Ev Ehrlich's Everyday Economics


Person of the Year

Hey! Anybody remember me?

I apologize for taking a ten week powder – my last post was in late October, just before the World Series. But lots of stuff was going on. First, I did some hanging out with Judge Crater and Jimmy Hoffa – what a pair! Then, I was leaving my house in my Escalade at three in the morning and I drove into a fire hydrant and my wife, Nancy, had to extricate me by smashing in the rear window of the car with a golf club and she doesn’t even play golf! Then, I got engaged and it turned out I was my ex-girl friend’s baby daddy! Then, NBC cut my much-ballyhooed prime time television program! And then Time magazine made me Person of the Year! Man, with all that going on, I barely know how I kept it together, let alone post a blog!

Well, OK, that’s not all 100 percent true. Time magazine did not make me Person of the Year, which is what they now call Man of the Year, even though the three women who have won the honor alone – Wallis Simpson (the Duchess of Windsor), Queen Elizabeth II (yes, two royals), and Cory Aquino – all won as “Men.” (Madame Chiang and Melinda Gates won it with their partners.) Instead, they gave the honor to an economist of all people, Ben Bernanke.

Bernanke deserved it. And he deserves it, not just for taking prompt action in the face of a potential economic cataclysm, but for having the courage to admit that he was flat-out wrong about how the world worked. His apostasy is perhaps the real story.

When Bernanke was first confirmed as Fed Chairman in 2007, he seemed to regard the Chairmanship as the ultimate class project. He was enchanted with formulae such as the then-famous “p-star,” which calculated underlying inflation and guided monetary policy in addressing it, as well as the “Taylor Rule,” a similar approach to the same problem. This rule- or equation- driven approach to determining monetary policy was favored by the academic supposition that a “mechanical” rule – similar to putting policy on autopilot -- was the best way to convince markets that the Fed was serious about reaching those targets, and if markets became so convinced, the target rate of inflation would be reached all the more quickly.

And, in contrast to Alan Greenspan’s economic Stengelese, Bernanke embraced “transparency,” his thinking being that being straightforward with the market (meaning its participants) was the best way to get them to, again, move to where the Fed wanted them to go. The only problem was that Bernanke’s light seemed to shine on a different measure of inflation or economic activity with every passing week, and as he continually shifted “what he was watching,” the only thing that became transparent was his diffuse focus.

At the root of Bernanke’s theorizing was his belief that the world worked in the way that the monetarist school of economics described it. Transparency and “p-star” type guiding mechanisms were important because, as Bernanke then appeared to believe, the supply of money determined the rate of inflation, as in the old saw about inflation being caused “by too much money chased too few goods." And this was a perfectly reasonable explanation of the dynamics of inflation, so long as you lived in 15th century Venice.

I remember sitting with the rest of middle management behind my then-boss, Alice Rivlin, who was the Director of the CBO in 1981, when the Reagan Revolution swept Republicans to control of the Senate. It was her first appearance in front of the newly-constituted and fairly hostile majority on the Senate Budget Committee. And one member – let’s not go into who – decided to challenge Alice on economics. “If I had an economy with only ten gold coins,” he lectured, “would it be possible to have any inflation?” His answer of choice was, “Of course not,” and his point was that if we similarly fixed the money supply, we would eliminate inflation, which was then running strong.

It was a perfect example of understanding a problem by ignoring its complexity. Beyond the issue of how fast those coins turn over, there’s the larger question of whether those gold coins are the only form money takes. In today’s world, money takes a burgeoning variety of forms – credit cards, zeroes-and-ones in electronic commerce, all manner of credit instruments, and so on. The issue is not how many gold coins or dollar bills there are, but rather, how much credit the economy is providing to itself and on what terms.

And this was the lesson that hit Bernanke on the forehead in 2008 and 2009. The rate at which the “money supply” grew was irrelevant. Banks had money – there was plenty of money around, but there was no lending. Manipulating the availability of money to drive the interest rate – the cost of money – to zero had no effect. (In fact, banks today have close to a trillion in reserves sitting around, doing nothing.) Instead, the Fed would have to wade into markets right up to its waist and take matters into its own hands – buying assets or otherwise guaranteeing their value, making banks whole after losses they incurred through their own cupidity, and trying to calm the outright panic that pervaded markets by giving the impression, through deeds more than words, that it was prepared to do anything to assure the flow of credit and the survival of the institutions that provided it.

There are still carpers today who argue that Bernanke’s his Orphean journey into the forbidden netherworld of financial activity – was arbitrary, improvised, and inconsistent. They are perfectly right -- it was all those things. And we should be grateful that it was so. Bear Stearns was bailed out but Lehman was allowed to die, and while there were good reasons for both decisions, one’s moral claim to a seat in the lifeboat was no better than the other’s. Rather than engage in a foolish consistency, these decisions were made on the fly, with one eye on resurrecting the orderly functioning of financial markets and the other on getting through one day with an eye to the next.

Similarly, Bernanke quickly and dramatically threw away pre-existing notions about central banking. The Fed would buy whatever assets it had to, and lend to whomever it had to, whether they were an investment bank usually at arm’s length from the Fed or a commercial one used to its embrace. It would discard academic ideas about the growth in the money supply and the possibility of future inflation and instead focus on the desperate here-and-now. (There’s not enough time here to talk about the future of inflation, but give me a week or two.) It is hard to imagine that the architect of this improvised, pragmatic, and close-to-the-vest program was only two years before concerned about “transparency” and fixed policy rules that would lead self-governing markets to adopt most rapidly.

The old saw has it that a conservative is a liberal who has just been mugged. But an interventionist is a laissez-faire practitioner who must preside over a crisis. It was true of Alan Greenspan in 1987 when, only months into his job, he was confronted with a stock market collapse and reacted by intervening quite decidedly to maintain liquidity in equity markets. It was true of President Bush, who knew some Sunday school economics but quickly initialed the memo when it was time to throw $700 billion at Mammon.

And so it was with Bernanke. By breaking all the rules and walking away from his underlying beliefs about the economy, he became a legendary Fed Chairman. The question is whether he has internalized the lessons of the experience. Does he still think economic crises are the exception to the rule, or are they an outcome to be expected in market driven by frail human psychology? Is the money supply the only way to manage the flow of credit, or can we use regulation to rein in excess, as the late Fed Governor Ned Gramlich futilely urged Greenspan to do when he saw the mortgage bubble coming? Can the Fed watch the prices of stocks and other financial assets for signs of excess, just as it does the prices of oil, haircuts, and peanut butter and jelly?

There’s an argument that Bernanke will never get to get “back to normal” during his tenure – that we’re in for a Japanese-style decade of stagnation – and that he’ll never get past “crisis mode.” I don’t buy that. The economy is going to get back to something looking like “normal” (I didn’t say “good”) quicker than most people think. And then we’ll see what Chairman Bernanke learned. Being a Person of the Year is a good thing. But a person who learns from experience and discards old, outdated beliefs is something even better – a Person.


Your Sports Reporter

I don’t want to devolve to sports on this page for a variety of reasons, but I can’t help it.

First, did anybody catch the whipping Harvard put on Princeton Saturday? I mean, they beat them like a borrowed mule, like a red-headed stepchild, like Gene Krupa’s bass drum during his solo in Benny Goodman’s 1938 Carnegie Hall rendition of Louis Prima’s Sing Sing Sing. What a pounding!

But as much as the eyes of the sports world are focused on Harvard’s quest for its first-ever three-peat atop the pigskin zuggerat of the Ancient Eight, there’s a World Series upon us, the climax of the sports year. It’s no coincidence or surprise that mammals go into seasonal hibernation and leaves fall off of trees once the Series is over. After all, that’s the natural cycle of the year – World Series, snow (with occasional college basketball), spring training.

It’s unfortunate that so many of the Series in this decade have been one-sided – 4- and 5-gamers that minimize the event and the worthiness of the losers. But in some ways it’s to be expected, because so many of the Series in this decade have been anticipated not because the teams involved were great (they all were hot, to be sure—the Rockies in 07 were as hot as you get -- but great is a different and very high standard) but because the match-up was interesting. How are the Rays – or the Rocks – or the Tigers – or the Marlins – going to handle the week? What the heck are the Red Sox doing here?” What are they doing here again? Is this the Rocket’s last outing – an early pull against the White Sox? (And I the opener in 2005 in Chicago was like nothing I’ve seen -- Pale Hose fans drinking, crying, and clutching their rosaries – what a scene!) Will Scioscia pitch to Bonds? Will Dusty’s kid get into the game? Fascinating, interesting stuff.

Off the top of my head, this is the first year since 2001, or maybe 1996, when the obvious two best teams in baseball are there at the end. “Best” is a very normative term, but in this year’s case, I think it’s hard to argue.

Is there someone in the NL who should be there instead of the Phils? They have very believable pitching and the first six guys in their line-up are merciless. And they have team speed and defense that could make the Yankees look old. When was the last time an NL Club appeared in two in a row, class? The Braves in the mid-90s. And when was the last time an NL Club won two in a row? See the next paragraph. Ryan Howard aiming at the right field porch in the Bronx – man! And…Pedro. Back to him in a minute.

And then there’s the Yanks. Take the pitching off the table and line them up against the greatest team of the past half-century, the 1975-76 Reds, the last NL team to win two in a row and the last gasp of the century-long Competitive Imbalance Era that was brought to an end by free agency.

Bench, Rose, and Morgan. Well, Bench might be the greatest MLB catcher ever (allowing me to sidestep Josh Gibson). Rose, sure, Morgan, great competitor. But compare them to ARod, Jeter, and Teixeira – ARod might have been the greatest shortstop ever until he moved over – you think Honus Wagner would be ARod if he were around today? I respect Cal Ripken, Ernie Banks, and Robin Yount – you really going to start them ahead of ARod and his one-day 800 homers? And do you want Rose over Jeter on game day? Jeter dives into seats; Rose only dives into Ray Fosse. You sure you want Morgan over Teixeira? You watched Tex this week?

The next three on each side go to the Reds – Perez, Foster, and Griffey against Matsui, Posada, and Cano – I’m saving Damon so that he and Melky line up against Concepcion and Geronimo, which is a push, leaning towards the Yanks, in my view. So there’s a case for the Reds until we bring back the rotation and Rivera (clearly the greatest relief pitcher ever) and the current Yanks look like All-Timers.

Beyond the two best teams facing each other, there are the stories, and there are two that deserve mention. For the Yanks, it’s the swansong of the Torre teams – Jeter, Rivera, Pettitte, and Posada – the tree on which the ornaments of ARod, Tex, or Godzilla were hung. For the Phils, it’s Grover Cleveland Martinez, Pedro, discarded and left sitting by Clubs too cheap to bring his expertise and craft into their dugout – starting with my Nationals – coming back to Yankee Stadium. Will he have the last laugh, or find himself walking off the mound to taunts of “Who’s your Daddy?” Please let him start Game Two so we can find out.

I’m not a sports columnist, so I don’t have to make a prediction. But I will, and here it is – it’s going to be a great Series. I’ve rooted for both teams at one point – as a kid New Yorker leading up to the ’77 Yanks (what an incredible year! And even more than Reggie’s three swings, the apex of that post-season being the way Billy Martin lifted game 5 in Kansas City, like a sneak thief in a crowd, sitting Reggie until he needed him in the eighth, while Reggie’s replacement, Paul Blair, started the three-run ninth) and during my five years in Philadelphia, when the Phils gave me one of the best Father’s day presents I ever got – trading Juan Samuel for Lenny Dykstra and Roger McDowell, the two most interesting Mets. And I certainly have it better than my Mets fan buddies like Bob or Bob or Gary or Sandy, who have to watch their two nemeses battle it out.

It makes me recall 1975 when, as a then-Yankee fan, watching the Reds and Red Sox was like watching Hitler and Stalin. I rooted for Stalin in the end and we lost. This will be more like the Yankees’ Julius Caesar and the Phils’ U. S. Grant. How can you not respect both, their common vision and bloody-mindedness? Too bad the Mets are Andre Maginot.

Happy World Series, every one.


Death Panels, Pro and Con

I am, like most of you, amazed and appalled by the discussion of Death Panels. Many of us expect the right wing to lie without compunction (Iraq and 9/11, Vince Foster, Swift Boats, Obama’s birth certificate – you know the list) but are always impressed by what the specific lie will be.

The focus on Death Panels confused me for a while on this score, but last Friday I read a column in the Washington Post by Charles Krauthammer, entitled “The Truth About Death Counseling,” that made me understand the reason for the furor. As Krauthammer said (and in admirable high literary dudgeon) the “Death Panel” provision might not be a Panel per se, but it is “subtle pressure applied by society through your doctor. And when you include it in a health-care reform whose major objective is to bend the cost curve downward, you have to be a fool or a knave to deny that it's intended to gently point the patient in a certain direction, toward the corner of the sickroom where stands a ghostly figure, scythe in hand, offering release.”

A ghostly figure, scythe in handDeath as Willie Horton! Well, I give Krauthammer credit – he’s hit it right on the nose. The Death Panel provision is exactly that – it’s a way to get Americans to confront the incredible sums we spend to keep ailing, aged relatives alive once they are already, obviously, and tragically unable to live without technological sustenance. My old man was 93 when he died – his kidneys were obliterated and his brain was poached in the resulting nitrogen coursing through his blood stream, which reduced him to a keening, thrashing piece of Divine clay (take that, “ghostly figure…”). When I instructed the doctors to send him to hospice care, they were genuinely relieved, after all, I could just as easily have told them to keep him going in case he suddenly jumped up and started speaking Latin. Quite remarkably, the doctor then told me the hospital had better uses for the bed. But enough about rationing.

Krauthammer gets it, even if he apparently disagrees – we need to establish a new social norm in America, one that holds that every moment medical technology keeps your cardio-pulmonary system going is not necessarily worthwhile. And he specifically understands – unless I credit him too much – that the debate over Death Panels and the other features of the health care bill are really about what our society’s norms should be regarding how we think about health-related issues.

And if President Obama truly wants to be a “transformational” President, he’s probably thinking in those ways as well. It’s possible – unavoidable – to think about American social progress as being measured by the norms our society develops to replace the old ones. The 40 hour work week, the extension of suffrage, progress towards civil rights, women’s rights, and gay rights – all were or are matters of what reasonable expectations we, as a people, decided to adopt. I remember dorks in high school (1965 or so) who argued against the Civil Rights Act because “you can’t legislate morality.” Leaving aside the layers of paradox and irony embedded in that remark, they were right. But you could pass a law and confront the populace with reality until they got it which, to a great extent, they did.

Cigarette smoking was a norm, now it produces a reaction that’s almost totalitarian. Recycling is taught to our kids as a gospel, cost-benefit analysis be damned. Every newspaper on the continent uses the term “Ms.” They’re all about evolving norms.

Which brings us back to Krauthammer. Giving doctors incentives to talk to patients about living wills, as he points out, won’t really amount to much, “except for the demented orphan.” (Jeez! As someone who’s given to literary excess myself, this guy ought to be my hero!) But it will force people to consider the question of what constitutes a “reasonable” death, if only because doctors will be paid based on quality measures that include whether their patients have considered it. And that means challenging, to some inevitable extent, the idea that deciding when to die in the context of a DNR or living will usurps “God’s” authority to determine when our time has come.

I don’t know if Krauthammer believes this last part. Much of the God-fearing right wing probably does, although I’d be surprised if Krauthammer, a guy with a tragic medical history, was that foolish. In a world of medical wonder that has rescued us from a Hobbesianly brutish and short life span, the idea that we die when God or Fate wills it obtains only if God invented angioplasties and dialysis. Like Krauthammer and many of you, if I lived in the 17th or 18th centuries, I’d be dead today a few times over, so God’s will has become much more forgiving in the intervening decades.

To many, any compromise on the idea that we live every damn day we can squeeze out until the paddles produce no response (or until Bill Frist reviews the videotape) smacks of eugenics. And to continue, and here I may be stretching, the idea that death has elements of social norms and that man’s relationship to life is governed by something other than a Divine Absolute quickly flows downhill to assisted suicide or worse, abortion.

That’s what’s going on here, to my thinking. The right wing knows that if people start to consider whether to have DNRs and living wills, and if they start to form new norms about the end of life and the balance between life and death, they’ll rethink their attitudes towards life and death, much as they rethought their attitudes towards the environment, people of color, the workweek, and any number of other things. In fact, I could argue that the best steps we could take to fix the health care problem in the U.S. would be precisely that -- to force such a reappraisal about the end of life, and a similar one regarding the individual’s responsibility for their own care.

The latter is also starting to take root – you see it in local laws about transfats in foods. (I was pleasantly stunned, when I made my first trips to both the new Yankee Stadium and Citi Field, to find calorie content listed next to every item on the food concession stands. A knish only has 180 calories! I’ll have two!) We are beginning to form a much-needed new norm about obesity and healthy choices. If we really wanted to kick that one into high gear, we’d tax employer-provided medical care (above some regionally-defined threshold) as ordinary income, if only to force people to think about what coverage is truly worth. But that might be asking too much, for now.

So Krauthammer’s right – or let’s hope he’s right. The health care law that emerges from the Congress (as I believe one will, for better or worse) will help society form new norms and expectations about the end of life and, hopefully, about responsibility for one’s own health. The law will lead them there. If it does, President Obama may well succeed in truly being “transformational,” by transforming not just the law, but how people make choices. Or, as John Wayne so eloquently said, “if you’ve got them by the balls, their hearts and minds will follow.”