Can Congress Manage the Health Care Sector?

Former U.S. Senate Majority/Minority Leader Tom Daschle (D-SD) says no way, Jose

In a recent interview about his new book, Daschle stressed:

Congress is just not capable of being the manager of a health care system and yet it’s largely Congress today that has that responsibility. It hasn’t worked for the last 50 years. It’ll work even less in the next 50.

Thus Daschle advocates creating a Federal Health Board to manage this $2 trillion chunk of the U.S. economy. 

Where does he look for a model of this type of centralized planning agency?  Quoth Daschle:

I believe that the connector idea is really the Massachusetts version of the Federal Health Board. I like a lot of what the connector is all about.

Re: Martin Feldstein — The Fed Should Stop Helping Commodity Speculators?

In The Wall Street Journal on April 15, Martin Feldstein of Harvard took a position between Makin and Chapman, saying the Fed should have left the federal funds rate at 2 1/4%, because a lower rate would cause “rising food and energy prices.” Feldstein told The Guardian the dollar had to fall further on April 11, so the link he envisions between Fed policy and commodity markets is not through exchange rates (I’ll discuss that in a later post), but just upside speculation alone:

Lower interest rates induce investors to add commodities to their portfolios. When rates are low, portfolio investors will bid up the prices of oil and other commodities to levels at which the expected future returns are in line with the lower rates.

But investors go short as well as long–betting the price will fall– and they can use credit for that too.

The only reason to make a leveraged bet that the price of oil, gold or corn will go higher is if you expect the prices to rise by enough (during the holding period) to exceed the interest expense.

Ignoring trading costs, if you can borrow at 5% to invest in something whose price is expected to rise by 8% that may look like easy money. Yet oil futures are cheaper than near-term spot prices, and gold has recently fallen by about 13%, so momentum trading is dangerous. It is properly called “greater fool investing” – just like paying too much for a Las Vegas condo on the assumption that some greater fool will later pay even more.

It seems unlikely that today’s quarter-point cut in the fed funds rate will result in lower margin rates for commodity traders. But even if it did that is not nearly enough to make a significant difference for more than a day or two.

U.S. politicians seem equally angry with upside “speculators” and downside “shorts,” but it is the contest between the two that constantly gropes for the right price.

I am shorting oil through an exchange-traded fund (DUG), and shorting precious metals through a mutual fund (SPPIX). I’m also slightly long the dollar (UUP). Don’t try this at home without a net. But if I win those bets, the world economy wins too.

Can Congress Control Medical Spending?

At a recent health policy forum in Washington, D.C., noted health economist and wit Uwe Reinhardt shed some light on that question:

[T]he following can be said: the United States Congress has absolutely no interest in reducing … dubious Medicare expenditures. Let me repeat that. The United States Congress has no interest whatsoever in reducing dubious Medicare expenditures …

So the interesting and intriguing question for all, for journalists too, [is]: why is the Congress so disinterested in cost containment when it constantly whines about having to restructure Medicare? That is to me a huge mystery.

Obviously, Prof. Reinhardt hasn’t read this.

Re: John L. Chapman — The Fed Should Tighten to Slow the Growth of MZM?

In The Wall Street Journal on April 29, another AEI economist, John L. Chapman, took the exact opposite position from John Makin. Chapman suggested the Fed “should soon begin a series of rate increases.” The title was “The Fed Must Strengthen the Dollar,” but that is not what he wrote. Chapman just advocated “a stable dollar.”

The dollar was stable in March and April. The Fed’s index of the dollar’s value against a broad basket of currencies (Jan. 1997=100) was 95.84 on March 6 and 95.81 on April 29. The index against major currencies (1973=100) remained close to 70. That was just two months, of course. But those were the months when we were deluged by editorials blaming rising prices of food and oil on “the falling dollar.” In any case, if the goal is being achieved with current Fed policy, then changing that policy would mean deviating from that goal.

Chapman, like some other economists, sees “inflation warnings” in rapid growth of a measure of money supply (or demand) known as MZM (money with zero maturity), which is largely driven by institutional money market funds. These short-term investments tend to expand when corporations and financial fiduciaries are nervous about investing longer-term, and therefore park more cash in money market funds for security.

The trouble with using MZM as an omen of inflation is that it has never worked.

MZM grew rapidly in 2001, during a recession, but MZM was nearly flat in 1973 when inflation began to explode. MZM fell from $854.3 billion in September 1978 to $827.3 billion in April 1980, yet this was a period of rapidly escalating inflation. Core inflation, excluding food and energy, reached 8.5% in the year ending December 1978, then 11.3% and 12.2% in the following years.

There may be an argument for raising the fed funds rate whenever oil and food prices rise, but MZM is not it.

Re: Ronald McKinnon — The Fed Should Tighten to Push the Euro Down?

In The Wall Street Journal of April 25, Ronald McKinnon of Stanford proposed “raising the fed funds rate as much as necessary to strengthen the dollar.” McKinnon’s argument had little to do with inflation, so he could just as well have asked the European Central Bank to lower interest rates as much as necessary. Yet he just asked the U.S. to “cooperate with foreign governments to halt and reverse the appreciation of their currencies against the dollar.”

McKinnon’s main argument for raising the fed funds rate is because he imagines that “foreigners are disinvesting from private U.S. assets.”

Net foreign purchases of U.S. stocks in the fourth quarter were $55.6 billion. Net foreign purchases of U.S. corporate bonds were $39.1 billion. Foreign direct investment in the United States increased by $39.9 billion in the fourth quarter, following an increase of $101.3 billion in the third.

There will surely be a good argument for raising the fed funds rate, sooner or later, but an exodus of foreign investment is not it.

Re: John Makin — The Fed Should Ease to Inflate House Prices?

The Wall Street Journal has been extremely ecumenical about airing a variety of critics of the Federal Reserve on its editorial page. In a series of posts, I will suggest reasons for remaining skeptical about the logic and evidence behind all of this policy advice.

On April 14, John Makin of the American Enterprise Institute proposed, “The Inflation Solution to the Housing Mess.” He thinks, “The Fed should announce its intention to add to its holding of Treasury securities in order to provide additional liquidity.” Makin knows “there is a substantial risk that inflation may rise for a time – this would be the policy goal.”

To establish higher inflation as a “policy goal” gives a small part of the economy (the existing inventory of new and used homes) priority over the rest (he does not and could not claim inflation would be confined to housing). He thinks easy money could halt declines in the Case-Shiller index of homes prices, although I have shown that index is not representative of nationwide housing prices

Makin argues that

the Fed’s lending programs have not provided adequate liquidity to financial markets: Reserves supplied to the banking system have grown at a tiny 0.6% annual rate since December. That’s because the reserves the Fed is injecting by lending are effectively pulled out or “sterilized” by its sales of Treasury securities. The Fed has been selling these securities to keep the fed funds rate at the level targeted by its Federal Open Market Committee directives.

But it doesn’t matter whether the Fed increases the monetary base (reserves and currency) by buying Treasury bills, gold bars, or Bear Stearns’ securities. In each case the Fed pays for new assets by writing a check on the Fed which ends up being added to bank reserves at the Federal Reserve banks.

The biweekly bank reserve data bounces around too much to speak of an annual rate of change between two dates. Reserves were $91.8 billion in the two weeks ended October 24 and $97.1 billion by March 26, but converting that into an annual rate of change would be just as misleading as Makin’s selective comparison.

Bank loans have been growing at a 10% annual rate this year, with Commercial and Industrial loans growing at a 20% pace. This does not look at though the banks are starved for reserves or that the Fed is “pushing on a string.”

Makin’s inference that monetary policy is too tight is dubious but also redundant. He clearly wants inflation to be higher, as a policy goal.

Planet Napolitano

Writing in The Wall Street Journal, Arizona Gov. Janet Napolitano (D) recently complained that the Bush administration is abandoning federal spending commitments, “cost-shifting to the states,” and creating budget deficits in states like Arizona.

In companion letters to the editor of today’s The Wall Street Journal, the Goldwater Institute’s Darcy Olsen and I inquire as to the color of the sky on planet Napolitano.

Olsen writes, in part:

Like most of the southwest, Arizona has been rolling in cash thanks to historic economic expansion. Three of the past five years saw double-digit percentage budget growth. But instead of reducing the tax burden or saving for a rainy day, state government ballooned 40% in real terms. Arizona now finds its per capita state spending on a par with Massachusetts.

Only 21 states went into the red this year, and Arizona led the way with the largest budget deficit of any state on a per-capita basis.

States can unilaterally opt out of some federal programs, like No Child Left Behind. Most governors can also reduce agency spending through executive action. Arizona did none of these things.

Meanwhile, I tackle Napolitano’s argument that restraining federal Medicaid and SCHIP spending amounts to “cost-shifting”:

Medicaid and SCHIP allow Arizona politicians to subsidize Arizona residents (and Arizona health-care providers), while shifting most of the cost to taxpayers in other states.

Gov. Napolitano opposes the administration’s policy not because it would increase cost-shifting, but because it would reduce her ability to shift those costs to other states.

Medicaid and SCHIP: socialism for state politicians.