Was Medicare Availability Linked to a Black Swan Event?

In a recent post, Scott Sumner looks at the gradual fade out of gold redemption over a forty year stretch in the U.S. Why did this black swan (i.e. relatively rare) event occur, after a long historical period in which gold (and related) standards remained quite stable? To be sure, there are no easy answers. Like Scott, I am inclined to agree with 1968 as an identification point, when the "gold window" was closed to foreigners. And as Scott also reminded his readers: the idea of fiat money as capable of replacing a gold standard, was inconceivable to populations for a long time.

Gold (and silver) standards among nations were particularly tested by WWI in the early twentieth century. Those problems were exacerbated, with the monetary policy stumbles which led to the Great Depression. Even though the path back to a gold standard was broken, fiat money nonetheless implied a changing relationship between national governments and their citizens - a relationship which still has not found real certainty. To what degree does today's knowledge economy matter? Has automation begun to turn the tide toward regression in this regard? How has services expansion affected attitudes toward fiat money?

Perhaps it depends on the services in question, and the degree to which citizens are capable of meeting those responsibilities through their own means. For instance, educational services in the U.S. were built on direct taxation which (excepting Medicare related retirement expectations) generally fall within budget capacities and the reasoning of participants - for better or worse. For the most part, those expectations were adopted in the U.S. before the twentieth century - in other words, prior to when monetary systems moved to fiat representation. In spite of its deficiencies, the transparency of property taxation accounts for much of public education, at local levels.

However, government responsibilities with healthcare needs are not transparent - nor did they really have a chance to start out that way. Substantial changes came about in healthcare requirements in the same time frames which Scott Sumner noted. Much of their current structure was established when taxation systems were expanding and increasing in complexity - hence hidden redistribution and subsidies which go well beyond the central components of the system. Nothing about this vital service role was directly conceived in terms of actual redistribution or monetary flow.

Healthcare often lost access to local coordination, once its most important elements shifted to prosperous regions of the country. Costs do not necessarily match up to the money that's available at any given moment. As a result, quarterly budget imbalances have become more difficult to ascertain, and healthcare accounts get shuffled around like so many bills at the end of the month, when there's not enough money left in the check book. In spite of increased government responsibility, the actual end product - in aggregate - is slowly being trimmed away.

With present day limitation on participating physicians, citizens are becoming responsible for healthcare budgets to a degree which increasingly goes beyond their own budgets. Indeed, the lack of clarity has generated imbalances throughout the economy: imbalances which cannot be addressed until healthcare needs are met and supplied more directly.

There were some interesting similarities between the years Medicare became available to the public, and the years which Scott mentioned (1968, 1971, 1979) as important for fiat monetary representation. I found this quote from Trends in Health Care Coverage and Insurance for 1968-2011

In 1968-1974, only persons aged 65 and over were asked about Medicare coverage. In 1976, Medicare coverage was estimated through reasons for not having health insurance coverage. Beginning in 1978, Medicare coverage was asked of persons of all ages.

Of course, Medicaid and its budget needs are not even considered in this context. One wonders: to what degree did government's new and open ended burdens for healthcare, play a part in the inability to maintain a gold standard?

None of this is to detract from Medicare and Medicaid, which have been lifesavers for so many. Rather, the problem is the way in which this system was conceived, alongside artificial limitations in supply which never should have been considered necessary. If that were not enough, we also got the artificial promises of healthcare insurance to make up the "difference". Granted, some products are worse than health insurance, but not many. As insurance gradually scales back in what it covers, unsuspecting customers will increasingly be left with the tab.

In "The Story of Medicine in America" (written in 1973), a quote which ends the book sounds oddly familiar, in spite of persistent government attempts to settle the matter:

Medicine in America is currently at a crossroads, with the path to the left leading to socialized medicine, the path ahead to the semi-federalized HMO, the path to the right following the status quo. The road the American physicians will choose is still uncertain.

Often we hear that education looks just like it did 100 years ago and is ready for a complete overhaul. Even though healthcare has changed dramatically in the past 100 years, everything about the way it is delivered also needs an overhaul - no less than education. Perhaps - if a lot more people were allowed to practice medicine - fiat monetary policy would not remain as threatening to some constituencies as it is now.

Some Aspects of Waterfall Effects

For some reason I've had quite a case of writer's block regarding this description...but why? I've written any number of times about "waterfall effects" over the past year - only to delete the text before hitting the publish button. At the very least: if I try to explain a simple way of envisioning monetary flows in this post, perhaps I won't delete so much material in the future!

Why emphasize a vertical flow component? To be sure, money circulates in seemingly endless ways. But there have also been recognizable points of wealth origination, which act as "waterfalls" and provide lead ins to other important forms of economic activities. Sometimes, the breadth and depth of original flows, can make secondary and service related flows more likely to occur. When we think of momentary "captures" in quantitative terms, what might otherwise appear "unequal", is actually a dynamic result.

Until recently, commodities and manufacture were responsible for providing what is a still symbolic role, for monetary origination. However, they are increasingly augmented by secondary monetary flows which are substantial in prosperous regions. The only problem is that the secondary effect is far more subdued elsewhere, in places which are nonetheless expected to play by the same rules. As a result, too many regions in developed nations have had little choice, but to heavily rely on the redistribution governments have provided. As governments came to rely more on finance and consumer roles, the vertical nature of the flow became oblique in some respects.

While redistribution made centralization possible in the 20th century, the load which redistribution now carries has become too heavy. Thus the question eventually becomes: how might productive decentralization best occur? Governments have a chance to thrive, when they plan for decentralization alongside their citizens...rather than struggling to prevent the inevitable. A major part of this transition, means making certain the public understands the roles money could fulfill in their daily lives. In order for this to happen, the service path which governments originated through fiat money, needs further evolution in order to continue.

Monetary origin has generally been associated with commodities such as gold, and fiat money has struggled to transition away from those earlier interpretations. While fiat money allowed (largely) government defined services to become a substantial part of GDP in the twentieth century, services are still a confusing component in wealth based terms. The problem in this regard, is that many service formations are not yet sustainable. Not only were they indirectly generated as partial markets, but they were heavily subsidized debt producers, as well.

Diminishing returns to capital are making it more difficult to maintain the service formations of the present - let alone expand them to the degree that populations have already invested and prepared for. Readers know that I would like to see some services as a more definitive part of the overall equation. Services could also become points of monetary origination, which would result in horizontal and decentralized flows to augment the vertical flows of commodities. Everyone's spending is indeed someone's income, and this needs to be a macroeconomic axiom which people can get behind and believe in.

Present day wealth continues to rely on product separate from time use, alongside the activities of finance. Even though these wealth generators are but a portion of GDP (as are services and government activity), flow does originate from newly created product. However, finance wealth has strong correlations with already existing wealth, before it becomes capable of adding to the mix. Finance can not be expected to fill in indefinitely, for the missing gaps in a marketplace. For instance, as Mark Sadowski indicates:

In particular, changes in private nonresidential fixed investment precede changes in business sector credit market debt and bank lending, and changes in private residential fixed investment precede changes in bank lending.

In other words, real growth needs to be present before finance and credit channels can contribute to wealth in any long term sense. What's more, further contributions in that regard may become more subdued than in the recent past. Populations in the present, need the option of incremental growth alongside the high expectations which developed in recent decades. Incremental forms of growth would also make it possible to explore horizontal services growth. New growth patterns such as this could serve to stabilize vertical wealth flows, so as to prevent deflation and contribute to monetary stability.

Keep Time Use Commensurate With Money

What is it that makes our time use important, in monetary terms? The actual limitations and capacities of time use seem so basic, that one would think such a logical consideration would be part of any monetary policy in the present. After all, many individuals in society are now expected to carry their own weight in economic terms, as they go through the course of their lives. In recent decades we've increasingly accepted and even welcomed that role. What's more, in terms of societal expectations of the developed world, the reality of total economic participation is practically a cultural "given" which - with a little luck - will eventually play a greater role in legal definitions as well.

However, the reality of (expected) total economic participation in monetary terms still "feels" new, which could explain the reluctance of policymakers and central bankers to come to terms with its true significance. Certainly it explains the knee jerk response in the U.S. of throwing entirely too many people into prison, instead of seeking out more rational economic environments for them to survive in. That very "newness" of expected economic participation may lie behind some of the confusions surrounding representative anchors for money in the present. It is particularly unsettling to see how nominal targeting could assist economic stability, and yet know that policymakers at the highest levels remain adamantly opposed to the value of our own time use as an anchor for monetary policy.

Prior to the 20th century, only a small portion of individuals in society were expected to be responsible for both oneself and family, in what we would consider today's economic terms. Certainly, the limitations of gold standards made sense, when it was primarily governments and wealthy citizens doing the majority of the buying and recorded economic activity. Even the reality of income tax is but 100 years old in the U.S., and our government did not really discourage citizens from utilizing barter or other non monetary forms of sustenance until after the system was put into place.

While there were certainly no 100 year celebrations in 2013, the income tax was nonetheless an acknowledgement of the growing importance of every citizen in economic life. It would seem we all "got the memo" in the 20th century, and agreed with government that our time and skills were really starting to matter, in monetary terms. And every time central bankers considered our time use and its incremental value in nominal targeting, it appeared as though governments might actually keep what appeared as though a reciprocal monetary promise with their citizens. After all, the economic use of our time was the most reliable indicator for economic stability, of all the resource options available. More people than ever were starting to agree: time is money.

Even so, not everyone has been sold on the idea of our ability to participate in the economy as the "new" gold standard. How does anyone know if jobs remain available? What's more - so the reasoning goes - there's more money and gain to be had "at the top", for the not so incremental requirements of both higher education and "bigger is better" definitions for environment use. For one thing, the incremental nature of what our time can actually accomplish is too transparent, too indicative of where rational thought and action might lead, for some who gain from hijacking the value of our future time for their own ends.

People in power have multiple reasons for their desire to keep credit appropriations and balance sheets as primary - even going so far as to insist they belong in definitions of macroeconomics - which is certainly not the case. Alongside the bastions of credit and finance, go the unnecessary coercions of living and knowledge use standards, for those who can ill afford or scarcely need today's superflous signals of "wealth" with their actual incomes.

Because governments refuse almost all innovation and efficiencies in building and construction requirements, a hidden feudal system exists for lower to middle classes such as what once existed in the Old World, and is slowly destroying the middle classes as it continues. For the lower classes it is apparently not enough to work all day, as they also have to take on additional jobs just to be able to live in housing as it has been mandated as necessary for all, by government. One's time is increasingly given over to the mortgages and rents which are a prime means of governments everywhere for their own wealth appropriations. Landlords - for all the blame they get - are but a foil for the real "action".

As long as monetary policy is thought of primarily in credit based terms, and wealth in terms of inefficient housing, the time to money link which is so vital for economic prosperity, will struggle to materialize in a rules based sense. Even though nominal targeting corresponded with other policy instruments in the years of the Great Moderation, in retrospect it may not have even happened for the right reasons in terms of monetary stability. We are in danger of governments continuing to turn their backs on the time to money perspective they once encouraged in the 20th century, as knowledge and skills use continue to be pared back for budgetary balance.

Why so? Because in the last 100 years of income taxes, the things people used to do that provided value outside of monetary terms no longer exist as true possibilities. Even though some may think of farmland as a "hedge" for the future, the idea is silly in any aggregate sense. The family farm, for the bulk of populations, is no longer a true option short of complete breakdown of monetary systems - which a Market Monetarist such as myself seeks to avoid in any circumstance. We cannot afford for governments to give up on the skills of their populations at the very historical moment when populations have never been so dependent on said skills for their very survival.

By the same token, women cannot just automatically resume the homemaker role as in past days, in that many of the jobs of the 21st century demand two incomes for housing, especially as it is presently defined by governments. Or, if someone needs to stay home because there's not enough jobs, then allow innovative thus affordable housing, for Pete's sake. More realistically - and more ominously - the continued call of the left for "living" wages is a pipe dream in terms of real government objectives, which in the present are all about capping off inflation so that it doesn't "froth" or "bubble" too much!

The real issues for our economic futures go well beyond the realm of politics, which is now mostly about fighting over the pie of static wealth that governments and their financial advisors have already envisioned. We know why monetary ideas evolved away from the use of the gold standard in the 20th century, for as populations became more involved in the economic life of nations, fiat money became ever more important for their actual representation. What perhaps was not so obvious? The degree to which finance and credit use, with tight definitions of wealth all around, could completely hijack the entire process.

Governments in particular need to let up with the silly staged hissy fits every time finance "gets out of control". Just allow affordable living and working conditions so that people don't invariably have to rely on credit use in the first place. What's more, if governments would get real about their special relationship with finance instead of pretending it's some kind of monster when the *** hits the fan... people might actually start to believe - once again - that it pays to be responsible in life...that it pays to be accountable and trustworthy.

If we can only convince our governments to keep time use commensurate with the true capacity of money, the mysteries of the "disappearing" middle class will finally be a thing of the past. And - by so doing - a thousand other confusions can also be laid to rest.

Buckminster Fuller in "Critical Path": A Unique Window Into The Great Depression

"Critical Path" was one of my favorite books, but because my first reading was more than 30 years ago, I don't always remember the particulars. So when I tried to recall his take on the Great Depression, I scanned as much of the chapter "Legally Piggily" as possible for this post. A word of warning! Some history buffs (and other specialists) who would pick up this book may be put off by his style, for he romps through history (and everything else) with a voice like no other and he is not easy to categorize. Perhaps that is what still makes him so interesting, to this day. For all the  recollections of the Depression years, we just don't seem to have the full range in viewpoints that one would expect. Perhaps that's why earlier depressions tended to catch people off guard, for too many people had forgotten the last one when...arggh, it happened again.  So I tried to round up as many "nuggets" and recollections as possible. Since there are too many quotes to post, I will summarize and paraphrase some of the elements which are central to the story he tells.

Fuller believed that swift technological evolution was responsible for the Great Crash, in the years leading up to the beginning of WWI and U.S. entry in 1917. In 1914, J.P. Morgan began purchases to help the British and their allies - an amount of goods from the U.S. equaling all the monetary bullion available to the "ins" power structure. Despite the unprecedented magnitude, it only fractionally tapped the available productivity of the U.S. Reading this I thought, how much of history would actually have been written, if nations never considered options beyond one's gold standard?

Ultimately the bills were run up, and the question became, how to pay? When Congress told J.P. Morgan that payment was no issue, he insisted it was, and a national income tax became the result. During WWI, U.S. industrial production was at $178 billion when there was $30 billion actually available. Because the debt to the U.S. was twice that of all the gold the "ins" had, all the countries involved paid their gold to the U.S. and consequently went off the gold standard. The U.S. then arranged vast trading account loans which created a boom - bust- boom sequence prior to the Great Crash.

However, prior to 1929, there was a vast amount of production capacity from WWI that was still in prime condition. What to do with it? Young people wanted autos, but the autos then were not yet being mass produced, and banks would not make loans for them. At the time, banks would accept chattel mortgages and time payments on large mobile capital goods such as trucking equipment, at least for large corporations. However, banks did support tractor-driven farm machinery. They would hold a chattel mortgage on the machinery, plus a mortgage on the farmland and all attached buildings.

There was a rough hog market in 1926, which made it difficult for many farmers to  make payments on their equipment. Local banks foreclosed on delinquent farmers' mortgages and machinery, with the assumption buyers would be at the ready. Alas, no buyers were in the offing and the previous owners, now bankrupt, could not buy their farms back. Dust bowls developed as upturned, unsown soil began to blow off the farms. Of course it helps to remember that a substantial part of the population still lived on farms at that time.

In 1927 and 1928, the bigger western city banks began to foreclose on their local county banks that had financed the farm machinery sales and were forced to borrow from the former. First the little and then the larger banks found that they had foreclosed on farmhouses with no indoor toilets, many with roofs falling in, barns in poor condition, and farm machinery rusting in the open elements. Word of the bad news spread; small bank runs started, then the crash. Business dropped, unemployment rose, prices dropped and no one had money. Larger banks foreclosed on smaller ones. In early 1933, 5000 banks closed their doors.

No one paraded or protested but instead became low in spirit. When the largest banks faltered, FDR was inaugurated  four months early. He immediately signed the Bank Moratorium  and about a month later, Congress voted the president the ability to control all money. U.S. citizens and their government had become the "wealth resource of last recourse". In 1933, the value of what Buckminster Fuller called "land-based capitalism" plummeted.

When Congress started the investigation of the banking system, they saw how many of the mortgaged properties were all but uninhabitable. At this point government dictated the banking strategy and started refinancing of the building industry. But the so-called building industry (remember this is Fuller talking, though I definitely relate) was already 2000 years behind the arts of building ships of the sea and sky. While airplanes and ships are weight and environment considerate, there is no weight consideration to design land-anchored environment controls. Instead they are completely dependent on sewers, waterlines, electric lines, highway maintenance and controlled by prime landowners with building codes and nearly impossible legal restrictions. Suffice to say I am being reminded now, why portions of this book became  hardwired into my brain.

Even though Buckminster Fuller decried the socialist decisions made at the time, he completely understood why they were necessary. But he wanted humanity to move into a state of true wealth: wealth still not possible as we continue to struggle with outdated interpretations of building product in the present. Perhaps people did not see Fuller for the proponent of freedom and prosperity that he actually was, because his idea of a different kind of wealth other than land was not unlike the philosophy of the American Indian as described by William Cronon in "Changes In the Land"(1983). For me, land wealth is important, but not primary. Whenever people see land wealth as the primary wealth attribute, they inadvertently lose land value anyway, whenever human attributes of wealth get stripped away from it. Let's do our best, not to let that happen again.