It’s trivial to use this incident to support the exact opposite of Greenwald’s conclusion. If bankers are complaining that they haven’t gotten anything in exchange for their political contribution to Democrats, then presumably cash donations do not have much influence on politics. (As for Greenwald’s implication that taxpayers are funding bankers’ ill-gotten bonuses, I refer you to Karl Smith.) To see this as evidence that Obama and Congress have been “bought” by Wall Street strikes me as a very twisted perspective.

But really, my intuition is worth approximately nothing here. As is Greenwald’s. Viewed in isolation, this one data point can be fit into radically opposed narratives. It’s easy to see what you want to see if you look at the world anecdote by anecdote. To determine how much money influences politics it really is necessary to approach the question in a much more careful, methodical manner.

I’m against forced redistribution, even to help the deserving poor.  Still, unless you buy the whole libertarian package, I understand taxing the rich to help the poor.  What I can’t understand is taxing everyone to help everyone.  Means-tested programs like TANF and Medicaid aren’t crazy; they take from Peter to pay Paul.  Universal programs Social Security and Medicare are crazy; they take from Peter to pay Peter. 

Even if you’re not into economics, universal programs should strike you as pointless.  But they’re actually worse: When you tax Peter to pay Peter, you distort Peter’s incentives along the way.  Of course, even means-tested programs require taxation.  But they require much lower taxation than universal programs.

…

Just think about how small government would be if only the bottom decile got full Social Security and Medicare benefits, and these benefits were phrased out over the second decile.  Right now, these programs are about 35% of the budget and growing fast.  With this means-testing formula, they would shrink down to roughly 5% (or even less, since the richer live longer).

Admittedly, if we got to this point, I still wouldn’t be satisfied.  The day we started means-testing all redistribution, I’d furrow my brow and ask, “So charity should be compulsory, but immigration restrictions are OK?”  But I’ll take what I can get.

There is a pragmatic argument to be made for continuing redistribution. As Tyler Cowen put it, “the nation-state will remain the fundamental locus for redistribution. That means helping the poor at home more than abroad; a decision to do otherwise would destroy political equilibrium and make everyone worse off.”. But anyone who supports redistribution at all should advocate open immigration to the greatest extent which is politically feasible.

Matthew Yglesias writes about the current research on birth control and fertility rates (featured in The Economist recently) and how it applies to Afghanistan.

the probability of having your [health insurance] policy torn up given a massively expensive condition is pushing 50%. One in two.

Assuming for the moment that that is correct, there’s really only one word to properly describe individual health insurance: a scam.

And shocking as it may be, I see no reason to doubt the article’s analysis. In a prepared statement, the CEO of Assurant Health recently informed Congress that

Rescission is rare. It affects less than one-half of one percent of people we cover.

This sounds pretty minuscule at first. However, it’s only for a small minority of very sick people that the insurance company has any financial incentive to cancel the policy — they are happy to take your money so long as you’re healthy.

As the article describes, no more than 5% of a insurer’s health policies cost the company enough to give it any financial incentive to tear up the policy. Furthermore, it’s only the sickest, most expensive 1% of the company’s policies (those which pay out more than $35000 per year) that it really has a strong incentive to rid itself of. If only these 1% of cases are targeted for rescission, then given that you are suffering a major medical problem costing more than $35000 per year, the chance of the insurance company booting you out is 50%.

Now, individual health insurance contracts certainly could be written to protect the insurance buyer from being defrauded by the insurer in this way. But they aren’t. The core problem is that health insurance policies are by their nature hideously complicated beasts (compared to say, fire or life insurance policies, which are far simpler). Before you sign one, you’d be well advised to hire a doctor, a contract lawyer, and a mathematician review it; the insurance company most assuredly has hired such people to help it write its health policies.

But in practice, no one goes to that much trouble and expense to evaluate a health policy. Consequentially, health insurance contracts are written entirely to protect the interests of the insurer, not the individual consumer.

A lot of regulation aimed at the health insurance industry is misguided and does more harm than good for the people who want to buy health insurance. The issue of rescission, however, is one case where regulation is badly needed.

Instead of simply taxing people and paying their medical bills, the government will mandate that everyone buy “private” health coverage, then tax them and subsidize their purchase of health coverage.

Instead of creating a government agency to pay everyone’s medical bills, the proposal tightly regulates insurance companies and requires them to accept anyone who wants to buy insurance. As far as I can tell, insurance companies will be left with less decision-making power than many actual government agencies.

It’s a single-payer system administered by the lobotomized husks of former insurance companies.

Now, if you support a single-payer system, you very well might support the Democratic proposal out of political necessity. But I don’t see how this proposal has any economic advantages over single-payer. If you do, the comments are open.

A credit default swap is sometimes described as an insurance contract written against the possibility of default of a particular underlying asset. If I buy a CDS and the specified asset defaults, I get to collect money from whoever sold me the contract. If I also have a long position in the asset in question, I might consider buying a CDS written against that asset as an insurance or hedge against the possibility that the asset loses its value.

But I don’t actually have to own the asset in question in order to buy a CDS from somebody else. I might want to buy a CDS as a partial hedge against some other asset I hold with which the specified security could be correlated. Or maybe I just feel like making a bet with somebody I think is dumber than I am.

The fun and games begin when multiple contracts get written on a single credit event and the notional value of outstanding contracts on that event– the total amount of money that is promised to be paid to the buyers of those CDS in the event of a default on the underlying asset– becomes larger than the par value of the underlying asset itself. Then it would clearly pay the party who sold those contracts to buy the underlying asset itself at par, relieve the original debtors of their burdensome obligations, and be out only $X (the underlying event) rather than some multiple of $X (all the contracts written on the event).

Amherst Holdings, a little firm from Austin Texas, did just that. They sold $130 million of CDS contracts to big banks against the default of some $29 million of subprime loans in California, and proceeded to pocket the difference.

Had the people buying those CDS contracts actually been using them as insurance, they’d be completely happy to see those subprime loans not default. In actuality, the big banks were just making a bet with someone whom they thought was dumber than themselves. And that can be a dangerous way to gamble.

2. The Left is not proposing any viable alternative to capitalism. Whereas vulgar libertarians have their Econ 101, the [G20] protestors have nothing, bar a few money cranks and moralistic bleating about greed.
What’s unforgivable here is that there are alternatives. But no-one’s interested. Why don’t we hear about market socialism, or the real utopias project, or the work of Equality Exchange, or issues of ownership, or a basic income, or the democratization of finance, or left libertarianism or the superiority of co-operative forms of ownership?
Most of the Left is more interested in smug self-righteousness than in economics.
3. The debate about what to do now is conventionally framed in terms of the state versus (actually existing) markets – that is, as one set of bosses versus another. The possibility that people can organize themselves – through either genuinely free markets and/or through democratic co-operation – doesn’t arise. But it’s this spontaneous free organization  that is the Marxist ideal.
We are, then, a million miles away from the end of capitalism, in any acceptable sense. I say all this in sorrow, as one who’s proud to call himself a Marxist.

The Right, of course, indulges in its own favorite varieties of self-righteousness. And note that this self-described Marxist thinks certain varieties of libertarianism might be a good idea. In many ways, the Left/Right divide is the relic of a previous intellectual era. This division will continue to be extremely important politically, but the more important intellectual divide is between people who understand economics and those who do not.

Old-school communism was politically successful in no small part because it had a clear villain: rich people. By contrast, economically sophisticated proposals for progress tend to focus on overcoming collective action problems, information asymmetries, etc. It’s not easy to get emotional satisfaction out of opposing an information asymmetry.

Today the major obstacle to progress is not any particular wrongheaded ideology but rather ignorance and instrumentally rational epistemic irrationality, which leads people to embrace dumb but emotionally satisfying ideas. And those are very difficult problems to overcome. My only hope is that we continue our present stumbling progress towards a wealthier and better educated world so that someday the intellectual grandchildren of Lou Dobbs might be laughed off the air.

His post is a bit long, however, so let me summarize. Some very real market failures lead to underinvestment in basic science, and government funding can help correct this. In spite of all the usual problems which afflict government-directed investment, it’s a good idea to spend tax money on basic science. However, there is no good reason for the government to fund applied research and technological development. The market does so much more efficiently.

Lastly, I’d like to highlight a comment by Jacob (not me), who points out that Swoopo stands to make a lot of money by dishonestly bidding up its own auctions.

Hat tip to Greg Mankiw.

the complete breakdown of traditional information flows, and a loss of confidence in the models used to evaluate that information. Markets need information to work properly, and the information financial markets need is not available.

For example, investors can no longer trust what ratings agencies tell them. A crucial piece of information, information designed to break informational asymmetries between firms and investors, turned out to be unreliable. In addition, investors can no longer believe the numbers they see on bank books. The numbers might say the bank is solvent, but how reliable are those numbers? And even if the numbers are meaningful today, will they be meaningful tomorrow? Is there any way to actually value the assets a lot of these banks have on their books when there is essentially no market for them, no way to engage in price discovery?

The general question of how best to form beliefs based on second-hand testimony, when one has little or no direct evidence, is an extremely difficult problem which admits few good solutions. One of those rare solutions is the market pricing mechanism, which in ordinary circumstances does an astonishingly good job of broadcasting reliable information. These, clearly, are not ordinary circumstances.

Mark Thoma proceeds to suggest various ideas about how to fix the information flows which markets rely upon and how to restore confidence in their accuracy. That is, he offers advice on how to help the market return to ordinary circumstances. The greater challenge is to understand how and why the market became so epistemically dysfunctional in the first place. Presently, there is no consensus among economists as to the root cause of even relatively simple cases of epistemic dysfunction in the markets, such as assest price bubbles. (In the current crisis, the bubble in house prices has lead to a much bigger and more complicated mess.) It is difficult to devise means to prevent future financial crises when such basic questions about their causes remain unanswered.