Note: This guest post is by @Krolik, whom I’ve had the pleasure of meeting in person for coffee before she ran off to her ballet lesson and I ran off, embarassed that I’ve never taken ballet and a bit sad that my parents denied me pink tutus.  She has a lovely blog, Project Wombat, about raising her son, and is very funny.  I’ve never had political posts before, so let it be said that I don’t necessarily agree or disagree with this post about the healthcare reform issue.  All I know is that we need to include Nutella in the bill as a healing elixir.

Unless you have already thrown your car radio into a lake, you have been hearing about healthcare reform every minute of every day.  Even major “helping you avoid thinking since 1999″ stations like 99.5 are discussing it!  It’s only a matter of time before Will.I.Am releases a kitschy video about health care reform, I expect.  Needless to say, I must get on that bandwagon.  I am sorry to see that you are along for the ride, but here goes.

Healthcare reform is tough for politicians to support – and you can easily see why if you just follow the money. The healthcare sector profits have been looking spiffy ever since Nixon did us all a favor and decided to privatize health insurance.  Other politicians continued in the proud tradition of relying on heathcare to line their pockets with more and more money ever since.  We are asking them to bite the hand that feeds them. But – and more interestingly – why are WE (or at least many of us) so much against health reform?  People have been bringing guns to town halls, for crying out loud. To pass, health care reform needs either real or poll-perceived support from all of us.

In fact, the Obama Administration has stated they want to get a bipartisan solution.  But what would that take?  And why does this issue provoke such deep emotion in people?  We are going to answer all these questions in this blog post.  Yes, I am that good.  I am awaiting your call inviting me on a lecture circuit.

In TED 2008, Jonathan Haidt gave a fascinating talk about the differences between being liberal and being conservative.  You can watch the video below – but, in short, the two groups are separated by only one metric: openness to experience.  If you are liberal – and highly open to experience – then new is exciting, and change is good.  If you are conservative – and not open to experience – then new is troubling and there is nothing worse than change.

The healthcare debate, of course, is all about change.  Our conservative friends immediately jumped to announce a doomsday scenario looming on the horizon (progressively getting more and more crazy-ass).  Socialism! Death squads!  Euthanasia! Never mind that the US already has many socialist policies, including Social Security (and just try taking that away from them), the highway system, the water lines, the public schools, the fire departments, the list goes on.

Never mind that there are many countries which have the single-payer system, and yet so far not all of their citizens have been euthanized.  In fact, their citizens have a much longer life expectancy - even with the stress of death squads looming over them. Our liberal friends, on another hand, believe that adopting single-payer is the way to go.  They watched Sicko, they bought the fact that anyone in Cuba is treated like a king in any clinic, and they think that government should fix most things.  But as with all other government-run things, single-payer system makes sure that it’s difficult to get really brilliant medical care – same way as it makes sure it’s difficult to get very poor care.  Bureaucracy is good at eliminating extremes; unfortunately, it eliminates both of them, the high as well as the low.

So liberals and conservatives are at odds.  But, as Jonathan Haidt points out in his talk, one is worthless without the other.  Conservatives know how difficult order is to obtain, and how hard you need to work to preserve it.  Without them, we would be a band of gypsies still roaming across Africa as we speak.  On another hand, liberals understand that sometimes, to move forward, you must leave the dear and familiar behind.  And without that understanding, we would still be in the Dark Ages and using goats as currency. What this fundamental openness-to-experience divide tells us is that when you are trying to inflict a large change, bipartisanship between liberals and conservatives is simply not possible.

I think this is the largest part of why healthcare reform is floundering so far.  The current health care system is so dysfunctional that the new system must be built from scratch.   And anything that has words “from scratch” in it will never be supported by a conservative.  Except, may be, an apple pie recipe.  And liberals, who love change, have a hard time supporting it too – because the change is not yet clearly defined.  In its desire for a bipartisan reform, the Obama Administration has not put forth any plan of its own – and in doing so, it has left its liberal base without any concrete revolution to get behind. We have only one hope for health care reform.  Unfortunately, it requires Democrats to grow a pair, which should happen about the same time we see pigs soaring over the Potomac.  They (Democrats, not the pigs) need to realize that they have been voted the majority because the public actually wants them to, you know, act, and they should shove true, single-payer (or at least a very expansive public option) down opposition’s throat.

Because, as much as I love my conservative friends, now we need a true, big change.  We need to create a brand new system.  A system that would be worthy of the loyal, patriotic and selfless devotion that my conservative friends wish to give it.  And once it’s enacted, just try taking the comprehensive health system away – you’ll be held at gunpoint at your town hall meeting by people on all sides.

Cross-posted on Swifteconomics.

Do you have a very sassy New York-born Jewish grandma?  Chances are, she is exactly like Anna Schwartz.  Except in addition to being sassy, Anna Schwartz is also a noted and very knowledgeable American economist, collaborating with Nobel Prize winner Milton Friedman on their seminal work about the Great Depression, A Monetary History of the United States, 1867 – 1960.   The book is very detailed and criticizes government intervention during the Great Depression and its aftermath.   You can  read parts of it as a Google Book here.  This book changed the way many people thought about monetary policy and shifted the viewpoint that looking at money activity was not important to how the economy worked.

Please make me some matzah ball soup. Then school the Fed.

(Source: The Wall Street Journal)

Anna Schwartz is often not mentioned in lieu of Milton Friedman, but she contributed in equal parts to the research they conducted together.  You can see another piece they wrote, specifically focusing on the Great Depression, here. That was in 1963.  Schwartz, at 93,  is still working full-time at the National Bureau of Economic Research where she started her career in 1941.  Marketplace’s Kai Ryssdal recently interviewed her on her thoughts about the Fed’s handling of the current economic crisis.

She brings up some great points, on the transparency of the Fed:

The market is just bewildered. Bernanke came into office insisting that the Fed would be much more transparent than it had been in the past. But I don’t believe that it’s lived up to that. If the market understood what the Fed was planning in each case, and could see a design, then I think the market would have reacted much more positively.

I remember when we went to the Federal Reserve as part of a field trip with my university Economics Club (where I was the Vice President.  Don’t laugh at me,) and I got to sit in Greenspan’s chair as one of the Federal Reserve governors told us about the Reserve’s plans to become more transparent, primarily by releasing the minutes of their meetings to the public, earlier.  I remember then I was impressed, and defended the Fed’s plans toward transparency all the way to the end.  But, like Schwartz tells it, this isn’t happening.

Ballin' hard in Greenspan's chair

As many economists know, transparency is key to free market functionality, and essentially, the big problem that brought down credit default swaps: no one knew what was going on with them, hence, they couldn’t be valued correctly.

She also is not happy at all with what Bernanke is doing:

Ryssdal: It sounds like you’re frustrated with Chairman Bernanke and the White House, that they maybe haven’t learned the lessons of history that you and Milton Friedman wrote about.

SCHWARTZ: Well, I think that that’s a fair statement. Considering Bernanke’s background, you would have expected a much more, should I say a tidy kind of performance by the Federal Reserve. Seemed to be something that was ad hoc and introduced without considering all the implications.

It’s one thing when TV pundits that don’t know much about economic policy criticize or praise government actions to reverse the recession.  It’s another when you are schooled by someone who could be your grandma, if your grandma had a Ph.D. in economics and was one of the foremost monetary policy analysts in the world.

Since most everyone in my extended family knows that I am an economist, I get frequently asked when the recession will end, as if I am Frodo holding the ring to throw into Mount Doom, where Mount Doom is really a combination of Freddie Mae, Citiman Brothers, and Goldman Ford.

So, here goes:

The economy will hit the bottom in the third quarter of 2009 and start slightly trending upward in the fourth quarter. What does this mean, and how will it come about? The Business Cycle Dating Committee of the National Bureau of Economic Research has predicted that

The most likely duration for this recession is somewhere between 18 and 24 months, with the trough likely at some point in the second half of 2009. The magnitude and the timing of large projected fiscal stimulus from the incoming Obama administration in early 2009 could ultimately have some bearing on the timing of the recovery. However, there is a high probability that this could be the longest postwar recession of all (the previous record was the 16-month recession in 1973–75).

(via my company’s chief economist)

What will it take for the economy to turn around, and how will we be able to tell?

Economic growth, the opposite of recession, depends on GDP (gross domestic product.) The economic equation for GDP is

Y=C+I+G+(X-M)

where

C=Consumption;
I=Investment (as in business investment into new machinery, new methods, etc.);
G=government spending and
(X-M)=exports minus imports.

There are several ways according to classical textbook economics to get out of a recession:

1) More government spending to increase G and therefore make Y bigger

2) More consumer spending (which is what Bush was trying to encourage with the stimulus or

3) More business investment through lowered business taxes, giving them incentives to spend more money spreading their business instead of being more cautionary.

So what has to happen in order to alleviate this recession?

1. The extra supply of houses in the United States must decrease so that demand can catch up and boost the housing sector, the segment most hurt by (and the one most hurting) the economy. This will stimulate consumer spending, as well as business investment. This may happen either through a stimulus package for consumers or friendlier terms on loans by banks. What may also help is the lowered federal funds rate (the rate at which banks loan to each other, which directly translates into the interest that you get in your bank accounts, such as your savings account.)
2. Friendlier terms on loans by banks, which allows consumers and businesses to put more money into savings. Think about it, would you rather save money at a 2.4% interest rate (the current rate on my ING account) or at 4.5% interest rate? While the Federal reserve is trying to stimulate spending by keeping interest rates low, as rates increase, banks will have more money to lend out, resulting in more loans and more business investment. You’ll notice that in the GDP equation, some parts can balance others out.
3. Oil prices need to remain low in order to lower investment prices for businesses. If you’ve been listening to the news, businesses are constantly talking about how operating costs have increased. Transportation costs, of which oil is a part, have had a large role to play in that; however, this may be hard to do given that OPEC is already trying to instate production cuts to hedge its losses.

4.  Consumer demand needs to increase, which may or may not happen with Obama’s proposed stimulus package.  While this helps in the short term, it gets us into more debt in the long term.

The problem is that the economy is not a closed laboratory that can be operated on. It is a living thing with so many millions of moving parts that it must be a nightmare for the Fed, the Treasury, and other regulators.  This is one of the reasons that economics is an imprecise science at best.  Even if you increase consumer confidence, what’s to say that investment will also increase?

Also, are government policies efficient?

These are the questions facing policymakers, as well as academic economists, and one of the reasons it is next to impossible to do anything about a recession right away.   One thing that helps, though, is public sentiment.  So, if you think positive, and your neighbor does, and investment in stocks starts again, which starts a chain reaction, the economy may become healthy again.