Rational Irrationality

How Markets Fail by John Cassidy is one of the best books I’ve read in the last couple years. It is first about ideas. It then integrates them in helping us understand what went wrong with our financial system. The first third of the book contains a history of economic thinking from Adam Smith, Hayek, Keynes, Arthur Pigou, von Neuman, Kenneth Arrow, Milton Friedman, Robert Lucas, Kahneman and Tversky and many others. It details the increasing use and sophistication of mathematics in economics and the revolutionary insights of game theory. The stagflation (the inflation rate jumped into double digits but unemployment did not fall) of the 1970's was an event that mainstream Keynesians could not explain, paving the way for the revival of conservative economics. Friedman’s view that the real culprit of the Great Depression was the Federal Reserve’s failure to counteract the decrease in the money supply also paved the way.

Cassidy then shows how these ideas got incorporated into theories about finance (efficient market theories). Finally, he explains how this led to the financial meltdown, including the seizing of credit markets, which continues to affect us today. In doing so, he explains some of the complicated financial innovations such as structured investment vehicles (SIV’s) and credit default swaps. This sounds daunting, but Cassidy is so knowledgeable and such a good writer that he pulls it off.

John Von Neuman, a genius who made significant contributions in many areas, formulated game theory. Game theory is an inquiry as to how actors will behave when they have to take into account the actions (or expectatios) of others. The prisoner’s dilemma is a commonly occurring situation in which rational individuals will choose an outcome that is not in either’s best interests even in something as simple as a two-person game. With ten people in becomes virtually impossible to sustain a cooperative outcome. In the economic arena, it helps explain situations where rational self-interest in the marketplace leads to socially damaging outcomes. A general manifestation is the Tragedy of the Commons; a more particular outcome is destroying the planet by industrial pollution. This is one type of “market failure” (externalities). Since one of the insights of classical economics is seeing how rational self-interest can lead to mutually beneficial outcomes (the invisible hand), it poses a potential problem for this theory.

Frederich Hayek’s big insight is that prices convey information which allocate resources. Firms do not need to ask consumers what to make and how much; prices transmit the information. This results in what he calls an “economy of knowledge.” Individual participants in the market need to know little to be able to take the right action. Hayek later expanded this efficiency of the market into a political theory; he viewed the free market as the only effective guarantor of individual freedom. The failure of communism only reinforces this view. However, just because central planning failed, how can we be sure that the price signals the market sends are the right ones? The general equilibrium theory was supposed to answer this question by showing the existence of a set of market prices at which all goods will be supplied in exactly the quantities that people demand. This can be done, but only by assuming that each industry contains many competing firms and that the firms are not able to lower the unit costs merely by raising output. At these prices, it is not possible to make anybody better off without making someone else worse off. This theory was very persuasive to economists because of its mathematical elegance.

However, in any economy, even the most efficient, some people will fare off better than others. How do we decide which economic outcome is preferable? Who decides? Kenneth Arrow’s work showed how the models could do this. I will leave out the intriguing details, but he showed how the free market could generate a Pareto-efficient outcome (meaning you cannot make one person better off without making someone else worse off. However, the difficulty in applying the theory to reality was not only the restrictive assumptions, but later work showed that in order for such a formal model to work, people would need access to an infinite amount of computation capacity (there had to be perfect information). The axioms of individual rationality and perfect competition were not sufficient to determine what would happen.

On top of this, the work of behavioral economists following Kahneman and Tversky have shown many of the foibles of human reasoning. We are not able to approach making the calculations required by classical economics. We are very bad at probability. Instead, we use “rules of thumb” (heuristics) to reach conclusions. These are “wired-in” and have been selected for by evolution. For much of human history, it was more important to think quickly than to deliberate. One of the irrational responses is to go with the herd despite available contrary information. This leads to bubbles. But it is rational for financial actors to go along with the herd. They continued to take such risks because everyone else was doing it and making a lot of money. If they didn’t, they would not have had jobs. But this just made the bubble bigger. As opposed to the negative feedback loop of general equilibrium theory, this is a positive feedback loop.

George Akerlof showed how hidden information can lead to market failure (adverse selection). This is potentially an issue in any market where the quality of goods is difficult to ascertain other than by casual inspection. The problem of hidden information eventually shows not only is there not a single set of assumptions under which markets are Pareto-efficient, but that with real economies (all those that exist outside of economics textbooks), they are never Pareto-efficient. There is always a potential policy intervention that could improve the welfare of at least one person while leaving nobody worse off. Just as externalities lead the system to issue the wrong price signals, so does hidden information.

Instability is true in most markets but most important in financial markets, for its failure has cascading effects on the rest of the economy (it is also important in the health care market, leading some people to not be able to get any insurance, not just expensive insurance). In an economic downturn, lenders have difficulty ascertaining which borrowers are good risks. This was amplified in recent history by financial innovation; the markets for items like credit default swaps disappeared, making it impossible to value them, which was exacerbated by the opacity of various large financial actors like hedge funds and investment banks. And because of the opacity of credit default swaps, it was difficult to determine who owed what to whom. This implosion was also exacerbated by the myth that financial institutions could mathematically model risk (hello Nassim Taleb), which contributed to rising leverage levels and more risk. A house of cards getting bigger all the time as well as more fragile, with the big players surfing the bubble.

In the efficient market view of finance, speculators play a stabilizing role, purchasing undervalued assets and selling short overvalued ones. However, during bubbles speculators play a destabilizing role (it seems like they do when the bubble bursts, too). Hyman Minsky went beyond Keynes in describing how booms and busts are created. The process does not depend on any external shock. The primary causes come from the competitive forces that are at work in the financial sector. Any period of stability “leads to an expansion of debt-financing,” with innovation and novel financial assets. Efficient markets theory turned on its head. This is a theory of rational irrationality, with the individual rational actions of banks and other financial firms serving to destabilize the entire system.

Cassidy argues that the current crisis is similar to the S & L crisis of the 1980's. The central causes are the same; a misguided faith in the free market, deregulation that was heavily influenced by industry lobbyists (and the conservative movement) and an unsustainable real estate boom. This does not mean that government is usually better than markets at allocating resources or that markets are not a means for driving prosperity. However, the debate should not be between laissez faire capitalism and a command economy. Markets do enable people to make mutually advantageous deals (win-win games). The place to begin looking for appropriate government action should be centered on market failure, which Cassidy calls reality-based economics (vs. utopian economics). The primary source of economic instability is the short-term rational (at the individual level) actions of the financial sector. Wall Street should be one of our biggest concerns and it needs to change. Business as usual is no longer rational for our society.

Overconfidence

In my last post, I raised the question why most people seem unwarrantly confident in their own opinions. I suggested that this may be partly due to fear. But there is another reason. Because it is naturally how we, as human beings, think.

The groundwork for modern behavioral economics was laid by Kahneman and Tversky. In the old model of human rationality, it was assumed that people were able to make probablistic calculations. What has been found is that instead we use unconscious rules of thumb, or "heuristics." These thought processes probably had evolutionary value at some time. Better to think fast when the lion is coming than reason.

One of the heuristics is to generalize on the basis of insufficient evidence. Once people are convinced that a small sample is representative of reality, they place unwarranted faith in their ability to forecast the future. Of course, overconfidence is often a valuable trait in itself. Currently, it leads people in sales, law and leadership positions to often be more effective. There is no reason not to think that some such traits often had evolutionary value in primitive societies, too. In order to have evolutionary value, it just means that you were more likely to pass on your genes. Certainly, the lotharios were better able to do this than the slackers.

There are other heuristics that make us likely to be wrong or overconfident. The availability heuristic leads people to give more weight to dramatic events, even if they occur less frequently. People can get "anchored" by even random occurences. For instance, studies have shown that a person presented a certain number randomly prior to making a decision will influence his decision dramatically. And then there is "confirmation bias." We tend to look for facts that confirm our already held views, rather than facts that would disconfirm them.

Often procrastination and laziness play in. It is easier go with your "intuition," your belief based on unconscious heuristics, than it is to deliberate. The latter requires effort. These tendencies have been correlated with regions in the brain by neurologists. Deliberation fires up the frontal cortex. Unconscious processes, the limbic system, which are the site of emotions. So even though it may be natural to be overconfident, the awareness of how little you know may also fire up the limbic system, making people even less likely to evaluate their beliefs. And the less likely you are to consider that you may be wrong, or even that your view is a prejudice based on little evidence, may make you even more overconfident.

Corrections

The last sentence of my last post looks just a day later to be pretty off the mark. After reviewing a bunch of posts on Steve Coll's blog, it appears that McChrystal's counterinsurgency strategy is to create outposts of government control around major cities, "ink blots." In order to police the country, one would need at least 500-600,000 more troops. Needless to say, we cannot afford that.

Yesterday, I was reading Juan Cole's Engaging the Muslim World. Cole is a professor of history at Michigan and was often interviewed during the Iranian protests. This is a wonderful counterpoint to much of the Muslim-bashing that goes on here. He makes the point that it is unlikely that a foreign military force could repress the rebellious Pashtun tribes in the south anyway. And many of the tribal regions do not want a strong central government ruling them. He also points out that our attempts to eradicate opium production robs many in the poorer regions of their means of livelihood. One in seven Pashtun farmers in the Helmand region who saw their poppy crops destroyed reported that they had to sell one of their children as a result. He also points out that a massive number of foreign troops in the area may just make it a magnet for radical Islamists. However, his bottom line is that what Afghans need is international aid and an intensive strengthening of good governance, i.e. Karzai needs to get rid of corrupt officials in areas of government control.

He also has an interesting chapter countering what he calls the Wahhabi myth, to which I may be susceptible. While private funds were given to madrasses in Pakistan who preach violence, the government of Saudi Arabia has been an ally. He also has some very important things to say about our attitudes about other Arab countries, including Pakistan, that are not based on facts. One is that Pashtuns were not primarily radicalized by these madrasses and that Pakistanis have overwhelmingly voted against Islamist parties. There are also a lot of good points about how the Bush administration made things worse in this part of the world. Arabs have good reasons to feel anxiety about U.S. presence, given our history of military intervention and the fact that they sit on most of the world's readily available oil as well as huge deposits of natural gas. But all that is for another day. I need to think about something else for awhile.

I started reading This Time is Different by Kenneth Rogoff and Carmen Reinhart and How Markets Fail by John Cassidy. The first is a study of financial failures over the last 800 years. The beginning was very good, but I may skip to the last part about our current situation. One has to ask the question of whether we can keep incurring more debt as a government. Cassidy's book looks to be more about the ideas that have led us into this situation. But there is never near enough time or energy to read everything that is interesting. It is instructive, however, to see how my views can change from one day to the next. I don't see how so many people can express the amount of certainty they seem to have about their opinions. I guess it causes too much anxiety for them to appreciate how little they really know.

Lessons from Ghost Wars

Steve Coll's book Ghost Wars was a marvelously written history of our involvement with Afghanistan from the late seventies to 9/11. His new edition contains facts that came out of the official U.S. investigation. The book reveals many points at which decisions were made that had far-reaching effects, such that things could have turned out differently. Such books cast doubt over histories that portray events along one overreaching narrative, whether it is Chomsky or Podhoretz.

We helped create the power of radical Islamism, initially by facilitating the rule of Ibn Saud's family over the area we now call Saudi Arabia (which was intimately bound with radical Wahhabi preaching), and more directly, through supporting the mujahedin in their war with the Soviets. Since we failed to have a CIA presence in Afghanistan, we relied almost entirely on Pakistan's intelligence agency, the ISI, and in the process made both the ISI and the mujahedin very powerful...with even more support from the now-rich Saudis. When the Soviets left, we completely disregarded the country. We cannot afford to do so again. So we cannot just pull out without there being a strong government. Otherwise, the Taliban will facilitate radical Islamic terrorism, as they did before.

But it has now been over 8 years since 9/11. What has Afghanistan become? What have the Taliban become? What has Pakistan become? We need to realize that Pakistan continually lied to us about their support for radical Islamists in order to fuel terrorist activity in Kashmir against India. India is always their biggest worry and they will do what they think they need to do. One has to wonder how stable their civilian government is. The main two actors are not much recommended. Will the military seize control again? However, one should be cheered that they are finally taking some action against rebels in the west of their country. And one should be cheered that the Obama administration is engaged with both countries and is attempting to force the Karzai government to reform.

The last third of the book concerns the activities of Al Qaeda and our various government entities, who knew he had big plans and were very worried. This history involves many more failures on our government's part. It easily could have turned out differently. 9/11 could have been prevented. You might also check out James Bamford's book The Shadow Factory, for more specific failures by the NSA in this regard.

All that said, we need to get beyond the surge mentality of the right. Afghanistan is a very different place than Iraq. There will never be a simple military solution. As Steve Coll reminds us in his blog at the New Yorker (which I have linked to on this page), we first need to consider what our goals are. I think that he is right that one of them has to be to prevent the Taliban from coming to power again. Unfortunately, that is going to involve negating their power in the south, the Pashtun land of Baluch.

Wed. bits

I am still reading Ghost Wars so I've been a little over-focused the last few days. Hey, it's a long book. But highly recommended. It is changing my views on Afghan policy. Here are a couple tidbits off the top of my head. When Saddam invaded Kuwait in 1991, bin Laden went to the Saudi king and requestd a jihad against Saddam using his soldiers. The king decided to allow American troops to do the job. Bin Laden was pissed. Or another: we were hunting and trying to kill bin Laden for years before 9/11. There was even a separate division of the CIA devoted to bin Laden. In 1999, George Tenet, head of the CIA announced publicly that Al Qaeda was the second biggest security problem we faced.

Here is a review of Steve Landsman's new book, which I thumbed through in the bookstore. I loved his argument about religious belief.

Here is Malcolm Gladwell's response to Steven Pinker's review of What the Dog Saw.

And here are Tyler Cowen's suggestions for health care reform.

Books

The Atlantic Magazine has published its 25 best books of the year here. Gordon Wood, easily my favorite author regarding the early history of the U.S. and the revolutionary era has a new book out called Empire of Liberty. Other books on the list that caught my attention are The Thirty Years War, The New Old World, The Arabs and This Time is Different. I also ran across a book called The Cold War that looks interesting. If anyone has read any of these, give me some feedback.

I am a huge Malcolm Gladwell fan, especially his New Yorker articles and The Tipping Point. He has a collection of his articles out called What The Dog Saw. Steven Pinker has some pretty incisive criticisms in his review in the NY Times today.

I wonder when Robert Caro is going to publish his fourth volumn of his biography of Lyndon Johnson. The Senate was a brilliant book. I hope Nassim Taleb is working on something new. I have read The Black Swan twice and may read it again when I get my loaned copy back. And where has Tony Judt been lately? I love his articles and Postwar was brilliant. I am getting a little burned out on behavioral economics and the financial meltdown, which is unfortunate because the best stuff on the latter is probably coming out now, after authors have had some time to digest and write. Andrew Sorkin's new book looks interesting but I know I wonuldn't read it for quite some time. It also purportedly doesn't contain much analysis, but Sorkin apparently had great access to the big Wall Street players.

Back to Steve Coll's Ghost Wars. This book is full of so many surprises that I can't wait. And it is very timely with the questions about Afghan policy swirling.

Ghost Wars

I am reading Ghost Wars by Steve Coll, an account of Afghanistan from the Soviet invasion of 1979 through 9/11. It is page-turner, with the first quarter of the book setting the background, with some great chapters on the history of Saudi Arabia, bin Laden, William Casey and the years leading up to 1986. Covert funding for the Soviet opposition increased dramatically in the mid-80's due to Congressional appropriations to the CIA (led by Charlie Wilson), which were matched by official Saudi contributions by their intelligence agency, and by massive private Saudi contributions. The CIA did not even have an outpost in Afghanistan in 1979 and for years we funneled all our money through the Pakinstani intelligence agency, the ISI. Although there were many groups fighting the Soviets, most of this massive surge in funding went to the Islamist groups such as Hekmatyar's. The Pakistani border ended up being a huge enclave of ISI, Arab volunteers and Wahhabi madrasses. They trained 6000-7000 jihadists a year.

The U.S. promoted these jihadists and the recruitment of Arab volunteers. The focus of the Reagan administration and especially Casey, was the defeat of the Soviets at all costs. Casey saw links of revolutions to Russia everywhere, including the IRA, Basque nationalists, Palestinian terrorists, and others. He was also very religious and saw a natural coalition of Christians with the Islamists against the atheistic communists.

The Islamist movement had been becoming more radicalized over the years, initially from the Muslim Brotherhood in Egypt in the 1920's. Cairo was the intellectual center from which the radical views spread, eventually to the university bin Laden attended in Saudi Arabia, but also to Afghanistan. However, most Afghans were primarily influenced by Sufiism and little in common with the Wahhabi-led extremists. They were a diverse bunch and included Ahmed Shah Massoud, the most formidable Afghan military leader who headed a northern alliance. Robert Gates, then second in command at the CIA, remarked in his memoir in 1996, that "no one should have any illusions about these people coming together politically."

The Saudi budget for 1969-74 was $9.2 billion. For the next five years, it was $142 billion. A generation removed from nomadic poverty, they were now powerful players. From the beginning, Ibn Saud had linked his power with the Wahhabis. Sensing the threat from Islamic radicalism, he embraced it, hoping to control it. There seemed to them to be no plausible politics but strict official religiousity and many of the royal family were true believers. Their state was, after all, the only modern nation-state created by jihad. In Afghanistan, bin Laden was just one of a variety of actors. But he began to ask the question of whether the jihad should not be just against the communists, but also against the corrupt governments of the Middle East, the U.S. and Israel. He was well-connected, wealthy and moved freely in circles of Saudi intelligence.

The Soviet introduction of the elite Spetsnaz, along with their Mi-24D Hind attack helicopters, seemed to be winning the war in 1984. But along with the increased funding, Afghan rebels now got satellite reconnaissance and Stinger hand-held missiles. On September 26, 1986, they were first put into use, detroying three Soviet helicopters.

Review of Three Kings

Lloyd C. Gardner’s Three Kings; The Rise of An American Empire in the Middle East after World War II is a highly readable account of U.S. policies regarding the Middle East beginning before the end of the war and continuing up to around 1980. It was interesting enough that I ordered his previously published The Long Road to Baghdad; A History of Foreign Policy from the 1970's to the Present. It focuses mainly on two episodes, one dealing with the crisis in Iran in 1951-53, when Mossadegh came to power, the Shah fled, and Iran threatened to nationalize their oil industry. In response, we (through the CIA) organized a coup which led the Shah back into power. The second centers on our dealings with Nasser in Egypt.

The main lesson I take is that the turbulent situation in the Middle East was caused partly by our policies. After the war, the British wanted help controlling the Middle East (they wanted to keep their empire) and the U.S. was only too willing to help, eventually replacing the Brits as the reigning power. After all, the oil that lay under the ground was a source of military power. We promoted stable governments by supporting dictators. Not only the Shah, but we also helped install Saddam in Iraq in 1963 and made it possible for the family of Ibn Saud to rule Saudi Arabia. One of the unintended consequences was that these dictators thereafter were able to blackmail us for money and arms. This was inconsistent with our professed aim, which was to promote self-determination of countries leaving the colonial era and democracy. What we did was to work to thwart Arab nationalism and it led to an arms race. It retarded political change, but when that change came it was virulently anti-U.S., such as during the Iranian revolution in 1979. After that, we tried to use Saddam to prevent the spread of such theological revolution by helping to fund the eight-year war with Iraq. We all live with the consequences today.

The ultimate justification for these actions was the “war against international communism,” even though Russia was not really a threat in this region and there was no universal communist threat as China and Russia were opposing powers. No one doubts the power of Russia in Eastern Europe at the time, but we made our conflicts into an ideological war in order to mobilize public opinion. In promoting these policies, various presidents acquired more power for the executive branch by funding wars without Congressional approval. Whatever you think of the communist threat, the success of these policies in the Middle East was temporary at best.

Irony abounds in this tale. As another example, Truman, in order to win the 1948 election, needed Jewish finance, so he opposed the British, who had the mandate on Palestine and tried to limit Jewish immigration. Ultimately, the Brits tired of this role (they could no longer afford their empire) and abruptly gave up the mandate, after which Israel declared itself a state. And, of course, we ended up being the fund of Israel’s military power, too. Our dealings with Nasser actually drove him to accept Russian assistance in the late 1960's. By keeping Saud in power, we also indirectly empowered the Wahabbis, who Saud had to appease because of the presence of Mecca in his country. Now we also have a dictator in Egypt, are supporting a corrupt government in Afghanistan, and are heavily involved in propping up the governments of Pakistan and Iraq.

These policies involved a uniting of political and economic interests. I imagine that those on the left believe it was the corporate interests that controlled. While this has certainly been the case in the past in some places, such as our invasions of various Latin American countries, I think that here the main force was a misguided effort at keeping the world safe. Of course, the oil companies benefitted, too, at least for awhile. Those on the right would have had us become more directly involved militarily, which ultimately we did in Iraq, partly justifying the action as spreading democracy! Whatever this history teaches us, it at least shows why they don’t trust us. Is it also partly responsible for the rise of violent Islam?

Addendum: This book would be better described as a history of US State Department and executive policy toward the Middle East from 1947-1960, during the Truman and Eisenhower years. Gardner implies that during these years we set the policy that we would follow for years to come.

Afghan Health Filibuster

Maybe it is because I woke up too early and am tired that I'm finding so much interesting stuff this morning on my news and blog troll. Here is a great interview asking the question why don't the democrats let Joe and the Party of No fillibuster. It is more complicated than what I suspected, but one source of the reason that just the threat of filibuster is so powerful nowadays is that Congressmen are busy campaigning 24/7.

Ezra has a another interview with health economist Jon Gruber on why a version of the Senate health care bill should be passed and he addresses the question of whether it does enough to address cost. I concur. It should and it does as much as we can expect at the moment. Nicolas Kristof suggests that in deciding whether to send more troops to Afghanistan we should consider the real costs of doing so, and compare those with health care reform. I have been arguing that we need to consider what we hope to accomplish, and this makes me even more leery of more troops. And Megan McCardle advises us not to get consumed with the sunk costs. She also praises Obama's rationality. If only our electorate was as rational. I read in the paper today that 57% favor more U.S. troops. I am still undecided on this issue and am reading Steve Coll's Ghost Wars, which is about Afghanistan from the time of the Russian invasion to 9/11. Already you can see how stupid our leaders were and how little the CIA knew. Kinda reminds me of James Bamford's book The Shadow Factory. Our intelligence agencies knew all about bin Laden long long ago and were spying on him. The NSA was even monitoring the planning center of 9/11 in Yemen and knew about several of the highjackers, but they did not confer with the CIA or the FBI.

T.R. Reid

Dave Leonhardt in the NY Times today has an article on why the Senate bill will be better on dealing with health care cost issues. So maybe some of my pessimism is not warranted. And it is not given that premiums will rise. Healthier people are supposedly being added to the pool as well as riskier.

T.R. Reid's appearance on Frontline last night was interesting. I was disappointed that the show was a rerun from last year. Isn't this November? His book The Healing of America is a welcome look at how other wealthy democracies deal with health care. He says that while the US "does well when it comes to providing medical care, it has a rotten system for financing that care." He argues that what other countries have that we don't is a unified system; everybody is included in the same system and covered by a single set of rules. This doesn't necessarily mean a Canadian-style single payer system. Germany has more than two hundred different insurance plans. Japan has more than two thousand. And in Germany, these plans cover people their entire lives. They don't have Medicare.

He also argues that universal coverage has to come first because it is "an essential tool to control costs and maintain the overall quality of a nation's health." Only this will create the political will to accept limitations and cost-control measures within the system.

Maybe we are on the right track. It is a slow track, but we are not going to be able to change everything at once. Reid's book is a good place to start thinking about it. Let's try to learn from what others have done rather than reinventing the wheel.

The Health Care Bills

I have not studied the bills in-depth, so I may easily change my mind. But first, I think we need to pass a bill. And what we pass is not going to effectively address the big elephant in the room, costs. But it is going to do some good stuff, including giving access to most of those people who cannot get insurance and eliminating preexisting conditions as a basis for denial. By doing so, premiums are going to rise. You add riskier people to the pool. The public option question at this point is only about the small percentage of people who will not be able to get insurance. Who are these going to be anyway? If we have an exchange where these people can choose the coverage they want, how important is a government-run program? So liberals, get over it. The right wing focus on the public option is stupid, but it is not that important. In the long run, we are going to have to return to look at the single payer option anyway when we finally get around to addressing costs. Continuing to link health insurance to employment is not the future. You can look at any other wealthy democracy to see this. And Medicare needs to be independent from Congress to eliminate special interests from blocking reform. Ultimately we need to do things like eliminate fees for services payments. If Medicare shows that it can deal with costs in a more innovative and effective way, then you have an argument for Medicare Part E (for everyone). I happen to think exchanges that give people choices are a better way to go, but that is partly an empirical question to which we do not know the answer. And you could always have both, a basic Medicare program along with exchanges for Medicare supplemental insurance. What happens in the future is dependent on what has happened in the past and what is happening now. We need to get a health care reform bill passed now. But knowing the Senate works, you have to be skeptical. After all, the Senate managed to keep blacks from exercising their civil rights in the south, including voting, for 100 years after the Civil War. One of the most effective methods was the registration test, graded by local board members so that no black could pass. Or having to have a sponsor to register. Let's also realize that many of the provisions do not go into effect until 2013. The debate about costs needs to continue. Holding out for the perfect plan now is less likely to result in healthy reform in the long run.

Addendum: For the fiscal year 2008, Medicare cost per enrollee was over $11,000. According to the Kaiser Family Foundation, cost per enrollee was $7439 in 2004. The fair amount for someone who is not subsidized by the government is cost per enrollee. No insurance company profits to figure in. So, instead of creating a whole new agency, why not let those who cannot get insurance sign up for Medicare and pay the premium? I would like to give them some different options.

20 Years Ago

Of course, 20 years ago the Berlin Wall fell. There were already hundreds of thousands of East Germans fleeing their country for the West because their living conditions were so abysmal. It raises the issue of the failure of communism. One of the most potent criticisms is the lack of an ethical dimension, which combined with the view that one was on the right side of a mechanistic history, gave people permission to do terrible things. I ran across this article which largely expresses my own views. And here is an interesting article on ethical reasoning. In my own study of Marx twenty-five years ago, I came to realize that he had no theory of the state and that his belief in the revolution was a quasi-religious one of conversion. And, of course, his idea that the world would be split into two classes has been proven false in successful countries. But why should one think the world will be better when the proletariat take over?

Addendum: This post does not convey what an enormous moment this was in Europe, as you may have seen on various news reports today. It also assumes that one knows how many well-meaning intelligent leftists in the 20-40's supported communism, even the Stalinist state. And it does not acknowledge the hysterical reaction to communism in this country, often manipulated by our leaders. The movie The Invasion of the Body Snatchers is in its own way a comic take on this attitude.

The Tribune and Disability

Here is a column from the Salt Lake Tribune last week on the rise of Social Security disability claims. You will see my comment at the bottom. I did not mention that the assertion that 13% of cases are approved at the administrative law judge level is laughably false. It is over 50%. I wrote a letter to the editor pointing this out as well as why a couple assertions by Mr. Allsup are ridiculous. They refused to print it. We know newspapers are in trouble, but when I read stories like this on an issue I know something about, and they are so wrong, I wonder about other stories. This is lazy journalism. Get a couple quotes from somebody, no matter how disrepected he is in the professional community, and a response from somebody else, and call it journalism. And explain nothing. The aging of boomers has already caused an increase in disability claims and this recession has been hardest on older men. If you lose your job, you are less likely to get hired for another job. Disability rules reflect age. If you are over 55 and cannot do your past work, the rules are more lenient. Of course, when many are unemployed and prospects are slim, people are looking for a way to get by. But the author could have at least explained what "silver tsunami" means and why it is occurring.

The Great Game Cont.

I am reading Three Kings; The Rise of an American Empire in the Middle East After World War II by Lloyd C. Gardner, a professor of history at Rutgers. So far, the action is taking place during WWII. In 1941, Russia and Britain occupied Iran, although it was nowhere near the war zone. This was another episode in the contest between the Russian Empire and the British Empire over the land south of Russia, called The Great Game. Of course, everyone knew that there was a lot of oil there. This is when FDR began his negotiations with Ibn Saud for access to Saudi oil and a military base on Saudi soil. We managed to fund Saud's government during the war by using the lend-lease program, even though the Saudis were not in the war's theatre (as Presidents began creating funding mechanisms that did not need the approval of Congress). Saud proceeded slowly, partly playing the Brits against the U.S., but also because he was held personally responsible for keeping the land around the sacred sites "free from the taint of foreign occupations" (bin Laden's primary complaint...and he attacked the base there in 1996).

It is perhaps well-known that the British had no intention of relinquishing their empire after WWII and that this was opposed in principle by FDR (in the Atlantic Charter). But everyone was working behind the scenes during the war to determine what would happen in the oil-rich middle east after the War. FDR's freedom of self-determination of countries took a second seat behind practical considerations around oil and bases for air power, which was the emerging force in the capacities of armies and in transportation. And the Truman doctrine, which immediately was about aid to Turkey (under pressure from Russia) and Greece (under pressure from local communists), but was also one of the first political announcements of the Cold War (after Churchill), was also an ideological chimera behind which real political decisions took place. Anything could be justified by an appeal to the fight against "international communism."

The Good Soldiers

I started The Good Soldiers by David Finkel earlier this week. I would read a chapter and then have to go blow my nose and wipe tears out of my eyes and that was usually enough for one day. Last night I picked it up and couldn't put it down until I finished at about 1 a.m. This is very powerful book. It is written by a reporter embedded with the 2-16 batalion in East Baghdad during "the surge," and takes place from April 2007 to March 2008. I don't believe that anyone who has not been in a situation like that can really imagine it, but this book gives you a vivid sense of the human consequences of war on soldiers. This particular war, with multiple deployments, better medical care in the field, and better armor has led to many more soldiers being saved, but many more damaged in different extreme ways, including severed limbs, closed head injuries from explosions and PTSD. I'm not sure how a human being couldn't have some PTSD after going through that. A great piece of writing.

Health Care Costs

Here is Ezra Klein raising the question of why every unit of health care, e.g. drugs, doctors, hospital care, costs much more in the U.S. than other wealthy democracies.

And even in Medicare Congress refuses to accept cost-saving measures because of lobbying from interest groups. Can we really hope to reign in costs with Medicare Part E (Medicare for Everyone)?