The Hearing

Simon Johnson and James Kwak will be presenting their perspectives on U.S. economic policy in a new weekly online column. We think that this format will allow more in-depth analysis of key policy issues than the blog format of The Hearing. Simon and James will no longer be posting to The Hearing; however, all previous posts will remain accessible here.

Today's column discusses the current debate over health-care reform, focusing on why many Americans feel comfortable with their current health care coverage -- and why they probably shouldn't.

Now that the Senate Finance Committee has finished doing whatever it did to health-care reform, it is turning to cap and trade with this morning's hearing on "allowance and revenue distribution." This sounds like a boringly technical topic, but in fact it's one of the most important aspects of climate change legislation.

A brief review: A cap-and-trade system to regulate carbon emissions is one in which, to emit a ton of carbon, you have to have a permit - these are the "allowances." Those permits can be traded on an open market. The point is that because the allowances have a market price, they create an incentive for firms to emit less carbon. Say I emit 100 tons of carbon, I have 100 permits, and permits trade at $20 each; if I can reduce my emissions by 10 tons, I can sell those permits and make $200; so if I can make that emission reduction by investing less than $200, then I will do so. (Without cap and trade that investment would be a pure cost, so I wouldn't do it.) In any plausible cap-and-trade bill, the total number of allowances will start high and go down over time; this is how emissions get reduced.

This is part of a series on The Hearing called "Making Financial Regulation Work." This guest post was filed by University of Pennsylvania professor David Zaring.

While Congress and the administration consider various proposals for financial reform, it is worth considering what the third branch of government could contribute. Will the Supreme Court have anything to say about what a systemic risk regulator should look like?

I think it could. The reason is a case called Free Enterprise Fund v. PCAOB, which the court will decide next term. Free Enterprise Fund could determine just how “independent,” or free from presidential control, an independent financial regulator can be.

This matters because a systemic risk regulator could either be very much under the president’s control or be very independent, depending on how Congress writes the legislation.

This guest post is from Sylvia Brandt, an assistant professor at the University of Massachusetts, Amherst.

During the Great Health Care Debate, a great deal of attention has been focused on the issue of physician incentives. Atul Gawande's article in the New Yorker on discrepancies in per-insured Medicare spending, which President Obama made required reading in the White House, highlighted the economic incentives that physicians have to order additional tests and procedures - especially when they can order those services from for-profit companies of which they are owners.

One proposed solution, reportedly favored by Peter Orszag and Obama, is to shift toward paying physicians for performance. The basic concept is simple: physicians' compensation would be linked to their patients' health outcomes, and therefore they would have the incentive to do what is most likely to produce a successful outcome at a reasonable cost. This idea seems obvious to many economists and policymakers. But when you look closely at the dynamics of illness, health care and household behavior, the picture becomes murkier.
Pay for performance faces some major drawbacks, especially where the treatment of chronic illness is concerned. Childhood asthma, an important chronic illness that has been the subject of my research for several years, is a good example.

The recent financial crisis began at least in part as a housing crisis. The toxic assets that initially threatened to bring down the global financial system were largely based on subprime residential mortgages; as borrowers began defaulting on those mortgages, whole classes of complex securities began plummeting in value.

The other side of banks losing money on their risky investments, of course, is homeowners losing their houses through foreclosure. In the dark months of September to February, it was common to say that the financial crisis would not end until the foreclosure crisis ended. Recently, however, as major banks have reported death-defying profits, one hears that sentiment less often; perhaps the financial sector can recover even as the foreclosure wave continues to crash down on communities across the country.

Today the Joint Economic Committee held a hearing on the foreclosure crisis, featuring a new report by the Government Accountability Office. And the evidence shows that the foreclosure crisis is very much not over, even if it is fading from the front pages.

This guest post is from Martin Baily, Charles Taylor and Peter Wallison of the Pew Financial Reform Project.
 
The patchwork of federal agencies that was charged with overseeing  the financial system failed to protect us from crisis last year, and everyone in Washington agrees that it needs fixing. However, the regulatory reform debate is proceeding piecemeal and at breakneck speed -- an unnecessarily risky strategy given the stakes involved. The regulatory infrastructure that will be implemented will affect the U.S. and global financial sector for decades to come. A fact-based, bipartisan approach is a much more certain path to get us to where we need to go – toward the creation of a competitive, fair and stable financial system for the 21st century.
 
There is time to be methodical about reform.  It will be a while before financial institutions resume significant credit expansion: The danger of excessive credit creation is a long way off.
 
What “methodical” means in this context is to proceed deliberately, with deference to the factors that precipitated past crises and with an eye to those that may arise in the future.  The legislative process now underway may not do this.  Many in Congress are worried that they do not see the full picture yet and there is no clear and widely shared understanding of what caused the current crisis. As interested stakeholders try to preempt the debate in their favor, a foundation of bipartisan understanding of the facts and the issues will be enormously important for keeping the debate on course and ensuring sound and enduring outcomes.

President Obama took to the airwaves last night to argue for comprehensive health-care reform in the face of increasing obstruction from Republicans and skepticism from "moderate" Democrats. There has been tremendous public debate over every dimension of health-care reform. Currently the key issues seem to be about cost - how much the bill itself will cost over the next 10 years, and whether it will succeed in reducing health-care costs in the long term.

Long-term care costs are important. As the refrain goes, if we fail to do anything, Medicare (and to a lesser extent Medicaid) will consume all of the federal budget at some point in the next few decades. And the administration has good ideas on this score, such as the Independent Medicare Advisory Council, which would have the power to modify reimbursement rates to create the incentives that lead to better patient outcomes at reduced costs.

The $700 billion bailout bill required the Treasury Department to obtain warrants from bailout recipients. The warrants give the owner the right to buy stock by some future date at a preset price. One of the overseers of the Troubled Asset Relief Program, Harvard professor Elizabeth Warren, alleges that the U.S. Treasury has been selling the taxpayers’ warrants back to the banks at 66 cents on the dollar. Not many people would like it if their Uncle Sam sold their $300,000 house for $200,000. Yet, that is what the July 2009 Congressional Oversight (COP) Panel Report alleges that Treasury is doing with the taxpayers’ warrants.

This report has many of the House Financial Services subcommittee on oversight and investigations members ready to take matters into their own hands. Democratic subcommittee members Mary Jo Kilroy (Ohio), Alan Grayson (Fla.), and Jackie Speier (Calif.) have introduced legislation to force the U.S. Treasury to auction the TARP warrants of banks receiving greater than $250 million in TARP monies.

Prominent economists -- Brad Delong and Simon Johnson, and "Mad Money" star Jim Cramer among them -- have argued that auctions are a great idea. An auction to third-party buyers will provide a true market price, increase transparency, reduce the potential for corruption and avoid draining bank capital. My analysis of the 1983 auction of the taxpayers’ warrants issued by Chrysler Motors indicates that auctions lead to higher prices for taxpayers than negotiations.

This guest post is from Dean Baker, co-director of the Center for Economic and Policy Research.

RealtyTrac released data last week showing that the foreclosure rate in the second quarter hit yet another record high, 11 percent above the first-quarter pace. Foreclosures are now running at a rate of close to 2 million a year.

It has been almost two years since the foreclosure crisis first became headline news. In this period, President Bush, Congress and most recently President Obama have put forward a variety of programs. None of them has had much impact on stemming the tide of foreclosures. It is time to try a different tack.

There is a simple solution that requires no taxpayer dollars, requires no new bureaucracy and can immediately help millions of people facing foreclosure. Congress can simply temporarily alter the rules on foreclosure to allow homeowners facing foreclosures the right to stay in their home for a substantial period of time (e.g. seven to 10 years) as renters paying the market rent.

The logic of this change is straightforward. Due to the housing bubble, ownership costs grew out of line with rents. As a result, in many bubble-inflated markets, mortgage payments plus taxes, insurance and other costs could easily be twice as high as the cost of renting a comparable unit. “Right to rent” legislation would allow homeowners who cannot meet their mortgage payments the right to stay in their home as long as they pay the market rent.

Nick Schulz, a fellow at the American Enterprise Institute, filed this guest post.

The House Financial Services Committee today held a hearing on consumer protection as part of a financial regulatory overhaul. In particular, the committee explored the creation of a dedicated agency called the Consumer Financial Protection Agency.

But before Congress creates a new entity that adds to the alphabet soup of regulatory bodies in Washington, it should take a good, long look in the mirror. Federal government policy and regulation played a sizable role in the generation of the housing bubble, and the subsequent bust that sent financial markets into a tailspin. Congress can best protect consumers by undoing many of the harmful policies that fueled the crisis in the first place.

For Congress to do that, it must rethink its steadfast promotion of homeownership, which has long been a bipartisan goal. The Democratic chairman of the committee, Barney Frank, has championed homeownership throughout his career. A keystone of President Bush’s “ownership society” was the promotion of homeownership, and, indeed, the Bush administration touted rising homeownership rates during its terms as an economic and social success story.

But in putting its meaty thumb on the scale in promoting homeownership, the federal government helped fuel the bubble and is partly responsible for the problems the nation now confronts.

So what will help?