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December 20, 2007

Economist's View - 7 new articles

EPA Denies California a Waiver

David Roberts of Grist with an analysis of the EPA's decision to deny California a waiver from federal fuel economy standards. California wants to implement its own greenhouse gas emissions standards that force a reduction in tailpipe emissions, but the request was denied:

Johnson's nuts, by David Roberts: As I mentioned below, today the U.S. EPA denied California's request for a waiver exempting it from federal fuel economy standards, allowing it to implement its own standards. EPA administrator Stephen Johnson announced the decision in a rushed press conference following President Bush's signing of the energy bill.

The announcement came with a veritable torrent of dishonest spin. Let me try to disentangle some of it.

1. Johnson leaned heavily on today's passage of the energy bill, saying that a "uniform national standard" is preferable to a "confusing patchwork of state standards."

The "patchwork" line is completely disingenuous. There aren't multiple standards in different states. There's one: California's standard, which other states can choose by law to adopt, or not. Seventeen states, representing over half the U.S. population, have pledged to adopt it.

2. Johnson said that he'd had "hours and hours" of briefing from the EPA's "world-class professional staff," which provided him with many "pros and cons" upon which he based his decision.

There's good reason to believe this is false. According to House Oversight Committee chair Henry Waxman (D-Calif.) and other sources, the EPA's professional staff was cut out of the debate (PDF), which proceeded almost entirely on political grounds. Indeed, EPA staff overwhelmingly believes that the waiver should be granted.

3. Johnson asserted that the newly passed CAFE standards (35mpg) are tougher than California's standards...

The reason automakers have lobbied the White House so hard to get this decision is that California's standards are tougher than the new federal standards. ... Make no mistake: this is a gift to automakers.

4. Johnson said he was denying the waiver on the basis of section 209 of the Clean Air Act. He said this request for a waiver was "distinct from all prior requests"... Thus, California does not meet the "compelling and extraordinary conditions" called for by the Act. ...

Johnson's legal reasoning has no support outside of Bush administration political appointees. In short, as Johnson all but admitted, this decision was made based on a "policy preference" of the White House -- exactly what was prohibited by the Supreme Court's ruling in Mass. v. EPA.

Schwarzenegger and state Attorney General Edmund G. Brown Jr. are preparing an immediate lawsuit. Sen. Barbara Boxer said she is "prepared to take all measures to overturn this harmful decision" via legislation. Waxman says his Oversight Committee will immediately launch an investigation into how the decision was made.

There's no way this decision will stand for long. It's just another petty act of truculent defiance from an executive branch that history has left behind. Quite a legacy. [NY Times story: "E.P.A. Says 17 States Can't Set Emission Rules for Cars"]

"Who is a Populist?"

Barkley Rosser at EconoSpeak asks "Who is a Populist":

Who is a "Populist"?, by Barkley Rosser: In recent election cycles the term "populist" has been applied to such varied figures as John Edwards, Mike Huckabee, Patrick Buchanan, and Ross Perot, arguably sharing a sort of economic nationalism for the poor. Originating in anti-aristocratic agrarian movements in Europe, especially the Russian Narodniki of the late 1800s, the movement in the US attempted to encompass the urban working class as well, as symbolized by the rural Scarecrow marching along with the urban Tin Woodman on the Yellow Brick Road to defeat the Wicked Witch of the East, with populist heroine Dorothy and the Cowardly Lion stand-in for fundamentalist and anti-imperialist populist William Jennings Bryan, he of the "Cross of Gold" speech, in Baum's populist fantasy novel. The movement would be partly absorbed by the later Progressive and New Deal movements.

The movement has always had a deep divide, with race the central issue. So, on the one hand we have the progressive wing, symbolized by the remnant Democratic-Farmer-Labor Party of Minnesota and the presidential candidacy in 1948 of FDR's former Ag Secretary, Henry Wallace for the Progressive Party. On the other, in the Deep South, we got "Pitchfork" Ben Tillman in South Carolina, whose follower, Strom Thurmond, would run as the "Dixiecrat" in the 1948 presidential campaign. Today, this divide most clearly shows up in the struggle over immigration.

Given recent discussions here, I was thinking of doing a similar post discussing the term "populist", but never made it past the Wikipedia entry.

Comment Problem

I just noticed the TypePad problem and will be approving comments caught in the spam filter, then deleting duplicates. There are currently about 80 comments in the filter, but a lot of these are multiple attempts (and none are actual spam). This is annoying - apologies.

[Please leave comments as always, and if it's caught in the filter (most aren't), I will approve it as soon as possible. Once I catch it - and I'll try to check often - it doesn't take long to move it out of the spam list.]

Update: See Moon of Alabama's "TypePad Sucks" for more on this. Update: Barry Ritholtz is also having problems. Update: TypePad tells me they've tweaked the filter and it ought to be better now.

Subprime Response

Larry Summers is worried:

Ex-Treasury Secretary Calls For Tax Cut, Spending Plan, by Michael M. Phillips, WSJ: Former Treasury Secretary Lawrence Summers, once a fiscal hawk among Clinton Democrats, said the government should consider a $50 billion to $75 billion tax-cut and spending package to stave off a deep recession.

Mr. Summers ... also urged the Federal Reserve to take more aggressive action to ensure that its rate cuts actually reduce consumers' interest charges and stimulate spending.

"Insufficient action to contain recessionary forces has much more serious consequences than excessive action to contain recessionary forces," Mr. Summers said...

Mr. Summers's comments put him among the most pessimistic economic prognosticators and were a slap at the Bush administration's handling of the subprime-mortgage crisis and the constriction of U.S. credit markets. "The kind of comprehensive approach that is necessary to minimize the risks is neither in place nor in immediate prospect," he said. ...

"I believe that slow growth is a near certainty, that a recession is more than a 50% chance, and that there's a distinct possibility of a more serious recession that will lead to the worst economic performance since the late 1970s and early 1980s," he said.

Even a mild recession, he said, would cost the average family of four between $4,000 and $5,000 in lost income each year, while driving up the annual government deficit by $100 billion.

The government, he said, should counter the downturn through targeted, temporary spending, including a pre-emptive extension in unemployment benefits, an increase in food stamps and a universal tax rebate. Taxpayers shouldn't have to pay income taxes on the value of any mortgage reduction that lenders grant them amid the current crisis, he said.

Mr. Summers's critique also extended to the Fed. He said the effect of the central bank's rate-cutting has been blunted by the reluctance of financial institutions to extend credit. ... To correct that, the Fed should pull its monetary-policy levers to the extent necessary...

He leveled a similar broadside against the centerpiece of the Bush administration's response... Treasury Secretary Henry Paulson has backed a voluntary industry plan that would expedite new mortgages or rate freezes ... over the next two years.

Mr. Summers projected that the plan -- aimed only at subprime borrowers who are current on their payments -- would result in a total reduction in mortgage payments of less than $5 billion and would miss the millions of other borrowers whose payments are also expected to jump.

Instead, he proposed changes in bankruptcy laws to allow insolvent homeowners to reduce their existing mortgage debt. He argued that such moves would allow more borrowers to keep their homes, and ultimately cost lenders less money than would a raft of foreclosures...

Hedge Fund Wizard or Scam Artist?

Hedge funds are risky, and ought to be transparent. Here's an example to illustrate "how easy it is to set up a hedge fund scam":

Hedge Fund Wizards, by Dean P. Foster and H. Peyton Young, Brookings Institution, Commentary, Washington Post: Scarcely a day goes by without another story of some large hedge fund blowing up due to bad bets. While many of the latest hedge fund casualties are linked to the subprime mortgage crisis, investors should not be lulled into thinking that the problem will be solved once the mortgage mess is mopped up.

Hedge funds are risky for another reason. It is extremely difficult to tell, based on past performance, whether a fund is being run by true financial wizards, by no-talent managers who happen to get lucky or by outright scam artists.

To illustrate how easy it is to set up a hedge fund scam, consider the following example. An enterprising man named Oz sets up a new fund with the stated aim of earning 10 percent in excess of some benchmark rate of return, say 4 percent. The fund will run for five years, and investors can cash out at the end of each year if they wish. The fee is the standard '2 and 20': 2 percent annually for funds under management, and a 20 percent incentive fee for returns that exceed the benchmark. ... [...continue reading...]

Overtreatment

This looks at one way to control health costs, reducing the amount of unnecessary medical care:

No. 1 Book, and It Offers Solutions, by Dvid Leonhardt, NY Times: In 1967, ... Dr. [Jack] Wennberg had been chosen to run a new center based at the University of Vermont that would examine medical care in the state. With a colleague, he traveled around Vermont, visiting its 16 hospitals and collecting data on how often they did various procedures.

The results turned out to be quite odd. Vermont has one of the most homogenous populations in the country... Yet medical practice across the state varied enormously, for all kinds of care. In Middlebury, for instance, only 7 percent of children had their tonsils removed. In Morrisville, 70 percent did. ...

The children of Morrisville weren't suffering from an epidemic of tonsillitis. Instead, they happened to live in a place where a small group of doctors — just five of them — had decided to be aggressive about removing tonsils.

But here was the stunner: Vermonters who lived in towns with more aggressive care weren't healthier. They were just getting more health care.

Dr. Wennberg ... has done versions of his Vermont study for the entire country. Again and again, he has come up with the same broad result. And that result holds the key to health care reform — how to spend less on health care while not making the population any less healthy. ...

It's not hard to find examples. Scientific studies have shown that many treatments, including spinal fusion, routine episiotomies and neonatal intensive care, are overdone. These procedures often help specific subsets of patients. But for a lot of people ... the treatments are a modern-day version of bloodletting.

"We spend between one fifth and one third of our health care dollars," writes [Shannon] Brownlee, [author of Overtreatment] ... "on care that does nothing to improve our health." Worst of all, overtreatment often causes harm, because even the safest procedures bring some risk. ...

Why is this happening, then? Above all, it's the natural outgrowth of our fee-for-service health care system. It turns doctors into pieceworkers, as Ms. Brownlee puts it, "paid for how much they do, not how well they care for their patients." Doctors and hospitals typically depend on the volume of work for their income, and they are the gatekeepers who decide when work needs to be done. They also worry about being sued if they do too little. So they err on the side of overtreatment. Patients play a role, too. We're entranced by the wonders of modern medicine...

In plain English, Ms. Brownlee lays out an agenda for reform... It includes some steps that should be widely popular, like giving doctors incentives to explain the risks and benefits of procedures more clearly than they do now. Research has shown that patients frequently decide against marginal care when they know the true risks and benefits. Malpractice laws would also need to be changed so doctors were not sued by patients who later changed their minds.

Other solutions would be more difficult — because medical evidence is often murky, because hospitals and insurers would fight to keep their revenues and because most Americans think it's the other guy who's getting unnecessary treatment. These are the reasons that presidential candidates don't focus on wasteful treatment.

But models for reform are out there. Hospitals that don't use the fee-for-service model, like those run by the Veterans Health Administration, are already getting better results for less money. ...

Essentially, the argument is that profit maximization by health care providers does not coincide exactly with maximizing health outcomes. As Shannon Brownlee says here:

Is this happening because doctors ... are rubbing their hands together, thinking up ways to pad their incomes...? Of course not. They are doing the best job they know how. Nonetheless, they are delivering a lot of unnecessary care — much of which is driven by the way different hospitals are organized and how the medical cultures within them evolve.

The solution, then, is to change the incentives so that the incentives faced by health care providers are consistent with achieving the best health outcomes. Mathew Yglesias describes this solution:

Brownlee's alternative is to turn doctors into salaried employees charged with doing the job of keeping people healthy, rather than into fee-for-service professionals whose level of compensation depends on how much treatment they prescribe.

There are other aspects to the problem of over-treatment that this particular solution does not fix, there are other possible solutions, and eliminating unnecessary care is not the only way to reduce the growth of medical costs, but if this helps to free up resources that can be used to provide care to those who are currently under-served, as it appears it would, then that would certainly help.

links for 2007-12-19

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