Tag: competition

Bringing the States Back In

afghanistanIt’s an annoying, hackneyed trope of foreign policy types to say “if you want to understand X, you have to understand Y.”  That said, let me engage in a little bit of it.

What’s going on in Afghanistan, we’re supposed to believe, is about terrorism, failed states, economic development, counterinsurgency, counterterrorism, human rights, and some other stuff.  And to an extent, it is about each of those things.  But to my mind, if you want to get a handle on what’s driving events over there, and on its historical status as a plaything of regional and extraregional powers, you ought to read this article in today’s Wall Street Journal.

The themes that permeate the article are familiar: States as the primary actors in international politics, their uncertainty about other states’ intentions, the fundamental zero-sumness of security competition…somebody should cook up a theory or two on this stuff.

Eventually–although in fairness, God only knows when–we’re going to leave Afghanistan.  When that happens, India and Pakistan are still going to live in the neighborhood.  They’d each prefer to have lots of influence in Afghanistan, and to preclude the other from having too much.  Accordingly, they’re both trying to set up structures and relationships that would, in the ideal scenario, let them control Afghanistan.  In a less-than-ideal scenario, they’d like enough influence to undermine the other’s control of the country.  Until you grasp that nettle, you’re really just fumbling around in the dark.

Find a solution for that in your COIN manual.

Why a “Public Option” Is Hazardous to Your Health

President Obama and other leading Democrats have proposed creating a new government health insurance program as an “option” for Americans under the age of 65. In a new study, Cato scholar Michael F. Cannon shows that government programs cost more and deliver lower-quality care than private insurance. “If Congress wants to make health care more efficient and increase competition in health insurance markets, there are far better options,” argues Cannon.

Fannie Med? Why a “Public Option” Is Hazardous to Your Health, Cato Policy Analysis No. 642

End the Credit Rating Monopoly

Earlier this week, SEC Chair Mary Shapiro appeared before Congress to suggest ways to fix the failings in our credit rating agencies.   Sadly her proposals miss the market, although that shouldn’t be so surprising as her suggestions appear to rest upon a misunderstanding of the problem.

The thrust of the SEC’s current approach is more disclosure, such as releasing “pre-ratings” that debt issuers may get before final issuance.  Additional disclosure of ratings methodology and assumptions is likely to be useless.  Almost all that information was available during the building housing bubble.  The problem is that the rating agencies had little incentive to go beyond the consensus forecasts of increasing to at most modest declines in home prices.  These same assumptions were the foundation of almost all government economic forecasting as well, yet few believe that forcing CBO or OMB to disclosure more of their forecasts will cure our budget imbalances.  What is needed is a change in incentives.

Here again the SEC seems to misunderstand the incentives at work, but then recognizing such would force the SEC to admit its own role in creating those some perverse incentives.  The SEC’s notion that agencies issue favorable ratings in order to gain business misses the most basic fact of the ratings business - they don’t have to compete for business, any debt issuer wanting to place “investment grade” debt has to use the agencies, and often has to use more than one of them.  Due to a variety of SEC and bank regulations, there is almost no competition among the rating agencies.  They have been given a government created monopoly.  If the rating agencies were, as the SEC proposes, competing strongly for business, then they wouldn’t have been earning huge profits on that business.  Competition erodes a business’ profits.  During the housing boom, the rating agencies continued to make ever more profits - more the sign of a monopoly than one of competition.

The truth is not that the agencies were captive to the debt issuers, but the other way around.  And like any monopolist, the agencies became lazy, slow and fat.  The real fix for the failure of the credit raters is to reduce the excessive reliance on their judgements inherent in most securities, banking and insurance regulations.  An investment grade rating should never serve as a substitute for appropriate due diligence on the part of investors (especially pension fund managers) or regulators.

Don’t Count on Getting Your “Investment” Back from Government Motors

The president and his appointees have expressed their hope that Government Motors will eventually pay back taxpayers for their “forced investment” in the company.  But there aren’t many cases of this sort of lemon socialism actually paying off.

Now most everyone connected with GM is admitting the same thing.  Reports the Washington Post:

If a new General Motors emerges from bankruptcy as planned, U.S. financial aid for the company will expand to nearly $50 billion, but neither the government nor the company is forecasting how much of the public money will be repaid.

It’s sure to be a stretch. For the United States to fully recover its investment, the value of General Motors stock will have to reach levels it has never before attained.

“I’m not going to predict it – that’s not my job today,” GM chief executive Fritz Henderson said in a recent interview.

“I don’t know how much we’re going to recover,” a senior Obama administration official said as the company headed into bankruptcy last month.

This uncertainty stems from the difficulty in valuing the 60 percent GM stake that the United States will receive in exchange for the public investment. The government also gets preferred shares and other compensation.

The stake will be worth enough to fully cover the government’s direct investment only if GM’s stock rises above $68 billion. Even at its recent 2000 peak, GM’s stock was worth only $56 billion.

“I don’t see GM hitting those benchmarks in a very long time,” said Maryann Keller, a veteran automotive analyst and author of “Rude Awakening: The Rise, Fall, and Struggle for Recovery of General Motors,” which was published in 1989.

She noted that global competition will continue to squeeze American automakers. Though the world’s factories can produce about 100 million vehicles a year, demand for them only stands at about 55 million, and the gap will push prices and profits down, she said.

“It’s very unlikely” that the government will recover its money, said David Whiston, auto equities analyst at Morningstar. “GM will be a smaller company after the bankruptcy and there are going to be more foreign automakers entering the market that will make GM’s efforts more difficult.”

Oh, well.  As they say, it’s only money!

Ed Crane Describes a Libertarian Approach to Health Care Reform

Last week, Cato hosted an all-day conference on health care reform, which included expert opinions from across the political spectrum.  Cato Founder and President Ed Crane started the event with a talk about a libertarian approach to reforming health care, which would reduce federal involvement, increase competition, decouple health care from employment and increase the amount of doctors available.

You can find all of Cato’s reasearch on health care reform at Healthcare.Cato.org.

You’re for Fair Competition, You Say?

Len Nichols is the top health-policy guy at the New America Foundation.  He’s spent the past few months trying to negotiate a compromise between the Left and the far Left over the creation of a new government health insurance program that would compete with private insurers.  With John Bertko, Nichols wrote a paper on how to create a level playing field between a government program and private insurance.

Yesterday’s CongressDailyAM, however, had an interesting article that sheds light on Nichols’ sense of fair play.  According to the article:

Nichols has floated the idea of writing into law a requirement that certain changes to the system would require a two-thirds vote to pass rather than a simple majority.

Never mind that such a requirement would guarantee that the new program would breed even more stagnation and death than Medicare and Medicaid do.

What Nichols proposes is that a Democratic Congress should be able to create a new Fannie Med by a simple majority vote in each chamber, but if a subsequent (Republican?) Congress wanted to repeal it, they should face a higher bar.

Keep that in mind when you hear talk about a level playing field.

Michael Lind’s Economic Philistinism

In a recently published article for the journal Democracy, Michael Lind of the New America Foundation lays out “The Case for Goliath” (registration required) – i.e., for returning to the good old days of price-and-entry regulation and cartelized industries. No, seriously.

I’ll give Lind credit for daring to go where his fellow devotees of “nostalgianomics” fear to tread.  Many on the left these days look back fondly at the ’50s and ’60s when activist government and strong unions coincided with a narrowing income distribution. What they fail to recognize, or at least admit, is that the political economy of that supposed golden age rested on a systematic muting of competition, both by circumstance and deliberate policy.  The devastation of Europe and Japan in World War II, price-and-entry controls, high trade barriers, and the threat of antitrust enforcement against industry leaders all combined to make heavy unionization and above-market wages for union workers economically viable.

This glaring oversight is understandable. There is, after all, overwhelming economic evidence that competition beats cartelization of industry hands down. When government restricts entry by new firms, the predictable result is a stifling of innovation. For example, consider this admission by former FCC chairman Michael Powell: “Because the history of the FCC is, when something happens that it doesn’t understand, kill it. We tried to kill cable. We tried to kill long-distance. When [MCI founder] Bill McGowan starting stringing out microwave towers that threatened AT&T, the FCC tried to stop him. The FCC tried to kill cable because it was going to threaten broadcasting.” (For more details on the the FCC’s lamentable track record, see here.)

The upshot is that progressive fantasies of a return to the good old days are just that – fantasies. Private-sector unions have withered and shrunk not because of changes in labor law, but because unionized firms haven’t been able to hack it in the new, more competitive marketplace (see “Auto industry, U.S.”). So the only way to get back to the days of Big Labor is by throttling the main engine of innovation and productivity: competition. And, well, that just doesn’t sound very progressive, does it?

Lind, though, grasps the nettle and chooses cartels and unions over economic progress. He does try to argue that we can have our cake and eat it too, but his case boils down to a crude post hoc ergo propter hoc fallacy: the big move toward cartelization in the ’30s was followed by good times in the ’50s and ’60s (let’s not talk about the ’70s), so therefore cartelization was good for the economy!  Yes, and the Union won the Civil War with inferior generals, so perhaps poor military leadership is a key to victory. The fact is, the strong economic performance of the early postwar decades occurred in spite of, not because of, widespread restrictions on competition.

Though the anticompetitive nostrums Lind peddles are pure poison, he nonetheless deserves commendation. By identifying correctly the link between cartelization and strong unions, Lind highlights the essentially reactionary nature of progressives’ infatuation with Big Labor. He has therefore, however unwittingly, performed a public service.