In the Debates over Economic Policy — and the Sotomayor Nomination — What Happened to the Loyal Opposition?

In the Debates over Economic Policy — and the Sotomayor Nomination — What Happened to the Loyal Opposition?

May 28, 2009

President Obama’s nomination of Sonia Sotomayor for the Supreme Court hasn’t triggered a conservative firestorm yet; and like the dog that didn’t bark in the Sherlock Holmes story, that’s part of a larger pattern affecting policy well beyond the Supreme Court. Granted, partisan conservatives find themselves facing an engaging, activist, Democratic president with very broad public support at his back. So it’s unsurprising that most GOP senators are withholding public judgment on Judge Sotomayor’s nomination, and even the RNC has taken the tact, ‘we haven’t found anything on her — yet.’ While Newt Gingrich went glibly over the top by calling the Judge a “racist,” even Rush Limbaugh couldn’t manage anything beyond calling her “a hack” who would be “a disaster on the court.”

The problem for partisan conservatives is that nobody listens to them except the bare quarter of the country that already agrees with them. The other three-quarters of us are comprised of partisan progressives, often as sure of their opinions as partisan conservatives, and the great plurality of Americans with views about many things but no unvarying, partisan or ideological take on reality. And every American has fresh memories and often personal feelings about the damage left by the recently departed, partisan conservative administration. So, almost nobody is interested today in hearing about conservative alternatives to the President’s policies and decisions.

Eventually, the not-very-partisan or ideological majority of Americans will accumulate some unhappy memories and personal disappointments about the current administration, and then they’ll be more prepared to at least listen to the conservative message. That could take several years, so for now, the Republican’s pitiable default position has become ‘just say no’ to the most popular president in a generation. The same partisan conservatives who used to advance fairly radical ideas — many of which became Bush administration proposals — are now reduced to predictable defenders of the status quo, whatever it happens to be.

Economic policy is suffering from this result. The administration’s approach to the financial market crisis, for example, has been properly questioned as not going far or deep enough into the problem by Paul Krugman, Joe Stiglitz, Simon Johnson and other progressives (including myself). But questions from the progressive side have little political significance, since no administration listens to outside advisors once its proposals have gone public, and everyone knows that friendly critics have no place else to go. The alternatives that matter in politics have to come from the opposition. But the Republican position here has been that government should be involved in the crisis as little as possible — which is as close as they can come to a status quo, when the status itself is a disaster. So the public debate never forced the administration to sharpen its own thinking and further hone its policies. The result is an economic program which might succeed — or, equally likely, could leave us with a financial system and economy that remain weak for years.

As for the debate over soon-to-be Justice Sotomayor, the Republicans are simply cooked. They can’t credibly say she isn’t up to the job — the meme on Harriet Miers —since her academic record is brilliant. They can’t credibly say she doesn’t have the requisite experience, since she’s been a sitting judge longer than any Supreme Court nominee in a century. And they can’t credibly call her a radical, since her opinions place her squarely in the center-left territory occupied by the Justice she’s replacing. In this last respect at least, she actually represents the status quo that Republicans currently cling to. But their followers won’t hear of it. So they’re left with another just-say-no message that’s certain to further alienate Hispanics, the largest voting group not yet locked in fully to either of the parties, and many women, the largest voting group period.

President Obama can rest easy: It’s likely to be a long time before most Americans listen to new ideas from conservative Republicans. The rest of us will have to settle for a debate over a Supreme Court nomination that’s likely to be as incoherent and enervating as the recent public discussions of the great economic issues of our time. In both cases, it’s a genuine shame.

The Courage and Cunning of the Administration’s Health Care Plans — and their Shortcomings

May 13, 2009

The administration’s new health care initiative has the distinctive “yes, but” quality of the Obama banking and housing plans: The focus is correct — here, address sharply-rising health care costs before moving on to guarantee universal coverage — even as the details fall short and the proposed execution remains up-in-the-air.

Let’s start by recognizing the political courage and cunning involved in the way the White House is framing the issue. Facing growing unease about forecasts of years of stupendously and dangerously large budget deficits, the President has faced up to the prime driver of those deficits: Two programs vital to his core support — Medicare for retirees and Medicaid for lower-income Americans. He did so certainly knowing full well that most liberal parts of his political base see universal insurance as the number one priority.

The cunning lies not in some naïve delusion that measures to slow the pace of health care cost increases from a gallop to a brisk trot will attract bipartisan support. It is sadly evident that the Republican strategy for the party’s short-term revival pivots on the President’s failure, and GOP leaders will not countenance support for administration measures whose passage voters will greet as a notable achievement.

Rather, the President’s cunning lies in his apparent, long-term strategic view. First, he appears to know that the economic recovery on which his larger agenda probably depends could hit the rocks in a year or two, unless he can bring down the long stream of huge, expected deficits. His only option here is to slow health care cost increases, starting with the public programs whose costs he can influence most directly. He also seems aware of the danger from certain forces that could make his presidency look a lot like George W. Bush’s. For example, he may recognize, as we have argued for several years, that slowing cost increases for employer-provided health care coverage is vital to relieving financial pressures on businesses which, under Bush, drove down wages even as productivity rose. Unless President Obama and his team can figure out how to contain those costs, the end of his second term, like Mr. Bush’s, could also see the insolvency of a vital American institution — in this case, Medicare and Medicaid. And like Bear Stearns and Lehman Brothers, Medicare’s insolvency would trigger cascading effects across the country and the economy, and about which he could do little in the time he would have left.

The best way to avoid such a string of setbacks and an ignominious end is to recognize and address the problem — so unlike Bush — before it becomes a crisis.

The potential social and political benefits go far beyond avoiding Bush’s sorry fate. Most important, any realistic prospect for financing universal coverage depends on getting those costs under control. Otherwise, President Obama will likely find his administration caught in the same vise that has immobilized health-care reformers for two decades, pressed between the social imperative to cover everyone and understandable resistance to paying for it from the majority of voters who are already covered. On the current path of medical cost increases, the taxpayers’ tab to pay for universal coverage would rise by 5 to 7 percent every year, with damaging effects for other programs of the President which would have to be pared back to protect the new achievement.

Then comes the sticky matter of actually slowing down those increases. Earlier this week, the White House presented a roster of medical and insurance organizations pledged together to support $2 trillion in cost reductions over the next decade. The main strategy is to attack “overuse and underuse” of health care. But it doesn’t include many details about how to do it. The administration’s program to computerize health care records over the next five years makes sense here, to help avoid wasteful or needlessly dangerous treatments. The hurdles will be very high, however, to actually putting in place a workable system covering tens of thousands of hospitals, clinics and doctors’ practices across the country.

The stimulus also includes $1 billion for prevention and wellness programs to improve diets, encourage exercise, reduce smoking and drinking, and detect cancers and other conditions early. Various studies have shown that some community-based intervention programs in these areas achieve very high returns, especially those aimed at young people. An analysis of several community-based programs to promote physical exercise, better nutrition and stop smoking, for example, found long-term reductions in diabetes, high blood pressure, heart and kidney disease, with a financial payoff of $5.60 in savings for every $1 invested. Large, long-term savings also were reported in a Michigan program that provides continuing education to prevent, recognize and treat athletic injuries, as well as a number of local programs that counsel low-income, first-time mothers on how best to care for their infants. But there also are many other programs that save little or nothing; and it will be very hard for Washington to identify and responsibly scale up those that work best.

The other large, promising approach, touted for several years by this writer and, of late, by OMB Director Peter Orszag, involves developing and applying data about what medical treatments work best, or work as well at less cost. The Dartmouth Atlas study of 2008, for example, found that the costs of treating older people for nine serious conditions, with the same outcomes in each group across five leading medical centers, varied by 30 percent to 45 percent based on where it was done. We could develop much more information in this area, identify those “best practices,” and mandate their use by health care facilities that accept federal money (which is almost all of them).

So the administration’s health-care focus, goals and priorities are right in every way that matters. Now they need to provide a much more detailed blueprint of how they intend to reach those goals and achieve those priorities.

Efficient Markets and the Economic Meltdown

May 7, 2009

I found myself this week addressing the chairman of the SEC and three other commissioners at a forum on short sales, and the discussion illustrated how much the attitudes of some lag behind the realities of our current crisis. After the repeated meltdowns of numerous markets over the past year, the open minds at the forum belonged to the members of the SEC and not the other economists on the panel, who repeatedly cited now-outdated research to bolster their disdain for regulation and faith in the optimal outcomes of markets.

Plenty of people believe in “free markets,” but markets are never free, because without elaborate rules and regulations, they regularly run amok. Truly unregulated markets have no place for fiscal stimulus in deep recessions or even for central banks which regulate the supply of credit. Yet, without them, our business cycles could consist mainly of long recessions and runaway inflations. Thankfully, all but the economic version of wingnuts accept that over time, we learn many useful things about how economies behave and can craft rules that reduce the incidence of developments which can needlessly impoverish a society and increase the likelihood of other developments that enrich us.

Yet, in the face of the evidence all around us that, just to start, our many multi-trillion dollar markets for housing, mortgage-backed securities, and credit default swaps all had become profoundly dysfunctional, an esteemed professor from Columbia University, another from Ohio State, and a Nasdaq senior economist all insisted that regulation would interfere with our best of all possible worlds. This adamant refrain seems to be heard most often from those who study and participate in financial markets. While in our current condition, it seems to bespeak serious cognitive dissonance or a touch of economic insanity, it may come down to the simple fact that in recent years, those markets have been the special province of America’s richest people and companies. Regulation which could constrain their freedom to get even richer seems to be an offence against economic nature.

The particular context for this week’s SEC forum involved short sales, which some blame for turning blue-chip firms like Bear Stearns, Lehman Brothers and Merrill Lynch into penny stocks. They’re partly right and partly wrong: Short sellers weren’t responsible for the collapse of those firms and others, but certain abuses of shorts sales accelerated the process, with very damaging results for all of us.
First, a brief primer in how short sales work. Short sales are stock trades in which an investor bets that a stock will go down. He places that wager by borrowing a company’s shares from another investor (for a fee) and then selling them. If the stock declines, he can purchase new shares in the market to replace those he borrowed and pocket the difference between the lower price and what he sold them for originally. Short sales are a good thing for a market, because they signal that some investors have negative information or intuitions about the outlook for a company, a sector or the overall economy. The result is that a stock’s price can reflect all of the information available to the market.

But some short sellers don’t play by the rules and distort those prices. The biggest abuse is what’s called “naked short sales,” where an investor sells the shares, receives payment, but fails to borrow and deliver the shares. The system has a way of papering over the problem: The organization that clears and settles most trades in U.S. markets, the Depository Trust and Clearing Corporation, “borrows” the shares from its depository of all shares, settles the trade, returns those shares, and waits for the short seller to borrow them himself. Naked short sales contribute nothing to the market, since the value of the negative information depends on the short seller putting up the ante for his bet by actually borrowing and delivering the shares. Otherwise, short sellers can flood the market with so many “sales” that it drives down a stock’s price.

That’s part of what happened with Bear Stearns and Lehman Brothers. As they began to sink, their short sales went up four-fold — and their naked short sales increased 150 times. By the time of their collapse, each had tens of millions of naked shorts out against them. Those firms would have failed without naked shorts, but the flood of those abusive trades helped drive their sudden, chaotic, and unmanaged collapse. Imagine how much better off the economy might be today, if smart regulation had prevented the avalanche of naked shorts and the last administration had managed the demise of Bear Stearns and Lehman Brothers in much the same way that the current administration is managing the final days of Chrysler.

By the way, naked shorts aren’t just a problem of a few firms during a crisis. SEC data show that on any given day in 2007 or 2008, large scale naked shorts afflicted between 1,200 and 3,500 companies, across every sector and on all exchanges. And the number of outstanding “failures to deliver” — that’s the shares sold nakedly short — on any given day totaled between 500 million and 1 billion shares.

There’s a simple solution which other countries use: Require that short sellers borrow the shares before they sell them. At the SEC forum, some such answer seemed to hold some appeal to the new chair of the SEC, Mary Schapiro, and some of her colleagues. But suggest it as a way to protect average shareholders who unwittingly pay for stock that isn’t delivered until the price has already fallen, and to safeguard the rest of us from markets running amok, and the wailing about the optimal outcomes of unregulated markets can overwhelm you. This time, hopefully, it won’t deafen the SEC, the President and his economic advisors.