By Dean Baker

In the matter of a few short weeks in the summer of 1997 the thriving countries of East Asia saw their economies overwhelmed by a financial tsunami. First Thailand and Indonesia, and then South Korea and Malaysia, saw investors panic and watched capital flee. Their currencies plummeted in value and their biggest companies wrestled with bankruptcy.

After being held up as models of successful development, these countries were suddenly denounced by the IMF and prominent economists everywhere for their lack of transparency, poor accounting standards, and crony capitalism. The IMF came into the region with a rescue plan that imposed harsh conditions. It demanded that these countries impose austerity plans and allow foreign investors to buy up their businesses at depressed stock prices.

The other part of the story was that the IMF insisted that these countries repay their debts. The only way that they could do this was to export like crazy. This route was opened to these countries by the plunge in the value of their currencies, most importantly against the dollar. The result was that goods from the region became very cheap to consumers in the United States, leading to a flood of imports to the United States.

 

There was a second route that the IMF could have followed for debt repayment. In recognition of the severity and extraordinary nature of the crisis, the IMF could have allowed for substantial write-downs of debt by the countries of the region. But it chose not to go this route.

Of course the IMF was not an independent actor. The IMF takes it lead from the United States. At the time, the folks calling the shots were the trio that Time Magazine dubbed the "Committee to Save the World (CSW)": Alan Greenspan, Robert Rubin, and Larry Summers.

The IMF rescue for East Asia had important ramifications for the rest of the developing world. The message that developing countries took away from the IMF's East Asia "rescue" was that they never wanted to be in a situation in which they were forced to turn to the IMF for help. The one way that they could prevent being forced to turn to the IMF was to accumulate massive amounts of foreign reserves as a defense. The only to accumulate foreign reserves is to run a balance of trade surplus.

This effort by developing countries to accumulate reserves meant that it was not only the countries of East Asia who were exporting like crazy, but rather the whole developing world (including China). Reversing the conventional view in economic theory, in the years after 1997 there was a massive flow of capital from the developing world to the wealthy countries, with the United States being the biggest recipient.

 

This capital flow from the developing world created the hot house in which the U.S. housing bubble could flourish. The jobs lost to imports created weakness in the labor market. Even though the 2001 recession officially ended in November of that year, the economy continued to shed jobs for nearly two more years, in part due to the loss of jobs to imports. Seeing this weakness in the labor market, the Fed continually pushed interest rates lower, reaching 1.0 percent in the summer of 2003.

Low interest rates in turn sustained the bubble far longer than otherwise would have been possible. The bubble itself helped to conceal many of the excesses and outright fraud perpetuated during these years. In a world where house prices are rising by more than 10 percent a year, and generating enormous profits for the firms in the real estate and banking sector, many sins can be concealed.

But bubbles inevitably burst. The bursting of the housing bubble will erase $8 trillion in housing wealth (more, if prices overshoot) and will leave many of the country's pre-eminent financial institutions bankrupt. More importantly, it is throwing the U.S. economy into its worst downturn since the Great Depression.

In history, we never get second chances, but it is still worth asking the question of what the world would look like if the CSW had taken the other path. Suppose Greenspan, Rubin, and Summers had instead arranged for the IMF to write down a large portion of the East Asian debt so that they were not forced to place the same priority on exports.

Furthermore, a less onerous rescue would not have created the same rush to accumulate reserves across the developing world, as did the bailout designed by the CSW. We can't know exactly how things might have turned out if the CSW taken this alternative path, but it's likely that Mr. Rubin's shares in Citigroup would be worth considerably more money today.

n       This article was published on March 9, 2009 by The Guardian Unlimited.

 


Competing Views of Government: Universal Medicare or Government-Protected Insurance Companies

By Dean Baker 

We all know that people have different ideologies about the proper role of government. Some people, who tend to be left of center, think that the government's role is to try to promote the general good, by providing basic services, protecting the poor and the sick, and ensuring a well-working economy. On the other hand, there are others, who usually place themselves right of center, who believe that the proper role of government is to redistribute as much income as possible to the wealthy.

 

These competing views of government are coming to a head in the debate over national health care reform. Those who think that the role of government is to serve the public good are likely to favor some form of universal Medicare. Such a system would almost certainly save a huge amount in administrative costs at the level of insurers, providers, and government oversight.

Private insurers spend more than 15 percent of the money they collect in premiums on administrative costs. By contrast, Medicare spends about 2 percent. Part of the insurers' administrative expenses go toward marketing - an expense that would be unnecessary in a universal Medicare system.

The other major factor driving administrative costs with private insurers is associated with their efforts to game the system. Gaming is the best way to make profits in the current system. If insurers can find effective mechanisms for either keeping sick people from being insured, or finding ways to deny coverage for expensive care, then they stand to make large profits. Naturally, profit-maximizing insurers will therefore devote substantial resources to trying to avoid ways to provide health care to people who need it.

 

 

At the level of providers, the wide range of divergent forms and policies employs hundreds of thousands of people in administrative positions in hospitals, doctors' offices, nursing homes and other providers. These people are often quite adept at dealing with various insurers, which is an important skill in our current system, but a task that would disappear if we had a universal Medicare system.

Finally, the state and federal governments must devote substantial resources for oversight to police the practice of insurers. Oversight agencies are essential for limiting abuse. This task would be much simpler if there were not corporations that stood to profit by keeping people from getting needed care.

While we could in principle shift to a universal Medicare system immediately, this would be an extremely difficult task politically and would present some serious practical problems as well. During his campaign, President Obama proposed something far more modest: give employers and individuals the choice to buy into a public Medicare-type program. Under this system, if people are happy with their current health care insurance, they would have the option to keep it. However, if they decided that the plan offered by the government was better, they could buy into it.

In this situation, insurers would compete with the government plan in the market. If private insurers could offer health insurance that provided better coverage or charged less, then people would have the option to buy into a private plan. Of course, the government would also regulate the market so that private insurers could not cherry-pick their way to profitability by insuring only healthy people and dumping them when they became sick.

The insurance industry already recognizes that it will lose out in this sort of competition. A government-run plan will be more efficient. We already know this based on the experience with Medicare. When private insurers have competed side by side with the traditional government Medicare plan, in the absence of government subsidies, the overwhelming majority of beneficiaries opted to go with the traditional Medicare plan.

This is why the insurers are yelling that they don't want to face "unfair" competition from a government plan. But, their complaint should be all the endorsement that the public needs to support a public Medicare-type plan. The public plan will be cheaper and better than what the private insurers have to offer. Why shouldn't the public then have this option?

We all know that the insurance industry executives and the company shareholders want to make lots of money, but maybe they should try to find an industry where they can compete. If the government can provide health insurance better and cheaper, then why do we need private insurers?