The revenge of the marketplace

The mass transit system in Washington, D. C., is in a financial crisis.  This is because, in an effort to raise money, the government raised prices.  Which has resulted in fewer and fewer people using the system.

The across-the-board fare increase imposed by Metro this summer has led to a drop in bus ridership and less-than-expected rail revenue as a result of changing travel patterns, an initial analysis by Metro shows.

Bus ridership has fallen 7 percent, with overall Metro system ridership 2 percent below the levels of the last fiscal year, which ended in July, and 3 percent below Metro’s projected level. The lower-than-expected passenger revenue is the main factor in Metro’s overall revenue shortfall of 4 percent so far this year.

The number of rail riders remained flat (though it was boosted by major events on the National Mall), but 2 to 3 percent of rail riders have moved their commutes from peak times to the window with the lowest fares, and others avoided certain trips, according to the analysis.

Metro this summer implemented nearly $109 million worth of rail, bus and paratransit increases, including a new 20-cent “peak-of-the-peak” surcharge for some rush-hour riders.

via Revenue, ridership on Metro fall short.

As prices rise, demand goes down.  That is an iron law of economics that cannot be legislated away.  Pricing has to be set by the market, not by government fiat.  The economic marketplace operates as a natural law, whether or not policy makers believe in it.

I lived in Estonia for a few weeks back when it was still a part of the Soviet Union, staying with a family as part of a college faculty exchange program.  Under Communism, prices were set by the state so as to make goods affordable for the masses.  But when the prices were set lower than the cost of production, you couldn’t buy the goods because the stores were virtually empty.

Also, production was not determined by market demand; rather, the government set quotas.  Factories had to meet their quotas or the managers and workers would get in big trouble.  So they took shortcuts.  A shoe factory could meet the quotas easier if they didn’t have to keep resetting the machinery to manufacture different sizes.  So they would produce a whole run of, say, size 6 shoes, the smaller size also having the advantage of saving material.  So if you went into a shoe store, you might find that it only had shoes in size 6.  If you wore a different size, you were out of luck.

Governments can certainly interfere in the marketplace, but the marketplace will have its revenge.

Fighting debt problems by encouraging debt

The usually liberal Fareed Zakaria on the incoherence of the government’s attempts to fix the economy:

Washington is asking consumers to stop saving and start spending, while the government issues more debt and the Fed lowers rates – all measures designed to increase debt. In other words, we are fighting a crisis caused by excessive debt by encouraging excessive debt. Is that really the best way to get growth?

The investment manager and guru Jeremy Grantham says no. In his latest quarterly letter, he points out that over the last generation, American government has created conditions that encouraged everyone to keep accumulating debt. But far from getting a bang, the country’s growth rate actually slowed down over that period. In fact, the effect of all this government-subsidized debt has been deeply destructive. It created asset bubbles in stocks, bonds, commodities and more. One stunning chart in his letter underscores the extent to which the Fed created what he calls “the first housing bubble in history,” meaning the first time that U.S. house prices rose dramatically across the board – and are now falling just as dramatically.

Debt-fueled growth “is, in an important sense, not the real world,” Grantham writes. “In the real world, growth depends on real factors: the quality and quantity of education, work ethic, population profile, the quality and quantity of existing plant and equipment, business organization, the quality of public leadership (especially from the Fed in the U.S.), and the quality (not quantity) of existing regulations and the degree of enforcement.”

This strikes me as the common-sense view of economics. We can push and pull fiscal and monetary policy all we want, but long-term growth depends on these broader and deeper factors.

via Fareed Zakaria – Economic policy needs common sense, not Fed magic, for long-term growth.

Another conversation with my brother

In case you missed it on the George Bush & Aids post, my brother and I had another exchange, in the course of which I formulate what I consider a truly conservative economic ideology:

He says: OK. I (“Dr. Veith’s” younger brother who is still and always will be a Democrat) hereby give George Bush credit for saving millions of lives as a result of his AIDS initiative. Hey, that felt kind of good!

Now for you conservatives, isn’t it about time to give President Obama credit for the bailout of General Motors?

I say: Jimmy (my brother) @3: Thank you for that concession. That was all I wanted. But what you want from conservatives shows that liberals do not understand the many different ideologies that they lump together under that label. Most people on this blog, I daresay, are suspicious of BOTH big government AND big business.

We do believe in free markets. To return to your earlier illustration, if doctors and pharmaceutical companies and everyone else in the health care professions could not make a lot of money from their work, we soon would be back to what you decried in the primitive health care endured by Adam Smith back in 1776.

However, the really big companies hate free markets. They don’t want competition that brings prices down and increases supply. This is the lesson of Monopoly, at which I beat you so many times, the object of which is not prosperity and abundance for everybody, but one person putting everybody else out of business and getting–with the state-run socialist bank–ALL of everyone’s money.

And even worse for us crunchy-conservatives or front-porch conservatives or social conservatives or whatever you want to call us than big government and big business is when both of those behemoths combine together into something that so gargantuan that it crowds out everybody! This is why we don’t like Obama’s bailout of the big banks and his merger with General Motors. This is also why we don’t like Obama’s health care system, which is a marriage of big government with the big insurance companies.

Then he says:

To my big brother,”Dr. Veith”. Thanks for reminding me how often you beat me at Monopoly.

I agree with much of what you said in your comments at #26. I agree that the individual can be harmed by both BIG government and BIG business. My question for you is how can we check the powers of BIG business?

Historically, it has been done in two ways, with unions and government. With the decline of unions, government is the principal way we can check the powers of big business. When conservatives reject any government role in a “free market system” as a mater of ideology, they are left with nothing to check the powers of big business.

I don’t think that a corporation should be allowed to make money any way it pleases. Corporations are fictional “persons” created under the law. Corporations exist to serve the people, we do not exist to serve the corporation. It is perfectly appropriate that the government that created corporations can and should regulate its activites. For example, the government should prohibit companies from selling dangerous products to the public, and should protect the safety of the company employees. I acknowledge that rules and regulations imposed by government on business can be too burdensome and heavy handed. So the rules and regulations imposed by government should be smart and pragmatic. But I think it is insane to reject the role of government in a modern free market economy on purely ideological grounds.

This is why I support Obama’s health care, because I think it is perfectly appropriate for government to prohibit insurance companies from denying people coverage for a pre-existing condition. Allowing insurance companies to only insure healthy people is a business model that does not benefit the public and is not sustainable in the long run.

Now I don’t want to start another debate on the wisdom or lack of wisdom of Obama’s health care. Time will tell. My point is that we should not reject the power of government to regulate the health care insurance industry as a matter of principal.

Does this make me a soci@list? I don’t think so.

I repost these exchanges because my brother is actually very perceptive, liberal though he is, and because they demonstrate the lesson I have been trying to impose on you all, that it is possible to disagree without being disagreeable, to remain one big happy family through it all, and that it is possible to use discussions consisting of different opinions to come to actual insights.

Anyway, who is with me in this suspicion of big government and big business and, especially, their marriage with their hideous spawn?

And can anyone answer Jimmy?  What can limit both big government and big business?

Lessons from Ireland’s economic collapse

Ireland may have saved civilization at one time, but now Ireland may be pulling down the European economic system.  Robert Samuelson explains what is going on with the Irish economic collapse and the European bailout of yet another country in the Euro-zone:

That Ireland, after Greece, has come to grief is ironic. Until recently, it was admiringly dubbed the Celtic Tiger for emulating Asian countries in attracting foreign investment – Intel and others – and achieving rapid export-led growth. From 1987 to 2000, annual economic growth averaged 6.8 percent; unemployment fell from 16.9 percent to 4.3 percent. But then solid growth gave way to a housing boom and bubble whose collapse left Irish banks awash in bad loans.

One cause was easy credit occasioned by the euro. With its own currency, Ireland could regulate credit. If it seemed too loose, the Central Bank of Ireland could raise interest rates. Adopting the euro meant Ireland surrendered this power to the European Central Bank (ECB), which set one policy for all euro countries. The ECB’s rates, though perhaps correct for France and Germany, were too low for Ireland and some others. Moreover, financial markets pushed rates on government bonds of euro countries down to lower German levels. In 1995, Ireland’s rates were more than a percentage point higher than Germany’s; by 2000, they were almost identical. . . .

So now the reckoning. In Ireland, the burst housing bubble left a massive budget deficit and lifted unemployment to 14 percent. Most European economies suffer from the ill effects of some combination of easy money, unsustainable social spending and big budget deficits. Countries are interconnected, so there are spillover effects. European banks – led by British, German, French and Belgian banks – have $500 billion in loans and investments in Ireland, reports the Financial Times. Large losses could snowball into a broader banking crisis.

Europe’s challenge is no longer just economic. It’s also social and political. Cherished values and ideals are under assault. The euro, intended to nurture unity, has bred discord, as countries assign blame and argue over sharing costs. The social contract is being rewritten, with government benefits and protections being cut.

via Robert J. Samuelson – In Ireland’s debt crisis, an ominous reckoning for Europe.

A single currency set by a central authority, indifferent to individual country’s economy sounds like an experiment that didn’t work.  This is another kind of argument for federalist-style de-centralization.

The “tax expenditures” solution

Here is another proposal for how to cut the deficit.  This one suffers from a toxic premise:

There is a way to cut budget deficits without raising tax rates. “Tax expenditures” are the special features of U.S. income tax law that subsidize mortgage borrowing, health insurance, local government spending and more. Although these subsidies are a form of government spending, they are counted as reduced tax revenue rather than increased government outlays. Yet tax expenditures increase the deficit by hundreds of billions of dollars a year, more than the total cost of all non-defense programs other than Social Security and Medicare.

A critical feature of the proposal recently unveiled by Erskine Bowles and Alan Simpson, the co-chairmen of the president’s bipartisan fiscal commission, is to reduce tax expenditures rather than raise tax rates. That would increase revenue without reducing incentives to work, save or invest.

Their most extreme suggestion is to eliminate all tax expenditures, raising $1 trillion a year in additional tax revenue, and then use all but $80 billion of that to cut tax rates. I think that devotes too little money to deficit reduction at a time when fiscal deficits are dangerously large.

Because Bowles and Simpson recognize that eliminating all tax expenditures is politically impossible, they also proposed to eliminate or scale back some tax expenditures while cutting tax rates less to achieve the same $80 billion annual deficit reduction. This option will undoubtedly be opposed by some who find it unfair to limit measures from which they benefit while leaving unchanged tax rules that benefit other people.

Here is a practical alternative toward the same end: Congress should cap the total benefit taxpayers can receive from the combined effect of different tax expenditures. That cap could be set as a percentage of an individual’s adjusted gross income and perhaps subject to an absolute dollar amount.

To be clear, the cap would not apply to the amount of any deduction but would limit the total tax savings that result from such deductions. Someone with a 25 percent marginal tax rate who pays annual mortgage interest of $4,000 would still deduct that $4,000. The cap would apply to the $1,000 tax saving that individual could expect on mortgage interest, not to his or her deduction.

The idea is not to single out a particular tax expenditure. Because the cap would reduce the revenue cost of all tax expenditures without eliminating or reducing specific ones, it would not unfairly burden taxpayers who benefit from one particular type of tax measure.

The budget gain would be substantial. My colleague Daniel Feenberg of the National Bureau of Economic Research and I have estimated that capping an individual’s benefit from tax expenditures at 2 percent of adjusted gross income would reduce the federal deficit in 2011 by $262 billion, or about 1.7 percent of gross domestic product. An additional cap on these benefits in absolute dollar terms would produce a larger deficit reduction.  . . .

The tax expenditures subject to the cap in our calculations reflect deductions for mortgage interest, state and local income and property taxes, and charitable contributions; credits for dependent care, children and certain education costs; and the exclusion of employer payments for health insurance. Congress could, of course, expand or reduce this list. Dropping the deduction for charitable contributions, for example, would reduce the 2011 revenue gain by some $45 billion.

More than 65 percent of taxpayers do not itemize their deductible expenses but use the standard deduction. Nearly half (46 percent) of taxpayers who use the standard deduction would not be affected by a 2 percent cap. For those who are, the cap would apply to various tax credits and to the exclusion of employer payments for health insurance.

via Martin Feldstein – How to cut the deficit without raising taxes.

Doesn’t this assume that all money belongs to the government?  So not taking a person’s money counts as an “expenditure”?  It also says that taxing something that was not taxed before somehow avoids a tax increase.

If you can get past those problems, what do you think of this idea?  Capping deductions might be better than eliminating them entirely, as some are proposing.  But decreasing the mortgage deduction certainly won’t help the housing market–which is necessary for non-government economic growth–nor will cutting back charitable deductions help churches and other private groups step in with the safety nets that government budget-cutting will be eliminating.

Medicare crisis

Part of the new federal  health care plan will be funded by cuts to Medicare, the existing government program that pays for health care for the elderly.  Already, though, an increasing number of doctors are  refusing to take on Medicare patients because the payments are too low.  And starting on January 1 those payments are scheduled to be cut  a whopping 25%.   From The Washington Post:

Want an appointment with kidney specialist Adam Weinstein of Easton, Md.? If you’re a senior covered by Medicare, the wait is eight weeks.

How about a checkup from geriatric specialist Michael Trahos? Expect to see him every six months: The Alexandria-based doctor has been limiting most of his Medicare patients to twice yearly rather than the quarterly checkups he considers ideal for the elderly. Still, at least he’ll see you. Top-ranked primary care doctor Linda Yau is one of three physicians with the District’s Foxhall Internists group who recently announced they will no longer be accepting Medicare patients.

“It’s not easy. But you realize you either do this or you don’t stay in business,” she said.

Doctors across the country describe similar decisions, complaining that they’ve been forced to shift away from Medicare toward higher-paying, privately insured or self-paying patients in response to years of penny-pinching by Congress.

And that’s not even taking into account a long-postponed rate-setting method that is on track to slash Medicare’s payment rates to doctors by 23 percent Dec. 1. Known as the Sustainable Growth Rate (SGR) and adopted by Congress in 1997, it was intended to keep Medicare spending on doctors in line with the economy’s overall growth rate. But after the SGR formula led to a 4.8 percent cut in doctors’ pay rates in 2002, Congress has chosen to put off the increasingly steep cuts called for by the formula ever since.

This month, the Senate passed its fourth stopgap fix this year – a one-month postponement that expires Jan. 1. The House is likely to follow suit when it reconvenes next week, and physicians have been running print ads, passing out fliers to patients and flooding Capitol Hill with phone calls to persuade Congress to suspend the 25 percent rate cut that the SGR method will require next year.

via Doctors say Medicare cuts forcing them to shift away from elderly.

Does anyone have a solution for this?


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