I have been struck at the heated rhetoric surrounding Paul Ryan’s Medicare reform proposal. One thing is not often pointed out: Ryan’s proposed “premium support” structure is in some ways similar to the plan put in place under President Obama’s healthcare reform law. In both cases, an individual would shop among competing private insurers, on an exchange overseen by the government regulators. In both cases, the government would provide financial support for the ”needy” (low-income households in the case of Obamacare, the elderly in the case of Ryancare).
Why don’t we see this parallel pointed out more often? The left wants to demonize Ryan, and the right wants to demonize Obama. Pointing out the similarities of their plans might make each of them seem, well, reasonable. The overwrought politics of health care makes it hard to recognize common ground.
By the way, the esteemed health economist Alain Enthoven had a column on the topic of Medicare reform in yesterday’s Wall Street Journal that is well worth reading.
There seems to be a conventional wisdom forming that long-term interest rates in the United States are as about as low as they can possibly be. For example, this is from an article in today’s Wall Street Journal:
“Rates are so low it’s hard to see them going much lower, but it’s easy to imagine them going higher,” said Kevin March, chief financial officer of Texas Instruments.
It is certainly true that most of the time when the yield spread is high the way to bet is that long-term bond rates are coming down and long-term bond prices are going up. But somehow I can’t see U.S. nominal interest rates falling much lower than they are now.
I don’t buy it. Why? Note this fact: The U.S. ten-year Treasury bond pays 3.18 percent, whereas a ten-year Japanese government bond pays 1.16 percent.
No, I am not predicting the United States is about to become just like Japan. But it is not inconceivable. That is why buying long-term bonds now is not a crazy investment strategy, and selling them (as many companies are now doing) is not at all a sure thing.
Addendum: Another noteworthy fact about bonds is that they have recently been negative beta assets. (You can verify this fact with this link.) Their hedging properties also make buying bonds a reasonable investment strategy.
I was fascinated a story in today’s Wall Street Journal. Apparently, Google is sitting on $37 billion in cash, but nonetheless decided to sell $3 billion worth of bonds. Why? To take advantage of low interest rates.
It is like reverse maturity transformation. The banking system borrows short and lends long. Google is borrowing long and lending short. (Or maybe I should call it reverse quantitative easing, as Google is also doing exactly the opposite of what the Fed has been doing.)
Does this make sense for Google? I have no idea, and I am ready to concede that those guys are a lot smarter (and financially successful) than I am. But there is reason to be skeptical.
The chart above shows the spread between the ten-year Treasury bond and the three-month Treasury bill. The yield spread is now high by historical standards. The empirical literature on the expectations theory of the term structure (in which I have sometimes played) suggests that this is a good time to borrow short and lend long–the opposite of what Google is doing.
Maybe this time is different, and past empirical regularities will not hold going forward. But ponder this question: If you had a friend with a paid-up house, would you suggest that he now take out a long-term mortgage in order to deposit the proceeds in a money-market fund? If not, does it make sense for Google to be doing much the same thing?
Updates:
1. A smart reader sends in the following plausible explanation:
While it’s true that Google has $37 billion in cash and equivalents, almost all of that $37 billion is in non-U.S. accounts (an artifact of funneling most of their profits through low-tax Ireland). They cannot spend that $37 billion in the U.S. without incurring a tax rate of 35 percent; thus, the borrowing is to finance spending in the U.S. (as opposed to abroad). All the big tech companies do the same thing (Microsoft was in the news for the same thing some 6 months ago). Thus, Google is not trying to play the yield curve so much as intertemporally arbitrage the U.S. tax code. By not repatriating the $37 billion now, they are betting that the U.S. corporate tax rate on repatriated foreign profits will be appreciably lower in the future than it is now.
2. On the other hand, another loyal reader points me toward this source, which says:
The firm doesn’t have the same issue with overseas cash that many of its large-cap technology peers do. Of Google’s $37 billion in cash, only about $17 billion is sitting outside the U.S. Microsoft, by contrast, has no net cash remaining in the U.S., while nearly 90% of Cisco’s cash is sitting outside of the country.
The point is that there’s room in a democracy for people who ridicule and denounce those who disagree with them; there isn’t any place for eliminationist rhetoric, for suggestions that those on the other side of a debate must be removed from that debate by whatever means necessary.
And it’s the saturation of our political discourse — and especially our airwaves — with eliminationist rhetoric that lies behind the rising tide of violence.
Where’s that toxic rhetoric coming from? Let’s not make a false pretense of balance: it’s coming, overwhelmingly, from the right. It’s hard to imagine a Democratic member of Congress urging constituents to be “armed and dangerous” without being ostracized.
Mobster wisdom tells us never to bring a knife to a gun fight. But what does political wisdom say about bringing a gun to a knife fight?
That’s exactly what Barack Obama said he would do to counter Republican attacks “If they bring a knife to the fight, we bring a gun,” Obama said at a Philadelphia fundraiser Friday night. “Because from what I understand folks in Philly like a good brawl.”
Whatever happened to that Obama guy? Did he get ostracized, as Paul suggests he would? My view: We should and do condemn people for their crimes, not for their metaphors.
This seems to be the economic policy question of the hour. It might be worth recalling that last month, the Wall Street Journal polled economists about this question. Of those who expressed an opinion, here are the results:
6 percent said no, all the tax cuts should be allowed to expire,
24 percent said yes, but only for those making less than $250,000 a year,
70 percent said that all the tax cuts should be extended.
