that we have a "structural deficit." That is, if you take all the things we are committed to buy, as a government, and all the sources of revenue available to the government, we will run a deficit even in good years. Our taxes are simply not high enough to cover the cost of all the things we want (Dionne's word: "need") government to do. Either we need to chop some beloved and well-regarded programs, or we need to raise taxes substantially to bring these two dynamics into balance.

Third, Dionne wants the federal government to adopt a provision common among the states: a capital budget. The idea is that we should not be borrowing in order to pay the ordinary expenses of government. Tax revenues, fees and imposts should cover the day-to-day cost of government services. We should be borrowing, as states and municipalities do, for capital expenditures, such as roads, buildings, bridges, airports, and rapid-transit systems.

In other words, we should balance the operating budget, and run a deficit only on the capital side. That's a good idea, but there are several problems with it. First, based on the experience of California and other states, I'd say that it's pretty easy to reclassify routine expenditures as being somehow capital costs. The motivation to do so is always present; it's always easier to borrow to pay your bills than it is to raise taxes.

The second problem with the capital budget idea is that governments tend to commit to more projects than are financially sustainable. Suppose we have $1 billion to spend on highways, but we want $20 billion in highway construction. Okay, if we borrow $20 billion from investors by selling bonds, we only have to pay $1 billion per year in interest and administrative costs. Look, Ma, I just multiplied my money by 20 times! But, if you do this year after year, eventually the debt service costs (interest and administration) rise to equal the amount of your annual borrowing, and then, after 20 years, you have to pay back the principal of the loans. So, in year 21, you have to pay back the $20 billion you borrowed in year one, and you have $20 billion in charges for your borrowings from years 2-19.

Third, the interest charges on your debt have to take priority over all other spending. I know, there have been instances of defaults on sovereign debt in the past. Even respectable countries such as Russia and Argentina have defaulted on their debt. But I don't think the people of California would enjoy the consequences of default one bit. That's part of the problem with the Federal government now. The service on the existing debt is around half a trillion dollars a year. That's a lot of money, and it has first call on our revenues.

There is another column from Thursday's Washington Post on a similar topic, and I'll post it soon.