A new era of bank runs?

From the early years of the Industrial Revolution until the beginning of the Depression, bank runs were quite common. Every ten years or so there would usually be a banking panic which would generally result in an economic collapse. The result was a boom-and-bust cycle that can be seen in the first half of the chart on the right. After World War II, however, bank runs stopped happening, which was a big reason why the US enjoyed a long period of economic stability between 1946 and 2007 in which GDP never fell by more then 2% from year to year. The death of the bank run is generally attributed to FDR's New Deal reforms, which created the FDIC and significantly limited the degree to which banks could engage in speculation.

In 2008-2009, however, we saw a new phenomenon: the shadow bank run, which this New York Times columnist argues will continue to happen in the 21st century. The so-called shadow banking system--involving instruments of short-term credit that are not guaranteed or subject to the same regulations as traditional banks--now accounts for more than $15 trillion in assets, up from $4 trillion in 1990. Along with the trillion-dollar derivatives market, the shadow banking system can accumulate an enormous amount of short-term risk--not just for investors but for the entire economy. A rush to withdraw from money market funds or a sudden pulling of credit between banks can cause a crash just like in 1893, 1907, or 1929.

The solution is not to extend government guarantees beyond traditional banks, since that would create the possibility of bailouts that would dwarf the ones that happened in '08-09. But we need to figure out some way to better protect short-term credit so that we will not enter into a new era of bank runs and boom-bust cycles. A volatile economy like the one we had from 1890 to 1930 tends to hit the middle class and working class the hardest, leading to increased poverty, more economic insecurity, and more demand for welfare programs. Needless to say, that would be bad.

Afghanistan violence should be a clear lesson in the futility of nation-building

On Tuesday Marine Gen. John Allen, the NATO commander in Afghanistan, told the House Armed Services Committee that the mission in Afghanistan is on track. If he really believed that, I think he'd be delusional.

Last month, the accidental burning of Korans at Bagram Air Force Base set off massive rioting. The thing is, the Korans were confiscated (and subsequently thrown into an incinerator by accident) because Afghan prisoners were writing military messages in them. The Korans that were supposedly "desecrated" by US troops had already been desecrated by the Afghans. So I really doubt that the riots--which caused at least 41 deaths--were all about the Koran burning. I think it had more to do with the fact that US troops have been occupying their country for the past ten years, and that we continue to prop up a corrupt and unpopular president who blatantly stole the last election. A common chant among protesters was "Death to America, death to Obama, death to Karzai." The Koran burning, it seems, was just the latest reason for anger toward their foreign occupiers.

On March 1, an American staff sergeant, who had served honorably during multiple tours in Iraq, broke down in Afghanistan and murdered 16 civilians, including women and children. Retired Army intelligence officer Ralph Peters says we should be surprised that this hasn't happened sooner and more often. Because of stop-loss policies, our troops are often serving multiple tours of duty--and in an environment where the mission has become less and less clear. It is indeed remarkable that more of them haven't cracked under such prolonged and outrageous stress.

Finally, since Gen. Allen still thinks that our mission is on track, one might ask him what exactly our mission in Afghanistan is at this point. The original mission, taking out the Taliban government who was supporting Al-Qaeda, was pretty much accomplished back in 2003. And yet US troops have stayed in Afghanistan for nine years since then, trying to set up a stable democratic government--in other words, nation-building. In the 2000 campaign, George W. Bush said that "I don't think our troops ought to be used for what's called nation-building...if we don't stop extending our troops all around the world in nation-building missions, then we're going to have a serious problem." Since then, thousands of US troops have been killed or maimed because Bush and Obama failed to listen to that advice.

In fact, the US record of success in nation-building missions over the last 100 years is fairly dismal. We have had two major successes, in Germany and Japan after World War II--but both those countries were fairly modern, industrialized, and had had a democratically elected legislature throughout most of the 1920's. But in Third World countries--Vietnam, Somalia, Haiti, several South American countries, Bosnia, Iraq, and Afghanistan--nation building has been largely a catastrophic failure. The scars of these wars are numerous: tens of thousands of dead and wounded (both American soldiers and local civilians) and tens of billions of dollars in spending added to the debt. Yet we never seem to learn from the past.

Obama's former Solicitor General: If people want Obamacare, it shouldn't matter if it's unconstitutional

A revealing quote from Neal Katyal, who served as Solicitor General from May 2010 until June 2011:

"The challengers are saying that this law is unconstitutional, which means even if 95 percent of Americans want this law, they can't have it. And that's a really profound thing for an unelected court to say."

So apparently, following the Constitution doesn't matter too much to Katyal. And these are the kinds of people Obama appoints to his cabinet.

Can we get a serious budget plan?

Another year, another display of both parties' complete inability to propose any serious solution to the country's fiscal situation.

The Democrats have not passed a budget in years. They seem completely unwilling to do anything about the fact that entitlement spending (if left unchanged) will explode the federal budget in a decade or so. Whether faced with a budget deficit, a proposed spending cut, or a new program that they have no way to pay for, the leftists' solution is the same: "Tax the rich." The problem is, there just aren't that many rich people. There has been lots of talk about the so-called Buffett rule, which would ensure that everyone earning at least $1 million annually pays at least 30% of their income in taxes--but even the Huffington Post admits that adapting the Buffett rule would bring in only $47 billion over the next eleven years. That's about $4.3 billion per year, which is about 0.2% of the 2011 budget deficit.

We did, at one point, have a fairly reasonable center-left budget plan: the Simpson-Bowles plan. Unfortunately it was rejected, not by the Republicans, but by President Obama.

On the right, we have Paul Ryan's budget. It is perhaps a good conservative thought experiment, and it allows the Republicans to tell the Democrats, "Hey, at least we have a budget proposal." In reality, however, Ryan accomplished no more than he would have if he had proposed a budget plan for the Land of Oz. Besides being dead on arrival in the Senate, the Ryan plan seems unlikely to attract support from anywhere close to a majority of the American people.

The Ryan plan does not address the deficit at all in the short term (although a supply-sider could make the argument that his tax cuts could spur economic growth that would decrease the deficit). In the long term, Ryan would shrink all discretionary spending (everything other than Social Security, health entitlements, and interest payments) to 3.75% of GDP. Military spending (aside from Iraq and Afghanistan) is currently about 3.5% of GDP, and Ryan refuses to cut the military. So that leaves 0.25% of GDP for everything else: infrastructure, border patrol, federal law enforcement, food and water safety, veterans benefits, the safety net, etc. While non-military discretionary spending does need to be cut somewhat, slashing it from its current level (about 3.5% of GDP) to 0.25% is simply ridiculous.

One could imagine a center-right proposal, combining revenue-neutral tax reform with some cuts in discretionary spending and measures to stop the runaway growth in entitlements. But nothing like that has ever been proposed.

Right now, it is clear that Congress and the White House care much more about making political statements, upholding pledges, and sticking it to the other party than they care about actually governing the country.

Trayvon Martin, racial profiling, and the War on Drugs

The recent killing of Florida teen Trayvon Martin, 17, is a disturbing case that has provoked outrage across the country. The black teenager was walking back to his father's house when he was spotted by neighborhood watch officer George Zimmerman, who is Latino. Zimmerman called police to report that he was suspicious of Martin and then followed him, leading to a confrontation in which Zimmerman shot and killed Martin. Martin was  unarmed; Zimmerman obviously had a gun. Authorities performed drug and alcohol tests on Martin but not on Zimmerman. Zimmerman is claiming he killed Martin in self-defense, and currently he has not been arrested or charged with a crime because there is not yet enough evidence to dispute his self-defense claim.

Over the past several days, protesters nationwide have been demanding Zimmerman's arrest. They have argued that Martin was seen as "suspicious" simply because he was a black male, and that he would still be alive if he had been white. Their claim is that Martin fell victim to a stereotype of black males as criminals.

I know far too little about the details of this case to make an informed argument for or against Zimmerman's arrest. If there is truly not enough evidence to prosecute him, arresting him would make no difference at all. But those who are angry about black males being stereotyped as criminals should look no further than the War on Drugs.

The War on Drugs, a US policy of increased enforcement and harsh sentences for drug offenses, started under Johnson and Nixon and then was significantly escalated under Reagan. Not coincidentally, the US prison population doubled between 1980 and 1990, and doubled again between 1990 and 2000. Although blacks are only 12% of the country's population, they comprise 62% of people sent to prison for drug offenses, most of them nonviolent.

As we should have learned during the 1920's, outlawing a popular product will likely lead to a large black market, the growth of gangs, and associated gang violence. As in the 20's, these gangs became most prevalent in the cities where drugs are most readily available, and in poor neighborhoods where people are looking for any way to make a buck. So law enforcement focused their efforts on those poor urban neighborhoods--which are often black neighborhoods--and a lot of black nonviolent drug offenders get caught in the dragnet. And over time, it's not hard to see how that could lead to a stereotype of black men as criminals.

The inexplicable focus on birth control

When President Obama ruled that religious institutions were required (under the new health care law) to cover contraception in their insurance coverage, it set off an overwhelming amount of outrage on the right.

What I find hard to explain, though, is the sudden and intense vitriol over one particular thing--birth control. Obama's ruling, after all, is just one more consequence of Obamacare, a law that 72% of Americans think is unconstitutional. The Republicans could have responded to the birth control mandate by escalating their attacks on Obamacare generally, as an infringement of liberty--and probably would have received a lot of support. Instead, for the next few weeks Rick Santorum (and to a lesser degree, Newt Gingrich) made birth control the major talking point of his campaign and the GOP debates. There was little or no mention of Obamacare or its infringement on individual liberty for everyone, just a lot of talk about religious liberty for the small minority of Catholics who take the birth control prohibition seriously. On his radio show, Rush Limbaugh called student Sandra Fluke a "slut" for advocating for birth control--and GOP frontrunners Santorum and Mitt Romney were unwilling to strongly criticize him. (On the flip side, nobody on the left seems to care about Bill Maher's history of equally appalling sexist rhetoric toward Michelle Bachmann and Sarah Palin).

This narrow focus on birth control is at best idiotic, and at worst chauvinistic. Surely Santorum, Gingrich, and Romney know that birth control is a hot-button issue for many women, and that the vast majority of Catholic women in America have used it. So why, then, do Santorum and Gingrich offer relatively tepid criticism of Obamacare prior to February, then bust into full-blown outrage over birth control? Why does Romney--who seems to have less fight than a sack of pillows--do nothing to counter them from the center? If the issue is "non-procreative sex," then why do they not seem to care that most insurance plans are already required to cover Viagra--which is probably most often prescribed for older men who have no intention or ability to procreate with their partner? Either they don't realize that they're alienating large swaths of moderate women and independents of both genders, or they actually do believe that women need to be kept under control.

The health care dilemma, as I see it

A huge part of the problem, IMO, is that health care today is expected to perform two unrelated and somewhat conflicting functions. The first is to insure people against unforeseen and catastrophic events at the lowest cost possible. The second is to make regular medical expenses more affordable. 

The first function (i.e. insurance in the classic sense, similar to car or home insurance) can be accomplished beautifully by the private sector as long as government stays out of the way. If there were no mandates requiring health plans to cover certain things, then premiums for a basic, catastrophic insurance plan would almost certainly be affordable to most healthy individuals. They could thus purchase a basic insurance plan and keep it for decades, not having to depend on their employers for health insurance, and not finding themselves suddenly uninsured if they lose or quit their job. Whatever happens, I think we will need to move away from employer-provided health care, simply because global competition will make it unaffordable for most companies.

One problem with this, of course, is that people with chronic conditions or past medical problems get screwed. Those who require regular medications for chronic conditions (e.g. Type 1 diabetes, bipolar, etc) would have enormous out-of-pocket costs. People who have had problems in the past (i.e. cancer, genetic heart problems) might have their premiums go up so high that they couldn't afford it. Another problem is that it gives somewhat of a financial incentive for people to wait until they get really sick rather than seek preventative care. One obvious example is maternity: if lower-income women have to pay out-of-pocket for all maternity/prenatal care (or switch to a more expensive health plan that covers maternity), a lot of them will probably decide to skip it. That of course could have really bad consequences for the babies. One could make the argument--and many on the left have--that subsidizing preventative care results in huge medical savings for society as a whole. That's probably the reason behind a lot of the mandates on coverage for maternity, routine checkups, etc.

The second function (making regular medical expenses more affordable) IMO cannot be accomplished by for-profit companies. It simply makes no sense: what service could they provide that would have any value toward accomplishing that goal? Right now, most people's health care is subsidized--but by their employers, not by government. Since it is subsidized for virtually everyone who has it, people naturally demand more of it--even more than they need--and health care costs go way up. Arthur Laffer calls this concept the health care wedge, and blames it for most of the runaway increase in health care costs (http://online.wsj.com/article/SB10001424052970204619004574324361508092006.html). And there is still the problem of people with pre-existing conditions being unable to get coverage. The only way to fix that, of course, is the way Europe does it: with an individual mandate, which is almost certainly unconstitutional.   IMO, ObamaCare is even worse than a public option like in Massachusetts, and may be even worse than a single-payer system. Not only does it have the individual mandate, but it also puts a huge burden on small business which suffocates job creation.

One way to make health care work might be to separate it into two pieces: catastrophic insurance (which would be private) and subsidized care for the poor or those with health problems (which could be subsidized by nonprofits, large corporations, or government). That way far fewer people would have subsidized health care and costs would not go up as much. Of course, tort reform and eliminating state barriers would also help keep costs down.