"Where the Second Avenue subway went wrong" (James Surowiecki)

New Yorkers once had train service all up and down Second Avenue. Here we see the old Second Avenue El (torn down in 1940-42) at 34th Street. [Click to enlarge.]

"The pool of dollars available for something like public transit is limited. The result of extravagant spending on subways and the like is that we end up with fewer of them than other cities. For the price of what New York spent on Calatrava’s PATH station alone, Stockholm is building nineteen kilometres of subway track and a six-kilometre commuter-rail tunnel. Worse, cost overruns fuel public skepticism toward government, making it harder to invest the next time around. It’s good for government to do big things, great things. But it’s better if it can do them under budget."

-- from James Surowiecki's "Where the Second Avenue
subway went wrong" in the Jan. 23 New Yorker

by Ken

Welcome to NYC, Second Avenue subway, and congratulations on sending forth your first expired customer!

If you'll bear with me, there is, I think, a reason why non-New Yorkers might care about the past, present, and future of NYC's Second Avenue subway, of which the mile-and-a-half segment first segment, offering stops at 72nd, 86th, and 96th Streets, opened -- finally! -- on New Year's Day, as I noted here the following Sunday.

As to that first expired customer, DNAinfo New York published this account yesterday under the slug "Crime & Mayhem":

Man Found Dead on Second Avenue Subway Car, NYPD Says

By Aidan Gardiner | January 31, 2017, 9:30am

MANHATTAN -- A man died after being found unconscious on a Q train as it pulled into the last stop of the Second Avenue subway Tuesday morning, NYPD officials said.

The man, who is in his 50s but whose name wasn't immediately released, was found on the train at the 96th Street station about 12:30 a.m., police said.

He showed no signs of trauma but was pronounced dead at Metropolitan Hospital, police said. [Note: The NY Post account expands on that "no signs of trauma": "Police said the man did not appear to have any signs of trauma on his body and likely died of natural causes."]

The medical examiner will determine his cause of death, police said.

As far as I could determine, the medical examiner is yet to be heard from.


MEANWHILE, SECOND AVEUNYUE RIDERSHIP
IS LAGGING BEHIND THE MTA'S PROJECTIONS

I don't think the shortfall is critical, and it certainly doesn't prove that the new subway-fragment isn't valuable to Upper East Siders. But it does focus a little more attention on the question of just what New Yorkers have gotten for our humongous investment. You can almost see beads of sweat dripping down the brow of NYS Gov. Andrew "The Second Avenue Subway C'Est Moi" Cuomo.

Second Avenue subway falls short of ridership projection

By Danielle Furfaro | February 1, 2017 | 12:35pm

Ridership on the Second Avenue Subway line has been lower than projected for its first month, officials said on Wednesday.

About 155,000 riders are taking the new line daily, slightly less than the MTA’s projections, Gov. Cuomo’s office said on Wednesday.

Ridership started out at about 130,000 riders per day when it first opened to the public on Jan. 1. The line gained about 8,000 riders a week, hitting 155,000 on Jan. 27.

The agency came to those figures by collecting turnstile numbers in the three new stations and in 63rd Street, as well as hand counting how many people exited via emergency gates at the new stations and analyzing how many people would have transferred from other lines, said MTA spokeswoman Beth DeFalco. Of the new stations, 72nd Street had the highest ridership with 51,450 passengers daily.

The MTA had said it hoped to attract 200,000 riders per weekday, but that likely won’t happen until later in the year, agency officials said on Wednesday.

Cuomo said he believes the number shows the line was desperately needed.

“The Second Avenue Subway has already become an integral part of the Upper East Side and these ridership figures show just how important this expansion project is to the neighborhood and our economy,” Governor Cuomo said.

The new line, in effect a northward extension of the Q line running up and down Broadway and Seventh Avenue before swinging eastward to Second Avenue has also helped to ease overcrowding on the notoriously packed Lexington Avenue line, said officials, who said the morning rush hour on four Upper East Side 4, 5, and 6 stations has now decreased by an average of 46 percent.

Part of the ridership lag, I think it's safe to say, has to do with the limited usefulness of the "Second Avenue subway-fragment" that we've gotten so far, passing itself off as "the Second Avenue subway." What we have is an eastward-and-northward extension of the Q line running up and down Broadway and Seventh Avenue -- first to the expanded Lexington Ave-63rd St stop, then northward under Second Avenue to 72nd, 86th, and 96th Streets. There's still no Second Avenue service above 96th Street or below 72nd Street.

Planning for northward extension to 125th Street is already in progress, and assuming that the funding falls into place, this Phase 2 may actually be built in our lifetimes. Southward extension, however, remains a drawing-board proposition.

For now, riders to and from the up-and-running Second Avenue stations have to either:

• come up above ground and walk four blocks between the Lexington Ave-63rd St station and the 59th St station of the Lexington Avenue line for a free transfer to and from the very Lexington Avenue line whose sardine-can overcrowding and relentless service bottlenecks a Second Avenue has been needed to ease; or

• use Q service up and down Broadway and Seventh Avenue.


IT SHOULD BE REMEMBERED THAT WHEN THE OLD
SECOND AVENUE EL WAS CLOSED AND TORN DOWN,

in 1940-42 -- with the Third Avenue El slated to follow -- it was on the promise that a Second Avenue subway would be built to replace them. On the West Wide the demolished Sixth and Ninth Avenue Els were indeed replaced with the building of the new IND Sixth and Eighth Avenue subways in the early 1930s.

On the East Side, however, abandoned el riders have been waiting since the '40s, strung along with empty and repeatedly betrayed promises. Demolition of the Third Avenue El was delayed in good part because of this failure, but it too came down -- most of it closing in 1955, with a portion of its Bronx service lingering into the 1960s and early '70s. The never-replaced loss of that el service in the Bronx had a serious depressive effect on the once-thriving Third Avenue corridor, but then, that's the Bronx, so who cares? Unless you count the people who live and do business there, or might want to -- and not many people at the power levels of NYC planning do count them.


WHICH BRINGS US BACK TO WHAT WE'RE
GETTING FOR OUR 2ND AVENUE SUBWAY $$$

And for this, I direct infrastructure-interested parties to James Surowiecki's New Yorker "Financial Page" from two weeks ago (the Jan. 23 issue), "Where the Second Avenue subway went wrong," which begins:

On New Year’s Eve, at a party to celebrate the opening of the long-awaited Second Avenue subway, Governor Andrew Cuomo said the project showed that government “can still do big things and great things.” What he didn’t say is that the project also shows that government can do really expensive things. The line, which so far consists of just three stations and two miles of track, is, at a cost of roughly $1.7 billion per kilometre of track, the most expensive ever built. And it will keep that record as Phase 2 begins, at a projected cost of $2.2 billion a kilometre.

"Construction projects everywhere are subject to delays and cost overruns," Surowiecki notes. But nowhere, he show, are they anywhere near as delayed or overrunnier than in the U.S.

We used to do better. Hoover Dam was completed under budget, and two years ahead of schedule, and the Golden Gate Bridge, too, was finished early and cost $1.3 million less than expected.

SUROWIECKI ASKS, "SO WHAT'S GOING WRONG?"

"It's complicated," he answers. "One analysis of the problem cited thirty-nine possible causes." There are high land and labor costs, and "a plethora of regulatory hurdles and other veto points" ("a recent paper by Philip Howard, the chairman of Common Good, suggests that a more streamlined regulatory process, like those found in many developed countries, could save hundreds of billions of dollars"). There's our unique division of jurisdiction among local, state, and federal jurisdictions, and increasingly there are political obstructions that often lead to projects' being dramatically upscaled; "long-suffering engineers call this 'scope creep.' "

All of this is vastly better explained in the original than in my bare-bones sketch. At this point, however, I prefer to defer to the author:

A major cause of scope creep is the fact that infrastructure spending is at the mercy of political winds. Planners know that opportunities to build are limited, so when they do get a chance they tend to milk it for all it’s worth. Politicians, meanwhile, like big, splashy projects that will win headlines and capture the public’s attention. This is why we end up putting money into new projects while skimping on maintenance, even though the return on investment from simply keeping roads and bridges in good shape is usually higher.

Politicians are fond of a quote commonly attributed to Daniel Burnham, the father of Chicago’s Exposition of 1893: “Make no little plans; they have no magic to stir men’s blood.” It’s an inspiring sentiment, but emblematic of what you might call the Edifice Complex, a habit, among politicians, of imagining that anything big and glitzy must therefore be worth doing. That’s how Detroit ended up with a People Mover monorail that moves very few people, why San Jose is set to spend more than a hundred and fifty million dollars on a transit station intended as “the Grand Central Station of the West,” and how New York managed to spend four billion dollars on a PATH station designed by Santiago Calatrava. On the Second Avenue line, too, the stations, which account for most of the cost, are lavish structures with huge mezzanines. They’re a pleasure to walk through, but more modest stations would have worked just as well.

Conservatives often reflexively dismiss infrastructure spending as a boondoggle, and liberals, perhaps in reaction, often reflexively defend it, no matter how wasteful. But the pool of dollars available for something like public transit is limited. The result of extravagant spending on subways and the like is that we end up with fewer of them than other cities. For the price of what New York spent on Calatrava’s PATH station alone, Stockholm is building nineteen kilometres of subway track and a six-kilometre commuter-rail tunnel. Worse, cost overruns fuel public skepticism toward government, making it harder to invest the next time around. It’s good for government to do big things, great things. But it’s better if it can do them under budget.

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James Surowiecki wonders about the failure to rein in out-of-control CEO pay, and reaches a conclusion that may surprise you

"[T]he failure of say-on-pay suggests that shareholders and boards genuinely believe that outsized C.E.O. remuneration holds the key to corporate success."

-- James Surowiecki, in "Why C.E.O. Pay Reform Failed"

by Ken

Remember, not so long ago, when the issue of outlandish, and ever outlandisher, executive pay was a burning issue, or at least an issue, in the land? What ever happened to all that outrage? In his latest New Yorker "Financial Page" column (April 20), James Surowiecki looks at the question Why C.E.O. Pay Reform Failed."

Our James begins by pointing out that now, in the heart of corporate shareholder meeting season,

American companies will engage in a quaint ritual: the shareholder meeting. Investors will have a chance to vent about performance and to offer resolutions on corporate policy. Many will also get to do something relatively novel: cast an advisory vote on the pay packages of C.E.O.s and other top executives. This power, known as “say-on-pay,” became law in 2010, as part of the Dodd-Frank bill. In the wake of the financial crisis, which amplified anger about exorbitant C.E.O. salaries, reformers looking for ways to rein in the practice seized on say-on-pay, which the United Kingdom adopted in 2002. The hope was that the practice would, as Barack Obama once put it, help in “restoring common sense to executive pay.”

"Say-on-pay," James notes, "is the latest in a series of reforms that, in the past couple of decades, have tried to change the mores of the executive suite.

For most of the twentieth century, directors were paid largely in cash. Now, so that their interests will be aligned with those of shareholders, much of their pay is in stock. Boards of directors were once populated by corporate insiders, family members, and cronies of the C.E.O. Today, boards have many more independent directors, and C.E.O.s typically have less influence over how boards run. And S.E.C. reforms since the early nineteen-nineties have forced companies to be transparent about executive compensation.

These reforms were all well-intentioned. But their effect on the general level of C.E.O. salaries has been approximately zero. Executive compensation dipped during the financial crisis, but it has risen briskly since, and is now higher than it’s ever been. Median C.E.O. pay among companies in the S. & P. 500 was $10.5 million in 2013; total compensation is up more than seven hundred per cent since the late seventies. There’s little doubt that the data for 2014, once compiled, will show that C.E.O. compensation has risen yet again. And shareholders, it turns out, rather than balking at big pay packages, approve most of them by margins that would satisfy your average tinpot dictator. Last year, all but two per cent of compensation packages got majority approval, and seventy-four per cent of them received more than ninety per cent approval.

"WHY HAVE THE REFORMS BEEN SO INEFFECTIVE?"

"Simply put," James says, "they targeted the wrong things."

People are justifiably indignant about cronyism and corruption in the executive suite, but these aren’t the main reasons that C.E.O. pay has soared. If they were, leaving salary decisions up to independent directors or shareholders would have made a greater difference. As it is, studies find that when companies hire outside C.E.O.s—people who have no relationship with the board—they get paid more than inside hires and more than their predecessors, too. Four years of say-on-pay have shown us that ordinary shareholders are pretty much as generous as boards are. And even companies with a single controlling shareholder, who ought to be able to dictate terms, don’t seem to pay their C.E.O.s any less than other companies.

Are you getting this? The people directly affected by crazy CEO salaries, surprisingly independent corporate boards and of course the shareholders themselves, are A-OK with the salaries they're shelling out to supposedly star CEOs. Why? Because, says James, "Just about everyone involved now assumes that talent is rarer than ever, and that only outsize rewards can lure suitable candidates and insure stellar performance." And it doesn't seem to matter that "evidence for these propositions is sketchy at best."

James turns to Southwestern Law School corporate-law professor Michael Dorff, author of the new book Indispensable and Other Myths.

Dorff told me that, with large, established companies, “it’s very hard to show that picking one well-qualified C.E.O. over another has a major impact on corporate performance.” Indeed, a major study by the economists Xavier Gabaix and Augustin Landier, who happen to believe that current compensation levels are economically efficient, found that if the company with the two-hundred-and-fiftieth-most-talented C.E.O. suddenly managed to hire the most talented C.E.O. its value would increase by a mere 0.016 per cent.

"HIGHER PAY FAILS TO PROMOTE BETTER PERFORMANCE"

Professor Dorff tosses another disclaimer into the issue of rightful CEO compensation: "that performance pay is overrated."

For a start, it’s often tied to things that C.E.O.s have very limited control over, like stock price. Furthermore, as he put it, “performance pay works great for mechanical tasks like soldering a circuit but works poorly for tasks that are deeply analytic or creative.” After all, paying someone ten million dollars isn’t going to make that person more creative or smarter. One recent study, by Philippe Jacquart and J. Scott Armstrong, puts it bluntly: “Higher pay fails to promote better performance.”

Oops!

"So," says James, "the situation is a strange one."

The evidence suggests that paying a C.E.O. less won’t dent the bottom line, and can even boost it. Yet the failure of say-on-pay suggests that shareholders and boards genuinely believe that outsized C.E.O. remuneration holds the key to corporate success.

Lurking here, James suggests, may be "the powerful mystique" of a smattering of "truly transformative C.E.O.s" like Apple's Steve Jobs. "But, more fundamentally," he says, "there’s little economic pressure to change: big as the amounts involved are, they tend to be dwarfed by today’s corporate profits." (The emphasis here is mine.)

Big companies now have such gargantuan market caps that a small increase in performance is worth billions. So whether or not the people who sit on compensation committees can accurately predict C.E.O. performance—Dorff argues that they can’t—they’re happy to spend an extra five or ten million dollars in order to get the person they want. That means C.E.O. pay is likely to keep going in only one direction: up.

Call it Christmas in April.

#

Let's look at two problems built into ACA-based health-care coverage, one of which we have a shot at doing something about

by Ken

This evening I want to think about two major problems with the way Obamacare works -- one having to do with the way it's set up, which could probably be fixed fairly straightforwardly but won't be because it would require Congress to do the fixing, and one that requires only a change in the way health-care consumers shop for coverage which probably won't be solved because, well, it's just too difficult for shoppers.

THE STRUCTURAL PROBELM FOR FAMILIES

This morning on the radio I heard a report that persuasively called attention to what indeed struck me as a serious problem with the structure of health care under the ACA: that it focuses almost entirely on individual insurance coverage, leaving enormous disparities between those rates and subsidies vs. those for family plans. As a result, in a country that pretends to place highest value on the family unit, people who need family coverage often face prohibitive costs and further are ineligible for subsidies that might make the coverage they need affordable.

As the report pointed out, in a normal political environment it would be reasonable to expect Congress to address this problem, but in our actual political environment the possibility of congressional action seems nonexistent. In some cases children may be eligible for coverage from other programs. But the overall result is that the prognosis for families where agonizing decisions must be made as to which members will have coverage will remain: Good luck to you.

THE "CONSUMER INERTIA" PROBLEM

In a new "Financial Page" piece, "Obamacare's Inertia Problem," New Yorker financial columnist James Surowiecki points to "one fundamental challenge" that remains: "If Obamacare is to succeed in holding down premiums over the long run, it needs consumers to shop around."

Surowiecki goes on to explain that in some areas, we consumers understand and are up to the challenge of "comparison-shopping and changing allegiance" -- "when it comes to, say, automobiles or consumer electronics."He notes that "companies in those markets face huge pressure to keep quality high and prices low." And then there are "markets where consumers tend to stick with the same choice forever, even though switching could save them quite a bit of money."

Energy bills are a classic example. We’ve long been told we can save money by leaving incumbent providers for newer upstarts, but the vast majority of us haven’t. Economists call it consumer inertia, and you can see it in many fields, including banking, credit cards, and health insurance. “History tells us that people are very sticky about health insurance,” Larry Levitt, a senior vice-president at the Kaiser Foundation, told me. “If you look at federal employees or at Medicare Part D, people generally don’t switch plans from year to year.”

First-time health-insurance shoppers, Surowiecki notes, are highly price-conscious. "Most Obamacare enrollees," he says, "chose lower-cost, higher-deductible plans." I'm not sure that this was necessarily the best possible choice, but he doesn't go into that. The point is that buyers price-shopped that first time out. After that, though, "inertia quickly takes hold."

When the Netherlands introduced managed competition for insurers, in 2006, almost twenty per cent of the insured switched after a year. But, by 2012, less than four per cent did. Karen Lamiraud, an economics professor at ESSEC Business School, studied the insurance market in Switzerland and found that the average switch rate between 1997 and 2007 was three per cent.

And "such inertia can be expensive."

Ben Handel, an economist at Berkeley, did a study of the insurance choices made by eighty-five hundred employees at a big company, and found that most ended up staying with their default option, even when it cost them serious money. “Consumers leave thousands of dollars a year on the table because of inertia,” he told me.

And I have to say that I sure as shootin' recognize what Surowiecki labels the key problem: "what economists call switching costs."

Sometimes they are tangible: if you want to get out of your cell-phone contract, you’ll have to pay a penalty. More insidious is what Handel calls “hassle costs”—the time and energy required to do enough research to make an informed switch. These are especially high when products and services are complicated and confusing, as with banking and health insurance, and when there are lots of potential options, which amplify people’s anxieties about making a bad choice. “The complexity is daunting, and these things just aren’t intrinsically interesting to most people,” Handel said. Obamacare has an extra layer of complexity, since you have to take subsidies and taxes into account. And since different insurers use different networks, getting a better deal often means finding a new doctor—a big disincentive.

Given the powerful disincentives for customers to switch suppliers, "it’s much easier for companies to raise prices," and Surowiecki offers the example of a storage unit. When that initially "attractive monthly rate" starts jumping, "What are you going to do? Move all your stuff?"

Similarly, even though there are lots of affordable new Obamacare plans this year, many of last year’s are raising premiums substantially. Lamiraud’s study found that in Switzerland the gap between the most expensive health plans and the cheapest didn’t narrow over time, which doesn’t suggest much price sensitivity.

Surowiecki notes that there's a certain amount of price pressure on the insurance company provided by the fair degree of "churn," with people coming in and out of coverage each year for such reasons as getting and losing jobs. And people on really tight budgets are apt to be forced to shop for cheaper coverage.

But the system also has a major feature that encourages inertia: your plan renews automatically each year if you do nothing. That’s crucial for getting people to stay insured, but it will keep a lot of people on plans that weren’t the best value they could have found.

"So how do you combat this?" Surowiecki asks.

More information is a start. One study Handel conducted found that “fully informed” consumers saved a couple of thousand dollars compared with those who were less well informed. But merely making information available isn’t enough: you have to confront people with it. In one experimental study, when Medicare Part D consumers got a letter telling them that they could save money by changing plans the chance of their actually doing so rose by almost fifty per cent. Decision-support companies, which analyze huge tranches of data in order to come up with personalized rankings of insurance plans, could work with the Obamacare exchanges. That probably won’t make insurers very happy, but it should please taxpayers. We’re going to pay most of the bill when Obamacare recipients make poor choices. So we should do all we can to help them make better ones.

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Might anti-Obamacare zealots live to regret throwing every tool they could think of at the ACA?

If the Supreme Court gives the wingnuts their way in the King v. Burell challenge to the ACA, it will mean a mess, yes, says James Surowiecki, but not the end of Obamacare.

"Obamacare’s opponents may win when the Supreme Court finally decides King, sometime next year. But it could turn out to be a fight they’d have been better off losing."

-- The New Yorker's James Surwiecki, in
"On Obamacare, the G.O.P. Lays a Trap for Itself"

by Ken

It's not as hard as you might think to be a jerkwad incompetent right-wing scumbag, because as you maraud your way through life, destroying everything you can get your grubby mitts on, you can always fall back on Rule No. 1 in the Jerkwad Incompetent Right-Wing Scumbag Handbook:

(1) It's always somebody else's fault.

Until it isn't. And even then, it still is.

It's only if you really, absolutely can't even pretend to find someone else you can point a finger at that you discreetly slip down to Rule No. 2 in the JIRWSH:

(2) Quick, ferchrissakes change the subject.

Could the jerkwad incompetent right-wing scumbags who've invested their entire beings in the proposition that Obamacare is the root of all evil be headed for a moment like this -- and of their own cock-brained doing?

New Yorker financial columnist James Surowiecki has taken an interesting look at the structural impact on the system of health-care law set up by the ACA in the event that the idiotic, hooligan challenge based on one tiny bit of sloppy text-drafting in the law gets the blessing, or rather curse, of right-wing thug-justices who are positioned to do, well, the sort of thing they do. The general assumption is that with the Supreme Court's recent announcement that it will hear the appeal in King v. Burwell, the right-wing thug contingent has not just the four votes needed to put a case on the docket but a likely and perhaps even in-the-bag fifth vote.

The problem, you'll recall, and I really hate to have to go into this again, is in a section of the ACA dealing with federal-government subsidies available to certain insurance buyers. The challenge is based on a misreading of admittedly careless language, by which "the State," clearly meant to refer to the government, is taken to mean any one of the 50 states. Never mind that the sentence in question, and the section in which it appears, can't be made to make any sense if read this way, or that it's clearly contradicted by everything else in the law, not to mention everyone involved in the frame and passing of the law. And never mind that there's an entire body of court precedent (yes, including the Supreme Court's) governing ambiguous legislative language, all of which leads to the obvious conclusion.

Never mind all of that, if you can twist this passage into meaning what it cannot possibly have been meant to mean, then you can twist your way to the conclusion that the indicated federal-government subsidies are available only to purchasers in states that have set up their own insurance exchanges, in accordance with the framework intended by the law. In states that have only the federal exchnges set up to provide coverage to people who live in states whose governments are controlled by jerkwad incompetent right-wing scumbags would, if you accept this idiotic misreading, purchasers would be ineligible for subsidies.

Again, this is a misreading that is impossible for anyone who is (a) reading in good faith, and (b) reading at or above, say, a fourth-grade reading level. Alas, the elite group that satisfies both conditions does not necessarily include a majority of the current U.S. Supreme Court.

As James S says in "On Obamacare, the G.O.P. Lays a Trap for Itself":

Republican politicians are, as of now, gleeful at the prospect of the Court delivering a blow to Obamacare. But, once the economic and political consequences of those disappearing subsidies kick in, Republicans could well end up wishing King v. Burwell had never seen the light of day.

Say what?

Let's back up a step. In a general way I think we all understand that a Supreme Court ruling for the mischief-making plaintiffs in King v. Burwell would be a devastating blow to the system set up by the ACA to bring as many people as possible into the insurance system, including especially the previously uninsured younger, healthier individuals, so that the whole shebang is workable from an actuarial standpoint, the way any system of insurance has to be. In order to pay out claims, enough people have to be paying in. Insurance 101.

But as James points out, one thing is emphatically not true even if the jerkwad incompetent right-wing scumbags actually pull off this judicial coup. This would not means the end of Obamacare -- or the scuttling of it, as James puts it. All the rest of the mammoth law would remain the governing law on health insurance in the U.S. As James puts it:

Even if the Court finds for the plaintiffs, the rules and regulations that Obamacare put in place will remain intact—insurance companies will still have to accept all applicants, without regard for preëxisting conditions, and they’ll still be prohibited from charging people with those conditions higher prices. And the tax increases that fund the subsidies and the cost-saving initiatives in the law won’t go away, either

SO WHAT WOULD IT MEAN?

"What a victory for the plaintiffs in King would do," says James, "is create two classes of citizens when it comes to Obamacare." Let's take this very slowly and methodically.

(1) First, James says, there are "people who live in one of the fourteen states that have set up their own exchanges, like California and New York." For them,

things will remain as they are now. Residents of those states will continue to be eligible for those federal health-insurance subsidies, depending on their income, which means, for most of them, that insurance will be quite affordable. And, because the subsidies make insurance so affordable, lots of healthy people (meaning mainly young people) in these states will continue to buy insurance, with the result that the risk pools in these states will be more balanced and not overloaded with people who are older or who are sick. That will help to hold down price increases in those states in the years ahead.

(2) "By contrast," James says, "life is going to get much harder for people who live in states that have not yet set up their own exchanges."

They’ll no longer be eligible for the subsidies, which means that many of them will have to pay hundreds of dollars more a month if they want to stay insured. Many of them won’t be able to afford that, which means they’ll return to being uninsured.

"And the problems won’t end there," he says.

Plenty of healthy, young people will decide to go without insurance, gambling that they won’t get sick. As a result, the risk pools in these states will be dominated by sick people (who will try, at all costs, to remain insured). Insurance companies will respond by raising the price of insurance to try to cover their costs, and that will drive more healthy people out of the market, leading to more price hikes, and so on.

"What these states may end up facing, in other words, is the insurance "death spiral" that the individual mandate and the subsidies were designed to avert.
Oops!


IN CASE YOU'RE NOT GETTING IT --

You're in good company. The Obamacare demonizers don't seem to be getting it either. As James says, "At first glance, this might all sound good from a Republican perspective."

After all, if Obamacare is an unacceptable imposition on individual freedom and an unworkable intrusion into health care, anything that makes it less effective would seem to be welcome.

This isn't where the story ends, though.

[T]he disappearance of subsidies is going to put governors and legislatures in states that haven’t established their own exchanges (nearly every red state) in a very difficult position. After all, their refusal—mostly politically motivated—to establish those exchanges will be the reason that their citizens lose subsidies, even as people in states like California and New York are reaping all the benefits of the law. The state legislatures will also, in effect, be responsible for insurance suddenly becoming far more expensive for millions of people. Finally, the politicians will also be putting a severe dent in the bottom line of insurance companies in their state, since the absence of subsidies guarantees that insurance companies are going to lose the customers they want (healthy people with low health-care costs) and get stuck with those they don’t (sick people whose health-care costs are sure to dwarf their premium payments).

Even if you're a jerkwad incompetent right-wing scumbag, you may begin to grasp that this could be not-so-good. Because in all likelihood you're also a self-serving opportunist. So let's go on.

The Republican hatred of Obamacare is so powerful, and Republican politicians’ fear of being challenged from the right is so strong, that there will undoubtedly be states where governors and legislatures hold firm and basically tell citizens that they can’t have, and shouldn’t want, the free money that the federal government is offering them. (Something like this already happened, after all, when some states opted out of Obamacare’s expansion of Medicaid, even though the federal government was going to pay almost all the costs.)  But, given that this will wreck the individual market for health insurance in these states, that it will (unlike Medicaid) affect plenty of middle-class voters, and that Democrats will be able to point to states where the subsidies are still intact as obvious success stories, staying true to conservative principles is going to be a very hard political sell—even in truly red states.

AND THE MORAL OF THE STORY IS:

Republican politicians have been able to reap the political rewards of inveighing against Obamacare without actually having to strip benefits from anyone. Now they’re going to have to put up or shut up. Obamacare’s opponents may win when the Supreme Court finally decides King, sometime next year. But it could turn out to be a fight they’d have been better off losing.

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The economics of our drug industry can't give us drugs we need, and soon will REALLY need. Is there a workaround?

“Antibiotic resistance really has the potential to make everything about the way we live different.”

-- Kevin Outterson, a founding member of the CDC’s working group
on antimicrobial resistance, to The New Yorker's James Surowiecki

by Ken

I think most of us are aware, in a general way, that there is a mismatch in the world of drug development between actual health needs and profitability. As, again, we're probably all aware, drug development is expensive, especially when you factor in the huge budgets required for regulatory hurdles and for marketing. Why, the subject even turned up as a plot point in last night's Royal Pains episode, with its attention to "orphan" diseases, the ones that fall beyond the economic interest of the pharmaceutical companies.

The New Yorker's James Surowiecki explains in his current (August 25) "Financial Page" piece, "Ebolanomics" (which, remember, you can actually read for yourself for free during the magazine's summer of "free"), that we shouldn't be surprised, during the current frenzy over ebola, that "there are no real tools to stop it." It suffers from a drug-fighting double whammy: Its victims are both predominantly poor and few in number, in the grand scale of things.

When pharmaceutical companies are deciding where to direct their R. & D. money, they naturally assess the potential market for a drug candidate. That means that they have an incentive to target diseases that affect wealthier people (above all, people in the developed world), who can afford to pay a lot. They have an incentive to make drugs that many people will take. And they have an incentive to make drugs that people will take regularly for a long time—drugs like statins.

This system does a reasonable job of getting Westerners the drugs they want (albeit often at high prices). But it also leads to enormous underinvestment in certain kinds of diseases and certain categories of drugs. Diseases that mostly affect poor people in poor countries aren’t a research priority, because it’s unlikely that those markets will ever provide a decent return. So diseases like malaria and tuberculosis, which together kill two million people a year, have received less attention from pharmaceutical companies than high cholesterol. Then, there’s what the World Health Organization calls “neglected tropical diseases,” such as Chagas disease and dengue; they affect more than a billion people and kill as many as half a million a year. One study found that of the more than fifteen hundred drugs that came to market between 1975 and 2004 just ten were targeted at these maladies. And when a disease’s victims are both poor and not very numerous that’s a double whammy. On both scores, a drug for Ebola looks like a bad investment: so far, the disease has appeared only in poor countries and has affected a relatively small number of people.

THE PROBLEM GOES BEYOND "ORPHAN DISEASES"

Surowiecki goes on to point out that this economic disincentive isn't limited to drugs for the poor and/or few. It poses a huge obstacle to the development of drugs that are likely to be needed desperately by the entire population.

This is, again, something I think we're all aware of in a general way: the growing problem of drug-resistant forms of diseases against which we will increasingly have no line of antibiotic defense. The economics of the pharmaceutical industry are again all wrong for this sort of thing. How can we expect drug makers to invest the necessary zillions to develoop drugs that they can't even market? The whole point of such drugs, after all, is to be ready when the existing drugs are no longer effective, and it doesn't take much thought to realize that, beyond the usual testing for efficacy and safety, these drugs mustn't be used till then. Overuse of the previous generations of antibiotics has played a large role in creating this looming crisis, after all.

In recent years, the rise of drug-resistant microbes has made the antibiotics we use less effective and has increased the risk that an infectious disease could get out of control. What people in the West need, health officials agree, is new drugs that we can keep in reserve against an outbreak that regular antibiotics can’t contain. Yet, over the past thirty years, the supply of new antibiotics has slowed to a trickle. “Antibiotic resistance really has the potential to make everything about the way we live different,” Kevin Outterson, a co-director of the Health Law program at Boston University and a founding member of the C.D.C.’s working group on antimicrobial resistance, told me. “So we need to stoke the pipeline.”

The trouble, again, is the business model. If a drug company did invent a powerful new antibiotic, we wouldn’t want it to be widely prescribed, because the goal would be to delay resistance. “Public-health officials would appropriately try to limit sales of the drug as much as possible,” Outterson says: a good public-health policy; a bad investment prospect.

Again, I think we're all vaguely aware of this looming crisis. But I think we mostly avoid thinking about it, since nobody seems to have any answer beyond crossing our fingers and hoping "that day" is as far in the future as possible. Never mind that for some diseases "that day" may already be here. This is stuff that I, for one, find too scary to think about, given that there doesn't seem to be anything we can do about it.


OUR MAN SUGGESTS A POSSIBLE WAY

"How," Surowiecki asks, "can we get the drugs we need without magically transforming the industry that develops them?" And he suggests an answer, which would be "to reward companies for creating substantial public-health benefits."

[T]he simplest way to do this would be to offer prizes for new drugs. Outterson describes one scenario: “The government would make a payment or a stream of payments to the company, and in exchange the company would give up the right to sell the product.” The drug company would get paid, and would avoid all the expenses of trying to push a new product (which you don’t want with a last-resort antibiotic, anyway). Society would get a new drug, and public-health officials would be able to control how it was promoted and used.

It's not a brand-new idea, Surowiecki says. "In the seventeen-hundreds, the British government successfully used a prize to find a method for measuring longitude at sea." But the prize idea has recently become more widely used.

In the past couple of decades, they've become more common, with prizes being offered for things like innovations in private space flight and an arsenic filter for safe drinking water. The Obama Administration has been especially active in this area, offering more than a hundred and fifty prizes for a range of technological breakthroughs. Economists on both the left and the right see them as a useful way to spark innovation. They’re cost-effective, since you have to pay only if the product works. They’re well suited to encouraging investment in public goods—like antibiotics and vaccines—where the benefits of an innovation aren’t reaped only by those who use it. (My family is safer if yours is vaccinated.) They rely on existing infrastructure. And, in economic jargon, they harness market forces by “pulling” research into neglected areas.

The up-front costs of a prize system would be substantial—a recent report commissioned by the F.D.A. estimated that it would cost a billion dollars to get a great new antibiotic, factoring in tax credits. But we’d save lives by developing the drugs we need and taking measures against future disaster. The alternative is pretty grim: a system that, when it comes to some fierce mortal perils, is leaving a lot of blood on the floor.

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James Surowiecki suggests that Obamacare is already part of a process that will help control health-care costs

"Bob Kocher, who was a special assistant for health care in the White House in 2009 and 2010, did a report for Lawrence Summers on the past sixty years of health-care legislation, and found that when Congress seriously considered enacting health-care reform the rate of health-care spending often slowed for a year or two. Just talking about medical costs, it seems, limits medical costs."

-- James Surowiecki, in his New Yorker "Financial Page"
piece this week (Dec. 9), "Controlling Health-Care Costs"

by Ken

After venturing the thought "Just talking about medical costs, it seems, limits medical costs." based on Bob Kocher's report, James Surowiecki continues:

Kocher, a physician turned venture capitalist (and currently a guest scholar at the Brookings Institution), dubs this "the health-care-policy placebo effect." As he told me, "When you've got politicians going around the country making speeches about how out-of-control health-care spending is killing the economy, health-care providers come to feel that it might make sense to be less aggressive in setting prices."

Of course this situation is only temporary. However, says, Surowiecki, "there's good reason to think that the moderation of health-care spending will persist." Why? Because "we're beginning to see deeper structural changes in the health-care system," from our nearly universal fee-for-service system, where "the more things [hospitals and doctors] do, the more money they get," and patients with insurance typically pay "only a small fraction of the cost of their care," and insurance companies pass the costs on to employers and the government, so that none of the people involved in the actual health-care process have any incentive to control costs, to a "value-based" system, where providers are paid "based on the value they deliver, rather than on the services they perform."

Jason Yeung, "an investor at Morgan Stanley's Growth Team," explains to Surowiecki:

"What we're moving toward instead is a world in which everybody in the system is sharing financial risk. And therefore everybody has an incentive to control costs."

"For consumers," says Surowiecki, "this means higher deductibles and co-pays, and having to think more about prices."

A peculiar feature of the American health-care system is the enormous variation in prices that hospitals charge for a procedure, which often are not correlated with quality. So in 2011 California adopted a system of "reference-based pricing" for state workers and retirees. If you needed hip-replacement surgery, say, the state would cover you for the amount charged (minus a deductible) at forty-one "value" hospitals in the state. If you went for a costlier option, you had to make up the difference. Most people chose one of the value hospitals, and their outcomes were similar to those of people who chose the more expensive hospitals. The state saved money, and the threat of losing customers, in turn, led the more expensive hospitals to cut prices; one study found that the price of joint-replacement surgery fell by about a third.

The California experience, says Surowiecki, has inspired others in the health-care system, including the insurer WellPoint. One result is the widely reported narrowing of hospital and doctor choices in the policies offered on the health-care exchanges. "Narrower networks let insurers push their customers toward cheaper hospitals, and also give them more leverage in bargaining down prices."

Obamacare is having a cost-controlling effect in other ways too, "by changing incentives for hospitals and doctors."

For instance, it penalizes hospitals when Medicare patients with certain conditions are readmitted within thirty days, on the assumption that this will encourage hospitals to offer better care initially, and to be diligent in following up. And the penalties are having an effect -- since the A.C.A. passed, readmission rates have fallen. "Once hospitals feel that gut reaction of not getting paid when the patient has to be readmitted on the twenty-fifth day," Yeung says, "that reverberates through the whole system."

Surowiecki stresses that "we're in the early stages of that process."

Kocher points out that fee-for-service likely still accounts for more than ninety per cent of health-care spending. And changing the system is going to be politically challenging. In theory, after all, reining in health-care spending sounds great. But in practice things like narrower networks limit patients' ability to see the doctors they want, while less money spent on health care means lower incomes for many doctors and hospitals. So some blowback is inevitable. Still, the changes we've seen in the past few years are going to be difficult to stop, because just about everyone now recognizes that when it comes to health care we spend far too much for the results we get. "No one knows when things are really going to change," Yeung said. "But, even if you're in a room with no clocks, you can know that when it strikes midnight the world will be different."

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The case of Penney CEO Ron Johnson: Managerial "genius" can't be rated without reference to context

Ousted JCPenney CEO Ron Johnson: Say, didn't this guy used to be a genius?

by Ken

On April 8, the AP's Anne D'Innocenzio reported:

J.C. Penney's board of directors has ousted CEO Ron Johnson after only 16 months on the job as a risky turnaround strategy backfired and led to massive losses and steep sales drops.

The department store chain said that it has rehired Johnson's predecessor Mike Ullman, 66, who was CEO of the department store chain for seven years until November 2011.

As D'Innocenzio reports the story, there wasn't any question about Penney's disastrous performance under Johnson's leadership. There was considerable surprise about the timing, though. Given Johnson's track record, it was widely assumed that he would be given more time to achieve the turnaround he was hired to do.

I'm just catching up with the story, because I'm just catching up with the "Financial Page" of James Surowiecki in the March 25 New Yorker, "The Turnaround Trap." Which is why magazines pile up in my apartment, including even those rare issues that I think I've read pretty thoroughly.

I'm always afraid I've missed something potentially special. And in issues I know perfectly well I've only skimmed, who knows what I've missed? (Trust me, you don't want to imagine -- and wouldn't have wanted to see -- what my life was like back when there were seven days a week's worth of New York Times-es piling up, until the inevitable periodic purge.)

It's especially odd that I missed Surowiecki's March 25 "Financial Page," because usually it's one of the early things I read in The New Yorker. I can only guess I was thrown off by this being the magazine's "Style Issue," which meant there were several long articles of astonishing triviality to tiptoe around. Intriguingly, this "Financial Page" may actually have been themed to fit in with the "Style Issue," dealing as it did with Ron Johnson's then-still-turbulent tenure at JCPenney.

Johnson's inaugural speech in January 2012 "was a much anticipated event," Surowiecki writes. And it was spectacular.

Penney was directionless and barely profitable, and Johnson was a retail superstar. He had helped make Target hip, pioneering partnerships with big-name designers like Michael Graves, and had then moved to Apple, where he orchestrated the creation of the Apple Store. Johnson's presentation did not disappoint. He made it clear that he wasn't going to just stabilize Penney; he was going to revolutionize it. Coupons and sales, which had become ubiquitous, were going to be replaced by what he called "fair and square pricing." The stores themselves would be radically redesigned, becoming curated showcases of mini shops, arranged by brand. J. C. Penney, Johnson said, would become "America’s favorite store."

Or maybe not.

Fourteen months later, J. C. Penney is America's favorite cautionary tale. Customers have abandoned the store en masse: over the past year, revenues have fallen by twenty-five per cent, and Penney lost almost a billion dollars, half a billion of it in the final quarter alone. The company's stock price, which jumped twenty-four per cent after Johnson announced his plans, has since fallen almost sixty per cent. Twenty-one thousand employees have lost their jobs. And Johnson has become the target of unrelenting criticism.

"Given Johnson’s track record," Surowiecki writes, "plenty of people are shocked by what's happened." But, he points out, "Hiring him was always a huge gamble," and he seems from the start to have totally misunderstood Penney's existing customers, for whom ferreting out those bargains was a crucial element of their relationship to the store, and the new Penney was rolled out without market research (which apparently "has always been anathema" at Apple) and "before the stores had been remodelled or filled with new merchandise," thereby "[driving] old customers away without giving new ones a reason to come in."

Columbia professor Mark Cohen, onetime CEO of Sears Canada, pointed out to Surowiecki that Johnson "had never been a C.E.O., never mounted or managed a turnaround, had limited fashion-apparel experience, and had no experience in the middle-market space." What's more, the people who were enthralled by Johnson's brilliance at Target and Apple somehow missed the fact that the situation facing him at Penney was a different beast entirely.

Johnson's champions assumed that, because he had done great work elsewhere, he would do great work at Penney. But the circumstances at Johnson's previous companies were radically different from those at Penney. Target was a thriving company that had already positioned itself as a trend-aware, fashionable store, so Johnson had plenty of support in the effort to make it cooler. And, while the Apple Store is a brilliant retail concept, its success was surely helped by the fact that it has been home to three of the best-selling consumer products ever.

Given the enormity of the challenge at Penny, Surowiecki ventures, "If Johnson isn't as good as he looked at Apple, he's probably not as bad as he looks at Penney.

The result, however, is that Johnson has --

become a living example of one of Warren Buffett's keenest observations: "When a manager with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact."

I suspect that this is way more common than we acknowledge among that increasingly entrenched and overpaid class of superstar CEOs who continue to fail upward and slink off nursing their overflowing golden parachutes. Many of them may once have performed what looked like corporate feats of brilliance, but under circumstances that either were atypically favorable or didn't have all that much to do with them. But once they reach a certain corporate rank, it's no longer about job performance. It's about coddling wildly overinflated egos and locking in the pay packages to which they've come to feel entitled.

The assumption that Johnson would sweep to triumph at Penney's, Surowiecki writes, "probably reflects what psychologists call 'the fundamental attribution error' -- our tendency to ignore context and attribute an individual's success or failure solely to inherent qualities." There's a lesson there that seems to be little appreciated by the people who watch over our corporations: Context matters. That seems to me a large and powerful lesson to emege in a magazine issue so largely concerned with something as evanescent and trivial as "style."

And to think, I came this close to throwing that issue out of The New Yorker out without reading this piece.

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You Don't Think The Democrats Would "Compromise" With The Big Bad GOP And Balance The Budget On The Backs Of Working People... Do You?

Clinton was the hero of the 2012 election for the Democratic Party, the MVP, don't you think? He fought tirelessly, strenuously and persuasively and there can be no doubt he helped Obama win reelection. He worked hard for a diverse array of Democrats running for offices up and down the ticket, from Pennsylvania's new Attorney General Kathleen Kane, reelected U.S. Senator Bob Casey, brand new congressman-elect progressive reformer Matt Cartwright and defeated corporate whore and arch-reactionary Mark Critz to progressive superstars Sherrod Brown (OH), Annie Kuster (NH), Carol Shea-Porter (NH), Raul Ruiz (CA), Alan Lowenthal (CA) and Mark Takano (CA) and rotgut right-wing Blue Dogs like Joe Donnelly (IN), Brendan Mullen (IN) and David Crooks (IN). Clinton showed up for the good, the bad and the ugly. For a partisan warrior he is certain much loved by Americans across the board and no one can deny he helped the Democrat cause immensely.

When it comes to policy, Clinton continues, as always, to be essentially a right-of-center corporatist, pushing horrible job-killing Republican trade policies, horrible Republican deregulation policies and horrible Republican financial policies. Remember that surreptitiously-shot video of he and Paul Ryan up top? He wasn't just being polite. He's certainly not as ruthless and heartless as a Paul Ryan or any Randian (Republican) but his vision of a Grand Bargain-- like Obama's-- emphasizes just "a little bit more" when it comes to what the rich need to chip in the bring down the deficits they ran up. A little bit more isn't enough and it's a terrible negotiating tactic in any case. The Democrats should be trying to bring back the Eisenhower income tax rates for multimillionaires and billionaires-- and not a nickel less.

Clinton's former Secretary of Labor, Robert Reich, may not have the clout with the electorate Clinton has, but he has a much clearer vision of how working families are being railroaded by the Democratic Establishment in the game of Shock Doctrine footsie they're playing with the Paul Ryans, Miss McConnells, Eric Cantors and John Boehners. Reich writes on his blog that before we even get started we have to determine if the Shock Doctrine bullshit (the ominous "fiscal cliff" the insiders are using to scare the peasants into agreeing to their own serfdom) is a real threat. He calls it a game of chicken.

The non-partisan Congressional Budget Office on Thursday warned that the automatic tax increases and spending cuts scheduled to start in January amount to too much deficit reduction, too soon. They’d put the economy back into recession, and push unemployment to about 9 percent. But the CBO also warned of an economic crisis ahead if the United States doesn’t stem the growth of the nation’s exploding deficit.

Get it? Reduce the budget deficit too quickly, and we’re in trouble. But fail to address the deficit, and we’re also in trouble. It’s really a matter of timing. That’s why I think any deal should include a trigger mechanism that begins to cut spending and raise taxes when the economy has two consecutive quarters of 6 percent unemployment or less, and 3 percent annualized growth or more.

In reality, though, the upcoming game of chicken isn’t about any of this. It’s over the clearest issue President Obama and Mitt Romney fought over: whether taxes should be raised on the rich.

Democrats and Republicans are now maneuvering to maximize their bargaining leverage when they sit down next year to decide this.

On Friday the President called on Congress to immediately make permanent the tax cuts for Americans who make less than $250,000 a year, while at the same time allowing tax rates to rise for wealthy Americans-- and then making those rates part of a broader deal next year.

The President knows congressional Republicans won’t agree, but he needed to set out his central demand because it’s the one thing that can fairly be interpreted as a mandate from the election.

So what’s going to happen? Bear with me, because this gets interesting.

Some Democrats (and some White House strategists) figure they’ll have most bargaining leverage in next year’s deal if they do nothing now-- allowing tax rates to rise automatically on everyone after the first of the year. Then they plan to offer Republicans a deal that reduces taxes on people earning less than $250,000-- which would be retroactive to January 1st.

Republicans would have to choose between a tax cut on the middle class or no tax cut at all. Democrats believe Republicans would have to take the deal. Even Grover Norquist would be hard-pressed to come up with an argument against it.

Some Republicans, meanwhile, figure they’ll have more bargaining leverage if they keep things as they are until late January or February.

What’s magical about late January and February? That’s when the debt ceiling has to be raised again, which means that’s when Republicans can once again threaten to vote against raising it. (In theory, we’ll hit the ceiling at the start of January, but the government can juggle payments and take various “extraordinary measures” for another month or two beyond that-- maybe even until March-- before it could no longer be able to borrow enough money to pay its bills.)

This is the thinking behind House Speaker John Boehner’s proposal earlier Friday that all the tax cuts-- including those for the rich-- should be extended until next year, until there’s a deal. “I’m proposing that we avert the fiscal cliff together in a manner that ensures that 2013 is finally the year that our government comes to grips with the major problems that are facing us," Boehner said.

So who blinks first? Democrats who don’t mind going over the cliff because they’ll get a better final deal-- and the deal will be retroactive to January 1st so it’s not really a cliff at all but more like a little hill? Or Republicans who want to extend the Bush tax cuts beyond January 1st, until we get sufficiently close to the debt ceiling that they can once again threaten the full faith and credit of America?

As I said before, I had naively assumed the election would put an end to these games, but obviously not. Yet Obama and the Democrats are holding most of the cards now. Let’s hope they use them.

Some people may get turned off to James Surowiecki's willingness to use the phase "fiscal cliff" without rolling his eyes, but he's clear in his New Yorker column that "there’s no reason to let the fiscal cliff force us into policies that Americans don’t actually want" but that insiders are pushing for their own various and sundry purposes-- the good of working families not being among them.

[F]or all the talk about how a grand bargain is in the works, it’s far from obvious that anyone, even the small bipartisan group of senators that’s supposedly working to come up with a plan, would be able to craft a long-term budget agreement that could pass a conservative-dominated House of Representatives and a Democratic Senate, much less do so in a matter of only weeks. The most obvious, and seemingly unbridgeable, chasm is between President Obama’s insistence that any agreement will have to include higher tax rates for the wealthiest Americans and Speaker Boehner’s insistence that raising rates on anyone is a non-starter. But there are similarly deep ideological divides over Social Security and Medicaid, and, to a lesser extent, over defense spending. It’s not that compromise on these issues is impossible. It’s just that it’s unlikely that Congress will be able to do in six weeks what it hasn’t been able to do in many years.

That’s not a bad thing, though. If Congress and the President were to come up with a grand bargain in such a short time, there’s a good chance that it would be largely a product of the inside-the-Beltway biases of deficit hawks (who tend to dominate the “serious” discussions of budget policy), rather than the long-term interests of the country. And at a time when long-term interest rates are at historic lows, with the U.S. able to borrow money for ten years at less than one per cent, we simply don’t need to rush to come up with a massive debt-reduction plan. Yes, in the long run we need to deal with the debt (which, above all, means dealing with the rising cost of health care). But there’s no reason to let the fiscal cliff force us into policies that Americans don’t actually want.

...Democrats can just let the tax cuts expire at the end of the year and then offer up a retroactive tax cut for ninety-eight per cent of Americans in January. Perhaps Republicans would be willing to vote against that, but it doesn’t seem likely.

Sometimes it makes sense to take yourself hostage in order to compel yourself to do something difficult. But that doesn’t mean that if you don’t actually do the difficult thing, it makes sense to shoot yourself in the head. Nor does it mean that hastily-arrived-at solutions, even ones that are labelled “grand bargain,” are necessarily preferable to the status quo. America may have a long-term debt problem. Throwing the economy back into recession isn’t the way to solve it.

This morning Digby published the original deal Obama made with Boehner last year, which shows "a willingness to cut all kinds of things, like TRICARE, which is the sacred health insurance program for the military, for military retirees; to cut Social Security; to cut Medicare. And there are some lines in there about, 'We want to get tax rates down, not only for individuals but for businesses.' So Obama and the White House were willing to go quite far." The also agreed to raise the Medicare eligibility age. The teabaggers saved us last time.  If this goes through in the lame duck, the greatest overall achievement of the Obama's presidency will be to have destroyed the Democratic brand. I didn't vote for him last week. Did you? Yeah, I know... he's better than Romney. USA! USA!

Congress can too take us over the fiscal cliff if it wants to, James S!

[Yes, you can click to enlarge.]

"The fact that Congress was foolish enough to create the fiscal cliff doesn't mean it also has to be foolish enough to drive us off it."

-- James Surowiecki, in this week's New Yorker
Financial Page, "Cliffhangers"

by Ken

No, James, Congress doesn't have to be foolish enough to drive us off the fiscal cliff, but it can if it wantsta, nyah-nyah-nyah.

Trust Financial Pagemeister Surowiecki to find a new angle on the fiscal cliff Congress created for itself and now doesn't know how to back away from. It's the concept of "pre-commitment" now making the fashionable rounds.

The idea is simple: you set a specific goal (lose twenty pounds in six months, say), and then commit to paying a penalty if you fail. Some people rely on a friend to help them live up to their word, but now there are also pre-commitment Web sites, like stickK.com (created by two Yale professors and an M.B.A. student), that will track your progress or lack of it, and take your credit-card info to insure that you suffer if you fail. StickK.com also makes it easier for you to design a penalty that will really hurt. Republicans, for instance, can commit to donating money to a pro-Obama Super PAC if they don't follow through on their resolutions. And stickK.com's data, at least, suggest that pre-commitment works. People who make resolutions on the site but don't put money at stake and don't pick someone to monitor their behavior succeed only twenty-nine per cent of the time, but nearly three-quarters of those who agree to pay a penalty and who name a referee follow through on their vows.

This is, James says, pretty much the approach the approach Congress took last year. It "may not have signed up with stickK.com, but it, too, has tried to use pre-commitment to curb its bad habits."

A big part of the dreaded "fiscal cliff" that we keep reading about is the direct result of Congress's attempt to force itself to change its ways. Last summer, during the absurd imbroglio over the debt ceiling, House Republicans and the White House agreed to get serious about reducing the deficit. But, since they couldn't agree on how to do so, they struck a deal. Congress set up a so-called super committee that was given the job of coming up with a long-term budget solution. It stipulated that, if the super committee failed, nearly a trillion dollars of automatic spending cuts, known technically as "sequestration," would go into effect, on January 2nd. None of these cuts -- half of which would come from the defense budget and half from domestic spending -- would be things that most congressmen wanted. But that was precisely the point: like any good pre-commitment penalty, the cuts were supposed to be so intolerable that Congress would make a deal in order to avoid them.

It didn't work. The super committee quickly, and predictably, failed, and, in the months that followed, Congress did nothing. If things go on like this, the spending cuts will start going into effect with the new year, and that, in combination with the expiration of the Bush tax cuts, will send us off the fiscal cliff: government and personal spending will plummet, potentially throwing the economy back into recession. No one likes this prospect. The White House says that the cuts will have "a devastating impact," and John Boehner, the House Speaker, says that the defense-budget cuts represent a "serious threat" to national security. Yet no deal seems imminent.The obvious question then, James suggests, is: "Why didn't pre-commitment work for Congress?" He first suggests some obvious structural reasons.

* Congress isn't a single entity "that can truly make a resolution." Individual congressmen all have different agendas, as do the two parties to which they belong.

* And as regards the Republicans, Democrats "expect[ed] that, when push came to shove, Republicans would vote to raise taxes," and "this was never going to happen." (The no-taxes pledge signed on to by most congressional Republicans, James suggests, "is a kind of pre-commitment device in its own right.")

* But then,

Congress's failure to reach a "grand bargain" on the deficit reflects the simple fact that, while talking about balancing the budget is easy, doing the things that you have to do to balance the budget is hard. This isn't just a problem with politicians; it's also a problem with voters, who regularly say that the deficit is a major concern, yet they also favor government spending to create jobs and oppose major cuts in most government programs. (The one program that voters are always happy to slash is "foreign aid," and that may be only because they vastly overestimate how much gets spent on it.) This is why Congress likes to outsource tough decisions to super committees and commissions, like Bowles-Simpson: it wants others to do what it can't do itself. This is also why it thought pre-commitment would be a good idea.

So what now?

Some commentators have suggested that the best course now may be to just let the sequestration cuts take effect: that'll teach Congress a lesson, the thinking goes, and, once the cuts start to be made, there'll be even more pressure to reach a deal. Though such a course of action might find favor with stickK.com's users, it would be terrible policy. After all, the cuts were designed with an eye to what would be most painful to people in both parties, rather than to what kinds of trims in government spending might make sense. It would be farcical to let cuts go through that nearly everyone on Capitol Hill thinks are misguided.

And then, I would suggest, James hauls us straight into the Twilight Zone.

Besides, the goal that sequestration was originally designed to enforce makes little sense right now. With the U.S. government able to borrow money at incredibly cheap rates and the economy still weak, slashing federal spending is the opposite of smart. The fact that Congress was foolish enough to create the fiscal cliff doesn't mean it also has to be foolish enough to drive us off it.

(1) The fact that "slashing federal spending is the opposite of smart" by no means means that the congressional spending-slashers will be any less keen to do it. And (2) like I said, just 'cause Congress doesn't have to be foolish enough to drive us off the fiscal cliff doesn't mean that it won't, or that it can't dream up something even crazier.

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Finally, some sense about Mayor Mike's sugared-beverage-limitation scheme, from The New Yorker's James Surowiecki

"If all this sounds as if New York's soda consumers were about to become the subjects of an elaborate social-science experiment designed to reshape their behavior and desires, well, that's kind of true. But then we've been the subject of just such an experiment, run by beverage and fast-food companies, for the past forty years. If Bloomberg has his way, we may start feeling like we're white rats in a maze, but at least there's a good chance we'll be thinner rats."

-- James Surowiecki, in this week's New Yorker

by Ken

I know awhile back I was promising to talk about The New Yorker's James Surowiecki's "Financial Page" about banksters-gone-wild and the LIBOR mess. (His title was "Bankers Gone Wild.") I'd still like to get back to that, because as usual Surowiecki has the ability to make me understand money-related issues -- what the issues are and how they got to be issues, including who-done-what -- that few other writers can, or (I suspect) honestly try to. Meanwhile I would encourage you to check it out on your own. It's filled with sensible sense that actually makes sense, as for this explanation for why it's not really a fantabulous idea to allow the banksters to regulate themselves, not even with the threat hanging over them that they could -- gasp! -- damage their reputations by being fiscally irresponsible: "[I]f recent history has taught us anything, it’s that self-regulation doesn’t work in finance, and that worries about reputation are a weak deterrent to corporate malfeasance."

The obvious contrast is the "common sense" so often purveyed by right-wing propagandists, stooges, or outright malefactors -- or just plain morons like the Teabaggers. When those people talk about "common sense," they really mean non-sense, stuff that sounds pretty but is not only wrong but usually wrong in every particular. Which brings me to the Surowiecki "Financial Page" I would rather talk about today, "Downing Supersize," one of the few sane responses I've seen to poor Mayor Mike Bloomberg's plan to ban sales of sugared soft drinks in sizes larger than 16 ounces -- at least at outlets that fall under the jurisdiction of the city's Board of Health, which is to say restaurants, fast-food joints, food stands, and the like, but not supermarkets, grocery stores, or delis. (Say, did you notice how I worked in that sarcastic reference to "poor" Mayor Mike? Pretty sweet, right?)

I took a trip a couple of weeks ago which involved a bus trip that has a stop, roughly midway, where a lot of people get on the bus. Approaching the stop I had an empty seat next to me. Experience has taught me that there would likely be so many people boarding at that stop that I was unlikely to depart with a still-empty seat, and so the principal question was who exactly would wind up there. And then the people started boarding, and I was put into a state of terror. My God, the size of them! And I don't mean that they were tall. My goodness, what sort of race of humans have we become? (In case you're wondering, I lucked out something unbelievable. Amid the stomp of the jumbos, a barely visible, exceedingly slender young woman asked if that seat was taken. I think I may have used up my quotient of good luck for the decade.)

There have been two common dismissive responses tp Mayor Mike's scheme:

(1) How dare the little Jew interfere with personal freedom? What kind of friggin' nanny state is this? People should have both the right and the responsibility to make their own sugared-beverage-consumption decisions.

(2) What the hell is the little Jew smoking? Okay, so maybe Americans have gotten a little porky. You're not going to solve that by refusing to allow them to drink super-giant sugar water.

The answers, in order, are:

(1) Are you out of your friggin mind? Do you think for even a second before you open your moronic trap? Personally, I think 20 ounces would be a better limit, but about the principle, I have no problem.

(2) First off, these people are lying. The mayor isn't banning anyone from drinking as much sugar water as they like; they would just have to buy it in 16-ounce increments. But more than that, are these people simply too stupid or inobservant to be aware of the dimension of the obesity problem, or are they just obesity profiteers or sympathizers-enablers of obesity profiteers? Surely no one with a working brain could believe either that those sugar waters aren't contributing mightily to the problem or that you don't choose to do nothing simply because the available solutions won't solve the entire problem. How stupid or dishonest are these people? (Answers: plenty stupid, plenty dishonest.)

Fortunately, James Surowiecki has much better answers -- better answers even than people this stupid and dishonest are entitled to.

THE FINANCIAL PAGE
DOWNSIZING SUPERSIZE
by James Surowiecki
AUGUST 13, 2012

In an era of political polarization, Michael Bloomberg has the rare ability to come up with policies that enrage everyone. His latest pet project -- banning large sodas, as a way of fighting obesity in New York -- has been ridiculed by both Jon Stewart and John Boehner. And a recent Board of Health hearing on the plan saw Democratic and Republican politicians alike lining up to attack the idea, which would prohibit restaurants, delis, sports arenas, movie theatres, and food carts from selling any soft drinks larger than sixteen ounces. Critics dismiss the ban as yet another expression of Bloomberg’s nanny-state mentality and as a "feel-good placebo" that's doomed to fail. They're right that the ban is blatantly paternalist. But that doesn't mean it won't work.

It's true that the ban will be easy to circumvent: if you want to drink thirty-two ounces, you can just buy two sixteen-ounce servings. But Bloomberg's proposal makes clever use of what economists call "default bias." If you offer a choice in which one option is seen as a default, most people go for that default option. People who are automatically enrolled in a retirement plan, for instance, are more likely to stay with their original plan than those who choose plans for themselves. In countries where people have to choose to be an organ donor, most people aren't donors; in countries where people have to actively say they don't want to be an organ donor, most are donors. The soda ban makes sixteen ounces or less the default option for soda drinkers; if they want more, they'll have to make an extra effort.

An executive at the American Beverage Association has dismissed the plan, saying that "150 years of research finds that people consume what they want." Actually, the research shows that what people "want" has a lot to do with how choices are framed. In one well-known study, researchers put a bowl of M&M's on the concierge desk of an apartment building, with a scoop attached and a sign below that said "Eat Your Fill." On alternating days, the experimenters changed the size of the scoop -- from a tablespoon to a quarter-cup scoop, which was four times as big. If people really ate just "what they want," the amount they ate should have remained roughly the same. But scoop size turned out to matter a lot: people consumed much more when the scoop was big. This suggests that most of us don't have a fixed idea of how much we want; instead, we look to outside cues -- like the size of a package or cup -- to instruct us. And since the nineteen-seventies the portion sizes offered by food companies and restaurants have grown significantly larger. In 1974, the biggest drink McDonald's offered was twenty-one ounces. Today, that's roughly the size of a "small" drink at Burger King. In effect, the scoops have got bigger, and consumption has risen accordingly.

Of course, if you don't want the large soda, you needn't order it. Yet the mere existence of the supersize can change your idea of how much you want to drink. In a classic experiment by Itamar Simonson and Amos Tversky, people asked to choose between a cheap camera and a pricier one with more features were divided more or less equally between the two options. But when a third option -- a fancy, very expensive camera -- was added to the mix most people went for the mid-range camera. The very expensive camera made the middle one seem less extravagant. In the same way, the fact that a large soda is now forty ounces makes a twenty-ounce soda feel sensible. Bloomberg's ban is designed to flip this effect on its head: if the largest soda you can order is sixteen ounces, a can of Coke may start to seem like more than enough. Some food researchers doubt that this will work, since so many of us are used to the idea of large servings. But even our experience of feeling satiated is highly malleable. In one experiment, people ate meals of dramatically different sizes in the dark, and those who were given much less food did not feel hungrier than the others or rate their meals as much smaller. So once people have a few sixteen-ounce drinks they may find that sixteen ounces is plenty.

Many economists would say that, if we want to discourage soda consumption, taxing it -- the way we do alcohol and tobacco -- would be more efficient than a ban. Some European countries do have such taxes, but the idea has been a political non-starter in New York. In any case, perhaps the most cunning aspect of Bloomberg's proposed ban is that it would function as a kind of stealth tax on consumption, while leaving average-sized sodas untouched. Currently, on a per-ounce basis, large drinks are much cheaper than smaller ones -- which encourages people to supersize. The soda ban should shift this. Two sixteen-ounce servings are bound to be more expensive than one thirty-two-ounce serving, which creates another disincentive to drink more.

If all this sounds as if New York's soda consumers were about to become the subjects of an elaborate social-science experiment designed to reshape their behavior and desires, well, that's kind of true. But then we've been the subject of just such an experiment, run by beverage and fast-food companies, for the past forty years. If Bloomberg has his way, we may start feeling like we're white rats in a maze, but at least there's a good chance we’ll be thinner rats. ♦

[Boldface emphasis added.]

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