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September 8, 2009

Economist's View - 4 new articles

"Ugly Truths About Housing"

Ed Glaeser explains some of the lessons he's learned from the recent crash of housing markets:

What We've Learned: Ugly Truths About Housing, by Edward L. Glaeser: ...What have we learned from the great housing bubble and crash of the aughts? Most obviously, we have learned that housing prices can be extraordinary volatile. This was less obvious from previous housing cycles. ...
So let no one ever again say foolish things like housing prices never fall. In the current drop, eight of the 20 Case-Shiller areas had housing price drops of 40 percent of more. ... Buyers and bankers should never again think that an area's recent price increases are the sign of a strong market where prices have nowhere to go but up. In the long run, price increases are followed by price drops, and special caution, by regulators as well, needs to be taken in booming markets.
In places like Las Vegas and Phoenix, there are no fundamental constraints on building new homes — like a shortage of land or onerous restrictions on construction... I once thought that this obvious lack of limits on building meant that such open areas would sit bubbles out,... but I was wrong. The logic of supply and demand can be ignored for longer than I thought, but it ultimately reasserts itself.
The second lesson of the housing debacle is that there is extraordinary pain in both housing price busts and booms. When housing prices soared, ordinary Americans found it increasingly hard to afford a house. ... [This] logic pushed me to boo when housing became outrageously expensive. During the boom, I hoped that housing prices would stop rising and even decline.
Yet I didn't understand the terrible impact that declining housing prices would have on our financial sector. While rising housing prices weren't particularly good for America, declining housing prices were particularly bad for the country. The lesson seems to be that large swings in housing prices, in either direction, can be extremely painful.
The third lesson is that American housing policy has been monumentally foolish. We have used public resources to encourage ordinary Americans to bet all they could on highly risky housing markets. Fannie Mae and Freddie Mac, the home mortgage interest deduction, even the willingness to bail out financial firms..., can all be seen as policies that encourage ordinary people to risk it all on real estate.
I had once thought that these policies were misguided, but not terrible. We now know that encouraging buyers and lenders to bet on housing can impose vast costs on the country. ...
I think that we have not yet fully faced the fact that our tax code encourages people to finance their homes with as much debt as possible, and that our financial regulations abet irresponsible lending.
Now that we have backed away from the abyss, we can consider making much-needed reforms, like reducing the upper cap on the home mortgage interest deduction, that could depress housing prices in the short run, but make future housing bubbles and crashes less likely.

I don't think much of the blame for the crisis can be placed on the home mortgage interest deduction, there was no big change in this deduction that corresponds to the start of the bubble. As for eliminating the deduction, though it's possible to make an argument that there are positive externalities to home ownership such as taking better care of the property, something that benefits surrounding properties, or having more involvement in the community, I don't think the case is very strong, particularly when the inequity between owners and renters is taken into consideration.


"The Public Plan Is Not the Same Thing as Cost Control"

Ezra Klein is worried that opposition to any health care reform plan that does not contain a public option will prevent legislation that is "a useful first step" from moving forward. He argues that the public plans that have been proposed would do very little to control costs, so giving them up is not much of a sacrifice:

The Public Plan Is Not the Same Thing as Cost Control, by Ezra Klein: This will not be a popular post, I fear. But one of the themes I'm seeing in a lot of the commentary is that the absence of a public plan is essentially equivalent to the absence of cost control, and the presence of a public plan is pretty much the presence of cost control. For the public plans on the table, that's not true, at least not in any way I can see.
You can control costs in one of three ways: use less treatment, need less treatment, or pay less for treatment. The theory of the public plan rested on paying less for treatment, as Medicare does (though it's important to note that Medicare's costs are still rising at a totally unsustainable rate, albeit a slightly less unsustainable rate than private insurance). The problem is that the public plan no longer has the attributes that permit Medicare to pay less for treatment.
The strongest public plan on offer is in the bill being considered by the House of Representatives. This plan is limited to the health insurance exchanges, which are in turn limited to employers with fewer than 20 workers. So that's the first point: The vast majority of Americans would be ineligible for the public plan, even if they wanted it. The CBO estimates that by 2019, the public plan would have a likely enrollment of 10 million Americans — and that estimate (pdf) imagines a world in which the exchanges are opened to businesses with 50 or fewer employees, which is to say, it's more favorable than the actual bill.
The end result is that the public plan is unlikely to have a very large customer base, which means it will be unable to use market share to bargain prices far lower than private insurers. That might not matter if the plan could attach itself to the rates that Medicare uses. In the first draft of the House bill, the plan could do that, at least for its first three or four years of existence, after which point it was cut loose from Medicare. But the deal Henry Waxman cut with the Blue Dogs erased that advantage, and now the public plan, even in the House bill, is on its own. That is to say, the plan has neither Medicare bargaining power nor the sort of customer base that gave Medicare its bargaining power.
Is that an argument against the public plan? Nope. There are real advantages to the presence of a public alternative. Competition matters, for one thing, and there are a lot of states where one or two private insurers essentially control the market. Experimentation matters, too, and the public plan could be used alongside Medicare to test payment reforms and disease management programs that could pay off in the long run. The public plan could also usher in a fairly radical level of transparency in pricing and behavior, forcing private insurers to follow suit. And lastly, the public plan is something of a corporate accountability measure. Its presence in the market ensures that health-care reform won't simply be a large reward to the insurance companies absent any serious changes in their behavior.
These were the original arguments for the public plan, and they're as strong today as they were then. But they are not the same as cost control. ... This step in health-care reform is largely about expanding coverage and creating a structure — with universality and the exchanges and so forth — that will make cost control easier down the road. None of the bills, on their own, really do all that much to control costs.

He's correct - the options for a public plan that have been proposed do not do much to control costs, and even in this weakened form, there is still considerable opposition to the proposed public plans from the right. The frustration on the left is over why the proposals for a public plan are so limited. Why don't they do more to control costs? Democrats control the White House and Congress, yet they cannot get this legislation passed? That is puzzling to many supporters. The practical realities of enacting legislation are far from the vision that many people had about what would happen after the election. For these people, cost control or lack of it is not the point, this is all about political power and allegiance to the people who put the president and congress in power. They would be far more willing to accept something like the Baucus plan if they felt that the administration had gone down fighting rather than giving in to the wishes of the other side whenever they manage to make a little noise.

I also agree with this. Here's Paul Krugman discussing Obama's health care speech to Congress tomorrow:

I, for one, won't be obsessing about exactly which pieces of proposed reform he emphasizes — because that's not what's driving the politics. Americans haven't become skeptical about Obamacare because they'd rather shave an extra $30 billion a year off the cost; they have not, contrary to "centrist" fantasies, been turned off by the details of the stimulus plan or cap-and-trade. What has been missing is a vision. And this is probably the last chance to supply that vision.

There are people on the left who want to feel as though they've finally triumphed over Republicans, and triumph has been defined, in part, as enacting a public plan (if for no other reason than the fact that Republicans oppose it). Compromise is not a win to many of the administration's supporters, and that's a problem since some form of compromise may be the only way to get legislation enacted. But if the goals are made clear, and that requires a clear statement of the administration's vision, then a "win" can be clarified as well. Is the vision cost control? Expanded coverage? What is the main goal of reform? The administration needs a clear statement of where it wants to go and how the proposals on the table will get us there, it needs to give supporters something besides a public plan to rally around. If it can do that, then health care legislation that does not include a public plan can still be a "win" in the eyes of supporters.


Reich: The Lessons from History on Health Care Reform

Robert Reich says one of the keys to health care reform is to ignore or disregard economists:

The Lessons from History on Health Care Reform, by Robert Reich: With Congress returning from recess to consider health care legislation and the President set to deliver a major address on the subject to both houses of Congress tomorrow, a bit of history may be in order. An excellent starting place David Blumenthal's and James Marone's "The Heart of Power," which I reviewed for the New York Times this past weekend. Here are the major points:
Universal health care has bedeviled, eluded or defeated every president for the last 75 years. ...
Devising a plan is easy compared with the politics of getting it enacted. Mere mention of national health insurance has always prompted a vigorous response from the ever-vigilant American Medical Association; in the 1930s, the editor of its journal equated national health care with "socialism, communism, inciting to revolution." Bill Clinton's plan was buried under an avalanche of hostility that included the now legendary ad featuring the couple Harry and Louise voicing their fears that the Clinton plan would substitute government for individual choice — "they choose, we lose."
One lesson is that a new president must move quickly, before opponents have time to stoke public fears. ...
Congress can be just as much of an obstacle:... a president must set broad health reform goals and allow legislators to fill in the details, but be ready to knock heads together to forge a consensus. ...
Presidents who have been most successful in moving the country toward universal health coverage have disregarded or overruled their economic advisers. Plans to expand coverage have consistently drawn cautions or condemnations from economic teams in every administration, from Harry Truman's down to George W. Bush's. An exasperated Lyndon Johnson groused to Ted Kennedy that "the fools had to go to projecting" Medicare costs "down the road five or six years." Such long-term projections meant political headaches. "The first thing, Senator Dick Russell comes running in, says, 'My God, you've got a one billion dollar [estimate] for next year on health. Therefore I'm against any of it now." Johnson rejected his advisers' estimates and intentionally lowballed the cost. "I'll spend the goddamn money." An honest economic forecast would most likely have sunk Medicare.
It's not so much that presidential economic advisers have been wrong — in fact, Medicare is well on its way to bankrupting the nation — but that they are typically in the business of thinking small and trying to minimize risk, while the herculean task of expanding health coverage entails great vision and large risk. Economic advice is important, but it's only one source of wisdom.
Yet since Johnson, presidents have found it increasingly difficult to keep their economists at bay, mainly as a result of the growth of Washington's economic policy infrastructure. Cost estimates and projections emanating from the White House's Office of Management and Budget and the Congressional Budget Office, both created during the Nixon administration, have bound presidents within webs of technical arguments, arcane rules and budget limits. To date, Democratic presidents have felt more constrained by this apparatus than Republicans, perhaps because they have felt more of a need to prove their cost-cutting chops.
President Obama seems to have anticipated many of these lessons. He's moved as quickly on the issue as this terrible economy has let him, and he has not been too rattled by naysaying economists (although the cost estimates of the Congressional Budget Office set him back). But although he outlined his goals but left most details to Congress, the lesson from history is that he may have waited too long to force a deal on that disorderly body (especially disorderly when Democrats are in charge). The question remains whether, in the weeks and months ahead, he can knock Congressional heads together to clinch it, and overcome those who inevitably feed public fears about a "government takeover" of health care and of budget-busting future expenditures. He needs to work fast, and be tough as nails.
But even if Obama fails, there is an art to losing, too — in a way that can tee up the issue for future presidents. Truman lost but nonetheless redefined the terms of debate, setting the stage for Medicare (which is why Johnson honored Truman when he signed it into law). Compare him with Clinton, who walked away from the wreckage of his health care plan and rarely mentioned the subject again. This allowed opponents to gain control over the spin and history, so that the Democrats' signature cause slipped out of political sight for a decade. ...


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