The Economists' Voice 2.0

The Economists' Voice 2.0: The Financial Crisis, Health Care Reform, and More

Aaron S. Edlin
Joseph E. Stiglitz
Copyright Date: 2012
Pages: 280
Stable URL:
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  • Book Info
    The Economists' Voice 2.0
    Book Description:

    The Economists' Voice: Top Economists Take On Today's Problems featured a core collection of accessible, timely essays on the challenges facing today's global markets and financial institutions. The Economists' Voice 2.0: The Financial Crisis, Health Care Reform, and More is the next installment in this popular series, gathering together the strongest essays published in The Economist's Voice, a nonpartisan online journal, so that students and general readers can gain a deeper understanding of the financial developments shaping their world.

    This collection contains thirty-two essays written by academics, economists, presidential advisors, legal specialists, researchers, consultants, and policy makers. They tackle the plain economics and architecture of health care reform, its implications for society and the future of the health insurance industry, and the value of the health insurance subsidies and exchanges built into the law. They consider the effects of financial regulatory reform, the possibilities for ratings reform, and the issue of limiting bankers' pay. An objective examination of the financial crisis and bank bailouts results in two indispensable essays on investment banking regulation after Bear Stearns and the positives and negatives of the Paulson/Bernanke bailout. Contributors weigh the merits of future rescues and suggest alternative strategies for addressing the next financial crisis. A final section examines a unique array of topics: the stability of pension security bonds; the value of a carbon tax, especially in fostering economic and environmental sustainability; the counterintuitive perils of net neutrality; the unforeseen consequences of government debt; the meaning of the Google book search settlement; and the unexploited possibilities for profit in NFL overtime games.

    eISBN: 978-0-231-50432-4
    Subjects: Economics, Political Science, Business

Table of Contents

Export Selected Citations
  1. Front Matter (pp. i-iv)
  2. Table of Contents (pp. v-x)
  3. Part I: Health Care Reform
    • CHAPTER 1 The Health Care Reform Legislation: An Overview (pp. 3-12)
      Chapin White

      The affordable care act (ACA) represents the most significant overhaul of our health care system since the establishment of Medicare and Medicaid. The ACA does two things: First, it fundamentally shifts the social contract in the United States. Starting in 2014, individuals will be required to have health insurance; in return, the federal government will significantly expand low-income health insurance subsidies. Second, it significantly rebalances the financing for Medicare by reducing the growth in outlays and increasing Medicare taxes paid by high earners.

      This chapter provides non-specialists with a guide to the major provisions, their logic, and the federal budgetary...

    • CHAPTER 2 The Simple Economics of Health Reform (pp. 13-20)
      David M. Cutler

      The affordable care act (ACA) is the most important piece of health care legislation since the creation of Medicare and Medicaid. The ACA¹ touches every corner of the medical system, addressing issues ranging from how people get health insurance coverage, to what type of care they receive, to how that care is paid for. Its impact will be felt for decades.

      The ACA was, and is, enormously controversial. It passed without any Republican votes and with a mixture of public support and opposition. Republicans have vowed to repeal it and replace it with something smaller. Thus the ACA itself may...

    • CHAPTER 3 The Economics, Opportunities, and Challenges of Health Insurance Exchanges (pp. 21-29)
      Mark G. Duggan and Robert Kocher

      A central component of the Affordable Care Act (ACA) is the creation of state-based health insurance exchanges, which have the potential to substantially improve the functioning and expand the reach of the private health insurance market. Here we describe salient features of the current market for health insurance and explain how the exchanges will build on this system by altering incentives for individuals, employers, and insurers. We conclude with a discussion of the challenges and key issues that remain.

      The U.S. private health insurance market has been dominated by employer-sponsored insurance (ESI). In 2009, more than 90 percent of the...

    • CHAPTER 4 Can the ACA Improve Population Health? (pp. 30-38)
      Dana P. Goldman and Darius N. Lakdawalla

      Health care reform may accomplish a number of different objectives—most notably that of providing valuable financial protection. However, its impact on population health is likely to be quite modest.

      Consider the evidence: Many of the greatest improvements in health during the last century had little to do with the health care system. Clean water, public sanitation, and reduced smoking all reflect public health interventions that had dramatic benefits.

      Cardiovascular disease also provides an example that yields significant insights. Between 1980 and 2000, the death rate for coronary heart disease was cut in half.¹ But only about half of this...

    • CHAPTER 5 Systemic Reform of Health Care Delivery and Payment (pp. 39-45)
      Henry J. Aaron

      The affordable care act (ACA) became law on March 23, 2010, but little of it is yet actively in effect. Not until January 1, 2014, will the Medicaid extensions, the individual mandate to buy insurance, the state-managed health exchanges, and the subsidies to make insurance affordable take effect. The tax on high-premium plans will not be imposed until 2018. Tight restrictions on the operations of the Independent Medicare Advisory Board will remain until 2018.

      Before those dates, the law will have to clear four hurdles. The odds that it will emerge unscathed are small. It is important to understand those...

    • CHAPTER 6 How Stable Are Insurance Subsidies in Health Reform? (pp. 46-54)
      Mark V. Pauly

      Under the new health reforms, changes in subsidies and regulations for health insurance are now, as the phrase goes, the “law of the land,” but the stability and eventual form of this program are still far from assured. In this chapter I want to take a step back from the details of the legislation, its political course, and its implementation to address the question of whether key features dealing with subsidies intended to reduce the number of uninsured people are likely to represent a stable political equilibrium. I do not imagine that either economists or political scientists can provide definitive...

  4. Part II: Financial Market Regulatory Reform
    • CHAPTER 7 Financial Regulatory Reform: The Politics of Denial (pp. 57-64)
      Richard A. Posner

      The principal underlying causes of the financial crisis that engulfed the nation (and the world) in the fall of 2008 were unsound monetary policy and other regulatory failures. But government officials insist on blaming the private sector and have crafted their proposals for financial regulatory reform accordingly. As a result, those proposals are not well designed to prevent a future such financial debacle.

      The Obama administration has proposed an ambitious program of financial regulatory reform, intended to prevent a recurrence of the financial collapse of September (2008). The main elements of the program were sketched in a Treasury Department white...

    • CHAPTER 8 Government Guarantees: Why the Genie Needs to Be Put Back in the Bottle (pp. 65-72)
      Viral V. Acharya and Matthew Richardson

      With governments beginning to implement new financial regulation, the G20, in its recent Pittsburgh summit, laid out the following four principles on which it will coordinate:

      1. building high-quality capital and mitigating pro-cyclicality;

      2. improving over-the-counter derivatives markets;

      3. arranging better plans for the resolution of cross-border and systemically important financial institutions by the end of 2010; and

      4. reforming compensation practices to support financial stability.

      Will the proposed reforms do the job? Overhauling the financial system is a tricky thing—but we have been here before.

      The last major financial crisis led to the sweeping reforms undertaken in 1934. The Glass Steagall Act...

    • CHAPTER 9 How Little We Know: The Challenges of Financial Reform (pp. 73-80)
      Russell Roberts

      When an airplane crashes, expert investigators probe the cause of the crash. Their analysis can lead to changes in aircraft design, flight procedures, and regulations in hopes of reducing the likelihood of a future crash. The growth of knowledge in the airline industry has been extremely productive. Between 1989 and 2008, there was a sevenfold reduction in the probability of a fatal crash.

      There is a natural tendency for economists (and even for normal people) to presume that similar analytical techniques can be applied to financial crashes. After all, economists presumably know more than we did in the past. We...

    • CHAPTER 10 Finding the Sweet Spot for Effective Regulation (pp. 81-88)
      R. Glenn Hubbard

      The conventional take on the present financial and economic crisis places blame on a dearth of regulation. But that is simplistic at best, entirely inaccurate at worst. The truth is that the financial crisis is the result of not so much a lack of regulation as a lack of effective regulation.

      Indeed, portions of the financial system hit hard by the crisis and significantly affecting economic activity—such as traditional banks—have historically been the most heavily regulated. Another center of the crisis was government-sponsored entities such as Fannie Mae and Freddie Mac, which were vehicles through which governmental capital...

    • CHAPTER 11 A Recipe for Ratings Reform (pp. 89-94)
      Charles W. Calomiris

      Credit rating agencies such as Moody’s, Standard and Poor’s, and Fitch used to be bit players in the dramas that attend financial crises. No more. Recent hearings at the House Committee for Oversight and Government Reform provided the latest in a series of surprising spectacles about the agencies, this time in accusatory exchanges among former and current executives of Moody’s. And new controversies are brewing: the engineering of a new set of complex transactions called “re-remics,” where rating agencies help repackage securities on a bank or an insurance company’s balance sheet to achieve an improvement of the ratings of the...

    • CHAPTER 12 Should Banker Pay Be Regulated? (pp. 95-102)
      Steven N. Kaplan

      In the aftermath of last year’s banking crisis, world leaders are looking for ways to see that this never happens again. G-20 leaders, the Obama administration, and, apparently, the Federal Reserve have focused on pay practices at financial firms as being a key cause of the recent disaster and have proposed restricting bankers’ pay. These restrictions largely amount to reducing short-term cash bonus payouts, increasing the use of restricted stock and options, and requiring the executives to hold the restricted stock and options for a period longer than the usual four-year vesting period. The big question is: “Will it work?”...

    • CHAPTER 13 Fixing Bankers’ Pay (pp. 103-114)
      Lucian A. Bebchuk

      In the aftermath of the financial crisis of 2008–2009, there are widespread concerns that the compensation structures of financial firms have provided excessive risk-taking incentives. Responding to such concerns, firms are seeking to reform their pay packages to avoid such incentives, and regulators around the world are moving toward setting standards for compensation structures in financial firms. The G-20 leaders, in their September 2009 summit, announced their commitment “to implement strong international compensation standards aimed at ending practices that lead to excessive risk-taking,” and the Federal Reserve Board in October 2009 requested comments on a “proposed guidance” that contemplates...

    • CHAPTER 14 It Works for Mergers, Why Not for Finance? (pp. 115-122)
      Aaron S. Edlin and Richard J. Gilbert

      The financial collapse that triggered the current great recession has launched a wave of proposals to reform the financial sector to prevent a recurrence. Most, though, are either unlikely to have much of an effect on systemic financial risk or are too complex to be implemented successfully. The Obama administration’s “Volker” proposal to limit speculative trading by banks on their own accounts, for example, is well intentioned but a mere Band-Aid. After all, speculation can be done by hedge funds, insurance companies, investment banks, and other financial players, as we learned from Lehman Brothers and the American International Group (AIG)....

  5. Part III: Financial Crisis and Bailouts
    • CHAPTER 15 Hedge Fund Wizards (pp. 125-129)
      Dean P. Foster and H. Peyton Young

      Every other week, it seems, some large hedge fund blows up due to bad bets. Many investors, including supposedly sophisticated ones, are losing their shirts. They shouldn’t be surprised, because the deck is stacked against them from the start.

      To see how vulnerable investors are in this market, let’s imagine for a moment that you are shopping for a “designer” car. These new-fangled vehicles have amazing performance, are manufactured using top-secret methods, and are completely unique. You will never see another one like yours on the road. In shopping for such a vehicle, however, you run into a problem: neither...

    • CHAPTER 16 Investment Banking Regulation After Bear Stearns (pp. 130-137)
      Dwight M. Jaffee and Mark Perlow

      It is now approaching six months since Bear Stearns collapsed and regulators orchestrated a merger by J. P. Morgan that included a $30 billion subsidized loan from the Federal Reserve. The Federal Reserve has, of course, made no promises that it will bail out other investment banks that get into trouble, but there is a widespread perception that it will. Treasury Secretary Paulson, for example, stated on July 31, 2008: “Americans have come to expect the Federal Reserve to step in to avert events that pose unacceptable systemic risk” (Paulson 2008). The good news is that the markets will take...

    • CHAPTER 17 Why Paulson Is Wrong (pp. 138-141)
      Luigi Zingales

      When a profitable company is hit by a very large liability, as was the case in 1985 when Texaco lost a $12 billion court case against Pennzoil, the solution is not to have the government buy its assets at inflated prices: the solution is Chapter 11. In Chapter 11, companies with a solid underlying business generally swap debt for equity: the old equity holders are wiped out, and the old debt claims are transformed into equity claims in the new entity, which continues operating with a new capital structure. Alternatively, the debt holders can agree to cut down the face...

    • CHAPTER 18 Dr. StrangeLoan: Or, How I Learned to Stop Worrying and Love the Financial Collapse (pp. 142-146)
      Aaron S. Edlin

      The world almost changed Wednesday, September 17, 2008.

      For years, the U.S. government debt soared. For years, the U.S. Treasury borrowed more and more funds. For years the government paid obscene sums in interest to service the debt. All that almost came to an end on Wednesday, September 17, 2008. That day, a light shone at the end of the tunnel, and the government almost found a way out of this “business” of borrowing money and entered the business of guarding money, an honorable and profitable business that Brink’s security company and vault makers like Diebold have enjoyed for years....

    • CHAPTER 19 Questioning the Treasury’s $700 Billion Blank Check: An Open Letter to Secretary Paulson (pp. 147-153)
      Aaron S. Edlin

      Dear secretary paulson,

      Today, I read the U.S. Treasury’s humble request for the authority to spend 700 billion taxpayer-owned dollars. This taxpayer’s answer: “No.”

      Sorry, Mr. Paulson, for the vote of no confidence, but consider the terms you propose. The only hard restriction on this gift certificate is that it must be redeemed at “a financial institution having its headquarters in the United States” and used to buy “mortgage-related assets.” You will have little trouble spending this bounty, probably all before Election Day.

      I did notice the soft restriction, with the two “Considerations” that you are intended to “consider” in...

    • CHAPTER 20 Auction Design Critical for Rescue Plan (pp. 154-158)
      Lawrence M. Ausubel and Peter Cramton

      The treasury proposes to invest $700 billion in mortgage-related securities to resolve the financial crisis, using market mechanisms such as reverse auctions to determine prices. A well-designed auction process can indeed be an effective tool for acquiring distressed assets at minimum cost to the taxpayer. However, a simplistic process could lead to higher cost and fewer securities purchased. It is critical for the auction process to be designed carefully.

      The immediate crisis is one of illiquidity. Banks hold a variety of mortgage-backed securities, some almost worthless, while others retain considerable value. None can be sold, except at fire-sale prices. The...

    • CHAPTER 21 A Better Plan for Addressing the Financial Crisis (pp. 159-171)
      Lucian A. Bebchuk

      The current financial crisis is widely viewed as the most serious since the Great Depression. Last week, facing severe market reactions to the failures of American International Group (AIG) and Lehman Brothers, the U.S. Treasury Department put forward a bold and massive program of spending up to $700 billion on purchasing “troubled assets” from financial institutions.

      This chapter critiques this proposed emergency legislation. It also puts forward a superior alternative for advancing the two goals of the proposed legislation—restoring stability to the financial markets and protecting taxpayers. I show that the proposed legislation can be redesigned to limit greatly...

    • CHAPTER 22 Please Think This Over (pp. 172-180)
      Edward E. Leamer

      Here are some choice words from the Treasury:

      Legislative Proposal for Treasury Authority to Purchase Mortgage-Related Assets

      The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.

      Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

      When I first read those words in an e-mail, I thought it was an...

    • CHAPTER 23 Is Macroeconomics Off Track? (pp. 181-187)
      Casey B. Mulligan

      Should macroeconomists begin again, particularly those at Chicago, Minnesota, Rochester, and other freshwater schools? These days, commentators tell us that we should scrap all that we hold dear—neoclassical growth models, asset pricing models, and the efficient market hypothesis alike.

      And not just run-of-the-mill journalists. No less than the Nobel Laureate Paul Krugman argued this September 2, 2009, in the New York Times Sunday Magazine that we are “mistaking beauty for truth,” dismissing “the Keynesian vision of what recessions are all about,” falling “in love with the vision of perfect markets,” and blaming entire recessions on laziness.

      Krugman and others...

    • CHAPTER 24 If It Were a Fight, They Would Have Stopped It in December of 2008 (pp. 188-194)
      Robert J. Barbera

      In the december 2009 issue of The Economists’ Voice, University of Chicago Professor Casey Mulligan (see Mulligan 2009) rejected Paul Krugman’s rebuke of freshwater economics and reaffirmed his faith in the New Classical Economics. His defense was short. He offered up a super-stylized macro model and pointed out that inclusion of a distortion term for his capital and labor market equilibrium conditions allowed him to comfortably explain the 2008—2009 recession. Really?

      As a Wall Street economic practitioner, I am decidedly unconvinced. Practitioners and theorists, I think, are in agreement that a theory is supposed to help us understand how...

    • CHAPTER 25 Comment on Barbera: Your Gift Will Make You Rich (pp. 195-198)
      Casey B. Mulligan

      Dear editors:

      As the current recession was unfolding, Nobel Laureate Paul Krugman accused (Krugman 2009) modern macroeconomists of “mistaking beauty for truth,” dismissing “the Keynesian vision of what recessions are all about,” falling “in love with the vision of perfect markets,” and blaming entire recessions on laziness.

      I published an article in The Economists’ Voice (Mulligan 2009) showing that Krugman’s accusations were incorrect and pointing readers to a number of articles published by some of those modern macroeconomists. I also gave examples in which modern macroeconomists used the neoclassical growth model primarily to examine the market imperfections that we supposedly...

  6. Part IV: Innovations in Policy and Business
    • CHAPTER 26 Pension Security Bonds: A New Plan to Address the State Pension Crisis (pp. 201-207)
      Joshua Rauh and Robert Novy-Marx

      The federal government should be worried about state pension liabilities. In the absence of fundamental reform, some large state pension funds may not last through this decade. When the funds run through their assets, the size of promised benefit payments will be so large that raising state taxes enough to make these pension payments will be infeasible. Just as the European Union is not standing back to watch Greece fail, the federal government will face massive and likely irresistible pressure to bail out the affected state governments.

      Take Illinois, for example. Even if its main three pension funds earn 8...

    • CHAPTER 27 Carbon Taxes to Move Toward Fiscal Sustainability (pp. 208-214)
      William D. Nordhaus

      Along with most other high-income countries, the United States faces a major increase in the government debt relative to GDP. The most recent report of the Congressional Budget Office (CBO) in June 2010 estimated that the debt-GDP ratio will be between 65 and 72 percent in 2015 under alternative assumptions about the baseline fiscal policy. The debt ratio is increasing rapidly as a result of the collapse of revenues in the current extended downturn. In order to address this issue, the federal government has established the National Commission on Fiscal Responsibility and Reform. This group has been charged with “identifying...

    • CHAPTER 28 Net Neutrality Is Bad Broadband Regulation (pp. 215-223)
      Robert E. Litan and Hal J. Singer

      America needs jobs, and President Obama is facing a serious problem of how to get them. Private-sector job creation in 2010 has been a paltry 100,000 per month. At that pace, it would take over three years to restore just the nearly four million private-sector jobs lost in the first six months of 2009, let alone absorb new and discouraged workers coming into the labor force.

      Jobs require private investment. After all, there is little appetite in Washington or among the public generally for additional federal stimulus. Moreover, there are few, if any, macroeconomic “bullets” left at the Federal Reserve,...

    • CHAPTER 29 Trills Instead of T-Bills: It’s Time to Replace Part of Government Debt with Shares in GDP (pp. 224-231)
      Mark J. Kamstra and Robert J. Shiller

      At this time of intense national debate on the rapidly rising national debt and on fundamental financial reform, a time of unusual economic and financial uncertainty, it is vitally important to reconsider the structure of government obligations. We believe that, in parallel with the many other ongoing changes in our financial structure, the obligations of the national government should take a new and innovative form.

      Consider a new U.S. government-issued security, with a coupon tied to the United States’ gross domestic product (GDP) in current dollars. Ideally, this security would be long term in maturity, perhaps even perpetual.

      We propose...

    • CHAPTER 30 The Google Book Settlement: Real Magic or a Trick? (pp. 232-240)
      Pamela Samuelson

      Paul courant (2009) has made a pragmatic argument in favor of the proposed settlement of the Authors Guild v. Google lawsuit that charged Google with copyright infringement for digitizing millions of books for its Google Book Search (GBS) initiative.

      I agree with Courant that it is socially desirable for millions of out-of-print books in the collections of major research libraries, such as University of Michigan’s, of which he is head librarian, to be digitized and made more widely accessible. And, indeed, the approval of the settlement would bring about greater access to these books.

      Courant, like other proponents of the...

    • CHAPTER 31 The Stakes in the Google Book Search Settlement (pp. 241-250)
      Paul N. Courant

      In 2004 google embarked on a project of historic scope. Its aim was to scan and index the contents of the world’s great research libraries. There was one small problem: authors and publishers of works in copyright sued, arguing that Google violated copyright law by scanning works without the explicit permission of rights holders. In the way of most commercial lawsuits, the parties settled, but unlike most commercial lawsuits, the settlement greatly expanded the stakes, creating a great electronic bookstore where Google would sell (with most of the revenue going to rights holders) access to millions of copyrighted works, something...

    • CHAPTER 32 The NFL Should Auction Possession in Overtime Games (pp. 251-258)
      Yeon-Koo Che and Terrence Hendershott

      Super bowl xliii of 2009 featured one of the closest contests in Super Bowl history. If not for the miraculous catch by Santonio Holmes in the waning seconds, the Steelers might have kicked a game-tying field goal and the Super Bowl would have gone into overtime.

      In a sense, however, overtimes can ruin great games, because, with all too high probability, whichever team gets the ball first wins. Instead of one of the best, the game might have been remembered as dubious, maybe even ignominious, with many “what ifs.” We propose an auction method to eliminate the coin flip’s randomness...

  7. Index (pp. 259-270)

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