Rather than trying to understand the current dynamics of monetary policy with a drought management metaphor, perhaps we could turn to the musical stylings of Ms Lily Allen:

Allen, speaking for the American people, is in a conflicted mood. “I want to be rich and I want lots of money,” she says, ignoring the fact that holding her savings as money rather than investing in higher-risk higher-yield assets is undermining the goal of wealth accumulation. Worse, she’s also spurred by instincts toward rapacious consumerism: “I want loads of clothes and fuckloads of diamonds.” Were she to achieve her aspiration of clothes-and-jewelry purchases, the economy would get moving again via employment in the relevant manufacturing and retail sectors. But in the real world, Allen is liquidity-constrained and her desire to stockpile cash prevents her from engaging in stimulative consumption. Once upon a time this wasn’t a big issue, as she sings there’s the debt option: “it doesn’t matter cause I’m packing plastic / and that’s what makes my life so fucking fantastic.”

Today, though, she’s “being taken over by the fear.” Prudent people have become concerned about the future and are attempted to transform as much of their income as possible into safe, highly liquid assets. This is causing a general glut of goods and services. What’s more, “the fear” affecting wealth holders is preventing the less-prudent from securing credit to finance their consumption or investment activities—that kind of lending, after all, is neither safe nor highly liquid. As a knock-on consequences of this, the inflation rate has been dropping and the price level is well below its expected destination. Due to money illusion, this is confusing people who “don’t know what’s right and what’s real anymore” distracted as they are by nominal prices.

The developed world’s population has not, however suddenly become lazy or indolent (“I’m not a saint and I’m not a sinner”), the problem is that elites have betrayed the population by failing to respond adequately to the rise of the fear. The excess desire for money can be met by printing additional money. The excess aversion to risk can be met with guarantees. Unfortunately, both congress and the Federal Reserve are themselves afflicted by the fear. Hence our current predicament.

I’m not very interested in the underlying dispute between Scott Winship and Mike Konczal, but I did think this Winship chart about health insurance was interesting:

I emailed Winship to ask him what this data looks like if we examine the under-65 crowd. To the eyeball, at least, the big story on this chart seems to be the creation of Medicare and then the aging of the population pushing a larger share of people into Medicare-eligibility. The answer turns out to be a bit interesting. Look at private insurance among working age people:

This decline in private health insurance coverage has, however, been entirely offset by an increase in the number of working age people on Medicaid, which stood at 13 percent in 2008. Among the under-18 set, private insurance is even rarer and public coverage even more common, since children are both poorer-than-average and politically easier to cover. In terms of causation, my understanding is that this is a blend of Medicaid “crowding out” private coverage and Medicaid filling a gap in private insurance’s affordability. The Affordable Care Act is going to continue this trend by substantially expanding Medicaid coverage.

I’ve been writing about barbers, but at the end of the day a the more important instances of license-driven cartelization occur in the health care sector. When we talk about health care in the United States, I think it should be uncontroversial to say that we have a cost-growth problem. And as Adam Ozimek observers, one reason is that high-wage occupations are using licensing rules to stifle competition from cheaper alternatives. If you’re a good boy like me and go to the dentist regularly to get your teeth cleaned, you’ve probably noticed that the dentist doesn’t actually clean your teeth. A dental hygenist does. So why don’t the hygenists band together and cut out the dentist? Well, they frequently can’t:

For instance, many states have regulations preventing dental hygienists from practicing without the supervision of a dentist. Dentists have an average of six years more schooling than a hygienists, who on average have 2.6 years of post high-school education. In addition, dentists make on average $100 an hour, and are 80% male, whereas hygiensts are 97% female and make around $37 an hour. Kleiner and Park find that these regulations transfer $1.5 billion dollars a year from hygiensts to dentists. This is a highly regressive transfer to a male dominated, higher educated, higher paid job from a female dominated, lower educated, lower paid job. In a very similar vein with likely similar impacts, many states restrict the ability of nurses to practice without the supervision of doctors. In fact these regulations are currently growing as regulators rush to restrict the number nurses working in retail health clinics in a variety of ways to prevent them from competing with doctors.

Not only does forcing hygenists to be “supervised” by a dentist raise the price of routine tooth-cleaning, it also raises the price of dental health services that really do require a dentist’s skill and training since it induces dentists to spend a share of each day shaking hands with patients who don’t need their expertise. This creates artificial scarcity in the supply of high-end dental services.

The bigger issue—though harder to estimate—is the way that these rules stifle potentially enormous gains from organizational innovation. Imagine a world in which in order to make clothes you needed a license from the State Board of Tailors, and the tailor lobby manages to persuade the state to extend the tailor’s monopoly by saying that to sell clothing you need to be under the supervision of a tailor. This set of rules doesn’t just reduce competition in the fields of clothing manufacturing and retailing. It prevents the technological and organizational innovations that have brought us mass-produced clothing, and retail chains. The cartel would justify its existence in the name of high-quality and consumer protection. And it’s even true that if we all went to work in handmade shirts and bespoke suits that we’d be wearing higher-quality clothing. But the impact on overall living standards would be devastating. There’s no H&M or Ikea of the health care sector, and there never will be without some relaxation of the rules governing who’s allowed to be a provider of health care services.

I’m perhaps more sensitive to this than most since I’m a first-generation political blogger and I can only imagine what the Massachusetts Board of Journalism would have done to me if it was illegal to provide news media services without a license back in 2002. But the potential social cost to letting professional groups insulate themselves from disruptive innovation is incalculable.

(cc photo by rollingrck)

One of the most unfortunate trends in American politics is the tendency of the conservative and libertarian types who are ideologically predisposed to be aware of the problems with public sector programs to be totally uninterested in actually making the public sector work better. Thus you get things like Tad DeHaven from the Cato Institute launching an on attack on public sector leaders who try to make the public sector more efficient that condemns recommendations of a “pie-in-the-sky ‘good government’ variety,” ignoring considerable evidence that good government is a key driver of prosperity.

DeHaven even winds up advancing the odd assertion that “[m]aking government ‘more efficient’ is all well and good, but if the “savings” just get plowed into other programs – as has been the case in Indiana – then taxpayers aren’t any better off.” That’s nuts. Consider a state that spends money on different programs that are supposed to reduce the level of crime. The state has prisons. The state has police officers. The state has parole officers. And within those broad fields of endeavor, different kinds of things are happening. It matters a great deal to taxpayers whether resources are being allocated efficiently inside that system. If it turns out that the marginal dollar spent on police salaries is less valuable than the marginal dollar spent on literacy education programs for prisoners, then cutting the size of the police force and expanding literacy education will reduce crime, thus benefitting taxpayers. Alternatively, if it turns out that reducing spending on prison and increasing the number of police officers will reduce crime, that would also benefit taxpayers.

You could go on like this. If we’re considering two transportation proposals, and one costs 20 percent more but is much more useful than agreeing to the net increase in spending is probably the more beneficial choice for taxpayers.

Debates about the overall size and costliness of the public are inevitable and healthy. But what’s not healthy is to have a politics that’s completely dominated by this question to the exclusion of all others. There’s a huge difference between dollars spent on useful infrastructure and dollars spent on pointless boondoggles. There’s a big difference between dollars spent on schools that help kids learn and schools that don’t. There’s a big difference between paying the salary of a barber cartel enforcer and paying the salary of a regulator who’s preventing deadly oil spills. This stuff matters enormously, but if our overall political conversation insists on ignoring it we’re bound to get it wrong.