Turning the Corner

The wise minds at the BEA say the economy has turned a corner, posting GDP growth at a relatively robust rate (3.5%) in the third quarter, just like Ben Bernanke promised it would.

Still, the fact that we're rising from rock bottom doesn't tell us how long it will take to get back to where we were, or what the recovered economy will look like. For that, we need to dig deeper into the numbers, and, simply put, the picture isn't pretty.

Firstly, the growth in the GDP is driven, as usually happens, by personal consumption. And that consumption is largely due to government stimulus--cash for clunkers, tax breaks etc. That's obviously the point of government stimulus, so to that degree, it's working.

But ultimately, the purpose of those policies is to jumpstart organic growth in the economy, and I'm not sure that's happening. Ideally, you create programs to make people spend, and that spending leads to investment in jobs, which gives people more income to spend etc. At the moment, there's no sign of a turnaround in the employment figures.

Moreover, even if that job growth occurs and the economy starts to grow without government training wheels, there are reasons to worry. Look deep into the BEA report and you'll see that personal income is declining again, even as GDP grows. In other words, people are making less but spending more--the money they're spending is just the goodies from the stimulus, not new wealth that organic economic growth has bestowed upon them. And once the stimulus dries up, those people can only do two things: stop spending [result: recovery halts] or start borrowing [result: unsustainable credit bubble]. Sound familiar?

As I wrote last winter, one of the problems during the last twenty years has been the disconnect between GDP growth--which correlated with spending--and declining or stagnant incomes. If the recovery continues that pattern, it only sets us up for a future reckoning.

Health Care: A Reader Request

A reader emailed yesterday asking what I made of Harry Reid's decision to bring the public option back from the dead, and whether I could explain the politics and policy in lay terms. Here's what I wrote [some day-after edits in parens]:

Basically, the various committees in the Senate and the House have each developed their own bills, which have passed the committee's own votes. Harry Reid, as Senate leader, gets to take those bills and combine them into a NEW bill, which the whole Senate then votes on. It has to get 60 votes to pass a [procedural] barrier called cloture. Basically, 60 Sens vote for it, and after that, the Senate has 30 hours before it has to pass the bill or not. During those 30 hours, they can consider amendments relevant to the bill but cannot consider any other policy matters. And on those amendments, only 51 votes are needed.

Once the full Senate passes the bill, that version goes back to the House, where they can either pass it as is, OR if they tweak it too, the full Senate has to re-vote on it. That can be dangerous, because the House is further left than the Senate and is likely to add things the Senate won't pass. So Reid is likely to try and manage the negotiations such that the Senate votes on the bill in a form the House can quickly pass and send straight to the Prez. It seems that the Schumer opt-out version of the pub-op is the one that can potentially get through both House and Senate.

How can it get through the Senate? Two ways--either Reid knows of a few senators who will vote for it but haven't said so yet, in which case, he writes it INTO the bill he brings to the floor and it gets 60 votes at cloture, after which they tweak/amend some and its over. OR he can only get the 50+ votes for it we know about right now in which case he DOESN'T put it in. They get 60 votes cloture on a bill sans public option, and then introduce the pub-op AS an amendment, at which point they only need to get 51.

On the policy of this [opt-out] version of the pub-option: I'm not a fan but it's better than the Snowe trigger compromise.

One of the big problems with health care markets right now is that they are too localized, with there just being one or two providers in each state. It's BETTER to override states rights in this case to get a giant national market where all those providers have to compete with one another--competition breeds innovation and lowers cost. A strong public option, because it would be national and have national-scale efficiencies would FORCE all the state-level insurance companies to operate AS THOUGH they were national anyway. Granted, the more centrist bill I preferred would've achieved the same goal at NO taxpayer expense simply by letting all the insurance firms from each state trade in all the other states too, but that's water under the bridge at this point.

Both the trigger compromise and the opt-out compromise [and the opt-in compromise that's somewhere between them] undercut this major benefit of a public option by tying it to particular local markets. However, the trigger compromise [and the opt-in] is [are] worse because they tie that localization to health risk too--the only places where the public option would get 'triggered' would be the sickest, most expensive places, where costs are naturally high. And the people who would sign up would be the poorest people in that market too. So basically it would just be taxpayers directly paying for the care of the sickest and poorest.

I'm a good liberal, so I don't have an intrinsic problem with that BUT we already have a program to pay for care for the very poorest and uninsurable--it's called Medicaid. There's no reason to just rip apart the whole system to expand Medicaid. Moreover, because the public option in a triggered system would only include the highest risk people, it wouldn't be able to reduce costs because the whole way that insurers reduce costs is by balancing the premiums from healthy people against the medical bills of the sick. Unlike Medicaid, which pays for direct care. So this would be much worse on the public fist than the opt-out. [The opt-in, I think, works the same way--the people who opt-in would be the same folks who would get triggered in]

Why? The opt-out starts out as a national public option, and only changes to a state system if a state--its healthy and sick, rich and poor citizens combined--votes to do so. Because, as first implemented, the public option will affect the market for everyone, not just the sick and poor, it will only get 'repealed' by certain states if rich and poor alike are dissatisfied with it, and that's not likely. It will still cost money, but it will be marginally less disastrous from a deficit perspective than the trigger. So of the compromises on the table right now, it is the best.

However, ALL of the above assumes that all the people in all the markets buy insurance as the mandate dictates. But who is to stop you from just disobeying the mandate? It's not a federal crime to do so, just a taxable offense. And the fine for not buying is so low (in the 100s of dollars) that many healthy people, who can afford their own care since they have so little of it, will just not buy. Since all insurance systems, public and private, need healthy people's premiums to pay for sick people's care, healthy people not buying (and thus failing to drive down costs to an affordable level for the sick) is a big problem. Indeed, it's precisely the problem we have now. By reducing the penalities/fines to almost nil, they've basically insured that we get an expansion of the insurance market to include a pub-op that we, the People, will have to pay for without the attendant benefit--and professed goal--of actually expanding coverage.

If they want to salvage this into meaningful policy and not waste my tax dollars on maintaining the status quo, they should increase the penalties and pass the opt-out.

The Future of Europe

As some readers of this blog may know, I have a large soft spot for the Watery Isle. I have visited friends and family there roughly once a year for as long as I can remember, and I lived there as a student, twice, in 2003 and 2006-7. So when I comment on events there, I do so with something more than an outsider's concern. But today, I comment as an American.

Let me explain. Despite all the hoopla about 'David Cameron the conservative reformer.' his policies are identical to the Thatcherite Tories of three decades ago. That is, shrinking the size of government through upper-income tax cuts and slashing spending, and focusing what's left of government on supporting 'traditional values.' [Especially egregious is his subtly concealed scheme to cut welfare payments to poor single moms--a group that correlates with immigrants-- while increasing the tax breaks to married couples, essentially paying middle-class white women to stay home and have babies. 'Lie back and think of England,' much?]

Together, as one journalist has already noted, these add up to a government that helps southern England at the expense of the North: the South is London financiers, Oxbridge academics, doctrinaire Anglicans and well-kept lawns. The North used to be factories, mines, sheep farms, and Protestant dissent, but Thatcherite labor reforms took the Northern economy and culture apart (as globalization necessitated, I admit). The result is that Britain is overly reliant on its financial sector and took a harder hit than most developed nations when the finance world collapsed last year. Granted, New Labour has done a whole lotta nothing to give the de-industrialized North something else to live on, but given that the North remains Labour's consituency, the chances of Britain's lack of economic diversity being addressed are much higher with Labour than with the Tories. Especially now that the financial crisis has made it possible for Labour to make a market-based argument for why Britain needs to start doing something besides banking again instead of the old socialist arguments that they rightly left behind 10 years ago.

All of this matters when it comes to understanding the two parties' attitudes to foreign policy. A Northern economy of producers needs places to send its goods; it needs influence over trade policy and immigration policy and a regional neighborhood of stable, growing economies. A Southern economy of bankers just needs the world's capital flows to pass through London and the pound to remain strong. In other words, a Northern economic strategy must be managed on the global stage; the Southern economic strategy can be managed from home. So while Labour's Miliband insists that active involvement in the EU makes Britain economically stronger, the South-leaning Tories see Europe as nothing more than a swipe at Britain's political autonomy. Economic internationalism isn't, ultimately, on their agenda.

Why should America care? Because one of these days, we're not going to be the world's superpower anymore. An outright GDP race between us and China, say, is a race we'll ultimately lose. But in a multipolar system, with a powerful entity in each region whose representatives can negotiate on the region's behalf, we have the opportunity to become the primary influencers of a Great Power diplomacy, having cultivated diplomatic engagement with all the big players already.

China, Russia and Saudi Arabia have been able to take a certain ownership of their regional neighbors to become regional representatives. Brazil and India are starting to think about it more. But no one European country has that kind of relative power over the others. A strong EU overcomes this hurdle and makes stable multi-polarity possible. And there is no strong EU without Britain in it. Firstly, because the Germans are rightly fed up of pulling the region's economic weight; secondly, because the Tory promise to revisit the Lisbon treaty (and likely withdraw from it) would put a literal stop to EU advances.

What, if anything, can the US do to stop a Cameron government from taking its roll-back-the-clock-on-Europe steps? I have no idea, but I do know that whatever the steps are, Obama might have the best shot of anyone of taking them. He and Cameron share an individualist streak that I abhor, but it means they are likely to have a pretty good personal working relationship. If institutionalists within the Obama administration are able to persuade him that a strong EU is a major US goal (he's never indicated he believes otherwise, but he's also focused his foreign policy energies outside Europe), he may be able to pass the word along. Here's to hoping.

Apocalypse 31: What's in a Name?

Not much, I hope. Since a favorite publication--BusinessWeek--is about to add "Bloomberg" to its title page. Bloomberg BusinessWeek (BBW for short!) doesn't quite roll off the tongue.

That said, Bloomberg buying BusinessWeek is about the best thing that could have happened, given that the alternatives all involved some kind of private equity entity, and as I've previously articulated, those kinds of mergers are bad news. Still, there are reasons to worry, because there's a lot of uncertainty about HOW Bloomberg plans to use BusinessWeek.

Bloomberg could take two approaches:

It could take BW and use it to deliver content to its core subscribers that Bloomberg's terminals don't already provide, namely, broad, analytical stories about topics like workplace culture, economic policy and management strategy, at which BW excels. This would allow Bloomberg to merge BW directly into its current business and basically avoid running it as its own entity. This has some value, but not much, since those subscribers either already get that news elsewhere or don't need it at all--they're mostly traders and the kind of news they need (real time, raw information) Bloomberg's own wire service already provides.

The alternative strategy is for Bloomberg to bring its corporate values and assets into a new market and target a new audience--the mid-level corporate citizens BW already speaks to. Bloomberg could use its vast store of real time data to flesh out BW's reporting. Moreover, Bloomberg's corporate value system (a willingness to invest a LOT of money for luxury quality product instead of cost-cutting its way to profit) has allowed it to fund a vast network of international bureaus when just about everyone else in media is cutting back on its global presence. BW has tried to do the same, by funneling money into expensive things like an investigative unit and funding a pretty solid international setup of its own.

Moreover, as BW's own Steve Baker points out, a strategy of continuing to develop and grow BW as its own entity would actually create a whole new business for Bloomberg: It might allow them to sell a discounted version of their data service over the web. BW's website is about the best place of any print publication's web presence to try this--it has a more lively, more social-media-esque comment space than any of its competitors, and has writers who actually get into the comments and respond to their readers, on both blog posts and ordinary articles.

Baker worries that Bloomberg won't take this latter, better route. James Ledbetter (who edits Slate's biz site) believes that Bloomberg PLANS to takes this route--to get deep into the web--and that's why they paid for BW in the first place.

Here's hoping Ledbetter is right.

Obama Plays Institutionalist?

Two weeks ago, I mentioned that I was frustrated with Obama's approach to big international issues like climate change, because it followed his preference for decentralized consensus governance over the institutions and realpolitik of great power diplomacy. (Worse still is the extent to which others seem to buy into his vision.)

On the environment, the opportunity to throw some real institutionalist punches and ram climate legislation through the Senate passed us by in June, when the House passed the bill and the health care debate hadn't taken over everyone's attention spans. Being individualists, the Obama-ites failed to think about the institutional structure of the Senate and the fact that it doesn't take on more than one big bill at a time, as well as about the institutions of other governments who would not, despite their general admiration for Obama, be duped into taking a handshake from him in December instead of real policy commitments to reduce emissions.

That said, there are occasional fleeting moments where it seems that Obama has grown savvy to these problems with his radical individualism. That's why, as I reported in Fortune today, he's using the institutions he still has power over (the executive agencies) to regulate individual industries in lieu of getting a comprehensive bill. In some ways, discretionary regulation beats Congressional oversight--career bureaucrats tend to be less beholden to lobbyists. On the other hand, discretionary regulation tends to be less economically efficient in the policies it produces, because industries are considered piecemeal and without proper attention to the way they interact in the macroeconomy. Furthermore, discretionary regulation is, well, discretionary, and doesn't have any value once power changes hands. Congressional policies, on the other hand, are very hard to undo once they're in place. Still, is this better than nothing? Hell, yeah.