Tuesday, January 19, 2016

Bernie Sanders' Appeal

Bernie Sanders is now running neck and neck with Hillary Clinton in the first two primary states, Iowa and New Hampshire.  How is it possible that a first term senator, an avowed Socialist, from one of the smallest states, a virtual unknown a year ago, could challenged the mighty Clinton political machine?

In a word, because he cares.  Bernie Sanders is a throwback to the 1960s, a let's-change-the-world type who, after fifty-five years, seems still to be responding to John F. Kennedy's challenge:  "ask what you can do for your country."  His campaign is about helping others and improving their lives.  His rumpled sartorial disarray is vivid evidence that he doesn't obsess over himself.

By contrast, Hillary Clinton continues to run a perfectly coiffed, highly calculated, endlessly scripted campaign focused on burnishing her image, protecting her from attack, and saying what the pollsters tell her voters want to hear.  It's hard to avoid the feeling that she's in it for herself, that this is all about Hillary. 

Voters respond favorably to candidates who care about them.  That's Politics 101, but not every politician seems to get it.  Bernie Sanders does.  Even though he still faces a very steep climb to get the Democratic nomination, his chances are growing.  Eight years ago, a first time senator from Illinois convinced voters that he cared about them, and beat Hillary Clinton for the Democratic nomination.  It could happen again.

Friday, January 8, 2016

The Challenge For China

The Chinese stock market fell some 12% this first week of 2016.  The downturn triggered corresponding drops in other stock markets around the world, including a loss of over 6% for the week in the U.S.  The financial press is probably secretly delighted, since such volatility captures the attention of a lot of people and brings a surge of traffic onto their websites.  But most people are unhappy.

The Chinese stock market fell for a simple reason--it's overvalued.  It's been overvalued for a while, at least since early 2015.  As we in America know, overvalued stocks fall sooner or later.  It happened in 2000 and 2008.  It's happening now in China, and elsewhere. 

Chinese financial regulators complicated matters by halting trading after a circuit breaker was triggered by a 7% fall two days in a row.  Circuit breakers can be useful in ameliorating short term panics.  But significant overvaluation, as one sees in China, is a long term problem, and circuit breakers may actually increase selling pressure by sharply limiting the time available for trading.  When trading hours are circumscribed, sellers want to move quickly to sell, but buyers want time to evaluate whether or not prices are leveling out.  The result is that there are many more sellers than buyers in a limited amount of time and prices plummet.  Chinese regulators had to suspend the circuit breakers, which was followed by a modest rise in Chinese stocks at the end of the week.

But the regulatory miscues aren't the long term story.  Stocks in China were pumped up by a number of government policies that directly or indirectly encouraged investment in equities.  The bubble peaked and burst this past summer, and the Chinese government has since been trying to prop up the market with restrictions on selling and government-induced purchasing.  These measures to balance supply and demand don't address the basic underlying problem--Chinese stocks aren't worth their nominal market prices--and consequently can't really calm things down. 

At this point, losses inhere in Chinese stocks.  These losses have not been fully recognized in market prices.  With the Chinese economy slowing and capital flowing out of China, there isn't much realistic prospect of the losses reversing.  They will have to be realized sooner or later.  The Chinese government probably understands this, but will endeavor to smooth out the process of realization of the losses to reduce the pain perceived by investors.  The U.S. Federal Reserve and European Central Bank used similar smoothing strategies to deal with the fallout from the Great Recession and the European sovereign debt crisis.  Smoothing carries a major risk of kicking the can down the road, with losses emerging like new heads of the Hydra if underlying economic growth hasn't been revived.  The challenge for China will be to accelerate its economic growth.  But the prospects for a near-term rebound of the Chinese economy are poor.  Low-cost manufacturing is gradually shifting out of China, where wages are rising, and hasn't yet been fully replaced by anything else.  China's economy seems to be meandering.  We can expect more market volatility.

Tuesday, January 5, 2016

Another Obama Foreign Policy Miss

The ongoing dustup between Iran and Saudi Arabia over the Saudi execution of a Shiite cleric (Nimr al-Nimr) and three other Shiites reflects another foreign policy foul up by the Obama administration.  Instead of tamping down sectarian tensions in the Middle East, the Obama administration (and its predecessor, the George W. Bush administration) made it easier for conflict to flare up.  A "democratically elected" government was established in Baghdad which, not surprisingly was Shiite dominated because Iraq is majority Shiite.  But adequate protection for the interests of Iraqi Sunnis, Kurds and other ethnic or religious groups wasn't ensured.  So Iraq degenerated into sectarian warfare, with the Sunni-dominated ISIS readily able to seize vast amounts of Sunni Iraq without facing much of a fight.  For the same reasons, it's been impossible to organize a military force in Iraq that can dislodge ISIS, except at the margins.

The Obama administration stood by the sidelines as Syria descended into civil warfare, without having a discernible, let alone coherent, policy.  The only line in the sand drawn by President Obama was to warn Bashar Assad against using poisonous gas, and when Assad did just that, Obama flinched.  His flinch paved the way for Vladimir Putin to start mucking around in Syria, a role that Putin has now expanded to a much larger military commitment to Assad.  Iran has been supporting Assad, because he is a member of the Alawites, a religious group affiliated with the Shiites.  So we have Russia and Iran working against the Saudis and their allies, who have been supporting Sunni interests in Syria.  The war in Syria is now firmly sectarian.  The ideals of the Arab Spring died a hard death there.

In Yemen, Shiite rebels have booted the Sunni ruler, and Iran is supporting the Shiite side of a civil war against the Saudi-supported Sunni side.  The U.S. used to have a Special Forces presence in Yemen, but those troops reportedly have left the country.  So we have in Yemen a second proxy war between Iran and Saudi Arabia.

The Obama administration has been trying to sell the nuclear accord with Iran as a great diplomatic achievement.  But the Saudis are nervous about the agreement, apparently believing that it doesn't truly restrain Iranian nuclear ambitions.  So, even while Obama thinks he's getting somewhere with Iran, he's losing influence over the Saudis.  It shouldn't be a surprise that the Saudis are getting feistier.  They evidently don't believe they can count on the U.S.  One would think that the U.S. might have restrained the Saudis from executing Nimr al-Nimr.  But either the administration didn't know the execution was scheduled (which would seem an intelligence failure) or it didn't understand the importance of the execution to the Iranians (which would seem an intelligence analysis failure). 

At the same time, the nuclear accord appears to have emboldened the Iranians.  They fired missiles from a ship that was hardly a mile away from an American aircraft carrier in the Persian Gulf.  They've announced they'll increase their ballistic missile capabilities, apparently in violation of a UN resolution.  But neither action generated a response from the U.S. other than commentary by official spokespersons along the lines of "naughty, naughty." 

The President reportedly is holding back on sanctions against Iran because he wants to implement the nuclear accord and strengthen the hand of Irans moderates.  The problem is we don't really know who is in control of Iran (another intelligence failure).  Implementing the accord means rolling back sanctions and allowing Iran to sell more oil internationally and otherwise engage in more international trade.  This will increase Iran's financial strength.  Who really controls that strength--Iranian moderates, Iranian radicals or Iranian terrorists?  No wonder the Saudis think they may have to go their own way.  If Obama is, in effect, going to strengthen Iran, the Saudis have to find ways to push back.

President Obama is dead set on avoiding conflict.  That much is clear to everyone.  Assad steps across his line in the sand and he does nothing.  Iran engages in provocative behavior after the nuclear accord, and he does nothing.  Putin has Russian jets bomb American-supported moderate rebels in Syria and Obama does nothing.  While almost no one in America wants our ground troops back in the Middle East, it's clear that the administration's policies are heightening sectarian tensions in the Middle East.   Just as the Obama administration was unduly focused on al-Qaeda until ISIS literally blasted its way into the administration's consciousness, it's now too obsessed with combating ISIS and not focused enough on the root problem of reducing sectarian tension.

The Middle East could degenerate into regionwide sectarian warfare in a flash--indeed, it's already partly there.  ISIS has been able to hold large amounts of territory only because sectarian tensions have been allowed to flare up.  It's important now to try to get the Iranians and Saudis to stand down.  The more Obama appeases Iran, the more provocative Iran becomes.  The recent Iranian Persian Gulf missile firing and ballistic missile program boost should be met with sanctions and a delay in the implementation of the nuclear accord.  The Iranians need to be firmly told that if they want to be re-admitted to international society, they have to be good citizens.  At the same time, the U.S. should quietly reassure the Saudis that it stands with them, and that they need to cool their jets.  Saudi arms should be twisted if necessary.  In other words, Obama has to stop appeasing and get tough with the toughs in the Middle East.

If the U.S. can lower sectarian animosity in the Middle East, it may be able to put together a working alliance to defeat and eventually destroy ISIS.  But if sectarian tensions keep increasing, there will be no workable solution for dealing with ISIS, and more conflict will likely erupt, further eroding American interests and influence.  ISIS could survive and perhaps even prosper.  It seems unlikely, however, that Obama, now firmly ensconced in his Ivy League populated bubble, will somehow connect with the realities of foreign relations.  That's a shame, because it means that he, like George W. Bush before him, will leave a foreign policy mess for his successor.

Friday, January 1, 2016

The Case For Regulating Drug Prices

Perhaps the most important reason for rising health insurance costs is continued large, and sometimes astronomical, increases in the price of pharmaceutical products.  These increases don't apply to aspirin or antacids.  They tend to appear in the price of lifesaving drugs.  Or they are imposed on drugs for serious medical conditions that require treatment if the patient is to have a decent quality of life. 

Also alarming is the fact that the people behind the rising prices are sometimes speculators, who purchase the rights to the drug and then ratchet up the cost.  While some major pharmaceutical companies may be able to point to substantial research and development costs as a reason for the expensive prices of new drugs, a speculator who buys the rights to established drugs and takes advantage of seriously ill patients is doing something that, as Berkshire Hathaway Vice Chairman Charlie Munger put it, is "deeply immoral."

In addition, those drug companies that can legitimately claim to have significant research and development costs aren't necessarily playing fair.  Many, and perhaps most, other countries around the world already regulate pharmaceutical prices.  Frequently, the prices they permit are so low that pharmaceutical companies may not recoup much, if any, of their R & D expenses.  So the drug manufacturers often seek to recover most or all of the R& D expenses from American consumers.  Americans are paying through the nose so people in other countries can enjoy low health care costs.

How can drug prices shoot up like a geyser when the economy is sluggish, incomes stagnant and general inflation almost nonexistent?  In a word, health insurance.  Health insurance programs allow drug companies to spread the cost of expensive drugs across large numbers of insured people, most of whom don't need the expensive drugs.  Even though health insurers are taking many steps to control drug price increases on many pedestrian pharmaceutical products, the price levitators have concentrated their immorality on drugs that people badly need.  It's hard for insurers to combat these price increases, since many patients may suffer dire consequences without the expensive drugs. 

While price controls are generally undesirable, as they can produce misallocation of resources, we are seeing a failure of market forces with expensive pharmaceutical products.  The prices American consumers pay aren't the result of the free interplay of competitive markets.  They are the product of exploitation of very ill people through speculative excess and the misallocation of outsized amounts of R & D expenses to Americans.  People with major medical problems have what economists call inelastic demand, a desire or need for a product that is unaffected by its price.  If you're dying, you'll pay any price for a medication that will let you live.  Price isn't a consideration if you otherwise have to live with terrible suffering.  Other countries around the world (including major industrial nations) don't allow drug companies to exploit this inelasticity of demand of their seriously ill citizens.  Why should Americans be hammered over the head?

There's no need for price regulation of most pharmaceutical products.  Go into any drug store and you'll see lots of price competition for lots of products.  These can be left alone.  The drugs that need regulation are the ones for which there aren't competitive and effective substitutes, especially if they are used for serious or life threatening ailments or conditions.  Lobbyists for the pharmaceutical companies and their running dog economists will endeavor to over-complicate the issues, asking how can a bureaucrat come up with a more rational pricing scheme than market forces.  However, let us note that market forces aren't working rationally in the drug market and most of the rest of the world doesn't get into a tizzy over the self-serving palaver of the drug industry. 

It may be difficult to construct a model for price regulation that the economics profession as a whole would consider elegant.  But how can it be elegant or fair for Americans to bear pharmaceutical R& D costs for most of the rest of the world?  How about allocating some of that cost to persons in Europe and Asia, many of whom live in wealthy, industrialized nations?  How can it be socially beneficial for speculators to exploit the inelastic demand of seriously ill people?  Perhaps price regulation models couldn't be certain of offering more than rough justice to the drug companies.  But rough justice to them is better than gross injustice to the seriously or desperately ill and to the Americans who pay already high and ever rising health insurance premiums.