Merry Christmas

More Profits, Less Welfare

Lucienne Bloch, Land of Plenty, woodcut, ca 1935.  Lucienne Bloch was in the WPA and worked with muralist Diego Rivera in the 1930s.

While Congress is working on half-measures to reform the US system of health insurance, I ran across these news stories about how our health care and welfare systems are working.  We always hear myths about America's systems of health and welfare:  You can depend on health insurers to protect your health.  Anyone can get the medications that they need.  America wouldn't let children go hungry.  The reality is anything but.

Aetna Is Forcing 600,000-Plus to Lose Coverage in Effort to Raise Profits

In a third-quarter earnings conference call, officials at Aetna announced that the health insururer is planning to force up to 650,000 clients to drop their coverage next year in order to raise to meet profit expectations.  They predicted that the company would lose between 300,000 and 350,000 members next year from its national account as well as another 300,000 from smaller group accounts.  Aetna's third quarter earnings were up 26 percent year over year, but if they price more families out of insurance, they can do better.

Unburied Bodies Tell the Tale of Detroit -- A City in Despair

Things are bad in Detroit.  The murder rate is soaring. The school system is in receivership. The city treasury is $300 million short.  The city cannot reliably provide rubbish collection and other basic services. Thousands of houses are abandoned.  Entire shopping districts lie boarded up.  Auto manufacturing plants have been abandoned for years.

Can it get worse?  It just did.  People are dying from their poverty, and not even receiving burials.

In June, the $21,000 annual county budget to bury Detroit’s unclaimed bodies ran out. Many there cannot affort to bury their family members, and the city managed to provide burial in the past. Now that the city is in financial straits, the bodies are piling up in the morgue now.

What has alarmed medical examiners at the mortuary is that most of the dead died of natural causes. It is evidence, they believe, of people who could not afford medical insurance and medicines and whose families can now not afford to bury them.

Many people cannot afford health insurance ... and they are dying because of it.  Does anyone doubt that the US needs national health insurance for all the people?

The Safety Net Is Failing Needy Americans

Four organizations -- The Institute for Policy Studies, the Center for Community Change, Jobs With Justice, and Legal Momentum -- have released a study showing how the nation's social welfare system is failing millions of Americans during the Great Recession, just as the need is greatest.  Here are highlights from Battered by the Storm: How the Safety Net is Failing Americans and How to Fix It.

Temporary Assistance to Needy Families (TANF) is supposed to be our nation’s last line of defense against falling into the depths of poverty.

Yet this program is so deeply inadequate that by 2008, the number of needy children receiving TANF fell to only 22 percent. Under the pre-“welfare reform” system of Aid to Families with Dependent Children (AFDC) in 1995, 62 percent of poor children were benefiting. Eligibility criteria are set at sub-poverty levels in some states, making poor children ineligible, and barriers such as lack of childcare and lack of access to employment have further kept poor children from receiving desperately needed economic assistance that a system such as TANF should provide.

The food stamp program is doing better, because it has responded to growing need by reaching more households.  Sadly, the average monthly benefit per person is only about $100.  The report asks: "How can our children be happy, healthy, and adequately nourished on that?"

The reason for this human misery lies in the political trend of the past 30 years that has benefitted the wealthiest Americans while reducing wages and increasing poverty for the rest.  With the onset of the Great Recession, we are seeing more poverty and likelihood of reprecussions for years to come.

Henri Matisse, Icarus

Eight Centuries of Financial Crises

Thomas Hart Benton, The Departure of the Joads, 1940.  Oil painting commissioned by 20th Century Fox to advertise their film production of John Steinbeck's novel, The Grapes of Wrath.

As behavioral economists know well, humans suffer from biases that cause them to overweight the present and the recent past in their reasoning.  If one's biases have been based on a period of good economic times, it is not surprising that many will be unprepared and suffer greatly during a general crisis.  Those wanting to place the present financial crisis in a long-term historical context may wish to read a fascinating, recently-released study from the National Bureau of Economic Research -- This Time is Different: A Panoramic View of Eight Centuries of Financial Crises, by Carmen M. Reinhart of the University of Maryland and Kenneth S. Rogoff of Harvard University.  Quotes of some of the key findings, with my comments:

We find that serial default is a nearly universal phenomenon as countries struggle to transform themselves from emerging markets to advanced economies.

The current crisis is nothing unique, because disruptive financial crises have occurred from time to time over the centuries.  Maybe it is prudent to live one's life as if financial and economic disaster is a real possibility (like avoiding massive debts, saving money, etc.).

Major default episodes are typically spaced some years (or decades) apart, creating an illusion that “this time is different” among policymakers and investors.

People have limited memories and tend to treat the recent past as "normal".  Those living in good times will hardly be prepared for extreme adverse events, unless they consciously review the historical record.

We also confirm that crises frequently emanate from the financial centers with transmission through interest rate shocks and commodity price collapses.

In other words, the current crisis is highly typical.  Problems started in US and spread to the rest of the world.  Within the US, the crisis started in the financial centers, including the large mortgage brokers and investment banks, spread into markets for securitized mortgages and credit default swaps, and snowballed into problems for Main Street and the entire nation.  A lack of proper regulatory oversight permitted critical financial institutions to operate without consideration to risk management and precipitate a massive crisis.

Our data also documents other crises that often accompany default: including inflation, exchange rate crashes, banking crises, and currency debasements.

Just because US hasn't experienced inflation, exchange rate crashes, or currency debasements yet, we can't ignore these possibilities.  Conditions are still in place for the crisis to morph into new phenomena.  Debt is being transferred from the financial system to the balance sheet of the Fed.  Most private debt (home mortgages, commercial real estate, credit cards, etc.) has hardly been touched yet.  There is a distinct risk that more crises could come soon.

The authors looked in particular detail at the years 1800 to 2006, where the data are the most complete:

Aside from the current lull, one fact that jumps out from the figure are the long periods where a high percentage of all countries are in a state of default or restructuring.

Countries are connected financially, now as in the past.  We should be on the lookout for further breakdowns as the crisis spreads and strains build on weak points throughout the world.   East European countries have built huge debts with West European banks.  Will this be the next place to crack?

Serial default on external debt—that is, repeated sovereign default—is the norm throughout every region in the world, even including Asia and Europe.

Soverign default isn't just possible, it is common.  Countries like France and Spain have defaulted multiple times in the past.  In view of the problems faced by a number of governments around the world (not just the US), we should be prepared for more shocks to come to the financial system.

Our extensive new dataset also confirms the prevailing view among economists that global economic factors, including commodity prices and center country interest rates, play a major role in precipitating sovereign debt crises.

If you have been worrying about these kinds of risks, you weren't off the mark.  Despite worries about the long-term sustainability of the US debt, there are many other countries around the world where sovereign risks are greater and more immediate.  Whenever central banks raise short-term interest rates in anticipation of economic recovery, there will be countries and corporations that will be unable to withstand the shock.

Periods of high international capital mobility have repeatedly produced international banking crises, not only famously as they did in the 1990s, but historically.

Capital mobility is one of the hallmarks of the present era of globalization.  However, our world has undergone earlier eras of globalization, accompanied both by capital flows and episodes of financial crises.  In fact, the present era's flows of instantaneous information seem pale in their impact, compared to the flow of material goods loosed on the world by industrialization and the age of steam in the nineteenth century.   We are not unique, and we would do well to consider the lessons of past crises.

Yet, the government’s gain to unexpected inflation often derives at least as much from capital losses that are inflicted on holders of long-term government bonds.

The US response to the financial crisis seems to have done little but increase the risks of new bubbles.   Is anyone worried that the US might try to inflate its way out of its debt problems?  Is anyone worried about a bubble in US Treasuries?  Of course they are.

Watteau, The Embarcation for Cythera, 1717.  Cythera is one of the Ionian islands and in antiquity was site of a shrine to Aphrodite.  Watteau is playing on a popular notion viewing Cythera as a fictional place where the power of love eliminated petty conflicts and people could live harmoniously and engage in amorous pursuits.  This idea followed the humanist views of the age of reason, whereby human beings were seen as perfectable and capable of achieving greater happiness.  In the midst of this dreamy optimism, the lower classes lived desperate lives under the thumb of the aristocracy.  In the painting, the elegantly attired rich await their departure for Cythera.  After their departure from the dust bowl, the Joads faced desperation, disillusion, and rejection.