After months of preparations and negotiations, Senator Max Baucus, chairman of the Finance Committee, unveiled his health care bill on Wednesday morning. The three Republicans in the so-called Gang of Six working on the legislation with Senator Baucus have so far refused to endorse his proposal, though negotiations will continue.
We asked health analysts and economists for their reactions to the bill. What are its most notable strengths and flaws? Does it achieve the broad goal of health reform?
Jacob S. Hacker, political science professor
Michael D. Tanner, Cato Institute
Dean Baker, Center for Economic and Policy Research
Henry J. Aaron, Brookings Institution
Lisa Dubay, professor of public health
Karen Davenport, Center for American Progress
Maggie Mahar, health care fellow at the Century Foundation
Michael Chernew, health care economist
William H. Dow, former Council of Economic Advisers economist
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A Bad Bill
Jacob S. Hacker is a professor of political science at Yale and the author of “The Great Risk Shift: The New Economic Insecurity and the Decline of the American Dream.”
To be successful, health care reform has to be constructed on three strong pillars: personal responsibility, shared responsibility and shared risk. Unfortunately, all three of these pillars are dangerously weak in Senator Baucus’s proposed legislation. In the Sisyphean search for a grand bipartisan deal that will not occur, Senator Baucus has produced a bad bill that will leave too many Americans without affordable quality coverage and do too little to ensure health security over the long term.
Personal and shared responsibility means employers and individuals should be expected to contribute to the cost of their coverage. Yet this responsibility creates a countervailing obligation on the part of the government to ensure that workers and firms have a choice of good affordable coverage that offers security and stability.
This proposal would leave too many without affordable coverage and does too little to ensure health security.
The Baucus bill fails to meet this obligation. Not only are the federal subsidies for low-income and (especially) middle-income Americans inadequate, the standards for coverage are extremely weak. Larger employers could offer coverage with extremely high deductibles and limited benefits without penalty, which their workers would be required to take unless it was extremely expensive.
At the same time, the penalty that employers would face if they didn’t offer coverage would be minimal and levied only when they failed to cover workers eligible for subsidies, creating limited incentive for businesses to continue offering coverage and a perverse incentive to prefer higher-income workers.
The third pillar of reform, shared risk, requires a new national insurance exchange that allows workers without secure coverage to join good group health plans, including the choice of a public health insurance plan competing on a level playing field with private insurers. Instead of a public plan, however, Senator Baucus’s bill contains the largely untested — and almost certainly ineffectual — idea of encouraging new member-run health care “cooperatives” through $6 billion in federal loans and start-up funds.
As I have argued elsewhere at length, cooperatives are not a serious means of reliably achieving any of the public plan’s three critical goals: providing choice for consumers, creating competition for insurers and controlling costs over the long term. They are unlikely to get off the ground quickly or broadly, or to have any real effect on the cost and quality of care.
The Baucus bill should be dead on arrival.
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A Mouse on Steroids
Michael D. Tanner is a senior fellow at the Cato Institute and co-author of “Healthy Competition: What’s Holding Back Health Care and How to Free It.”
Sen. Baucus and his fellow Gang of Six negotiators have labored mightily and brought forth a mouse — a steroid-enhanced, misshapen mouse, but a mouse nonetheless. In fact, despite months of work, Senator Baucus has not actually produced a bill, but a 223-page summary of what he hopes a bill will contain. Unfortunately, without seeing actual legislative language, many questions still remain.
Here is some of what we know and don’t know:
The Good:
— The plan drops the idea of a government-run “public option” in favor of co-ops. Government involvement with these co-ops would essentially be limited to providing start-up grants. The co-ops are unlikely to have much, if any, impact on the cost or availability of health insurance, but are far preferable to a government run plan.
— The plan takes the first tentative steps toward allowing people to purchase health insurance across state lines. It would allow states to establish interstate compacts for insurance purchasing beginning in 2015. It would also allow insurers to develop national products that could be sold in any state. National plans would be exempt from state mandated benefits. This doesn’t go far enough, and risks simply transferring regulation and mandates from the state to the regional or national level, but a first read suggests it is a step in the right direction.
The Bad:
— The plan would force states to increase Medicaid eligibility to individuals at 133 percent of the poverty level, and to enroll single, childless adults. While the federal government would pick up some of the increased cost, states would be responsible for at least some of the increase, a provision that will undoubtedly strain already tight state budgets.
— While the employer mandate is much watered down, it is still there. The Baucus plan has no specific requirement for employers to provide insurance. But any employer who fails to do so would have to pay the cost of all subsidies that the government provides his or her workers to help them pay for insurance on their own, up to $400 per worker. Since it will ultimately be the worker who pays the mandate’s cost, through reduced compensation or reduced employment, the government will be giving the worker a subsidy with one hand, and taking it back with the other.
— The bill would cut payments to the Medicare Advantage program. In response, many insurers may stop participating in the program, while others could increase the premiums they charge seniors. Millions of seniors will likely be forced off their current plan and back into traditional Medicare.
The Ugly:
—The Baucus plan contains a heavily punitive individual mandate, a requirement that every American purchase a government-designed minimum insurance package. Failure to comply would result in a fine that could run as high as $3,800 for a family of four. Moreover, the mandate may not apply just to those without insurance today. While the summary says that those with “grandfathered” plans would not have to change their current plan to satisfy the mandate, it is vague about what qualifies as “grandfathered.” The summary also says that employer-provided plans would have to be changed within five years to comply with new insurance regulations, and that “grandfathered” plans would not be eligible for any subsidies. It is unclear, therefore, whether people will be able to keep their current plans.
— The Baucus plan imposes a 35 percent excise tax on health insurance plans that offer benefits in excess of $8,000. Insurers would almost certainly pass this tax on to consumers in the form of higher premiums. Roughly half of Americans, mostly middle-class, would be effected. There are also “fees” on prescription drug companies, medical device manufacturers, and clinical laboratories. This is simply a way of hiding taxes, and will result in higher health care costs that will be passed on to consumers.
Where’s the Cost Containment?
Dean Baker is an economist and co-director of the Center for Economic and Policy Research.
The big plus of the Baucus plan is that it will eliminate discrimination based on pre-existing conditions, which means that people will have real insurance. As it stands now, few people are really insured against serious illness since if they get sick, they will lose their job and then they will lose their insurance. The Baucus bill would effectively allow people to still buy affordable insurance.
The bill’s less generous subsidies could lead to serious political problems.
The subsidies in the bill should also help many moderate income families afford insurance. At the same time, they are less generous than the subsidies in the other bills. This could lead to serious political problems if people resent being forced to buy a policy that they have trouble affording.
Finally, the proposal does not include the option to buy into a public plan. This is important because the public plan provided a potential mechanism for effective cost control. It is hard to see how costs can be contained in this plan. Also, in the absence of a public plan, many people may resent being forced by the government to buy a private insurance plan.
Affording Reform
Henry J. Aaron is a senior fellow in economic studies at The Brookings Institution.
Groucho Marx famously said that he would not join any club that would have him as a member. American voters are about to find out whether the U.S. Congress will vote for any health plan it is willing to pay for.
It is not clear that enough Democrats will vote for the tax increases or spending cuts necessary to pay for any bill they are willing to support.
The fundamental challenge is simple: extending health insurance to everyone is expensive. Meeting the president’s prudent commitment not to sign any bill that would boost the deficit requires sizable tax increases or spending cuts to pay the subsidies necessary to make insurance affordable for low- and moderate income households. How generous coverage should be depends on how much taxes can be increased or spending cut.
Like earlier draft Senate and House bills, the ‘”chairman’s mark” of Senator Baucus would require legal residents to be insured — through a public program, employer-sponsored plans, or individually purchased insurance. The price tag of the earlier bills was north of $1 trillion over 10 years. However, members of Congress seemed unable to identify ways to pay for those bills in a politically acceptable way. Senator Baucus’s plan lowers the overall cost by promising much less generous benefits than previous bills did.
Unfortunately, reducing one problem creates another. Health insurance is costly because health care is expensive. Someone has to cover those costs — individuals or taxpayers. So, reducing the subsidies heightens the risk that health insurance mandate may place undue financial burdens on low- and moderate income households.
Complicating the politics is the irresponsibility of Republican members of Congress. With remarkable inconsistency, they favor extending insurance, don’t want to boost burdens on households, oppose cuts in Medicare payments to providers, swear to vote against tax increases of any kind, and profess deep worry about the budget deficit.
With the support of virtually no Republicans, passing a bill requires that Democrats must stay united. But here is where the Groucho Marx problem bites. It is not clear that enough Democrats will vote for the tax increases or spending cuts necessary to pay for any bill they are willing to support.
An Impossible Task
Lisa C. Dubay is an associate professor and Director of Policy Studies in the Department of Health Policy and Management at the Johns Hopkins Bloomberg School of Public Health. Her research focuses on insurance coverage, access to care, and the health of low-income populations.
Senator Baucus attempts to craft a bill that will bring along moderates from both sides of the aisle and balance the scale of the nation’s under- and uninsured problem with the fiscal realities of the day. This is an unenviable and clearly impossible task.
That said, the bill has much to recommend it. It offers broad sweeping insurance market reforms that would protect all Americans from being discriminated against based on their health status or denied coverage because they have a pre-existing condition. It would also place a cap on individuals’ annual health care costs.
It doesn’t have regulatory teeth that would control cost growth in the absence of a public plan.
State level health insurance exchanges would be established for individual and small group markets making the purchase of coverage more affordable and transparent. For the uninsured, the bill would expand the Medicaid program offering an affordable coverage to 17 million uninsured Americans and provide subsides to purchase coverage in health insurance exchanges for up to another 16 million uninsured Americans.
Other parts of the bill are pure political compromise. Despite President Obama’s extolling the clear virtues of having a public plan in health insurance exchanges in his speech last Wednesday, the Baucus plan is the only committee bill that does not include a public plan. Unfortunately, neither does it include regulatory teeth that would control cost growth in the health insurance exchanges in the absence of a public plan.
At the same time, it would allow for the purchase of insurance across state lines — a plum reward for which the insurance industry has been lobbying for decades. The bill does allow for the formation of nonprofit state level co-operatives, but they are unlikely to be competitive or effective at controlling costs in the many markets where one or two insurers or large hospital systems dominate the scene. Consequently, health care costs will continue to rise at the current rate and affordability concerns will remain.
Finally, in trying to keep the costs of health reform down, the bill provides much less generous premium subsidies to purchase coverage in the health insurance exchanges than other bills before Congress. Premium subsidies are tied to affordability standards that range from 3 percent of income for those just above poverty to 13 percent of income for those with incomes between 300 and 400 percent of poverty.
This trade-off reflects a sad reality of our nation, its citizens and our representatives today: Americans want reform but they don’t want to pay for it. Senator Baucus and all of us need to look deeper into our souls and our wallets and make health care truly affordable for all. The character of our nation is at stake.
Embracing Obama’s Ideas
Karen Davenport is the director of health policy at the Center for American Progress and served on the White House Health Care Reform Task Force in 1993.
This is a compromise proposal and it shows. It was designed to elicit Republican support, though at this writing, not a single Senate Republican has embraced this plan.
Senator Baucus has hewed closely to some of the key elements of President Obama’s reform proposal and the Senate health and education committee House reform plans.
The plan takes meaningful steps toward ensuring that all Americans have affordable access to health insurance.
He creates a new marketplace for individuals and small businesses to purchase insurance coverage, and he would require health insurance plans to offer coverage to everyone, without excluding coverage for pre-existing conditions or charging higher prices to people with health problems.
He would provide help to small businesses who struggle to offer coverage to their employees, and help to lower-income families who cannot afford health insurance premiums. He would expand Medicaid, the proven program for many low-income Americans, to ensure that everyone with incomes below 133 percent of the poverty level could rely on this safety-net.
And he would require the Medicare program — one of the best levers we have for prompting system changes in payment systems and health care delivery — to develop new payment methods designed to link payment incentives to higher-quality, higher-value health care.
These changes will make meaningful steps toward ensuring that all Americans have affordable access to health insurance. But do they go far enough?
In comparison to legislation that has moved through the House health committees, the Baucus proposal offers slimmer subsidies towards the purchase of health coverage for low and moderate-income Americans, and less help with cost-sharing responsibilities. Key senators have expressed concern that this help will not be enough to guarantee that individuals and families can afford to purchase health coverage and access health care, and amendments to enhance this support are expected during committee consideration of the proposal next week.
Progressives are disappointed — but perhaps not surprised — that the proposal does not include a public insurance option. Nor does it require employers to provide health coverage to their workers. On these issues, and others, the proposal falls short of the president’s plan.
These choices also affect other aspects of the bill. For example, the Congressional Budget Office — which estimated that a public health insurance option would charge premiums 10 percent lower than typical private coverage — said today that the health insurance cooperatives in this proposal would have little impact on insurance markets or reduce the federal costs of the bill.
Senator Baucus has offered a proposal that makes important reforms. He has also made significant compromises that affect the overall shape, reach and cost of his proposal. But so far, these compromises have failed to win him any votes. It remains to be seen whether changes in committee can both improve the plan and secure Republican support.
Good News for Insurers
Maggie Mahar is the health care fellow at the Century Foundation where she writes the blog, Health Beat. She is the author of “Money-Driven Medicine: The Real Reason Health Care Costs So Much.”
Under the Baucus bill, insurers won’t be able to charge more if you are sick, but they will be able to charge more if you are older — asking you to pay five times as much as a “young invincible.” (Under the House bill, HR3200, premiums for older customers are capped at twice what insurers bill younger Americans.) If you are a single parent, you pay 80 percent more than a single adult — a pretty stiff penalty for single parenthood since children usually need substantially less health care. Finally, there is a 50 percent surcharge for smokers.
If you’re not young and invincible, you’re not going to like this plan.
No doubt many observers would say that charging smokers more sounds fair — until you stop to consider the fact that the vast majority of adult smokers in this country are poor. Many will qualify for a 100 percent subsidy. So who will pay the extra 50 percent? Taxpayers.
Single parents also tend to be on the low end of the income ladder, and many will qualify for a subsidy. More tax dollars winging their way to Aetna.
But it’s the age penalty that really hurts. Granted, premiums for a mid-level “silver” plan are capped at 13 percent of income. But that means a 56-year-old couple with income of $60,000 could wind up paying premiums of $7,800, plus out-of-pocket expenses for coverage that’s worth 25 percent less than the top-of-the-line “gold plan.” (Couples earning more than $43,710 don’t qualify for subsidies.)
Finally, the Senate Finance Committee vetoed the public sector option. Giant profit insurers will have to compete only with puny co-ops — and they must be newly formed. No established co-ops allowed, giving the private sector insurance industry a virtual monopoly over the millions of new customers who will be coming their way, tax subsidies in hand.
A Sinking Ship
Michael Chernew is a professor of health care policy at Harvard Medical School.
The estimated costs of the Senate Finance bill (and all other reform proposals) are inherently uncertain. Assumptions need to be made about how patients, providers and insurers will respond to the numerous provisions that change the health care environment and regulatory structure, many of which are not yet fully specified or deferred to new entities.
It’s unlikely we will find some magic combination of provisions that is politically feasible and effective at controlling spending.
Thus, reasonable people will reach different conclusions regarding the expense of reform. Arguing about whether the 10 year cost is higher or lower than the Congressional Budget Office estimate (which is more favorable than previously reported and to its credit will have detractors on both sides) is not productive.
More importantly, we must evaluate the fiscal consequences of the plan based on whether it creates a financially sustainable health care system in the long run. Higher taxes or fees are necessary evils but do not, in general, further the goal of a better system.
The Baucus bill is a reasonable start towards systemic reform, but much work will remain to be done. Insurance reforms and establishment of exchanges are a start but will not be sufficient. Information technology, comparative effectiveness research and increased prevention are all good reforms but will likely not be sufficient. More fundamental changes, such as payment reform and benefit design reform will be needed.
To its credit, the Baucus plan provides mechanisms to encourage such changes but the cost containment provisions are not strong enough or spelled out in enough detail to convince the skeptics. Certainly some will prefer stronger explicit cost containment options but it is unlikely we will find some magic combination of provisions that is politically feasible and sufficiently effective at controlling spending.
In the end, we must recognize we are on a sinking ship. The Baucus bill offers us one reasonable life raft, but if we board it we must recognize it will take a lot of continued work to make sure it floats.
Needed: A Private Plan Option
William H. Dow, who was a senior economist for President George W. Bush’s Council of Economic Advisers, is a professor of health economics at the University of California, Berkeley.
The health reform mark released today by Senator Baucus proposes several compromises regarding a “public option.” For proponents, he proposes seeding new nonprofit cooperative health insurers. For supporters of private insurance approaches, he allows some Medicaid eligibles (only those with incomes 100-133 percent of the poverty line) to choose private insurance plans instead in their insurance exchange.
He would also expand “premium support” programs that subsidize Medicaid eligibles who instead choose employer insurance. These proposals offer something for both sides of the public/private debate, but as proposed they would likely have little impact. I would suggest building on the spirit of these proposals to offer more meaningful compromise proposals.
A fiscally prudent way to introduce competition into Medicaid.
First, allow all Medicaid eligibles the choice of instead electing qualifying private plans through the exchange. If a new cooperative or existing insurer markets a more attractive insurance option that covers mandated services, Medicaid eligibles should be able to vote with their feet. If these private insurance plans cost more than the actuarial value of Medicaid, then individuals would have to pay any difference in premiums. This proposal is consistent with recent conservative efforts at introducing competition into Medicaid.
Second, allow anyone eligible for premium credits to buy into their state Medicaid plan at unsubsidized rates. If individuals are willing to forgo private insurance amenities for the lower price of a Medicaid plan, as some low-income people likely would, then they should be given that option. This is particularly important for individuals receiving premium credits, because over time it could reduce the needed public budgetary cost of those credits. This policy would expand choice while also being fiscally prudent.
These proposed changes would create 50 state market experiments to better understand the relative merits of public versus private plans. By focusing on the low-income, these changes would avoid undermining the private health insurance industry as some public-option opponents have feared. And these changes would promote the goal of stable, portable insurance coverage among this vulnerable population.
Not a Bad Plan
Gail Wilensky is a senior fellow at Project HOPE. She was the administrator of Health Care Financing Administration (now the Center for Medicare and Medicaid Services) from 1990 to 1992 and the chairwoman of the Medicare Payment Advisory Commission from 1997 to 2001.
It is not surprising that the Baucus plan is getting criticized by both sides, especially the left. Compromises are rarely pretty. And while I have some concerns about the proposal as it stands, on balance it is better than the other bills under consideration.
One of the best things about the Baucus bill is the absence of a public plan.
Several provisions improve the bill. Most important to me is the absence of a public plan. For me, public plans will inevitably use the power of government to reimburse at rates under cost and fundamentally destabilize private insurance. The proposal to create co-ops needs to be carefully designed so that the federal subsidies are limited and used only for start-up purposes. Otherwise a co-op at the national level could become a poorly disguised public plan. With 1,300 insurance companies in the U.S., I’m not sure the lack of insurance alternatives is really a problem, other than maybe a political problem.
The second improvement is the use of a 35 percent excise tax on insurance companies for plans costing more than $8,000 to $21,000. This is a clumsy way to introduce a tax cap but since it will shift the cost to the plan owners, ultimately it will get the job done of discouraging high cost plans. Third, people who are between 100 percent and 133 percent of the poverty line will have the choice of enrolling in Medicaid or in a private health insurance plan offered through the health insurance exchange. Extending this option to those below 100 percent of the poverty line over time would make it even better. And fourth, it is judged by the Congressional Budget Office as not only providing a slight reduction to the deficit over the first 10 years but remaining budget neutral in the following budget period.
While I am sympathetic with the Congressional committee’s need to expand coverage to the uninsured at as low a cost as possible and having to finance that cost so as to not add further to the deficit, a few of their strategies are disturbing. The penalties being proposed are pretty stiff for people at 300 percent of the poverty line (although they are waived if the lowest cost premium exceeds 10 percent of income). It may be better to phase into this level of penalty in two or three steps, though, ultimately, insurance reforms and full coverage require enforced individual mandates. In addition, the various fees that are being imposed on insurance companies, pharmaceutical companies, etc. to raise revenue will just increase the cost of health care which is counter-productive to the efforts to reduce the costs of health care, to say the least.
My biggest concern is that the efforts to reform the delivery system are no more than gentle pushes in the right direction, which are likely to produce no more than tepid responses from providers. If the country is serious about slowing health care spending, it better get as aggressive in its efforts toward payment bundling, payments for accountable care and other innovative efforts as it is proposing to be in its enforcement of individual mandates.
http://roomfordebate.blogs.nytimes.com/2009/09/16/grading-the-baucus-health-plan/
Wednesday, September 16, 2009
Tuesday, September 15, 2009
Boy, Oh, Boy By MAUREEN DOWD
The normally nonchalant Barack Obama looked nonplussed, as Nancy Pelosi glowered behind.
Surrounded by middle-aged white guys — a sepia snapshot of the days when such pols ran Washington like their own men’s club — Joe Wilson yelled “You lie!” at a president who didn’t.
But, fair or not, what I heard was an unspoken word in the air: You lie, boy!
The outburst was unexpected from a milquetoast Republican backbencher from South Carolina who had attracted little media attention. Now it has made him an overnight right-wing hero, inspiring “You lie!” bumper stickers and T-shirts.
The congressman, we learned, belonged to the Sons of Confederate Veterans, led a 2000 campaign to keep the Confederate flag waving above South Carolina’s state Capitol and denounced as a “smear” the true claim of a black woman that she was the daughter of Strom Thurmond, the ’48 segregationist candidate for president. Wilson clearly did not like being lectured and even rebuked by the brainy black president presiding over the majestic chamber.
I’ve been loath to admit that the shrieking lunacy of the summer — the frantic efforts to paint our first black president as the Other, a foreigner, socialist, fascist, Marxist, racist, Commie, Nazi; a cad who would snuff old people; a snake who would indoctrinate kids — had much to do with race.
I tended to agree with some Obama advisers that Democratic presidents typically have provoked a frothing response from paranoids — from Father Coughlin against F.D.R. to Joe McCarthy against Truman to the John Birchers against J.F.K. and the vast right-wing conspiracy against Bill Clinton.
But Wilson’s shocking disrespect for the office of the president — no Democrat ever shouted “liar” at W. when he was hawking a fake case for war in Iraq — convinced me: Some people just can’t believe a black man is president and will never accept it.
“A lot of these outbursts have to do with delegitimizing him as a president,” said Congressman Jim Clyburn, a senior member of the South Carolina delegation. Clyburn, the man who called out Bill Clinton on his racially tinged attacks on Obama in the primary, pushed Pelosi to pursue a formal resolution chastising Wilson.
“In South Carolina politics, I learned that the olive branch works very seldom,” he said. “You have to come at these things from a position of strength. My father used to say, ‘Son, always remember that silence gives consent.’ ”
Barry Obama of the post-’60s Hawaiian ’hood did not live through the major racial struggles in American history. Maybe he had a problem relating to his white basketball coach or catching a cab in New York, but he never got beaten up for being black.
Now he’s at the center of a period of racial turbulence sparked by his ascension. Even if he and the coterie of white male advisers around him don’t choose to openly acknowledge it, this president is the ultimate civil rights figure — a black man whose legitimacy is constantly challenged by a loco fringe.
For two centuries, the South has feared a takeover by blacks or the feds. In Obama, they have both.
The state that fired the first shot of the Civil War has now given us this: Senator Jim DeMint exhorted conservatives to “break” the president by upending his health care plan. Rusty DePass, a G.O.P. activist, said that a gorilla that escaped from a zoo was “just one of Michelle’s ancestors.” Lovelorn Mark Sanford tried to refuse the president’s stimulus money. And now Joe Wilson.
“A good many people in South Carolina really reject the notion that we’re part of the union,” said Don Fowler, the former Democratic Party chief who teaches politics at the University of South Carolina. He observed that when slavery was destroyed by outside forces and segregation was undone by civil rights leaders and Congress, it bred xenophobia.
“We have a lot of people who really think that the world’s against us,” Fowler said, “so when things don’t happen the way we like them to, we blame outsiders.” He said a state legislator not long ago tried to pass a bill to nullify any federal legislation with which South Carolinians didn’t agree. Shades of John C. Calhoun!
It may be President Obama’s very air of elegance and erudition that raises hackles in some. “My father used to say to me, ‘Boy, don’t get above your raising,’ ” Fowler said. “Some people are prejudiced anyway, and then they look at his education and mannerisms and get more angry at him.”
Clyburn had a warning for Obama advisers who want to forgive Wilson, ignore the ignorant outbursts and move on: “They’re going to have to develop ways in this White House to deal with things and not let them fester out there. Otherwise, they’ll see numbers moving in the wrong direction.”
http://www.nytimes.com/2009/09/13/opinion/13dowd.html?_r=1&em=&pagewanted=print
Copyright 2009 The New York Times Company
Surrounded by middle-aged white guys — a sepia snapshot of the days when such pols ran Washington like their own men’s club — Joe Wilson yelled “You lie!” at a president who didn’t.
But, fair or not, what I heard was an unspoken word in the air: You lie, boy!
The outburst was unexpected from a milquetoast Republican backbencher from South Carolina who had attracted little media attention. Now it has made him an overnight right-wing hero, inspiring “You lie!” bumper stickers and T-shirts.
The congressman, we learned, belonged to the Sons of Confederate Veterans, led a 2000 campaign to keep the Confederate flag waving above South Carolina’s state Capitol and denounced as a “smear” the true claim of a black woman that she was the daughter of Strom Thurmond, the ’48 segregationist candidate for president. Wilson clearly did not like being lectured and even rebuked by the brainy black president presiding over the majestic chamber.
I’ve been loath to admit that the shrieking lunacy of the summer — the frantic efforts to paint our first black president as the Other, a foreigner, socialist, fascist, Marxist, racist, Commie, Nazi; a cad who would snuff old people; a snake who would indoctrinate kids — had much to do with race.
I tended to agree with some Obama advisers that Democratic presidents typically have provoked a frothing response from paranoids — from Father Coughlin against F.D.R. to Joe McCarthy against Truman to the John Birchers against J.F.K. and the vast right-wing conspiracy against Bill Clinton.
But Wilson’s shocking disrespect for the office of the president — no Democrat ever shouted “liar” at W. when he was hawking a fake case for war in Iraq — convinced me: Some people just can’t believe a black man is president and will never accept it.
“A lot of these outbursts have to do with delegitimizing him as a president,” said Congressman Jim Clyburn, a senior member of the South Carolina delegation. Clyburn, the man who called out Bill Clinton on his racially tinged attacks on Obama in the primary, pushed Pelosi to pursue a formal resolution chastising Wilson.
“In South Carolina politics, I learned that the olive branch works very seldom,” he said. “You have to come at these things from a position of strength. My father used to say, ‘Son, always remember that silence gives consent.’ ”
Barry Obama of the post-’60s Hawaiian ’hood did not live through the major racial struggles in American history. Maybe he had a problem relating to his white basketball coach or catching a cab in New York, but he never got beaten up for being black.
Now he’s at the center of a period of racial turbulence sparked by his ascension. Even if he and the coterie of white male advisers around him don’t choose to openly acknowledge it, this president is the ultimate civil rights figure — a black man whose legitimacy is constantly challenged by a loco fringe.
For two centuries, the South has feared a takeover by blacks or the feds. In Obama, they have both.
The state that fired the first shot of the Civil War has now given us this: Senator Jim DeMint exhorted conservatives to “break” the president by upending his health care plan. Rusty DePass, a G.O.P. activist, said that a gorilla that escaped from a zoo was “just one of Michelle’s ancestors.” Lovelorn Mark Sanford tried to refuse the president’s stimulus money. And now Joe Wilson.
“A good many people in South Carolina really reject the notion that we’re part of the union,” said Don Fowler, the former Democratic Party chief who teaches politics at the University of South Carolina. He observed that when slavery was destroyed by outside forces and segregation was undone by civil rights leaders and Congress, it bred xenophobia.
“We have a lot of people who really think that the world’s against us,” Fowler said, “so when things don’t happen the way we like them to, we blame outsiders.” He said a state legislator not long ago tried to pass a bill to nullify any federal legislation with which South Carolinians didn’t agree. Shades of John C. Calhoun!
It may be President Obama’s very air of elegance and erudition that raises hackles in some. “My father used to say to me, ‘Boy, don’t get above your raising,’ ” Fowler said. “Some people are prejudiced anyway, and then they look at his education and mannerisms and get more angry at him.”
Clyburn had a warning for Obama advisers who want to forgive Wilson, ignore the ignorant outbursts and move on: “They’re going to have to develop ways in this White House to deal with things and not let them fester out there. Otherwise, they’ll see numbers moving in the wrong direction.”
http://www.nytimes.com/2009/09/13/opinion/13dowd.html?_r=1&em=&pagewanted=print
Copyright 2009 The New York Times Company
Thursday, September 10, 2009
Lying Costs $500,000/Word
Today the nation watched you raise $400,000 in one day to help show Republican Congressman Joe Wilson the door. Rep. Wilson made waves last night by heckling President Obama, shouting, "you lie!" in the middle of the President's address to Congress (and over $1 million in 3 days)
Starting at 9:30 last night, you stepped up to say you wouldn't tolerate that sort of disgraceful, boorish behavior in our nation's capitol. For almost 3 hours this morning, you were raising $1,000 a minute for Democrat Rob Miller, Wilson's opponent in 2010. And by mid-afternoon today, you'd hung a $200,000 pricetag on each word of Rep. Wilson's outburst.
The momentum is still building. CNN, the Washington Post and the Nation noticed your efforts, and are reporting them to an even larger audience. As of this email, 10,000 of you have raised more for Rob Miller than the entire pharmaceutical industry gave to Rep. Wilson last cycle. That's real grassroots fundraising.
It wouldn't be possible without ActBlue, and a $15 recurring donation is all it takes to make sure we're there the next time.
Good ideas depend on us, and we depend on you.
From all of us at ActBlue, thanks.
Erin Hill
Executive Director, ActBlue
P.S. At ActBlue, we've been fighting for Democrats for half a decade. Support the future of Democratic politics with a $15 recurring contribution.
ActBlue is the nation's largest source of funds for Democrats. Launched in 2004, ActBlue created and deployed the next generation of online fundraising tools, enabling individuals and groups to raise money for the Democratic candidates of their choice at www.actblue.com.
Wondering how you can make the most of ActBlue? We're always happy to help. Email us at WWW.actblue.com.
"Erin Hill, ActBlue"Add sender to Contacts
https://secure.actblue.com/contribute/page/supportactblue?amount=15&recurring=24&refcode=20090910millertherm
Starting at 9:30 last night, you stepped up to say you wouldn't tolerate that sort of disgraceful, boorish behavior in our nation's capitol. For almost 3 hours this morning, you were raising $1,000 a minute for Democrat Rob Miller, Wilson's opponent in 2010. And by mid-afternoon today, you'd hung a $200,000 pricetag on each word of Rep. Wilson's outburst.
The momentum is still building. CNN, the Washington Post and the Nation noticed your efforts, and are reporting them to an even larger audience. As of this email, 10,000 of you have raised more for Rob Miller than the entire pharmaceutical industry gave to Rep. Wilson last cycle. That's real grassroots fundraising.
It wouldn't be possible without ActBlue, and a $15 recurring donation is all it takes to make sure we're there the next time.
Good ideas depend on us, and we depend on you.
From all of us at ActBlue, thanks.
Erin Hill
Executive Director, ActBlue
P.S. At ActBlue, we've been fighting for Democrats for half a decade. Support the future of Democratic politics with a $15 recurring contribution.
ActBlue is the nation's largest source of funds for Democrats. Launched in 2004, ActBlue created and deployed the next generation of online fundraising tools, enabling individuals and groups to raise money for the Democratic candidates of their choice at www.actblue.com.
Wondering how you can make the most of ActBlue? We're always happy to help. Email us at WWW.actblue.com.
"Erin Hill, ActBlue"
https://secure.actblue.com/contribute/page/supportactblue?amount=15&recurring=24&refcode=20090910millertherm
Tuesday, September 8, 2009
8 Questions About Health-Care Reform
Reporting by Ceci Connolly and Alec MacGillis
President Obama will address a joint session of Congress on Wednesday in an attempt to restart his push for reform. Obama has said he hopes to provide affordable coverage to every American while reining in medical spending over the long term. Democratic lawmakers, who return to Washington on Tuesday, have been wrestling with the issue for months but are far from agreement. Here's a look at some ideas being considered and the impact they might have.
#1 If I don't have health insurance now, how will reform affect me?
Under the proposals being considered, people without insurance will be required to get it. They will be able to buy coverage on a new "exchange," a marketplace in which private insurers will offer plans (possibly alongside a government-run option or a nonprofit cooperative). The government will subsidize the cost of plans, on a sliding scale, up to a certain income: Liberal Democrats want help extended to families earning as much as four times the poverty level ($88,000 for a family of four); conservative Democrats want to limit help to families earning $66,000 or less. Plans offered on the exchange will have to comply with much stricter rules than those that exist in today's Wild West individual insurance market — prohibitions on denying coverage based on preexisting conditions, limits on how much prices can be determined by people's ages, caps on out-of-pocket spending and limits on "rescissions," or the practice of voiding coverage based on technicalities after someone submits a big claim. Meanwhile, the poorest among the uninsured will probably be covered by expanded Medicaid eligibility. Graph
#2 If I currently have health insurance, how will reform affect me?
Not that much, at least initially. The legislation is intended to preserve the existing employer-based insurance system -- at first, only small businesses and people who aren't covered through their jobs will be allowed to buy plans on the new exchange. Over time, access to the exchange may be broadened, though this raises the possibility that if people buy insurance on the exchange instead of on the job, employer plans may be left with a smaller pool of employees who have greater health-care costs, a situation that could make those plans hard to sustain. The Democrats' hope is that your employer-based insurance premiums will grow more slowly if the health-care system as a whole is more rational and less wasteful. People now covered by individual plans will be able to get better-regulated plans on the new exchange, possibly with government subsidies. People now covered in the workplace won't have to worry as much about losing coverage if they lose their job or want to start their own business -- they would turn to the exchange for new coverage.Graph
#3 How much is reform likely to cost?
The price tag for covering the uninsured comes in around $1 trillion over the first 10 years, just under double what the new Medicare drug benefit was expected to cost. The proposals would pay for about half of this by squeezing money out of Medicare and Medicaid, including the subsidies that now go to private insurers that offer Medicare Advantage plans and the Medicaid payments that go to hospitals caring for a disproportionate share of the uninsured -- the hope is that more of these hospitals' patients would be covered after reform. Much of the remainder would be paid for through new tax revenue. House Democrats want an income tax surcharge on those earning more than $1 million, President Obama wants to reduce the itemized deductions for wealthy taxpayers, and moderate Senate Democrats have talked about taxing the most costly of employer-provided health plans. The cost of covering the uninsured is separate from the related question of how to "bend the curve" of the country's overall health-care spending. The goal is to achieve this by expanding "comparative effectiveness" research into what treatments work best, and by nudging health-care providers into models in which they work closely together and are paid on salaries, instead of charging for each procedure provided.Graph
#4 How much does the federal government now spend on health care? Graph
#5 What will happen to small businesses under health-care reform?
Small businesses now have a difficult time buying coverage for employees. They have a smaller pool of people to cover than large companies do, so coverage costs can soar if the workers tend to be older or if even one person happens to get very sick. The proposals seek to solve this problem by letting small businesses buy coverage on the new exchange, where their workers would be pooled together with all the other people on the exchange, spreading the risks more broadly. The proposals also include various tax credits to help small businesses obtain coverage. At the same time, the proposals require businesses of a certain size to provide coverage or pay a penalty. The House bill originally mandated that companies with a payroll of at least $250,000 offer insurance or pay a fine ranging from 2 to 8 percent of payroll depending on the company's size; conservative Blue Dog Democrats, however, demanded that companies with annual payrolls of $500,000 or less be exempt from any mandate. The Senate Health, Education, Labor and Pensions Committee bill has a penalty of $750 per full-time worker and exempts firms with fewer than 25 employees. The Senate Finance Committee is considering a lesser penalty -- charging businesses the cost of subsidizing those employees who qualify for public assistance in getting their own coverage.
#6 I keep hearing about plans to create a "public option" or health insurance cooperatives. How would those work?
The House Democrats' plan and the Senate health committee's plan both would offer a new government-run insurance plan, or "public option," on the new exchange. People would buy it just as they would a private plan on the exchange: They would pay premiums, and if their income is low enough, they would get government subsidies to help cover the cost. It would be available only to those people allowed access to the exchange -- initially, small businesses and people without employer-based coverage. Under the initial House plan, the public plan would pay doctors and hospitals reimbursement rates 5 to 10 percent higher than Medicare reimbursement rates. The thinking is that this would make the plan competitively priced compared with private plans -- spurring them, it is hoped, to reduce their own prices -- while somewhat allaying the concerns of providers who say Medicare reimbursements are too low. Blue Dog Democrats in the House want the plan's reimbursement rates to be negotiated with each provider, instead of tied to Medicare, which would probably mean higher reimbursements and premiums. Moderate Senate Democrats opposed to a public option are considering creating nonprofit insurance cooperatives, which would be seeded with federal money but run by the people who belong to them, not the government. Supporters of the public option are questioning whether the co-ops would have enough heft to compete with private insurers.Graph
#7 What is likely to happen to my Medicare coverage under current proposals?
The vast majority of benefits provided by Medicare to 45 million senior citizens and people with disabilities would not be changed. Under the House bills, premiums for Medicare prescription drug coverage, known as Part D, would increase slightly. That increase would be offset by deep discounts on medications bought in the coverage gap known as the "doughnut hole."
Graph
Overall, the result would be lower out-of-pocket costs on prescription drugs for most seniors, according to the Congressional Budget Office.
Most of the bills Congress is considering would provide higher reimbursement to doctors, especially primary-care physicians. But hospitals and insurance companies that sell managed-care plans, called Medicare Advantage, would have lower-than-expected government payments.
Democrats initially included a provision to allow Medicare to reimburse physicians for end-of-life consultations. But false accusations that the provision would lead to government "death panels" have prompted lawmakers to rethink the idea.
#8 What do the current bills have in common, and what are the major legislative challenges that lie ahead?
Bills approved by the Senate health committee and three House panels are similar in many respects. All four versions would:
Require every American to carry insurance, with discounts for people who cannot afford it and penalties for people who refuse to buy coverage.
Require most employers to contribute to the cost of employee coverage or pay into a health fund, while small firms would be exempt or receive tax credits to reduce the price.
Expand the Medicaid health program for the poor.
Provide insurance discounts for people earning less than 400 percent of the federal poverty level, or about $73,000 for a family of three.
Impose new restrictions on insurance practices, such as prohibiting the denial of coverage because of preexisting conditions.
Create a new marketplace, dubbed an "exchange" or "gateway," for individuals and small businesses to comparison-shop for insurance.
The Senate Finance Committee has yet to release a bill but is circulating a more modest draft that would cost less than $900 billion over 10 years and provide smaller subsidies for purchasing insurance.
In the coming weeks, the three House versions will be merged into a single bill and brought to the floor for a vote. Any Senate Finance Committee bill would be merged with the health committee's version and sent to the floor. If both the House and the Senate approve bills, differences would be hammered out in a conference committee and sent to both chambers for final action.
© 2009 The Washington Post Company
http://www.washingtonpost.com/wp-srv/special/politics/8-questions/index.html
President Obama will address a joint session of Congress on Wednesday in an attempt to restart his push for reform. Obama has said he hopes to provide affordable coverage to every American while reining in medical spending over the long term. Democratic lawmakers, who return to Washington on Tuesday, have been wrestling with the issue for months but are far from agreement. Here's a look at some ideas being considered and the impact they might have.
#1 If I don't have health insurance now, how will reform affect me?
Under the proposals being considered, people without insurance will be required to get it. They will be able to buy coverage on a new "exchange," a marketplace in which private insurers will offer plans (possibly alongside a government-run option or a nonprofit cooperative). The government will subsidize the cost of plans, on a sliding scale, up to a certain income: Liberal Democrats want help extended to families earning as much as four times the poverty level ($88,000 for a family of four); conservative Democrats want to limit help to families earning $66,000 or less. Plans offered on the exchange will have to comply with much stricter rules than those that exist in today's Wild West individual insurance market — prohibitions on denying coverage based on preexisting conditions, limits on how much prices can be determined by people's ages, caps on out-of-pocket spending and limits on "rescissions," or the practice of voiding coverage based on technicalities after someone submits a big claim. Meanwhile, the poorest among the uninsured will probably be covered by expanded Medicaid eligibility. Graph
#2 If I currently have health insurance, how will reform affect me?
Not that much, at least initially. The legislation is intended to preserve the existing employer-based insurance system -- at first, only small businesses and people who aren't covered through their jobs will be allowed to buy plans on the new exchange. Over time, access to the exchange may be broadened, though this raises the possibility that if people buy insurance on the exchange instead of on the job, employer plans may be left with a smaller pool of employees who have greater health-care costs, a situation that could make those plans hard to sustain. The Democrats' hope is that your employer-based insurance premiums will grow more slowly if the health-care system as a whole is more rational and less wasteful. People now covered by individual plans will be able to get better-regulated plans on the new exchange, possibly with government subsidies. People now covered in the workplace won't have to worry as much about losing coverage if they lose their job or want to start their own business -- they would turn to the exchange for new coverage.Graph
#3 How much is reform likely to cost?
The price tag for covering the uninsured comes in around $1 trillion over the first 10 years, just under double what the new Medicare drug benefit was expected to cost. The proposals would pay for about half of this by squeezing money out of Medicare and Medicaid, including the subsidies that now go to private insurers that offer Medicare Advantage plans and the Medicaid payments that go to hospitals caring for a disproportionate share of the uninsured -- the hope is that more of these hospitals' patients would be covered after reform. Much of the remainder would be paid for through new tax revenue. House Democrats want an income tax surcharge on those earning more than $1 million, President Obama wants to reduce the itemized deductions for wealthy taxpayers, and moderate Senate Democrats have talked about taxing the most costly of employer-provided health plans. The cost of covering the uninsured is separate from the related question of how to "bend the curve" of the country's overall health-care spending. The goal is to achieve this by expanding "comparative effectiveness" research into what treatments work best, and by nudging health-care providers into models in which they work closely together and are paid on salaries, instead of charging for each procedure provided.Graph
#4 How much does the federal government now spend on health care? Graph
#5 What will happen to small businesses under health-care reform?
Small businesses now have a difficult time buying coverage for employees. They have a smaller pool of people to cover than large companies do, so coverage costs can soar if the workers tend to be older or if even one person happens to get very sick. The proposals seek to solve this problem by letting small businesses buy coverage on the new exchange, where their workers would be pooled together with all the other people on the exchange, spreading the risks more broadly. The proposals also include various tax credits to help small businesses obtain coverage. At the same time, the proposals require businesses of a certain size to provide coverage or pay a penalty. The House bill originally mandated that companies with a payroll of at least $250,000 offer insurance or pay a fine ranging from 2 to 8 percent of payroll depending on the company's size; conservative Blue Dog Democrats, however, demanded that companies with annual payrolls of $500,000 or less be exempt from any mandate. The Senate Health, Education, Labor and Pensions Committee bill has a penalty of $750 per full-time worker and exempts firms with fewer than 25 employees. The Senate Finance Committee is considering a lesser penalty -- charging businesses the cost of subsidizing those employees who qualify for public assistance in getting their own coverage.
#6 I keep hearing about plans to create a "public option" or health insurance cooperatives. How would those work?
The House Democrats' plan and the Senate health committee's plan both would offer a new government-run insurance plan, or "public option," on the new exchange. People would buy it just as they would a private plan on the exchange: They would pay premiums, and if their income is low enough, they would get government subsidies to help cover the cost. It would be available only to those people allowed access to the exchange -- initially, small businesses and people without employer-based coverage. Under the initial House plan, the public plan would pay doctors and hospitals reimbursement rates 5 to 10 percent higher than Medicare reimbursement rates. The thinking is that this would make the plan competitively priced compared with private plans -- spurring them, it is hoped, to reduce their own prices -- while somewhat allaying the concerns of providers who say Medicare reimbursements are too low. Blue Dog Democrats in the House want the plan's reimbursement rates to be negotiated with each provider, instead of tied to Medicare, which would probably mean higher reimbursements and premiums. Moderate Senate Democrats opposed to a public option are considering creating nonprofit insurance cooperatives, which would be seeded with federal money but run by the people who belong to them, not the government. Supporters of the public option are questioning whether the co-ops would have enough heft to compete with private insurers.Graph
#7 What is likely to happen to my Medicare coverage under current proposals?
The vast majority of benefits provided by Medicare to 45 million senior citizens and people with disabilities would not be changed. Under the House bills, premiums for Medicare prescription drug coverage, known as Part D, would increase slightly. That increase would be offset by deep discounts on medications bought in the coverage gap known as the "doughnut hole."
Graph
Overall, the result would be lower out-of-pocket costs on prescription drugs for most seniors, according to the Congressional Budget Office.
Most of the bills Congress is considering would provide higher reimbursement to doctors, especially primary-care physicians. But hospitals and insurance companies that sell managed-care plans, called Medicare Advantage, would have lower-than-expected government payments.
Democrats initially included a provision to allow Medicare to reimburse physicians for end-of-life consultations. But false accusations that the provision would lead to government "death panels" have prompted lawmakers to rethink the idea.
#8 What do the current bills have in common, and what are the major legislative challenges that lie ahead?
Bills approved by the Senate health committee and three House panels are similar in many respects. All four versions would:
Require every American to carry insurance, with discounts for people who cannot afford it and penalties for people who refuse to buy coverage.
Require most employers to contribute to the cost of employee coverage or pay into a health fund, while small firms would be exempt or receive tax credits to reduce the price.
Expand the Medicaid health program for the poor.
Provide insurance discounts for people earning less than 400 percent of the federal poverty level, or about $73,000 for a family of three.
Impose new restrictions on insurance practices, such as prohibiting the denial of coverage because of preexisting conditions.
Create a new marketplace, dubbed an "exchange" or "gateway," for individuals and small businesses to comparison-shop for insurance.
The Senate Finance Committee has yet to release a bill but is circulating a more modest draft that would cost less than $900 billion over 10 years and provide smaller subsidies for purchasing insurance.
In the coming weeks, the three House versions will be merged into a single bill and brought to the floor for a vote. Any Senate Finance Committee bill would be merged with the health committee's version and sent to the floor. If both the House and the Senate approve bills, differences would be hammered out in a conference committee and sent to both chambers for final action.
© 2009 The Washington Post Company
http://www.washingtonpost.com/wp-srv/special/politics/8-questions/index.html
Monday, September 7, 2009
Gross: Taxpayers Will Make Money on Bailout
Bond guru Bill Gross figures a big, government bailout of the banking system, correctly managed, could make back up to an 8 percent return for U.S. taxpayers.
What's more, the bailout is absolutely necessary, Pimco's founder and chief investment officer writes in an op-ed in The Washington Post.
It will take something as big as Treasury Secretary Henry Paulson's plan to spend upwards of $700 billion, perhaps more, to unfreeze our credit markets and prevent much bigger problems in the lives of millions of ordinary Americans.
"Critics call this a bailout of Wall Street; in fact, it is anything but," Gross maintains.
"The Treasury proposal will not be a bailout of Wall Street but a rescue of Main Street, as lending capacity and confidence is restored to our banks, and the delicate balance between production and finance is given a chance to work its magic."
Gross figures that the problem assets will go for 65 cents on the dollar and earn between 10 percent and 15 percent for the Treasury. Once you count in financing costs, the "positive carry" for the holders — the taxpayers — should be between 7 percent and 8 percent, he says.
Gross offers one big caveat: Washington cannot fix this quickly or brutally. It will take time. And it will take a carefully managed process like the Resolution Trust Corporation, which dug the country out of the savings & loan crisis of the late 1980s, to do it right.
"My estimate of double-digit returns assumes lengthy ownership of the assets and is in turn dependent on the level of home foreclosures, but this program is, in fact, directed to prevent just that," Gross says.
Washington should be careful, yes, and allowing some homeowners to stay in their homes, that is, to avoid foreclosure, is critical. But now is the time, Gross says.
"The need for speed is clear," Gross says. "In this case, there really are weapons of mass destruction — financial derivatives — that threaten to destroy our system from within. Move quickly, Washington, with appropriate safeguards."
Politicians are spending the week tearing into Paulson's plan to buy troubled bank assets backed by mortgages.
Some in Congress are already asking for stock warrants, the right to take stakes in the banks the public rescues. Taxpayers deserve a slice of the upside, argue some.
"Right now the price of admission (to the proposed Treasury program) is zero. It's not inappropriate to demand that if they benefit from this transaction in the future ... that they will share that benefit with the taxpayers who made the benefits possible," said Sen. Jack Reed, D-R.I., on Tuesday.
Reprint from Wednesday, September 24, 2008 9:13 AM
http://moneynews.newsmax.com/streettalk/bailout/2008/09/24/133871.html
© 2008 Newsmax. All rights reserved
What's more, the bailout is absolutely necessary, Pimco's founder and chief investment officer writes in an op-ed in The Washington Post.
It will take something as big as Treasury Secretary Henry Paulson's plan to spend upwards of $700 billion, perhaps more, to unfreeze our credit markets and prevent much bigger problems in the lives of millions of ordinary Americans.
"Critics call this a bailout of Wall Street; in fact, it is anything but," Gross maintains.
"The Treasury proposal will not be a bailout of Wall Street but a rescue of Main Street, as lending capacity and confidence is restored to our banks, and the delicate balance between production and finance is given a chance to work its magic."
Gross figures that the problem assets will go for 65 cents on the dollar and earn between 10 percent and 15 percent for the Treasury. Once you count in financing costs, the "positive carry" for the holders — the taxpayers — should be between 7 percent and 8 percent, he says.
Gross offers one big caveat: Washington cannot fix this quickly or brutally. It will take time. And it will take a carefully managed process like the Resolution Trust Corporation, which dug the country out of the savings & loan crisis of the late 1980s, to do it right.
"My estimate of double-digit returns assumes lengthy ownership of the assets and is in turn dependent on the level of home foreclosures, but this program is, in fact, directed to prevent just that," Gross says.
Washington should be careful, yes, and allowing some homeowners to stay in their homes, that is, to avoid foreclosure, is critical. But now is the time, Gross says.
"The need for speed is clear," Gross says. "In this case, there really are weapons of mass destruction — financial derivatives — that threaten to destroy our system from within. Move quickly, Washington, with appropriate safeguards."
Politicians are spending the week tearing into Paulson's plan to buy troubled bank assets backed by mortgages.
Some in Congress are already asking for stock warrants, the right to take stakes in the banks the public rescues. Taxpayers deserve a slice of the upside, argue some.
"Right now the price of admission (to the proposed Treasury program) is zero. It's not inappropriate to demand that if they benefit from this transaction in the future ... that they will share that benefit with the taxpayers who made the benefits possible," said Sen. Jack Reed, D-R.I., on Tuesday.
Reprint from Wednesday, September 24, 2008 9:13 AM
http://moneynews.newsmax.com/streettalk/bailout/2008/09/24/133871.html
© 2008 Newsmax. All rights reserved
How Did Economists Get It So Wrong?
By PAUL KRUGMAN
I. MISTAKING BEAUTY FOR TRUTH
It’s hard to believe now, but not long ago economists were congratulating themselves over the success of their field. Those successes — or so they believed — were both theoretical and practical, leading to a golden era for the profession. On the theoretical side, they thought that they had resolved their internal disputes. Thus, in a 2008 paper titled “The State of Macro” (that is, macroeconomics, the study of big-picture issues like recessions), Olivier Blanchard of M.I.T., now the chief economist at the International Monetary Fund, declared that “the state of macro is good.” The battles of yesteryear, he said, were over, and there had been a “broad convergence of vision.” And in the real world, economists believed they had things under control: the “central problem of depression-prevention has been solved,” declared Robert Lucas of the University of Chicago in his 2003 presidential address to the American Economic Association. In 2004, Ben Bernanke, a former Princeton professor who is now the chairman of the Federal Reserve Board, celebrated the Great Moderation in economic performance over the previous two decades, which he attributed in part to improved economic policy making.
Last year, everything came apart.
Few economists saw our current crisis coming, but this predictive failure was the least of the field’s problems. More important was the profession’s blindness to the very possibility of catastrophic failures in a market economy. During the golden years, financial economists came to believe that markets were inherently stable — indeed, that stocks and other assets were always priced just right. There was nothing in the prevailing models suggesting the possibility of the kind of collapse that happened last year. Meanwhile, macroeconomists were divided in their views. But the main division was between those who insisted that free-market economies never go astray and those who believed that economies may stray now and then but that any major deviations from the path of prosperity could and would be corrected by the all-powerful Fed. Neither side was prepared to cope with an economy that went off the rails despite the Fed’s best efforts.
And in the wake of the crisis, the fault lines in the economics profession have yawned wider than ever. Lucas says the Obama administration’s stimulus plans are “schlock economics,” and his Chicago colleague John Cochrane says they’re based on discredited “fairy tales.” In response, Brad DeLong of the University of California, Berkeley, writes of the “intellectual collapse” of the Chicago School, and I myself have written that comments from Chicago economists are the product of a Dark Age of macroeconomics in which hard-won knowledge has been forgotten.
What happened to the economics profession? And where does it go from here?
As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth. Until the Great Depression, most economists clung to a vision of capitalism as a perfect or nearly perfect system. That vision wasn’t sustainable in the face of mass unemployment, but as memories of the Depression faded, economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations. The renewed romance with the idealized market was, to be sure, partly a response to shifting political winds, partly a response to financial incentives. But while sabbaticals at the Hoover Institution and job opportunities on Wall Street are nothing to sneeze at, the central cause of the profession’s failure was the desire for an all-encompassing, intellectually elegant approach that also gave economists a chance to show off their mathematical prowess.
Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets — especially financial markets — that can cause the economy’s operating system to undergo sudden, unpredictable crashes; and to the dangers created when regulators don’t believe in regulation.
It’s much harder to say where the economics profession goes from here. But what’s almost certain is that economists will have to learn to live with messiness. That is, they will have to acknowledge the importance of irrational and often unpredictable behavior, face up to the often idiosyncratic imperfections of markets and accept that an elegant economic “theory of everything” is a long way off. In practical terms, this will translate into more cautious policy advice — and a reduced willingness to dismantle economic safeguards in the faith that markets will solve all problems.
II. FROM SMITH TO KEYNES AND BACK
The birth of economics as a discipline is usually credited to Adam Smith, who published “The Wealth of Nations” in 1776. Over the next 160 years an extensive body of economic theory was developed, whose central message was: Trust the market. Yes, economists admitted that there were cases in which markets might fail, of which the most important was the case of “externalities” — costs that people impose on others without paying the price, like traffic congestion or pollution. But the basic presumption of “neoclassical” economics (named after the late-19th-century theorists who elaborated on the concepts of their “classical” predecessors) was that we should have faith in the market system.
This faith was, however, shattered by the Great Depression. Actually, even in the face of total collapse some economists insisted that whatever happens in a market economy must be right: “Depressions are not simply evils,” declared Joseph Schumpeter in 1934 — 1934! They are, he added, “forms of something which has to be done.” But many, and eventually most, economists turned to the insights of John Maynard Keynes for both an explanation of what had happened and a solution to future depressions.
Keynes did not, despite what you may have heard, want the government to run the economy. He described his analysis in his 1936 masterwork, “The General Theory of Employment, Interest and Money,” as “moderately conservative in its implications.” He wanted to fix capitalism, not replace it. But he did challenge the notion that free-market economies can function without a minder, expressing particular contempt for financial markets, which he viewed as being dominated by short-term speculation with little regard for fundamentals. And he called for active government intervention — printing more money and, if necessary, spending heavily on public works — to fight unemployment during slumps.
It’s important to understand that Keynes did much more than make bold assertions. “The General Theory” is a work of profound, deep analysis — analysis that persuaded the best young economists of the day. Yet the story of economics over the past half century is, to a large degree, the story of a retreat from Keynesianism and a return to neoclassicism. The neoclassical revival was initially led by Milton Friedman of the University of Chicago, who asserted as early as 1953 that neoclassical economics works well enough as a description of the way the economy actually functions to be “both extremely fruitful and deserving of much confidence.” But what about depressions?
Friedman’s counterattack against Keynes began with the doctrine known as monetarism. Monetarists didn’t disagree in principle with the idea that a market economy needs deliberate stabilization. “We are all Keynesians now,” Friedman once said, although he later claimed he was quoted out of context. Monetarists asserted, however, that a very limited, circumscribed form of government intervention — namely, instructing central banks to keep the nation’s money supply, the sum of cash in circulation and bank deposits, growing on a steady path — is all that’s required to prevent depressions. Famously, Friedman and his collaborator, Anna Schwartz, argued that if the Federal Reserve had done its job properly, the Great Depression would not have happened. Later, Friedman made a compelling case against any deliberate effort by government to push unemployment below its “natural” level (currently thought to be about 4.8 percent in the United States): excessively expansionary policies, he predicted, would lead to a combination of inflation and high unemployment — a prediction that was borne out by the stagflation of the 1970s, which greatly advanced the credibility of the anti-Keynesian movement.
Eventually, however, the anti-Keynesian counterrevolution went far beyond Friedman’s position, which came to seem relatively moderate compared with what his successors were saying. Among financial economists, Keynes’s disparaging vision of financial markets as a “casino” was replaced by “efficient market” theory, which asserted that financial markets always get asset prices right given the available information. Meanwhile, many macroeconomists completely rejected Keynes’s framework for understanding economic slumps. Some returned to the view of Schumpeter and other apologists for the Great Depression, viewing recessions as a good thing, part of the economy’s adjustment to change. And even those not willing to go that far argued that any attempt to fight an economic slump would do more harm than good.
Not all macroeconomists were willing to go down this road: many became self-described New Keynesians, who continued to believe in an active role for the government. Yet even they mostly accepted the notion that investors and consumers are rational and that markets generally get it right.
Of course, there were exceptions to these trends: a few economists challenged the assumption of rational behavior, questioned the belief that financial markets can be trusted and pointed to the long history of financial crises that had devastating economic consequences. But they were swimming against the tide, unable to make much headway against a pervasive and, in retrospect, foolish complacency.
III. PANGLOSSIAN FINANCE
In the 1930s, financial markets, for obvious reasons, didn’t get much respect. Keynes compared them to “those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those that he thinks likeliest to catch the fancy of the other competitors.”
And Keynes considered it a very bad idea to let such markets, in which speculators spent their time chasing one another’s tails, dictate important business decisions: “When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.”
By 1970 or so, however, the study of financial markets seemed to have been taken over by Voltaire’s Dr. Pangloss, who insisted that we live in the best of all possible worlds. Discussion of investor irrationality, of bubbles, of destructive speculation had virtually disappeared from academic discourse. The field was dominated by the “efficient-market hypothesis,” promulgated by Eugene Fama of the University of Chicago, which claims that financial markets price assets precisely at their intrinsic worth given all publicly available information. (The price of a company’s stock, for example, always accurately reflects the company’s value given the information available on the company’s earnings, its business prospects and so on.) And by the 1980s, finance economists, notably Michael Jensen of the Harvard Business School, were arguing that because financial markets always get prices right, the best thing corporate chieftains can do, not just for themselves but for the sake of the economy, is to maximize their stock prices. In other words, finance economists believed that we should put the capital development of the nation in the hands of what Keynes had called a “casino.”
It’s hard to argue that this transformation in the profession was driven by events. True, the memory of 1929 was gradually receding, but there continued to be bull markets, with widespread tales of speculative excess, followed by bear markets. In 1973-4, for example, stocks lost 48 percent of their value. And the 1987 stock crash, in which the Dow plunged nearly 23 percent in a day for no clear reason, should have raised at least a few doubts about market rationality.
These events, however, which Keynes would have considered evidence of the unreliability of markets, did little to blunt the force of a beautiful idea. The theoretical model that finance economists developed by assuming that every investor rationally balances risk against reward — the so-called Capital Asset Pricing Model, or CAPM (pronounced cap-em) — is wonderfully elegant. And if you accept its premises it’s also extremely useful. CAPM not only tells you how to choose your portfolio — even more important from the financial industry’s point of view, it tells you how to put a price on financial derivatives, claims on claims. The elegance and apparent usefulness of the new theory led to a string of Nobel prizes for its creators, and many of the theory’s adepts also received more mundane rewards: Armed with their new models and formidable math skills — the more arcane uses of CAPM require physicist-level computations — mild-mannered business-school professors could and did become Wall Street rocket scientists, earning Wall Street paychecks.
To be fair, finance theorists didn’t accept the efficient-market hypothesis merely because it was elegant, convenient and lucrative. They also produced a great deal of statistical evidence, which at first seemed strongly supportive. But this evidence was of an oddly limited form. Finance economists rarely asked the seemingly obvious (though not easily answered) question of whether asset prices made sense given real-world fundamentals like earnings. Instead, they asked only whether asset prices made sense given other asset prices. Larry Summers, now the top economic adviser in the Obama administration, once mocked finance professors with a parable about “ketchup economists” who “have shown that two-quart bottles of ketchup invariably sell for exactly twice as much as one-quart bottles of ketchup,” and conclude from this that the ketchup market is perfectly efficient.
But neither this mockery nor more polite critiques from economists like Robert Shiller of Yale had much effect. Finance theorists continued to believe that their models were essentially right, and so did many people making real-world decisions. Not least among these was Alan Greenspan, who was then the Fed chairman and a long-time supporter of financial deregulation whose rejection of calls to rein in subprime lending or address the ever-inflating housing bubble rested in large part on the belief that modern financial economics had everything under control. There was a telling moment in 2005, at a conference held to honor Greenspan’s tenure at the Fed. One brave attendee, Raghuram Rajan (of the University of Chicago, surprisingly), presented a paper warning that the financial system was taking on potentially dangerous levels of risk. He was mocked by almost all present — including, by the way, Larry Summers, who dismissed his warnings as “misguided.”
By October of last year, however, Greenspan was admitting that he was in a state of “shocked disbelief,” because “the whole intellectual edifice” had “collapsed.” Since this collapse of the intellectual edifice was also a collapse of real-world markets, the result was a severe recession — the worst, by many measures, since the Great Depression. What should policy makers do? Unfortunately, macroeconomics, which should have been providing clear guidance about how to address the slumping economy, was in its own state of disarray.
IV. THE TROUBLE WITH MACRO
“We have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand. The result is that our possibilities of wealth may run to waste for a time — perhaps for a long time.” So wrote John Maynard Keynes in an essay titled “The Great Slump of 1930,” in which he tried to explain the catastrophe then overtaking the world. And the world’s possibilities of wealth did indeed run to waste for a long time; it took World War II to bring the Great Depression to a definitive end.
Why was Keynes’s diagnosis of the Great Depression as a “colossal muddle” so compelling at first? And why did economics, circa 1975, divide into opposing camps over the value of Keynes’s views?
I like to explain the essence of Keynesian economics with a true story that also serves as a parable, a small-scale version of the messes that can afflict entire economies. Consider the travails of the Capitol Hill Baby-Sitting Co-op.
This co-op, whose problems were recounted in a 1977 article in The Journal of Money, Credit and Banking, was an association of about 150 young couples who agreed to help one another by baby-sitting for one another’s children when parents wanted a night out. To ensure that every couple did its fair share of baby-sitting, the co-op introduced a form of scrip: coupons made out of heavy pieces of paper, each entitling the bearer to one half-hour of sitting time. Initially, members received 20 coupons on joining and were required to return the same amount on departing the group.
Unfortunately, it turned out that the co-op’s members, on average, wanted to hold a reserve of more than 20 coupons, perhaps, in case they should want to go out several times in a row. As a result, relatively few people wanted to spend their scrip and go out, while many wanted to baby-sit so they could add to their hoard. But since baby-sitting opportunities arise only when someone goes out for the night, this meant that baby-sitting jobs were hard to find, which made members of the co-op even more reluctant to go out, making baby-sitting jobs even scarcer. . . .
In short, the co-op fell into a recession.
O.K., what do you think of this story? Don’t dismiss it as silly and trivial: economists have used small-scale examples to shed light on big questions ever since Adam Smith saw the roots of economic progress in a pin factory, and they’re right to do so. The question is whether this particular example, in which a recession is a problem of inadequate demand — there isn’t enough demand for baby-sitting to provide jobs for everyone who wants one — gets at the essence of what happens in a recession.
Forty years ago most economists would have agreed with this interpretation. But since then macroeconomics has divided into two great factions: “saltwater” economists (mainly in coastal U.S. universities), who have a more or less Keynesian vision of what recessions are all about; and “freshwater” economists (mainly at inland schools), who consider that vision nonsense.
Freshwater economists are, essentially, neoclassical purists. They believe that all worthwhile economic analysis starts from the premise that people are rational and markets work, a premise violated by the story of the baby-sitting co-op. As they see it, a general lack of sufficient demand isn’t possible, because prices always move to match supply with demand. If people want more baby-sitting coupons, the value of those coupons will rise, so that they’re worth, say, 40 minutes of baby-sitting rather than half an hour — or, equivalently, the cost of an hours’ baby-sitting would fall from 2 coupons to 1.5. And that would solve the problem: the purchasing power of the coupons in circulation would have risen, so that people would feel no need to hoard more, and there would be no recession.
But don’t recessions look like periods in which there just isn’t enough demand to employ everyone willing to work? Appearances can be deceiving, say the freshwater theorists. Sound economics, in their view, says that overall failures of demand can’t happen — and that means that they don’t. Keynesian economics has been “proved false,” Cochrane, of the University of Chicago, says.
Yet recessions do happen. Why? In the 1970s the leading freshwater macroeconomist, the Nobel laureate Robert Lucas, argued that recessions were caused by temporary confusion: workers and companies had trouble distinguishing overall changes in the level of prices because of inflation or deflation from changes in their own particular business situation. And Lucas warned that any attempt to fight the business cycle would be counterproductive: activist policies, he argued, would just add to the confusion.
By the 1980s, however, even this severely limited acceptance of the idea that recessions are bad things had been rejected by many freshwater economists. Instead, the new leaders of the movement, especially Edward Prescott, who was then at the University of Minnesota (you can see where the freshwater moniker comes from), argued that price fluctuations and changes in demand actually had nothing to do with the business cycle. Rather, the business cycle reflects fluctuations in the rate of technological progress, which are amplified by the rational response of workers, who voluntarily work more when the environment is favorable and less when it’s unfavorable. Unemployment is a deliberate decision by workers to take time off.
Put baldly like that, this theory sounds foolish — was the Great Depression really the Great Vacation? And to be honest, I think it really is silly. But the basic premise of Prescott’s “real business cycle” theory was embedded in ingeniously constructed mathematical models, which were mapped onto real data using sophisticated statistical techniques, and the theory came to dominate the teaching of macroeconomics in many university departments. In 2004, reflecting the theory’s influence, Prescott shared a Nobel with Finn Kydland of Carnegie Mellon University.
Meanwhile, saltwater economists balked. Where the freshwater economists were purists, saltwater economists were pragmatists. While economists like N. Gregory Mankiw at Harvard, Olivier Blanchard at M.I.T. and David Romer at the University of California, Berkeley, acknowledged that it was hard to reconcile a Keynesian demand-side view of recessions with neoclassical theory, they found the evidence that recessions are, in fact, demand-driven too compelling to reject. So they were willing to deviate from the assumption of perfect markets or perfect rationality, or both, adding enough imperfections to accommodate a more or less Keynesian view of recessions. And in the saltwater view, active policy to fight recessions remained desirable.
But the self-described New Keynesian economists weren’t immune to the charms of rational individuals and perfect markets. They tried to keep their deviations from neoclassical orthodoxy as limited as possible. This meant that there was no room in the prevailing models for such things as bubbles and banking-system collapse. The fact that such things continued to happen in the real world — there was a terrible financial and macroeconomic crisis in much of Asia in 1997-8 and a depression-level slump in Argentina in 2002 — wasn’t reflected in the mainstream of New Keynesian thinking.
Even so, you might have thought that the differing worldviews of freshwater and saltwater economists would have put them constantly at loggerheads over economic policy. Somewhat surprisingly, however, between around 1985 and 2007 the disputes between freshwater and saltwater economists were mainly about theory, not action. The reason, I believe, is that New Keynesians, unlike the original Keynesians, didn’t think fiscal policy — changes in government spending or taxes — was needed to fight recessions. They believed that monetary policy, administered by the technocrats at the Fed, could provide whatever remedies the economy needed. At a 90th birthday celebration for Milton Friedman, Ben Bernanke, formerly a more or less New Keynesian professor at Princeton, and by then a member of the Fed’s governing board, declared of the Great Depression: “You’re right. We did it. We’re very sorry. But thanks to you, it won’t happen again.” The clear message was that all you need to avoid depressions is a smarter Fed.
And as long as macroeconomic policy was left in the hands of the maestro Greenspan, without Keynesian-type stimulus programs, freshwater economists found little to complain about. (They didn’t believe that monetary policy did any good, but they didn’t believe it did any harm, either.)
It would take a crisis to reveal both how little common ground there was and how Panglossian even New Keynesian economics had become.
V. NOBODY COULD HAVE PREDICTED . . .
In recent, rueful economics discussions, an all-purpose punch line has become “nobody could have predicted. . . .” It’s what you say with regard to disasters that could have been predicted, should have been predicted and actually were predicted by a few economists who were scoffed at for their pains.
Take, for example, the precipitous rise and fall of housing prices. Some economists, notably Robert Shiller, did identify the bubble and warn of painful consequences if it were to burst. Yet key policy makers failed to see the obvious. In 2004, Alan Greenspan dismissed talk of a housing bubble: “a national severe price distortion,” he declared, was “most unlikely.” Home-price increases, Ben Bernanke said in 2005, “largely reflect strong economic fundamentals.”
How did they miss the bubble? To be fair, interest rates were unusually low, possibly explaining part of the price rise. It may be that Greenspan and Bernanke also wanted to celebrate the Fed’s success in pulling the economy out of the 2001 recession; conceding that much of that success rested on the creation of a monstrous bubble would have placed a damper on the festivities.
But there was something else going on: a general belief that bubbles just don’t happen. What’s striking, when you reread Greenspan’s assurances, is that they weren’t based on evidence — they were based on the a priori assertion that there simply can’t be a bubble in housing. And the finance theorists were even more adamant on this point. In a 2007 interview, Eugene Fama, the father of the efficient-market hypothesis, declared that “the word ‘bubble’ drives me nuts,” and went on to explain why we can trust the housing market: “Housing markets are less liquid, but people are very careful when they buy houses. It’s typically the biggest investment they’re going to make, so they look around very carefully and they compare prices. The bidding process is very detailed.”
Indeed, home buyers generally do carefully compare prices — that is, they compare the price of their potential purchase with the prices of other houses. But this says nothing about whether the overall price of houses is justified. It’s ketchup economics, again: because a two-quart bottle of ketchup costs twice as much as a one-quart bottle, finance theorists declare that the price of ketchup must be right.
In short, the belief in efficient financial markets blinded many if not most economists to the emergence of the biggest financial bubble in history. And efficient-market theory also played a significant role in inflating that bubble in the first place.
Now that the undiagnosed bubble has burst, the true riskiness of supposedly safe assets has been revealed and the financial system has demonstrated its fragility. U.S. households have seen $13 trillion in wealth evaporate. More than six million jobs have been lost, and the unemployment rate appears headed for its highest level since 1940. So what guidance does modern economics have to offer in our current predicament? And should we trust it?
VI. THE STIMULUS SQUABBLE
Between 1985 and 2007 a false peace settled over the field of macroeconomics. There hadn’t been any real convergence of views between the saltwater and freshwater factions. But these were the years of the Great Moderation — an extended period during which inflation was subdued and recessions were relatively mild. Saltwater economists believed that the Federal Reserve had everything under control. Freshwater economists didn’t think the Fed’s actions were actually beneficial, but they were willing to let matters lie.
But the crisis ended the phony peace. Suddenly the narrow, technocratic policies both sides were willing to accept were no longer sufficient — and the need for a broader policy response brought the old conflicts out into the open, fiercer than ever.
Why weren’t those narrow, technocratic policies sufficient? The answer, in a word, is zero.
During a normal recession, the Fed responds by buying Treasury bills — short-term government debt — from banks. This drives interest rates on government debt down; investors seeking a higher rate of return move into other assets, driving other interest rates down as well; and normally these lower interest rates eventually lead to an economic bounceback. The Fed dealt with the recession that began in 1990 by driving short-term interest rates from 9 percent down to 3 percent. It dealt with the recession that began in 2001 by driving rates from 6.5 percent to 1 percent. And it tried to deal with the current recession by driving rates down from 5.25 percent to zero.
But zero, it turned out, isn’t low enough to end this recession. And the Fed can’t push rates below zero, since at near-zero rates investors simply hoard cash rather than lending it out. So by late 2008, with interest rates basically at what macroeconomists call the “zero lower bound” even as the recession continued to deepen, conventional monetary policy had lost all traction.
Now what? This is the second time America has been up against the zero lower bound, the previous occasion being the Great Depression. And it was precisely the observation that there’s a lower bound to interest rates that led Keynes to advocate higher government spending: when monetary policy is ineffective and the private sector can’t be persuaded to spend more, the public sector must take its place in supporting the economy. Fiscal stimulus is the Keynesian answer to the kind of depression-type economic situation we’re currently in.
Such Keynesian thinking underlies the Obama administration’s economic policies — and the freshwater economists are furious. For 25 or so years they tolerated the Fed’s efforts to manage the economy, but a full-blown Keynesian resurgence was something entirely different. Back in 1980, Lucas, of the University of Chicago, wrote that Keynesian economics was so ludicrous that “at research seminars, people don’t take Keynesian theorizing seriously anymore; the audience starts to whisper and giggle to one another.” Admitting that Keynes was largely right, after all, would be too humiliating a comedown.
And so Chicago’s Cochrane, outraged at the idea that government spending could mitigate the latest recession, declared: “It’s not part of what anybody has taught graduate students since the 1960s. They [Keynesian ideas] are fairy tales that have been proved false. It is very comforting in times of stress to go back to the fairy tales we heard as children, but it doesn’t make them less false.” (It’s a mark of how deep the division between saltwater and freshwater runs that Cochrane doesn’t believe that “anybody” teaches ideas that are, in fact, taught in places like Princeton, M.I.T. and Harvard.)
Meanwhile, saltwater economists, who had comforted themselves with the belief that the great divide in macroeconomics was narrowing, were shocked to realize that freshwater economists hadn’t been listening at all. Freshwater economists who inveighed against the stimulus didn’t sound like scholars who had weighed Keynesian arguments and found them wanting. Rather, they sounded like people who had no idea what Keynesian economics was about, who were resurrecting pre-1930 fallacies in the belief that they were saying something new and profound.
And it wasn’t just Keynes whose ideas seemed to have been forgotten. As Brad DeLong of the University of California, Berkeley, has pointed out in his laments about the Chicago school’s “intellectual collapse,” the school’s current stance amounts to a wholesale rejection of Milton Friedman’s ideas, as well. Friedman believed that Fed policy rather than changes in government spending should be used to stabilize the economy, but he never asserted that an increase in government spending cannot, under any circumstances, increase employment. In fact, rereading Friedman’s 1970 summary of his ideas, “A Theoretical Framework for Monetary Analysis,” what’s striking is how Keynesian it seems.
And Friedman certainly never bought into the idea that mass unemployment represents a voluntary reduction in work effort or the idea that recessions are actually good for the economy. Yet the current generation of freshwater economists has been making both arguments. Thus Chicago’s Casey Mulligan suggests that unemployment is so high because many workers are choosing not to take jobs: “Employees face financial incentives that encourage them not to work . . . decreased employment is explained more by reductions in the supply of labor (the willingness of people to work) and less by the demand for labor (the number of workers that employers need to hire).” Mulligan has suggested, in particular, that workers are choosing to remain unemployed because that improves their odds of receiving mortgage relief. And Cochrane declares that high unemployment is actually good: “We should have a recession. People who spend their lives pounding nails in Nevada need something else to do.”
Personally, I think this is crazy. Why should it take mass unemployment across the whole nation to get carpenters to move out of Nevada? Can anyone seriously claim that we’ve lost 6.7 million jobs because fewer Americans want to work? But it was inevitable that freshwater economists would find themselves trapped in this cul-de-sac: if you start from the assumption that people are perfectly rational and markets are perfectly efficient, you have to conclude that unemployment is voluntary and recessions are desirable.
Yet if the crisis has pushed freshwater economists into absurdity, it has also created a lot of soul-searching among saltwater economists. Their framework, unlike that of the Chicago School, both allows for the possibility of involuntary unemployment and considers it a bad thing. But the New Keynesian models that have come to dominate teaching and research assume that people are perfectly rational and financial markets are perfectly efficient. To get anything like the current slump into their models, New Keynesians are forced to introduce some kind of fudge factor that for reasons unspecified temporarily depresses private spending. (I’ve done exactly that in some of my own work.) And if the analysis of where we are now rests on this fudge factor, how much confidence can we have in the models’ predictions about where we are going?
The state of macro, in short, is not good. So where does the profession go from here?
VII. FLAWS AND FRICTIONS
Economics, as a field, got in trouble because economists were seduced by the vision of a perfect, frictionless market system. If the profession is to redeem itself, it will have to reconcile itself to a less alluring vision — that of a market economy that has many virtues but that is also shot through with flaws and frictions. The good news is that we don’t have to start from scratch. Even during the heyday of perfect-market economics, there was a lot of work done on the ways in which the real economy deviated from the theoretical ideal. What’s probably going to happen now — in fact, it’s already happening — is that flaws-and-frictions economics will move from the periphery of economic analysis to its center.
There’s already a fairly well developed example of the kind of economics I have in mind: the school of thought known as behavioral finance. Practitioners of this approach emphasize two things. First, many real-world investors bear little resemblance to the cool calculators of efficient-market theory: they’re all too subject to herd behavior, to bouts of irrational exuberance and unwarranted panic. Second, even those who try to base their decisions on cool calculation often find that they can’t, that problems of trust, credibility and limited collateral force them to run with the herd.
On the first point: even during the heyday of the efficient-market hypothesis, it seemed obvious that many real-world investors aren’t as rational as the prevailing models assumed. Larry Summers once began a paper on finance by declaring: “THERE ARE IDIOTS. Look around.” But what kind of idiots (the preferred term in the academic literature, actually, is “noise traders”) are we talking about? Behavioral finance, drawing on the broader movement known as behavioral economics, tries to answer that question by relating the apparent irrationality of investors to known biases in human cognition, like the tendency to care more about small losses than small gains or the tendency to extrapolate too readily from small samples (e.g., assuming that because home prices rose in the past few years, they’ll keep on rising).
Until the crisis, efficient-market advocates like Eugene Fama dismissed the evidence produced on behalf of behavioral finance as a collection of “curiosity items” of no real importance. That’s a much harder position to maintain now that the collapse of a vast bubble — a bubble correctly diagnosed by behavioral economists like Robert Shiller of Yale, who related it to past episodes of “irrational exuberance” — has brought the world economy to its knees.
On the second point: suppose that there are, indeed, idiots. How much do they matter? Not much, argued Milton Friedman in an influential 1953 paper: smart investors will make money by buying when the idiots sell and selling when they buy and will stabilize markets in the process. But the second strand of behavioral finance says that Friedman was wrong, that financial markets are sometimes highly unstable, and right now that view seems hard to reject.
Probably the most influential paper in this vein was a 1997 publication by Andrei Shleifer of Harvard and Robert Vishny of Chicago, which amounted to a formalization of the old line that “the market can stay irrational longer than you can stay solvent.” As they pointed out, arbitrageurs — the people who are supposed to buy low and sell high — need capital to do their jobs. And a severe plunge in asset prices, even if it makes no sense in terms of fundamentals, tends to deplete that capital. As a result, the smart money is forced out of the market, and prices may go into a downward spiral.
The spread of the current financial crisis seemed almost like an object lesson in the perils of financial instability. And the general ideas underlying models of financial instability have proved highly relevant to economic policy: a focus on the depleted capital of financial institutions helped guide policy actions taken after the fall of Lehman, and it looks (cross your fingers) as if these actions successfully headed off an even bigger financial collapse.
Meanwhile, what about macroeconomics? Recent events have pretty decisively refuted the idea that recessions are an optimal response to fluctuations in the rate of technological progress; a more or less Keynesian view is the only plausible game in town. Yet standard New Keynesian models left no room for a crisis like the one we’re having, because those models generally accepted the efficient-market view of the financial sector.
There were some exceptions. One line of work, pioneered by none other than Ben Bernanke working with Mark Gertler of New York University, emphasized the way the lack of sufficient collateral can hinder the ability of businesses to raise funds and pursue investment opportunities. A related line of work, largely established by my Princeton colleague Nobuhiro Kiyotaki and John Moore of the London School of Economics, argued that prices of assets such as real estate can suffer self-reinforcing plunges that in turn depress the economy as a whole. But until now the impact of dysfunctional finance hasn’t been at the core even of Keynesian economics. Clearly, that has to change.
VIII. RE-EMBRACING KEYNES
So here’s what I think economists have to do. First, they have to face up to the inconvenient reality that financial markets fall far short of perfection, that they are subject to extraordinary delusions and the madness of crowds. Second, they have to admit — and this will be very hard for the people who giggled and whispered over Keynes — that Keynesian economics remains the best framework we have for making sense of recessions and depressions. Third, they’ll have to do their best to incorporate the realities of finance into macroeconomics.
Many economists will find these changes deeply disturbing. It will be a long time, if ever, before the new, more realistic approaches to finance and macroeconomics offer the same kind of clarity, completeness and sheer beauty that characterizes the full neoclassical approach. To some economists that will be a reason to cling to neoclassicism, despite its utter failure to make sense of the greatest economic crisis in three generations. This seems, however, like a good time to recall the words of H. L. Mencken: “There is always an easy solution to every human problem — neat, plausible and wrong.”
When it comes to the all-too-human problem of recessions and depressions, economists need to abandon the neat but wrong solution of assuming that everyone is rational and markets work perfectly. The vision that emerges as the profession rethinks its foundations may not be all that clear; it certainly won’t be neat; but we can hope that it will have the virtue of being at least partly right.
Paul Krugman is a Times Op-Ed columnist and winner of the 2008 Nobel Memorial Prize in Economic Science. His latest book is “The Return of Depression Economics and the Crisis of 2008.”
This article has been revised to reflect the following correction:
Correction: September 6, 2009
Because of an editing error, an article on Page 36 this weekend about the failure of economists to anticipate the latest recession misquotes the economist John Maynard Keynes, who compared the financial markets of the 1930s to newspaper beauty contests in which readers tried to correctly pick all six eventual winners. Keynes noted that a competitor did not have to pick “those faces which he himself finds prettiest, but those that he thinks likeliest to catch the fancy of the other competitors.” He did not say, “nor even those that he thinks likeliest to catch the fancy of other competitors.”
Copyright 2009 The New York Times Company
http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html?_r=1&em=&exprod=myyahoo&pagewanted=print
I. MISTAKING BEAUTY FOR TRUTH
It’s hard to believe now, but not long ago economists were congratulating themselves over the success of their field. Those successes — or so they believed — were both theoretical and practical, leading to a golden era for the profession. On the theoretical side, they thought that they had resolved their internal disputes. Thus, in a 2008 paper titled “The State of Macro” (that is, macroeconomics, the study of big-picture issues like recessions), Olivier Blanchard of M.I.T., now the chief economist at the International Monetary Fund, declared that “the state of macro is good.” The battles of yesteryear, he said, were over, and there had been a “broad convergence of vision.” And in the real world, economists believed they had things under control: the “central problem of depression-prevention has been solved,” declared Robert Lucas of the University of Chicago in his 2003 presidential address to the American Economic Association. In 2004, Ben Bernanke, a former Princeton professor who is now the chairman of the Federal Reserve Board, celebrated the Great Moderation in economic performance over the previous two decades, which he attributed in part to improved economic policy making.
Last year, everything came apart.
Few economists saw our current crisis coming, but this predictive failure was the least of the field’s problems. More important was the profession’s blindness to the very possibility of catastrophic failures in a market economy. During the golden years, financial economists came to believe that markets were inherently stable — indeed, that stocks and other assets were always priced just right. There was nothing in the prevailing models suggesting the possibility of the kind of collapse that happened last year. Meanwhile, macroeconomists were divided in their views. But the main division was between those who insisted that free-market economies never go astray and those who believed that economies may stray now and then but that any major deviations from the path of prosperity could and would be corrected by the all-powerful Fed. Neither side was prepared to cope with an economy that went off the rails despite the Fed’s best efforts.
And in the wake of the crisis, the fault lines in the economics profession have yawned wider than ever. Lucas says the Obama administration’s stimulus plans are “schlock economics,” and his Chicago colleague John Cochrane says they’re based on discredited “fairy tales.” In response, Brad DeLong of the University of California, Berkeley, writes of the “intellectual collapse” of the Chicago School, and I myself have written that comments from Chicago economists are the product of a Dark Age of macroeconomics in which hard-won knowledge has been forgotten.
What happened to the economics profession? And where does it go from here?
As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth. Until the Great Depression, most economists clung to a vision of capitalism as a perfect or nearly perfect system. That vision wasn’t sustainable in the face of mass unemployment, but as memories of the Depression faded, economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations. The renewed romance with the idealized market was, to be sure, partly a response to shifting political winds, partly a response to financial incentives. But while sabbaticals at the Hoover Institution and job opportunities on Wall Street are nothing to sneeze at, the central cause of the profession’s failure was the desire for an all-encompassing, intellectually elegant approach that also gave economists a chance to show off their mathematical prowess.
Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets — especially financial markets — that can cause the economy’s operating system to undergo sudden, unpredictable crashes; and to the dangers created when regulators don’t believe in regulation.
It’s much harder to say where the economics profession goes from here. But what’s almost certain is that economists will have to learn to live with messiness. That is, they will have to acknowledge the importance of irrational and often unpredictable behavior, face up to the often idiosyncratic imperfections of markets and accept that an elegant economic “theory of everything” is a long way off. In practical terms, this will translate into more cautious policy advice — and a reduced willingness to dismantle economic safeguards in the faith that markets will solve all problems.
II. FROM SMITH TO KEYNES AND BACK
The birth of economics as a discipline is usually credited to Adam Smith, who published “The Wealth of Nations” in 1776. Over the next 160 years an extensive body of economic theory was developed, whose central message was: Trust the market. Yes, economists admitted that there were cases in which markets might fail, of which the most important was the case of “externalities” — costs that people impose on others without paying the price, like traffic congestion or pollution. But the basic presumption of “neoclassical” economics (named after the late-19th-century theorists who elaborated on the concepts of their “classical” predecessors) was that we should have faith in the market system.
This faith was, however, shattered by the Great Depression. Actually, even in the face of total collapse some economists insisted that whatever happens in a market economy must be right: “Depressions are not simply evils,” declared Joseph Schumpeter in 1934 — 1934! They are, he added, “forms of something which has to be done.” But many, and eventually most, economists turned to the insights of John Maynard Keynes for both an explanation of what had happened and a solution to future depressions.
Keynes did not, despite what you may have heard, want the government to run the economy. He described his analysis in his 1936 masterwork, “The General Theory of Employment, Interest and Money,” as “moderately conservative in its implications.” He wanted to fix capitalism, not replace it. But he did challenge the notion that free-market economies can function without a minder, expressing particular contempt for financial markets, which he viewed as being dominated by short-term speculation with little regard for fundamentals. And he called for active government intervention — printing more money and, if necessary, spending heavily on public works — to fight unemployment during slumps.
It’s important to understand that Keynes did much more than make bold assertions. “The General Theory” is a work of profound, deep analysis — analysis that persuaded the best young economists of the day. Yet the story of economics over the past half century is, to a large degree, the story of a retreat from Keynesianism and a return to neoclassicism. The neoclassical revival was initially led by Milton Friedman of the University of Chicago, who asserted as early as 1953 that neoclassical economics works well enough as a description of the way the economy actually functions to be “both extremely fruitful and deserving of much confidence.” But what about depressions?
Friedman’s counterattack against Keynes began with the doctrine known as monetarism. Monetarists didn’t disagree in principle with the idea that a market economy needs deliberate stabilization. “We are all Keynesians now,” Friedman once said, although he later claimed he was quoted out of context. Monetarists asserted, however, that a very limited, circumscribed form of government intervention — namely, instructing central banks to keep the nation’s money supply, the sum of cash in circulation and bank deposits, growing on a steady path — is all that’s required to prevent depressions. Famously, Friedman and his collaborator, Anna Schwartz, argued that if the Federal Reserve had done its job properly, the Great Depression would not have happened. Later, Friedman made a compelling case against any deliberate effort by government to push unemployment below its “natural” level (currently thought to be about 4.8 percent in the United States): excessively expansionary policies, he predicted, would lead to a combination of inflation and high unemployment — a prediction that was borne out by the stagflation of the 1970s, which greatly advanced the credibility of the anti-Keynesian movement.
Eventually, however, the anti-Keynesian counterrevolution went far beyond Friedman’s position, which came to seem relatively moderate compared with what his successors were saying. Among financial economists, Keynes’s disparaging vision of financial markets as a “casino” was replaced by “efficient market” theory, which asserted that financial markets always get asset prices right given the available information. Meanwhile, many macroeconomists completely rejected Keynes’s framework for understanding economic slumps. Some returned to the view of Schumpeter and other apologists for the Great Depression, viewing recessions as a good thing, part of the economy’s adjustment to change. And even those not willing to go that far argued that any attempt to fight an economic slump would do more harm than good.
Not all macroeconomists were willing to go down this road: many became self-described New Keynesians, who continued to believe in an active role for the government. Yet even they mostly accepted the notion that investors and consumers are rational and that markets generally get it right.
Of course, there were exceptions to these trends: a few economists challenged the assumption of rational behavior, questioned the belief that financial markets can be trusted and pointed to the long history of financial crises that had devastating economic consequences. But they were swimming against the tide, unable to make much headway against a pervasive and, in retrospect, foolish complacency.
III. PANGLOSSIAN FINANCE
In the 1930s, financial markets, for obvious reasons, didn’t get much respect. Keynes compared them to “those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those that he thinks likeliest to catch the fancy of the other competitors.”
And Keynes considered it a very bad idea to let such markets, in which speculators spent their time chasing one another’s tails, dictate important business decisions: “When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.”
By 1970 or so, however, the study of financial markets seemed to have been taken over by Voltaire’s Dr. Pangloss, who insisted that we live in the best of all possible worlds. Discussion of investor irrationality, of bubbles, of destructive speculation had virtually disappeared from academic discourse. The field was dominated by the “efficient-market hypothesis,” promulgated by Eugene Fama of the University of Chicago, which claims that financial markets price assets precisely at their intrinsic worth given all publicly available information. (The price of a company’s stock, for example, always accurately reflects the company’s value given the information available on the company’s earnings, its business prospects and so on.) And by the 1980s, finance economists, notably Michael Jensen of the Harvard Business School, were arguing that because financial markets always get prices right, the best thing corporate chieftains can do, not just for themselves but for the sake of the economy, is to maximize their stock prices. In other words, finance economists believed that we should put the capital development of the nation in the hands of what Keynes had called a “casino.”
It’s hard to argue that this transformation in the profession was driven by events. True, the memory of 1929 was gradually receding, but there continued to be bull markets, with widespread tales of speculative excess, followed by bear markets. In 1973-4, for example, stocks lost 48 percent of their value. And the 1987 stock crash, in which the Dow plunged nearly 23 percent in a day for no clear reason, should have raised at least a few doubts about market rationality.
These events, however, which Keynes would have considered evidence of the unreliability of markets, did little to blunt the force of a beautiful idea. The theoretical model that finance economists developed by assuming that every investor rationally balances risk against reward — the so-called Capital Asset Pricing Model, or CAPM (pronounced cap-em) — is wonderfully elegant. And if you accept its premises it’s also extremely useful. CAPM not only tells you how to choose your portfolio — even more important from the financial industry’s point of view, it tells you how to put a price on financial derivatives, claims on claims. The elegance and apparent usefulness of the new theory led to a string of Nobel prizes for its creators, and many of the theory’s adepts also received more mundane rewards: Armed with their new models and formidable math skills — the more arcane uses of CAPM require physicist-level computations — mild-mannered business-school professors could and did become Wall Street rocket scientists, earning Wall Street paychecks.
To be fair, finance theorists didn’t accept the efficient-market hypothesis merely because it was elegant, convenient and lucrative. They also produced a great deal of statistical evidence, which at first seemed strongly supportive. But this evidence was of an oddly limited form. Finance economists rarely asked the seemingly obvious (though not easily answered) question of whether asset prices made sense given real-world fundamentals like earnings. Instead, they asked only whether asset prices made sense given other asset prices. Larry Summers, now the top economic adviser in the Obama administration, once mocked finance professors with a parable about “ketchup economists” who “have shown that two-quart bottles of ketchup invariably sell for exactly twice as much as one-quart bottles of ketchup,” and conclude from this that the ketchup market is perfectly efficient.
But neither this mockery nor more polite critiques from economists like Robert Shiller of Yale had much effect. Finance theorists continued to believe that their models were essentially right, and so did many people making real-world decisions. Not least among these was Alan Greenspan, who was then the Fed chairman and a long-time supporter of financial deregulation whose rejection of calls to rein in subprime lending or address the ever-inflating housing bubble rested in large part on the belief that modern financial economics had everything under control. There was a telling moment in 2005, at a conference held to honor Greenspan’s tenure at the Fed. One brave attendee, Raghuram Rajan (of the University of Chicago, surprisingly), presented a paper warning that the financial system was taking on potentially dangerous levels of risk. He was mocked by almost all present — including, by the way, Larry Summers, who dismissed his warnings as “misguided.”
By October of last year, however, Greenspan was admitting that he was in a state of “shocked disbelief,” because “the whole intellectual edifice” had “collapsed.” Since this collapse of the intellectual edifice was also a collapse of real-world markets, the result was a severe recession — the worst, by many measures, since the Great Depression. What should policy makers do? Unfortunately, macroeconomics, which should have been providing clear guidance about how to address the slumping economy, was in its own state of disarray.
IV. THE TROUBLE WITH MACRO
“We have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand. The result is that our possibilities of wealth may run to waste for a time — perhaps for a long time.” So wrote John Maynard Keynes in an essay titled “The Great Slump of 1930,” in which he tried to explain the catastrophe then overtaking the world. And the world’s possibilities of wealth did indeed run to waste for a long time; it took World War II to bring the Great Depression to a definitive end.
Why was Keynes’s diagnosis of the Great Depression as a “colossal muddle” so compelling at first? And why did economics, circa 1975, divide into opposing camps over the value of Keynes’s views?
I like to explain the essence of Keynesian economics with a true story that also serves as a parable, a small-scale version of the messes that can afflict entire economies. Consider the travails of the Capitol Hill Baby-Sitting Co-op.
This co-op, whose problems were recounted in a 1977 article in The Journal of Money, Credit and Banking, was an association of about 150 young couples who agreed to help one another by baby-sitting for one another’s children when parents wanted a night out. To ensure that every couple did its fair share of baby-sitting, the co-op introduced a form of scrip: coupons made out of heavy pieces of paper, each entitling the bearer to one half-hour of sitting time. Initially, members received 20 coupons on joining and were required to return the same amount on departing the group.
Unfortunately, it turned out that the co-op’s members, on average, wanted to hold a reserve of more than 20 coupons, perhaps, in case they should want to go out several times in a row. As a result, relatively few people wanted to spend their scrip and go out, while many wanted to baby-sit so they could add to their hoard. But since baby-sitting opportunities arise only when someone goes out for the night, this meant that baby-sitting jobs were hard to find, which made members of the co-op even more reluctant to go out, making baby-sitting jobs even scarcer. . . .
In short, the co-op fell into a recession.
O.K., what do you think of this story? Don’t dismiss it as silly and trivial: economists have used small-scale examples to shed light on big questions ever since Adam Smith saw the roots of economic progress in a pin factory, and they’re right to do so. The question is whether this particular example, in which a recession is a problem of inadequate demand — there isn’t enough demand for baby-sitting to provide jobs for everyone who wants one — gets at the essence of what happens in a recession.
Forty years ago most economists would have agreed with this interpretation. But since then macroeconomics has divided into two great factions: “saltwater” economists (mainly in coastal U.S. universities), who have a more or less Keynesian vision of what recessions are all about; and “freshwater” economists (mainly at inland schools), who consider that vision nonsense.
Freshwater economists are, essentially, neoclassical purists. They believe that all worthwhile economic analysis starts from the premise that people are rational and markets work, a premise violated by the story of the baby-sitting co-op. As they see it, a general lack of sufficient demand isn’t possible, because prices always move to match supply with demand. If people want more baby-sitting coupons, the value of those coupons will rise, so that they’re worth, say, 40 minutes of baby-sitting rather than half an hour — or, equivalently, the cost of an hours’ baby-sitting would fall from 2 coupons to 1.5. And that would solve the problem: the purchasing power of the coupons in circulation would have risen, so that people would feel no need to hoard more, and there would be no recession.
But don’t recessions look like periods in which there just isn’t enough demand to employ everyone willing to work? Appearances can be deceiving, say the freshwater theorists. Sound economics, in their view, says that overall failures of demand can’t happen — and that means that they don’t. Keynesian economics has been “proved false,” Cochrane, of the University of Chicago, says.
Yet recessions do happen. Why? In the 1970s the leading freshwater macroeconomist, the Nobel laureate Robert Lucas, argued that recessions were caused by temporary confusion: workers and companies had trouble distinguishing overall changes in the level of prices because of inflation or deflation from changes in their own particular business situation. And Lucas warned that any attempt to fight the business cycle would be counterproductive: activist policies, he argued, would just add to the confusion.
By the 1980s, however, even this severely limited acceptance of the idea that recessions are bad things had been rejected by many freshwater economists. Instead, the new leaders of the movement, especially Edward Prescott, who was then at the University of Minnesota (you can see where the freshwater moniker comes from), argued that price fluctuations and changes in demand actually had nothing to do with the business cycle. Rather, the business cycle reflects fluctuations in the rate of technological progress, which are amplified by the rational response of workers, who voluntarily work more when the environment is favorable and less when it’s unfavorable. Unemployment is a deliberate decision by workers to take time off.
Put baldly like that, this theory sounds foolish — was the Great Depression really the Great Vacation? And to be honest, I think it really is silly. But the basic premise of Prescott’s “real business cycle” theory was embedded in ingeniously constructed mathematical models, which were mapped onto real data using sophisticated statistical techniques, and the theory came to dominate the teaching of macroeconomics in many university departments. In 2004, reflecting the theory’s influence, Prescott shared a Nobel with Finn Kydland of Carnegie Mellon University.
Meanwhile, saltwater economists balked. Where the freshwater economists were purists, saltwater economists were pragmatists. While economists like N. Gregory Mankiw at Harvard, Olivier Blanchard at M.I.T. and David Romer at the University of California, Berkeley, acknowledged that it was hard to reconcile a Keynesian demand-side view of recessions with neoclassical theory, they found the evidence that recessions are, in fact, demand-driven too compelling to reject. So they were willing to deviate from the assumption of perfect markets or perfect rationality, or both, adding enough imperfections to accommodate a more or less Keynesian view of recessions. And in the saltwater view, active policy to fight recessions remained desirable.
But the self-described New Keynesian economists weren’t immune to the charms of rational individuals and perfect markets. They tried to keep their deviations from neoclassical orthodoxy as limited as possible. This meant that there was no room in the prevailing models for such things as bubbles and banking-system collapse. The fact that such things continued to happen in the real world — there was a terrible financial and macroeconomic crisis in much of Asia in 1997-8 and a depression-level slump in Argentina in 2002 — wasn’t reflected in the mainstream of New Keynesian thinking.
Even so, you might have thought that the differing worldviews of freshwater and saltwater economists would have put them constantly at loggerheads over economic policy. Somewhat surprisingly, however, between around 1985 and 2007 the disputes between freshwater and saltwater economists were mainly about theory, not action. The reason, I believe, is that New Keynesians, unlike the original Keynesians, didn’t think fiscal policy — changes in government spending or taxes — was needed to fight recessions. They believed that monetary policy, administered by the technocrats at the Fed, could provide whatever remedies the economy needed. At a 90th birthday celebration for Milton Friedman, Ben Bernanke, formerly a more or less New Keynesian professor at Princeton, and by then a member of the Fed’s governing board, declared of the Great Depression: “You’re right. We did it. We’re very sorry. But thanks to you, it won’t happen again.” The clear message was that all you need to avoid depressions is a smarter Fed.
And as long as macroeconomic policy was left in the hands of the maestro Greenspan, without Keynesian-type stimulus programs, freshwater economists found little to complain about. (They didn’t believe that monetary policy did any good, but they didn’t believe it did any harm, either.)
It would take a crisis to reveal both how little common ground there was and how Panglossian even New Keynesian economics had become.
V. NOBODY COULD HAVE PREDICTED . . .
In recent, rueful economics discussions, an all-purpose punch line has become “nobody could have predicted. . . .” It’s what you say with regard to disasters that could have been predicted, should have been predicted and actually were predicted by a few economists who were scoffed at for their pains.
Take, for example, the precipitous rise and fall of housing prices. Some economists, notably Robert Shiller, did identify the bubble and warn of painful consequences if it were to burst. Yet key policy makers failed to see the obvious. In 2004, Alan Greenspan dismissed talk of a housing bubble: “a national severe price distortion,” he declared, was “most unlikely.” Home-price increases, Ben Bernanke said in 2005, “largely reflect strong economic fundamentals.”
How did they miss the bubble? To be fair, interest rates were unusually low, possibly explaining part of the price rise. It may be that Greenspan and Bernanke also wanted to celebrate the Fed’s success in pulling the economy out of the 2001 recession; conceding that much of that success rested on the creation of a monstrous bubble would have placed a damper on the festivities.
But there was something else going on: a general belief that bubbles just don’t happen. What’s striking, when you reread Greenspan’s assurances, is that they weren’t based on evidence — they were based on the a priori assertion that there simply can’t be a bubble in housing. And the finance theorists were even more adamant on this point. In a 2007 interview, Eugene Fama, the father of the efficient-market hypothesis, declared that “the word ‘bubble’ drives me nuts,” and went on to explain why we can trust the housing market: “Housing markets are less liquid, but people are very careful when they buy houses. It’s typically the biggest investment they’re going to make, so they look around very carefully and they compare prices. The bidding process is very detailed.”
Indeed, home buyers generally do carefully compare prices — that is, they compare the price of their potential purchase with the prices of other houses. But this says nothing about whether the overall price of houses is justified. It’s ketchup economics, again: because a two-quart bottle of ketchup costs twice as much as a one-quart bottle, finance theorists declare that the price of ketchup must be right.
In short, the belief in efficient financial markets blinded many if not most economists to the emergence of the biggest financial bubble in history. And efficient-market theory also played a significant role in inflating that bubble in the first place.
Now that the undiagnosed bubble has burst, the true riskiness of supposedly safe assets has been revealed and the financial system has demonstrated its fragility. U.S. households have seen $13 trillion in wealth evaporate. More than six million jobs have been lost, and the unemployment rate appears headed for its highest level since 1940. So what guidance does modern economics have to offer in our current predicament? And should we trust it?
VI. THE STIMULUS SQUABBLE
Between 1985 and 2007 a false peace settled over the field of macroeconomics. There hadn’t been any real convergence of views between the saltwater and freshwater factions. But these were the years of the Great Moderation — an extended period during which inflation was subdued and recessions were relatively mild. Saltwater economists believed that the Federal Reserve had everything under control. Freshwater economists didn’t think the Fed’s actions were actually beneficial, but they were willing to let matters lie.
But the crisis ended the phony peace. Suddenly the narrow, technocratic policies both sides were willing to accept were no longer sufficient — and the need for a broader policy response brought the old conflicts out into the open, fiercer than ever.
Why weren’t those narrow, technocratic policies sufficient? The answer, in a word, is zero.
During a normal recession, the Fed responds by buying Treasury bills — short-term government debt — from banks. This drives interest rates on government debt down; investors seeking a higher rate of return move into other assets, driving other interest rates down as well; and normally these lower interest rates eventually lead to an economic bounceback. The Fed dealt with the recession that began in 1990 by driving short-term interest rates from 9 percent down to 3 percent. It dealt with the recession that began in 2001 by driving rates from 6.5 percent to 1 percent. And it tried to deal with the current recession by driving rates down from 5.25 percent to zero.
But zero, it turned out, isn’t low enough to end this recession. And the Fed can’t push rates below zero, since at near-zero rates investors simply hoard cash rather than lending it out. So by late 2008, with interest rates basically at what macroeconomists call the “zero lower bound” even as the recession continued to deepen, conventional monetary policy had lost all traction.
Now what? This is the second time America has been up against the zero lower bound, the previous occasion being the Great Depression. And it was precisely the observation that there’s a lower bound to interest rates that led Keynes to advocate higher government spending: when monetary policy is ineffective and the private sector can’t be persuaded to spend more, the public sector must take its place in supporting the economy. Fiscal stimulus is the Keynesian answer to the kind of depression-type economic situation we’re currently in.
Such Keynesian thinking underlies the Obama administration’s economic policies — and the freshwater economists are furious. For 25 or so years they tolerated the Fed’s efforts to manage the economy, but a full-blown Keynesian resurgence was something entirely different. Back in 1980, Lucas, of the University of Chicago, wrote that Keynesian economics was so ludicrous that “at research seminars, people don’t take Keynesian theorizing seriously anymore; the audience starts to whisper and giggle to one another.” Admitting that Keynes was largely right, after all, would be too humiliating a comedown.
And so Chicago’s Cochrane, outraged at the idea that government spending could mitigate the latest recession, declared: “It’s not part of what anybody has taught graduate students since the 1960s. They [Keynesian ideas] are fairy tales that have been proved false. It is very comforting in times of stress to go back to the fairy tales we heard as children, but it doesn’t make them less false.” (It’s a mark of how deep the division between saltwater and freshwater runs that Cochrane doesn’t believe that “anybody” teaches ideas that are, in fact, taught in places like Princeton, M.I.T. and Harvard.)
Meanwhile, saltwater economists, who had comforted themselves with the belief that the great divide in macroeconomics was narrowing, were shocked to realize that freshwater economists hadn’t been listening at all. Freshwater economists who inveighed against the stimulus didn’t sound like scholars who had weighed Keynesian arguments and found them wanting. Rather, they sounded like people who had no idea what Keynesian economics was about, who were resurrecting pre-1930 fallacies in the belief that they were saying something new and profound.
And it wasn’t just Keynes whose ideas seemed to have been forgotten. As Brad DeLong of the University of California, Berkeley, has pointed out in his laments about the Chicago school’s “intellectual collapse,” the school’s current stance amounts to a wholesale rejection of Milton Friedman’s ideas, as well. Friedman believed that Fed policy rather than changes in government spending should be used to stabilize the economy, but he never asserted that an increase in government spending cannot, under any circumstances, increase employment. In fact, rereading Friedman’s 1970 summary of his ideas, “A Theoretical Framework for Monetary Analysis,” what’s striking is how Keynesian it seems.
And Friedman certainly never bought into the idea that mass unemployment represents a voluntary reduction in work effort or the idea that recessions are actually good for the economy. Yet the current generation of freshwater economists has been making both arguments. Thus Chicago’s Casey Mulligan suggests that unemployment is so high because many workers are choosing not to take jobs: “Employees face financial incentives that encourage them not to work . . . decreased employment is explained more by reductions in the supply of labor (the willingness of people to work) and less by the demand for labor (the number of workers that employers need to hire).” Mulligan has suggested, in particular, that workers are choosing to remain unemployed because that improves their odds of receiving mortgage relief. And Cochrane declares that high unemployment is actually good: “We should have a recession. People who spend their lives pounding nails in Nevada need something else to do.”
Personally, I think this is crazy. Why should it take mass unemployment across the whole nation to get carpenters to move out of Nevada? Can anyone seriously claim that we’ve lost 6.7 million jobs because fewer Americans want to work? But it was inevitable that freshwater economists would find themselves trapped in this cul-de-sac: if you start from the assumption that people are perfectly rational and markets are perfectly efficient, you have to conclude that unemployment is voluntary and recessions are desirable.
Yet if the crisis has pushed freshwater economists into absurdity, it has also created a lot of soul-searching among saltwater economists. Their framework, unlike that of the Chicago School, both allows for the possibility of involuntary unemployment and considers it a bad thing. But the New Keynesian models that have come to dominate teaching and research assume that people are perfectly rational and financial markets are perfectly efficient. To get anything like the current slump into their models, New Keynesians are forced to introduce some kind of fudge factor that for reasons unspecified temporarily depresses private spending. (I’ve done exactly that in some of my own work.) And if the analysis of where we are now rests on this fudge factor, how much confidence can we have in the models’ predictions about where we are going?
The state of macro, in short, is not good. So where does the profession go from here?
VII. FLAWS AND FRICTIONS
Economics, as a field, got in trouble because economists were seduced by the vision of a perfect, frictionless market system. If the profession is to redeem itself, it will have to reconcile itself to a less alluring vision — that of a market economy that has many virtues but that is also shot through with flaws and frictions. The good news is that we don’t have to start from scratch. Even during the heyday of perfect-market economics, there was a lot of work done on the ways in which the real economy deviated from the theoretical ideal. What’s probably going to happen now — in fact, it’s already happening — is that flaws-and-frictions economics will move from the periphery of economic analysis to its center.
There’s already a fairly well developed example of the kind of economics I have in mind: the school of thought known as behavioral finance. Practitioners of this approach emphasize two things. First, many real-world investors bear little resemblance to the cool calculators of efficient-market theory: they’re all too subject to herd behavior, to bouts of irrational exuberance and unwarranted panic. Second, even those who try to base their decisions on cool calculation often find that they can’t, that problems of trust, credibility and limited collateral force them to run with the herd.
On the first point: even during the heyday of the efficient-market hypothesis, it seemed obvious that many real-world investors aren’t as rational as the prevailing models assumed. Larry Summers once began a paper on finance by declaring: “THERE ARE IDIOTS. Look around.” But what kind of idiots (the preferred term in the academic literature, actually, is “noise traders”) are we talking about? Behavioral finance, drawing on the broader movement known as behavioral economics, tries to answer that question by relating the apparent irrationality of investors to known biases in human cognition, like the tendency to care more about small losses than small gains or the tendency to extrapolate too readily from small samples (e.g., assuming that because home prices rose in the past few years, they’ll keep on rising).
Until the crisis, efficient-market advocates like Eugene Fama dismissed the evidence produced on behalf of behavioral finance as a collection of “curiosity items” of no real importance. That’s a much harder position to maintain now that the collapse of a vast bubble — a bubble correctly diagnosed by behavioral economists like Robert Shiller of Yale, who related it to past episodes of “irrational exuberance” — has brought the world economy to its knees.
On the second point: suppose that there are, indeed, idiots. How much do they matter? Not much, argued Milton Friedman in an influential 1953 paper: smart investors will make money by buying when the idiots sell and selling when they buy and will stabilize markets in the process. But the second strand of behavioral finance says that Friedman was wrong, that financial markets are sometimes highly unstable, and right now that view seems hard to reject.
Probably the most influential paper in this vein was a 1997 publication by Andrei Shleifer of Harvard and Robert Vishny of Chicago, which amounted to a formalization of the old line that “the market can stay irrational longer than you can stay solvent.” As they pointed out, arbitrageurs — the people who are supposed to buy low and sell high — need capital to do their jobs. And a severe plunge in asset prices, even if it makes no sense in terms of fundamentals, tends to deplete that capital. As a result, the smart money is forced out of the market, and prices may go into a downward spiral.
The spread of the current financial crisis seemed almost like an object lesson in the perils of financial instability. And the general ideas underlying models of financial instability have proved highly relevant to economic policy: a focus on the depleted capital of financial institutions helped guide policy actions taken after the fall of Lehman, and it looks (cross your fingers) as if these actions successfully headed off an even bigger financial collapse.
Meanwhile, what about macroeconomics? Recent events have pretty decisively refuted the idea that recessions are an optimal response to fluctuations in the rate of technological progress; a more or less Keynesian view is the only plausible game in town. Yet standard New Keynesian models left no room for a crisis like the one we’re having, because those models generally accepted the efficient-market view of the financial sector.
There were some exceptions. One line of work, pioneered by none other than Ben Bernanke working with Mark Gertler of New York University, emphasized the way the lack of sufficient collateral can hinder the ability of businesses to raise funds and pursue investment opportunities. A related line of work, largely established by my Princeton colleague Nobuhiro Kiyotaki and John Moore of the London School of Economics, argued that prices of assets such as real estate can suffer self-reinforcing plunges that in turn depress the economy as a whole. But until now the impact of dysfunctional finance hasn’t been at the core even of Keynesian economics. Clearly, that has to change.
VIII. RE-EMBRACING KEYNES
So here’s what I think economists have to do. First, they have to face up to the inconvenient reality that financial markets fall far short of perfection, that they are subject to extraordinary delusions and the madness of crowds. Second, they have to admit — and this will be very hard for the people who giggled and whispered over Keynes — that Keynesian economics remains the best framework we have for making sense of recessions and depressions. Third, they’ll have to do their best to incorporate the realities of finance into macroeconomics.
Many economists will find these changes deeply disturbing. It will be a long time, if ever, before the new, more realistic approaches to finance and macroeconomics offer the same kind of clarity, completeness and sheer beauty that characterizes the full neoclassical approach. To some economists that will be a reason to cling to neoclassicism, despite its utter failure to make sense of the greatest economic crisis in three generations. This seems, however, like a good time to recall the words of H. L. Mencken: “There is always an easy solution to every human problem — neat, plausible and wrong.”
When it comes to the all-too-human problem of recessions and depressions, economists need to abandon the neat but wrong solution of assuming that everyone is rational and markets work perfectly. The vision that emerges as the profession rethinks its foundations may not be all that clear; it certainly won’t be neat; but we can hope that it will have the virtue of being at least partly right.
Paul Krugman is a Times Op-Ed columnist and winner of the 2008 Nobel Memorial Prize in Economic Science. His latest book is “The Return of Depression Economics and the Crisis of 2008.”
This article has been revised to reflect the following correction:
Correction: September 6, 2009
Because of an editing error, an article on Page 36 this weekend about the failure of economists to anticipate the latest recession misquotes the economist John Maynard Keynes, who compared the financial markets of the 1930s to newspaper beauty contests in which readers tried to correctly pick all six eventual winners. Keynes noted that a competitor did not have to pick “those faces which he himself finds prettiest, but those that he thinks likeliest to catch the fancy of the other competitors.” He did not say, “nor even those that he thinks likeliest to catch the fancy of other competitors.”
Copyright 2009 The New York Times Company
http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html?_r=1&em=&exprod=myyahoo&pagewanted=print
The Greatest Ever Canadian:Tommy Douglas
Tommy Douglas was voted "The Greatest Canadian" of all time in a nationally televised contest organized by the Canadian Broadcasting Corporation in 2004. His candidacy was advocated by CBC's George Stroumboulopoulos.
Thomas Clement "Tommy" Douglas,(20 October 1904 – 24 February 1986) was a Scottish-born Baptist minister who became a prominent Canadian social democratic politician. As leader of the Saskatchewan Co-operative Commonwealth Federation (CCF) from 1942 and the seventh Premier of Saskatchewan from 1944 to 1961, he led the first socialist government in North America and introduced universal public healthcare to Canada. When the CCF united with the Canadian Labour Congress to form the New Democratic Party, he was elected as its first federal leader and served in that post from 1961 to 1971. He is warmly remembered for his folksy wit and oratory with which he expressed his determined idealism, exemplified by his fable of Mouseland.
In 1930 Douglas married Irma Dempsey, a music student at Brandon College. They had one daughter, actress Shirley Douglas, and they later adopted a second daughter Joan, who became a nurse. His grandson is the actor Kiefer Sutherland.[1]
The miniseries Prairie Giant: The Tommy Douglas Story, was filmed between February and May 2005 and aired on CBC Television in two parts on March 12 and 13, 2006.
Tommy Douglas was born in Falkirk, Scotland in 1904. In 1910, his family immigrated to Canada, where they settled in Winnipeg. At the age of ten[2], Douglas injured his leg and developed osteomyelitis. The leg would have been amputated had it not been for a doctor who saw the condition as a good subject to teach his students and agreed to help for free. This rooted Douglas' belief that health care should be free to all, as he thought people shouldn't be dependent on generosity in order to get their health in good order. During World War I, the family returned to Glasgow. They came back to Winnipeg in 1919, in time for Douglas to witness the Winnipeg General Strike. From a rooftop vantage point on Main Street, he witnessed the police charging the strikers with clubs and guns, a streetcar being overturned and set on fire. He also witnessed the RCMP murder two men.[3]
At the age of fifteen, Douglas began an amateur career in boxing. In 1917 Tommy used the One Big Union Gym to train his skill, fighting bouts that included wrestling as well. Douglas appeared with Canadian heavyweight champ Jack Taylor, and the U.S. champion, Ed "Strangler" Lewis. Weighing 135 pounds, Douglas fought in 1922 for the Lightweight Championship of Manitoba; and after a six round fight won the title. Douglas sustained a broken nose, a loss of some teeth, and a strained hand and thumb. Douglas successfully held the title the following year.
In 1924, Douglas attended Brandon College to study for the ministry. While there, Douglas was influenced by the social gospel movement, which combined Christian principles with social reform. He graduated from Brandon College in 1930, and completed his Master's degree (MA) in Sociology from McMaster University in 1933. His thesis entitled The Problems of the Subnormal Family was on eugenics, a way to "solve the problems of the Subnormal Family" by sterilizing mentally and physically disabled Canadians, and sending them to camps.[2] He briefly continued his graduate work at the University of Chicago but rejected this theory after his experiences of encountering the poor in Chicago and after a trip to Nazi Germany in 1938[citation needed]. He rarely mentioned his thesis later in his life, and his government never enacted eugenics policies (it may be noted that two Canadian provinces, Alberta and British Columbia, had eugenics legislation in the 1930s, and that the philosophy was not discredited in North America prior to World War II).
Following this, he became a minister at the Calvary Baptist Church in Weyburn, Saskatchewan. With the onset of the Depression, Douglas became a social activist in Weyburn, and joined the new CCF organization. He was elected to the Canadian House of Commons in the 1935 federal election.
After the outbreak of World War II, Douglas enlisted in the wartime Canadian Army. He had volunteered for overseas service and was on a draft of men headed for the Winnipeg Grenadiers when a medical examination turned up leg problems. Douglas stayed in Canada and the Grenadiers headed for Hong Kong. But for that ailment, he would have been with the regiment when its members were killed or captured at Hong Kong in December 1941.
Despite being a federal Member of Parliament and not yet an MLA, Douglas was elected the leader of the Saskatchewan CCF in 1942 but did not resign from the House of Commons until June 1, 1944. He led the CCF to power in the June 15, 1944 provincial election, winning 47 of 53 seats in the Legislative Assembly of Saskatchewan, and thus forming the first democratic socialist government in not only Canada, but all of North America.
Douglas and the Saskatchewan CCF then went on to win five straight majority victories in all subsequent Saskatchewan provincial elections up to 1960. Most of his government's pioneering innovations came about during its first term, including:the creation of the publicly owned Saskatchewan Power Corp., successor to the Saskatchewan Electrical Power Commission, which began a long program of extending electrical service to isolated farms and villages; the creation of Canada's first publicly owned automobile insurance service, the Saskatchewan Government Insurance Office; the creation of a large number of Crown Corporations, many of which competed with existing private sector interests; legislation that allowed the unionization of the public service; a program to offer free hospital care to all citizens—the first in Canada. passage of the Saskatchewan Bill of Rights, legislation that broke new ground as it protected both fundamental freedoms and equality rights against abuse not only by government actors but also on the part of powerful private institutions and persons.(The Saskatchewan Bill of Rights preceded the adoption of the Universal Declaration of Human Rights by the United Nations by 18 months).
Premier Douglas was the first head of any government in Canada to call for a constitutional bill of rights. This he did at a federal-provincial conference in Quebec City in January, 1950. No one in attendance at the conference supported him in this. Ten years later, Premier Lesage of Quebec joined with Premier Douglas at a First Ministers' Conference in July, 1960, in advocating for a constitutional bill of rights. Thus, respectable momentum was given to the idea that finally came to fruition, on April 17, 1982, with the proclamation of the Canadian Charter of Rights and Freedoms.[4]
Thanks to a booming postwar economy and the prudent financial management of provincial treasurer Clarence Fines, the Douglas government slowly paid off the huge public debt left by the previous Liberal government, and created a budget surplus for the Saskatchewan government. Coupled with a federal government promise in 1959 to give even more money for medical care, this paved the way for Douglas's most notable achievement, the introduction of universal medicare legislation in 1961.
Medicare
Douglas's number one concern was the creation of Medicare. In the summer of 1962, Saskatchewan became the centre of a hard-fought struggle between the provincial government, the North American medical establishment, and the province's physicians, who brought things to a halt with the 1962 Saskatchewan Doctors' Strike. The doctors believed their best interests were not being met and feared a significant loss of income as well as government interference in medical care decisions even though Douglas agreed that his government would pay the going rate for service that doctors charged. The medical establishment claimed that Douglas would import foreign doctors to make his plan work and used racist images to try to scare the public.[citation needed] Their defenders have also argued that private or government medical insurance plans covered 60 to 63 percent of the Saskatchewan population before Medicare legislation was introduced.[citation needed]
An often forgotten political fact is that though Douglas is widely hailed as the father of Medicare, he had retired from his position as Saskatchewan's premier, turned over this job in 1961 to Woodrow Lloyd and took the leadership of the federal New Democratic Party.
The Saskatchewan program was finally launched by his successor, Woodrow Lloyd, in 1962. The success of the province's public health care program was not lost on the federal government. Another Saskatchewan politician, newly elected Prime Minister John Diefenbaker, decreed in 1958 that any province seeking to introduce a hospital plan would receive 50 cents on the dollar from the federal government. In 1962, Diefenbaker appointed Justice Emmett Hall—also of Saskatchewan, a noted jurist and Supreme Court Justice—to Chair a Royal Commission on the national health system - the Royal Commission on Health Services. In 1964, Justice Hall recommended the nationwide adoption of Saskatchewan's model of public health insurance. In 1966, the Liberal minority government of Lester B. Pearson created such a program, with the federal government paying 50% of the costs and the provinces the other half.
Federal NDP leader
When the CCF allied with the Canadian Labour Congress to form the New Democratic Party (NDP) in 1961, Douglas defeated Hazen Argue at the first NDP leadership convention and became the new party's first leader. Douglas resigned from provincial politics and sought election to the House of Commons in the riding of Regina City in 1962, but was defeated. He was later elected in a by-election in the riding of Burnaby—Coquitlam, British Columbia.
Re-elected as MP for that riding in the 1963 and 1965 elections, Douglas lost the redistricted seat of Burnaby—Seymour in the 1968 federal election. He won a seat again in a 1968 by-election in the riding of Nanaimo—Cowichan—The Islands, following the death of Colin Cameron, and represented it until his retirement from electoral politics in 1979.
While the NDP did better in elections than its CCF predecessor, the party did not experience the breakthrough it had hoped for. Despite this, Douglas was greatly respected by party members and Canadians at large as the party wielded considerable influence during the minority governments of Lester Pearson. In 1970, Douglas and the NDP took a controversial but principled stand against the implementation of the War Measures Act during the October Crisis.
Late career and retirement
In 1962, Douglas received an honorary Doctor of Laws from the University of Saskatchewan. He resigned as NDP leader in 1971, but retained his seat in the House of Commons. He served as the NDP's energy critic under the new leader, David Lewis. He was re-elected in the riding of Nanaimo–Cowichan–The Islands in the 1972 and 1974 elections.
He retired from politics in 1978 and served on the board of directors of Husky Oil, an oil and gas exploration company.
In 1980 he was awarded a Doctor of Laws, honoris causa by Carleton University in Ottawa.
The Douglas-Coldwell Foundation was established in 1971. In 1981, Douglas was made a Companion of the Order of Canada. In 1985, he was awarded the Saskatchewan Order of Merit. In the mid-1980s, Brandon University created a students' union building in honour of Douglas and his old friend, Stanley Knowles.
In June 1984 Douglas was injured when he was struck by a bus but he quickly recovered and on his 80th birthday he claimed to The Globe and Mail that he usually walked up to five miles a day.[5] By this point in his life his memory was beginning to slow down and he stopped accepting speaking engagements but remained active in the Douglas-Coldwell Foundation.
He became a member of the Queen's Privy Council for Canada on November 30, 1984. In 1998, he was inducted into the Canadian Medical Hall of Fame.
Douglas died of cancer on February 24, 1986 at the age of 81 in Ottawa.[6]
Honorary Degrees
Tommy Douglas Received Honorary Degrees from several Universities including:
University of Saskatchewan in Saskatoon, Saskatchewan (LL.D) in 1962 [3]
Queen's University in Kingston, Ontario (LL.D) on 27 May 1972 [4]
University of Regina in Regina, Saskatchewan in 1978
University of British Columbia in Vancouver, British Columbia 27 May 1981
Trent University in Peterborough, Ontario (LL.D) in 1983 [5]
http://en.wikipedia.org/wiki/Tommy_Douglas
Thomas Clement "Tommy" Douglas,(20 October 1904 – 24 February 1986) was a Scottish-born Baptist minister who became a prominent Canadian social democratic politician. As leader of the Saskatchewan Co-operative Commonwealth Federation (CCF) from 1942 and the seventh Premier of Saskatchewan from 1944 to 1961, he led the first socialist government in North America and introduced universal public healthcare to Canada. When the CCF united with the Canadian Labour Congress to form the New Democratic Party, he was elected as its first federal leader and served in that post from 1961 to 1971. He is warmly remembered for his folksy wit and oratory with which he expressed his determined idealism, exemplified by his fable of Mouseland.
In 1930 Douglas married Irma Dempsey, a music student at Brandon College. They had one daughter, actress Shirley Douglas, and they later adopted a second daughter Joan, who became a nurse. His grandson is the actor Kiefer Sutherland.[1]
The miniseries Prairie Giant: The Tommy Douglas Story, was filmed between February and May 2005 and aired on CBC Television in two parts on March 12 and 13, 2006.
Tommy Douglas was born in Falkirk, Scotland in 1904. In 1910, his family immigrated to Canada, where they settled in Winnipeg. At the age of ten[2], Douglas injured his leg and developed osteomyelitis. The leg would have been amputated had it not been for a doctor who saw the condition as a good subject to teach his students and agreed to help for free. This rooted Douglas' belief that health care should be free to all, as he thought people shouldn't be dependent on generosity in order to get their health in good order. During World War I, the family returned to Glasgow. They came back to Winnipeg in 1919, in time for Douglas to witness the Winnipeg General Strike. From a rooftop vantage point on Main Street, he witnessed the police charging the strikers with clubs and guns, a streetcar being overturned and set on fire. He also witnessed the RCMP murder two men.[3]
At the age of fifteen, Douglas began an amateur career in boxing. In 1917 Tommy used the One Big Union Gym to train his skill, fighting bouts that included wrestling as well. Douglas appeared with Canadian heavyweight champ Jack Taylor, and the U.S. champion, Ed "Strangler" Lewis. Weighing 135 pounds, Douglas fought in 1922 for the Lightweight Championship of Manitoba; and after a six round fight won the title. Douglas sustained a broken nose, a loss of some teeth, and a strained hand and thumb. Douglas successfully held the title the following year.
In 1924, Douglas attended Brandon College to study for the ministry. While there, Douglas was influenced by the social gospel movement, which combined Christian principles with social reform. He graduated from Brandon College in 1930, and completed his Master's degree (MA) in Sociology from McMaster University in 1933. His thesis entitled The Problems of the Subnormal Family was on eugenics, a way to "solve the problems of the Subnormal Family" by sterilizing mentally and physically disabled Canadians, and sending them to camps.[2] He briefly continued his graduate work at the University of Chicago but rejected this theory after his experiences of encountering the poor in Chicago and after a trip to Nazi Germany in 1938[citation needed]. He rarely mentioned his thesis later in his life, and his government never enacted eugenics policies (it may be noted that two Canadian provinces, Alberta and British Columbia, had eugenics legislation in the 1930s, and that the philosophy was not discredited in North America prior to World War II).
Following this, he became a minister at the Calvary Baptist Church in Weyburn, Saskatchewan. With the onset of the Depression, Douglas became a social activist in Weyburn, and joined the new CCF organization. He was elected to the Canadian House of Commons in the 1935 federal election.
After the outbreak of World War II, Douglas enlisted in the wartime Canadian Army. He had volunteered for overseas service and was on a draft of men headed for the Winnipeg Grenadiers when a medical examination turned up leg problems. Douglas stayed in Canada and the Grenadiers headed for Hong Kong. But for that ailment, he would have been with the regiment when its members were killed or captured at Hong Kong in December 1941.
Despite being a federal Member of Parliament and not yet an MLA, Douglas was elected the leader of the Saskatchewan CCF in 1942 but did not resign from the House of Commons until June 1, 1944. He led the CCF to power in the June 15, 1944 provincial election, winning 47 of 53 seats in the Legislative Assembly of Saskatchewan, and thus forming the first democratic socialist government in not only Canada, but all of North America.
Douglas and the Saskatchewan CCF then went on to win five straight majority victories in all subsequent Saskatchewan provincial elections up to 1960. Most of his government's pioneering innovations came about during its first term, including:the creation of the publicly owned Saskatchewan Power Corp., successor to the Saskatchewan Electrical Power Commission, which began a long program of extending electrical service to isolated farms and villages; the creation of Canada's first publicly owned automobile insurance service, the Saskatchewan Government Insurance Office; the creation of a large number of Crown Corporations, many of which competed with existing private sector interests; legislation that allowed the unionization of the public service; a program to offer free hospital care to all citizens—the first in Canada. passage of the Saskatchewan Bill of Rights, legislation that broke new ground as it protected both fundamental freedoms and equality rights against abuse not only by government actors but also on the part of powerful private institutions and persons.(The Saskatchewan Bill of Rights preceded the adoption of the Universal Declaration of Human Rights by the United Nations by 18 months).
Premier Douglas was the first head of any government in Canada to call for a constitutional bill of rights. This he did at a federal-provincial conference in Quebec City in January, 1950. No one in attendance at the conference supported him in this. Ten years later, Premier Lesage of Quebec joined with Premier Douglas at a First Ministers' Conference in July, 1960, in advocating for a constitutional bill of rights. Thus, respectable momentum was given to the idea that finally came to fruition, on April 17, 1982, with the proclamation of the Canadian Charter of Rights and Freedoms.[4]
Thanks to a booming postwar economy and the prudent financial management of provincial treasurer Clarence Fines, the Douglas government slowly paid off the huge public debt left by the previous Liberal government, and created a budget surplus for the Saskatchewan government. Coupled with a federal government promise in 1959 to give even more money for medical care, this paved the way for Douglas's most notable achievement, the introduction of universal medicare legislation in 1961.
Medicare
Douglas's number one concern was the creation of Medicare. In the summer of 1962, Saskatchewan became the centre of a hard-fought struggle between the provincial government, the North American medical establishment, and the province's physicians, who brought things to a halt with the 1962 Saskatchewan Doctors' Strike. The doctors believed their best interests were not being met and feared a significant loss of income as well as government interference in medical care decisions even though Douglas agreed that his government would pay the going rate for service that doctors charged. The medical establishment claimed that Douglas would import foreign doctors to make his plan work and used racist images to try to scare the public.[citation needed] Their defenders have also argued that private or government medical insurance plans covered 60 to 63 percent of the Saskatchewan population before Medicare legislation was introduced.[citation needed]
An often forgotten political fact is that though Douglas is widely hailed as the father of Medicare, he had retired from his position as Saskatchewan's premier, turned over this job in 1961 to Woodrow Lloyd and took the leadership of the federal New Democratic Party.
The Saskatchewan program was finally launched by his successor, Woodrow Lloyd, in 1962. The success of the province's public health care program was not lost on the federal government. Another Saskatchewan politician, newly elected Prime Minister John Diefenbaker, decreed in 1958 that any province seeking to introduce a hospital plan would receive 50 cents on the dollar from the federal government. In 1962, Diefenbaker appointed Justice Emmett Hall—also of Saskatchewan, a noted jurist and Supreme Court Justice—to Chair a Royal Commission on the national health system - the Royal Commission on Health Services. In 1964, Justice Hall recommended the nationwide adoption of Saskatchewan's model of public health insurance. In 1966, the Liberal minority government of Lester B. Pearson created such a program, with the federal government paying 50% of the costs and the provinces the other half.
Federal NDP leader
When the CCF allied with the Canadian Labour Congress to form the New Democratic Party (NDP) in 1961, Douglas defeated Hazen Argue at the first NDP leadership convention and became the new party's first leader. Douglas resigned from provincial politics and sought election to the House of Commons in the riding of Regina City in 1962, but was defeated. He was later elected in a by-election in the riding of Burnaby—Coquitlam, British Columbia.
Re-elected as MP for that riding in the 1963 and 1965 elections, Douglas lost the redistricted seat of Burnaby—Seymour in the 1968 federal election. He won a seat again in a 1968 by-election in the riding of Nanaimo—Cowichan—The Islands, following the death of Colin Cameron, and represented it until his retirement from electoral politics in 1979.
While the NDP did better in elections than its CCF predecessor, the party did not experience the breakthrough it had hoped for. Despite this, Douglas was greatly respected by party members and Canadians at large as the party wielded considerable influence during the minority governments of Lester Pearson. In 1970, Douglas and the NDP took a controversial but principled stand against the implementation of the War Measures Act during the October Crisis.
Late career and retirement
In 1962, Douglas received an honorary Doctor of Laws from the University of Saskatchewan. He resigned as NDP leader in 1971, but retained his seat in the House of Commons. He served as the NDP's energy critic under the new leader, David Lewis. He was re-elected in the riding of Nanaimo–Cowichan–The Islands in the 1972 and 1974 elections.
He retired from politics in 1978 and served on the board of directors of Husky Oil, an oil and gas exploration company.
In 1980 he was awarded a Doctor of Laws, honoris causa by Carleton University in Ottawa.
The Douglas-Coldwell Foundation was established in 1971. In 1981, Douglas was made a Companion of the Order of Canada. In 1985, he was awarded the Saskatchewan Order of Merit. In the mid-1980s, Brandon University created a students' union building in honour of Douglas and his old friend, Stanley Knowles.
In June 1984 Douglas was injured when he was struck by a bus but he quickly recovered and on his 80th birthday he claimed to The Globe and Mail that he usually walked up to five miles a day.[5] By this point in his life his memory was beginning to slow down and he stopped accepting speaking engagements but remained active in the Douglas-Coldwell Foundation.
He became a member of the Queen's Privy Council for Canada on November 30, 1984. In 1998, he was inducted into the Canadian Medical Hall of Fame.
Douglas died of cancer on February 24, 1986 at the age of 81 in Ottawa.[6]
Honorary Degrees
Tommy Douglas Received Honorary Degrees from several Universities including:
University of Saskatchewan in Saskatoon, Saskatchewan (LL.D) in 1962 [3]
Queen's University in Kingston, Ontario (LL.D) on 27 May 1972 [4]
University of Regina in Regina, Saskatchewan in 1978
University of British Columbia in Vancouver, British Columbia 27 May 1981
Trent University in Peterborough, Ontario (LL.D) in 1983 [5]
http://en.wikipedia.org/wiki/Tommy_Douglas
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