Monthly Archives: November 2013

A Finance Practitioner’s Perspective

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John Hussman writes,

the past 13 years have chronicled the journey of valuations – from hypervaluation to levels that still exceed every pre-bubble precedent other than a few weeks in 1929. If by 2023, stock valuations complete this journey not by moving to undervaluation, but simply by touching pre-bubble norms, we estimate that the S&P 500 will have achieved a nominal total return of only about 2.6% annually between now and then.

He uses the Shiller P/E ratio as his measure of over- or under-valuation. Thanks to Timothy Taylor for the pointer.

What I found even more interesting was a paragraph later in Hussman’s essay.

On careful analysis, however, the clearest and most immediate event that ended the banking crisis was not monetary policy, but the abandonment of mark-to-market accounting by the Financial Accounting Standards Board on March 16, 2009, in response to Congressional pressure by the House Committee on Financial Services on March 12, 2009. The change to the accounting rule FAS 157 removed the risk of widespread bank insolvency by eliminating the need for banks to make their losses transparent. No mark-to-market losses, no need for added capital, no need for regulatory intervention, recievership, or even bailouts. Misattributing the recovery to monetary policy has contributed to a faith in its effectiveness that cannot even withstand scrutiny of the 2000-2002 and 2007-2009 recessions, and the accompanying market plunges. This faith is already wavering, but the loss of this faith will be one of the most painful aspects of the completion of the present market cycle.

And I cannot resist the subsequent paragraph:

The simple fact is that the belief in direct, reliable links between monetary policy and the economy – and even with the stock market – is contrary to the lessons from a century of history. Among the many things that are demonstrably not true – and can be demonstrated to be untrue even with simple scatterplots – are the notions that inflation and unemployment are negatively related over time (the actual correlation is close to zero and slightly positive), that higher inflation results in lower subsequent unemployment (the actual correlation is positive), that higher monetary growth results in subsequent employment gains (the correlation is almost exactly zero), and a wide range of similarly popular variants. Even “expectations augmented” variants turn out to be useless. Examining historical evidence would be a useful exercise for Econ 101 students, who gain an unrealistic sense of cause and effect as the result of studying diagrams instead of data.

Social Heterogeneity

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Kevin Drum writes,

Via Harrison Jacobs, here’s a recent study showing the trend in income segregation in American neighborhoods. Forty years ago, 65 percent of us lived in middle-income neighborhoods. Today, that number is only 42 percent. The rest of us live either in rich neighborhoods or in poor neighborhoods.

Pointer from Tyler Cowen.

Drum goes on to say,

We increasingly lack a shared culture or shared experiences, and that makes democracy a tough act to pull off. The well-off have less and less interaction with the poor outside of the market economy, and less and less empathy for how they live their lives.

Some comments:

1. The increase in segregation by income over the past forty years is something that one can see and feel, at least if you are as old as I am.

2. My guess is that you could observe similar trends in terms of education. I would bet that today more Harvard students come from the top 20 percent of the income distribution than was the case 40 years ago. I would bet that more students who do not attend college come from the bottom 20 percent of the income distribution. Note that by “more” I do not mean “every.” With “gifted and talented” programs, “magnet schools,” and whatnot, school classrooms are much more segregated by income class than they were forty years ago.

3. Many trends are at work that are reducing social homogeneity. Skills are diverging, tastes are diverging, and cultural habits are diverging.

4. Both liberals and conservatives lament heterogeneity and would like to undertake a project to restore America to some prior era of less diversity. For liberals, economic homogeneity takes precedence. For conservatives, cultural homogeneity takes precedence.

5. Music might be a useful metaphor. In 1970, a lot of people listened to two or three popular radio stations in every city. Probably 3/4 of Americans recognized most of the top ten songs of that year. Even today, my high school students probably would recognize some of those songs. But music is much more fragmented now. Songs are iconic only for particular sub-cultures and only for short periods of time.

6. It could be that the project of returning to some bygone age of cultural and/or economic homogeneity is as unrealistic as expecting everyone to enjoy Simon Garfunkel, the Carpenters, and The Guess Who.

7. The middle of the twentieth century was about masses. Mass consumption. Mass production. Mass warfare. Mass destruction. Mass politics. We are not in the middle of the twentieth century any more.

DY2VTSS?

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CBS News headline, October 31.

Unlike HealthCare.gov, Washington state’s health insurance exchange appears to be working well

Seattle Times headline, October 25.

Thousands get wrong subsidies data from state health exchange

Why would some of the state sites, such was Washington state, be working more smoothly than healthcare.gov? Perhaps they do not rely as much on national government databases to verify identity. It seems that the Washington state site asks for motor vehicle information, suggesting that they use their motor vehicle database as a way to check identity.

Healthcare.gov’s Fail: A Diagnosis

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Today’s WaPo story seems to vindicate my instinct to blame the project organization, not the technical people.

Recall what I wrote in my letter to the editor.

I doubt that presidential anger can do much to cure the dysfunctional organizational dynamics that I suspect are at the heart of the Web site problems.

Today’s story is about those dysfunctional organizational dynamics. Most devastating is a 3-year-old memo from health economist David Cutler. He barely even touches on the technical issues of implementation. He sees the Administration dropping the ball on preparing the health industry and the public for the new system.

Running exchanges is a collaborative process. As just one example, the person who ran the Commonwealth Connector in Massachusetts estimates that he had 500 town meetings to discuss reform, the equivalent of 17,000 meetings nationally – and this was in a state where two-thirds of people, along with insurance companies, supported reform. The person newly appointed to head the insurance oversight office has a reputation as an insurance bulldog, not a skilled facilitator. Remember that most people will get their information about reform from their doctor and their insurance agent. If you cannot find a way to work with hesitant states and insurers, reform will blow up.

An important implication is that even if the Web site were working perfectly, we would have plenty of implementation problems. Has there been enough consumer education to enable people to understand which plan to choose? Have doctors been coached about how to help with the process? etc.

Later, he writes,

Above the operational level, the process is also broken. The overall head of implementation inside HHS, Jeanne Lambrew, is known for her knowledge of Congress, her commitment to the poor, and her mistrust of insurance companies. She is not known for operational ability, knowledge of delivery systems, or facilitating widespread change. Thus, it is not surprising that delivery system reform, provider outreach, and exchange administration are receiving little attention. Further, the fact that Jeanne and people like her cannot get along with other people in the Administration means that the opportunities for collaborative engagement are limited, areas of great importance are not addressed, and valuable problem solving time is wasted on internal fights

The WaPo story makes it seem as if no one was really in charge.

The Medicaid center’s chief operating officer, a longtime career staffer named Michelle Snyder, nominally oversaw the various pieces, but, as one former administration official put it: “Implementing the exchange was one of 39 things she did. There wasn’t a person who said, ‘My job is the seamless implementation of the Affordable Care Act.’ ”

That last sentence gets to the heart of the matter. As I wrote here,

I suspect that the technical problems are mere symptoms. Probably what is fundamentally messed up in this health insurance brokerage business is the org chart.

Cutler’s memo includes a recommendation for a functional org chart. I think that anyone with business experience or common sense would think along similar lines. President Obama’s supporters can spin like Dervishes, and yet it will be difficult to escape the inevitable inference that the White House clique lacks business experience and common sense.

The Great Bubble-ation?

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Alex Pollock writes,

Inevitably following each of the great bubbles was a price shrivel. Then many commentators talked about how people “lost their wealth,” with statements like “in the housing crisis households lost $7 trillion in wealth.” But since the $7 trillion was never really there in the first place, it wasn’t really lost.

He has a chart that shows that the biggest financial bubbles of the past 60 years occurred during the period we call the Great Moderation. Thus, during a period of macroeconomic stability, we had financial instability. Hyman Minsky would not have been surprised.

The Clunkers Program

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Mark Thoma points to an analysis by Ted Gayer and Emily Parker.

The $2.85 billion program provided a short-term boost in vehicle sales, but the small increase in employment came at a far higher implied cost per job created ($1.4 million) than other fiscal stimulus programs, such as increasing unemployment aid, reducing employers’ and employees’ payroll taxes, or allowing the expensing of investment costs.

Pointer from Mark Thoma.

Although this analysis supports a view that this program was not a very effective stimulus, I think this sort of analysis has to be somewhat tenuous. Any government spending involves a diversion of funds from some other use. Any government spending redistributes income. As far as I can tell, Gayer and Parker assume that the subsidies accrued to car buyers. But maybe the subsidies accrued to auto companies or auto workers, in which case the multiplier effects would show up rather indirectly. The concept of what is seen and what is not seen casts suspicion on any calculations of the sort attempted here.

I am not trying to defend the Cash for Clunkers program, of course. I am just trying to point out how difficult it is to draw firm conclusions about the effect of macroeconomic policy.

A Software Executive Gives Input

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He emails me (but not for attribution)

The key to the whole thing is the back-end. The big problem here is likely having to query various legacy DBs in real time (e.g., have the website fire a query to see if your name and SSN match). This was a home-run approach by the original technical team, and in my view a huge blunder (though hindsight is 20/20, and I’ve made some very dumb technical decisions in my life). They already have an Oracle (basically, a modern relational database) instance up and running. The crucial change would be to grab a batch transfer from the legacy systems as of say October 25th and move ALL of it into the Oracle instance. You could then have every query fire against the Oracle database. This would radically simplify every technical problem, as you would now have end-to-end control over the DB – logic – website. You could structure highly simplified queries, and build the whole data model around exactly one job: make this one website work. You could then periodically batch update from those source legacy systems, say daily or weekly once you were in production.

This occurred to me also. You create extracts of the data on legacy systems, and then you run the web site against the extracts. Some issues.

1. You have to hope that the existing system has a clean separation of business logic from physical location of the data. That way, you just change the statements that access data to find it in the extract rather than in the legacy system. If there is business logic mixed in with the data-access statements, then there is more to re-code and test.

2. The job of building the data model for the extract database is not trivial.

3. The job of tuning the database to obtain good response times is not trivial.

4. In some sense, you have two databases. You have a “read-only” database of extracts from other systems. You also have a database that is written to as the user goes through the process. Tuning the performance of that latter database is a nontrivial problem–although they should already be working on it.

5. We start with a deficit in terms of testing, and that deficit gets much larger if we redo the data interchange process.

6. This creates new security problems, and it may create new logistical problems for the people managing the legacy databases. Not that those issues will be given priority at this point.