Andrew Samwick:

Government bureaucrats don't reduce costs. Market competition reduces costs. The challenge for health care reform is to get the market competition into the places where we want it -- providers and insurers competing to deliver better services at lower prices -- and out of the places where we don't want it -- insurers competing to insure only the lowest risks and providers gaming the government reimbursement systems to earn the highest profits.

Susan of Texas:

Government might possibly keep [one] safe and therefore the billions wasted are money well-spent. [One] graciously permits the government to police [one's] bar-hopping, repair the roads [one] drives on, clean [one's] water and deliver it to [one's] door, remove [one's] bodily waste, treat it, and release it far from [one's] view.

The government hauls away [one's] garbage, keeps [one's] lights on, pumps natural gas into [one's] water heater, for far less money than it would cost if [one] had to do it on [one's] own. It keeps food manufacturers from poisoning [one], and inspects the restaurants [one] visits, the buildings [one] lives and works in, the cars that whizz by [one] on the freeway. It created the internet [one] works on, and much of the medication and vaccines [from which one] has benefited. It educated most of the people who fix [one's] dishwasher, [one's] car, [one's] hair, [one's] dog. All of that is perfectly okay. But health care for people drowning in rising premiums?...[T]here the benefits must stop, there the line must be drawn.[emphasis mine]

Following up on Robert's post (he started later and finished earlier):

Dr. Black:

[T]he idea that all this came about simply because the banksters decided a bit of extra risk was good is an idea only a macro finance person could sanely entertain.

All right, I represent that remark in more ways than one. So let's Tell the Truth, Shame the Devil, and make the case for Financial Intermediation—all while agreeing with him that Geithner's statement is absurd.

(For my next trick, I'll spin plates on poles and juggle cutlery while riding a unicycle. You might want to stay clear of the area for a while)

So let's talk about weather derivatives, the driving habits of government employees, and Miss Spider's Sunny Patch below the break.



It was 1993, I think, when Richard Sandor gave the closing presentation at the ISDA Conference in Washington, D.C. Sandor was enthusiastic; there was finally enough weather trend data that you could model damage expectations for an area and reasonably estimate, for instance, the likely exposure of an insurance company to hurricane or tornado damage.

We may not be able to do anything about the weather, but we can do something about managing the risk associated with it.

Sandor's argument was, in short, That's what we do. We manage risk.

Contrast that with the story of GEICO, the current crown jewel of Berkshire Hathaway. GEICO started as an insurance company dedicated to Government Employees. It started that way for a reason, and the reason has everything to do with risk. Because GEICO management looked at the data and realised what anyone who thinks about it for a second will already know: government employees are safer drivers than the rest of the population.

They are safer drivers because they are more risk-averse. They take a job with, as a rule, lower pay than they could get in the public market, but better security. They prefer stability. Short version: they are risk averse.

Therefore, they are safer drivers than the general populace (who don't want to be stuck behind them when they are time-dependent).

SO when Brad DeLong says:

I think the private-sector players in financial markets right now are highly risk averse--hence assets are undervalued from the perspective of a society or a government that is less risk averse.

my immediate response is at best Inigo Montoya ("I do not think those words mean what you think they do") and at worst a version of Nelson Algren's amendment of Thackeray ("That's Not the Way to Bet").

Because risk management means managing risk, not just taking chances. Hitting on 17 in blackjack isn't the way to get rich. Paying $50 for something that is worth $35 to you isn't the way of getting rich.

And, worse, it isn't the way to get capitalism working again.

Because sooner or later, the professionals have to take over again.

The kids were watching Miss Spider's Sunny Patch this weekend, an episode where the young Dragonfly flies for the first time, accompanying a bunch of "Daredevil" dragonflies. They fly for a while and then the whole place gets covered in fog. The daredevils find a place to sit and wait. The youngster keeps chiding them: "C'mon, I thought you guys were Daredevils."

The Daredevils explain, roughly, that they don't fly without knowing where they are going.

Unlike, apparently, the U.S. Treasury.

Robert already dealt with the basic illiquidity of the market. So let's talk about Price Discovery, but this is getting long even for me, so...

CONTINUED ON NEXT ROCK

My Loyal Reader notes that the economic survival of Zimbabwe's current government is now largely dependent on sin taxes:

As he presented his revised 2009 budget to parliament, Finance Minister Tendai Biti noted that "indirect taxes made up of customs and excise duty have contributed 88 percent of government revenue, which means that the government has been literally sustained by beer and cigarettes."

Those who are planning to "go Galt" will need also to Sin No More.

I promise to try posting more this weekend, but this one is just too good to pass up.

Since most people don't know it beyond three to six digits, today, 14 March (14.03)—er, oops, March 14 (3.14)—has been officially designated "Pi Day."

Ten Republicans voted against the (purely symbolic) designation:

1. Chaffetz
   
2. Flake
   
3. Heller
   
4. Johnson (IL)
   
5. Miller (FL)
   
6. Neugebauer
   
7. Paul
   
8. Pence
   
9. Poe (TX)
   
10. Shuster

In fairness, I note that 30 Representatives (24 Dems, 6 Reps, and the total only comes to 431 so a few bodies appear to be vanished) did not vote, but 10 went to the explicit effort to signal their opposition to the motion, including Mike Pence, who is from the only state that ever did make a concerted effort to define Pi as 3:

In 1897 the Indiana House of Representatives unanimously passed a measure redefining the area of a circle and the value of pi....The bill died in the state Senate.

Happy Pi Day!

Willem Buiter, whose early posts at Maverecon were the epitome of restraint, calls for nationalisation:

By throwing cheap money with little conditionality at the banks, the Fed and the US Treasury may get bank lending going again. By subsidizing new capital injections, they reward bad porfolio choices by the existing shareholders. By letting the executive leadership and the board stay on, they further increase moral hazard, by rewarding failed managers and boards that have failed in their fiduciary duties. All this strengthens the incentives for future excessive risk taking.

There is a better alternative. The alternative is to inject additional capital into the banks by taking all the banks into full public ownership. With the state as sole owner, the existing top executives and the existing board members can be fired without any golden handshakes. That takes care of one important form of moral hazard. Although publicly owned, the banks would be mandated to operate on ordinary commercial principles. Managers could be incentivised by linking remuneration to multi-year profitability. The incentives for excessive liquidity accumulation and for excessively cautious lending policies that exist for partially nationalised banks and for banks fearing nationalisation would, however, be eliminated.

He also addresses the sticking point on the formation of the "bad bank": if the government already owns the assets, the sale price becomes an accounting question. Not that that is necessarily good, but at least it limits some of the profiteering.

Read the whole thing.

Via Krugman, who was via Robert.

Ken Houghton

CR beat me to commenting on this Mankiw whine post, partially because I couldn't think of anything reasonable to say about it. (CR could. That's why he gets the big bucks.)

But now that CR has done the heavy lifting, let's look at the other aspect: Mankiw's standard:

Based a standard ranking of economists' academic accomplishments as of October 2008...[emphasis mine]

11. Larry Summers
21. Greg Mankiw
35. Ben Bernanke
99. Eddie Lazear
132. Glenn Hubbard
249. Harvey Rosen
391. Christy Romer*
653. Austan Goolsbee

[emphases Mankiw's; Bush administration officials]

Leaving aside whether the ranking used makes sense, we ask the next question: What does this have to do the performance of the individual in a government role?

So I realised we've been thinking about the Obama Administration in exactly the wrong way.

Several people are referencing the late David Halberstam's The Best and the Brightest, a biography of the Kennedy Administration's well-educated pedigree and their policy missteps. Krugman used it as a cautionary phrase in the exact post about which Mankiw whimpered. As John McCain once wrote:

The term "best and brightest" has become an insult, not an accolade, thanks largely to Halberstam's magnificent, scabrous epic about the policymaking blunders that swept the United States into Vietnam. This classic work is part of the Vietnam canon, but it is not really about Vietnam; it is very much a Washington book, focused on the surety of the hawks stateside rather than the misery and warfare in Indochina. [italics mine]

But look at (most of*) Obama's picks:

Orszag - Currently at the OMB. Prior experience at CEA, and then as a Special Assistant to the President during the Clinton Administration.
Summers - veteran of the Clinton Administration
Geithner - veteran of the Clinton Administration
Paul Volcker - veteran of the Carter and Reagan Administrations, named Chair of the Federal Reserve by Carter.
Melody Barnes - Eight years as Chief Counsel to Senator Kennedy on the Senate Judiciary Committee
Heather Higginbottom - Eight years as legislative director for Senator Kerry

The list goes on, but what is notable is that—with the exceptions of the Advisors Goolsbee and C. Romer—all have extensive government policy experience.

Let's look at the Bush people:

Mankiw - columnist for Fortune, textbook author. As Bruce Bartlett noted in 2003, "Mankiw endorsed the election of George W. Bush because, unlike Al Gore, he would cut taxes, reform Social Security and antitrust policy, and try to implement school choice." Spent one year as a CEA staff member—twenty years prior to being named CEA Chair.
Lazear - No policy-making experience prior to being named to the CEA.
Hubbard - No policy-making experience prior to being named Chair of the CEA.
Harvey S. Rosen - Deputy Assistant Secretary (Tax Analysis), Department of the Treasury, 1989-91, then no government experience again until named to the CEA in 2003. (Fairness note: the interim is largely a Democratic Administration. No indication what he did from 1991 to 1993, save possibly returning to Princeton to teach). Note that he officially did exactly that in 2005, though he had warned that might happen.

Comparing the actual policy experience of the two Administrations, references to Halberstam's work are much more applicable to the Bush Administration than the incoming Obama Administration.

Despite having a relative disadvantage in looking for people with policy-making experience (eight years with a Democrat in the executive branch over the past 28 years v. Bush's twelve of the previous twenty), the Bush Administration's combined highlights list has less total experience in policy-making than Summers alone.

Knowing how to make sausage is a Comparative Advantage when one is working in a sausage-making environment. Otherwise, you just end up with a "hack."

*Mankiw uses Greg and Ben and Eddie as well, so I assume the use of "Christy" is not meant to pejorative. Firedoglake's mileage may vary.
**Goolsbee is the notable exception, and he is in a Senior Advisory role, specifically the Economic Recovery Advisory Board, where he will be working with Paul Volcker.

Ken Houghton

CR beat me to commenting on this Mankiw whine post, partially because I couldn't think of anything reasonable to say about it. (CR could. That's why he gets the big bucks.)

But now that CR has done the heavy lifting, let's look at the other aspect: Mankiw's standard:

Based a standard ranking of economists' academic accomplishments as of October 2008...[emphasis mine]

11. Larry Summers
21. Greg Mankiw
35. Ben Bernanke
99. Eddie Lazear
132. Glenn Hubbard
249. Harvey Rosen
391. Christy Romer*
653. Austan Goolsbee

[emphases Mankiw's; Bush administration officials]

Leaving aside whether the ranking used makes sense, we ask the next question: What does this have to do the performance of the individual in a government role?

So I realised we've been thinking about the Obama Administration in exactly the wrong way.

Several people are referencing the late David Halberstam's The Best and the Brightest, a biography of the Kennedy Administration's well-educated pedigree and their policy missteps. Krugman used it as a cautionary phrase in the exact post about which Mankiw whimpered. As John McCain once wrote:

The term "best and brightest" has become an insult, not an accolade, thanks largely to Halberstam's magnificent, scabrous epic about the policymaking blunders that swept the United States into Vietnam. This classic work is part of the Vietnam canon, but it is not really about Vietnam; it is very much a Washington book, focused on the surety of the hawks stateside rather than the misery and warfare in Indochina. [italics mine]

But look at (most of*) Obama's picks:

Orszag - Currently at the OMB. Prior experience at CEA, and then as a Special Assistant to the President during the Clinton Administration.
Summers - veteran of the Clinton Administration
Geithner - veteran of the Clinton Administration
Paul Volcker - veteran of the Carter and Reagan Administrations, named Chair of the Federal Reserve by Carter.
Melody Barnes - Eight years as Chief Counsel to Senator Kennedy on the Senate Judiciary Committee
Heather Higginbottom - Eight years as legislative director for Senator Kerry

The list goes on, but what is notable is that—with the exceptions of the Advisors Goolsbee and C. Romer—all have extensive government policy experience.

Let's look at the Bush people:

Mankiw - columnist for Fortune, textbook author. As Bruce Bartlett noted in 2003, "Mankiw endorsed the election of George W. Bush because, unlike Al Gore, he would cut taxes, reform Social Security and antitrust policy, and try to implement school choice." Spent one year as a CEA staff member—twenty years prior to being named CEA Chair.
Lazear - No policy-making experience prior to being named to the CEA.
Hubbard - No policy-making experience prior to being named Chair of the CEA.
Harvey S. Rosen - Deputy Assistant Secretary (Tax Analysis), Department of the Treasury, 1989-91, then no government experience again until named to the CEA in 2003. (Fairness note: the interim is largely a Democratic Administration. No indication what he did from 1991 to 1993, save possibly returning to Princeton to teach). Note that he officially did exactly that in 2005, though he had warned that might happen.

Comparing the actual policy experience of the two Administrations, references to Halberstam's work are much more applicable to the Bush Administration than the incoming Obama Administration.

Despite having a relative disadvantage in looking for people with policy-making experience (eight years with a Democrat in the executive branch over the past 28 years v. Bush's twelve of the previous twenty), the Bush Administration's combined highlights list has less total experience in policy-making than Summers alone.

Knowing how to make sausage is a Comparative Advantage when one is working in a sausage-making environment. Otherwise, you just end up with a "hack."

*Mankiw uses Greg and Ben and Eddie as well, so I assume the use of "Christy" is not meant to pejorative. Firedoglake's mileage may vary.
**Goolsbee is the notable exception, and he is in a Senior Advisory role, specifically the Economic Recovery Advisory Board, where he will be working with Paul Volcker.