The Obama administration tells us that the government deficit is going to be well over $1 trillion a year for at least ten years. And that does not take into account the outlier years in the 2020s when the really heavy lifting of Social Security and Medicare kicks in.

There is a truism that goes a little like, “If something can’t happen, then it won’t.” Let me make a prediction. We won’t have a trillion-dollar deficit in ten years. Why? Because it can’t happen. The market will simply not allow it.

via Thoughts from the Frontline.

And another:

Just as I was writing in 2006 about the potential for a crisis, and yet the party went on for quite some time, I think the party can limp along now. But there will come a point when the party is over. Interest rates on the long end will rise precipitously, forcing mortgages up and making the deficit even worse. It will be an even worse crisis than the one we have just gone through. And there will be fewer options for policy makers, and none of them will be good or pleasant. And it will take most people unawares. They will see the current trend and project it into the future. And they will be hit hard.

Can we avoid this calamity? Yes, we can wrestle the US budget deficit back under some kind of control, close to nominal GDP or on a clear trajectory to get there within a reasonable time (say, a few years). As noted above, we can run deficits close to nominal GDP almost forever. But there is no political willpower to do that now. And so, the market will at some point force the hand of the political class. That investor in St. Louis, or China or (????) will decide not to buy government debt at such low rates. The avalanche will start. And everyone will be surprised at the ferocity of the crisis. Except you, gentle reader. You have been warned.

This rings very true.  I would add that I think the next crisis will be a simultaneous financial and political one.  In this crisis, policy makers stepped in put the financial markets on life support.  But now that their destinies are tied, their destinies will rise and fall together through the next crisis.

There will be no change now.  Our current leadership has shown their true colors for too long.  Hopefully, after the next crisis, we will have leaders and a leadership structure that puts a premium on effective action.

On the flip side, the article also points out how there are some positive changes that could happen – it’s just a bit scary to think we have to keep our fingers crossed that the good outweighs the bad.  We are used to dealing with this sort of uncertainty from nature, but human built systems are supposed to minimize the down side and maximize the upside.  Maybe man made things don’t defy nature as much as we think.

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Julian Stevens, of Moorfields Eye Hospital, is an expert on laser refractive surgery. He has, in the past, offered tailored treatment for members of the special forces. “They require 1,000-metre vision at night,” he said. “It is the same for fighter pilots.”

Surgeons offer eyesight tailored to an individual’s life and career – Times Online.

We are entering an age where we will have an unparalleled ability to alter ourselves, specializing or bodies as much as we have specialized our minds through education.  This kind of tinkering will forever change our society.

Look at the NFL today vs. 60 years ago.  Players are bigger, stronger, and faster.  But that difference will be nothing compared to what science will soon allow us to do.  In 50 years, what physical enhancements you have may be more meaningful than your education or experience on the job hunt.

I don’t know if it will be good or not, but it will certainly be different.

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Many have lived beyond their incomes simply because incomes have been outstripped by the costs of middle-class life. By the fall of 2008, most American workers were bringing home roughly the same weekly wages they had earned in 1983, after accounting for inflation.

via As Jobs Are Lost in Recession, So Is the Middle Class – NYTimes.com.

So with the current social engineering our system provides, we can’t all live “middle class lives” because what is now considered middle class is actually quite upper class.  The end result of the degree of income inequality in this country is that middle class is the old upper class, and the old upper class is something newer and far wealthier than anything since the days of the “robber barrons” at the turn of the century

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Today more than two-thirds of Americans own their own homes. Among whites, more than 75% are homeowners today.

Yet the story of how the dream became a reality is not one of independence, self-sufficiency, and entrepreneurial pluck. It’s not the story of the inexorable march of the free market. It’s a different kind of American story, of government, financial regulation, and taxation.

We are a nation of homeowners and home-speculators because of Uncle Sam.

Via The New American Dream: Renting

A great analysis of the interplay between home ownership and politics.

I have the suspicion that one day, the American Dream of home ownership will be an example of the kind of policy that can only be sustained in a country by the rising tides that come with  being the most dynamic economy in the world.  I fear that we will bear the burden of the entitlement programs those years left behind long after the party is over.

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•Equalize the tax laws so that employer-provided health insurance and individually owned health insurance have the same tax benefits. Now employer health insurance benefits are fully tax deductible, but individual health insurance is not. This is unfair. (This IS unfair… it’s worth repeating).

•Repeal all state laws which prevent insurance companies from competing across state lines. We should all have the legal right to purchase health insurance from any insurance company in any state and we should be able use that insurance wherever we live. Health insurance should be portable. Amen, but to do this you have to do the next one first…

•Repeal government mandates regarding what insurance companies must cover. These mandates have increased the cost of health insurance by billions of dollars. What is insured and what is not insured should be determined by individual customer preferences and not through special-interest lobbying.  Agreed completely, although we might need to do a makeover of how we explain what is covered and is not… for instance, right now my medical insurance would not cover an annual eye exam, but if undetected glaucoma blinded me and I needed eye surgery, I’d be covered… very intuitive and easy to understand as always.

•Enact tort reform to end the ruinous lawsuits that force doctors to pay insurance costs of hundreds of thousands of dollars per year. These costs are passed back to us through much higher prices for health care. Agreed in theory, but calling for tort reform is kinda like sayiing your want to eat healthier – its much easier to say it and bury your head in a box of fried chicken than to actually do it.

•Make costs transparent so that consumers understand what health-care treatments cost. How many people know the total cost of their last doctor’s visit and how that total breaks down? What other goods or services do we buy without knowing how much they will cost us?  I don’t think anyone knows what medical care actually costs – there is what providers bill, what network plans pay, what non-network plans pay, and what medicare pays.  Giving consumers a copy of the bill would be a step in the right direction, but part of the problem is that it often takes weeks of back and forth between providers, patients, and insurance companies to find out who pays what and how much.

•?Enact Medicare reform. We need to face up to the actuarial fact that Medicare is heading towards bankruptcy and enact reforms that create greater patient empowerment, choice and responsibility. Let’s do Social Security too while we’re at it.

•Finally, revise tax forms to make it easier for individuals to make a voluntary, tax-deductible donation to help the millions of people who have no insurance and aren’t covered by Medicare, Medicaid or the State Children’s Health Insurance Program.  Of the many things about taxes and tax forms that need revising, this is pretty low down on the list.

via John Mackey: The Whole Foods Alternative to ObamaCare – WSJ.com.

Aside from his reform ideas, Mackey provides one other insight that sticks out

At Whole Foods we allow our team members to vote on what benefits they most want the company to fund. Our Canadian and British employees express their benefit preferences very clearly—they want supplemental health-care dollars that they can control and spend themselves without permission from their governments. Why would they want such additional health-care benefit dollars if they already have an “intrinsic right to health care”? The answer is clear—no such right truly exists in either Canada or the U.K.—or in any other country.

Overall this is a very clear and succinct article about what is wrong with health care, what trade-offs exist, and what choices we make.

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Growth: Why the Stats Are Misleading – BusinessWeek.

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via Economic Principals » Blog Archive » Auctions and Politicians.

Click through to see how evolving technology is allowing for the design of sophisticated auctions that has the potential to solve problems with (and change) our economy and government.

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Another gem about why banks were so unprepared for a catastrophic economic situation:

The individuals who were running large financial institutions had an opportunity to pursue strategies that resembled, in terms of their reward structures, going short on extreme market volatility. Those strategies paid off for years but ended in disaster. Until the volatility actually arrives, this trading position will appear to yield supernormal profits, and indeed, the financial sector was enormously profitable until the asset-pricing bubbles burst.

From a publication by economist/blogger Tyler Cowen.   See the full article here.

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Arguably, better matching pay with value created is ideal, but it is also difficult to measure, which is why we rewrite the rules of financial services compensation every 15 years or so.  Creating new regulations and better modeling risk both have the same problem: how do you accurately identify and measure risk?  If you subscribe to murphy’s law (maybe it should be renamed Taleb’s law), you will take on too little risk.  If you use the computer programs of recent years, you will obviously take on too much.

I think the best solution will be the one that fights complexity with simplicity.  If banks are required to hold a percentage of the assets they generate, they will be much more invested in generating quality assets.   If non-bank financial institutions are allowed to do the same things as banks, why are they regulated differently?  All of the slicing and dicing of securities combined with the insuring and reinsuring created a tangle beyond comprehension of any participant, let alone risk management (this might be pushing it, but all these agreements remind of the secret alliances that were a part of making world war I a world war – no one knew enough about everyone else’s commitments to take appropriate action).

Financial innovation will always outpace regulation because there is money to be made, but smart regulations will make the system simpler and clearer, rather than adding pages and pages of new rules to administer and loopholes to exploit.  Although, all those regulations and loopholes do make for big business…

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Veach and Kamangar argued that all the ad slots should be auctioned off. In search, Google had already used scale, power, and clever algorithms to change the way people accessed information. By turning over its sales process entirely to an auction-based system, the company could similarly upend the world of advertising, removing human guesswork from the equation.

The move was risky. Going ahead with the phaseout… meant giving up campaigns that were selling for hundreds of thousands of dollars, for the unproven possibility that the auction process would generate even bigger sums. “We were going to erase a huge part of the company’s revenue,” says Tim Armstrong, then head of direct sales in the US… “Ninety-nine percent of companies would have said, ‘Hold on, don’t make that change.’ But we had Larry, Sergey, and Eric saying, ‘Let’s go for it.’”

via Secret of Googlenomics: Data-Fueled Recipe Brews Profitability.

This is an amazing, must read article.  On it’s face, it is about the chief economist at Google, but it is really about how Google (and other itnernet busienses) are combining technology and economics to create better (more efficient and profitable) business models.

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