Market Jitters

Barry Ritholz wonders today about the spike in his blog's traffic yesterday as markets around the world were losing value. I admit that I contributed to his site's traffic as I used these three posts to explain to my undergraduate finance theory students how to try to make sense of large market movements. We are passed the lectures on bubbles, noise trading, and herd behavior, and so we spent only a little time assessing what occurred.

In the first of these linked posts, Barry contrasts the explanation based on China's 8.8% drop with other events that also occurred yesterday, including news stories related to subprime lending and the weakness in the Advanced Durable Goods report. I don't buy any explanation based on China--its stock market is too small, the effect on other Asian markets was not particularly large, and weakness in the Chinese economy would indicate that we are likely to be able to run our trade deficit with China at lower cost. That shouldn't be bad news. I don't know enough about the subprime lending issues to know how important they were--I think it's a fairly marginal part of the real housing sector, so I'm skeptical there as well.

That would leave us with the weakness in durable goods. If this is to be the explanation, then it is interesting that it generated a downward movement. Typically, when there is unexpected strength in the other major monthly economic releases like GDP and Employment, the market does poorly. The rationale is that unexpected strength in the economy will make the odds of a Fed increase in short term interest rates more likely. That increase, in turn, depresses stock market values. The same process, probably to a milder extent, should operate in reverse for unexpected weakness in the macroeconomy.

So this durable goods report was unexpected weakness--why didn't the market hold steady or even go up? According to this view, the answer would have to be that, unlike GDP and Employment, the Durable Goods report also tells us directly about economy-wide investment and thus future business growth. So weakness there could be greeted not just with the lower inflationary expectations but lower profit expectations as well. Plausible--a good event study to do for an undergraduate finance major, perhaps.

My preferred explanation is that we have plenty of investors, both individual and institutional, who treat stock markets like a speculative exercise. There is noise trading and herd behavior aplenty, and so a drop of over 3% in the U.S., and larger drops in more thinly traded markets, shouldn't be all that surprising. I didn't even check my portfolios yesterday.

Via the Opinionator, here are some anecdotes from Daniel Gross about the way some professional investors in China viewed the events:

Special World is Flat bonus anecdote. Note the way Chinese analysts have quickly assimilated the technique, developed over several decades by U.S. analysts, of using fatuous cliches to explain baffling market activity.

''The most important reason for today's decline was pressure for profit-taking,'' said Peng Yunliang, a senior analyst at Shanghai Securities.

''People viewed 3,000 as a psychological benchmark. It's understandable they might want to pull back after the market hit that peak,'' Peng added.

It truly is a global capital market.

Speaking of Google Searches (and Lack of Seriousness)

This post of mine is the first one listed, out of tens of million results, for

show me how to make a baby

Although I do think the VoxSon and VoxDaughter are exemplary, I wasn't aware that this was evident from my blogging. Nor was I previously aware of such a link between income inequality and fertility.

Our Distracted Media

James Joyner at Outside the Beltway has a very thoughtful post, "The News Business is a Business," in which he writes:

Austin Cline laments the fact that the news media is giving an “undeservedly large amount of attention” to the death of Anna Nichole Smith and the ensuing legal wrangling and to trivial matters such as Britney Spears’ decision to shave her head. While our politics are virtually 180 degrees apart, we agree on the relative merits of these stories.

The bottom line, though, is that the business of journalism is business. That for-profit businesses lead with the news that they believe, correctly it turns out, that their audience is most interested in should hardly be surprising. That’s how they sell advertising, keep and expand their audience, and ensure their employees can feed their families and pay their mortgages. The fact that “corporations are now pretty much in control of the network news divisions” is nothing new. Further, General Electric and Time Warner are more able to absorb losses than would be a small group of private owners.

More importantly, these fluffy stories pay for the stuff Cline and I find interesting. There’s hardly a dearth of good reporting on matters of war, international affairs, and domestic public policy. Indeed, there’s more of it than most of us can keep up with.

I think that's a pretty reasonable analysis of what's going on, including the appeal to a tradeoff at the end that naturally resonates with an economist. But I think there is something more to it. Even if there is "no dearth of good reporting" (a point on which I do not agree), so-called news organizations are drowning it out with their pre-occupation with non-newsworthy events. We cannot find the signal amidst the noise.

The news media help set a national agenda in this country for topics of broad conversation. Being on that agenda increases the amount of discussion in the public. Being off the agenda decreases the amount of discussion. More discussion leads to more information being made public.

When I read this post at OTB, I found myself thinking back to the summer of 2001, when, with the benefit of hindsight, the news media might have been usefully employed in aggregating up the disparate pieces of information that led to 9/11. Instead, what were the big stories that summer? The ones I remember most were the mania associated with the TV show "Survivor" and, even more so, the disappearance of Chandra Levy. The question is not so much what these so-called news entities were showing, it's what they were not showing because they were showing this other stuff.

The preoccupation with Chandra Levy's disappearance that summer was so consuming for these so-called news organizations that some people have theorized that her disappearance must have been related to 9/11. Want to convince yourself? Do a Google search for "Chandra Levy." As of this writing, the top five hits are the entry in Wikipedia, two stories at CNN.com about her body being found, and then these two from conspiracy theorists.

There is another problem. The news business is a business, to be sure, but it is supposed to be a serious business. These sagas of missing or crazy people just don't rise to the level of seriousness required of a news organization. It is beneath them, and they should recognize it as such. And people notice this lack of seriousness--they begin to impart that lack of seriousness to the whole brand, even when something big happens and we really then do need a serious news organization. And we are all worse off for it.

School Choice in Utah

Apparently, Richard Kahlenberg of The Century Foundation would like to redirect this award to the state of Utah, for its new school voucher program. He writes:

In debate over the voucher scheme, proponents made much out of the legislation’s provision that public schools losing enrollment would retain a portion of state funding for the first five years after a student departed. A similar “hold harmless” provision helped ease the passage of a private school voucher initiative for low income students in the District of Columbia. But harm to public school budgets is not the leading reason that plans like Utah’s are unwise. The cause for concern goes far deeper.

The late Albert Shanker, longtime president of the American Federation of Teachers, articulated something more important. “Our public schools have played a major part in the building of a nation,” he argued. “They brought together countless children from different cultures—to share a common experience, to develop understanding and to tolerate differences....Only public schools are designed to educate every child; only public schools serve to bring many diverse groups together.”

He is right to focus on something other than money--we care primarily about the quality of the product, not how its purchase is financed. And I agree with Shanker's quote up until the interpretation of the last statement that "only public schools serve ..." The relevance of this last statement presumes that this historical role is still being served--that's open to debate. It also presumes that this would still be true even if private schools were placed on a more equal financial footing with public schools--that's also open to debate. But more importantly, we shouldn't get our priorities confused here. The primary objective of K-12 schools is to expand students' intellectual capabilities; everything else is secondary.

Later, Kahlenberg cites some of his own work to contend that:

[E]ducation research has long found that what helps students achieve is not whether they attend private or public school, but whether the school has a core of middle class families—who provide positive peer influences, active parental support, and insist on high quality teachers with high expectations.

Well, if that's his view, then he shouldn't object to a law that allows parents to choose their childrens' schools, provided each choice has such a core of middle class families. More importantly, he should be a supporter of reform efforts that promote the positive peer influences, active parental involvement, and high expectations which are the fundamentals to student achievement. Many of us simply believe that the most reliable way to get those fundamentals in place is to increase the choice of provider beyond the local monopolies that now often prevail.

Borgman on the Nonbinding Resolution

As usual, Jim Borgman at the Cincinnati Enquirer shows us that a picture really is worth a thousand words (or however many I wrote).

Teachers and Technology in the Classroom

Catching up on my blog reading, via Joe Malchow, I find Steve Jobs taking issue with teacher unions in K-12 education:

CEO Steve Jobs lambasted teacher unions today, claiming no amount of technology in the classroom would improve public schools until principals could fire bad teachers.

Jobs compared schools to businesses with principals serving as CEOs.

"What kind of person could you get to run a small business if you told them that when they came in they couldn't get rid of people that they thought weren't any good?" he asked to loud applause during an education reform conference.

"Not really great ones because if you're really smart you go, 'I can't win.'"

In a rare joint appearance, Jobs shared the stage with competitor Michael Dell, founder and CEO of Dell Inc. Both spoke to the gathering about the potential for bringing technological advances to classrooms.

"I believe that what is wrong with our schools in this nation is that they have become unionized in the worst possible way," Jobs said.

"This unionization and lifetime employment of K-12 teachers is off-the-charts crazy."

I think Jobs has missed the mark here, in two ways.

First, the part of K-12 education that is off-the-charts crazy is how little choice there is for consumers. When did we decide that sending our children to education factories with hundreds or thousands of students was a good idea? With more choice and thus more competition, parents and students could better hold K-12 educators accountable for the quality of the services they provide. Bad practices--if unions and lifetime employment contracts are bad practices--wouldn't survive vigorous competition in the product market. Education reformers should be focused on expanding the choice of provider in education. Almost everything else would fall into place. The prospect of losing "economies of scale" in education doesn't scare me a bit. It shouldn't just be the rich and the religious who have choice, and we shouldn't be using our political system to actively undermine and restrict choice.

Second, as a wise man once said, "there is more to life than increasing its speed." I think the benefits of technology in the classroom are overstated. The best things to put in a classroom to promote a student's education are good instructors and good peers. The props are very much secondary. The best lecture is a conversation, not a slideshow or a video.

And the Award for Folly Goes To ...

... House Majority Leader Steny Hoyer, who is quoted in Jonathan Weisman's inappropriately titled "House Rebukes Bush on Iraq" as follows:

Some liberals and conservatives dismissed the House resolution as merely a symbolic gesture and said that Democratic leaders should have resorted to binding legislation if they were serious about stopping the troop buildup. But House Majority Leader Steny H. Hoyer (D-Md.) said that Bush would have vetoed such a bill, with no possibility of an override. The nonbinding resolution is not dependent on the president's signature.

"What the president cannot veto is the opinion of the Congress of the United States, the judgment of the Congress of the United States, the counsel of the Congress of the United States," Hoyer added, pounding on a lectern after the vote. "Let us hope that the commander in chief hears this counsel."

For those of you wondering whether you took the same eighth-grade social studies class as Representative Hoyer, binding legislation that the President vetoes is a much more substantive event than a nonbinding resolution that doesn't make it to his desk.

A close runner-up in this weekend's contest is Senate Majority Leader Harry Reid, who is quoted as follows:

Democrats in the Senate face a similar political dynamic. Senate Minority Leader Mitch McConnell (R-Ky.) said yesterday that most Republicans will block a debate on the House-passed resolution until they are guaranteed a vote on a resolution opposing any effort to cut off funding for the war. He predicted that Democrats will muster nowhere near the 60 votes they would need today to move to a debate on the resolution opposing additional troop deployments.

Many Republicans will not bother to show up in the rare Saturday session. Sen. John McCain (Ariz.) will be campaigning for president in Iowa. A Democratic counterpart, Sen. Barack Obama (Ill.), will be campaigning in South Carolina.

Democratic aides said that will only mean another round of newspaper headlines proclaiming that Republicans are blocking a debate on the war.

"Let us be clear," Senate Majority Leader Harry M. Reid (D-Nev.) said, "anyone voting 'no' tomorrow is voting to give the president a green light to escalate the war.

So voting "no" on a nonbinding resolution (or the decision to have a vote on a nonbinding resolution) gives the President a green light? For those of you trying to figure out the rules of the road, voting "yes" on a binding resolution to authorize the funding for the additional troops is the green light. What has been happening on Capitol Hill this week is analogous to the yellow "Slow Children" sign that you sometimes see on the side of the road.

Yet Another Reason Why I'd Never Make It in the "News" Business

This week, the House of Representatives chose to use about three days of its precious time discussing the following nonbinding resolution:

Resolved by the House of Representatives (the Senate concurring) that —

(1) Congress and the American people will continue to support and protect the members of the United States Armed Forces who are serving or who have served bravely and honorably in Iraq; and

(2) Congress disapproves of the decision of President George W. Bush announced on Jan. 10, 2007, to deploy more than 20,000 additional United States combat troops to Iraq.

The choice to spend three days on this was made from a long list of things the House could have been doing, whether about the war in Iraq or other pressing matters.

I choose to take them at their word, and the word they used was "disapproves." When I read about the event in the New York Times this morning, I saw the following:

A sharply divided House of Representatives passed a resolution on Friday formally repudiating President Bush’s decision to send more than 20,000 new combat troops to Iraq.

The rare wartime rebuke to the commander in chief — an act that is not binding, but that carries symbolic significance — was approved 246-to-182, with 17 Republicans breaking ranks to join all but two Democrats in supporting the resolution.

I don't see where the words "repudiating" and "rebuke" are supported in the text of the resolution. In order for a disapproval to qualify as a rebuke, it has to be sharp or stern. This nonbinding resolution is neither. In order for a statement to repudiate, it must reject something. A nonbinding resolution rejects nothing. The troop surge is no less feasible for the President now than it was three days ago.

Opponents of the President's plan to add more combat troops may wish that House members would have actually repudiated or rebuked, but in a nonbinding resolution that uses only the word "disapproves," they clearly did not in their formal capacity as legislators.

House members have said many things to a largely empty chamber during the preceding three days, but we don't elect them to make speeches. We elect them to legislate. They have not done so, and were I a journalist, I would have written it that way in the opening paragraphs of my report.

Leadership in Politics and Academia

I thought this column by Frank Rich today was pretty good in the way it quotes Barack Obama and discusses his candidacy:

But at least one rap against him [Obama] can promptly be laid to rest: his lack of experience. If time in the United States Senate is what counts for presidential seasoning, maybe his two years’ worth is already too much. Better he get out now, before there’s another embarrassing nonvote on a nonbinding measure about what will soon be a four-year-old war.

That's absolutely right. Experience means more than marking time in a position that other people envy. It means developing leadership capacity and a track record of taking responsibility for decisions. That's why, in the realm of presidential candidacies, a few years as governor of any state can trump decades in the Senate. Obama is later quoted in the article as saying, "They don't want experience, they want judgment." Given what typically passes for "experience" in this context, that's true as well.

Also this week, we learn that Harvard will soon have a new president. The Harvard Crimson reported that Professor Drew Gilpin Faust, a Civil War scholar who currently leads the Radcliffe Institute for Advanced Study, is slated to be approved by the Board of Overseers today. I wish her the very best of luck and hope for good things from my alma mater under her leadership.

Some of the reactions to her appointment surprised me. Consider these quotes from a Washington Post article:

Sheldon Hackney, who was president of Penn from 1981 to 1993 while Faust was a teacher there, said Faust was not only a great educator but always displayed sound judgment and was well-respected by her peers.

"She will be really good for Harvard," he said. "There is no big significant change that you can make in the university for which you don't need faculty support, and she will be able to get that."

Some educators said the choice of Faust was a surprise because she does not have extensive administrative experience. That was probably a plus, said George Washington University President Stephen Joel Trachtenberg.

"They didn't want anybody with administrative experience," he said. "They wanted an inspirational leader, a political symbol, a decent person that everybody could feel good about to help them do what the presidents do best."

I'll go along with Hackney (and Obama) that sound judgment is more important than any particular administrative experience. But I don't see how he can assert that "she will be able to get faculty support." Tenured faculty at Harvard (or Hackney's Penn or my Dartmouth) are deeply entrenched in their positions, particularly on matters related to resource allocation. This was the biggest challenge facing Summers as he sought to position Harvard for the next century, and it will be Faust's as well. What's the evidence that she will be able to get faculty support for major initiatives, in which some will be winners and some will be losers, if not prior administrative experience in which she's done so on a smaller scale?

It is also impossible to believe that the presidential search committee really behaved the way Trachtenberg suggests. That warm glow that's being described--everyone feels good so they'll help her accomplish her goals--will vanish the moment this "inspirational leader, political symbol, a[nd] decent person" tries to tell one group of faculty that, in the allocation of resources across departments, their department will get less because other departments are more deserving.

Reading and Listening

Yesterday, when I got to my office, I thought this econoblog was going to be the best thing I'd read all day. It's Brad DeLong and Arnold Kling having a pretty contentious and articulate debate about the legacy of the New Deal. Read the whole thing.

But then, realizing that I would have to introduce Neal Katyal at his public lecture last evening, I started reading this article forthcoming in Vanity Fair. And maybe I haven't been keeping up with current events, but I found parts of it truly shocking. The public lecture was fantastic (read about it here), on a par with Katyal's appearance on the Colbert Report.

Are You Powerless to Fight?

The title of this post harkens back to a post two years ago, in which a commenter admonished me for not doing more to bring the Republican Party more in line with my own views about budget policy.

Reading stories like "Democrats Face Limits in Changing Bush's Budget" in yesterday's New York Times makes me wonder whether the anonymous commenter would come back and ask the same question of the Democratic Party's new majorities in Congress. Consider the following:

In theory, the budget presents the Democrats their first real opportunity to rewrite the administration’s policies, especially on tax cuts, that they have been attacking for six years.

But in practice, Democrats know that the only way they can find the revenue to restore the administration’s proposed spending cuts would be to cut back on military spending, delay their stated intentions to balance the budget or rescind the Bush tax cuts in future years. They are not especially eager to do any of these.

The most likely result, even some Democrats acknowledge, will be a limited reshaping of the budget by restoring some proposed cuts in a variety of domestic programs, including children’s health care, Head Start and home heating
assistance for the poor and the elderly.

But few Democrats are expected to look for new revenues by calling for an end to Mr. Bush’s tax cuts, instead of extending them as the president proposed Monday, or to deal with the looming costs of Social Security and Medicare as the postwar generation retires, all of which pose huge budget problems in future years.

This would be sad if true. The Democrats are not constrained in the budget they pass. They could declare the President's budget DoA and write their own from a different template. It wouldn't have to extend the tax cuts. It could redo the defense budget. It could raise taxes to fund all of the social programs they want. They need only have the creativity to write such a budget and the will to defend it.

Since the Democrats can't guarantee 60 votes in the Senate, there will be negotiations before the Congress can pass their budget. Since the Democrats cannot override a veto, there will be further negotiations after they pass it. So what? That's the way the system is supposed to work ... unless the Democrats really do feel they are powerless to fight.

Yet Another Reason Why I Don't Run NIH

My old friend (and former mentor) Geoff Davis runs the website phds.org, where he blogs on matters related to engineering and science, particularly the education and professional development of young scientists. Prompted by the concluding paragraph of my post on opportunity cost as it pertains to stem cell research, Geoff writes:

I suspect that Andrew is more reacting crankily to a boilerplate plea for money rather than being completely serious. After all, this same argument could be made about any contender for federal investment, and I haven't ever heard of anyone else making a serious effort to estimate returns of alternative federal investments in the course of asking for more money.

As if we were still sitting at Murphy's, I will rewrite this paragraph as follows:

I am sure that Andrew is not only reacting crankily to yet another boilerplate plea for money but is completely serious. After all, this same argument should be made about every contender for federal investment, and it should be a part of every stage of the federal budgeting process to make a serious effort to estimate the returns of alternative federal investments in the course of asking for more money.

From the few grant panels on which I've served, I don't think my description is so wide of the mark. The panels rank the grant applications in order of their scholarly promise, and the budget that has been previously allocated determines how high in the ranking an application has to be in order to get funded. In that stage of the process, the ranking is the consideration of opportunity cost. I've even been on some panels in which there was discussion of not using the whole budget allocation if the set of applications was unusually weak.

I have less understanding of how the budget allocations for the grant panels are set, but I presume that policy makers, in consultation with the bureaucrats, assess the returns from past allocations to scientific research and decide on how much they want to budget going forward. Setting that budget is, in some form, the consideration of opportunity cost. As Geoff goes on to say:

His point about opportunity costs is a good one to remember, though. Imagine instead that Fuller and Reeve were demanding a bigger slice of the NIH pie for stem cell research. Something else would have to be cut. How would one make the case for stem cells as opposed to, say, more research on cancer or heart disease?

One would have to get inside the mind of the program officers at the NIH to know this for sure, but at some level, it's already being done. It just wasn't being done--or even acknowledged--in the WaPo op-ed that prompted my original post.

This Week in Academia

Accusations of racism. Stem cell research controversy. A hunger strike. Read all about it. In the blogosphere, here are some interesting posts at Blackademics and Three Bulls! and TigerHawk.

If the purpose is to get tenure, this will be a tough case to sell. Fewer than half of those who come up for tenure at MIT get it. The set of people coming up for tenure as already been thinned by attrition during the intervening time period. Being denied tenure there is not so unusual, making it harder to point to Sherley's race as a key factor. One of the articles I read on this issue noted that Sherley has gotten big grants and has received other offers of employment. So I think it is reasonable to infer that he has some other purpose in mind. It will be interesting to see how it all turns out.

Is It Really Adverse Selection?

Tyler Cowen of Marginal Revolution weighs in with a very thoughtful post challenging the notion that it is adverse selection, driven by informational asymmetries, that plagues the health insurance market:

To be sure, this is a real point but it is not adverse selection. Adverse selection requires asymmetric information, namely that I know more about my brain tumor than does my potential insurance company. The more likely problem is that the tumor is common knowledge, or would be if I applied for insurance, and the company won't sell a policy for any price cheaper than the costs of treatment. There is no asymmetry of information, rather insurance simply is no longer possible. In the limiting case, imagine that a predictor-demon could forecast your lifetime medical expenditures with certainty, and then blog them by your social security number. Such a person, no matter how healthy, couldn't buy insurance either.

Scream all you want, but that is not inefficient per se (don't complain in the comments about the limits of the efficiency concept, and the cruelness of economists, I'm already on that one, scroll down to #7 under "microeconomics", alternatively you might make a complicated Rawlsian argument.) Covering these people, by the use of government policy, is a transfer, not an efficiency improvement, with an added caveat for imperfect capital markets.

Defenders of the adverse selection argument in reality believe the following: if someone is going to face death, or a very bad medical outcome, and can't buy their way out of it, government should put up the money, at least within limits.

Maybe yes, maybe no, but now we are comparing competing investments and which will bring the greatest utilitarian good and the greatest moral good. I'm far from convinced health care access wins that race or even comes in second.

Why does this matter? Because if it's adverse selection, that leads very quickly to a policy argument for a mandate on coverage and, in this market, a single payer system. Not so fast, say the bloggers at MR, and I think they are right.

Economics Missing in Action: Opportunity Cost

In today's Washington Post, Joseph Fuller (founder of the Monitor Group) and Brock Reeve (executive director of the Harvard Stem Cell Institute) argue that the United States may soon lose its leadership position in stem cell research. Their concluding paragraph:

In short, the stem cell sector is at risk of experiencing a failure to launch at the national level. Yes, some progress is being made: WARF has just revised some of its licensing policies; venture capital activity has picked up recently; and academic research and clinical centers, disease foundations and patient-advocacy groups are adopting a more aggressive stance in breaking down existing barriers. But will this be enough? Or will foreign governments, using America's biotech success as a model, systematically encourage the development of stem cell research and, not satisfied with emulating our competitive performance, succeed in outstripping us?

This experience is contrasted in the body of the op-ed with past successes in biotech, and the consumer electronics and automotive sectors are held out as examples where the United States "fumbled" its global leadership position.

It is quite possible that everything the authors argue is true, but even in that case, their argument is incomplete. Consider the last question they pose in their concluding paragraph. So what if foreign governments tax their citizens to support stem cell research? What have we lost?

We will not have lost the opportunity to benefit from that research. Some part of the research will find its way into products--those products will be available here at prices similar to what they would be if the products were developed domestically. No loss to the consumers.

We will not necessarily have lost the opportunity to invest in these technologies as private entities--the capital markets in Europe and Asia are generally open to U.S. investments. The governments on these continents would have to specifically block or discourage that investment.

We will not have taxed our citizens to support production of these goods. So we will have that money, whether in the government or the private sector. How do we know whether that money is better spent on stem cell research than keeping it in the private sector or with the government?

That's the key element that is missing from the op-ed: what is the opportunity cost of committing the money to stem cell research relative to its best (or most likely alternative use)? Ultimately, the authors cannot be persuasive just by claiming that the gross returns to stem cell research conducted domestically are positive or high. The returns to the activity--net of the opportunity cost of the investment--must be positive or high.

Jon Gruber on Health Insurance Reform

Via the Economic Research Initiative on the Uninsured (ERIU), here is an interview with Professor Jon Gruber of MIT, who played a key role in the recent Massachusetts health insurance reform. Here's his assessment of the recent proposal by the Administration (with my emphasis added):

Bush's proposal is a step forward and two steps backward. He's rightly drawn attention to the largest hidden expenditure on health care, the $200 billion a year that we spend on subsidizing the provision of employer-provided health insurance. Basically, people who get paid wages get taxed on those wages, but individuals who are paid in the form of health insurance don't get taxed on that compensation. And if they were, we would raise about $200 billion more a year in tax revenue. This is a very inefficient use of money for several reasons. First, it's very regressive; the richer you are, the bigger tax break you get. Secondly, it's what we call a marginal subsidy; every dollar an employer spends on health care is cheaper than that spent on wages, leading to excessively generous, even gold-plated, health insurance. The third problem is that it props up the system of insurance being tied to employers, extending a number of inefficiencies and distortions in how the labor market works.

However, what the president has done is say 'let's blow up the existing system by taking away the entire employer exclusion and rededicating it to an individual tax break where every person, as long as they were insured, would get an individual tax break of $7,500 or $15,000 per family.' The reason that is two steps backward is that it doesn't address the two things you need to address to get rid of this employer exclusion: 1) he doesn't acknowledge that this system is devoting most of the money to the rich. Under his proposal, the system becomes even a little more regressive than the existing one; and, 2) even more importantly, if you're going to blow up the employer-based system you need someplace else where people can go. Bush doesn't do that, and that's the fundamental flaw. Overall, he has raised an important issue, but he chose to do it in a dangerous context.

I remain convinced that the first reform is to remove the tax exclusion for health insurance premiums. Phase it in over time if you like, but sunset it in any case. Use the money saved--$200 billion a year according to Gruber--to start fixing the gaps in coverage.

January Employment Report

My quick read of the just released January employment report is that the main indicators were partly up and partly down. We saw some improvement in payroll jobs (+111,000) with unemployment rates holding steady around 4.6 percent and hours and average weekly earnings slightly down.

January is the month in which the BLS revises its jobs numbers to better match the sample's underlying population drawn from unemployment insurance records. The result in this case is that there were an additional 933,000 payroll jobs at the end of December 2006 than previously estimated. (See the discussion regarding "Table B" in the report.) So combined with the 111,000 net new jobs in January, I expect that most of the news coverage will focus on these "additional 1 million jobs." You are likely to hear the phrase "8.2 million new jobs since August 2003" quite a lot, based on an update to these talking points.

UPDATE: My mistake--the 7.4 million new jobs in the talking points noted above already had the adjustments had already been factored in. Very smart folks.

education reform

Money should follow the recipient. It should not be given to providers who claim to serve the recipients. Historically--the GI Bill.

Centralization is the enemy--leads to large, anonymous experiences. That's dangerous, particularly for young adolescent boys.

Children can tell when playing fields are not level, they have extremely sensitive ears and eyes for bullshit and hypocrisy.

They have to see that they matter--and that must be personal, face-to-face, even intimate.