Friday, December 28, 2012

Binocular Snapshot for 12/28/2012

LastDayWatchers check the analysis and suggestions of Allan Meltzer  An Extraordinary Economic Mess earning 3 of 5 stars inside the Recommended Reading section 

(his nonexistence defense spending suggestion keep this from receiving higher grade)

Here is a excerpt

Our health care system is very inefficient. Many repeat that we spend more per capita and in the aggregate than other countries but do not have the best results. One reason is that we spend at least 50 percent of total health spending on people in the last six months of life. They receive expensive care that other countries do not offer. Instead of providing costly care without charge, we could require a co-payment graduated according to income. Doctors would counsel patients on the treatments, the likely benefit, and the costs to them. Many would choose hospice care and avoid treatment.

There are many other reforms that would increase efficiency and lower cost. Greater reliance on nurse-practitioners instead of doctors and ending the payment system that rewards procedures instead of patient care are other examples. Giving states control of Medicaid would lower cost.

A huge problem faced by the country is the growing power of the Federal Reserve, which began almost a hundred years ago as a public-private partnership with limited powers. Today, its power to expand money and credit is unlimited in practice. In a republic such as ours, no one and no agency should have such unrestricted power to expand. Congress must restrict Federal Reserve actions through legislation.

Throughout its history, the Federal Reserve has achieved low inflation and relatively stable growth, punctuated by small recessions, in only two periods. One was the gold exchange standard from 1923 to 1928. The other was 1985-2003, when the Federal Reserve approximately followed what was known as the Taylor rule. Named for economist John B. Taylor, it was designed to calibrate appropriate interest rates based on inflation and other factors. There are no comparable periods under discretionary policy. The only candidate is the 1950s, but the decade from 1953 to 1962 had three recessions, including a rather sizable, short recession in 1957-1958.

No rule will work perfectly, so policy must give the Federal Reserve some flexibility. If they miss the inflation or growth targets specified by the rule, Fed governors must offer an explanation—and their resignation. The political authorities can accept the explanation or the resignations. Several countries with announced inflation targets have adopted a rule of this kind.

In the past, Federal Reserve officials have made major mistakes. The Great Depression of the 1930s and the Great Inflation of the 1970s are well known. Failure to recognize the difference between monetary and non-monetary problems contributed to both errors, and to others as well. The current Fed is repeating that error. The slow recovery is mainly a result of heightened uncertainty about taxes, healthcare, energy and other costs. 

It is not the result of insufficient money or liquidity. Adding more liquidity in QE3 will not help. Banks are awash in idle reserves—currently more than $1.5 trillion compared to $100 billion or less before the recent crisis. Corporations hold hundreds of billions of cash. Adding more reserves simply complicates the huge problem of reducing reserves when inflation starts to rise. That’s a big problem that current policy is making bigger.

My friends at the Fed tell me not to worry. All they have to do, they say, is raise interest rates. Not so easy in practice. Remember that higher interest rates will have to be paid by government (on the debt as it rolls over) and by private borrowers as well. Much of the debt has a short term to maturity, so the increase in interest payments comes upon us quickly. As the debt comes due, Congress will face hundreds of billions of additional interest payments. Even if Congress and the president finally agree on deficit reduction, they will be hit with increased spending to service the debt. Inflation makes the problem worse—much worse—because interest rates will increase as they did in the 1970s and early 1980s.

The Fed also faces an enormous balance-sheet explosion. I do not believe they have a coherent, workable plan to withdraw the excess reserves they have created. Congress should insist on seeing a detailed plan.

On regulation, the Dodd-Frank law that regulates financial institutions calls for more than 300 new rules. Obama’s Affordable Care Act has almost as many. Others affect energy, labor and business practices. Congress leaves the details to the agencies to write.

That opens the way for crony capitalism and corruption. Lobbyists swarm toward the regulators trying to diminish the impact on themselves. We get rule by regulators in place of the American tradition—adherence to the rule of law.