Remember “mutual assured destruction?” MAD was the dominant principle of the Cold War: The Soviet Union would not attack us as long as we retained the ability to retaliate. They might surprise us and obliterate New York, Chicago, Los Angeles, and Washington, but our nuclear subs and hardened silo-based missiles would respond in kind, turning Moscow, Leningrad, Kiev and Vladivostok into historical footnotes (if mankind survived to write any more history).
A kind of financial “MAD” became our consolation in the 1990s as China continued to accumulate foreign exchange, the vast majority of which was in dollars (or financial assets like bonds that were priced in dollars). At present, China’s holdings of dollar assets top $1.5 trillion, says the Peterson Institute for International Economics.
I sent my Nissan Quest to the crusher for a lousy $4,500. Yes, I could see into the engine compartment without opening the hood—but it ran like a top! Now the feds will have their way with my car. Some minion will replace its engine oil with sodium silicate and fire up the unsuspecting engine—until it seizes up, never to run again. It’s the automotive equivalent of “hung from the neck until dead.” What have I done?
As cars fly out of the showroom and the dealerships are clogged with eager buyers, many of us are questioning this bit of Washington wisdom.
When I was a child, my grandparents hosted a gift orgy on Christmas Eve—the whole family gathered in Chicago and every aunt & uncle brought something for ME. My cousins and I had eyes only for the pile of gifts under the tree.
Remind you of the American Recovery and Reinvestment Act (ARRA)? The ARRA orgy begins with the reasonable assumption that the economy needs a healthy dose of Christmas cheer. Congress and the Administration joyfully decreed that we could save the world and spend money, too. Every lobby and interest group joined in the happy chorus. Presto! Christmas in February.
Yet “killing two birds with one stone” only works if you’re a very good shot. ARRA is riddled with Congressional multitasking, using the occasion of the stimulus (and its virtually unlimited spending) to implement specific social goals.
Every day we see more evidence of the buckets of cash Congress has made available through the stimulus bill. Eager to see public dollars replacing lackluster business and consumer spending, our elected representatives have filled the pipelines of countless federal programs.
Public projects that were hopeless dreams in September have been reborn. One that has garnered particular attention in New York State is high speed rail.
After I made some cautionary comments on the pending fiscal stimulus plan on a local television news program, a friend said that I “sounded like a Republican.” I never did find out whether this was intended as a compliment or a criticism. Regardless of her intent, I found her comment troubling. Should caution have a partisan label?
I despair that elected officials seem to remember only half of a course in economics. We get more-or-less balanced policy in normal times because they remember different halves. Republicans remember 18th Century political philosopher Adam Smith proclamation that competition can harness initiative and build a stronger economy—yet forget Smith’s injunctions against concentrations of economic power. In this crisis, Democrats remember 20th Century economist John Maynard Keynes’ observation that public spending can stimulate the economy—yet forget that what we spend our money on and the amount of debt we incur matters rather a lot.
Originally published in Rochester Business Journal
1/9/2009, 1/16/2009, 1/23/2009
Part One
Early signals from our health insurer led us to expect another double-digit increase in our insurance premiums—perhaps a 15% hit. Frankly, I thought that we were just being softened up for something lower—If I were led to expect 15%, then a mere 11% bump should make me (relatively) happy. I was stunned when the final price of the most popular of our plans would go up 21% in 2009.
The big increase in price led us to explore cheaper plans, particularly a policy that includes a “Health Savings Account” (HSA). The discussion below refers to the specific plans we were offered by Excellus BlueCross BlueShield.
CAUTION: The remainder of this column discusses insurance premiums, deductibles, out-of-pocket maxima and other arcane health insurance jargon. Readers looking for lighter fare might prefer IRS Publication 17 or, perhaps, a William Faulkner novel.
This week’s conference on the state’s budget crisis—sponsored by the Empire Center on State Policy and the Center for Governmental Research Inc.—was organized around a technical question: What can be cut from New York’s budget to fix a deficit estimated (today, at least) at $12.5 billion? Yet the overriding problem is not technical but political. My colleague Erika Rosenberg, moderator of one of the sessions, asked the panelists this question: “What’s it going to take for the Legislature to make the unpopular decisions that are needed to balance the budget?”
Gov. David Paterson made the correct technical decision in calling the Legislature back for a special session on Nov. 18. Yet the brutal reality of New York politics eliminated any possibility of progress. With control of the state Senate still in question and the political risks starkly clear, the session never convened.
Back in 2002, CGR reported on the many buildings around the state bearing the names of elected officials. To illustrate our point, we included a picture of the Joseph L. Bruno Stadium at Hudson Valley Community College, built with $14 million contributed by the generosity of then Senate Majority Leader Bruno. Of course, he was being generous with OUR money.
Bruno Stadium
In hindsight, it was risky to use the Bruno example. A political friend told me what he’d have done to me had he been on Bruno’s staff. Standards of decency and editorial policy prevent me from saying more.
A lot of money flows to community projects through the goodwill of legislators. The NYS Legislature has long divvied up $200 million in “member item” cash—money from the annual budget that can be allocated by a member of the legislature with no more process than the permission of his or her political leader. In 2006, my colleague Erika Rosenberg reported that the problem extended to several billion dollars in additional money that was borrowed to fund projects sponsored by individual members. We called these funds “Capital Pork.”
In an essay in last week’s City newspaper, former Rochester Mayor Bill Johnson mentioned “Depression era conditions.” It wasn’t clear what he meant—fortunately, however, we’re a long way from reaching such depths of despair. After all, GDP actually rose at a 2.8% rate through the second quarter of 2008. Unlike the 25% unemployment of the Great Depression, we’re just over 6% now. I’ll be astounded if the unemployment rate doesn’t continue to rise and GDP begin to fall—but this isn’t the Great Depression.
A friend asked yesterday if we should mount a “public works” program and attempt to “jumpstart” the economy through direct spending or, perhaps, by encouraging the public to spend more by sending out another wave of government rebate checks.
The following is based on a book review I delivered on behalf of the Rochester Public Library’s “Books Sandwiched In” series.
Dan Ariely’s Predictably Irrational comes from a field called “behavioral economics,” a branch of cognitive psychology focused on economic decision-making. Folks in the field attempt to figure out why apparently rational people behave irrationally so much of the time.
That markets are influenced by irrational behavior is easily demonstrated. Let’s consider recent trends in oil prices. When oil was trading at over $140 per barrel, relatively few oil industry experts would defend the price on the basis of pure supply and demand. Sure, some would cite rising demand in China or the number of cars added to the road every day in Mumbai. Many authoritative voices had been saying for months that they while they could rationally explain a spot price around $100 per barrel, the arithmetic simply didn’t justify $140 per barrel. So why were apparently smart people betting big dollars on a higher price? How did the price get to $147 per barrel? Largely because they believed that other people believed that prices were going to rise. And they believed that they were smart enough to buy when prices were rising and to sell before the bubble burst.
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Remember “mutual assured destruction?” MAD was the dominant principle of the Cold War: The Soviet Union would not attack us as long as we retained the ability to retaliate. They might surprise us and obliterate New York, Chicago, Los Angeles, and Washington, but our nuclear subs and hardened silo-based missiles would respond in kind, turning Moscow, Leningrad, Kiev and Vladivostok into historical footnotes (if mankind survived to write any more history).