Sunday, December 25, 2011

The economic pie

Andy Xie, says inequality is a price worth paying if it motivates people to make the economic pie bigger... but I would add "only if the pie gets to be shared by all".

The Occupy Wall Street movement drew attention to what organizers said was a huge gap between the 99 percent of the nation's citizens whose lives are out of synch with the 1 percent wealthiest Americans.

The top 1 percent control about one-fifth of the nation's income and two-fifths of the wealth. The top 10 percent take in about half of all income and have accumulated 80 percent of the wealth. Meanwhile, about 80 percent of Americans merely get by and have very little wealth available as a cushion for when personal finances turn down.

The gap between the rich and the rest, which has roughly doubled over the past two decades in the United States, is an inevitable result of competition. Of course, competition motivates people, and inequality is often a price worth paying if it motivates people to make the pie bigger. All could be better off with a bigger pie, even if inequality worsened. Limiting competition improves equality but decreases incentives for people to work. A society needs to make a tradeoff between the two.

Inequality worsens in an environment of limited competition, as inefficiency and social friction rise. Examples of this phenomenon include the Philippines, where few families rule through monopolistic practices. The country has become poorer relative to others over the past two decades, while inefficiencies are supported by Filipinos who work abroad and send money home.

Many Latin American countries fall into this category, too, and the United States is heading that way.

Wednesday, November 09, 2011

Oligarchy, American Style

By Paul Krugman
Published: November 3, 2011

Inequality is back in the news, largely thanks to Occupy Wall Street, but with an assist from the Congressional Budget Office. And you know what that means: It’s time to roll out the obfuscators!

Anyone who has tracked this issue over time knows what I mean. Whenever growing income disparities threaten to come into focus, a reliable set of defenders tries to bring back the blur. Think tanks put out reports claiming that inequality isn’t really rising, or that it doesn’t matter. Pundits try to put a more benign face on the phenomenon, claiming that it’s not really the wealthy few versus the rest, it’s the educated versus the less educated.

So what you need to know is that all of these claims are basically attempts to obscure the stark reality: We have a society in which money is increasingly concentrated in the hands of a few people, and in which that concentration of income and wealth threatens to make us a democracy in name only.

The budget office laid out some of that stark reality in a recent report, which documented a sharp decline in the share of total income going to lower- and middle-income Americans. We still like to think of ourselves as a middle-class country. But with the bottom 80 percent of households now receiving less than half of total income, that’s a vision increasingly at odds with reality.

In response, the usual suspects have rolled out some familiar arguments: the data are flawed (they aren’t); the rich are an ever-changing group (not so); and so on. The most popular argument right now seems, however, to be the claim that we may not be a middle-class society, but we’re still an upper-middle-class society, in which a broad class of highly educated workers, who have the skills to compete in the modern world, is doing very well.

It’s a nice story, and a lot less disturbing than the picture of a nation in which a much smaller group of rich people is becoming increasingly dominant. But it’s not true.

Workers with college degrees have indeed, on average, done better than workers without, and the gap has generally widened over time. But highly educated Americans have by no means been immune to income stagnation and growing economic insecurity. Wage gains for most college-educated workers have been unimpressive (and nonexistent since 2000), while even the well-educated can no longer count on getting jobs with good benefits. In particular, these days workers with a college degree but no further degrees are less likely to get workplace health coverage than workers with only a high school degree were in 1979.

So who is getting the big gains? A very small, wealthy minority.

The budget office report tells us that essentially all of the upward redistribution of income away from the bottom 80 percent has gone to the highest-income 1 percent of Americans. That is, the protesters who portray themselves as representing the interests of the 99 percent have it basically right, and the pundits solemnly assuring them that it’s really about education, not the gains of a small elite, have it completely wrong.

If anything, the protesters are setting the cutoff too low. The recent budget office report doesn’t look inside the top 1 percent, but an earlier report, which only went up to 2005, found that almost two-thirds of the rising share of the top percentile in income actually went to the top 0.1 percent — the richest thousandth of Americans, who saw their real incomes rise more than 400 percent over the period from 1979 to 2005.

Who’s in that top 0.1 percent? Are they heroic entrepreneurs creating jobs? No, for the most part, they’re corporate executives. Recent research shows that around 60 percent of the top 0.1 percent either are executives in nonfinancial companies or make their money in finance, i.e., Wall Street broadly defined. Add in lawyers and people in real estate, and we’re talking about more than 70 percent of the lucky one-thousandth.

But why does this growing concentration of income and wealth in a few hands matter? Part of the answer is that rising inequality has meant a nation in which most families don’t share fully in economic growth. Another part of the answer is that once you realize just how much richer the rich have become, the argument that higher taxes on high incomes should be part of any long-run budget deal becomes a lot more compelling.

The larger answer, however, is that extreme concentration of income is incompatible with real democracy. Can anyone seriously deny that our political system is being warped by the influence of big money, and that the warping is getting worse as the wealth of a few grows ever larger?

Some pundits are still trying to dismiss concerns about rising inequality as somehow foolish. But the truth is that the whole nature of our society is at stake.

Friday, September 23, 2011

China's Next Prize: Global Financial Crown

By Andy Xie 09.07.2011

But the first step toward coronation, and boosting the world economy, should be an international equities board

Labor surplus globalization helped China's economy expand more than 20-fold in nominal dollar terms over a period of just two decades, building what's now the world's second-largest economy and largest international trading nation.

Globalizing China's current capital surplus would make it even bigger. Not only could China take the crown as the largest economy on the planet, but it may become the world's biggest financial center as well.

Each of these developments would be in the best interests of China and the rest of the world. So how can we globalize surplus capital? The first step should be to internationalize China's savings through equities by following through with plans to launch an international board on the Shanghai stock market.

An international equities board would have a significant, positive impact on the global economy. Through board mechanisms, China's surplus savings would be invested in multinational companies, thus contributing to the global economy by inspiring multinationals to expand.

China currently has a highly developed manufacturing sector but a backward financial sector dominated by state ownership and caged by a closed capital account and fixed currency exchange rates. Moreover, China lacks certain conditions necessary to qualify as a global financial center, including the rule of law, strong private property protection and transparency.

Opening an international board, though, would offer a jump-start for the changes needed to improve China's financial environment and lay a foundation for building a global financial center.

For starters, China should lay down rules so that the global top 500 companies can list on the international board. It should be a transparent process that does not include tight controls or force companies to individually lobby the government.

To date, China has missed opportunities to accept significant responsibility for the healthy functioning of the global economy. Its foreign assets of some US$ 4 trillion are overwhelmingly parked in government bonds. These lopsided allocations have created huge distortions in relative prices for bonds and stocks – a distortion that's had a destabilizing effect on the global economy.

An international board could encourage rebalancing. And now that the world economy is double-dipping, the time is ripe. A remedy to this lopsided predicament is needed – as soon as possible.

Surplus to Surplus

Globalizing China's surplus labor was the single most important factor in China's modern-day economic development. Two decades ago, the surplus depressed domestic labor costs to less than 5 percent of developed economy labor prices, even though China's labor quality was several times higher than relative wages suggested.

Since then, opening China to foreign-direct investment and building a supportive infrastructure led to rapid industrialization and export growth.

But in recent years, the labor surplus has clearly disappeared. Indeed, a shortage of blue-collar workers is plaguing many industries in China. Wages for basic labor are rising at double-digit rates. In some industries, such as mining, wages have doubled over the past three years.

Wage levels, however, are still just one-tenth of those found in developed economies. Costs have yet to become a barrier to China's ongoing industrialization, and manufacturing is making the right moves by upgrading in response to the labor shortage. China is now preparing to compete against Germany and Japan.

As China's labor surplus gradually integrated into the global economy, the country migrated from a capital shortage to a surplus situation. The trade surplus grew to today's level of between US$ 200 and US$ 400 per capita – a range that's relatively low by East Asian standards.

The trade surplus per capita could rise by five times or more. But because China has a vast population, a big jump in per capita would create an aggregate surplus that's huge relative to the global economy.

For example, China's trade surplus would be US$ 1.4 trillion to reach US$ 1,000 per capita, which is a modest amount by East Asian standards. If China upgrades its industries successfully in response to rising labor costs, as Japan did in the 1970s and South Korea and Taiwan did in the 1990s, its trade surplus could rise to US$ 1 trillion, and the per capita jump to US$ 715.

China's enormous surplus could eventually exceed all the funds raised on all stock markets worldwide. How that money is spent, logically, would have a huge impact on the global economy.

From Trade to Finance

A country becomes a world financial center after succeeding as a trade center. London won status as a global financial center because Britain overtook other countries to become the largest trader of goods and services. New York rose as a financial center after the United States replaced Britain as the top international trade player.

China is solidifying its position as the world's largest trading nation. By 2020, it could dwarf all others, becoming twice as big as the second-largest country. So could China become the world's financial center? Yes. Should it? I think the answer is, again, yes.

In terms of industrial energy consumption, China is already the biggest industrial economy in the world. The dollar value isn't there yet because Chinese goods are still inexpensive. China could raise prices to absorb rising labor costs in this decade and still grow exports at more than 10 percent per annum. By 2020, China could become twice as big as Germany in international trade.

Nevertheless, China must do something to build its status as an international financial hub. Inaction would hurt its own economy as well as the rest of the world's.

In the past, financial services set up shop after traders were in place because most financing was related to trade. Most financial firm profits were derived from trade, too.

One can see the connection in Pingyao, the little town in Shanxi Province that's small and poor but once dominated China's financing in the 19th century. At that time, Pingyao served as a link between makers of Chinese goods and buyers in the rising Russian Empire. Pingyao bordered both worlds and could arbitrage price differences, creating a national financial center until seaborne trade eclipsed land routes, and Shanghai became China's financial hub.

The United States didn't plot to supplant Britain as the international financial center. It happened because the United States replaced Britain first as the biggest industrial power and trading nation. Wall Street's importance is a consequence of American industrial success.

The most important economic development in the 21st century will be China's rise as the largest industrial nation. I have anticipated this for a long time. This is a consequence of globalization and China's cultural characteristics. The government has adopted supportive policies, i.e., not standing in the way. And no other country is on the horizon to challenge China's industrialization.

Some may argue that things have changed since Pingyao's glory days. The IT revolution has made the physical place for asset trading irrelevant. But Germany's plight is a reminder that when profit sources and financial centers are disconnected, bad things happen.

Germany amassed the world's biggest trade surplus over the past decade, but its financial system has been woefully underdeveloped. So it has had to rely on London bankers to recycle money into other countries. Naturally, London bankers can screw Germany; they're even paid to do so.

A decade or two from now, as a result of this mismatch, Germany may become a poor country. People may look back and pin Germany's downfall to the country's hyper-competitive manufacturing combined with an inadequate financial sector.

No Substitute

China has avoided Germany's fate so far by pouring its surplus capital into government bonds, especially U.S. Treasuries. This strategy has worked: Major economy government bonds have held up in value, even though their economies are in shambles.

But government bonds cannot sustain value if underlying economies are in constant crisis. At some point in these situations, either government debt levels become too high or tax revenues are too low. Central banks are then forced to bail out governments by printing money. China would get its money back in this scenario, but only after currency depreciation.

Unless China changes its strategy, it cannot avoid Germany's fate. China's net foreign assets have risen twice as fast as its trade surplus, mainly due to capital inflow, especially from overseas Chinese, to avoid the dollar's depreciation.

The Chinese government is essentially taking on currency risks for the entire, overseas Chinese community. If China loses its foreign exchange reserves, the central government may go bankrupt and the country's financial foundation will vanish.

In addition to risking assets, China's foreign reserves strategy is distorting the global economy. The sharp price divergence for stocks and bonds is mostly due to the fact that money is concentrating in institutions that only buy government bonds, including those in China. Oil exporting countries have even more money than China in the bond market.

Putting all that money into bonds keeps stock prices low and discourages company investment and hiring, thus destabilizing the global economy. A country that saves a lot of money must instead allocate that money effectively and efficiently to help the global economy, not just governments.

Over the past decade, though, China has been one of several countries that amassed savings but did a bad job allocating surplus capital. And over the next decade, China's money pile may grow until it dwarfs all others. If China fails to allocate this wealth effectively, the world will blame China for its ills.

Stop Sauntering

To successfully allocate this surplus capital, then, China must become the world's biggest financial center. The money must be deployed efficiently, i.e. put toward things that improve rather than impede global growth. Otherwise a backlash would impede China's development, and everyone would suffer.

An alternative to a trade surplus would be to create a massive asset bubble that exaggerates domestic demand. Japan did that in the 1980s. China is doing quite a bit now. Without a domestic asset bubble, I think, China's trade surplus would be twice its current size.

Running a bubble, though, merely delays the inevitable and leads to financial crisis. China's total property value, including work-in-progress and land reserves, is already five times GDP. The bubble is about 100 percent above the sustainable level but could double if the government allows.

When the bubble is big enough, the country will start running trade deficits rather than surpluses. But if the bubble bursts and China's currency is devalued, property values would fall to 2.5 times GDP or less and create a huge trade surplus equal to more than 10 percent GDP.

The world won't tolerate such an outcome. Countries would react with protectionist policies that shut down the global economy for everyone.

Neither will the global economy wait for China to saunter along at its own financial services development pace. Surplus capital must be injected into the global economy, and soon.

The only way out is to develop a global financial center that allocates China's surplus capital effectively and efficiently to boost global economic growth, thus safeguarding its ability to earn surpluses.

Another argument for a new board is that multinationals must expand in emerging economies such as China because their home countries don't have surplus capital. It makes sense for them to raise money in places where that money will be invested.

Many argue that an international board would hurt the A-share market. This is petty reasoning. A-share market values are low because it's concerned about growth at home and abroad. The international board would help the global economy, which would be good for China's economy. Besides, the A-share market could rally as multinational business confidence improves.

Liquidity is not a problem in China. And appropriate policy adjustments can help maintain liquidity levels that support stock investing on domestic markets.

To boost stock demand, the Chinese government could introduce new sources of funds for equities. A 401K-like retirement plan, for example, could boost A-share demand greatly, possibly by more than 100 billion yuan per annum, sufficiently offsetting fund-raisings on the international board. Raising stock investment ratios for insurance companies would provide another source of domestic equity demand.

In the end, China must internationalize its surplus capital for the global economy and its own to function normally. The alternatives are asset bubbles and financial crises. Continuing to lock up surplus money could encourage protectionism and destroy the global economy.

Saturday, July 23, 2011

Xie: Great summer slowdown

Global Economy on a Slow Summer Burn
By Andy Xie


It appears euro zone countries have managed to keep Greece afloat for the time being by providing cash assistance and getting bondholders, mainly West Europe banks, to accept a "voluntary" rollover. This deal merely kicks the can down the road. When the next wave of Greek bonds comes due, we'll see the drama repeated. Rolling over debt doesn't make the debt good, and even a rookie analyst can see that Greece can't pay its debt.

The economy in Greece is only 2 percent of the European Union's. Its national debt is 340 billion euros, less than 2 percent of total EU credit outstanding. So, in theory, a Greek bankruptcy would be no worse than that for a major corporation – painful but manageable. Besides, bankruptcy is inevitable unless someone else pays a national debt level equal to around 80,000 euros for each of Greece's 4.4 million citizens.

Why are European governments trying so hard to delay the Greek bankruptcy? Because the nation's finances are linked to the wider banking system, with two-thirds of the money owed to western banks and other foreign investors. Hence, France and Germany in particular are trying to delay it.

But the delay is just an accounting gimmick. Investors have obviously lost money, and it's sad to see European governments engage in this self-deception. Greek bonds are already pricing in bankruptcy by trading at massive discounts to par. If banks with bonds mark to market, they'd have to recapitalize immediately.

Three big rating agencies are challenging European practices by noting that the debt rollover is de facto bankruptcy. Their opinion matters because the European Central Bank can't hold bankrupt government bonds as collateral. U.S. banks pledged worthless subprime paper to the Federal Reserve to secure loans during the 2008 crisis, and now European banks are doing the same to the ECB.

Obama on a back foot.

President Obama made a big mistake when he listened to economists who advised big stimulus to get the economy and employment going again after the 2008 crisis. It would have been better to let the economy land where it would, and then recover on more solid ground in time for the 2012 election.

That's what Ronald Reagan experienced when he was president in the 1980s. Then-Fed Chairman Paul Volker raised interest rates aggressively to tame inflation and the economy crashed. But recovery came by the time Reagan was seeking re-election in 1984. He won. By then, the economy had cleaned out most of the dirt that accumulated during the high-interest rate period.

In hopes of winning the election, Obama may add to his previous mistake by piling more stimulus, providing a temporary fix but setting the stage for another crash later.

Another byproduct of Obama's mistaken policy is a new round of declines for property prices. Based on historical data, U.S. housing prices should have been cut in half after the 2008 crisis, but the government stimulus and the Fed's QE 2 gave property owners hope for recovery. So they hesitated, and the market recovered a bit last year, only to deflate hopes again. That led to the current wave of defaults, triggering another price decline.

Tuesday, July 12, 2011

Overheard this...

"Capitalism without bankruptcy is like Christianity without hell"


Friday, February 25, 2011

Election contest update

Updated Constituency list, voter number (estimated), and probable contestants.

Single Seat Ward (12, Total voters: 309,964)

Bukit Panjang (33,035)
PAP = Teo Ho Pin

Hong Kah North (27,691)
PAP = Amy Khor

Hougang (24,532)
PAP = Desmond Choo Pey Ching

Joo Chiat (22,027)
PAP = Charles Chong

Mountbatten (23,712)
PAP = Lim Biow Chuan
NSP = Jeannette Chong-Aruldoss

Pioneer (25,732)
PAP = Cedric Foo Chee Keng
RP = Kenneth Jeyaratnam

Potong Pasir (17,306)
PAP = Sitoh Yih Pin
SPP = Lina Loh (Chiam's wife)

Punggol East (33,261)
PAP = Michael Palmer

Radin Mas (31,001)
PAP = Sam Tan Chin Siong
RP = Alec Tok

Sengkang West (26,869)
PAP = Lam Pin Min

Whampoa (21,615)
PAP = Heng Chee How

Yuhua (23,183)
PAP = Grace Fu

4-Member GRC (2, Total voters: 179,057)

Holland-Bukit Timah (91,559)
PAP = Vivian Balakrishnan, Christopher De Souza
SDP = John Tan, Dr Vincent Wijeysingha, Michael Fernandez

Moulmein-Kallang (87,498)
PAP = Lui Tuck Yew

5-Member GRC (11, Total voters: 1,512,303)

Aljunied (143,024)
PAP = George Yeo

Bishan-Toa Payoh (122,416)
PAP = Wong Kan Seng

Chua Chu Kang (158,552)

East Coast (120,207)
PAP = Lim Swee Say, Maliki Osman,

Jurong (125,214)

Marine Parade (154,340)
PAP = Goh Chok Tong

Nee Soon (148,168)
PAP = K Shanmugam, Muhammad Faishal Ibrahim

Sembawang (142,351)
PAP = Khaw Boon Wan

Tampines (137,437)
PAP = Mah Bow Tan

Tanjong Pagar (139,638)
PAP = Lee Kuan Yew

West Coast (120,956)

6-Member GRC (2, Total voters: 347,767)

Ang Mo Kio
PAP = Lee Hsien Loong

Pasir Ris-Punggol (168,834)
PAP = Teo Chee Hean

Total voters: 2,349,091


Thursday, January 20, 2011

Xie on Australia and Japan

From Between a Crutch and Walking Stick: Why the dollar has got to go as the world's reserve currency – and how the euro will replace it.


Some (developed economies) are behaving like nothing has happened. Australia stands out in that regard. Its household debt has surged by 20 percent since the Crisis hit and recently surpassed 100 percent of GDP. Its household debt to disposable income ratio, at 156 percent, is the highest among major economies in the world. Australia has had 4.5 percent of GDP in annual current account deficit for two decades, i.e., its household debt is funded by foreign capital inflow. Its property market is still booming. When you see rapidly rising household debt, a big current account deficit, and a booming property market, it is a credit-cum-property bubble for sure.

Australia's bubble has survived the 2008 crisis because commodity prices came on the back of the Fed's zero interest rate policy and China's massive credit growth. The Australian bubble is very likely to burst when commodity prices fall sharply. Either a substantial economic slowdown in China or spiking U.S. interest rates would trigger it.

Australia is an exception. The booming commodity market is giving it the choice not to adjust. Some economies must adjust and fast, because they depend on foreign capital for financing. Iceland, Greece, and Ireland are small economies that depend on foreign capital to fund their fiscal deficits, i.e., they run large current account deficits and don't have sufficient domestic savings to fund their government deficits.


Japan is another economy that hasn't decreased its leverage; the belt tightening in the private sector has been offset by the government's deficit spending. Japan's debt level is truly frightening. But, it has been that way for two decades. The reason for its stability is due to its high domestic savings rate. Japan has been consistently running large current account surplus, i.e., sending its savings surplus abroad, for decades. Japanese people have extremely high home bias in deploying their savings. Japan's government can borrow at extremely low interest rate. Hence, it has no incentive to change its behavior.

Only a sustained current deficit would change Japan's dynamics. An aging and declining population is slowly bringing down Japan's savings rate. But Japan's investment need is declining too. Hence, it is still running a significant current account surplus. The situation will change in a decade or so. Japan is unlikely to change without an external constraint. I suspect that Japan will look the same a decade from now.

Tuesday, January 18, 2011

Amy Chua is a Wimp

January 17, 2011

Sometime early last week, a large slice of educated America decided that Amy Chua is a menace to society. Chua, as you probably know, is the Yale professor who has written a bracing critique of what she considers the weak, cuddling American parenting style.

Chua didn’t let her own girls go out on play dates or sleepovers. She didn’t let them watch TV or play video games or take part in garbage activities like crafts. Once, one of her daughters came in second to a Korean kid in a math competition, so Chua made the girl do 2,000 math problems a night until she regained her supremacy. Once, her daughters gave her birthday cards of insufficient quality. Chua rejected them and demanded new cards. Once, she threatened to burn all of one of her daughter’s stuffed animals unless she played a piece of music perfectly.

As a result, Chua’s daughters get straight As and have won a series of musical competitions.

In her book, “Battle Hymn of the Tiger Mother,” Chua delivers a broadside against American parenting even as she mocks herself for her own extreme “Chinese” style. She says American parents lack authority and produce entitled children who aren’t forced to live up to their abilities.

The furious denunciations began flooding my in-box a week ago. Chua plays into America’s fear of national decline. Here’s a Chinese parent working really hard (and, by the way, there are a billion more of her) and her kids are going to crush ours. Furthermore (and this Chua doesn’t appreciate), she is not really rebelling against American-style parenting; she is the logical extension of the prevailing elite practices. She does everything over-pressuring upper-middle-class parents are doing. She’s just hard core.

Her critics echoed the familiar themes. Her kids can’t possibly be happy or truly creative. They’ll grow up skilled and compliant but without the audacity to be great. She’s destroying their love for music. There’s a reason Asian-American women between the ages of 15 and 24 have such high suicide rates.

I have the opposite problem with Chua. I believe she’s coddling her children. She’s protecting them from the most intellectually demanding activities because she doesn’t understand what’s cognitively difficult and what isn’t.

Practicing a piece of music for four hours requires focused attention, but it is nowhere near as cognitively demanding as a sleepover with 14-year-old girls. Managing status rivalries, negotiating group dynamics, understanding social norms, navigating the distinction between self and group — these and other social tests impose cognitive demands that blow away any intense tutoring session or a class at Yale.

Yet mastering these arduous skills is at the very essence of achievement. Most people work in groups. We do this because groups are much more efficient at solving problems than individuals (swimmers are often motivated to have their best times as part of relay teams, not in individual events). Moreover, the performance of a group does not correlate well with the average I.Q. of the group or even with the I.Q.’s of the smartest members.

Researchers at the Massachusetts Institute of Technology and Carnegie Mellon have found that groups have a high collective intelligence when members of a group are good at reading each others’ emotions — when they take turns speaking, when the inputs from each member are managed fluidly, when they detect each others’ inclinations and strengths.

Participating in a well-functioning group is really hard. It requires the ability to trust people outside your kinship circle, read intonations and moods, understand how the psychological pieces each person brings to the room can and cannot fit together.

This skill set is not taught formally, but it is imparted through arduous experiences. These are exactly the kinds of difficult experiences Chua shelters her children from by making them rush home to hit the homework table.

Chua would do better to see the classroom as a cognitive break from the truly arduous tests of childhood. Where do they learn how to manage people? Where do they learn to construct and manipulate metaphors? Where do they learn to perceive details of a scene the way a hunter reads a landscape? Where do they learn how to detect their own shortcomings? Where do they learn how to put themselves in others’ minds and anticipate others’ reactions?

These and a million other skills are imparted by the informal maturity process and are not developed if formal learning monopolizes a child’s time.

So I’m not against the way Chua pushes her daughters. And I loved her book as a courageous and thought-provoking read. It’s also more supple than her critics let on. I just wish she wasn’t so soft and indulgent. I wish she recognized that in some important ways the school cafeteria is more intellectually demanding than the library. And I hope her daughters grow up to write their own books, and maybe learn the skills to better anticipate how theirs will be received.

The War on Logic

January 16, 2011

My wife and I were thinking of going out for an inexpensive dinner tonight. But John Boehner, the speaker of the House, says that no matter how cheap the meal may seem, it will cost thousands of dollars once you take our monthly mortgage payments into account.

Wait a minute, you may say. How can our mortgage payments be a cost of going out to eat, when we’ll have to make the same payments even if we stay home? But Mr. Boehner is adamant: our mortgage is part of the cost of our meal, and to say otherwise is just a budget gimmick.

O.K., the speaker hasn’t actually weighed in on our plans for the evening. But he and his G.O.P. colleagues have lately been making exactly the nonsensical argument I’ve just described — not about tonight’s dinner, but about health care reform. And the nonsense wasn’t a slip of the tongue; it’s the official party position, laid out in charts and figures.

We are, I believe, witnessing something new in American politics. Last year, looking at claims that we can cut taxes, avoid cuts to any popular program and still balance the budget, I observed that Republicans seemed to have lost interest in the war on terror and shifted focus to the war on arithmetic. But now the G.O.P. has moved on to an even bigger project: the war on logic.

So, about that nonsense: this week the House is expected to pass H.R. 2, the Repealing the Job-Killing Health Care Law Act — its actual name. But Republicans have a small problem: they claim to care about budget deficits, yet the Congressional Budget Office says that repealing last year’s health reform would increase the deficit. So what, other than dismissing the nonpartisan budget office’s verdict as “their opinion” — as Mr. Boehner has — can the G.O.P. do?

The answer is contained in an analysis — or maybe that should be “analysis” — released by the speaker’s office, which purports to show that health care reform actually increases the deficit. Why? That’s where the war on logic comes in.

First of all, says the analysis, the true cost of reform includes the cost of the “doc fix.” What’s that?

Well, in 1997 Congress enacted a formula to determine Medicare payments to physicians. The formula was, however, flawed; it would lead to payments so low that doctors would stop accepting Medicare patients. Instead of changing the formula, however, Congress has consistently enacted one-year fixes. And Republicans claim that the estimated cost of future fixes, $208 billion over the next 10 years, should be considered a cost of health care reform.

But the same spending would still be necessary if we were to undo reform. So the G.O.P. argument here is exactly like claiming that my mortgage payments, which I’ll have to make no matter what we do tonight, are a cost of going out for dinner.

There’s more like that: the G.O.P. also claims that $115 billion of other health care spending should be charged to health reform, even though the budget office has tried to explain that most of this spending would have taken place even without reform.

To be sure, the Republican analysis doesn’t rely entirely on spurious attributions of cost — it also relies on using three-card monte tricks to make money disappear. Health reform, says the budget office, will increase Social Security revenues and reduce Medicare costs. But the G.O.P. analysis says that these sums don’t count, because some people have said that these savings would also extend the life of these programs’ trust funds, so counting these savings as deficit reduction would be “double-counting,” because — well, actually it doesn’t make any sense, but it sounds impressive.

So, is the Republican leadership unable to see through childish logical fallacies? No.

The key to understanding the G.O.P. analysis of health reform is that the party’s leaders are not, in fact, opposed to reform because they believe it will increase the deficit. Nor are they opposed because they seriously believe that it will be “job-killing” (which it won’t be). They’re against reform because it would cover the uninsured — and that’s something they just don’t want to do.

And it’s not about the money. As I tried to explain in my last column, the modern G.O.P. has been taken over by an ideology in which the suffering of the unfortunate isn’t a proper concern of government, and alleviating that suffering at taxpayer expense is immoral, never mind how little it costs.

Given that their minds were made up from the beginning, top Republicans weren’t interested in and didn’t need any real policy analysis — in fact, they’re basically contemptuous of such analysis, something that shines through in their health care report. All they ever needed or wanted were some numbers and charts to wave at the press, fooling some people into believing that we’re having some kind of rational discussion. We aren’t.