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My Two Cents
Marketplace economics correspondent Chris Farrell helps you manage your money and your risks smartly without turning personal finance into a second career.

• Good advice from Krugman
  

  From Paul Krugman's Nobel lecture. Good advice for anyone trying to think through a problem:

  My rules for research:

  1. Listen to the Gentiles

  2. Question the question

  3. Dare to be silly

  4. Simplify, simplify

  The slides of his talk are well worth going through, especially since he uses the U.S. auto industry as an example in his lecture. Thanks to Tyler Cowen of Marginal Revolution for the pointer.

• The bailout, again
  

  Why are we bailing out the auto companies? Why not just bailout the workers? In other words, lets take the money and give it to the workers. They can use it to retrain, move to another part of the country, get more education. We live in an economy where the real value is human capital. The workers, the employees, these are also the people we care about. Left to its own devices the Detroit auto industry will shink. Ford will probably survive. Maybe a slimmed down GM. Someone will buy the Jeep brandname. The consumer will continue to have a lot of choice.

  Of course, letting this process unfold has been harsh on many workers and it would get even worse. That's why Washington should send it money to the workers. The economy will benefit short-term and long-term from an investment in protecting and educating and moving the workers. But Washington doesn't have to get involved with Detroit auto industry management or try to decide what will the the autos of the future.

  It's human capital that needs a helping hand, not the company, not management, not the board of directors, not shareholders and not the private equity investors. Invest in people, not place.

• Bailout a private equity behemoth?
  

  Is the U.S. taxpayer really going to bail out an investment by one of the leading private equity firms? The very politically connected private equity firm Cerebus owns Chrysler, and its seeking its share of the Detroit bailout. It's an empire built on debt. here's how a recent New York Times story put it: "But if they fail Cerberus and its partners could lose their daring bets on Detroit. Without a bailout Cerberus could lose about $2 billion and suffer a stinging blow to its reputation. With one it might eventually profit from its troubled deals."

  Seems to me that the Cerebus investors should get wiped out first, no?

• Health care reform--now
  

  My latest musings at Business Week:

  Viewpoint December 5, 2008

  Want Real Stimulus? Try Universal Health Care

  Health-care reform would put one of the most productive sectors in the U.S. to work to shore up the nation's economy, says BW contributing editor Chris Farrell
  By Chris Farrell

  The economy is in a tailspin. The latest salvo of grim tidings came courtesy of the Labor Dept.'s Dec. 5 employment report: U.S. employers slashed 533,000 jobs in November (BusinessWeek.com, 12/05/08), the largest monthly decline in more than three decades. The unemployment rate now stands at 6.7% and the ranks of the jobless have increased by 2.7 million since December. The broadest measure of unemployment (a figure that includes the unemployed, employees laboring part-time, and others barely working) stands at a dismaying 12.5%, or 19.3 million workers, up from 8.4% a year ago, or 12.9 million workers.

  Considering all the actions being taken by the U.S. Treasury and Federal Reserve to shore up the economy, the risk that a disinflationary recession deepens into a deflationary depression remains remote. But it isn't inconceivable.

  The New Stimulus Package

  To stave off an unwelcome reprise of the 1930s, the incoming Obama Administration and Congress are preparing a large fiscal stimulus package for the New Year. The centerpiece of the new Administration's initiative to get the economy going again was unveiled in news reports Dec. 6: The largest public works initiative since the creation of the national highway system in the late 1950s.

  President-elect Obama highlighted the main components of the planned government investment in infrastructure: A massive effort to make public buildings more energy-efficient; more roads and bridges; upgrading school buildings; extending the information superhighway; and medical care electronic record keeping. It's increasingly apparent that the Detroit automakers will also get government money to stay alive.

  Yet major health-care reform--specifically, universal health care--should top the list. Forget any suggestion that reform is too expensive or that it would take too long to have an impact. Wrong, on both counts. A bold embrace of universal health care offers policymakers the chance at a fiscal triple-play: Universal coverage would stimulate the economy, it would boost the financial security of ordinary Americans, and it would break the health-care reform log-jam.

  Rx for a Healthy Economy

  To paraphrase and update a famous quote about General Motors (GM), what's good for health-care reform is good for the economy. (It would certainly be good for General Motors, too.)

  The case for long-term reform is compelling. The problems associated with America's badly frayed health-care system are well known. The country spends a world-beating 16% of gross domestic product on health, yet in international comparisons it lags behind a number of key measures. For instance, the U.S. ranks 29th in infant mortality and 48th in life expectancy. The number of people without health insurance was 38 million in 2007, and that number is guaranteed to have risen in the meantime with the recession that began a year ago. With universal health care, everyone under age 65 would be covered by a qualified health insurance company or through a government-sponsored program. (Those over 65 already have a version of universal coverage through Medicare.)

  Universal coverage would boost the economy in the short term. The reason is that the financial side of the health-care equation is deteriorating rapidly for the average American family. Some 41% of working-age adults--72 million people--had trouble paying their medical bills or were paying off accrued medical debt from the past year. (That's up from 34%, or 58 million people, in 2005.) Taken altogether, in 2007 an estimated 116 million people, or two-thirds of working-age adults, were either uninsured for a time, faced steep out-of-pocket medical costs relative to their incomes, had difficulties paying their medical bills, or didn't get the care they needed because of cost, according to the Commonwealth Fund Biennial Health Insurance Survey.

  Targeting fiscal stimulus toward universal coverage would help ordinary workers rather than Wall Street tycoons. It would also relieve a major source of economic insecurity for anyone handed a pink slip during the recession.

  Funding Health Care

  For quick implementation, the initial system largely would take bigger and better advantage of existing programs. How much would it cost? Depending on the details, it would take somewhere between $100 billion and $200 billion to require that insurance companies abandon any screening based on preexisting conditions, fund tax credits for employers and workers, open up Medicare to younger folks, boost enrollment in State Children's Health Insurance Plans, and jump-start other initiatives to get everyone under the universal coverage umbrella.

  Dean Baker, an economist and co-director of the Center for Economic & Policy Research has come up with a universal coverage package that would cost $160 billion a year. The main components of his idea: $120 billion in tax credits to employers who cover workers for the first time in 2009 and 2010, a credit for employers that increase their existing coverage, and another $40 billion to reduce the health-care burden on Medicare beneficiaries. (He would also open up Medicare to employers and individuals.)

  What's more, rising health-care spending is not quite the devil it's often made out to be. The medical industry is among the nation's most globally competitive sectors. Health care is also a big U.S. employer, with 13.4 million workers. Indeed, even as most industries shrink their payrolls health care has created jobs. For instance, in November health-care employment grew by 34,000 and over the past 12 months the industry has added 369,000 jobs.

  The Time Is Now

  To be sure, this kind of universal health care isn't good enough for the long haul. It doesn't go far enough to create incentives for health-care efficiencies, let alone establish a stable source of funding. But once the economy recovers, Washington can debate how to create a more cost-effective and cost-efficient health-care system. Hopefully, any long-term solution will sever