An ongoing review of politics and culture

Whistling Past the Graveyard

Some good news from Wall Street:

The improvement in sentiment in Wall Street may be traced almost directly to the encouraging reports which the financial community is receiving from the leading industries of the country, according to investment trust executives. They say that the current rise in security prices is firmly grounded on the improvement in business conditions that began in December.

New York Times
February 14, 1930

Two months later the Dow hit a level it would not see again for about 25 years. Happy Valentine’s Day, pal.

In the Crash of 1929, the Dow lost 48% of its value. Six months later it rallied back 48% (because this was from a starting point half as high, this meant it got back 52% of the loss from the Crash). In 2007 – 2009, the Dow lost 54% of its value. It has now rallied back 54%, or in other words, it has regained 45% of this loss in value.

Japan has gone through a similar process of dealing with an exploded real estate bubble. The Nikkei hit a peak of about 39,000 in 1989. It has moved downwards in a sawtooth pattern for the past 20 years, with big rallies in 95 – 96, 98 – 99 and 03 – 07. Today, 20 years after its peak, the Nikkei is at about 10,000.

The current Wall Street rally is not being driven by mass delusion, but is being driven in large part by forward corporate earnings projections. Suppose these projections turn out to be correct – where is the money going to come from to generate them? The U.S. government (like others) is substituting public debt for private debt. The reason we’re running a $1.4 trillion deficit this year (about 10% of total economic output) is to prop up aggregate demand while individuals try to “de-leverage” (Wall Street speak for pay down credit card bills by eating out less and not buying that big screen TV ). The so-called “stimulus bill” is nothing but a reorientation and massive increase in long-term spending. The real stimulus is current spending on all parts of government grossly in excess of current tax receipts. This can go on for a while, but even the balance sheet of the United States is finite. There is a desperate race on right now between the borrowing capacity of the U.S. government on one hand, and the ability of the private economy to work off enough debt to start growing again organically (and ultimately pay off all of this public debt) on the other.

I don’t know who is going to win this race. But then again, neither do you. Any prudent company or individual is planning for a 2010 that could fall anywhere from “Well, we got through that crisis, and now we’re back to growth” to “It’s 1931”.

It therefore seems slightly surreal to me to read newspaper trend stores about people getting bored with the incredible austerity of the past, oh, 10 months. Similarly, political debates around cap-and-trade, health care, entitlements, the $100 billion of new schools spending in the stimulus bill with no obvious prospects for improving reading or math skills, and so on that causally describe reducing U.S. economic output or efficiency in support of some lofty goal strike me as entirely detached from the reality of how harsh the real choices in front of us are likely to be.

Why Not Fruit Trees?

On public streets, I mean. If municipalities are going to plant and trim trees anyway it would seem smart to plant the kind that bear apples or oranges or avocados or peaches or nectarines, right? The fruit could be available to any member of the public that wanted to pick it. Hey, access to fresh fruit in poor communities? Jobless entrepreneurs selling produce on the corner? Sounds good to me!

Is there some reason this is a bad idea?

The Option Syndrome

I have invented a new concept called the Option Syndrome. I hope the expression will catch on and people will start using it. It refers to the never-ending thickening of legalese.

Why the Option Syndrome?

Friends of The American Scene might remember that I graduated from law school but decided not to be a lawyer, and therefore never passed the bar. I usually say this makes me just enough of a lawyer to be a pain in the ass, but not enough of one to be actually useful.

Our law school library was stocked with law review archives dating back a couple of centuries, and when I was studying and needed a mental health break, I would wander around the library and pick an ancient book at random and start reading. This was an intense pleasure, because unlike lawyers and legislators today, French lawyers and legislators of back in the day knew how to write.

Stendhal, one of the great 19th century novelists of the French pantheon, once said that he would read the French Civil Code (somewhat erroneously referred to in the English-speaking world as the Napoleonic Code) as stylistic inspiration.

Of course, today there are still plenty of great legal minds who are also excellent craftsmen of prose, and a joy to read. But the overwhelming majority of legal documents involve redundant, unnecessary, overwrought, undecipherable legalese.

Just try to read the terms of service to the next website you subscribe to. You’re never quite sure if they’re going to be able to buy your newborn from you.

This is destructive. It increases transaction costs (to an eye-popping extent in the US) for everyone, and also raises real questions of democratic accountability, insofar as the law is supposed to be the expression of the general will, and it is hard for the people to oversee their representatives when the understanding of the laws belongs more and more to a learned elite.

So in order better to identify, and therefore combat this phenomenon, I’ve dubbed it the Option Syndrome. Why the Option Syndrome?

Because, wherever you look, an option is defined as “the right, but not the obligation,” to buy or sell an asset at a certain date and a certain price. But of course, by definition, if something is a right, then it is not an obligation. Yet you will never see an option defined as a right. Always “the right, but not the obligation.”

Ergo, the Option Syndrome.

Go forth and spread the meme!

EDIT: This WSJ op-ed, “You Commit Three Felonies A Day,” is quite related.

Who's Running This Joint, Anyway?

Matt Yglesias, international blogger of mystery, makes a puzzling claim:

©learly the reason bankers pay themselves so much money is that banking firms make so much money. They’re not going to just pile the money up on the roof and light it on fire. Huge finance profits imply huge finance compensation packages.

That’s interesting. So when Exxon or AT&T or Ford have a banner year, overall compensation across a big percentage of employees goes way up? And when Goldman and Citi and BofA make net losses in a given year, nobody gets paid a bonus? I didn’t know that.

Employees at financial services firms take home a bigger percentage of firm earnings than do employees at non-financial firms. That could be because they are genuinely more valuable – possessed of skills that are rarer or harder to replicate than employees at most firms. Or it could be due to exceptionally poor corporate governance at financial institutions. Or it could be due to a substantial relative information advantage that financial services firms employees have in negotiating with their employers as compared with employees at non-financial firms. Or it could be yet another consequence of moral hazard. Or it could be a consequence of the stickiness of compensation arrangements that such arrangements persist even when the conditions that originally justified them no longer obtain (e.g., the transformation of investment banks from partnerships to public companies to subsidiaries of large global banking conglomerates). The point is: there are lots of reasons why bankers get paid so much that don’t imply that this is either cause or consequence of the high absolute level of reported profits in the industry. And if bankers didn’t get paid so much, that wouldn’t mean that they’d set the extra money on fire. It means that a greater percentage of earnings would accrue to shareholders. Remember them?

There’s an old school of thought, in fact, that argues that all or virtually all profits should be paid out to investors in the form of dividends, precisely to prevent insider self-dealing. If you wanted to create a structural check on banker pay, it might make sense to consider requiring banks to do exactly that: pay out their earnings as dividends, in a manner roughly analogous to the way REITs work. If investors received their return primarily in variable dividend form, it would be really transparent how returns were being shared between investors and employees, and that might, perhaps, force real change in the structure of compensation.

How Useful Are Explanations - Financial Crisis Edition

This post is almost certain to be misunderstood, but I’m not sure what to do about that, so I’m just going to write it anyway.

The ongoing financial crisis is the result of the implosion of the American real estate market, particularly the “hot” markets of California, Florida, Arizona and Nevada, in the wake of massive and imprudent sub-prime lending that drove up prices to unsustainable levels. Most folks agree on that.

Meanwhile, the causes of that orgy of imprudent lending and parabolic price increases are many, and everybody has their favorite. Is the root cause easy money from the Fed? Or lax regulation of the banking sector (and, particularly, the “shadow” banking sector that wasn’t regulated by the Fed)? Or conflict of interest at the ratings agencies? Or over-reliance on mathematical models as against simple rules for limiting risk? Or political incentives to increase lending to traditionally “underserved” communities (generally lower-income and/or racial minorities)? Or the greed unleashed by the bonus culture on Wall Street?

All of these explanations have some degree of plausibility. And all of them probably have some validity. But consider that the United States is not the only country that went through a real estate bubble and subsequent crash. Some of the other countries that had bubbles include the U.K., Ireland, Spain, Australia, Russia, the United Arab Emirates . . . it’s a long list. Lending (and borrowing) was wildly imprudent in Florida . . . but also in Hungary, not a country known for irrational exuberance, or for large-scale immigration, or for political correctness. The Fed was too easy too long . . . except that it took longer for the ECB to raise rates than for the Fed, and the ECB didn’t go as high either . . . which in turn didn’t stop the Euro from continuing to appreciate against the dollar right up to the summer of 2008, a year into the crisis, when all hell finally and completely broke loose.

And don’t forget: there was also a wild stock market bubble in China. And in Brazil. And there was a sudden and massive run-up in the price of oil, and many other commodities.

Not every country experienced a bubble, of course. There wasn’t much of a housing bubble in Canada, or in Germany. Canada’s banking system has also weathered this particular storm much better than most countries’ banks, in part because there was no domestic housing bubble and in part because of extremely strict regulation combined with protectionist barriers against foreign competition in banking . . . except that Japan has been devastated by the financial crisis, and it also has a clubby, protected banking sector and didn’t have the kind of housing bubble that many other countries experienced.

There is a very real sense in which it feels like there are too many explanations, such that all are, in some sense, besides the point; there’s a sense that too much money was chasing too little opportunity for productive deployment, resulting in a variety of bubbles around the world, the structure of said bubbles dictated by the particularities of local conditions. This is the “savings glut” hypothesis, which has some plausibility . . . until you think about it and say, was there really a shortage of ways to productively deploy capital in China, in India, in Southeast Asia, in Africa . . . really? The savings glut had to be deployed in chasing ever higher property values in London and Las Vegas, Dublin and Dubai?

Right now, the United States has a real dilemma. In retrospect, it will seem obvious what we should have done, but prospectively it’s very unclear. We are going to run up enormous debts in the short term, and these debts are overwhelmingly going to be financed overseas. A necessary but not sufficient condition to restoring budgetary equilibrium is restoring economic growth. A necessary but not sufficient condition to restoring economic growth is to restore bank lending. The things we would normally do to reassure creditors – cutting spending, raising rates, being hawkish about future inflation and erosion of the value of the dollar – are all things that would send us back into a deep recession, which in turn will make it difficult for us to service our debt. The things we would normally do to boost growth – keep rates as low as possible (effectively even lower than that, through “quantitative easing”), increase spending and lower marginal tax rates, targeting higher levels of inflation and letting the dollar fall – are all things that will alarm our creditors, and in turn make it difficult for us to finance the debts that we are going to have to incur in the short term no matter what we do. And, incidentally, tighter regulation of the banking system – precisely what you would want in the wake of a banking crisis – in precisely what you don’t want in the wake of a recession, because it necessarily reduces the amount of lending the banking sector can engage in, the opposite of the desired policy outcome in the short term.

The Obama Administration is going to make some choices. Ten years from now, we’ll know what the economic future brings, and we’ll have our explanations as to why things went well or poorly, and some clear ideas about what Bernanke and Summers and Geithner and the rest of them should have done differently, and what future managers of the macro economy should emulate about their policies. But to an alarming degree, no matter what, we’ll still be guessing.

Finally, consider the following cheery thought.

Our biggest worry right now is that everything we’re doing won’t work: either the economy will simply sink back into recession, or we’ll be forced back in by our creditors, or we’ll succeed in sparking growth at a price of suddenly resurgent inflation – the scenarios for possible failure are manifold.

Our second-biggest worry, though, is that what we’re doing will work – because then the game starts up again. We survived the worst economic crisis since the Great Depression. Policy works. We now know what to do. And isn’t that sense of confidence just what lays the groundwork for the next crisis?

Don’t forget, Alan Greenspan got his initial reputation for wizardry for successfully navigating the crash of 1987, the S&L crisis, and the peso crisis that followed his big hike in short-term rates in 1994. The great economic performance that followed for the rest of the 1990s was punctuated only by the brief blip of LTCM and the Russian default in 1998, another crisis handled beautifully by the maestro. These were genuine successes. Success is what you want; you don’t want to aim for failure. But the people who say that a string of successes are precisely what lulled the market into thinking failure was impossible are not wrong.

The Cheapest Higher Education Ever

Let me recommend another Washington Monthly article, this one titled, “College for $99 a Month: The next generation of online education could be great for students—and catastrophic for universities.” An editor at National Review wondering what kind of stories to buy could do worse than using this piece as a model — in the course of telling an interesting story about an entrepreneur in Online education, it identifies the regulatory barriers that are stymying his ability to innovate, makes a compelling case for how the free market can benefit consumers, and weighs that against Burkean concerns that rapidly change in large societal institutions can exact unexpected costs.

When I argue that right-leaning publications would do well to produce a certain kind of carefully reported, well written narrative journalism, this is exactly the kind of piece I have in mind.

The Socialism Implicit in the Social Cost of Carbon

Burning fossil fuels creates so-called “external costs” because it contributes to ongoing climate change. This is a fancy way of saying that when I burn such fuels, other people become worse off than they would be otherwise, because I have increased the odds that they will suffer damages from anthropogenic global warming (AGW). This both seems unfair, and means that we will burn more fossil fuels than would seem to be socially optimal. It seems obvious to many people that we should therefore tax fossil fuels in order to prevent this. This is termed a Pigovian tax, and is sometimes referred to as “internalizing the externality”, or taxing fossil fuels to reflect the “social cost of carbon”.

It’s not so obvious to me that this is good idea. To implement it would be little more than a re-labeling of the kind of comprehensive planning that Hayek attacked sixty years ago.

Over at the Daily Dish I try to explain why.

Does Universal Health Care Reduce Employment?

Three academics claim to have a preliminary answer with the provenance of empirical science. William H. Dow, Arindrajit Dube and Carrie Hoverman Colla recently had an editorial in the New York Times arguing that San Francisco’s “near universal health care program” initiated early last year has not contributed to reduced employment despite the fact that “many businesses there had to raise their health spending substantially to meet the new requirements.”

Over at the Daily Dish I try to make the point that their argument doesn’t hold up to scrutiny.

Free markets and government intervention

I am a fierce proponent of free markets. Therefore I am a fierce proponent of government intervention in the market.

Or, to put things less inflamatorily, one thing that often bothers me about US defenders of free markets is how easily they (and we) forget that free markets are created, maintained and curated by, well, the government. Free market conservatives often behave as if free markets are like a state of nature in which ham-fisted government arrives after the fact and wrecks everything when, in fact, it is the opposite. In a state of nature, you have permanent war. Traders and entrepreneurs can only exist once you have a Leviathan to enforce things like private property, money and contracts — all things created and maintained by the State. The rules of the market are set by the State. And if the State doesn’t intervene — justly — in the markets, you cannot have a free market.

To use a more down-to-Earth example, in France retail prices are on average 20% higher than in Germany (and this even though Germany has a higher VAT). Why? Because retail in France is a cartel. France’s big retailers hold local monopolies that they do not contest from each other. Government regulations also play a role — zoning laws prevent the opening of “big box” suburban stores to protect central “mom and pop” stores and other laws make it hard to “squeeze” suppliers. But the big companies have created a comfortable cartel. To create a free market there would require government intervention. Negative intervention, to be sure — scrapping wrongheaded regulations —, but also positive intervention, i.e. good ol’ trust-busting. It is the government’s refusal to step in which is stifling free markets, not the other way around.

The limited liability corporation, the contract-as-legal-document, all of these things are government inventions, and government institutions.

You see this in countless examples.

For example, many on the left point to the ballooning CDS market as one of the causes of the financial crisis (not without merit). The whole market was deregulated! And then the shit hit the fan! Ergo deregulation is bad, and regulation is good! In response, many free market conservatives point out that the success of the CDS market was a form of regulatory arbitrage, a way for banks and other institutions to meet their capital ratio requirements under the Basel rules. Free marketers use this as a Gotcha — see! It was all the government’s fault after all! — but in doing so miss a much more important insight: that all markets are dependent on how they are structured, and they are structured first and foremost by the government. There is no free market in finance, there never was, and there never will be, at least in the sense that these people think. Banks were insured by the government before the crisis. Ten years ago, if you asked anyone if, supposing some catastrophe, the government would let the biggest banks in the US fail, the (honest) response would have been: “Of course not.” (The actual response would’ve been: “It’ll never happen.”)

Free markets require a strong and active government. The US is a “more free market” place than “Europe” (insofar as these broad strokes mean anything), in part because it has a government that is less high about maintaining a free market. There was never any trust busting in France. Among my friends who work in finance in Paris and New York, they scared of the SEC; meanwhile its equivalent the AMF is the butt of jokes.

The reason I write this now is because, as much as I’ve enjoyed Megan’s spirited defense of pharmaceutical and medical innovation — and as much as I agree with her on the merits —, at times she does sound too much as if the pharmaceutical industry as it exists today is an unadulterated free market. In her Bloggingheads with Mark Schmitt, even though I was hootin’ and hollerin’ when she excoriated Schmitt’s attacks on Big Pharma as crypto-socialist, I couldn’t help but take Schmitt’s point that Big Pharma as it currently exists was created and is made possible by the government. Leave alone the FDA approval process — the pharma business is based on patents and copyright, which are government created and enforced institutions if there ever were. When pharma companies pay off generics companies not to bring generics to the market, that is a voluntary transaction between private entities, and yet it is the opposite of a free market. It is, in fact, cartel formation. And it begs for big bad government to come in, perhaps with black helicopters, take people to court and slap big fines.

The question of health care reform vis à vis the healthcare and pharma markets is not whether to leave the market intact or not. It’s how do we structure a market so that the incentives are aligned in a way that serves consumers best.

Just a thought.

"Please Eliminate Three."

James Surowieki has stumbled upon the secret flaw in our nation’s fiscal structure:

But here are fifty culprits you might not have thought of: the states. Federalism, often described as one of the great strengths of the American system, has become a serious impediment to reversing the downturn.

He complains that states are lousy at coordinated action, like building national railroads and the magical “smart grid” that will solve our energy problems, and that the “disproportionate” influence of rural constituents on state governments will divert resources from productive urban centers, but here’s his curious insight:

[Fiscal stimulus is] built on the idea that during serious economic downturns the government can use spending increases and tax cuts to counteract the effects of consumers who are cutting back on spending and businesses that are cutting back on investment. So fiscal policy at the national level is countercyclical: as the economy shrinks, government expands. At the state level, though, the opposite is happening. Nearly every state government is required to balance its budget. When times are bad, jobs vanish, sales plummet, investment declines, and tax revenues fall precipitously—in New York, for instance, state revenues in April and May were down thirty-six per cent from a year earlier. So states have to raise taxes or cut spending, or both, and that’s precisely what they’re doing: states from New Jersey to Oregon have raised taxes in the past year, while significant budget cuts have become routine and are likely to get only deeper in the year ahead. The states’ fiscal policy, then, is procyclical: it’s amplifying the effects of the downturn, instead of mitigating them. Even as the federal government is pouring money into the economy, state governments are effectively taking it out. It’s a push-me, pull-you approach to fighting the recession.

The states, according to Surowieki, are working against federal stimulus by raising taxes and spending less, a combination that he refers to as “taking money out” of the economy. As if this is by choice, he complains that they’re “doing precisely the wrong thing.”

I’m no financial columnist, but when I last checked, states were still constrained not only by their various commitments to balanced budgets, but by things like Baa1 bond ratings. Then there’s the trifling detail that to keep the lights on and repay their bonds, state governments need real money. California, for instance, can’t pull the red lever labeled “Quantitative Easing” and start cutting payroll checks. So I’m not sure how Surowieki wants the states to help with fiscal stimulus, other than by ceasing to exist, admittedly an increasingly popular solution in certain quarters.

UPDATE: Over at Free Exchange, the point is made that being tied to the fiscal mast is California’s political choice, and the decision to run balanced budgets is what keeps those bond ratings low and prevents big deficits in lean times:

California had a gross state product in 2008 of nearly $2 trillion—larger than Russia, Spain, Brazil, or Canada. All of those countries carry significant public debt; Canada has debt equal to about 60% of GDP, for instance. If California could borrow, it could borrow.

This is true, and it’s fun to imagine the macroeconomics of a counterfactual California with both fiscal and monetary autonomy.

Can Americans Handle Shopping for Health Care?

Apparently they can:

Consumer-driven health (CDH) products [i.e., high-deductible health plans relying on HSAs or Health Reimbursement Arrangements to reimburse for qualified expenses] have been marketed in various forms since the early 2000s. While emerging data is [sic] not entirely conclusive, general directional conclusions can be drawn from the studies published to date. […]

With regard to first-year cost savings, all studies showed a favorable effect on cost in the first year of a CDH plan. CDH plan trends ranged from -4 percent to -15 percent. Coupled with a control population on traditional plans that experienced trends of +8 percent to +9 percent, the total savings generated could be as much as 12 percent to 20 percent in the first year. All studies used some variation of normalization or control groups to account for selection bias.

For savings after the first year, at least two of the studies indicate trend rates lower than traditional PPO plans by approximately 3 percent to 5 percent. If these lower trends can be further validated, it will represent a substantial cost-reduction strategy for employers and employees.

Generally, all of the studies indicated that cost savings did not result from avoidance of appropriate care and that necessary care was received in equal or greater degrees relative to traditional plans. All of the studies reviewed reported a significant increase in preventive services for CDH participants. Three of the studies found that CDH plan participants received recommended care for chronic conditions at the same or higher level than traditional (non-CDH) plan participants. Two studies reported a higher incidence of physicians following evidence-based care protocols.

The authors add that “no data-based study has emerged” to contradict the indication that CDH plans “can produce significant (even substantial) savings without adversely affecting member health status”. H/T to Alex Tabarrok, who adds that the effects of such plans would likely be much more significant if they were adopted more widely.

(Cross-posted.)

Sentence of the Day

And the award goes to TAS-friend Will Wilkinson:

In a world of doubling-every-fifteen-minutes Hansonian robot growth, the portion of GDP necessary to fund universal grants sufficient to ensure a modestly lavish level of consumption would be so trifling that no one would even notice.

TAS bonus assignment: Work the phrase “Hansonian robot growth” into as many conversations as possible this week. Share your best conversational snippets in the comments below. (Yes, it’s fine to just make them up.)

Government by Goldman Sachs

If you’re in Washington right now, and you are engaged in public policy around Wall Street, if you are a regulator at the FCC, if you are at the Federal Reserve, if you are in the US Treasury, and you’re thinking, ‘What do I do next, after I stop doing my poorly paid public service job,’ there is an out! You get paid millions of dollars a year to go work at Goldman Sachs. I don’t know that the people engaged in trying to fix the problem are necessarily totally conscious of this — of how corrupt it all is — but it’s in the air they breathe. The existing institutional structure rewards the people who are making the decisions, so they don’t want to change it. They can’t imagine a different institutional structure. They can’t imagine a tamed financial sector that is just there to serve the economy.

— Michael Lewis

Goldman Sachs had collected $7.5 billion from its AIG credit-default swaps but had an additional $13 billion at risk—money AIG could no longer pay. In an age in which we’ve become numb to such astronomical figures, it’s easy to forget that $13 billion was a loss that could have destroyed Goldman at that moment.

Hank Paulson and then–New York Fed chief Tim Geithner called an emergency meeting for the following Monday morning at the Federal Reserve Bank, ostensibly to discuss whether a private banking syndicate could be established to save AIG—one in which Goldman Sachs and JPMorgan Chase, two of the ailing insurance giant’s clients, would play prominent roles. “It was in their interest to be part of the solution,” says Robert Willumstad, the CEO of AIG at the time, who was also part of the meetings. “Geithner called on those two banks specifically to be helpful. You get the sense that both of those guys had been close to Geithner and giving him advice.”

At the meeting, it was hard to discern where concerns over AIG’s collapse ended and concern for Goldman Sachs began: Among the 40 or so people in attendance, Goldman Sachs was on every side of the large conference table, with “triple” the number of representatives as other banks, says another person who was there. The entourage was led by the bank’s top brass: CEO Blankfein, co-chief operating officer Jon Winkelried, investment-banking head David Solomon, and its top merchant-banking executive Richard Friedman—all of whom had worked closely with Hank Paulson two years prior. By contrast, JPMorgan CEO Jamie Dimon did not attend. (Goldman Sachs has said that Blankfein left after twenty minutes, realizing he was the only chief executive present. But the person who was there says Blankfein was directly engaged in at least one full AIG meeting that Monday, appearing “ashen-faced” and “jumpy.”)

On the government side, Goldman was also well represented: Geithner himself had never worked for Goldman, but he was an acolyte of former Goldman co-chairman and Clinton Treasury secretary Robert Rubin. Former Goldman vice-president Dan Jester served as Paulson’s representative from the Treasury. And though Paulson himself wasn’t present, he didn’t need to be: He was intimately aware of Goldman’s historical relationship with AIG, since the original AIG swaps were acquired on his watch at Goldman.

— Joe Hagan

inquiring minds want to know

So, the Powers That Be at Apple have rejected a number of apps for the iPhone that rely on Google Voice — including one from Google itself — and now the FCC wants to know what’s up. Yet it was just a couple of months ago that the Federal Trade Commission wanted to know whether Apple and Google were getting too snuggly with each other. What are the chances that the rejection of a few Google apps is a way for Apple and Google to get the spotlight off their relationship? If they can convince the FTC that, as the old saying goes, it’s not what it looks like, then they’re going to be better prepared to deal with anything that the new Microsoft/Yahoo partnership might throw their way. Not that I’m cynical.

Let's subsidize cigarettes, shall we?

My fiancée is right next to me enjoying Megan’s tremendous post on the obesity scare — I feel a special kinship to Peter now that we’re both engaged to freakishly smart and talented econobloggers — and I want to fire off a quick post about something that’s been nagging me for a while.

The justification for taxes on cigarettes is that smokers cost more to the public purse, right? Not because they smell bad, right? They cost more because they get cancer, right?

What if it was the other way around? What if smokers saved the government money? Because we do. We get cancer earlier. We die younger. We cost less in pensions and we even cost less in healthcare. What is so cripplingly damaging to the healthcare system is end of life care for the elderly, right? Postponing the inevitable by a couple months, right? End of life care is much cheaper for a 60 year old with untreatable cancer, whom you just put on a morphine drip, than it is for an 85 year old with about eleven different conditions.

So perhaps the ObamaCare plan or other healthcare systems around the world should create a cigarette subsidy to save money! Public service announcements explaining that the cool kids smoke! (Well, maybe not, that would drive the kids away.) If the purpose of a Pigovian tax truly is to reduce negative externalities, should we not go even further and tax gyms, and subsidize transfats?

It’s the right thing to do.

Look, just to be clear: this post is tongue in cheek obviously, but it hints at a real problem with Pigovian taxes and purely utilitarian public policy more generally.

The real reason we have tons of taxes on cigarettes is because 1- it’s politically expedient to raise taxes on a minority and 2- most people think “Ick, gross!” The negative externality argument is used to retrospectively justify a sin tax applied for moral, not economic reasons.

But this creates a pitfall: facts, as a great thinker once said, are stubborn. If your negative externality is actually a positive externality, the mask of your oh-so-utilitarian, oh-so-rational policy falls.

One of the reasons I don’t think of myself as a libertarian even though they’re the group whose actual policy preferences most closely mirror mine is because of things like this. Legislation reflects a society’s moral values. In fact, it should reflect a society’s moral values, consistent with individual freedoms, because it is what a democratic polis is all about: a nation deciding by which rules it wants to live.

Government can’t and won’t “just get out of our lives”, simply because what you describe as “getting out of our lives” isn’t the same thing as what I describe as “getting out of our lives”, and, until Jim Manzi finally succeeds at creating evidence-based social science, there is no scientific way to decide what government should or should not do — and nor should there be.

So if you want to disincentivize smoking through sin taxes, that’s perfectly fine. It’s okay to have public policy that disincentivizes bad things just because they’re bad, without having to make budget projections over the next 30 years. I’m willing to pay extra to feed my addiction. But don’t lie about the real reason you’re doing it.

And remember, next time you see me light up — I’m doing my part to save healthcare and pensions.

Who Should Decide How Much a Year of Productive Life is Worth?

Peter Singer says that’s the government’s job. I disagree.

Why not just break them up?

We find ourselves in a bit of a pickle.

The government basically poured heaps and heaps of cash into the financial system in order to keep it from imploding, which was almost certainly the right call, but this has had the annoying side effect of subsidizing the financial sector, in particular Goldman Sachs, which is now basically a government-supported cash machine which is making billions off of taxpayer subsidies .

It’s terribly distasteful, as Ezra Klein and Megan McArdle and others have pointed out. It’s also very bad policy, since there basically isn’t much of a free market in finance anymore.

As Howard Lindzon joked, who cares if Goldman gets its secret quant sauce stolen since it’s in the business of running the government?

But the thing is, there isn’t much we can do about it.

Or is there?

Here’s my modest proposal: why not just break up the banks?

Seriously.

All of the big ones: Goldman, Morgan Stanley, JPMorgan, Bank of America, Citigroup… Too big to fail is too big to exist, right?

EDIT: As I’ve tried to explain in the comments, the reason would basically be moral hazard: “If you screw up the global economy, ok, we’re not going to let you fail, because you’re systemically important, but we are going to break you up after the smoke clears because, hey, come on.”

But mostly it’s about culture: the financial markets are still incredibly skittish, because they don’t know if/when the financial crisis is ending, and they don’t know if/when/how the government will step in. Meanwhile a vast majority of people are angry, ANGRY (not unjustifiably so) at the bankers. This would provide national and even global cathartic closure and allow us to move on.

It’s hard to see why the bits of Goldman Sachs that underwrite bond issues can’t operate independently from the bits that account for most of the high-frequency trading on the NYSE and Nasdaq. You have boutique M&A shops and hedge funds that do each of those things without doing the other stuff, and do quite well. You might have some synergies in there but between how over-hyped corporate synergies are and regulatory China walls, I’m not sure how big they truly are.

Unlike a terra incognita Lehman-style bankruptcy, there are well-established legal frameworks for doing this: banks routinely spin off, sell and buy bits of each other, without creating counterparty risk and widespread panic. Goldman would simply spin itself off bit by bit and the remaining shell would return its symbolic assets (an $80,000 commode and Hank Paulson’s hair, perhaps) to shareholders and shut down.

There are not the ethical or legal problems that you have in a nationalization. Corporations do not have rights as such, and only exist insofar as they are a very efficient way of pooling together financial and human resources and providing products and services to the market. Shareholders would not be expropriated as such, they would only hold, say, a share of Goldman Sachs Private Equity, a share of Goldman Sachs M&A and a share of Goldman Sachs Hedge Fund for every three shares of Goldman Sachs Inc. (Actually, an unwritten agreement to jettison the brand “Goldman Sachs” for a few decades might not be such a bad thing either.) Again, legally and financially, this is very easy to do.

And politically, I suspect not much political capital would be lost by Congress in appearing to be tough on Goldman Sachs.

This would leave aside the difficult question of whether to reinstate Glass-Steagall and whether putting together commercial and investment banking is what destroyed us (or saved us, since standalone investment banks were the first to go under). No messy nationalizations with no exit strategies either.

Right after the banks are broken up, we might see a wave of consolidation and the emergence of new financial behemoths. But that wouldn’t be so bad as watching the old ones rake in billions off of taxpayer subsidies, would it? And more crucially, these smaller entities would have much less in the way of implicit government guarantees so we might actually see a little free market going on. More competition for M&A and wealth management where Goldman and JPMorgan respectively are picking up the pieces of all their fallen competitors. New entities that wouldn’t be in the business of government arbitrage so much as in the business of, you know, business.

And also, it must not be discounted, it would provide a big cathartic moment for everyone, voters, consumers and investors alike, to put the financial crisis truly behind us and start again on a sound footing.

So: why not?

I’m genuinely asking. I mean: I might be wrong about this, but why is it not even talked about and seriously considered except for the odd fringe loony? What am I missing?

Why not just break them up?