Always Talking About the Wrong Thing: Obama's Birth, Government Takeover of Health Care and Hyper-Inflation

Recent news provides us with three examples of how and why we are always focused on the wrong issues in this country. Perhaps that's why we always get wrong solutions.

Yes, Virginia, Obama Was Born

President Obama released his "official" birth certificate today and lo and behold, he was actually born and not sprouted out of the ground or sent here by aliens.

Turned out that Michelle Bachmann knew that Obama was born when and where he represented. She admitted that last week. The politics of the past 2 years caused her to promote the lie that Obama was not born in the U.S. It made her a sweetheart of the tea parties. The politics of today made it more politically beneficial of her to move past the topic. It allows her to differentiate her presidential bid from Donald Trump's. She had no remorse or regret for her smear of the President or lying to the American public from her congressional pulpit.

Taking Government Out of Health Care When It Was Never Really In

Another example of our misguided political discourse is the debate over health care reform. David Corn wrote an interesting article on the "government takeover of health care" lie for the May/June 2011 issue of Mother Jones. It's the story of how difficult it is to combat an organized spreading of a sound byte lie.

Of course, the real story of health care reform was the improbability that the new law would reduce insurance premiums. I spoke to a health insurance agent on Monday. I was hoping he would be able to find me a more affordable policy with a smaller deductible. He couldn't. He did find me a health care reform compliant policy that would have added some preventative care, but that would have increased my premium by about 40%. He also told me to expect large premium increases in the next year.

The agent said that the problem with the new law was that the 80/20 rule requiring insurance plans to pay out at least 80 percent of premiums in benefits. It's supposed to punish insurers for spending too much in administrative costs, but it operates as an incentive to keep premiums high so administrative costs can be paid. This did not come from an anti-reform right-wing tea partier. This agent is a Democrat who I met through another Democratic activist.

The problem of high health insurance administrative costs was never going to be solved with a mathematical formula like the 80/20 rule. The problem was never due to insurance companies charging administrative costs they did not incur. The problem is that insurance companies incur administrative costs because they are incentivized to find reasons to deny coverage. It's simple. They make more money if they deny coverage more often and they save more in benefits not paid out than they pay to find reasons to deny coverage. The real issue is how to take away the profit incentive to deny coverage. That means taking health care out of the category of goods and services and characterizing it as a human right. We don't  have a problem with too much government in health care, we had a problem with too little. But, Republicans had a good sound byte and sales team on the "government takeover" meme as noted by David Corn, so the entire conversation was about how to keep government out of health care as much as possible. The result is more access, but only for the wealthy who can afford it and already had pretty good access to begin with.

Mark Kirk's Junk Economic Indicators Give Junk Economic Solutions

A more recent example of setting the conversation on the wrong path comes from Mark Kirk's latest email. He sent around a chart from the St. Louis Fed that describes the Adjusted Monetary Base to get people worried about inflation. Here's the chart:

The problem is that this chart alone does not say anything about whether there is or is not a worrisome inflation on the horizon. The "adjusted monetary base" is an economic index that measures "the effects on a central bank’s balance sheet of its open market operations, discount window lending, unsterilized foreign exchange market intervention, and changes in statutory reserve requirements." More simply put, its the sum of the currency held by the public and reserves held by financial institutions with the Federal Reserve Banks and even more simply put (the UK definition, but it's illustrative here as well) it's the money supply in common use.

So, isn't a rising monetary base inflation?

Well, no. While there is a relationship between money supply and inflation, the monetary base is only one component of the money supply and the money supply is only one component of inflation. The relationship is described by an equation wherein the price and quantity of assets, goods and services sold can be predicted by the money supply (of which the monetary base is one component). However, you also have to take into account demand--the quantity of assets, goods and services sold. When there is high unemployment and shrinking demand, the money supply is going to be less of a factor in creating inflation.

The real story behind Kirk's email has little to do with real economics. The extremist right wing has been floating the meme that we are headed toward hyper-inflation. It's been a favorite topic of the John Birch Society for a while now. It's the whole Ron Paul gold standard/buy gold now stuff that sent Jared Lee Loughner over the edge.

Harvard economics professor Greg Mankiw looked at a similar Monetary Base chart in 2009 and asked, "So what?" Mankiw responded to the chart by explaining that the monetary base is being held as reserves. The excess money is not flowing, so it's not inflationary. Mankiw says that we should care about inflation, but not because of the reserves being held by banks. The inflation concern should be understood in terms of pressures on the fed to take action to prevent double dip recession. Here's another explanation from Econobrowser.

Krugman also believes that the monetary base has little to do with threats of inflation pointing to the "liquidity trap" and basically agreeing with Mankiw adding that government borrowring has not offset reduced private borrowing. More from Krugman here and here. At the latter link, Krugman explains why inflation is a real problem in emerging economies where the demand is increasing, but not here where demand is declining.

So, as usual, Mark Kirk is asking us to focus on the wrong thing while pushing extremist right-wing views on hyper-inflation and trying to make them sound "moderate". The argument is that government spending and borrowing is causing price increases. It's a scare tactic to get Americans to agree to end Medicare and reduce Social Security. It's also an excuse to take attention away from unchecked speculation in commodities markets that is translating into artificially increased prices on goods such as food and gas. See here too.

Mark Kirk still hasn't figured out that for most of us, there's still a recession out there and that we have a demand side economy. To bring our economy back from the edge we have to spend to support demand.

Until Americans demand news and commentary on real issues, we're going to continue to get the junk discussions and junk solutions.