Month: December 2008

By Patrick Appel

The new Atlantic is now online. Henry Blodget’s article on the economic mess is worth a read:

As we work our way through the wreckage of this latest colossal bust, our government—at our urging—will go to great lengths to try to make sure such a bust never happens again. We will “fix” the “problems” that we decide caused the debacle; we will create new regulatory requirements and systems; we will throw a lot of people in jail. We will do whatever we must to assure ourselves that it will be different next time. And as long as the searing memory of this disaster is fresh in the public mind, it will be different. But as the bust recedes into the past, our priorities will slowly change, and we will begin to set ourselves up for the next great boom.

A few decades hence, when the Great Crash of 2008 is a distant memory and the economy is humming along again, our government—at our urging—will begin to weaken many of the regulatory requirements and systems we put in place now. Why? To make our economy more competitive and to unleash the power of our free-market system. We will tell ourselves it’s different, and in many ways, it will be. But the cycle will start all over again.

So what can we learn from all this? In the words of the great investor Jeremy Grantham, who saw this collapse coming and has seen just about everything else in his four-decade career: “We will learn an enormous amount in a very short time, quite a bit in the medium term, and absolutely nothing in the long term.” Of course, to paraphrase Keynes, in the long term, you and I will be dead.

By Patrick Appel
"Every conventional wisdom has been turned on its head in the course of the Iraq War. And political ironies abound. The vilified George Bush did largely accomplish his goal of liberating an entire nation. A democratic regime can function in the Middle East. And there was in fact a military “solution”–one  that preceded the political reconciliation," – Jennifer Rubin, celebrating way too early.

By Patrick Appel
A reader writes:

Balko’s theory that "Prohibition was the pièce de résistance of the early 20th-century progressives’ grand social engineering agenda" isn’t right.

 

The temperance movements of the 19thC & 20thC were classic Protestant Christian movements, conservative in nature. Wesleyans, Methodists, arts colleges, working men’s clubs, self-improvement, all that sort of thing. You could just as easily say it was "early 20th-century conservative Christians’ grand social engineering agenda". All the more compelling since the war on drugs is its direct descendent and prosecuted just as vigorously by contemporary Christian conservatives. Failed social engineering can be a conservative enterprise as much as anything else.

By Patrick Appel

A wonky e-mail from a reader:

I’m an ERISA employee benefits attorney who started out working for Nebraska’s state pension plans.  I’ve thought a lot about the "defined contribution" (e.g. 401(k)) versus "defined benefit" (e.g. traditional state pension) debate.  I tend to agree with most of the criticisms of 401(k) plans that you cited — But I think you need to think more about the actual state of large state defined benefit pension plans.

You mention that the states have vastly underfunded the public pensions.  First, many (although not all) public pension plans were originally established (like Social Security) as a pay-as-you go type plan — although the vast majority of state plans are now pre-funded plans.  The idea of the pre-funded plan is that enough money has been put aside during a worker’s career, that there are sufficient funds to pay the pension checks of that worker for the rest of the worker’s lifetime.  In a sense, the traditional defined benefit pension plans work like giant insurance policies, with the risk of some workers outliving their money offset by other workers who die prematurely.

To work successfully, a big state pension plan has to have two things going for it:  (1) workers who spend the majority of their careers within the same system, and (2) realistic actuarial assumptions regarding mortality and investment return.

These two things explain why the current state pension plans are less successful than they should be in theory.

(1) Workers don’t usually spend their full careers in the same pension plan — and therefore don’t earn full benefits.  This is good for the plans, but bad for the workers.

(2) The actuarial assumptions are easy to manipulate, and there are many reasons why political leaders yield to the manipulation temptation.  The real difficulty is that human nature doesn’t like to set aside a pot of money for the future.  States are continually fiddling with the actuarial assumptions, so they don’t have to contribute to the plan.  Since it is an inexact science, the actuaries can only do so much to prevent undue manipulation.  Also, whenever the plans are "overfunded," policy makers see using the overfunded-plans as a way to grant enhanced benefits to their workers without having to actually spend money — they juice up the benefits with the "surplus," get praise from the workers, and don’t have to raise taxes.  In bad times, political leaders like to staunch holes in their budgets by making unrealistic assumptions — then the actuarial model allows them to lower their contributions, and they have "instant money" for other state priorities.

Then there is the question of how the media reports on state pension plans —  Short-term volatility in the financial markets may make a state pension plan look "underfunded" this year, but "overfunded" in three years.  (Go back and read news articles, and you will see these see-saw reports on the same state pension funds — they are in "crisis" for a few years, then they are in "good shape.")   Many of the criticisms about their funding are aimed either at those that are still recovering from starting as a pay-as-you-go system (where the current benefits are being paid from revenues generated by current contributions), or are made at a time when the current actuarial projections are grim.  . . .   Media-types never seem to notice that these actuarial projections usually have a rolling 30-year time horizon, so they are sort of like weather forecasts — not implausible, but notoriously changeable and often inaccurate.

Moreover, I liken the big pension plans to "wholesale" for the financial industry, whereas the 401(k) plans are more like "retail."  A big state pension plan has a huge pot of money and therefore negotiating power with the financial industry.  You and I have a small pot of money and basically have to take or leave the fee structures we’ve given.  And large employers (where most 401(k) plans locate) pass many of the fees on to their individual participants. Therefore, the financial industry has incentive to discourage pension plans and encourage 401(k) plans.

An example (hypothetical) helps make this point.  If a financial provider has (for example) a $1,000,000,000 pot of pension money, they can charge (for example) 30 basis points to manage the money (wholesale) — this generates a fee of $3,000,000.  If that same financial company is managing $1,000,000,000 in 401(k) money, they can charge 175 basis points (retail) — this generates a fee of $17,500,000.  For a financial company, the difference between the two pots of money is $14,500,000 in gross revenue.  Of course, the infrastructure needed to service the money will be much more complex for the 401(k) plan, and therefore their costs would be higher.  Still, one might question whether the costs are really $14.5 million higher for the 401(k) plan.

The bottom line is that we don’t have retirement product in the United States that prudently and efficiently sets aside money for a mobile workforce.  Social Security is inadequate, and is funded on a "pay as you go" model.  Traditional defined benefit pension plans don’t work for the mobile work force, if they are sponsored by single employers. 401(k)-type plans put too much risk and expense on the individual, who is ill-equipped to handle it.

By Patrick Appel
The Economist evaluates the situation in Pakistan:

The problem of Islamist militancy in Pakistan is very unlikely to be addressed satisfactorily in the near future. US efforts—at least in their current form—to force the issue are as likely to worsen the situation as to improve it. Perceived US interference in the region may seriously undermine the Pakistani government’s will to tackle the problem. But even with the best intentions, a whole range of problems will hamper Pakistan’s ability to improve the situation. For one, the government’s efforts will depend on a military that has historically sought to undermine it, and that has already expressed reservations about Mr Zardari’s handling of the current crisis. Also worrying is the increasing evidence that militant groups which initially fought for local causes (primarily the Kashmir issue) have now conflated their regional goals, training and tactics with the broader movement of global Islamist jihad.

Newsweek’s new poll shows what we already knew, support for gays civil rights is growing:

One reason that tolerance for gay marriage and civil unions may be on the rise is that a growing number of Americans say they know someone who’s gay. While in 1994, a NEWSWEEK Poll found that only 53 percent of those questioned knew a gay or lesbian person, that figure today is 78 percent. Drilling down a bit more, 38 percent of adults work with someone gay, 33 percent have a gay family member and 66 percent have a gay friend or acquaintance.

By Patrick Appel
Gates has an article in the new issue of Foreign Affairs. FP wonks Fred Kaplan , Judah Grunstein, and Nathan Hodge analyze it. Here’s Hodge:

In this latest article — mostly, a repackaged version of this speech to National Defense University — Gates seems to be taking aim at the F-22 again. "The Defense Department has to consider whether in situations in which the United States has total air dominance, it makes sense to employ lower-cost, lower-tech aircraft that can be employed in large quantities and used by U.S. partners," he writes. That sounds like a plug for the smaller, cheaper (and internationally procured) F-35. As Axe noted here earlier this week, with Gates in line to lead the Pentagon under President Barack Obama, the F-22’s future is starting to look less than bright.

Graph from America’s Defense Meltdown.

By Patrick Appel

Tim Dickinson does a No on 8 postmortem. The thrust of the piece:

"This was political malpractice," says a Democratic consultant who operates at the highest level of California politics. "They fucked this up, and it was painful to watch. They shouldn’t be allowed to pawn this off on the Mormons or anyone else. They snatched defeat from the jaws of victory, and now hundreds of thousands of gay couples are going to pay the price."

By Patrick Appel

Jacob Grier, like Radley Balko, compares prohibition to the war on drugs:

…we should acknowledge our contemporary struggle with prohibition. The war on drugs has led to gang violence, trampling of civil liberties, and military interventions abroad. Federalist principles are routinely ignored in medical marijuana raids, doctors face prosecution for prescribing painkillers, and ordinary adults must show their ID just to purchase effective cold medicine. The United States now has more than 300,000 people imprisoned for drug violations.

Suderman has additional thoughts on modern-day prohibition movements.

(Hat tip: Schwenkler)

By Patrick Appel
A reader writes:

You know, there are many instances of anecdotal evidence that show the UK health system as wonderful, and many that show the UK health system as dreadful.  There are also many instances of anecdotal evidence that show the US health system as wonderful, and many that show the US health system as dreadful.  The point is, one can always find anecdotal evidence for whatever side of an argument one takes.  The question which no one seems interested in tackling in this particular discussion is:  For the average person in the average situation, which health system — UK or US — is more consistently better?

Ezra makes a related point.