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The Bernanke Fed

October 25, 2005
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The stock market took off today on President Bush’s announcement that Ben Bernanke, the former Princeton University economist turned Federal Reserve Board governor, will take over the Fed when Alan Greenspan retires early next year. While the media immediately reported the market’s response was due to perceptions Bernanke will be an inflation hawk like Greenspan, some of his recent speeches suggest his mind works in unconventional ways when it comes to prescribing medicine for imbalances in the economy.

Take the current account deficit, currently running somewhere north of $600 billion a year. We’re not just importing significantly more goods and services than we export — the trade deficit. The U.S. is also a major importer of capital with the exporting nations of Asia, especially China, being some our biggest lenders.

The traditional view is that this current account deficit is a mirror image of the nation’s budget deficit, which the Bush administration has pushed to near record levels to support his war in Iraq, hurricane relief and undiminished domestic spending. He even faces a minor revolt in the House among fiscal conservatives who want to use the budget deficit to take another whack at what’s left of discretionary federal spending. These allies of anti-tax activist Grover Norquist believe the current economic environment presents their best opportunity to, using his words, drown what’s left of the government in a bathtub.

Greenspan could usually be relied upon to sound these conservative themes in his periodic trips to Capitol Hill. When it came to fiscal policy, the Ayn Rand devotee never drifted far from his roots.

But Bernanke may not be as reliable an ally for the deficit hawks. In two speeches earlier this year, the Fed governor downplayed the role of the federal budget deficit as a driver of the nation’s current account deficit, which most economists see as unsustainable.

“I disagree with the view, sometimes heard, that balancing the federal budget by itself would largely defuse the current account issue,” he said. “In particular, to the extent that a reduction in the federal budget resulted in lower interest rates, the principal effects might be increased consumption and investment spending at home rather than a lower current account deficit. Indeed, a recent study suggests that a $1.00 reduction in the federal budget deficit would cause the current account deficit to decline less than $0.20. These results imply that even if we could balance the federal budget tomorrow, the medium-term effect would likely be to reduce the current account deficit by less than one percentage point of GDP.”

Supreme Court Justice nominee Harriet Miers will soon face the furies of the right. Bernanke may get the same treatment once the deficit hawks have had time to read of his recent speeches.

Galbraith on Bernanke

October 25, 2005
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My friend and colleague James Galbraith of the University of Texas last night sent around his six-year-old review of Ben Bernanke’s book on targeting inflation. I found it especially persuasive on how conservative mainstream economists have taken to declaring a consensus in the profession where none exists.

Most of the commentary this morning has focused on Bernanke’s inflation-fighting skills. Dr. Galbraith issues the necessary corrective in pointing out that the Fed’s responsibilities include maintaining full employment (honored mostly in the breach over the years). Here’s his review:

The Inflation Obsession: Flying in the Face of the Facts
By James K. Galbraith

From Foreign Affairs, January/February 1999

Inflation Targeting: Lessons from the International Experience. Ben Bernanke, Thomas Laubach, Frederic S. Mishkin and Adam S. Posen. Mishkin, and Adam S. Posen. Princeton: Princeton University Press, 1999, 365 pp. $24.95.

Should a central bank address a broad agenda of economic growth, price stability, and full employment? Or should it focus single-mindedly on controlling inflation? Last autumn this debate mounted in Europe, where calls from social democratic governments for lower interest rates grew louder as the continent prepared for the European Central Bank. In the United States, where federal law stipulates full employment as a policy goal, Republican proposals to require that the Federal Reserve focus only on inflation surface regularly in Congress.

Ben S. Bernanke and his colleagues, each a veteran of the Federal Reserve Bank of New York research staff, make the case for inflation targeting in a book that has the intellectual rigidity of a manifesto. But their tone, worried rather than strident, will seem familiar to followers of the recurrent debates over competitiveness, which cater to national vanity in similar terms. In the authors’ eyes, the United States is “lagging behind other industrial countries in considering monetary policy frameworks and institutions that might help ensure good economic performance in the long term.”

Since the early 1980s, a handful of countries have formally declared that low and stable inflation should be the overriding objective of monetary policy. These countries, which include New Zealand, Canada, Great Britain, and Sweden, are the main focus of the book. After reviewing these cases, Inflation Targeting uses them as examples to argue that inflation targeting would also enhance American “economic performance in the long term.” But the authors have a curious interpretation of this phrase. They do not use it to refer to rising living standards, full employment, declining inequality in pay, or similar recent improvements in American material well-being. Rather, they explicitly deny that monetary policy should be praised for these blessings, since the gains of an expansionary monetary policy are inherently temporary and unsustainable. Economists should therefore not count such gifts among the benefits of a sensible long-term monetary policy.

In other words, America’s present affair with full employment is sure to end badly, with an acceleration of inflation leading finally to recession and unemployment. In contrast, the right strategy to fight inflation is to keep unemployment high enough all the time at its “natural” rate, or as low as joblessness can go without sparking inflation. A central bank distracted by the pursuit of economic growth and full employment is to be condemned, while a central bank that achieves price stability at the cost of chronic high unemployment — as in Germany — has done its duty. The European Central Bank, charter-bound to price stability whatever the cost, represents the pinnacle achievement for this school of thought. Meanwhile, the Federal Reserve — unmentioned in the U.S. Constitution, obliged to report on unemployment — must seem emasculated in comparison.

OFF TARGET?

The case for inflation targeting, as Bernanke and his colleagues present it, rests on a theory — the natural rate of unemployment mentioned above — that links monetary policy exclusively to inflation control and denies central banks any important role in determining economic growth or employment. As disciples of the natural-rate doctrine, our authors favor inflation targeting not simply as the better strategy, but as the only strategy consistent with sound economics. But are these principles correct?

The authors do not bother to argue their case, but merely tell us that these truths were presented by Milton Friedman in 1967, refined by Robert Lucas in 1976, and consequently were accepted by most economists. Indeed, the theme of consensus crops up time and again. We read that “most macroeconomists agree” the inflation rate is the only variable that monetary policy can affect in the long run; that there is “by now something of a consensus that even moderate rates of inflation are harmful”; and that there “is a growing belief among economists and central bankers” that low inflation is good for both efficiency and growth. For the authors, the case is closed and consensus has settled the issue.

In fact, no such consensus exists or has ever existed. To take just a few examples, Robert Eisner, a former president of the American Economics Association and a renowned macroeconomist, has never accepted the Friedman/Lucas view. Neither has James Tobin, Paul Samuelson, Robert Solow, or the late William Vickrey — all Nobel laureates. Neither did Ray Fair at Yale, James Medoff at Harvard, or William Dickens at the Brookings Institution. Bernanke and his colleagues maintain the illusion of consensus by ignoring the actual debate, which has grown more intense, not less, in recent years.

There are two basic reasons why this controversy persists. First, although the Friedman/Lucas doctrine does enjoy some academic dominance, it rests on a peculiar philosophical position that regards the future as a sort of lottery drawing. For example, it would view the Asian financial crisis not as a policy failure but merely an unfortunate, random outcome. Not surprisingly, many thoughtful economists reject this approach. Second, the real world has been openly contradicting the theory for years. Three years ago, every advocate of the natural-rate doctrine firmly held that unemployment below six percent would spark inflation. Unemployment has since fallen, but contrary to theory it not only has remained below the supposed natural rate but has failed to touch off inflation. The Friedman/Lucas arguments have received a clear empirical rebuke.

Instead, deflation, not inflation, reared its head in much of the world last year as the financial crisis spun out of control. But adherents of the natural-rate theory were never able to see this threat. They were still arguing for an anti-inflation policy when the Asian crisis broke in 1997, and they were still clinging to it in the summer of 1998 when U.S. markets began to crack under the strain. As the case for urgent action grew evident to everyone else, including Federal Reserve Chairman Alan Greenspan, the diehard natural raters inside the Federal Reserve obstructed forceful action. The concrete result: interest rate cuts were at first too cautious to impress the financial markets and affect the economy, and so the crisis deepened.

Can a central bank pursue inflation targeting without adhering to the natural-rate doctrine? Although Bernanke and his coauthors make no effort to separate the two, it is possible to base inflation forecasts on something other than the unemployment rate. An inflation targeter could very well have argued at the Federal Reserve last August that the Asian crisis had eliminated inflation risk and that large cuts in interest rates were essential to ward off the threat of deflation.

This supply-side view may be an improvement over an employment-driven inflation obsession, but it is still less sensible than current Federal Reserve practice. Economists opposed to rate cuts could have countered, correctly, that deflation outside the United States will not depress prices inside the country because most wages and prices are unlikely to fall that quickly. However, the great danger of the Asian crisis is not falling price levels but rising unemployment, recession, and income inequality. A doctrine of inflation targeting, even if not tied to the natural-rate dogma, would have weakened the argument for the interest rate cuts needed to stabilize employment and output, not to mention the financial markets and the banking system.

A CASE FOR CUTS

In any case, events have already overtaken our authors. The only potentially effective response to the global slump has been for the Federal Reserve to sharply cut U.S. interest rates and ensure a depreciation of the dollar. These measures help slow the flight of capital to the United States, return confidence to Asian markets, and restore the balance sheets of otherwise insolvent Japanese banks. Inflation targeting would have delegitimized these policy goals. The argument for having our central bank exclusively address inflation not only ignores the reality of the crisis but assaults the urgent present priorities of the Federal Reserve itself.

What of the claim that inflation-targeting countries have enjoyed superior economic performance, even if employment and growth are omitted and inflation alone is considered? A fair evaluation of this claim would require a comparative perspective, which the authors do not provide. We are left then to review the historical record and ask, What kind of evidence do Bernanke and his colleagues actually present that inflation targeting succeeded?

This part of Inflation Targeting merits careful reading, for much of the story in detail is interesting and competently told. But what is striking is that even the authors admit that inflation targeting in practice has actually done little to fight inflation. In the case of New Zealand, they write, “the decision to announce inflation targets occurred after most of the disinflation . . . had already taken place.” The same is true for Canada, and Britain also embraced inflation targets when “it was most likely to meet them.” Sweden “was in deep recession” with inflation “down to a historically low rate of three percent per year” when its central bank adopted inflation targets.

In other words, the countries in question never introduced inflation targets when inflation posed a serious threat, nor did adopting targets reduce the cost of any ongoing inflation battle. In all cases, the declaration of war came after the fighting was over. So why did the central bankers do it? Bernanke and his colleagues are quite honest about the reasons. Inflation targeting in all cases coincided with high unemployment, and its main effect was to excuse central bankers from addressing this crisis. Second, inflation targeting could substitute for the messy practice of money supply targeting, an earlier misguided enthusiasm that Britain had once embraced and that Germany used until the launch of the euro. Third, and in sharp contradiction with the first motive, inflation targeting provided in a few cases some camouflage for central bankers who were actually planning to ease monetary policy in order to fight unemployment. They said one thing to placate conservatives and did another to accommodate the political and economic realities of the hour.

Central bankers, like generals, are often accused of refighting the last war. But as the motives above suggest, this case is somewhat different. First, inflation targeting commits itself in principle to fight the last war — the war against inflation — as a way to avoid addressing the present threat — unemployment. Second, inflation targeting allows central bankers to change tactics of the last war even though it has already ended. And third, it permits central bankers to assert that the inflation war is still raging, even when they are really planning to fight unemployment. These mechanisms are useful from a narrow public relations standpoint, but it is hard to see how they actually relate to economic performance, including the pursuit of low inflation.

What should the United States do? The Federal Reserve is an independent executive agency under the authority of Congress. It therefore comes under the Humphrey-Hawkins Full Employment and Balanced Growth Act of 1978, which rewrote U.S. economic policy goals to specify that they include, among many things, full employment, balanced growth, and reasonable price stability. In particular, the act set interim targets of four percent unemployment and three percent inflation — goals that are now, within a few tenths of a percentage point, achieved.

The authors of Inflation Targeting do not discuss the Humphrey-Hawkins Act. If they had the chance, however, they would likely rewrite it and order the Federal Reserve to fight inflation alone. They do not say what would become of the Humphrey-Hawkins goal of “full employment.” In principle, perhaps some other agency could address the task of sustaining full employment through a jobs program funded by tax increases or deficit spending. But it is unlikely that Bernanke and his colleagues have this in mind. One suspects instead that what they really want is to abandon full employment as a formal objective of American policy.

It is ironic that this book appears just as Alan Greenspan, Alice Rivlin, and the rest of the Federal Reserve leadership have demonstrated how spurious the natural-rate doctrine is by proving that full employment, balanced growth, and reasonable price stability are not mutually exclusive. This is a remarkable accomplishment, and it is due in part to the willingness of Chairman Greenspan to overrule the adherents of the Friedman/Lucas view and experiment cautiously with continuing reductions in unemployment. In this way, Greenspan and company have affirmed the good sense of the Humphrey-Hawkins law. The fact that the unfolding crisis of go-go globalization now threatens this accomplishment does not diminish its validity or its importance. And in their attempt to stabilize the financial markets and the world economy as the deflationary crisis of 1998 unfolded, the Federal Reserve’s leadership demonstrated far more sophistication, flexibility, and common sense than Bernanke, Laubach, Mishkin, and Posen show in this evasive, unpersuasive book.

www.foreignaffairs.org is copyright 2002–2005 by the Council on Foreign Relations. All rights reserved.

Pills to Avoid Heart Attacks? Hard to Swallow

October 22, 2005
By

The following appeared in Friday’s Los Angeles Times:

By John Abramson and Merrill Goozner

IS POPPING A PILL the best way to reduce your risk of a heart attack?

That’s the message Americans and their doctors hear almost every day. The Journal of the American Medical Assn., for instance, reports in its Oct. 12 issue that the growing use of statin drugs in the United States is largely responsible for falling cholesterol levels over the last decade. Coupled with new data showing that the number of heart disease deaths is falling in the U.S., it sounds like great news.

Unfortunately, putting those two facts together gives Americans the wrong prescription for the most effective way to minimize their risk of heart disease.

First of all, cholesterol levels in the U.S. actually fell faster before statins entered widespread use in the early 1990s, as some Americans decreased their consumption of saturated fats. But, despite the falling cholesterol levels, National Institutes of Health data show that the U.S. is still lagging badly behind most of the other industrialized countries in eliminating heart disease as a major cause of premature death.

Not only that, but during the period when statin use exploded in the U.S., the death rate from heart disease was actually falling faster in most of the other countries — which use half as many cholesterol-lowering drugs and a third as many cardiac procedures to open clogged arteries. How can we be taking more than twice as many statins and receiving three times as many cardiac procedures and still have higher death rates from heart disease?

The problem is that while U.S. doctors and public health authorities focus on drug therapy (often working hand in hand with researchers funded by the drug industry), the nation ignores what the scientific evidence really shows to be the most effective way to prevent heart disease: adopting a healthy lifestyle.

For instance, the Nurses Health Study, which began in 1976, shows that women who follow five healthy lifestyle habits — routine exercise, a Mediterranean-style diet (high in fruits, vegetables, unprocessed grains and olive oil; low in dairy fat, red meat and trans fat or partially hydrogenated fat), not smoking, moderate drinking and maintaining a reasonable body weight — develop only 17% as much heart disease as those who don’t. Sadly, only 3% of U.S. women do those things.

On the other hand, not a single randomized, controlled study shows that cholesterol-lowering statin drugs benefit women without preexisting heart disease. Yet ubiquitous television and print advertising encourages women to talk to their doctors about cholesterol, and a recent survey showed that two-thirds of Americans have.

How about people over 65, those most likely to be taking a statin? A recent study of European seniors showed that 60% of their deaths from all causes could be attributed to not following simple health habits.

On the other hand, a study published in the British journal the Lancet showed that not treating high-risk seniors with a cholesterol-lowering drug increased their risk of death by an insignificant 3%.

Obviously, healthy lifestyle is far more important for seniors. But they are much more likely to emerge from their doctor visits with a prescription for a statin than a realistic plan to adopt a healthier lifestyle.

There’s no doubt that statins can help some people, especially those who already have heart disease and men at very high risk of developing it. But the scientific evidence is clear: Most heart disease results from the way we live our lives, and there’s no magic pill to help us change that.

So why all the brouhaha about getting so many people on statins? It’s an exquisite example of bank robber Willy Sutton’s law: That’s where the money is.

JOHN ABRAMSON is the author of “Overdosed America” (Harper Collins, 2004) and a clinical instructor at Harvard Medical School. MERRILL GOOZNER is the author of “The $800 Million Pill” (University of California Press, 2004) and the director of the Integrity in Science program at the Center for Science in the Public Interest.

Pills to avoid heart attacks? Hard to swallow

October 22, 2005
By

By John Abramson and Merrill Goozner

IS POPPING A PILL the best way to reduce your risk of a heart attack?

That’s the message Americans and their doctors hear almost every day. The Journal of the American Medical Assn., for instance, reports in its Oct. 12 issue that the growing use of statin drugs in the United States is largely responsible for falling cholesterol levels over the last decade. Coupled with new data showing that the number of heart disease deaths is falling in the U.S., it sounds like great news.

Unfortunately, putting those two facts together gives Americans the wrong prescription for the most effective way to minimize their risk of heart disease.

First of all, cholesterol levels in the U.S. actually fell faster before statins entered widespread use in the early 1990s, as some Americans decreased their consumption of saturated fats. But, despite the falling cholesterol levels, National Institutes of Health data show that the U.S. is still lagging badly behind most of the other industrialized countries in eliminating heart disease as a major cause of premature death.

Not only that, but during the period when statin use exploded in the U.S., the death rate from heart disease was actually falling faster in most of the other countries — which use half as many cholesterol-lowering drugs and a third as many cardiac procedures to open clogged arteries. How can we be taking more than twice as many statins and receiving three times as many cardiac procedures and still have higher death rates from heart disease?

The problem is that while U.S. doctors and public health authorities focus on drug therapy (often working hand in hand with researchers funded by the drug industry), the nation ignores what the scientific evidence really shows to be the most effective way to prevent heart disease: adopting a healthy lifestyle.

For instance, the Nurses Health Study, which began in 1976, shows that women who follow five healthy lifestyle habits — routine exercise, a Mediterranean-style diet (high in fruits, vegetables, unprocessed grains and olive oil; low in dairy fat, red meat and trans fat or partially hydrogenated fat), not smoking, moderate drinking and maintaining a reasonable body weight — develop only 17% as much heart disease as those who don’t. Sadly, only 3% of U.S. women do those things.

On the other hand, not a single randomized, controlled study shows that cholesterol-lowering statin drugs benefit women without preexisting heart disease. Yet ubiquitous television and print advertising encourages women to talk to their doctors about cholesterol, and a recent survey showed that two-thirds of Americans have.

How about people over 65, those most likely to be taking a statin? A recent study of European seniors showed that 60% of their deaths from all causes could be attributed to not following simple health habits.

On the other hand, a study published in the British journal the Lancet showed that not treating high-risk seniors with a cholesterol-lowering drug increased their risk of death by an insignificant 3%.

Obviously, healthy lifestyle is far more important for seniors. But they are much more likely to emerge from their doctor visits with a prescription for a statin than a realistic plan to adopt a healthier lifestyle.

There’s no doubt that statins can help some people, especially those who already have heart disease and men at very high risk of developing it. But the scientific evidence is clear: Most heart disease results from the way we live our lives, and there’s no magic pill to help us change that.

So why all the brouhaha about getting so many people on statins? It’s an exquisite example of bank robber Willy Sutton’s law: That’s where the money is.

JOHN ABRAMSON is the author of “Overdosed America” (Harper Collins, 2004) and a clinical instructor at Harvard Medical School. MERRILL GOOZNER is the author of “The $800 Million Pill” (University of California Press, 2004) and the director of the Integrity in Science program at the Center for Science in the Public Interest.From the Los Angeles Times

Did An FDA Advisory Committee Just Approve Another Vioxx?

October 21, 2005
By

The Food and Drug Administration advisory panel system got another black eye tonight. The Journal of the American Medical Association just released a study reevaluating the evidence behind a new diabetes drug from Bristol Myers-Squibb and Merck. The drug, muraglitazar, lowers blood sugar levels but more than doubles users risk of serious heart trouble. There are already a number of drugs on the market that do the same thing.

This new drug was approved by a 8-1 margin at an advisory committee meeting that met in early September. The FDA staff, which has yet to approve the drug, almost always follows the advice of its advisory committees. But now they’re going to have to pay attention to this new study, which was actually a reevaluation of the data submitted to the FDA.

Three cardiologists at the Cleveland Clinic, including Steve Nissen and Eric Topol, found muraglitazar more than doubled a diabetic’s risk of suffering death, heart attack or stroke compared to other drugs on the market. The authors concluded that “this agent should not be approved to treat diabetes until . . . safety is documented” in a clinical trial designed to test its cardiovascular safety. Recall that Topol was among the first to raise the alarm about the cardiovascular risk from Vioxx, and in a 2001 article called for a dedicated trial that would measure its safety — a trial that was never conducted.

Although only one member of the committee had direct ties to the manufacturer (see GoozNews, September 9th), the FDA appears to have picked an especially lame group of advisers in this case. A companion editorial in JAMA pointed out that the two drug companies proposed monitoring safety concerns by sending out questionnaires to about 15,000 diabetics taking the drug once it was on the market. The advisory committee bought it.

Right. Subject hundreds of thousands of diabetics to a possibly dangerous drug while sending out unscientific questionnaires (i.e., not in a controlled experiment) to a relatively small number of people taking the drug. Concluded JAMA: “A premarketing safety trial . . . will provide more secure evidence and has an additional advantage of limiting risk only to study participants while safety concerns are being assessed.” The question now, the editorial concluded, “is which safety message will the FDA buy?”

Von Eschenbach Still at NCI?

October 19, 2005
By

The National Cancer Institute put out a press release yesterday announcing grants to cutting edge nanotechnologies for diagnosing and treating cancer. The release prominently quoted Dr. Andrew von Eschenbach, the Bush family friend who indicated two weeks ago he was temporarily giving up his duties at NCI to take over the Food and Drug Administration. The discrepancy was first reported by The Hill, which covers Congress.

These grants — worth $35 million to 12 university-based research teams — graphically demonstrate why holding both jobs represents an inherent conflict of interest and can’t be allowed to stand. A quick check on several of the awardees reveals many have patented their technologies and several are collaborating with private sector firms.

Take James Baker Jr., M.D., of the University of Michigan, who is working on a nanotech system to deliver drugs directly to cancer cells. So far, it’s worked fairly well in mice. In a June report on the NCI website, Baker indicated he was preparing to license this technology to Avidimer Therapeutics, an Ann Arbor start-up in which Baker holds a significant financial interest.

Baker also indicated he hopes to be in clinical trials within a year. When that happens, he’ll have to go to the FDA to approve his protocols. At that point, the guy who was in charge of the agency that gave Baker his grants will be in charge of the agency responsible for reviewing the animal data (often from tests in dogs) that claims this brand new technology is safe enough to try in humans.

Recall that the first words out of von Eschenbach’s mouth after getting the FDA interim appointment were that he wanted to “streamline” the approval process at the agency. If I were a dying or very ill cancer patient, I would be very interested in participating in early trials of this promising new technology. But von Eschenbach’s conflict of interest might give me pause. After all, no one — not even the dying — wants to be treated like a dog.

Pollsters on Drugs

October 18, 2005
By

I never much liked political operatives and seeing James Carville on TV usually sends me lurching for the clicker. But with President Bush’s approval ratings slipping below 40 percent in the latest Gallup Poll, all the signs are pointing toward a classic correction. The midterm elections in the second term of a two-term presidency almost always result in a major turning out of incumbents. So I was curious about Carville’s data in his latest poll, which landed in my in-box today.

The former Clinton braintrust (Carville works with Stanley Greenberg and Robert Shrum in an outfit called Democracy Corps) reports the country is “ready for a political upheaval in 2006.” But the Democrats, they warn, are “underperforming.”

That’s putting it mildly. Over the past year, support among the electorate for Republicans slipped from 53 to 48 percent, according to their poll. But support for Democrats fell by the same five points landing at 49 percent. “Both national parties are at a half-century low point in public esteem,” they noted.

Okay, so what will it take for the public to turn out enough Republicans to create a Democratic Congress next year? Carville and company ran a number of “attack” lines by their sample voters. Ranking right up near the top of the list of things that angered voters was Republicans giving drug companies the right to raise prices for seniors and barring Medicare from negotiating a better deal.

Sound familiar? This line of attack was typical of their other ideas that polled well. Attack oil companies, score points. Attack Bush’s effort to privatize Social Security, score more points. Indeed, virtually all the talking points on their list could have been lifted from political ads run in 2004, 2002 or even 2000.

Well, one doesn’t have to be a political specialist to know that the Social Security debate went nowhere this year and no one will be talking about it next year. Likewise, oil prices may be an issue — or not. If I were running for office next year as a Democrat, I don’t know that I’d want to pin my hopes on high oil prices and a recession.

And as someone who has followed the drug issue pretty closely the past few years, I can say with some certainty that this is not going to be an issue next year. Why? The Medicare drug benefit is going to have its intended effect of making drug prices a non-issue for most seniors. In the long run it is nothing more than a massive giveaway to the drug industry. Indeed, within a decade, most seniors will be paying as much or more for drugs as they’re paying now and that’s on top of the $100 billion a year the feds will be chipping in.

But in the short run, most seniors are going to be paying less because Medicare will be picking up some of the tab. Every senior with income at 150 percent of the poverty level or less — and that’s about one-third of the elderly population — will have their drug bills reduced to a minor monthly co-pay. Anyone with annual drug bills less than $2,500 will see their out-of-pocket payments reduced to well under $1,000. And people with catastrophic drug bills will get substantial relief.

There will be tons of confusion as seniors are forced to choose among drug plans and the media will have a field day this winter as the program stumbles in its efforts to get off the ground. But by next spring, the issue will be gone — as it was last year after the Republican Congress stayed up late one night twisting arms to get it passed so it wouldn’t be an issue in the presidential race.

Carville and company are so wrapped up in their old way of thinking about issues (poll on it; if it taps a nerve, make a commercial about it) that they can’t see the coming catastrophe. The drug bill is symptomatic of a much larger problem: we have an out-of-control health care system that is threatening to bankrupt the entire economy.

Democrats need to start talking about that. Their problem, though, is that the solution — some variation of national health insurance with either price controls or caps on expenditure growth — is considered a political non-starter by the high-paid consultants peddling the usual Democratic nostrums.

So the conversation about meaningful reform can never begin. A political constituency is never built. And change never comes.

The Journal and Refco

October 17, 2005
By

Admittedly, picking on the Wall Street Journal’s editorial page is a cheap thrill, but I just can’t stop myself this morning. Last week, I wrote how the implosion of commodities firm Refco would probably put the kabash on the efforts by business lobbyists to gut the Sarbanes/Oxley Act. This morning, the Journal picks up on that theme:

“One early lesson is already apparent: All those new laws, rules and
regulators that Congress created after the WorldCom and Enron failures
weren’t able to detect, much less prevent, what is alleged to have been
fraudulent behavior. Sarbanes-Oxley, which was supposed to protect
investors from nefarious CEOs, didn’t deter former Refco chief Phillip
Bennett from allegedly disguising that an entity he controlled owed Refco hundreds of millions of dollars.”

Right. And we might as well repeal the homocide laws since they haven’t put an end to murder.

Refco and Sarbanes/Oxley

October 14, 2005
By

Business has launched its fall offensive to roll back the Sarbanes/Oxley act, the legislation passed in the wake of the Enron scandal that toughened reporting requirements for publicly traded companies. The campaign’s managers must be gnashing their collective teeth this week as revelations about financial shenanigans continue to pour out of Refco, one of the world’s largest futures and commodities brokerage houses.

For those who don’t follow the financial pages closely, Refco’s CEO Phillip Bennett, who went on indefinite leave Monday, apparently kept a $450 million loan to himself off the books for the past three years. Though he repaid the money as soon as it was discovered, the off-balance sheet transaction was precisely the kind of inside dealings Sarbanes/Oxley was designed to prevent.

The law requires that CEOs and chief financial officers certify that their financial statements are true, thus opening up the top officers to criminal prosecution of that later turns out to be incorrect. Presumably Bennett signed such documents for Refco, which went public a few years ago and sold stock to, among others, the good professors and teachers who invest through TIAA-CREF. General Motors was also a major investor, according to this morning’s New York Times.

I wonder if Bennett was among those lobbying to get the law repealed. I’m also wondering if this is one of those butterflies that periodically flap their wings in the financial system and lead to systemic trouble down the road.

Katrina Housing Fiasco

October 13, 2005
By

I’m glad somebody finally wrote the story of the Bush administration’s failure to deal effectively with post-Katrina housing for the half million displaced persons. Instead of giving housing vouchers for the 300,000 vacant apartments in Texas (his home state!), FEMA and the Red Cross are spending billions of dollars to put people up in hotels.

I was personally offended by this approach when I first heard about it about a week after the hurricane. The Red Cross was pulling in millions and my wife and I were about to donate. But when I heard that much of the money would go to put people up in hotels, I wondered: And at what rates? What were the hotel chains contributing in exchange for guaranteed full occupancy? We decided to donate in other ways.

The irony in all this is that when it comes to housing, liberals are the main support for voucher programs to house low income people. But over the years, while the Republicans have occasionally given housing voucher programs like Section 8 lip service, they usually are the first programs on the chopping block. Why? Effective housing voucher programs are also effective income and race integration programs, and many landlords in suburban areas would rather see their apartments stay empty that rent to people who are not the same class or race as those already living there.

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