Good ideas on health care reform

Glad to see the Journal has finally started running op-eds with proposals for solutions to the health care situation, rather than just storming against the Obamacare thing.

What I’ve seen that I really like:  Reforming and expanding Healthcare Savings Accounts, combined with high-deductible insurance policies.  And then providing health care stamps, analagous to food stamps, with which people who have legitimate financial need can fill their HSA.

This seems to me like a relatively efficient, manageable solution that offers a real possibility of helping the poor without undermining the many things that actually work in American healthcare.

I also, of course, am firmly convinced that we need pricing transparency.  Just no way you can run an efficient market when nobody even knows the product prices.

***

One thing I’d like to argue about:  Saw a comment a week or so ago about how Americans, compared to other nations, spend the most on healthcare, but do not have the best health outcomes.  To which I’d observe:  If you are in poor health, you will spend more money on healthcare.

I believe our obesity rates alone probably explain a significant portion of the gap.  We as a nation choose to be in poorer health than we must, and then we choose to treat the health problems we give ourselves (understandably!).  No surprise the figures run as they do.

[There is also a significant amount of money spent on elective procedures such as cosmetic surgery that are may be bundled into our ‘healthcare expenses’, but have nothing to do with making people healthier.]

None of which is to deny that our health care situation has its problems.  Just that the raw statistics do not tell you what the problem really is.

May the Best Budgeter Win

A few months ago (yeah, I know), I picked up a copy of The Medieval Military Revolution (Barnes & Noble 1998 – originally written in 1995 — Edited by Andrew Ayton & J.L. Price).  Been sitting on my shelf, inherited from TR, yet unread.  I was looking for something I didn’t find there, but I came across this thought in the editor’s introduction:

Those that live by the sword shall die by the sword, and this can be applied in a sense to governments and even states as well.  States went bankrupt, at least technically, through the cost of war, and the fiscal strain of long-term involvement in warfare was perhaps the single most important threat to political stability even in this most turbulent of periods.

In this case, the editor is writing about the mid-16th to mid-17th century.  But every century has its nations, and the realities of economics and defense don’t disappear over time.

When I was in high school economics, I can remember people trying to argue that somehow the US’s national debt just didn’t matter.  We were too big to fail, or by some bit of magic we could borrow as much as we wanted and nothing would really happen . . . it was bizarre. Didn’t make sense then, and still doesn’t.  I suppose we could always stiff our creditors in the end, but even that has its consequences.

The US is a mighty wealthy nation.  Wealthy people can waste a lot of resources and not feel the consequences the way poorer neighbors would.  But there are limits to our wealth.  We can’t just magically spend on anything we decide we want — even we must pick and choose.

***

And anytime we borrow? We have to pay it back out of future wealth.  The only time borrowing fuels growth is when the money borrowed is invested in something that makes us more productive. The hallmark of a chronic debtor, of course, is the conviction that every debt really was necessary, really did make the debtor ‘better off’.

But reality isn’t so.

In the current economic quagmire, households, businesses, and governments that had previously acted prudently and with fiscal restraint are managing fairly well.  A neighbor was laid off, but fortunately he had savings, was living beneath his means — he has a little cushion to get by while he looks for a new job.  The greatest crises today are coming among those who were massively in debt a year ago or more, and don’t know how to get by without yet more debt.  (Or, of course, stiffing their creditors.)

–>  Not talking here about those families and businesses that did everything ‘right’ during the flush times (which were not, for them, all that flush), but still struggle today.  Not talking about those whose reverses have been far greater than anyone could plan against.  Prudence today won’t withstand every possible storm tomorrow. But it sure improves your odds.

***

So I’m a bit alarmed by the current rush to spend, spend, spend.  Oh and it isn’t a democrat’s problem — I had a pit in my stomach prior to the presidential election, knowing that I could count on either party to be just as irresponsible.  I’m alarmed by things like trying to create new government-sponsored insurance programs *for people who already have health insurance*, when we haven’t sucessfully put together a program for those who don’t.

–> Frankly I’m really dissappointed in the democrats, because they aren’t actually coming through on helping people who actually need help.  Tons and tons of spending on vague programs to ‘stimulate’.  Er, how about we just get everyone who needs food fed?  Houses for *actual homeless people*?

A more personal example: I’ve a friend who has an undiagnosed breathing problem. She *stops breathing*.  She can’t afford a doctor’s visit to diagnose the problem.  Mmn . . . how ’bout we stimulate the economy by making it possible to get in for a doctor’s appointment if you’re a person who can’t work because you can’t, uh, breathe reliably??  That cash would trickle into the pockets of a receptionist, a maintenance guy, a lab worker, an MD — *and* we’d have a person who might be able to breathe all the time? And thus be able to go get a job? Hmmn?

***

End of the rant.  Have a good week.  Soon as I find my lost book, I’ll have a review up on the other blog.  Meanwhile am trying, as always, to clean the house, educate the children, exercise the ol’ mind, body & spirit, and all that other vocation-y stuff.  Hope y’all are doing well.  Oh, and hey, to keep you busy during my slackerlyness, here’s another cornucopia of social-issues rants: http://www.frontporchrepublic.com/ . Thanks to Bethune Catholic for the link.

routine care and the uninsured

Anna in the combox on my last post points out that I glossed over the importance of routine care as a cost-savings measure.   She shares a specific example of a family member’s costly (and potentially deadly) health problem that could have been caught and treated earlier via routine care.   WSJ this morning has an article about the large number of clients health insurers are losing to layoffs.

–> Given the cost of privately-obtained insurance, and given that an unemployed person will naturally put off lower-priority expenses, the layoffs *will* mean people skip on routine care that could have saved much time and distress.

***

What’s the solution?  I don’t know.  It’s really tempting to, say, add some kind of health care aid as part of unemployment compensation. It seems pretty simple – in addition to that paltry sum of unemployment payments, you get a packet of health-care stamps or some such thing.

Objections?

Doing so creates an incentive to not return to employment unless it provides a better package than the unemployment package.  The way our unemployment system works now, we assume that you were pretty pulled together before you were laid off — you kept yourself healthy, you are up-to-date on your physical, you have some emergency savings, you weren’t living above your means.  Unemployment payments are, in my state anyway, a little something extra to tide you over while you scramble for a new job, any job.

Most Americans, it turns out, aren’t actually living this way.  Americans are, on average, in poor health, they haven’t got savings, they are in the habit of using credit all the time.   Not poor Americans, *all* Americans.   Conservatives have a well-trained stinginess-reflex that recoils at the thought of aiding and abetting these bad habits.   Liberals, on the other hand, might recognize the need for change, but observe that you won’t have much chance for self-improvement if you’ve just dropped dead.

My intuition is that the solution lies in the middle.  It is reasonable to set up some mechanism for providing routine preventative care and emergency health care to people whose situation falls outside the norm.  Whether due to temporary unemployment or some tragic longterm problem.  We should think about how to do so efficiently. (Health care stamps? Clinics? Private Charities? Insurance vouchers? School nurses? So many possibilities.)

And then, separately, we need to be working on addressing the myriad problems that are making our health care crisis so much more onerous than it ought to be.

Taking Apart Health Costs, part II

The other week I made some opening remarks.  The next thing I want to do is look at the different kinds of health care costs.  I think costs can be divided into three different categories:

-Well Visits / Routine Care

-Minor mishaps

-Major events

Cost-wise,  each of three works differently.  From an insurance point of view, the funding of each category of costs ought to work differently.  Today I’ll look at the first type of health care cost, routine care.  Then I’ll take on the other two categories in turn, in subsequent posts.

***

“Well Visits” or Routine Care

This kind of health care is what you do to keep yourself healthy.  The periodic physical or well-child visit, vaccines as appropriate, routine screenings like getting your cholesterol checks, or having the dermatologist look for suspicious moles.

As with all health care, exactly who needs what and when is debatable.   One real challenge for managing a nation’s health care needs is deciding what those needs are. If you happen to agree with the manager of your health care plan, you are going to be fairly happy.  If you find that your health care plan covers — even insists — on care you don’t want, and will not cover the care you do want, you won’t be so happy.

–> Fondness for nationalized health care plans, or for company-sponsored plans, often divides based on that question.  Any just health care system will find the right balance between protecting a legitimate amount of disagreement, while neither blindly funding true quack treatments, nor refusing care that could reasonably be needed.  No easy task.  I am leery of anyone who claims this is easily determined, and that the rest of us should just go along.

A second point to remember is that our current models for administering routine care — and thus the costs associated with that care — are not set in stone.  Some of the tasks of well-care could be done by the individual — such as tracking your own family’s weight and height.   Where a health care professional is required, models for economic delivery of routine care should not be dismissed.  There is much to be said for the corner pharmacy running flu-shot clinics, or the local hospital dispatching a team of cholesterol-checkers for a one-day-blitz at the company cafeteria.

–> When we look at health care reform, we should be willing to think outside the box about ways to reduce costs, but also allow that some patients really do need a level of closer monitoring and hand-holding.

The good news is that patients won’t generally double-dip if there are multiple venues for the same kind of care — no one gets a flu shot at Walgreens *and* from the doctor’s office, just because both are available.  What we sometimes think of as ‘scattershot’, really is not.  A patient will reliably avoid excess poking and prodding, and given multiple choices for receiving routine care, will usually pick the one most suited to his situation.

On the topic of routine care, we should go ahead and acknowledge that some elements of well-care are most important as compensation for poor behavior.  A good health care system will combat these problems at the source.  In other words, a good health care system might involve making it possible for kids to walk to school and play outside more.

–> No no! I am *not* suggesting the Department of Transportation become an office of a National Health Bureau!  What I am suggesting is that ‘health care reform’ is much more than creating a national insurance program.  By their nature, the nations’ health concerns need to be attacked from multiple angles.  One element of managing routine health care costs is to be looking for ways to reduce the need for preventative care.

Try not to squirm as I observe: we should not overlook our nation’s moral climate when trying to find ways to reduce health care costs.   I don’t say leave people hanging out to dry because of their past mistakes; but by all means, do help avert disaster and instruct on avoiding more problems in the future.  A legitimate part of routine care is education and assistance in adopting healthy behaviors.

***

After all this attacking of health care costs from without and within, we are still left us with some routine well-care that is useful and well worth our while.  Having acknowledged that your list of the right and good may be different from mine, assume for the rest of this article that when I talk about ‘routine care’ I am referring to those well-care practices that you happen to think are money well spent.  Here are some observations specifically about the nature of these types of costs:

The payoff is not immediate. Break your leg, and you have no doubt that the services of a good bonesetter are well worth your while.  Spending $120 for your physician to tell you your toddler looks normal?  Might make you feel good, but when money is tight, you are going to be tempted to just look around at the local playgroup and be content your kid looks okay and seems normal enough.  If you haven’t dropped dead yet, what’s another month or two before going in for that physical . . .

. . . And frankly, most people who go in for routine care didn’t end up “needing it”.   For every baby saved from disaster by a routine a well-visit, there are plenty that could have skipped the appointment and been the none the worse.  At the height of the polio epidemics, most people managed just fine without the vaccine.  Trouble is, if you’re the one who did need the care, you would have been sunk without it.

–> So when we look at the benefits of routine care, we have to acknowledge that we are checking all in the hope of saving some.  Well worth it.  As a result, we have to overcome our natural stinginess — towards ourselves and towards others.

***

Currently, there are three ways to pay for well-care in the United States.  One is to have the care paid for by an employer-sponsored health care plan.  The second is to qualify for a government-run program.  The third is to pay for it yourself (or persuade a loving friend or relative to pay it for you).  Each of these is valid.

Employers have a legitimate interest in ensuring employees and their dependents receive routine care.  The expense up front can pay for itself by saved sick days and avoiding more expensive treatments down the road.  It is not unreasonable to continue to allow employers to subsidize health care costs.

The government likewise benefits from a healthy populace, for the same reason.  Healthy citizens are productive citizens who can contribute to wider society.  Two obvious cautions:

1) The US government does not have a perfect track record in its management of other efforts.  We would be unwise to assume it will be able to manage a national health care system any better than it can manage any other department.

2) As with employers, the utilitarian interest is limited.  The government benefits greatly from cultivating intelligent, hard-working, highly-capable individuals.  There is a temptation to limit care only to those who show promise, and discretely push aside those who don’t offer sufficient promise for future contributions.   The current rate of abortion for children diagnosed with Down Syndrome is telling.  There is already a strong tendency in our country to consider life itself as really only appropriate for those who offer the rest of us more perceived “benefit” than cost.  There is no reason to think that government-run health care will be anything other than a reflection of wider society’s values.

Individuals and their immediate relations are the obvious primary beneficiaries of routine care.  Well it is reasonable for the government or employers to fund routine care when individuals might otherwise neglect it, the cost of routine care properly belongs to the individual. The most effective health care system, in my opinion, will help individuals make wise decisions on which routine care is needed, and provide a convenient means of setting aside funding for that care.

***

What about Insurance?

Health “insurance” for routine care is a misnomer.  There is no ‘insurance’ to it.  Insurance is the pooling of risk.  I pay homeowner’s insurance so that in the unlikely event that my house catches fire, I can benefit from the my neighbors’ contributions to the insurance program,  and thus receive money to rebuild my home.  With true insurance, all participants contribute a share of the cost of one person’s disaster.  If I’m lucky, I’ve ‘thrown my money away’ — I’ll never collect.  If I’m unlucky, I can be rescued from an emergency I never could have saved for on my own.

Routine care, in contrast, is an expected cost.   It’s not a question of ‘whether I will want a tetanus shot’.  I want one.  Someone has to pay for it.  Likewise there is no magical cost savings by having 100% of newborn babies get their well-visits paid for by the insurance company.  In a perfectly run nationalized health care system, the cost of routine care is exactly the same as if each of us just paid out of our own pocket.

In the case of routine care, all that an insurance program does is act as a middle man.  Now there can be benefits to middle men.  My insurance program (Blue Cross Blue Shield) regularly pays a lower rate than the retail price on my medical bills.  Even when my insurance “doesn’t cover” a particular service, I only have to pay the ‘negotiated rate’, effectively cutting my cost in half over the list price.  Kind of a Sam’s Club for health care.

–> To the extent that an insurance program is providing an effective tool for matching health care consumers and providers, it is a worthy organization.  Just like your local grocery stores is ‘merely a middleman’ that makes it a lot easier and more efficient to feed your family.  But insurance is no more the means of getting health care than the grocery store produces food.

Now one advantage of an insurance program is that it forces you to set aside the cash.  If you are a poor saver, purchasing an insurance policy that bundles routine care with your other health care needs is a way of tricking yourself into saving for routine care. Indeed, the company selling you an insurance policy for non-routine care has an interest in motivating you through low co-pays to get to the doctor early and often, in the hopes of warding off a more expensive condition down the road.  Kind of like your home insurance company benefits if you install a sprinkler system (to put out house fires), and replace that old wiring before it catches fire.

–> But all the same, the routine care you need is not an insurable risk, it is a regularly scheduled expense.  For this reason, if ordinary workers cannot afford to pay routine medical costs out of pocket, the problem lies elsewhere than a lack of insurance.  Maybe costs are too high.  Maybe the workers aren’t earning a living wage.  Maybe workers are lousy at managing their money.  Insurance programs may or may not turn out to be the easiest way to compensate for the underlying problem.  But lack of “insurance” coverage for routine care is not, in itself, the problem, and more than lack of food insurance is the reason people are malnourished, or lack of clothing insurance is the reason I dress so shoddily.

Keep in mind: There will always be people who cannot pay their ordinary expenses.  People who cannot, for whatever reason, pay their own food and housing bills, likewise will need assistance paying for even routine preventative medical care.  “The poor will always be with us” and all that.   We should distinguish these ought-to-be-exceptional cases from the needs of ordinary citizens.   There is a place for soup kitchens and food stamps; there is a place for charitable health clinics and health-care stamps.  But we shouldn’t therefore assume that the whole country needs to sign up for charitable relief.

***

All that rambling to summarize just a few points:

Routine Care costs can be reduced, but not eliminated. We will get a lot of bang for our health care efforts by working to find ways to reduce our need for routine care, and to delivery efficiently what care is needed.

Routine Care costs go to 100% of citizens. By its definition.  There is no risk to be pooled. What we think of as “insurance coverage” for routine care is actually just a means of either forcing ourselves to pay for the care, or getting someone else to pay for it instead.

There are multiple beneficiaries to routine care. The primary beneficiary is the individual receiving the care, and a just health care system makes makes it simple and convenient for the individual to access affordable routine care.  But there are times in places when others benefit, and it is reasonable to allow those others to pay for that care.

***

So what do I think about “Insurance” Programs for routine care? I think they have their place, as part of a multi-faceted approach to providing health care.  But we should recognize them for what they are — savings plans, middle men, and cost-shifters.  We should consider whether other changes that facilitate individual health-care savings would be more effective.

And what do I think is the number one thing-we-haven’t-tried-yet that is worth exploring? Price lists.  Publicly posted.  Not just the ‘list price’ but the agreed-on prices for different classes of consumers.  I think we kid ourselves about ‘managing health care costs’ when virtually nobody even knows what those costs really are.

link – investment vs speculation

Goodness, I have no idea whether I’m a distributist or not (someone maybe could tell me), and I certainly don’t know whether The Distributist Review is generally a good blog or not.  But here’s a useful post:  The Wealth Delusion.  Go read it.  All about what I’m all about: economics needs to reflect reality, not fantasy.

Taking Apart Health Care Costs, intro

Busy day on the WSJ’s editorial page.  Top center is a nice letter-to-the-editor proposing a realistic compromise concerning mark-to-market and regulatory capital.  See, I knew I wasn’t crazy.

Jim Curley will be thrilled to see someone else advocating for smaller businesses, down in the lower right hand section of the letters.  Not sure how one would make it happen, but there is a valid point: if a business is “too big to fail”, it is too big.   You can’t have your whole economy living and dying on the wisdom of a single CEO or board of directors.  An alternate view: maybe no company is too big to fail.  You can let it be big, as long as you are willing to let it fail.  Something to think about it; I don’t have a fully-formed opinion yet.

And then the topic I do want to cover today is introduced in “National Health Preview”, a critique of Massachusetts’ health reform results.  Not supportive to say the least.

***

Health care reform and universal health care coverage is a thorny issue, and I wanted to break apart the cost structure, and maybe add a few other comments, to help us think about it.

The first thing to keep in mind, and forgive me for stating the obvious, is that someone has to pay for it. I say so because health care is expensive, and if you won’t or can’t pay your own bill, it comes out of your neighbor’s pocket.  If you are a person who has good health care coverage, can pay your own bills, and lives comfortably, take a look at your budget.  What several thousands of dollars a year in other spending are you willing to give up so that your less-fortunate fellow citizens can enjoy the same health care benefits you do?  A less expensive car?  A smaller house?  You have to be willing to sacrifice, if you really mean to provide everyone in America with the health care that we tend to consider our due.

And that leads to a problem: Everyone dies. And bunches of us won’t do it on the cheap.  A lot of us are going to die after a long illness that can be treated for a time, to prolong our life and make it more comfortable.   What is an an extra year of life worth?  It is priceless.  How much is it worth to ensure that you or a loved one does not suffer needlessly in the final days, months, or years of your life?

–> When it comes down to it, our wants and needs for health care are almost unlimited.  And a sordid reality is that there is already a tendency to resort to euthanasia when the money runs short.   A health care solution that encourages people to die early so as to ‘not be such a burden on society’ is not a health care solution, it is a nazi regime.  Whatever we do, we need to guard against this vigilantly.

Making all this even more complicated, is that medical science is far from exact. Not only do we wonder whether it is worth the expense to give mom that chemotherapy, we aren’t even sure whether chemotherapy is really what she needs.   And she might or might not want it as part of her treatment, no matter how beneficial the rest of us find it.

–>  As a result of this, nationalized health care systems are very popular with people whose alternative is no treatment at all.  But those who can afford to pay for the treatment of their choice (or would be able if only they weren’t being taxed to pay for everyone else’s treatment) often beg to differ with the medical bureaucrats’ decision over what treatment is the best one.  A just health care system would take into account both sets of concerns.

Likewise, there is much argument about what deserves to be covered as a ‘health care cost’ and what does not.  For example, under a typical insurance program in the US today, it is pretty easy to get coverage for a surgery that will restore your ability to use an injured leg.  But coverage for adaptive equipment that compensates for the loss of use of that same limb can be ridiculously difficult to obtain.  Even if the equipment in question costs less than the surgery.  Not proposing here that we use equipment instead of surgery.  Am proposing that part of the equation is a review of what we mean by health care, and what our goals are.   A just health care system extends benefits fairly, not treating some conditions as more privileged than others.

Finally, we should keep in mind that like all problems, health care issues need to be attacked from a thousand angles.  This or that program by itself won’t fix everything.  You have to constantly be looking at malpractice issues, at the system for educating a licensing medical professionals, at the management of costs, at the way our health care businesses are organized, all of it.  Insurance programs are only one part of the picture.

***

Enough for today.  I’ll keep going in the next installment.  Have a good weekend.

tax law madness reaches new heights

Retroactive taxes are evil.  End of story.

You earn income through legal means.  You set aside the expected amount for taxes.  Chances are you spend the rest.   Even if you save or invest your income, likely you put it into something that is not very liquid — an educational savings account with penalties for withdrawal, for example.  Or real estate.  There is no reason to believe that any person, no matter how wealthy, parks his income in a bank account waiting to see if the government is going to ask for it back.  It is your money, legally acquired; it is reasonable to think it really is yours to do with as you please.

And then here comes Congress, deciding that because your income is unpopular, they should be free to tax it at 90%. Retroactively.  What if you can’t pony up the cash come tax time? Well, then you can pay penalties,  maybe have your home seized, maybe go to prison.

Am I outraged by the AIG bonuses?  Of course I am.   They are yet another symptom of lousy management by both AIG and our Congress who decided to invest in the company.  If we like, let us pass a law limiting compensation to government-funded entities.

But a retroactive tax is nothing short of confiscation of private property.  It is evil, and it is bad governance.

***

Edited to add this link to a description of the bill that passed the House.

Warren Buffet & Mark-to-Market

So I’m loathe to argue with Warren Buffet on financial matters.  His wealth being the result of a keen understanding of reality, which is what this blog is about.  But if I correctly understand what he is campaigning for concerning the mark-to-market rule, I think he is nearly right.

So the whole issue with the mark-to-market rule and banks begins with how banks are regulated:  Banks are required to have a certain amount of assets for each dollar worth of loans they make.  So for example if the bank has $1 million in assets (cash, stock, real estate, what have you), they can make only so many dollars in loans.  If they want to make more loans, they have to increase their assets.  If they reduce the amount of assets they have, they also have to reduce the amount of their loans.

Mark-to-market is a new accounting rule that says this:  That $1 million in assets? It is what those assets are worth now, not what you paid for them.

Warren Buffet is arguing that although mark-to-market is a fine rule for the financial statements, it should not be used to kick in regulatory requirements.  In other words, if your $1 million in assets drops in value to $750K, by all means report the loss in value on your annual report.  But don’t let the bank be required to generate $250K in new assets all on a moment’s notice, because chances are the dip in market value is going to come back up before you know it, and everything will be fine.

I think he’s mostly right here.  You can’t run any operation living and dying on the blippiness of changing market values.  But, if [if – note the if] Buffet is arguing that the bank can go on as if nothing happened while waiting for a rebound, I think that’s not quite right.

***

Here’s a similar example that is more concrete, to help you see what I’m saying:

Suppose you bought a house for $200K, and you paid for it cash. [Try not to laugh.  We’re pretending.]  You own it outright, no mortgage, it’s all yours.

So then you go to the bank, and based on the value of this house, you get a $200K home equity loan.  A loan that is secured by your house.  If you don’t pay back your loan, the bank gets your house.

Now imagine that the housing market tumbles [I see you aren’t laughing now], and your house is only worth about $100K.  We can’t be entirely sure of its market value, since you aren’t trying to sell it, but that’s a reasonable estimate of what you could get if you had to sell the thing right now.

–> Which means you now have a $200K loan, secured by a house worth only $100K.

What should the bank do?  Should they require you to quick pony up another $100K in assets or else declare you bankrupt?  Or should they continue to act as if your home is still worth $200K, and let you borrow freely based on that value?  After all, sooner or later the market will probably turn around and your  home’s value will go back up again.

They should do neither.  Declaring you bankrupt is nonsense.  Chances are you are just going to pay off your home equity loan as previously planned, your house was only really there as insurance in case something happened.  –> This is the argument against regulatory mark-to-market.  Forcing the banks to behave like they are bankrupt when really they are not is causing all kinds of financial havoc.  Not good for the economy, the bank, or anyone, anymore than suddenly calling in that $200k home equity loan would make sense in our example.

BUT, you can’t ignore reality.  Your house just dropped in value big time.  Who knows why.  Maybe it’s a cyclical downturn or the result of some temporary panic, and everything will be back to normal before you know it.  Or maybe you paid way way too much for the thing, and if your banker had taken one look at it you’d never have gotten that loan.  Or something else — an earthquake just opened a huge sinkhole in your driveway, gangsters are building a compound next door, who knows.

–>  All kinds of things can affect the value of a house, or any other asset; some of them are real changes, others are just the vagaries of the market.  Some will be easily rectified, others will cause a permanent loss in value.

What should the bank do? Let you pay down your line of credit.  At a normal manageable rate.  And once your outstanding debt matches the current value of your house, all is good again.  Doesn’t really matter, from a regulatory perspective, whether it is because your home’s value rebounds or because you reduce your overall loan.  The important thing is that your financial situation reflects reality.

***

This is where our banks need to be with mark-to-market.  Use mark-to-market as a tool to guide what the bank ought to do next.  When assets drop too low, no need to declare bankruptcy, but it is time to put the brakes on future lending until the situation balances out again.

Warren Buffet is absolutely right, it is unreasonable and imprudent to ask banks to magically conjure up new assets out of thin air whenever the market takes one of its habitual dives.  He knows very well that usually things turn around, usually it will work out in the end if you just sit tight.

But at the same a time, you can’t use ‘it’s just a little downturn’ as an excuse to allow a bank to be in way over its head, continuing to make loans based on what used to be true, but is no longer.

–>  If you put together a reasonable mechanism for adjusting to changes in asset values, if the situation really is a temporary market downturn, quickly enough it’ll sort itself out, and you can go back to lending-as-usual.  But if it turns out that your assets really do have permanent loss in value, you have begun to make the necessary changes to get your financial situation back in balance.

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This, by the way, is a gratuitous econ post.   A little lenten penance for you.  We’re still on schedule for my hopeless review of Church and State in the Middle Ages come Friday.  Or the day that will be called Friday for blogging purposes, regardless of what the so-called ‘calendar-value’ of that day appears to be.

Wealth, Money, Stimulus

High time we got back to economics.  Naturally I’ve been generating plenty of opinions on the economic situation even as I sit on my hands these last couple of months.  Today, the deluge.

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Review: What is wealth? Recall that economics is the study of how to use limited resources to meet unlimited wants and needs.  Wealth, then, is what helps meet those needs.  Food comes to mind.  Houses. Clothes.  Toys.  Medical care.  An afternoon spent rolling in the maple leaves.  These are kinds of wealth.

We work to increase our wealth. We increase our wealth by taking something we value less, adding human labor, and turning it into something we value more.  A packet of seeds and a patch of dirt, turn it into food.  A pile of lumber, turn it into a bookshelf.  Knit a sweater, write a story, build a car, put a trail through the woods or a road through the prairie, whatever it is we want.

–>  And sometimes we just work, or refrain from working, in order to preserve or enjoy the wealth given to us.   Clean water, mountains, beaches, creeks, swamps — these things meet a need we have.  We don’t make them, we just do our best to maintain them and avoid destroying them.  They are a most definitely a kind of wealth, as real estate prices make clear.

Wealth-generation versus busyness. Not all work generates wealth.  Think of digging a ditch and then filling it back in.  Or filling out a long complicated tax form.  Aside from the zen exercise, I argue that no wealth has been generated by your busyness.  Opportunity cost is part of this equation.  It isn’t that the ditch-digging wasn’t helpful for building muscles or teaching patience, or that the tax form didn’t grow your mental powers.  But the same amount and type of work would have generated so much more wealth if you had devoted that time and energy to doing something that was actually wanted.

–> Wealth depends on *wanting* what you produce.  Okra comes to mind.  A treasure house of okra does very little to meet my unlimited wants and needs.  Perhaps not so for you.  But for me, please, make it tomatoes.

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Where does an economic crisis come from?

We’re having one.  And understanding where the crisis comes from is the first step in trying to resolve it.  Oh, I don’t know either.  But today we’ll talk about the general principles, and maybe that will give us some clues.

Two broad sources of economic crisis:

A tremendous loss of wealth. Either the destruction of what you currently have, or a failure to be able to produce what you normally require.  Hence the traditional sources of economic crises:  disease, famine, crop failure, war, corruption, earthquake, flood, tsunami, fire, etc. etc.  What you have is destroyed.  You are poorer.  Or what you need — say, food — you cannot produce.

Have we experienced this lately?  I think so.  Quite a few wars going on just now, and the US is involved in a couple of them.  Expensive and destructive.  Not too mention the tying up of labor and resources that could be spent actually producing wealth.   More expensive than not going to war?  We could argue all night.  But consider the possibility at least that our current wars are costing us wealth.  Worth the cost?  Perhaps.  But let us not be surprised if the spending of our wealth makes us poorer — even if we are happy to be poorer.

(It is okay to spend one kind of wealth – say, lives, tanks, fuel, food — to get another, say, peace.  But just don’t be surprised when you are short on the one if you’ve gone and spent it.)

You may also recall the last several years were busy for natural disasters.  Can’t lose the bulk of the Gulf coast to hurricanes and not be poorer for it.  Easy to look at the busyness of re-building and think how swimmingly the economy is going — and forget that all the busyness is the work of replacing what was lost and destroyed.  All that work is to replace lost wealth, not to generate new wealth.

Plenty more examples.  –>  We should consider that at least part of the reason we feel so poor lately, is that we are so poor.  If so, part of the solution is stop the causes of on-going loss, and then to generate new wealth.  To the extent that loss is unavoidable, we have to accept our poverty.  Which brings me to the other source of economic ‘crisis’:

Fantasy exceeding Reality. All this talk of ‘bubbles’ and ‘speculation’, is mostly this. But think first about your personal life.  Ever have a time when your imagination takes you one way, and later you discover reality was the other direction?  A crisis results . . .

It is, say, the end of the day and the house is a wreck and suddenly there is a whirlwind-of-cleaning-crisis because you have a big mess and neither time nor energy to fix it.  Much yelling at children and bickering with the spouse.  (Ahem.  This is, of course, a purely theoretical example.) The fantasy of ‘we’ll clean it up later’ collides with the reality of ‘I should have started cleaning sooner’.

Financially we do the same.  You take out loan on the expectation that future income will come in to help you pay the bill.  Or you spend today’s income on new clothes and a family vacation, and forget that you needed to set aside that cash for the emergency fund or the kids’ college.  When reality intervenes, you are stuck with a loan or expenses you can’t pay, and you have a ‘crisis’.

This can happen on a national scale, too.  We borrow today for a spending program, sure that tomorrow’s income will allow us to pay it back.  Well, if we as a nation don’t generate the wealth to pay back our loans, we end up in a crisis.

–> It is easy to deceive ourselves about these ‘crises’.  I’m sure I would have had the house clean if only the baby hadn’t picked just this moment to take up cooking.  Well, perhaps, but how many children must you have before you learn what it is toddlers do, and plan accordingly?  Likewise, financially, surely you knew that the kids were going to grow up and want to go to college?  Surely you considered the possibility that you wouldn’t get the raise, that your car might break down, that the hot water heater might go out . . . we can’t plan for every disaster, but a certain amount of turmoil?  It’s going to happen, you’ve got to allow for it.

Nationally, just as likely.  Big spending programs built on best-case-scenarios are going to leave us crunched for cash when the best-case doesn’t happen.

And one other source of economic woe: Poor distribution of resources. Nobody go running for Das Kapital.  But, but, but: how wealth is spread around society does have its impact.  The well-being of the economy — that is, how well our resources are being used to meet human needs — is measured not only on by the average-well-being, but by the well-being of each individual.  What with society being made up all these individual human beings.

I mention this just to give you one more clue to consider.  Compared to other countries, I think the US does pretty well — not as well as I’d like, but better than we could.  Still, when looking for ways to improve the economy, look at your tax code, your inheritance laws, your education system, your health care practices, your wage laws, your lending laws: How do these impact the flow of wealth?  Do they help the poor end of society make at least a modest living?  Do they encourage enterprise?  Do they encourage us to make good use of resources, or are there bizarre incentives towards wastefulness?

–> One of the results of our specialized economy, is that in a crisis, a portion of the people end up with nothing. As they said during the great depression, if you had a job, you were fine.  Specialization of labor is a good thing — we end up wealthier as a society, and for the most part, as individuals as well.  But if we are going to enjoy the benefits of specialization, we also need to make provision for the unemployed.

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What about the complicated financial situation?

Remember that money is backed by the wealth of the nation.  Even in a gold-based economy, that hunk of metal is not being passed around because of its own inherent worth (gold is useful, but not that useful), but as a token to represent the wealth of its owner.

Yes,  yes, you can really mess up a financial system through poor management of your coin-minting process. Yes, look at your financial system and figure out what needs to be done better. And I’ll say right here that the FDIC did just what it was meant to do, and prevented a massive run on the banks.  Good job.

–> But make sure you aren’t looking at the mess in the financial markets, and blaming the market, rather than the economic situation it represents.  I’m reminded of last fall when everyone was lamenting that you couldn’t get approved for a car loan as easily as a year earlier.   All the sudden you could only get approved for a car you could actually afford.  Nothing wrong with that particular financial market, except that it hadn’t come to its senses sooner.

I do think our current financial-system-practices encourage the whole fantasy life problem.  Don’t know what to do about it, though.  The same financial instruments that cause such temptation and disaster when abused really are good and useful in their place.

I expect there is a need for reform here and there.  Certainly transparency is a great help in protecting investors.  Mostly though I’m afraid that the push is to rescue companies whose only ‘crisis’ is poor business practices.   To a certain extent, you have to live with the pain of your thoughtless actions, and take responsibility for your own misguided choices.

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So about that stimulus package . . .

You be the judge.

Does it provide for the basic needs of the unemployed?

Does it address wealth-drains, such as corruption and bureaucratic complexity?

Where it invests, is it to produce infrastructure or goods that are truly needed?    Is it careful to limit spending so that we aren’t blindly putting out okra and moving piles of dirt left and right in the quest for busyness, but with no check for whether our work will produce actual wealth?

Does it encourage private investment and enterprise?

–>  Does it limit government spending only to areas where there is real reason to believe the private sector can’t or won’t  step in to address true wants and needs? Does it avoid excess spending, so that capital markets have funding available to lend to businesses?

Is it based on realistic expectations for our ability to pay back the government’s loans later?  Or are we signing ourselves up for an economic ‘crisis’ down the road, when we are forced to face the sad truth that we are not as wealthy as we had expected?

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Enough for this month.  Next week: Review/report on Requiem Press’ Church and State in the Middle Ages.  Ha, dismal sciences everywhere.

About that international dateline . . .

I’m looking at my schedule for the weekend, and estimating that ‘Friday’ will show up on this blog sometime Monday afternoon.

Meanwhile, my thought for the weekend:

How ’bout a square-feet-per-occupant guideline on that housing bailout?  Not persuaded that the bailing-out is the best way to proceed.   (Said by a person who is very keen on affordable housing and owner-occupied housing.)  But I’m certainly sympathetic to those who were faced with the choice of ‘if you want to own a home, you have to buy at this ridiculous price’.   We were fortunate not to have needed to relocate during the big bubble.

So my thought is this: If I am going to be subsidizing your housing, I would like it to be reasonable housing.  Kind of rankles to imagine someone went out and mortgaged a McMansion, and I have to pay taxes to make sure the poor folks don’t have to downsize to a house like . . . mine.  Just envy speaking, don’t mind me.

Plus I’m curious to see what the government would come up with as a ‘normal’ home.