Wednesday, November 30, 2005
Moral Hazard at its Finest
A few weeks ago I taught my "Economics and Public Policy" class about moral hazard. Moral hazard occurs when the actions of one party to a transaction are hidden from the other party so that those actions may be taken against the interest of the party that can't see them. The most common example is people who have health insurance behaving in unhealthy ways while the insurance company would rather they take care of themselves.
The savings and loan crisis of the late 1980s was another example of moral hazard. Savings and loans, knowing that their losses would be covered by the government made very risky investments (these are the hidden actions), lost their money and the government (and taxpayers) took a financial bath.
We are on the cusp of an even greater crisis as a result of moral hazard. Last weekend the Times reported that pension managers are increasingly investing in unregulated hedge funds. Like the S+L's, pensions are insured by the government. If the pension plan defaults, then the government picks up the tab for the workers whose money has been gambled away. As more and more companies doubt their ability to meet their pension obligations, they are taking bigger and bigger risks. More and more are defaulting leaving the Pension Benefit Guaranty Corporation with the bill.
Republicans typically recognize the moral hazard problem that government insurance creates and hence want to minimize the level of insurance. However denying government insurance is not really credible as the political pressure to take care of defrauded pension beneficiaries will be great. The best the government can do is provide the insurance (and create the moral hazard problem) and then restrict pension managers abilities to make particularly risky investments (to minimize the effects of the moral hazard problem).
However, as the article details, Congress is actually making it easier for pension funds to lose the money they owe their beneficiaries by raising the limit that can be invested in hedge funds. This has all the makings of a financial disaster. Coupled with the crisis in Medicare on the horizon and the questionable future of social security, my generation needs to think very seriously about how we will finance our retirements. The government and private pension plans may not be able to help us.
The savings and loan crisis of the late 1980s was another example of moral hazard. Savings and loans, knowing that their losses would be covered by the government made very risky investments (these are the hidden actions), lost their money and the government (and taxpayers) took a financial bath.
We are on the cusp of an even greater crisis as a result of moral hazard. Last weekend the Times reported that pension managers are increasingly investing in unregulated hedge funds. Like the S+L's, pensions are insured by the government. If the pension plan defaults, then the government picks up the tab for the workers whose money has been gambled away. As more and more companies doubt their ability to meet their pension obligations, they are taking bigger and bigger risks. More and more are defaulting leaving the Pension Benefit Guaranty Corporation with the bill.
Republicans typically recognize the moral hazard problem that government insurance creates and hence want to minimize the level of insurance. However denying government insurance is not really credible as the political pressure to take care of defrauded pension beneficiaries will be great. The best the government can do is provide the insurance (and create the moral hazard problem) and then restrict pension managers abilities to make particularly risky investments (to minimize the effects of the moral hazard problem).
However, as the article details, Congress is actually making it easier for pension funds to lose the money they owe their beneficiaries by raising the limit that can be invested in hedge funds. This has all the makings of a financial disaster. Coupled with the crisis in Medicare on the horizon and the questionable future of social security, my generation needs to think very seriously about how we will finance our retirements. The government and private pension plans may not be able to help us.
Monday, November 28, 2005
Back From Baby Care
When my son was born last winter, I noted that I would likely be posting less frequently. To my surprise, the change was not dramatic, going from posting every 2 or 3 days to every 3 or 4. Well the level of busyness anticipated at that point may have finally hit.
I expected to post entries here a few times over the past week. After all, we were not traveling and I was taking a few days off from work. In addition, my wife and I are sharing care of the boy. Unfortunately the boy (or the boss as I like to call him) has entered a new stage. It is the "entertain me" stage. While he is capable entertaining himself for minutes at a time he does so much better if he knows we are keeping an eye on him.
And when he is not in one of those "oh I'll just bang my cups together" moods he is a high consumer of attention. He gets bored easily unless he is trying to do something that he is not supposed to, like open the refrigerator or attack the dog, the preventing of which of course requires more energy from his parents than playing with him.
So the Thanksgiving weekend quickly flew by. And while he indeed took naps and goes to bed at a reasonable hour, that time was spent recovering rather than blogging. I never thought I would take a nap at 10 am but my wife and I each took three in the past week. By 9 pm we were exhausted and settled for watching a half hour tv show (usually the wonderful Curb Your Enthusiasm) on dvd rather than a movie.
The past week has given me an even greater appreciation for those who provide child care effectively. We recently switched centers and are now at one that does a very good job of taking care of our little boy. Given that our son wears us out, I can't imagine caring for three or four like him. It is a harder job than being a professor that's for sure.
Of course, while I have some relief at actually coming to work today, I was quite sad when I left him and my wife at home this morning. For all the exhaustion, it's worth every tiring minute.
I expected to post entries here a few times over the past week. After all, we were not traveling and I was taking a few days off from work. In addition, my wife and I are sharing care of the boy. Unfortunately the boy (or the boss as I like to call him) has entered a new stage. It is the "entertain me" stage. While he is capable entertaining himself for minutes at a time he does so much better if he knows we are keeping an eye on him.
And when he is not in one of those "oh I'll just bang my cups together" moods he is a high consumer of attention. He gets bored easily unless he is trying to do something that he is not supposed to, like open the refrigerator or attack the dog, the preventing of which of course requires more energy from his parents than playing with him.
So the Thanksgiving weekend quickly flew by. And while he indeed took naps and goes to bed at a reasonable hour, that time was spent recovering rather than blogging. I never thought I would take a nap at 10 am but my wife and I each took three in the past week. By 9 pm we were exhausted and settled for watching a half hour tv show (usually the wonderful Curb Your Enthusiasm) on dvd rather than a movie.
The past week has given me an even greater appreciation for those who provide child care effectively. We recently switched centers and are now at one that does a very good job of taking care of our little boy. Given that our son wears us out, I can't imagine caring for three or four like him. It is a harder job than being a professor that's for sure.
Of course, while I have some relief at actually coming to work today, I was quite sad when I left him and my wife at home this morning. For all the exhaustion, it's worth every tiring minute.
Saturday, November 19, 2005
The Politicization of War
If the use of torture and the denial of basic constitutional rights is my least favorite thing done by this Administration, then the use of national security to demonize those who disagree with you comes in second. This week Rep. John Murtha (D-Pa) called for the withdrawal of troops from Iraq. While I do not agree with this position, it is certainly something worth debating in good faith.
The Bushies and their allies in Congress instead used the Murtha proposal to continue their two week long attack on anyone who questions the rationale for the war, their use of intelligence to support the war, or current policy in Iraq. This attack basically is that anyone who dares criticize or investigate the Administration as compromising the safety of our troops and putting politics ahead of their lives. One member of Congress went so far as to call Murtha a coward (kudos to Republicans Henry Hyde and Curt Weldon for praising Murtha).
If the Bush Administration wants to attack those who put politics ahead of American lives then they should point the gun on themselves. The Iraq war was drummed up in the fall of 2002 to help Republicans in the midterm elections. The rush to war in the spring of 2003 was done so that a victory could be had well in time for the Bush reelection in 2004. We did not go in with enough troops because to do so would have entailed a draft and the huge political costs associated with one. There is no other convincing explanation for the timing behind the war.
Perhaps there was a legitimate case for going to war with Iraq at some point (I didn't think so then and don't now but I admit there were moments when I considered it). But those who questioned it then and those who question it now had the lives of the American troops and the security of Americans at home as their concern. To imply that they didn't smells of McCarthyism.
The Bushies and their allies in Congress instead used the Murtha proposal to continue their two week long attack on anyone who questions the rationale for the war, their use of intelligence to support the war, or current policy in Iraq. This attack basically is that anyone who dares criticize or investigate the Administration as compromising the safety of our troops and putting politics ahead of their lives. One member of Congress went so far as to call Murtha a coward (kudos to Republicans Henry Hyde and Curt Weldon for praising Murtha).
If the Bush Administration wants to attack those who put politics ahead of American lives then they should point the gun on themselves. The Iraq war was drummed up in the fall of 2002 to help Republicans in the midterm elections. The rush to war in the spring of 2003 was done so that a victory could be had well in time for the Bush reelection in 2004. We did not go in with enough troops because to do so would have entailed a draft and the huge political costs associated with one. There is no other convincing explanation for the timing behind the war.
Perhaps there was a legitimate case for going to war with Iraq at some point (I didn't think so then and don't now but I admit there were moments when I considered it). But those who questioned it then and those who question it now had the lives of the American troops and the security of Americans at home as their concern. To imply that they didn't smells of McCarthyism.
Wednesday, November 16, 2005
Torture and Access to Courts
The past week has found the Senate debating various measures about barring torture of enemy combatants and denying these combatants access to the judicial system. The torture ban passed 90-9 (as Jon Stewart pointed out, this means 9 Senators favor torture) and sets up a conflict with the Administration. The denial of access to the courts passed as well but has since been scaled back allowing detainees to appeal sentences greater than 10 years and their status as enenmy combatants.
More than the particulars of these measures or the politics surrounding them I want to ask the question, "Why the hell is this an issue?" While I'm happy to praise John McCain for shepherding the torture measure and resisting attempts to exempt the CIA, it is ridicculous that the Senate has to tell the Administration it shouldn't be torturing people. This is two years after Abu Ghraib, a year after Seymour Hersh's work for the New Yorker and yet there is still the need to have this measure?!?
As for the rights of detainees, access to the courts is about as fundamental a right as we have in our society. It's up there with freedom of speech and freedom of religion. The most murderous scumbags get their day in court and get to confront the evidence against them. The fact that the Administration has fought this principle and that a majority in the Senate (including unfortunately McCain and Joe Lieberman, two former favorites of mine) wants to compromise it is terrifying. What conservative instincts I have are libertarian in nature and this deeply offends them.
Most people utter the phrase "Innocent until proven guilty" without really thinking about it. Our society has decided for over 200 years that convicting an innocent man is worse than acquiting a guilty one. That's why jury verdicts have to be unanimous and the burden of proof is on the state. The restriction of access to the courts reverses this formulation and makes imprisonment of the innocent more likely. The torture policy raises the cost of imprisoning the innocent (and violates even the human rights of the guilty). Make no mistake about it, we have tortured innocent people.
Both of these debates hurt our soldiers should they get captured and compromise our ability to accomplish anything diplomatically. The veil of hypocrisy covers all of our rhetoric on democracy and human rights. Why should China listen to us? Why should Arab countries? It took 200 years of progress (and occasional steps backward) to earn a reputation as a superpower that was interested not just in its own power but rather in principles of freedom and fairness. It's only taken 5 to lose it. How long will it take to get it back?
More than the particulars of these measures or the politics surrounding them I want to ask the question, "Why the hell is this an issue?" While I'm happy to praise John McCain for shepherding the torture measure and resisting attempts to exempt the CIA, it is ridicculous that the Senate has to tell the Administration it shouldn't be torturing people. This is two years after Abu Ghraib, a year after Seymour Hersh's work for the New Yorker and yet there is still the need to have this measure?!?
As for the rights of detainees, access to the courts is about as fundamental a right as we have in our society. It's up there with freedom of speech and freedom of religion. The most murderous scumbags get their day in court and get to confront the evidence against them. The fact that the Administration has fought this principle and that a majority in the Senate (including unfortunately McCain and Joe Lieberman, two former favorites of mine) wants to compromise it is terrifying. What conservative instincts I have are libertarian in nature and this deeply offends them.
Most people utter the phrase "Innocent until proven guilty" without really thinking about it. Our society has decided for over 200 years that convicting an innocent man is worse than acquiting a guilty one. That's why jury verdicts have to be unanimous and the burden of proof is on the state. The restriction of access to the courts reverses this formulation and makes imprisonment of the innocent more likely. The torture policy raises the cost of imprisoning the innocent (and violates even the human rights of the guilty). Make no mistake about it, we have tortured innocent people.
Both of these debates hurt our soldiers should they get captured and compromise our ability to accomplish anything diplomatically. The veil of hypocrisy covers all of our rhetoric on democracy and human rights. Why should China listen to us? Why should Arab countries? It took 200 years of progress (and occasional steps backward) to earn a reputation as a superpower that was interested not just in its own power but rather in principles of freedom and fairness. It's only taken 5 to lose it. How long will it take to get it back?
Sunday, November 13, 2005
Onward to the Midterms
My students recently got their midterms back from me but Democrats and Republicans have already started studying for next year's midterms. The passing of this year's election means that the midterm election season has begun for those who are running and for those who watch the running.
The Times had an article about the conventional wisdom that the Democrats are poised to pick up a rash of seats and possibly even take control of the House of Representatives. Because one rarely writes articles confirming the conventional wisdom, the Times points out that the number of House districts likely to be competitive is very small making wholesale change unlikely.
This is true but it ignores two other factors. First, the low approval ratings for Bush and Republicans are affecting current recruiting for both Democrats and Republicans. Dems are finding it easier to recruit strong candidates that can run close races against incumbents and Republicans are having difficulty doing the same. This means that there are likely to be more competitive races next fall in Republican held districts than in Democratic ones.
Second, close races tend to all break one way or the other due to things that happen as the election approaches. This could mean that the Republicans (perhaps because of a terrorist attack or a stupid comment by a prominent Democrat) hold off many of the challenges or it could mean that the Democrats (because of high unemployment or continued problems in Iraq) win many of them. The Democrats need a pickup of 15 seats which is hard but not impossible. I put their chances at about 20%.
The Senate is easier to gauge because we know more about particular races. The Republican incumbents in Ohio and Pennsylvania will have problems holding their seats. If both these races go Democratic, then the Dems will have to pick up four more seats to have a majority. That means holding on to their vulnerable seats in New Jersey, Minnesota, and Maryland and winning Arizona, Nevada, Montana, Rhode Island, and Missouri (or 3 of 5 to bring the Senate to 50-50). Not very likely, probably less likely than taking the House back.
The Times had an article about the conventional wisdom that the Democrats are poised to pick up a rash of seats and possibly even take control of the House of Representatives. Because one rarely writes articles confirming the conventional wisdom, the Times points out that the number of House districts likely to be competitive is very small making wholesale change unlikely.
This is true but it ignores two other factors. First, the low approval ratings for Bush and Republicans are affecting current recruiting for both Democrats and Republicans. Dems are finding it easier to recruit strong candidates that can run close races against incumbents and Republicans are having difficulty doing the same. This means that there are likely to be more competitive races next fall in Republican held districts than in Democratic ones.
Second, close races tend to all break one way or the other due to things that happen as the election approaches. This could mean that the Republicans (perhaps because of a terrorist attack or a stupid comment by a prominent Democrat) hold off many of the challenges or it could mean that the Democrats (because of high unemployment or continued problems in Iraq) win many of them. The Democrats need a pickup of 15 seats which is hard but not impossible. I put their chances at about 20%.
The Senate is easier to gauge because we know more about particular races. The Republican incumbents in Ohio and Pennsylvania will have problems holding their seats. If both these races go Democratic, then the Dems will have to pick up four more seats to have a majority. That means holding on to their vulnerable seats in New Jersey, Minnesota, and Maryland and winning Arizona, Nevada, Montana, Rhode Island, and Missouri (or 3 of 5 to bring the Senate to 50-50). Not very likely, probably less likely than taking the House back.
Wednesday, November 09, 2005
Off Year Elections
It is extremely tempting to read a great deal into yesterday's off year election results. In 1993, Giuliani, Riordan, and Whitman, all Republicans, took the New York Mayor, LA Mayor, and NJ Governor races, and the next year was the Republican sweep of 1994. However in 1997 and 2001, the off year results had no predictive values regarding the following year's midterm elections. Therefore it is best to view each result in isolation. That doesn't mean they won't have national impacts, it just means we shouldn't spot trends just because of a couple of data points.
In my state of New Jersey, Jon Corzine successfully weathered a nasty campaign and voter hostility to Democratic corruption to become Governor. Corzine will enjoy being Governor more than being a Senator since he likes to be in charge of things. He may have a Presidential campaign in his future but it is far more likely to be in 2012 than in 2008. Even that is in doubt since he will have to accomplish a lot as governor in order to peel off the mud left on him as a result of this campaign. Of national interest is the question of who Corzine will appoint to replace him as a Senator. Tom Kean Jr. will be a strong Republican candidate next year and any Democrat besides acting Governor Codey will go into that Senate race as an underdog.
The most important result of the day may be the Governor's race in Virginia. Tim Kaine became the second Democrat to win election in a state that has voted Republican in the Presidential election since 1964. This may signal both the changing hue of Virginia from red to purple (i.e. a swing state). It may also signal the potential of previous Governor Mark Warner as a Presidential candidate. He is one of my early preferences for the Democratic nod in 2008.
The failure of election reform initiatives in Ohio was a disappointment. The most notable one would have taken redistricting out of the hands of the state legislature and put it in the hands of an independent commission. This is something that would greatly improve the quality of Congress and is something all states should consider. I know less about the other initiatives but from what I do know, it is unfortunate that they lost as well.
A similar reform lost in California. Gov. Terminator proposed four reforms there as well but the other three were clearly designed to weaken his political enemies. So while I am disappointed in the fate of the redistricting reform in California, the disappointment is tempered by knowledge of a sound political defeat for Ahhrnold. He now faces a battle for his political life in 2006 and it is one that may be beyond his ability to win.
In my state of New Jersey, Jon Corzine successfully weathered a nasty campaign and voter hostility to Democratic corruption to become Governor. Corzine will enjoy being Governor more than being a Senator since he likes to be in charge of things. He may have a Presidential campaign in his future but it is far more likely to be in 2012 than in 2008. Even that is in doubt since he will have to accomplish a lot as governor in order to peel off the mud left on him as a result of this campaign. Of national interest is the question of who Corzine will appoint to replace him as a Senator. Tom Kean Jr. will be a strong Republican candidate next year and any Democrat besides acting Governor Codey will go into that Senate race as an underdog.
The most important result of the day may be the Governor's race in Virginia. Tim Kaine became the second Democrat to win election in a state that has voted Republican in the Presidential election since 1964. This may signal both the changing hue of Virginia from red to purple (i.e. a swing state). It may also signal the potential of previous Governor Mark Warner as a Presidential candidate. He is one of my early preferences for the Democratic nod in 2008.
The failure of election reform initiatives in Ohio was a disappointment. The most notable one would have taken redistricting out of the hands of the state legislature and put it in the hands of an independent commission. This is something that would greatly improve the quality of Congress and is something all states should consider. I know less about the other initiatives but from what I do know, it is unfortunate that they lost as well.
A similar reform lost in California. Gov. Terminator proposed four reforms there as well but the other three were clearly designed to weaken his political enemies. So while I am disappointed in the fate of the redistricting reform in California, the disappointment is tempered by knowledge of a sound political defeat for Ahhrnold. He now faces a battle for his political life in 2006 and it is one that may be beyond his ability to win.
Sunday, November 06, 2005
Between Academics, Politics, and Policy
I spent the past few days at the Asoociation for Public Policy Analysis and Management (APPAM) conference in Washington DC. While the conference had many interesting papers and presentations, (including a fascinating one from this author) the presentation that I found most interesting was not based on any research or papers.
This presentation was given by my former political boss, John Graham, and Julian LeGrand, one of Tony Blair's top economic advisers. Both are former academics and they discussed the transition between the academic world and the political world (both were deliberately careful to avoid the phrase, "the real world" since both the academic and political worlds are often described as surreal or unreal).
LeGrand and Graham each made points that resonated with me. Graham noted that the policy analyst who wants to "do the right thing" is caught in a world with public affairs people, lawyers, and political folks. The analysts who are most successful are those who can convince these other constituencies that good public policy serves their interests. This may mean compromising on the "best" choice in order to get a good choice that is acceptable. Analysts who rigidly insist on their preferred policy often end up disappointed and quickly burnt out. This was one of the key lessons of my 5 years in the federal government.
LeGrand bemoaned the negative connotation of the phrase "political." Often academics (or even young policy analysts) who move to government positions complain about decisions made for political reasons. In a democracy however, these are the most important reasons to make many decisions. Even after the science is done and the economics is done, there is still room for decisions based on values. Those making these value-based decisions should be responsible to the voters. Academics and policy analysts who forget this do so both at the peril of their careers and at the peril of sacrificing democratic values for those of technocracy
This presentation was given by my former political boss, John Graham, and Julian LeGrand, one of Tony Blair's top economic advisers. Both are former academics and they discussed the transition between the academic world and the political world (both were deliberately careful to avoid the phrase, "the real world" since both the academic and political worlds are often described as surreal or unreal).
LeGrand and Graham each made points that resonated with me. Graham noted that the policy analyst who wants to "do the right thing" is caught in a world with public affairs people, lawyers, and political folks. The analysts who are most successful are those who can convince these other constituencies that good public policy serves their interests. This may mean compromising on the "best" choice in order to get a good choice that is acceptable. Analysts who rigidly insist on their preferred policy often end up disappointed and quickly burnt out. This was one of the key lessons of my 5 years in the federal government.
LeGrand bemoaned the negative connotation of the phrase "political." Often academics (or even young policy analysts) who move to government positions complain about decisions made for political reasons. In a democracy however, these are the most important reasons to make many decisions. Even after the science is done and the economics is done, there is still room for decisions based on values. Those making these value-based decisions should be responsible to the voters. Academics and policy analysts who forget this do so both at the peril of their careers and at the peril of sacrificing democratic values for those of technocracy
Wednesday, November 02, 2005
The Moment of Truth
Samuel Alito is apparently a nice guy. In a way, that is a shame because within the next month he is going to be a the center of the most controversial confirmation hearings since the "high tech lynching" of Clarence Thomas. As predicted, Bush went rightward with his Supreme Court pick and now the battle that both sides of the culture wars have been eagerly awaiting for over a decade has been joined.
And it has been joined of course for cynical reasons. While Bush will get accused of appointing Alito to reverse Roe v. Wade, the real reason is that he needs to shore up his conservative base and he needs a high profile fight to distract attention from Libby, Iraq, Miers, and the economy. I'm fairly sure that aside from his natural hatred of losing he doesn't really care very much how the fight turns out.
Unfornuately, that doesn't matter in terms of the decision to confirm Alito. While, despite the rhetoric, Roe is safe (there are still 5 pro-Roe votes on the court, not counting Roberts who is unclear), the Alito confirmation would cement a majority against affirmative action, government regulation of the economy, and individual rights in general. He has to be beaten for this reason.
While many have criticized the Democrats, I think they have had a largely successful session of Congress. They have stayed unified, defeated attempts to reform social security, won a compromise on appeals court judges, and denied the President several other initiatives. Their only real failure has been the bankruptcy bill. Yesterday's maneuver by Reid to force action on the Iraq war investigation was brilliant. Reid has been a great minority leader.
But all of that is meaningless if they don't win this one. And it won't be easy. They have to not only hold together the 44 Democrats but they have to convince the public that Alito's confirmation would be so bad for the country that at least 6 moderate Republicans feel pressure to vote with them. Alito's demeanor and a large scale press from the right will make this harder. Politically the Democrats can survive a well fought loss where the party sticks together. Policy-wise there is too much at stake to settle for that. The moment of truth for the Democratic party has arrived.
And it has been joined of course for cynical reasons. While Bush will get accused of appointing Alito to reverse Roe v. Wade, the real reason is that he needs to shore up his conservative base and he needs a high profile fight to distract attention from Libby, Iraq, Miers, and the economy. I'm fairly sure that aside from his natural hatred of losing he doesn't really care very much how the fight turns out.
Unfornuately, that doesn't matter in terms of the decision to confirm Alito. While, despite the rhetoric, Roe is safe (there are still 5 pro-Roe votes on the court, not counting Roberts who is unclear), the Alito confirmation would cement a majority against affirmative action, government regulation of the economy, and individual rights in general. He has to be beaten for this reason.
While many have criticized the Democrats, I think they have had a largely successful session of Congress. They have stayed unified, defeated attempts to reform social security, won a compromise on appeals court judges, and denied the President several other initiatives. Their only real failure has been the bankruptcy bill. Yesterday's maneuver by Reid to force action on the Iraq war investigation was brilliant. Reid has been a great minority leader.
But all of that is meaningless if they don't win this one. And it won't be easy. They have to not only hold together the 44 Democrats but they have to convince the public that Alito's confirmation would be so bad for the country that at least 6 moderate Republicans feel pressure to vote with them. Alito's demeanor and a large scale press from the right will make this harder. Politically the Democrats can survive a well fought loss where the party sticks together. Policy-wise there is too much at stake to settle for that. The moment of truth for the Democratic party has arrived.
