Morgan Stanley Whine on Wine
A few days ago, researchers at Morgan Stanley issued a report on the state of the wine market. They assert that there will be an imminent “shortage” in that market. In order to demonstrate their point, they present a graph which purports to show a divergence between production (lower) and consumption (higher). For a moment, let us suppose that their data are correct. Will consumption above production result in a shortage? The answer my friends is “NO.” Instead, what would happen is that the price of wine would rise. As a result of the rise in price, the quantity demanded would decline and the quantity supplied would increase [immediately by drawing down inventory and ultimately by increasing the inputs to production including land]. A shortage [greater quantity demanded than quantity supplied] can exist only in the presence of governmental price control.
In fact, there are serious questions about the accuracy of the Morgan Stanley data. The International Organization of Vine and Wine seems to have a VERY different view.
Was the USA founded as a Christian nation?
Read Wikipedia regarding the Treaty of Tripoli signed and unanimously ratified by the Senate in 1797. Very interesting! Article 11 of the English translation includes the following statement: “Art. 11. As the Government of the United States of America is not, in any sense, founded on the Christian religion,—as it has in itself no character of enmity against the laws, religion, or tranquility, of Mussulmen [Muslims],—and as the said States never entered into any war or act of hostility against any Mahometan [Muslim] nation, it is declared by the parties that no pretext arising from religious opinions shall ever produce an interruption of the harmony existing between the two countries.”
The anatomy of the next housing crisis
The next housing crisis will be driven by property taxes, but let’s review the last crisis before moving forward with a description of the next one. Recall that during the Bush presidency there were two Fed chairmen, Greenspan and Bernanke. The change occurred at the start of 2006. Between 2000 and 2006, the Bush/Greenspan era, the money supply (M1) grew rather steadily but a problem was looming: the money multiplier . . . the link between the monetary base and the money supply . . . was declining. Then came the Bush/Bernanke era. The money supply (M1 again) ceased to grow at all during this era. The monetary base grew at a diminished rate, but because of the decline in the money multiplier, the money supply grew not at all. Well, this set off a mini recession, not enough to be labeled a recession, but a little one nevertheless. So by the start of 2007, housing prices began to level off or decline a bit. Meanwhile, the financial sector had been made exceptionally delicate by the use of high loan-to-value mortgages. As an aside, a 95% loan to value ratio is under water if housing prices are constant, if brokerage commissions and selling costs are 6% or more. So if prices decline ever so slightly, then lots of houses are under water with negative equity. No one will default if their home has positive equity, but lots of people will default if their home has negative equity. The rate of mortgage defaults increased dramatically in early 2007. You could say that there was a cascade of defaults. By the late summer of 2008, these default and foreclosure problems had become obvious in the mortgage derivatives market. The rest is well known.
The next housing crisis will be driven by extreme property tax rates. A great many cities are overextended with bloated government and underfunded retirement systems. Some of these cities have assessment systems with long lags in adjustments . . . sometimes because of legalities and sometimes for other reasons. Nevertheless, assessments have not adjusted downward rapidly enough to reflect the decrease in housing values since 2007. At the same time, many cities are pushing the envelope on property tax rates to cover their financial difficulties. As a result, it is not hard to find properties with huge effective property tax rates. That is the ratio of property tax to the market value of property is unsustainably large. What should this ratio be to be sustainable? The answer is on the order of 1% to 2%. What have I been seeing lately in Chicago suburbs? I have seen up to slightly over 7%. Magnitudes over 3% will cause a vicious circle of property value declines, defaults, and chronic public sector budget difficulties. Of course, the more extreme the effective rate, the greater the downward pressure on values.
What should be done about all this? First, we must stop the practice of high loan-to-value ratio mortgage lending. Second, cities should get their effective property tax rates under control. There is temporary pain associated with both of these steps but not taking them will lead to greater pain in the next housing crisis.
Resolving the budgetary impass
The House of Representatives, dominated by Republicans, has sent a bill to the Senate which funds the government with the exception of Obamacare. Of course, the Senate, dominated by Democrats, cannot abide this House bill. A reasonable result can be obtained. What should happen is that the Senate should strip out the exception for Obamacare and send its bill to a Conference Committee. In that Committee, both Republicans and Democrats should compromise. Republicans should give up on the idea of defunding Obamacare and Democrats should give up on special deals for special interest groups. That is, there should be no special deals for Congressional staff, certain businesses, and unions. Instead, everyone should be treated the same and that should be the law of the land. If there is a delay in enforcement for certain businesses, then there should be a delay for all, businesses and individuals. This is the middle ground and it is not so hard to find it.
Milk prices to $6 or $8 per gallon?
Are retail milk prices going to go to $6 or $8 per gallon if the Congress doesn’t act in the next few days? The answer is a big, fat “NO.” It seems that if there is not a new farm bill, then government starts buying milk at some inflated figure as the result of some archaic price parity formula from the late 1940s. If this is so, the government will very quickly own all the milk. Do you think that they might sell some at a lower price? Alternatively, they could flush it down the sewers. By the way, these price parity computations make no sense whatsoever because of technological change in this industry.
Let’s hope that the government gets completely out of the milk regulation/subsidy business. It would be a great relief. First of all, low-priced milk from foreign producers is currently restricted by quotas. Second, there are some really great substitutes for milk: almond “milk” and soy “milk”. So even if the supply curve shifts to the left as subsidies are eliminated, the demand curve for milk is not insensitive to price changes. Prices would not change much.
Regulating Food Carts
The Institute for Justice has taken an anti-property rights position in fighting against food cart/truck regulation. The reason that this is so discouraging is that Institute for Justice is usually on the side of the angels such as in its defense of monks producing caskets in Louisiana. The list can go on and on. In general, the Institute for Justice works to protect people from government regulations that line the pockets of politicians while restricting the ability of business people to earn livings and consumers to the widest possible range of choice. How does regulation accomplish all this? Regulations usually protect a certain trade association and concentrates economic power from which the political class derives donations and possibly even bribes. The rationale is that the public is being protected from the evils of black people who braid the hair of other black people without the imprimatur of the government apparatus. The Institute of Justice attempts to save us from this sort of regulation. Bless their hearts for doing so. Unfortunately, they have recently taken a wrong turn.
Food cart/truck regulation is a different kettle of fish. City streets are the property of the City. One would think that the property rights position would be that the owner of the property(i.e., the City) should be able to control its use. Suppose that one would assert that food carts/trucks should be able to locate wherever their owners want within the confines of a shopping center. This is preposterous, but this is exactly what the Institute for Justice is asserting for City property.
What economic problem emerges if the Institute for Justice wins this case? The answer is the tragedy of the commons. If everyone can use a resource as much as they want, then the resource will be overused and its value will be destroyed.
Why do Cities want to regulate food carts/trucks? The answer is quite simple. Cities are in business with brick and mortar restaurants. The linkage is through the property tax. The property tax is a tax on property value. Property value, in turn, is the present value of the residual income from property. So the residual income from brick and mortar restaurants is shared by property owners and the City.
Why do restauranteurs want food carts/trucks regulated. This is obvious, isn’t it. They fear the competition when the competition does not have to pay the rents otherwise necessary to obtain proximity to the points in the city that generate restaurant traffic. These rents are the device that rations the quantity and placement of restaurants.
Post Office pricing
Recently, I paid to rent a P.O. Box for another year. At that point, a thought crossed my mind. They charge me $50 per year while home delivery is free. That can’t be right. Sure, my P.O. Box takes up a little piece of real estate, but that seems really trivial. Why not get rid of free home delivery and give everyone a P.O. Box? Let’s start with the more rural Post Offices that the experts say are losing money. At the same time, let’s install a few government-email-only computers at each of these Post Offices. Give everyone who wants it a government email address.
Rethinking health care reform
The President recently said that people like me, the always griping, should keep their mouths shut about Obamacare . . . unless they have a better idea. Well, here it is.
Obamacare is failing. Some skeptics would say that it was intended to fail. The thought is that the left would then opt for a single payer (government) system, thereby completely socializing the health care system. Others might suggest that there is less of a conspiracy here and the Obamacare failure is simply another bit of evidence that massive government can do little that is good.
It is time to reassess and to craft a new kind of health care reform. In doing so, let’s recognize that the Democrats identified some real problems with the existing system. Some of these problems are a lack of insurance transportability, cancellation of insurance of high risk individuals, and issues about who is really bearing the cost of the health care system. This last point can be expressed in other words: the general population, including the young, is not subsidizing the uninsured poor; instead, the uninsured poor are being subsidized by those who are insured and buying medical services.
There are really two pieces to health care reform, insurance and costs. Both should be addressed. First, let’s create an insurance system that brings in many more people but offers transportability and universal access.
Health insurance reform
First, get rid of the notion that health insurance comes from employers. This was originally a notion that grew out of a way to get around wage controls during WWII. This system, in combination with high job mobility, has produced problems associated with a lack of transportability and a lack of access to those with preexisting conditions.
New groups need to be created. It is best if these new groups are “natural” groups (i.e., groups to which everyone automatically belongs). One example of a natural group is State of birth. But other people may have other and better ideas for natural groups. Anyone who belongs to a group (e.g, a State of birth) should be able to buy a health insurance policy from among the insurance companies with offerings for the group.
Second, get rid of mandates. Decrees requiring that people or businesses must do thus and so just tick people off. Instead, rely on pricing to achieve the desired results. Prices will not be correct initially, and that is one reason why it is desirable to have multiple groups. It is like having multiple experiments. Some will be more successful than others, and the more successful ones will be copied by the less successful ones. It is like the prices for travel delay when an airline overbooks a flight. It is not obvious how much the airline will have to pay to get passengers to give up their seats; the price is ultimately found by a discovery process that looks very much like an english auction.
An example of the use of a price rather than a mandate is helpful in understanding this distinction. Suppose it would be desirable if young adults have insurance. The government could issue a mandate requiring that they have insurance. Alternatively, insurance contracts could have a schedule of co-pays that decreases with the number of years in the system. For example, the first year might have a co-pay of 50%, the second 45%, the third 40%, and the fourth 35%, and so on until the co-pay is 20% in the seventh year and all following years. If young adults drop coverage, it takes six years to achieve the long-run, co-pay level, so they are less likely to drop coverage and likely to get back in quickly if they do drop coverage.
Although the insurance contract should “belong” to the insured, various parties could pay for some part of the insurance: the insured, the insured’s employer, relatives, associates, charities, or the government. One might allow the same tax benefits to all the private parties who pay, perhaps a deduction from their taxable income. Among other things, this would encourage parents of young adults to keep their “children” active in the system, because they care about their “children’s” health insurance even though their “children” may not care. If the government chooses to contribute, then there is an element of socialized medicine and one could substitute this policy for Medicaid.
Third, catastrophic (i.e., high deduction) insurance in combination with health savings accounts for minor issues should probably be a focus (i.e., not necessarily the only focus) of the new groups. What should be realized is that annual checkups, dental cleaning, and other recurring expenses are not really appropriate subjects of insurance. As a result of this realization, prepayment via health savings accounts seems appropriate.
Cost reform
There are a couple of dimensions of cost reform: transparency and shifting the supply curve, ,
In terms of transparency, customers of health care services need to see the costs prior to undergoing any procedure: the overall costs and the division of costs between the insurance company and the patient. The existence of co-pays is absolutely necessary to provide discipline in the system, as is complete information on the costs.
The supply curve can shift if the cost of monitoring health status can be decreased. For example with the right regulatory environment, drug stores could employ a nurse who would take vital signs and some other monitoring functions. Perhaps taking photographs of skin anomalies, drawing blood, and collecting urine samples, and issuing fecal sample kits. EKG or ECG tests are also possible at the drugstore. Of course, the results would be forwarded to a center staffed by doctors and they would interpret the tests and communicate with the customer regarding diagnosis and any next steps that might be advisable.
We also need to shift the supply curve for more-or-less trivial visits to doctors and emergency rooms. Of course, what might seem trivial at first may not end up being trivial. So here is how this could be handled: the first visit is to relatively low level personnel, but they would not be permitted to handle a second visit for the same physical complaint. What categories of complaint are we addressing here? Basically, we are talking about self-limiting conditions that may be addressed by OTC medications or anti-bacterial medications: colds, flu, poison ivy, minor bacteria infections and so on. Please note that I am not suggesting anti-bacterials for colds and flu.
Finally, we need to shift the supply curve for major health issues. One big way to address this is to limit punitive malpractice lawsuit awards. This suggestion does not address awards that compensate for various damages; it only addresses punitive awards. The idea is to reduce the cost of medical liability insurance without reducing the ability of patients to recover for real damages they have suffered. Of course, there must also be enough to compensate lawyers who take cases on a contingency basis. At the same time, there should be a realization that malpractice is not at the root of all bad outcomes. Perhaps we need bad outcome insurance as a rider on health insurance policies and not just malpractice insurance that doctors purchase.
A second way to shift the cost curve for major health issues is to provide information to potential patients of the costs of various settings inside and outside the United States. This requires transparency in costs. It also requires that the natural group coverage could be for hospitals any where in the US and the world. So even though a group might be for persons born in Ohio, hospital coverage could include Texas and Thailand as examples.
Selling Detroit?
When an entity goes bankrupt, it is ordinarily the case that assets are sold so that the creditors can be satisfied . . . to some extent. With Detroit going bankrupt there are a lot of assets. There is a trial balloon that Detroit might sell land, land that the City has acquired through tax liens or will acquire by eminent domain. The thought is that developers will buy this land. Really?
The problem is that jurisdiction would have to be sold. Nobody is going to develop land in the City of Detroit. What Detroit must do is to sell the right to govern these territories. Who would buy? Nearby jurisdictions are the most likely buyers, but there could be totally new municipalities.
What is the most reasonable way to sell jurisdictions? Combinatorial auctions would be the best way. These auctions are used to sell FCC spectra. That is, suppose you want to buy the right to broadcast in a certain frequency band and in a specific region. In this case, a combinatorial auction provides a way to combine several regions and/or frequency bands.
What about other assets? Detroit has a zoo, museums, water treatment facilities, and so on. These facilities ought to be sold. It is doubtful that combinatorial auctions would be appropriate for these disconnected and greatly differentiated facilities.
On the other hand, the land to be sold should also be sold via combinatorial auctions. My own economic experiments suggest that this method will maximize the value. If you want to learn more about combinatorial auctions, take a look at the site of the person who invented them, Rex Schrader.
Fed stimulus?
There is a general worry that if and when the Fed dials back on its extreme asset buying programs, the economy will lose a source of stimulus and might stagnate or decline. On the other hand, there is not one iota of credible, empirical evidence that what the Fed has been doing is, in fact, stimulative. Suppose instead that the Fed activities have crowded out private investment or credit market activity, have been contractionary all along, and have delayed recovery. In this case, losing this Fed policy would be a good thing.
Well, maybe not. Medicine can have a placebo effect. So removing that medicine could create worries that problems will follow and generate defensive behavior. What we might hope for is that the talking heads would be a little more careful with regard to characterizing what the Fed has been doing and what the effects might be of getting rid of the current policy. This new pill will be difficult to swallow for those who belong to the cult of low interest rates.