Monthly Archives: January 2014

Reinhart and Rogoff: Great Recession may “surpass in severity”; the Great Depression in many Countries


A new paper from Reinhart and Rogoff: Recovery from Financial Crisis: Evidence from 100 Episodes. Excerpt:

Examining the evolution of real per capita GDP around 100 systemic banking crises reveals that a significant part of the costs of these crises lies in the protracted and halting nature of the recovery. On average it takes about eight years to reach the pre-crisis level of income; the median is about 6 ½ years. Five to six years after the onset of the current crisis only Germany and the US (out of 12 systemic crisis cases) have reached their 2007-2008 peaks in per capita income. In a sample that covers 63 crises in advanced economies and 37 in larger emerging markets, more than forty percent of the post-crisis episodes experienced double dips. The analysis summarized here adds another dimension to an observation we have been emphasizing on the basis of our earlier work—namely, that the subprime crisis is not an anomaly in the context of the pre-WWII era. Postwar business cycles are not the right comparator for the severe crises that have swept advanced economies in recent years.

Even after one of the most severe multi-year crises on record in the advanced economies, the received wisdom in policy circles clings to the notion that high-income countries are completely different from their emerging-market counterparts. The current phase of the official policy approach is predicated on the assumption that growth, financial stability and debt sustainability can be achieved through a mix of austerity and forbearance (and some reform). The claim is that advanced countries do not need to resort to the more eclectic policies of emerging markets, including debt restructurings and conversions, higher inflation, capital controls and other forms of financial repression. Now entering the sixth or seventh year (depending on the country) of crisis, output remains well below its pre-crisis peak in ten of the twelve crisis countries. The gap with potential output is even greater. Delays in accepting that desperate times call for desperate measures keeps raising the odds that, as documented here, this crisis may in the end surpass in severity the depression of the 1930s in a large number of countries.
emphasis added

The policies of austerity in Europe have failed miserably and many countries there are experiencing a worse slump than during the Depression (austerity in the US has held back the recovery too, but at least there was a little stimulus in 2009, and monetary policy was accommodative). As Reinhart and Rogoff note, higher inflation in Europe (and the US) would help.

Reinhart and Rogoff: Great Recession may “surpass in severity” the Great Depression in many Countries
Bill McBride
Fri, 31 Jan 2014 22:21:00 GMT


Obamacare Light

It seems the GOP finally has an Obamacare alternative.  That’s good I think, though it sounds like it does a poor job of expanding access relative Affordable Care Act of 2010.

I can’t help but think the impact will be further splinter Republicans.  I think many of the critics of Obamacare start with this chain of reasoning:

1. The US is God’s gift to the world

2. Nothing God makes if flawed

3. So the US is not flawed, or at least wasn’t before being corrupted by those Democrats

4. The US healthcare system is or was part of that unflawed whole, and is not flawed.

5. You can’t improve on God’s work, the US or its healthcare system.

6. Any attempt, like Obamacare, alternatives to it, or certainly more far reaching change, is blasphemy

Given this state of mind, how can an alternative Obamacare be anything other than the works of RINOs.

I think the party maybe split by this.

From the Daily Dish

Fighting for your life: Love and Family


alexander-mair-memento-mori-1605 I have two stories about dire illness and family support during illness. They lead to a recommendation about how the health care system should engage with families.

First: The world is built with trapdoors that open randomly and take you suddenly to hell. Arnold Relman tells this story. He is 90 years old and a former editor of the NEJM.

I was hurrying down the stairs to meet a cab… I lost my balance and pitched forward, landing hard on my head on the slate floor of the hall. I heard a loud crack as my head hit the floor, and although I did not lose consciousness and felt very little pain, I knew at once that I must have sustained severe injuries.

Relman had broken three cervical vertebrae and was instantly in a fight for his life. Taken to the Massachusetts General Hospital, he experienced cardiac arrests and resuscitations which, as often happens, broke his ribs. Relman was breathing only through a tube inserted during an emergency tracheostomy, with mechanical ventilation moving his shattered ribs.

I was constantly struggling to breathe through the emergency tracheostomy, and could not rest. It seemed as if I were trying to breathe through a narrow straw. Also, I was frequently choking on blood and secretions that accumulated in my throat and in the tracheal tube. Adding to my misery were the constraints imposed by the rigid collar around my neck and all the catheters and tubes to which I was attached.

Some people think that we should not speak of ‘fighting’ against illness. In one of the extraordinary essays written as he was dying from cancer, Christopher Hitchens argued that fighting against cancer is one of

the most appealing clichés in our language… People don’t have cancer: they are reported to be battling cancer… Allow me to inform you, though, that when you sit in a room with a set of other finalists, and kindly people bring a huge transparent bag of poison and plug it into your arm, and you either read or don’t read a book while the venom sack gradually empties itself into your system, the image of the ardent soldier or revolutionary is the very last one that will occur to you. You feel swamped with passivity and impotence: dissolving in powerlessness like a sugar lump in water.

Hitchens may have experienced his treatment passively, but not Relman. Relman faced a terrible choice. He was in excruciating pain from his shattered vertebrae and the treatments they required. He could take high doses of pain and sleeping medicines. But he knew that these drugs would suppress his respiration and greatly increase his risk of developing pneumonia, an imminent threat to a severely injured 90 year old. So he minimized these medications, which meant that he would be in agony, including long sleepless hours at night. This is fighting for one’s life.

What he needed in this fight was human contact. He was able to communicate only by writing notes.

…looking over those notes, which my wife saved, I can see that constantly scribbling messages, many of which were of no conceivable importance, was my desperate attempt to maintain contact with the world.

relman_1-020614_jpg_600x705_q85And he had his family (the picture is of Relman in the ICU, with his wife, Dr. Marcia Angell).

Even in the best of hospitals, with the best of medical and nursing care, the ICU can be a devastating psychological experience for patients—as it was for me. Totally helpless, deprived of control over one’s body, ICU patients desperately need the comforting presence of family and loved ones… For their part, my family were at my bedside as much as possible. My wife was especially comforting and stayed long hours with me.

Relman’s survival seems miraculous; he rightly credits the ICU specialists and his family.

Sharing Relman’s essay with colleagues, I have heard many harrowing stories of families seeking to care for loved ones. Unfortunately, some of these stories included conflicts with hospital staff, like this one reported by Louise Aronson.

Aronson had brought her father, recently discharged following a triple bypass, back to the hospital following a precipitous drop in blood pressure at home. Then, in the hospital,

my father’s blood pressure dropped again. I told the nurse and stayed out of the way. She silenced the alarm, upped the fluids, and rechecked the blood pressure. It was better. But less than half an hour later, we listened as the [pressure dropped again]. The numbers flashed, but the silenced alarm remained quiet. I pressed the call button, and when the nurse arrived I asked her to call for the doctor. When no one came, I went to the nursing station and made my case to the assembled doctors and nurses. They were polite, but their unspoken message was that they were working hard, my father wasn’t their only patient, and they had appropriately prioritized their tasks.

Aronson, however, is herself a physician. When the pressure drops again, she thinks to do a rectal exam. Her father’s bowel is full of blood: his blood pressure was dropping because he was hemorrhaging.

I took my bloody gloved finger out into the hallway to prove my point… A nurse followed me back into my father’s room, saw my panicked mother holding a bedpan overflowing with blood and clots, and called for help. Within seconds, the room filled, and minutes later, when the ICU team showed up, I stood back, a daughter again.

She reflects on how doctors and staff sometimes understand patients’ families.

When we call patients and families “good,” or at least spare them the “difficult” label, we are noting and rewarding acquiescence. Too often, this “good” means you agree with me and you don’t bother me and you let me be in charge of what happens and when. Such a definition runs counter to what we know about truly good care as a collaborative process. From the history that so often generates the diagnosis to the treatment that is the basis of care or cure, active participation of patients and families is essential to optimal outcomes. [emphasis added]

One of our themes at TIE is that health insurance reform is not enough. Health care reform requires changing how we deliver health care. Even in the ICU, families deliver essential care. I’m convinced that one of the most important changes that we can make is engaging families in care. And not just when they show up at the hospital or clinic. Are you trying to understand your readmission rates (did you ask families why the patient came back?)? Are you trying to reorganize the triage procedure at your ER (did you ask families how the procedure could best serve them?)? Families can be trouble, but they are not going away. Consider including them at the table.



Fighting for your life: Love and Family
Bill Gardner
Tue, 28 Jan 2014 13:22:58 GMT

U.S. Household Finances Rebound


One signal for whether the U.S. economy is ready for a more robust recovery is the extent to which the financial position of households has rebounded. Here are some illustrative figures, taken from the January 2014 issue of Economic Trends from the Cleveland Fed.
O.Emre Ergungor and Daniel Kolliner write about “Household Economic Conditions.” Here’s a figure showing the movements in household wealth since 2000. Household assets and net worth have now rebounded and surpassed their pre-recession highs.

Part of what’s happening here is that households have trimmed back on many of their debts. This figure show the change in outstanding debt in various categories over the previous four quarters. During the housing bubble, for example, mortgage debt was growing at more than 10% per year. But household mortgage debt has been contracting (that is, negative growth) since about 2008. The authors write: “Revolving consumer credit balances plummeted in 2008 and are currently barely higher than their level in the third quarter of 2012. Outstanding home mortgage debt is still contracting due to record write-off s and reduced demand for homes in previous years. Nonrevolving consumer credit, which consists of secured and unsecured credit for student loans, automobiles, durable goods, and other purposes, is the only credit category that shows some sign of life. It is currently 8.5 percent above year-ago levels. Note, however, that the student loan component is entirely driven by federal government loans to students and does not reflect private market activity.”

The combination of lower household debts and sustained low interest rates means that households are spending less on debt service. They write: “The financial obligation ratio, which expresses household liabilities, such as credit card payments, mortgage payments, home property taxes, and rent payments, as a percentage of disposable income, is at its lowest level since the third quarter of 1981.”

A result of these changes is that retail sales and consumption overall, if not yet back to healthy growth rates, are at least solidly back in positive growth after their nosedive during the Great Recession.

Of course, the unemployment rate remains high, as do the number of long-term unemployed and concerns over whether some workers are not being counted as unemployed because they have become too discouraged to look  for work. But noting that the economy is improving is not to make the claim that it’s already a bright sunshiny day. One final pattern caught my eye in an article on “Employee Compensation Costs during the Recovery,” by Joel Elvery. He points out that the patterns of wages and of benefits have been diverging in recent years.

This figure needs to be interpreted with care, because hourly compensation costs are affected by which workers have jobs. Thus, the rise in wages and salary around 2008 is not because lots of workers saw a big raise, but instead because lower-paid workers were more likely to become unemployed, and so the average wage and salary for those with jobs was  higher as a result. But the overall pattern here is clear enough. Over the last decade, wages and salaries have been pretty flat, but the costs to employers of benefits like retirement and savings accounts, as well as health insurance, have been rising. As I’ve written before on this blog, health care costs (along with other benefits) have been eating your pay raise.

U.S. Household Finances Rebound
Timothy Taylor
Fri, 24 Jan 2014 12:00:00 GMT

The Myth of Maximizing Shareholder Value


Yves here. This is a subject near and dear to my heart. So many of the assertions made about “maximizing shareholder value” are false that they should be assumed to be a lie until proven otherwise. The first is that board and managements are somehow obligated to “maximize shareholder value” is patently false. Legally, shareholders’ equity is a residual claim, inferior to all other obligations. Boards and management are required to satisfy all of the company’s commitments, which include payments to vendors (including employees), satisfying product warranties, paying various creditors, paying taxes, and meeting various regulatory requirements (including workplace and product safety rules and environmental regulations). As we wrote last year:

If you review any of the numerous guides prepared for directors of corporations prepared by law firms and other experts, you won’t find a stipulation for them to maximize shareholder value on the list of things they are supposed to do. It’s not a legal requirement. And there is a good reason for that.

Directors and officers, broadly speaking, have a duty of care and duty of loyalty to the corporation. From that flow more specific obligations under Federal and state law. But notice: those responsibilities are to the corporation, not to shareholders in particular…Shareholders are at the very back of the line. They get their piece only after everyone else is satisfied. If you read between the lines of the duties of directors and officers, the implicit “don’t go bankrupt” duty clearly trumps concerns about shareholders…

So how did this “the last shall come first” thinking become established? You can blame it all on economists, specifically Harvard Business School’s Michael Jensen. In other words, this idea did not come out of legal analysis, changes in regulation, or court decisions. It was simply an academic theory that went mainstream. And to add insult to injury, the version of the Jensen formula that became popular was its worst possible embodiment.

And as John Kay has stressed, when companies try to “maximize shareholder value,” they don’t succeed:

Oblique approaches are most effective in difficult terrain, or where outcomes depend on interactions with other people. Obliquity is the idea that goals are often best achieved when pursued indirectly.

Obliquity is characteristic of systems that are complex, imperfectly understood, and change their nature as we engage with them…

Obliquity gives rise to the profit-seeking paradox: the most profitable companies are not the most profit-oriented. ICI and Boeing illustrate how a greater focus on shareholder returns was self-defeating in its own narrow terms. Comparisons of the same companies over time are mirrored in contrasts between different companies in the same industries. In their 2002 book, Built to Last: Successful Habits of Visionary Companies, Jim Collins and Jerry Porras compared outstanding companies with adequate but less remarkable companies with similar operations…in each case: the company that put more emphasis on profit in its declaration of objectives was the less profitable in its financial statements.

So what is this propagandizing really about? As this post from INET discusses, it’s a justification for extractive capitalism.

Originally published at the Institute for New Economic Thinking blog

In 2010, the 500 largest companies in the United States, otherwise known as The Fortune 500, generated $10.7 trillion in sales, reaped a whopping $702 billion in profits, and employed 24.9 million people around the world.

Historically this has been good news. After all, when these corporations have invested in the productive capabilities of their U.S. employees, Americans have typically enjoyed plentiful well paying and stable jobs. That was the case a half century ago.

Unfortunately, as Bill Lazonick points out in the interview below, it’s not the case today.

For the past three decades, top executives have been rewarding themselves with mega-million dollar compensation packages while American workers have suffered an unrelenting disappearance of middle-class jobs. Since the 1990s, this hollowing out of the middle-class has even affected people with lots of education and work experience.

As the Occupy Wall Street movement correctly recognized, the concentration of income and wealth of the economic top “one percent” of society has left the rest of us largely high and dry. Corporate profits are increasingly going to share buybacks or dividend distribution, but very little is going back into research and development efforts, capital reinvestment, and employment.

Corporations, in other words, are devoting increasing amounts of their considerable and growing financial resources to redistribution rather than innovation. And they are doing so based on the justification of 
“increasing shareholder value.”

However, as Lazonick points out, when the shareholder-value mantra becomes the main focus for companies executives usually concentrate on avoiding taxes for the sake of higher profits and don’t think twice about permanently axing workers. They also increase distributions of corporate cash to shareholders in the form of dividends and, even more prominently, stock buybacks.

When a corporation becomes financialized in this way, the top executives no longer concern themselves with investing in the productive capabilities of employees, the foundation for rising living standards. Instead they become focused on generating financial profits that can justify ever higher stock prices – in large part because, through their stock-based compensation, high stock prices translate into megabucks for these corporate executives themselves.

It’s not a pretty state of affairs. Lazonick discusses how we evolved from a society in which corporate interests were largely aligned with those of broader public purpose into a state where crony capitalism, accounting fraud, and corporate predation are predominant characteristics.

Lazonick makes a very powerful case that the ideology of “maximizing shareholder value” primarily works to the benefit of the very corporate executives who make corporate resource allocation decisions, and who derive high levels of remuneration from munificent stock option awards. As for the rest of us, we’re left to fight over the crumbs.

The Myth of Maximizing Shareholder Value
Yves Smith
Fri, 24 Jan 2014 07:13:35 GMT

The Big Question: Is there an alternative to Obamacare?


A health policy discussion with Booth colleagues Matthew Gentzkow and Matthew Notowidigdo.
The original is here at the Booth / Capital Ideas website. The other “big ideas” videos are really good.
My views expressed here are summed up a bit more eloquently in a recent WSJ Oped, here, and a longer essay “After the ACA” available here. More on health economics and insurance, including how individual insurance can protect against preexisting conditions on my webpage here, and by clicking the “health economics” link to the right.

The Big Question: Is there an alternative to Obamacare?
John H. Cochrane
Sun, 19 Jan 2014 15:26:00 GMT

An Imperfect System–Free enterprise/Democracy

Prosperity means change and that often leaves many behind: the older; the less educated; the geographically immobile; those who just can’t adapt for a lot of reasons. Joseph Schumpeter called this creative destruction, and it is certainly a product of capitalism in the past and now. Free enterprise and free exchange and commercial activity is the best path to a wealthy and growing economy; but I also believe it is unable without a state build safety net to provide for the victim of creative destruction that society as a whole benefits from.

If find it odd that it is often acknowledged that democracy is just the best of the flawed forms of human governance – it isn’t perfect. Few who advocate free enterprise have the equivalent humility to acknowledge that it is the best way manage resources of the alternative available – but it isn’t perfect. I acknowledge both that market economies are the best way to build a society in the face of scarcity, but are far from perfect.



I hate when people take photos of their meal instead of eating it, because there's nothing I love more than the sound of other people chewing.

Wed, 08 Jan 2014 00:00:00 GMT

Benghazi and Our Idiotic Opposition Party

Well, many have likely heard that the Senate Intelligence Committee report is out with regard to the tragic attack on the US Consulate in Benghazi, Libya on 9/11/2012.   It is sad reading anyway you look at it.  The President didn’t perform as he should have have, and GOP look like idiots for not holding him accountable.  Is that because the GOP are squishes?  No, it’s because they’re so out of touch they couldn’t effectively use what was a failure of this administration against them.

It seemed to me as soon as this became an issue that the issue was:  Did the administration use proper foresight and planning to protect its people?  How they spun the issue after the fact seemed beside the point; I think that’s what Hillary meant when she said:  “What does it matter?”  I never doubted that once the attack was underway the administration did what it could to right the situation, but it was tragically to late.

That said the GOP seemed to attack this issue based on criticism that was beside the point or implausible to anyone not blinded by rage and hatred directed at President Obama.  The most criticism was directed at the so called talking points:  Did they show the administration tried to put a happy face on this tragedy – beside the point!  The President didn’t use available forces to stop the attack – makes Obama such a monster few would believe it.  In the end Benghazi never got beyond an issue your angry old father or uncle might go on about, and President Obama glided to re-election.

So the GOP are villains attacking the President?  No they’re incompetent as an opposition.   The Senate report seems to show on the real issue with respect to Benghazi the President need to be called to account.  How else can you respond to: 

The State Department should have increased its security posture more significantly”. 


There were “tripwires” designed to prompt a reduction in
personnel or the suspension of operations at the Mission facility in Benghazi
and although there is evidence that some of them had been crossed, operations
continued with minimal change. Some nations closed their diplomatic
facilities in Benghazi as the security conditions deteriorated during the
summer of 2012, but other nations stayed along with the United States,
contrary to some public reports and statements that the U.S. was the last
country represented in Benghazi.

With regard to the real issue about Benghazi the administration failed.  Such failures have happened before and will again, but we must strive to learn and improve all the same.

At the same time the report confirms what were side issues or diversions were just that.  There was no means to save the Benghazi mission that was spared out of shear malice: 

There were no U.S. military resources in position to intervene
in short order in Benghazi to help defend the Temporary Mission Facility and
its Annex on September 11 and 12, 2012.” and “Unarmed U.S. military surveillance assets were not delayed when responding to the attack, and they provided important situational awareness for those under siege during the attacks against the Temporary Mission Facility and the Annex on September 11 and 12,2012.

Furthermore, it appears to me the administration did attempt spin the issue by either ignoring it or spinning it:

The DNI’s Office of Analytic Integrity and Standards (AIS)
failed to provide complete and accurate information to Congress during its
review of the Benghazi attacks. The Committee found AIS’s methodology in
assembling documents to be flawed. Despite repeated requests from the
Committee, AIS also refused to provide complete, accurate, and thoroughly
cited information to Congress.”

But even once you know this – is anyone shocked by it really?  Yet, the GOP made that a major issue against Obama, or it tried to.

So there were real issues about Benghazi that could have figured in the 2012 race, but didn’t .  There were stupid and pointless issues that shouldn’t have figured in the 2012 race, but did.  Why is that?

It’s because we have an ineffective and perhaps above all totally insular opposition.  They used issues with regard to President that most people saw as nothing more than insanely partisan or beside the point.  In the end Benghazi exacted little or no political price because of that.  The way Benghazi was used arose for the fact that attacks that demonized President Obama are what Republicans wanted to hear, and did.  In the end though this covered up the real issue that should have been discussed and alienated median voters. 

Benghazi and its political aftermath, or the lack of it have starkly illustrated some things.  The GOP has become more and more extreme in views and mostly listens only to itself.  It can’t or won’t engage with the electorate.  Finally it can’t hold the party in power to account.  The Democrats learned the cost of this path; when will the Republicans?

Comment on: A Brief Note on the “War on Poverty”

So if transfers reduce poverty but those on the programs never become self-sufficient is that a win?  Bob Murphy says no, but I’d say yes.  Social Security has been most successful in reducing poverty, but those on the program are unlikely to become young and rich.  The program is not a failure.  What say you?


To pick just one prominent example, the White House’s Council of Economic Advisers issued a report that contained the following chart:

Yet hang on a second: Surely to actually “win” the War on Poverty would mean that the government could stop spending money, because every household were self-sufficient. The criterion can’t be, “After you account for how much money we’re still throwing at it, the net result is better.”

Switch to an actual military context to see my point. Suppose after Pearl Harbor, the federal government declared war on Japan. Further suppose that 50 years later, U.S. and Japanese forces were still engaged in massive naval battles in the Pacific, and in fact the Japanese had more ships and aircraft than at the start, though they had been pushed back about a third of the distance toward Japan and away from Hawaii. Wouldn’t it be time to declare, “This is not at all working” and sue for peace?

A Brief Note on the “War on Poverty”
Bob Murphy
Wed, 08 Jan 2014 21:35:21 GMT