The Power of Lowered Expectations

There’s a snippet from Hassan Hakimians’s post at Project Syndiate considering why economists did not predict the “Arab Spring” that I found very intriguing:

According to the American sociologist James C. Davies’s so-called J-curve theory, revolutions – such as the Russian Revolution of 1917 and Egypt’s revolution of 1952 – occur when periods of prolonged economic and social development are sharply and suddenly reversed. In other words, it is not straightforward economic hardship, but rather frustration with the disparity between expectation and reality that awakens the masses.

And people wonder why I’m worried about the United States.

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This Sounds Good to Me

The editors at Bloomberg point out a good feature in the Republican tax reform plan—treating debt and equity the same for the purposes of taxation. I’ll let them explain it:

One of the biggest defects in the U.S. tax code is that it encourages companies to finance themselves by borrowing rather than by issuing equity. Correcting this bias should be a top priority for President Donald Trump and Republicans in Congress as they merge their plans for tax reform.

The tax preference for debt over equity is neither new nor confined to the U.S., but that doesn’t make it good policy. Many governments treat interest on debt as a deductible expense, so payments to creditors don’t get taxed while payments to shareholders do. This tilting of incentives has no good justification and can be dangerous.

Highly leveraged enterprises are much more likely to fail in an economic downturn. This fragility is what turns isolated asset bubbles into major catastrophes. It’s why the subprime boom of the 2000s, financed largely with credit, was so much more damaging than the equity-fueled dot-com craze of the 1990s.

While the best approach would be to eliminate the corporate income tax entirely, if you’re going to maintain a corporate tax system (which appears to be a political necessity), allow companies to deduct the equity issued as an expense.

That sounds good to me but I’m no expert on corporate finance and would appreciate any commentary by people who are.

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If It Were Easy Anybody Could Do It

While I agree with the gist of what Megan McArdle has to say in her recent piece about reforming the U. S. health care system at Bloomberg View:

Why are memes like this so compelling? Because they’re easy. But the whole truth is not so easy. And solutions for Americans’ health-care complaints? Those are really hard.

which is that reforming our system is hard, I’m not completely in agreement with her about everything. There are many complications including:

  • Insurance is not care.
  • Care is not health.
  • Health is dependent both on factors that can be affected by changes in care or government policy and factors that can’t, e.g. genetics, individual personal behavior, or at least can’t without grave difficulty.

One of the dirty little secrets about health care is that spending is lower and health is better in some OECD countries in which the people, for various cultural reasons, don’t seek as much care as Americans tend to, e.g. Japan. Praise is often lavished on Singapore’s system. If Americans sought as little care as Singaporans do, our system would be less expensive, too. And, shazam!, places in the United States that are more like Singapore than they are like, say, Indiana, e.g. Hawaii, also spend less on health care.

And then there’s the most serious complication: one person’s spending is another person’s income.

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The Cream of the Jest

Here’s the kernel of Jacob L. Shapiro’s post at Geopolitical Futures on the “frenemy” relationship between the United States and China:

The U.S. and China do not see eye to eye in three areas: Chinese territorial claims in the South and East China seas, how to deal with North Korea, and the parameters of the U.S.-China trade relationship. The last one is the most important to both sides. While both countries are dependent on each other, their relationship is heavily weighted in the U.S.’ favor. China needs the U.S. more than the U.S. needs China, and many of China’s current moves, particularly regarding North Korea, attempt to develop as much leverage with the U.S. as possible. These were the same issues the administration of former President Barack Obama faced with China, the only difference being that the Trump administration means to push even harder on the trade issue than its predecessor.

A tremendous flaw in our negotiations with China is that neither American leaders nor American diplomats seem to recognize that the U. S. is negotiating from a position of strength.

In my view that’s the heart of the matter. American leaders have been weak-minded and weak-willed; Chinese leaders have been strong-minded and strong-willed. That more than compensates for China’s material position of weakness. The joke is on us.

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What’s the Secret of Our Success?

There’s a lot of stewing about the World Happiness Report and that the people of the United States, apparently, aren’t as happy as they used to be. At Bloomberg View Leonid Bershidsky remarks:

Wealth is easy to quantify, so many governments concentrate on fixing this variable. That appears to be Donald Trump’s intention in the U.S., too. But the experience of the small European nations at the top of the table shows that once a certain level of wealth is achieved, growth isn’t as important to happiness levels. As long as per capita GDP is relatively stable, the other factors do their job, and if there’s a problem with them — for example, health care becomes less accessible or deteriorates, the social fabric starts fraying, people grow more selfish or freedom erodes — people tend to feel unhappy despite an unchanged comfort level.

I think that they need to start looking at the United States differently. Here are the report’s ten happiest countries:

  1. Norway
  2. Denmark
  3. Iceland
  4. Switzerland
  5. Finland
  6. Netherlands
  7. Canada
  8. New Zealand
  9. Australia
  10. Sweden

The U. S. is fourteenth.

Those countries have some things in common. With the exception of Finland they’re all mostly speakers of Germanic languages (as is the U. S.). They’re all small and quite homogeneous. Many are culturally Lutheran.

The United States is the only really populous, racially and ethnically diverse country among the twenty happiest countries. So, two cheers for us.

Not only are we large and diverse but we’re able to keep it together. Rather than moaning (or chuckling) that the U. S. isn’t the happiest country, maybe other countries should be wondering about the secret of our success.

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The Myth-Busters’ Myths

I had a problem with Ruopeng An and Roland Sturm’s article at the RAND Blog on myths about American obesity:

There are lots of theories about what’s causing the epidemic of obesity in America. Already, two in three Americans are overweight or obese. If current trends continue, some people believe a majority of Americans will be obese in another decade or so.

A few years ago we teamed up to crunch the data looking for possible policy solutions. We used national studies and government databases to search for ways to combat the epidemic. To do that we needed to look for evidence of what was driving Americans’ weight gain. Was it neighborhood “food deserts” where it was hard to find healthy food? Is healthy food just too expensive? Are Americans exercising too little? Drinking too much sugary soda?

Along the way, we found out that the data don’t support many of the popular theories about what’s causing obesity to increase so dramatically. And we reached one indisputable conclusion: We’re all getting fatter.

The problem I had was with their conclusion:

The hard truth is simple: If we want to stop getting fatter, we have to start eating less.

The authors obviously continue to believe in the simple thermodynamics theory of weight gain, despite the evidence against it.

In my own case I consume about 1,800 calories a day and exercise more than 150 minutes a week. I’m definitely not sylph-like but I’m not sloppy fat, either. According to the tables I’m overweight. Some of that is undoubtedly because I’m built on a different scale than most people. My shoulders are broader, my chest is deeper, I’m more muscular, and my legs are shorter.

I believe that weight gain is multi-factorial including not just not getting enough exercise and eating too much but also age, genetics, and overuse of antibiotics resulting in an imbalance in the gut flora just to name three other factors. I wish more scientists relied on science on this subject.

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The Likelihood of War With China

The RAND organization considers the likelihood of war between the United States and China:

A recent study issued by the RAND Corporation indicates that a significant fraction of U.S. surface-naval forces involved, including aircraft carriers, and an even greater fraction of Chinese forces could be destroyed early in a spiraling armed conflict.

Although the military balance in the western Pacific still favors the U.S., this is shifting as China invests a major share of its growing military budget into “anti-access/area-denial” capabilities, like anti-ship missiles, designed to strike U.S. forces in the region.

Moreover, although the U.S. spends about three times what China does on military capabilities, China can concentrate on the western Pacific, whereas the U.S. faces threats elsewhere, such as Russia, Iran and the Islamic State militant group (ISIS).

Although China’s military disadvantage is shrinking, it would suffer immense harm—more than the U.S.—in the event of a war. Although the collapse of bilateral trade would damage both economies, virtually all of China’s trade, being seaborne, would be disrupted by a war in the western Pacific.

Does anyone know of any wargaming of direct military conflict between the United States and China that did not expressly preclude it that did not escalate to a nuclear exchange between the two countries? I don’t.

I don’t believe, as RAND apparently does, that complacency will lead to war. I think that the most likely cause of war between the United States and China is the U. S. going to war with North Korea (for whatever reason) and China entering the conflict on North Korea’s side.

That’s the reason I believe in putting what pressure we can on the Chinese authorities, particularly soft power sorts of pressure, before the situation with North Korea gets beyond any control.

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Round ‘Em Up

I wish I’d seen this on St. Patrick’s Day. I’d have posted it then. Enjoy.

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Real Health Care Reform

I’ve been asked to give my ideas on what real health care reform would look like and I’m a bit nonplussed. Here are a few facts about our present health care system:

  • We spend more on health care per capita than any other OECD country by a substantial margin.
  • Other OECD countries adopted their own systems when health care was much, much less expensive than it is now.
  • Health care presently comprises about 17% of the U. S. economy, more than any other OECD country, and prices in health care are growing at a multiple of the prices in most other sectors with the exception of education which has much the same problems as the health care system.
  • Government at one level or another provides between 50% and 70% of all of the funds spent on health care.
  • The incentives for government to increase health care spending have outweighed its incentives to restrain spending to date.
  • Prices in other sectors of the economy have been kept low through mass production.
  • In health care we have mass consumption and artisanal production—an obvious mismatch.
  • Physicians produce much of the demand for health care.
  • We haven’t had a free market in health care for more than a century. I don’t believe we want one.
  • Health care insurance prices are proportion to health care prices.
  • The evidence that increasing health care insurance coverage in the absence of a commitment to control costs will reduce costs is weak.
  • At present prices and the present rate of increase a single-payer system will solve nothing.

Somewhere in all of that there may be a solution but I’m damned if I see it. At least not a solution that we want.

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What Are the Priorities?

Should the federal government provide funding for the arts or National Public Radio?

My own view is that both the National Endowment for the Arts and National Public Radio are largely subsidies for the upper middle class, they can well afford to fund both themselves (and largely do), that public radio in particular is an idea whose time has past, and I would rather see the federal government spend money on evidence-based programs that help inner city black kids than on the NEA or NPR.

I recognize there’s a fallacy in my response: even if funding for the NEA or NPR were zeroed out it’s unlikely that additional money will be spent on programs that help inner city black kids. How about the program most likely to help inner city black kids: jobs for their parents?

This discussion is an excellent example of the main advantage conveyed by holding the White House and majorities in both houses of the Congress—the power to set the agenda. Why are we talking about this? Because the budget submitted by President Trump cuts funding for the NEA and NPR and increases military spending.

My agenda would be drastically different from either Democrats or Republicans in that not only would I defund the NEA and NPR, I’d cut military spending commensurate with a reduction in a reduction in the missions we’re asking our military to perform.

Maybe it’s my own blockheadedness but I fail to see why we should be deploying special forces to two-thirds of the countries in the world. I also recognize that there are others who think we should be spending a lot more money on the NEA and NPR and spending more on our military. I wonder where they expect to get the money to do it? Especially since we’re already extracting about as much money from the private sector as at any time in our history with the exception of the depths of World War II.

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