U.S. Health Care Prices Are the Elephant in the Room

Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.

Traditionally, the theory driving discussions on the high cost of health care in the United States has been that there is enormous waste in the system, taking the form of excess utilization of care. From that theory it follows that methods of controlling the growth of health spending should focus on ways to reduce the use of unnecessary or only marginally beneficial health care.

Largely overlooked in these discussions has been the elephant in the room: the extraordinarily high prices Americans pay for health care. However, as a group of us noted in a paper in 2004, “It’s the Prices, Stupid,” it is higher health spending coupled with lower - not higher â€" use of health services that adds up to much higher prices in the United States than in any other member nation of the Organization for Economic Cooperation and Development. Aside from a few high-tech services, Americans actually use less health care and rely on fewer real health-care resources than do residents of other industrialized countries.

Readers who want to get a peek at this elephant in the room should peruse the set of slides published a few days ago by the International Federation of Health Plans, a global network of private health-insurance plans with 100 members in 31 countries. The federation annually surveys prices actually paid for selected health care goods and services in the different countries.

Shown below are three slides from the set:

International Federation of Health Plans

International Federation of Health Plans

International Federation of Health Plans

In most other countries, prices for health care goods and services are not negotiated between individual health insurers and individual physicians, hospitals or drug companies, as they are in the private insurance sector in United States.

Instead prices there either are set by government or negotiated between associations of insurers and providers of care, on a regional, state or national basis. The single prices for other countries shown in the chart therefore can be taken representative of prices actually paid there.

By contrast, as can be seen in the charts, in the United States there is quite a range of prices for the identical good or service.

Ideally, the federation should also have shown the median for prices in the United States. The median represents the midpoint of a frequency distribution; if the distribution of prices is skewed toward either low or high values, the average will be either above or below the midpoint and may not be representative.

Whatever the case may be with the distributions of American prices underlying the charts, it seems clear that the prices for health care in the United States are much higher than they are in other nations. As we noted in the paper cited above, it goes a long way toward explaining why, on average and in purchasing-power parity dollars per-capita, health spending in the United States is so much higher than it is elsewhere in the world.

My explanation for the relative high prices Americans pay for health care relative to other countries is that the payment side of the health care market in the private sector is fragmented, weakening the bargaining power of individual insurers, especially vis-à-vis the increasingly consolidated hospital sector, although other factors, including malpractice premiums, play a part as well.

To endow the payment side of health care with more market muscle, I have proposed an all-payer system based on the models used in Germany or Switzerland or in the state of Maryland. In these systems, government does not dictate prices. Instead, health care prices are negotiated at what Europeans call a “quasi market” level.

Average or median prices aside, however, the federation charts also show that the variation of prices for identical items within the United States - even within a single city - dwarfs the cross-national variation in prices for the same item. That phenomenon has begun to attract attention in the news media only lately.

As Consumer Reports noted in an illuminating article, “Health care prices are all over the map, even within your plan’s network.” The chart at the bottom of the article, based on the Healthcare Blue Book on prices, is especially revealing.

The high variance of health care prices in the United States can be explained in good part by the opacity of these prices. Both government and the private sector have done their best to maintain that opacity.

It is possible to find prices paid by Medicare on the Web, but they are written in code that means something to the providers of health care although little to patients.

Pretend to be a prospective patient searching the Web for Medicare fees. Google “Medicare fee schedules.” At the top of the list you will find this Web site. Try to find the fee for a screening colonoscopy in your area.

If you get frustrated, try this one.

Good luck on your hunt for Medicare fees.

Fees in the private health care sector have been jealously guarded trade secrets among insurers and providers of health care. True, some health insurers now provide their insured members with “cost estimates,” by provider and by major procedure, of what the procedures rendered by a particular providers might cost patients out of pocket, but not full prices. I have found the site for that purpose on my insurance policy very difficult and cumbersome to navigate.

For uninsured patients (also known as self-pay patients) full price information is hard to come by. I tried it again just the other day, calling up a New Jersey hospital and seeking a price for a colonoscopy. After a runaround of several telephone calls, I gave up. I have described the attempt more fully in response to a comment on the previous blog post.

It is truly remarkable that few state governments have made any effort to provide their residents with greater price transparency in health care, as well they could and should.

A report on March 18, “Report Card on State Price Transparency Laws” by the Catalyst for Payment Reform and the Health Care Incentives Improvement Institute gives 29 states the failing grade of F on this score, including New York and New Jersey. Another 6 earned a D, barely passing. Only Massachusetts and New Hampshire earned an A.

With so much carefully guarded and government-shielded opacity on health care prices, it should be no surprise that prices for health care vary as much as they do in the United States, even within small regions and for the same health insurer.

It will not change until citizens make it an issue in political campaigns.

U.S. Health Care Prices Are the Elephant in the Room

Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.

Traditionally, the theory driving discussions on the high cost of health care in the United States has been that there is enormous waste in the system, taking the form of excess utilization of care. From that theory it follows that methods of controlling the growth of health spending should focus on ways to reduce the use of unnecessary or only marginally beneficial health care.

Largely overlooked in these discussions has been the elephant in the room: the extraordinarily high prices Americans pay for health care. However, as a group of us noted in a paper in 2004, “It’s the Prices, Stupid,” it is higher health spending coupled with lower - not higher â€" use of health services that adds up to much higher prices in the United States than in any other member nation of the Organization for Economic Cooperation and Development. Aside from a few high-tech services, Americans actually use less health care and rely on fewer real health-care resources than do residents of other industrialized countries.

Readers who want to get a peek at this elephant in the room should peruse the set of slides published a few days ago by the International Federation of Health Plans, a global network of private health-insurance plans with 100 members in 31 countries. The federation annually surveys prices actually paid for selected health care goods and services in the different countries.

Shown below are three slides from the set:

International Federation of Health Plans

International Federation of Health Plans

International Federation of Health Plans

In most other countries, prices for health care goods and services are not negotiated between individual health insurers and individual physicians, hospitals or drug companies, as they are in the private insurance sector in United States.

Instead prices there either are set by government or negotiated between associations of insurers and providers of care, on a regional, state or national basis. The single prices for other countries shown in the chart therefore can be taken representative of prices actually paid there.

By contrast, as can be seen in the charts, in the United States there is quite a range of prices for the identical good or service.

Ideally, the federation should also have shown the median for prices in the United States. The median represents the midpoint of a frequency distribution; if the distribution of prices is skewed toward either low or high values, the average will be either above or below the midpoint and may not be representative.

Whatever the case may be with the distributions of American prices underlying the charts, it seems clear that the prices for health care in the United States are much higher than they are in other nations. As we noted in the paper cited above, it goes a long way toward explaining why, on average and in purchasing-power parity dollars per-capita, health spending in the United States is so much higher than it is elsewhere in the world.

My explanation for the relative high prices Americans pay for health care relative to other countries is that the payment side of the health care market in the private sector is fragmented, weakening the bargaining power of individual insurers, especially vis-à-vis the increasingly consolidated hospital sector, although other factors, including malpractice premiums, play a part as well.

To endow the payment side of health care with more market muscle, I have proposed an all-payer system based on the models used in Germany or Switzerland or in the state of Maryland. In these systems, government does not dictate prices. Instead, health care prices are negotiated at what Europeans call a “quasi market” level.

Average or median prices aside, however, the federation charts also show that the variation of prices for identical items within the United States - even within a single city - dwarfs the cross-national variation in prices for the same item. That phenomenon has begun to attract attention in the news media only lately.

As Consumer Reports noted in an illuminating article, “Health care prices are all over the map, even within your plan’s network.” The chart at the bottom of the article, based on the Healthcare Blue Book on prices, is especially revealing.

The high variance of health care prices in the United States can be explained in good part by the opacity of these prices. Both government and the private sector have done their best to maintain that opacity.

It is possible to find prices paid by Medicare on the Web, but they are written in code that means something to the providers of health care although little to patients.

Pretend to be a prospective patient searching the Web for Medicare fees. Google “Medicare fee schedules.” At the top of the list you will find this Web site. Try to find the fee for a screening colonoscopy in your area.

If you get frustrated, try this one.

Good luck on your hunt for Medicare fees.

Fees in the private health care sector have been jealously guarded trade secrets among insurers and providers of health care. True, some health insurers now provide their insured members with “cost estimates,” by provider and by major procedure, of what the procedures rendered by a particular providers might cost patients out of pocket, but not full prices. I have found the site for that purpose on my insurance policy very difficult and cumbersome to navigate.

For uninsured patients (also known as self-pay patients) full price information is hard to come by. I tried it again just the other day, calling up a New Jersey hospital and seeking a price for a colonoscopy. After a runaround of several telephone calls, I gave up. I have described the attempt more fully in response to a comment on the previous blog post.

It is truly remarkable that few state governments have made any effort to provide their residents with greater price transparency in health care, as well they could and should.

A report on March 18, “Report Card on State Price Transparency Laws” by the Catalyst for Payment Reform and the Health Care Incentives Improvement Institute gives 29 states the failing grade of F on this score, including New York and New Jersey. Another 6 earned a D, barely passing. Only Massachusetts and New Hampshire earned an A.

With so much carefully guarded and government-shielded opacity on health care prices, it should be no surprise that prices for health care vary as much as they do in the United States, even within small regions and for the same health insurer.

It will not change until citizens make it an issue in political campaigns.

Median Household Income Down 7.3% Since Start of Recession

For the first time in over a year, median annual income fell by a statistically significant amount from the previous month, according to a report from Sentier Research.

Median annual household income in February 2013 was $51,404, about 1.1 percent (or $590) lower than the January 2013 level of $51,994. The numbers are all pretax, and are adjusted for both inflation and seasonal changes.

Source: Sentier Research analysis of Labor Department data. Note that vertical axis does not start at zero to better show the change.

The analysts at Sentier Research (a company that provides demographic and income analysis, run by former Census Bureau officials) note that median income has been depressed recently by inflation. While inflation is still quite low, income growth has been so weak that even very little inflation is enough to wipe out whatever gains households are seeing in their paychecks.

The longer-run trends are even more depressing.

February’s median annual household income was 5.6 percent lower than it was in June 2009, the month the recovery technically began; 7.3 percent lower than in December 2007, when the most recent recession officially started; and 8.4 percent lower than in January 2000, the earliest date that this statistical series became available.

Why are incomes stagnating, even falling David Leonhardt presented some possible theories last fall.

The Debate on Bank Size Is Over

Simon Johnson, former chief economist of the International Monetary Fund, is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

While bank lobbyists and some commentators are suddenly taken with the idea that an active debate is under way about whether to limit bank size in the United States, they are wrong. The debate is over; the decision to cap the size of the largest banks has been made. All that remains is to work out the details.

To grasp the new reality, think about the Cyprus debacle this month, the Senate budget resolution last week and Ben Bernanke’s revelation that â€" on too big to fail â€" “I agree with Elizabeth Warren 100 percent that it’s a real problem.”

Policy is rarely changed by ideas alone and, in isolation, even stunning events can sometimes have surprisingly little effect. What really moves the needle in terms of consensus among policy makers and the broader public opinion is when events combine with a new understanding of how the world works. Thanks to Senator Sherrod Brown, Democrat of Ohio; Senator Warren, Democrat of Massachusetts, and many other people who have worked hard over the last four years, we are ready to understand what finally defeated the argument that bank size does not matter: Cyprus.

There is no shortage of recrimination about how the Europeans handled the Cypriot situation. And it’s hard to feel good about a policy process that ends with the president of the Eurogroup of finance ministers, Jeroen Dijsselbloem of the Netherlands, flip-flopping on the most important issue of all: who will bear losses and in what precise order of priority, in the (likely) event of future euro-zone financial system meltdowns.

Specifically, Mr. Dijsselbloem began by making a clear statement on Monday regarding how the Cyprus situation would serve as a template for future assistance within the euro zone. After a few hours of falling stock prices for banks in peripheral Europe, he did not so much walk this statement back as sprint it back at full speed, with this remarkable retraction (provided here in its entirety):

Cyprus is a specific case with exceptional challenges which required the bail-in measures we have agreed upon yesterday.

Macroeconomic adjustment programs are tailor-made to the situation of the country concerned and no models or templates are used.

I would translate this into plain English as: “We, the combined finance ministers of Europe, have no idea what we will want to do in the future â€" and we have no plans to work that out before bad things actually happen.”

My colleague Jacob F. Kirkegaard, a must-read expert on European policy and its nuances, is hopeful that Europe is moving toward a variant of the Federal Deposit Insurance Corporation rules-based approach to bank resolution, in which small depositors have complete confidence they will be fully protected and other kinds of investors understand where they stand relative to potential losses (and to each other).

Contrast the chaos of the last week and Mr. Dijsselbloem’s verbal contortions with what happened when IndyMac Bancorp failed in 2008 (on the latter, I recommend Chapter 7 in Sheila Bair’s book, “Bull by the Horns”). The F.D.I.C. has very clear rules, laid out by statute and reinforced by precedent. The agency knows how to close a small or medium-scale bank without a macroeconomic soap opera â€" and a national catastrophe. (IndyMac had $32 billion in assets when it failed.)

But the bigger point from Cyprus is much simpler. Why would you want one or two banks to become so large in terms of their assets relative to gross domestic product that a single mistaken calculation can bring down the economy In the American context, why would you allow any bank to outgrow the F.D.I.C.’s ability to resolve it in a relatively straightforward and low-cost manner (The largest bank failure handled to date was that of Washington Mutual, also known as WaMu, with $307 billion in assets; JPMorgan Chase, today the world’s largest bank when measured properly, has assets closer to $4 trillion).

According to their proponents, two troubled Cypriot banks, Bank of Cyprus and Laiki Bank (also known as Cyprus Popular Bank and previously known as Marfin Popular Bank), “only” made the mistake of buying Greek government bonds, before those were restructured and fell in value, reflecting the terms of the latest euro-zone rescue package for Athens.

The third largest Cypriot bank, Hellenic Bank, also has some problems but remains out of the news for now. (For background, see this Bank of Cyprus investor presentation through September 2012 and Laiki’s third-quarter results. In both cases, these are the latest available on their Web sites.)

But this single mistake resulted in combined losses worth at least one-quarter of Cyprus’s G.D.P., not just because the bets were big relative to the balance sheets of those banks, but rather because the banks are so big relative to the economy. Banking assets in Cyprus reached seven times G.D.P., with the Bank of Cyprus having a balance sheet valued at roughly twice Cypriot G.D.P. and Laiki only slightly smaller (see the investor relations presentations linked above, with more background at Figure 3 in this paper).

And in another case study for Anat Admati and Martin Hellwig’s cautionary book, “The Bankers’ New Clothes,” the Cypriot banks had wafer-thin layers of equity, so big losses have to fall on creditors (unless taxpayers somewhere are feeling generous). For Bank of Cyprus, equity was supposedly 2.3 billion euros at the end of the third quarter of 2012, when the bank’s assets were 36.2 billion euros. I haven’t seen a convincing statement of Laiki’s recent equity funding level. The chairman of the Bank of Cyprus resigned on Tuesday, although there remains some confusion about who among the bank’s board and senior management remains on the job.

Furthermore, these banks structured their liabilities so that their only real creditors providing private-sector funding were depositors (i.e., they issued very little by way of bonds or similar forms of debt). Hence the options became either a complete bailout supported by the euro zone (making the bank creditors whole) or losses for at least some depositors.

The scale of losses in the latter route will disrupt the economy for many years and is likely to end the Cypriot offshore banking model.

Given that we have a choice, why would any American want to allow a few banks to become so vulnerable and so big relative to the economy

Our largest banks are not yet at Cypriot scale, thank goodness. But they want to get bigger and they receive implicit government subsidies, in the form of downside protection available to creditors, which enable them to borrow more and potentially expand without limit.

In fact, it was the stated policy of former Treasury Secretary Timothy F. Geithner to encourage these banks to grow further â€" for example, to provide financial services to emerging markets in Asia, Latin America and Africa. This is not any kind of market outcome but rather a poorly conceived and extremely dangerous government subsidy scheme.

The good news at the end of last week was that the Senate unanimously decided that the United States should go in another direction, by ending the funding advantages of megabanks.

The decision was expressed in an amendment to the nonbinding Senate budget resolution, but this does not make it any less momentous. The vote was 99 to 0, as a result of a lot of hard work by Senators Brown and David Vitter, Republican of Louisiana, and their respective staffs. Senators Bob Corker, Republican of Tennessee, and Mark Pryor, Democrat of Arkansas, also joined this important initiative.

Lobbyists were, naturally, apoplectic.

But making last week even more decisive, Mr. Bernanke’s language shifted significantly. In a recent interaction with Senator Warren, which I wrote about in this space, Mr. Bernanke had essentially denied that large financial institutions represent a threat.

Now he has denied that denial, saying in the clearest possible terms during a news conference on March 20: “Too big to fail is not solved and gone,” adding, “It’s still here.”

And in case anyone did not fully grasp his message, Mr. Bernanke explained, “Too big to fail was a major source of the crisis, and we will not have successfully responded to the crisis if we do not address that successfully.”

Now that the policy consensus has shifted, how exactly policy plays out remains to be seen (Rob Blackwell of American Banker has some suggested scenarios).

Legislation under development by Senators Brown and Vitter will definitely be worth supporting. Opinion on Capitol Hill has now moved in a way that will continue to reinforce itself, particularly as the European disaster unfolds.

The Federal Reserve’s Board of Governors is getting the message. Even William Dudley, president of the New York Fed, a traditional bastion of Wall Street, is signaling that he now knows which way the wind is blowing.

The Orwellian doublespeak of Wall Street â€" nicely described by Dennis Kelleher of Better Markets â€" has taken a beating. Next up: cutting the subsidies of the biggest banks in a meaningful way.

Investors vs. Occupants in the Housing Recovery

One of the big questions about the sustainability of the housing recovery is whether it’s being driven by owner-occupants â€" the people who live in the houses they buy â€" or speculators.

In the last year or so, after all, some of the big institutional investors have bought up a lot of distressed properties because they perceived the market to be undervalued, and saw some major opportunities in the rental market. Blackstone, for example, is now the biggest owner of single-family homes, having purchased about 20,000 homes across the country, most of them foreclosures.

New data released by the National Association of Realtors suggests that investors are still playing a role in the market, but their influence is down from its peak.

Source: Realtors Confidence Index, National Association of Realtors

The chart above shows the share of monthly home sales that went to investors. The data come from the Realtors Confidence Index, which is based on about 3,000 responses each month from members of the National Association of Realtors. In February, investors accounted for about one in five purchases, which is close to the long-term average, according to Walter Molony, who works in the association’s public affairs office.

From Mr. Molony, here is the breakdown of home sales by use for 2003-11, from a separate, annual questionnaire filled out by about 2,000 home buyers each year. The 2012 numbers come out next week.

Source: National Association of Realtors

He writes:

This tracked well with findings from the Realtors Confidence Index, but digression from monthly data in the R.C.I. that began in 2011 appears to result from additional purchases outside of [Multiple Listing Service] listed property (courthouse auctions, bulk purchases, etc., outside of publicly marketed property). That pattern likely began to reverse in 2012 as foreclosure inventory, most popular with investors, declined over the course of the year.

When I went to Sacramento a couple weeks ago to write about the recovery, I found some resentment of investors, at least among buyers. Investors have helped a very depressed market recover, but they have also been outbidding owner-occupants, particularly since many investors can finance their purchases entirely in cash rather than having to wait for a loan.

Here’s a look at the share of sales that were paid for in cash, from the Realtors Confidence Index survey:

Source: Realtors Confidence Index, National Association of Realtors

As of February, the share was about one in three, whereas Mr. Molony says that in a “normal market,” all-cash transactions account for closer to 10 percent.

The Limits of China’s Market Model

Cathy McGregor James McGregor, author of “No Ancient Wisdom, No Followers.”

In his book “No Ancient Wisdom, No Followers,” the author James McGregor delivers a sharp critique of China’s recent development path, and what he calls “authoritarian capitalism.”

In Mr. McGregor’s China, the government plays too large a role in the economy, and big state-owned entities dominate because of government subsidies and preferential treatment. Private entrepreneurs and multinational corporations are at a distinct disadvantage, one that he argues is likely to damage China’s prospects in the long run. With China determined to create its own global brands, he says, the government is putting rules and regulations in place that seem increasingly protectionist.

A former reporter for The Wall Street Journal who has spent more than 20 years in China, Mr. McGregor now works as a senior counselor for APCO Worldwide, a global communications consultancy. His book, in paperback and e-book format, was published late last year. He talked about it in an e-mail interview, which has been edited for style.

Q.

How did you come to write this book

A.

My interest in this book was fueled by the 10th anniversary of China’s joining the World Trade Organization and seeing China heading in a much different direction than had been anticipated. Instead of pursuing further market reforms and expanding the role of private enterprise, China had turned back to state-owned enterprise and begun strong-arming multinationals to hand over their most advanced technology to their state-owned business partners. I wanted to dig deeper into this situation while stepping back to look at the overall picture of where China had come from and where the country is headed as a political-economic entity.

Q.

One interesting aspect of your book is the description of how huge, powerful state-owned companies in China benefit from state subsidies, low-interest loans and favorable policies that help them maintain dominance, and yet don’t really result in capable, well-managed and innovative companies. Doesn’t this mean that China won’t be able to compete in the global marketplace over the long run and that multinationals â€" operating more on their wits â€" will always be able to beat out the Chinese competitors, in the global marketplace, at least

A.

In the long run the United States doesn’t need to worry about Chinese state enterprise taking over the world. They are simply too political and inefficient. But as these state-owned enterprises go out into the world fueled by huge subsidies and favorable policies, they will be able to destroy quite a few good companies that are simply efficient businesses. Look at what we’ve seen with solar and wind companies in the United States and Europe already.

Q.

If the situation is so troubling, why do global brands seem to be scrambling to get into China or expand their presence here

A.

It is a different story for different sectors. Technology and advanced industrial companies are having an ever more difficult in China. China’s long-term goal is to learn from them, and then replace them with Chinese technology created by absorbing and re-innovating. But many retailers and consumer goods companies are doing well. China needs to expand consumption to reduce dependence on exports and government infrastructure spending for growth. Getting good quality products at reasonable prices to Chinese consumers through efficient retailers helps with the party’s economic and social stability goals. When your business is in China’s interest, your business can do well.

Q.

Apple sold more than $20 billion worth of goods in China during the last year. Starbucks, General Motors, Coca-Cola and General Electric seem to be thriving in China. Is your argument that these are exceptions, or that many of the multinationals would be doing far better were it not for China’s restrictive trade and investment policies

A.

Manufacturing for export by foreign companies in China is quite open. But penetrating the domestic market is a challenge. If China had more open trade and investment policies, United States exports to China would skyrocket as Chinese people trust the quality of American goods. American manufacturers would quickly expand their operations in China for products to be sold in China. No doubt about that.

Q.

If the Chinese government forces global companies into unfair joint ventures and even allows such vast intellectual-property theft, why do the multinationals put up with that

A.

Simple answer: growth. China has been the only significant global growth market since the global financial crisis. The country is spending trillions of dollars on infrastructure, including bullet trains, subway systems, nuclear power plants, airports, seaports, refineries, electric grid â€" the list goes on and on. If you are in the business of transportation, power generation, aviation, telecommunications, computing or logistics, among others, if you don’t make it in China you won’t make it anywhere.

Q.

What are some of the solutions What can United States or global companies do to improve the situation in China, or could the United States government be doing more

A.

The answer is to vigorously enforce World Trade Organization rules and hold China to the bilateral agreements it has made. At this point China is winning through intimidation on the trade front. Countries and companies that threaten to file W.T.O. cases are quietly informed that the retribution will be fierce. At the same time, we should welcome Chinese investment in the United States and push for reciprocal treatment. China has the upper hand because of the fiscal irresponsibility of American politicians. The best thing the United States can do to deal with China is get our own house in order.

Q.

Westerners doing business in China are often advised not to engage in public fights with the Chinese authorities; that negotiating quietly, behind closed doors, is the better option. Is that still the case, or is your book suggesting that bolder, more confrontational tactics are necessary

A.

Companies that individually and publicly take on China face the wrath of China Inc. But those who band together behind trade associations and government forums stand a better chance. It is always better to try to work out things behind closed doors. But only if China is willing to listen. Today, that is often not the case. The global financial crisis caused a significant shift in thinking by many in the government. For many years, foreign companies that invested in China were looked at as friends who were helping China. There are many in China now who believe that the foreigners need China more than China needs the foreigners. So they often don’t feel a need to engage even behind closed doors.

The Limits of China’s Market Model

Cathy McGregor James McGregor, author of “No Ancient Wisdom, No Followers.”

In his book “No Ancient Wisdom, No Followers,” the author James McGregor delivers a sharp critique of China’s recent development path, and what he calls “authoritarian capitalism.”

In Mr. McGregor’s China, the government plays too large a role in the economy, and big state-owned entities dominate because of government subsidies and preferential treatment. Private entrepreneurs and multinational corporations are at a distinct disadvantage, one that he argues is likely to damage China’s prospects in the long run. With China determined to create its own global brands, he says, the government is putting rules and regulations in place that seem increasingly protectionist.

A former reporter for The Wall Street Journal who has spent more than 20 years in China, Mr. McGregor now works as a senior counselor for APCO Worldwide, a global communications consultancy. His book, in paperback and e-book format, was published late last year. He talked about it in an e-mail interview, which has been edited for style.

Q.

How did you come to write this book

A.

My interest in this book was fueled by the 10th anniversary of China’s joining the World Trade Organization and seeing China heading in a much different direction than had been anticipated. Instead of pursuing further market reforms and expanding the role of private enterprise, China had turned back to state-owned enterprise and begun strong-arming multinationals to hand over their most advanced technology to their state-owned business partners. I wanted to dig deeper into this situation while stepping back to look at the overall picture of where China had come from and where the country is headed as a political-economic entity.

Q.

One interesting aspect of your book is the description of how huge, powerful state-owned companies in China benefit from state subsidies, low-interest loans and favorable policies that help them maintain dominance, and yet don’t really result in capable, well-managed and innovative companies. Doesn’t this mean that China won’t be able to compete in the global marketplace over the long run and that multinationals â€" operating more on their wits â€" will always be able to beat out the Chinese competitors, in the global marketplace, at least

A.

In the long run the United States doesn’t need to worry about Chinese state enterprise taking over the world. They are simply too political and inefficient. But as these state-owned enterprises go out into the world fueled by huge subsidies and favorable policies, they will be able to destroy quite a few good companies that are simply efficient businesses. Look at what we’ve seen with solar and wind companies in the United States and Europe already.

Q.

If the situation is so troubling, why do global brands seem to be scrambling to get into China or expand their presence here

A.

It is a different story for different sectors. Technology and advanced industrial companies are having an ever more difficult in China. China’s long-term goal is to learn from them, and then replace them with Chinese technology created by absorbing and re-innovating. But many retailers and consumer goods companies are doing well. China needs to expand consumption to reduce dependence on exports and government infrastructure spending for growth. Getting good quality products at reasonable prices to Chinese consumers through efficient retailers helps with the party’s economic and social stability goals. When your business is in China’s interest, your business can do well.

Q.

Apple sold more than $20 billion worth of goods in China during the last year. Starbucks, General Motors, Coca-Cola and General Electric seem to be thriving in China. Is your argument that these are exceptions, or that many of the multinationals would be doing far better were it not for China’s restrictive trade and investment policies

A.

Manufacturing for export by foreign companies in China is quite open. But penetrating the domestic market is a challenge. If China had more open trade and investment policies, United States exports to China would skyrocket as Chinese people trust the quality of American goods. American manufacturers would quickly expand their operations in China for products to be sold in China. No doubt about that.

Q.

If the Chinese government forces global companies into unfair joint ventures and even allows such vast intellectual-property theft, why do the multinationals put up with that

A.

Simple answer: growth. China has been the only significant global growth market since the global financial crisis. The country is spending trillions of dollars on infrastructure, including bullet trains, subway systems, nuclear power plants, airports, seaports, refineries, electric grid â€" the list goes on and on. If you are in the business of transportation, power generation, aviation, telecommunications, computing or logistics, among others, if you don’t make it in China you won’t make it anywhere.

Q.

What are some of the solutions What can United States or global companies do to improve the situation in China, or could the United States government be doing more

A.

The answer is to vigorously enforce World Trade Organization rules and hold China to the bilateral agreements it has made. At this point China is winning through intimidation on the trade front. Countries and companies that threaten to file W.T.O. cases are quietly informed that the retribution will be fierce. At the same time, we should welcome Chinese investment in the United States and push for reciprocal treatment. China has the upper hand because of the fiscal irresponsibility of American politicians. The best thing the United States can do to deal with China is get our own house in order.

Q.

Westerners doing business in China are often advised not to engage in public fights with the Chinese authorities; that negotiating quietly, behind closed doors, is the better option. Is that still the case, or is your book suggesting that bolder, more confrontational tactics are necessary

A.

Companies that individually and publicly take on China face the wrath of China Inc. But those who band together behind trade associations and government forums stand a better chance. It is always better to try to work out things behind closed doors. But only if China is willing to listen. Today, that is often not the case. The global financial crisis caused a significant shift in thinking by many in the government. For many years, foreign companies that invested in China were looked at as friends who were helping China. There are many in China now who believe that the foreigners need China more than China needs the foreigners. So they often don’t feel a need to engage even behind closed doors.

Indexation Perils

Casey B. Mulligan is an economics professor at the University of Chicago. He is the author of “The Redistribution Recession: How Labor Market Distortions Contracted the Economy.”

Indexing fiscal policy parameters to consumer price inflation was a nice improvement in the 1970s when both price and wage inflation took off, but the American economy is different now and may require different index approaches.

Economic policy often involves setting benefit amounts or thresholds for program eligibility or for new tax brackets. A few examples are the federal poverty line of $23,550 (for a family of four), the maximum food-stamp benefit of $668 a month and a $113,700 cap on income subject to taxation for Social Security.

Ideally, policy parameters are chosen to balance costs and benefits. The $110,100 threshold might have been pretty sensible for 2012, but we doubt that a $110,100 threshold would be equally sensible in 2017 or 2022. If nothing else, the existence of inflation means that a dollar will not have the same economic value in the future as it does now.

Costs and benefits could be re-evaluated every year, but it is sometimes easier to set a formula for automatic updating â€" guessing, in effect, how the optimal policy will change over time. Many fiscal policy parameters are now indexed to consumer price inflation, based on the assumption that they should remain in a fairly fixed ratio to consumer prices.

The income tax code was not always indexed, and the rapid inflation of the 1970s awakened many Americans to “bracket creep,” as inflation raised the dollar earnings of the poor and middle class and put them in tax brackets originally meant for higher-income taxpayers, without necessarily giving them any additional purchasing power.

However, many costs and benefits of fiscal policy, especially those related to incomes and jobs, depend on wages rather than consumer prices and arguably fiscal policy parameters should be indexed to wages rather than consumer prices. A few policy parameters are indexed to wages, such as parts of the benefit formulas for Social Security and unemployment insurance, but consumer price indexation is more common.

If wages and consumer prices always moved together, the distinction would be largely academic. But in reality, wages change differently than consumer prices do. There is a tendency for wages to increase more than consumer prices over long periods of time, thanks to labor productivity gains.

Indexing can play a role in political debates, as the parties that believe that a policy parameter is too low might want it indexed to wages rather than consumer prices in order that it increase more over time (for the same reason, they might want it indexed to the average wage rather than the median wage, because average wages have tended to increase more than median wages have). Parties on the other side might push for consumer price indexation, or no indexation at all.

For example, if you think that the poverty line is too high, you are glad that the line is not indexed to wage inflation and might wish that it were not indexed at all, so that more of the population might creep out of the poverty category.

But in these times, we may see political parties switching sides on the indexing question, because a number of forces may cause wages to increase less than consumer prices, if at all.

Rising health insurance costs tend to reduce cash wages or cause them to grow less than consumer prices, as employers cannot compete well when they are paying more in cash wages and more for employee health insurance. I noted in an earlier post that the least-skilled workers are seeing their wages fall over time, largely because they are out of work and failing to acquire the skills that come with working.

Employers are also facing new health care regulations expected to reduce cash wages as many employers of low-skill workers are hit with per-employee fines of about $3,000 per employee per year. Were a federal sales tax, such as the value-added tax used in many European countries, to be created, consumer prices would increase significantly more than wages do.

While we can be thankful we are not now experiencing the high inflation rates of the 1970s that urgently introduced inflation indexing into fiscal policies, we may want to reconsider policy thresholds and how they relate to the labor market fundamentals.

This Week’s Links

This is a weekly series in which NYT developers share their recommendations from around the web.

The GitHub Revolution: Why We’re All in Open Source Now

Github has become more than just a place for programmers to share code. It’s a way for just about anyone to collaborate. My favorite line: “This isn’t just a tool: We’re witnessing the birth of a new culture.”

fun.js

An introduction to new book by Michael Fogus, “Introducing Functional JavaScript.” The book is available for preorder now and will be published in June.

Backbone.js 1.0

After more than two years, Backbone version 1.0 has been released.

Firefox OS Simulator 3.0 Preview

The Firefox OS Simulator just got some new features that will help you make your Firefox OS apps even better. The enhancements include push-to-device, rotation simulation, a geolocation API and more.

Fetching Multiple Resources With One Request

Are you having trouble retrieving multiple sets of data in a single request In this post, Phil Jackson (no, not the retired NBA coach) offers his thoughts on how you should handle those requests.

Shadow DOM 301: Advanced Concepts & DOM APIs

Eric Bidelman discusses some pretty complex features of the Shadow DOM. If you’re unfamiliar with Shadow DOM, check out the previous HTML5 Rocks articles before jumping into this one.

Shadow DOM 101 | Shadow DOM 201

ECMAScript 6 and Spread Operator

The spread operator is a great way to simplify some of those magical JavaScript functions like call and apply. The operator allows you to pass a variable amount of arguments to a function. While you’re at it, learn about the spread operator’s counterpart, the rest parameter.

Trevor Landau is a software developer on the Mobile Web Tech team at The New York Times. He is passionate about open source, clean code and back-end performance. His real love is JavaScript, but he is interested in all facets of web technologies. Twitter: @trevor_landau

Declining Wealth Brings a Rising Retirement Risk

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform - Why We Need It and What It Will Take.”

In a recent post, I examined aggregate national wealth from the Federal Reserve Board’s flow of funds statistics. They show that while national wealth is now approximately back to its precrisis level, the composition of it has changed. Much more is now held in the form of such financial assets as stocks and much less in nonfinancial forms such as housing. This is important, economically and distributionally, because the wealthy are much more likely to be invested in stocks and bonds, while the middle class has more of its wealth in home equity.

Several new studies cast further light on the composition and distribution of wealth, with implications for the ability of millions of Americans to retire and have an adequate retirement income.

On March 21, the Census Bureau published data on median household wealth - the median is the exact middle of the distribution of wealth. It shows that between 2000 and 2005, median wealth increased significantly, to $106,585 from $81,821. It then fell to $68,828 in 2011. Thus, although the stock market is close to its prerecession peak and aggregate national wealth has largely been restored, the median family’s wealth is still considerably below its peak and needs to rise considerably just to get back to where it was in 2000.

The reason, of course, is that the housing market continues to lag. As Figure 1 illustrates, virtually all of the change in wealth since 2000 has been accounted for by the rise and fall of home equity, which closely tracks the price of homes.

United States Census Bureau, Survey of Income and Program Participation, 1996, 2001, 2004 and 2008 Panels Median net worth of households, in 2011 dollars. Median net worth is the sum of the market value of assets owned by every member of the household minus liabilities owed by household members; the Case-Shiller Home Price Index is a measure of home values that tracks home prices in 20 metropolitan regions.

On the other hand, households have grown less dependent on housing wealth over time. In 1984, 41 percent of wealth was held in the form of home equity. By 2000, that percentage had fallen to 30 percent; in 2011 it was 25 percent.

A key reason for this change has been the switch from defined-benefit to defined-contribution pension plans. In the former, workers are promised a specific income at retirement, which the employer provides. The employer bears all the risk of market fluctuations.

Under a defined contribution scheme, such as a 401(k) plan, the worker and the employer jointly contribute to a tax-deductible and tax-deferred account from which the worker will finance retirement. Thus, to a certain extent, the growth of pension wealth is more apparent than real.

The worker always, in effect, owned the assets from which his pension was paid; he just never saw them or benefited when the stock market increased, nor did he suffer when the market fell. With a 401(k) account, the worker knows the present value of his retirement saving at the close of the market every day.

There are several big problems in this shift to defined-contribution pension plans. One is that workers don’t take advantage of them or fail to contribute the maximum contribution they are permitted to make. Another is that they fail to invest in stocks and instead put their money into certificates of deposit or other investments that tend to underperform stocks in the long run. Workers may also be unwise in choosing investment advisers and end up paying a lot in unnecessary fees that can be very costly to returns.

These mistakes are hardly surprising. Under defined-benefit plans, companies hired professional money managers to invest their pension funds. The average worker can hardly be expected to have the same level of expertise, nor do they have the time to investigate their options adequately. They also tend to be excessively risk-averse and invest too conservatively.

Now the first generation of workers who have virtually all their pension saving in defined-contribution plans is nearing retirement, and the news isn’t good. According to a March 19 report from the Employee Benefit Research Institute, only about half of workers nearing retirement have confidence that they have enough money saved for an adequate retirement.

Not surprisingly, retirement saving has taken a back seat to more pressing concerns - coping with unemployment, maintaining standards of living during an era of slow wage growth, putting children through increasingly expensive colleges and so on. People may also have simply underestimated how much money they needed to save in the first place.

This problem is much more severe for black Americans. According to a new study by the Institute on Assets and Social Policy at Brandeis University, black families have considerably less wealth than white families even when their incomes are comparable. Over a 25-year period, a $1 increase in income generated $5.19 in wealth for white families but just 69 cents for black Americans.

The study identified several possible explanations: years of homeownership, household income, spells of unemployment, education, and inheritances from parents. With regard to housing in particular, white families generally bought homes at an earlier age, thus building home equity longer; white families tended to get better mortgages, in part because they made larger down payments. Black Americans bought homes in poorer areas where there was less home price appreciation.

The wealth gap isn’t only racial, it’s generational. According to a March 15 study from the Urban Institute, young people today have considerably less wealth than their parents did at the same stage of life.

Factors include young people buying homes at a market peak and hence suffering disproportionately from the decline in home prices; they also put less money down, making it more likely that they have negative home equity. Younger workers have also tended to marry at a lower rate, have lower incomes than their parents, pay much higher costs for health insurance, and are more likely to graduate with college debts.

What’s really depressing about these studies is the lack of solutions and the likelihood that the problem will only get worse.

Republicans in Congress have pressed for years to convert Social Security, a classic defined-benefit pension, into a defined contribution plan, and also to convert Medicare into a voucher program. These changes would shift even more of the financial risk in retirement onto families that have yet to adapt to fundamental changes in employer pensions and the economy over the last 30 years. The future doesn’t look pretty.

A Metric for News Apps

OpenNews fellow Brian Abelson recently pondered some deep questions on his blog: How do you define “success” for a news app And how can you measure reader engagement The Times’s Red Carpet Project serves as a case study. (Bonus: math and graphs!)

I wrote a post on creating metrics of engagement for news apps… http://t.co/e6LQfYXmkv … let me know what you think!

â€" brian abelson (@brianabelson) 20 Mar 13

Another Look at Natural Gas

After my column on Wednesday about how the nation’s natural gas boom is helping reduce emissions of heat-trapping carbon, I received a bunch of e-mail arguing that gas obtained by hydraulic fracturing could, on the contrary, worsen climate change.

The main reason is that fracking wells â€" where water, chemicals and sand are pumped at high pressure into horizontal shafts to fracture shale rock deep underground â€" leak.

Cheap natural gas is helping to cut carbon emissions because power companies are using it to replace coal, a much dirtier fuel. But the benefits would be wiped out if a lot of the gas escaped into the atmosphere, because natural gas is mostly methane, which traps much more heat in the atmosphere than carbon dioxide.

One study last year suggested that replacing coal with gas would reduce greenhouse gas emissions only as long as the leakage of methane into the air from gas production did not exceed 3.6 percent.

The question is, how much do these wells leak “There is a lot of debate over that,” noted Susan Brantley, a geoscientist who heads the Earth and Environmental Systems Institute at Pennsylvania State University. “It is very vitriolic.”

According to a draft of the Environmental Protection Agency’s annual inventory of greenhouse gases, methane emissions from natural gas production declined by 45 percent from 2006 to 2011, to about 48 million metric tons of CO2 equivalent.

Andrew Revkin’s Dot Earth blog has covered this controversy exhaustively. And in January, the magazine Nature published a good account of the state of knowledge on the subject.

But the best answer is that we don’t have a definite answer. Different groups of researchers have come up with vastly different estimates of leakage, from around 2 percent to a whopping rate of 9 percent, found in a recent analysis of a gas field in Utah.

Ms. Brantley suggests that the National Science Foundation underwrite an exhaustive study that could bring some clarity to the issue. But will it have the money Sequestration just cut some $350 million from its budget for 2013.

A Strange Bank Holiday

The bank holiday continues in Cyprus. Banks are closed.

And people continue to withdraw money from their accounts as rapidly as possible.

That sounds more than a little strange. But in a way it is representative of what has gone on in Cyprus over the last couple of weeks. Everyone wants to fix things, but hard decisions are to be avoided.

It is obvious that once you tell people you will â€" or may â€" impose a one-time tax on bank balances, people will try to get their money out before the tax hits. So the authorities declare a bank holiday. But they would hate to inconvenience anyone, so they order the banks to keep some cash machines functioning.

As a result, we get to see pictures of lines at banks. Just like in the bad old days before deposit insurance in the United States.

Cyprus has deposit insurance, on balances up to 100,000 euros. If the banks are failing, why not close them down and try to meet that obligation That would amount to a potential 100 percent tax on balances above the line, and the Cypriots would hate to offend the rich Russians who seem to have a lot of accounts. So they try to hit small depositors as well, establishing the unfortunate precedent that in Europe deposit insurance is not really real.

Who will blink Will Cyprus knuckle under to European demands Will the European Central Bank make good on its threat to cut off the banks Maybe we will find out on Monday.

The Hard Math on Fossil Fuels

How close is the world to devastating climate upheaval My column on Wednesday argued that the natural gas boom is helping the United States reduce its emissions of heat-trapping carbon into the air, encouraging power generators to switch to gas from the much dirtier coal. American CO2 emissions last year totaled about 5.25 billion tons â€" almost 13 percent less than in 2007.

But as some readers argued, the decline is so modest that it is almost irrelevant. To stop the world’s temperature from rising more than 2 degrees Celsius (3.6 degrees Fahrenheit) above the pre-industrial era â€" considered by most climate scientists as the prudent limit â€" emissions must fall much faster.

In fact, keeping to the target probably requires that a good share of the world’s fossil fuel remains untapped.

Source: Energy Information Administration, Department of Energy

Fatih Birol, chief economist of the International Energy Agency, told me the atmosphere could absorb at most another one trillion tons of CO2. It got almost 32 billion tons in 2011 alone, 3.2 percent more than the year before.

Even if emissions were to remain at the same level as last year â€" a highly unlikely prospect given the rapid growth of energy consumption in countries like China â€" the global economy, in about 30 years, would have to stop relying on fossil fuels entirely.

Most of the carbon in the ground is in the form of coal. But the world’s known reserves of oil and gas contain about one trillion tons of CO2. Applying Mr. Birol’s limit would require Saudi Arabia, Gazprom and Exxon to leave some of their reserves in the ground. They are unlikely to take kindly to this.

What’s more, Mr. Birol’s numbers may be too optimistic. Estimates by the Potsdam Institute for Climate Impact Research in Germany â€" reported by the Carbon Tracker Initiative in Britain â€" suggest that to keep the odds of exceeding the 2-degree ceiling below 20 percent, no more than 565 billion tons of CO2 can be put into the air over the next 40 years. That would require cutting the world’s total emissions by more than half, to about 14 tons a year.

Look at it this way: the world’s carbon intensity â€" the amount of carbon emitted into the atmosphere for each dollar of economic production â€" fell about 0.8 percent a year over the last decade or so. According to a study by PricewaterhouseCoopers, avoiding a 2-degree rise requires a decline in emissions of 5.1 percent a year â€" every year until 2050.

As the PricewaterhouseCoopers study suggests, it might be “too late for 2 degrees.”

The Hard Math on Fossil Fuels

How close is the world to devastating climate upheaval My column on Wednesday argued that the natural gas boom is helping the United States reduce its emissions of heat-trapping carbon into the air, encouraging power generators to switch to gas from the much dirtier coal. American CO2 emissions last year totaled about 5.25 billion tons â€" almost 13 percent less than in 2007.

But as some readers argued, the decline is so modest that it is almost irrelevant. To stop the world’s temperature from rising more than 2 degrees Celsius (3.6 degrees Fahrenheit) above the pre-industrial era â€" considered by most climate scientists as the prudent limit â€" emissions must fall much faster.

In fact, keeping to the target probably requires that a good share of the world’s fossil fuel remains untapped.

Source: Energy Information Administration, Department of Energy

Fatih Birol, chief economist of the International Energy Agency, told me the atmosphere could absorb at most another one trillion tons of CO2. It got almost 32 billion tons in 2011 alone, 3.2 percent more than the year before.

Even if emissions were to remain at the same level as last year â€" a highly unlikely prospect given the rapid growth of energy consumption in countries like China â€" the global economy, in about 30 years, would have to stop relying on fossil fuels entirely.

Most of the carbon in the ground is in the form of coal. But the world’s known reserves of oil and gas contain about one trillion tons of CO2. Applying Mr. Birol’s limit would require Saudi Arabia, Gazprom and Exxon to leave some of their reserves in the ground. They are unlikely to take kindly to this.

What’s more, Mr. Birol’s numbers may be too optimistic. Estimates by the Potsdam Institute for Climate Impact Research in Germany â€" reported by the Carbon Tracker Initiative in Britain â€" suggest that to keep the odds of exceeding the 2-degree ceiling below 20 percent, no more than 565 billion tons of CO2 can be put into the air over the next 40 years. That would require cutting the world’s total emissions by more than half, to about 14 tons a year.

Look at it this way: the world’s carbon intensity â€" the amount of carbon emitted into the atmosphere for each dollar of economic production â€" fell about 0.8 percent a year over the last decade or so. According to a study by PricewaterhouseCoopers, avoiding a 2-degree rise requires a decline in emissions of 5.1 percent a year â€" every year until 2050.

As the PricewaterhouseCoopers study suggests, it might be “too late for 2 degrees.”

Changing the Culture of College Application

When Central Magnet High School opened in Bridgeport, Conn., almost 30 years ago, few of its students thought about applying to selective colleges.

The school is a magnet school, housed inside a larger regular high school. To be admitted, students need to maintain a minimum grade point average in junior high school and, in some cases, win a spot through a lottery. In the 1980s, as today, the parents of the vast majority of Central Magnet’s students did not attend college themselves.

George Moran was a guidance counselor at the school when it opened, and he is still a guidance counselor there, working his final year before retirement. I quoted him in Sunday’s article about a new study finding that most high-achieving, low-income students did not attend a selective college.

The pattern is especially worrisome because many of those students end up attending colleges near their homes with low graduation rates - and a significant portion do not earn a college degree. The median weekly pay of full-time workers with a four-year college degree was 55 percent greater last year than the pay of workers attending some college but without a four-year degree, according to the Bureau of Labor Statistics. If anything, that figure understates the gap, because college graduates are also more likely to have a full-time job than those not graduating from college.

The evolution of Central Magnet over the last 30 years, in Mr. Moran’s telling, highlights how this pattern might change. Over the years, more Central Magnet students began to apply to and attend selective colleges. As they did, the students in subsequent years began to see applying to those colleges as a normal thing to do. Moving 50 miles, or hundreds of miles, away from home was no longer deeply unusual for a top student.

By now, Central Magnet graduates have attended all eight Ivy League universities, liberal arts colleges like Amherst, Colgate, Haverford, Vassar and even Rice University, some 1,500 miles away, in Houston. “All these schools that were completely unheard of in the last five years are suddenly standard fare,” Mr. Moran said. Among the 140 or so students in a senior class at Central Magnet, more than 70 percent enroll in a four-year college and about 20 percent enroll in a two-year college, he said.

Most high schools with large numbers of low-income students still resemble the Central Magnet of the 1980s, based on the results of the new study, which is by Caroline M. Hoxby of Stanford and Christopher Avery of Harvard. The students do not apply to selective colleges partly because the colleges have not been aggressive in recruiting them. And even if a college has reached them and urged them to come, many students cannot fathom doing so. They may not know anyone who has attended such a college, Ms. Hoxby notes.

David Hunter, chief executive of QuestBridge, a California organization that helps award scholarships to top low-income students nationwide, told me that some students who received the group’s material in the mail did not initially know what to make of it. “Some of them think it could be a scam,” Mr. Hunter said. (And indeed, scholarship swindles surely exist.)

It is an expensive mistake for students to make, given that QuestBridge helps a few hundred students a year earn full scholarships to colleges like Bowdoin, Brown, Carleton, M.I.T., Northwestern, Notre Dame, Princeton, Virginia and Williams. But it’s also understandable.

Of course, a student who knows someone who previously won such a scholarship would not make that mistake - just as today’s Central Magnet students are more likely to consider colleges that match their academic profiles.

For colleges and policy makers, it’s a lesson in inertia. Changing the application and enrollments patterns of high-achieving, low-income students will probably take an enormous amount of initial work. Over time, though, the work will get easier.

The London Whale, Richard Fisher and Cyprus

Simon Johnson, former chief economist of the International Monetary Fund, is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

In the ordinary course of political events, months or even years pass between a definitive investigation and sensible policy remedies being proposed. There was a lag, for example, between the Pecora hearings in the 1933 and some of the modern securities legislation that followed. (Consider reading Michael Perino’s book, “The Hellhound of Wall Street,” or watch his 2009 conversation with Bill Moyers, in which I took part.)

We finally had a modern Pecora moment last Friday, when Senators Carl Levin of Michigan and John McCain of Arizona laid bare how JPMorgan Chase has been run since the financial crisis and since the passage of the Dodd-Frank Act, which supposedly “reformed” banks.

Within 24 hours, we had the clearest possible statement of how to think about the modern financial system - and make it less risky - in the form of a speech by Richard Fisher, president of the Federal Reserve Bank of Dallas. The timing was presumably coincidental, yet it also reflects the speed with which smart people are reassessing the risks posed by the mismanagement of financial institutions. With Mr. Fisher as a thought leader, some of the best new ideas are being developed within the Federal Reserve System.

The question now is how fast attitudes will change within the Board of Governors, the seven presidential appointees who sit atop the Federal Reserve System. Unfortunately, at least two powerful governors seem to resist sensible further reform.

At its heart, the Levin-McCain report reveals executives with a profound misunderstanding of risk in the world’s largest bank (I use the calculations of comparative bank size offered by Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corporation). Even worse, the report shows us in some detail that banks - even after Dodd-Frank - can and do readily manipulate complicated measures of risk in order to make their positions look safer than they really are.

As Jeremy Stein, a Fed governor, pointed out recently, there are strong incentives to do this repeatedly in banking organizations (read the opening few paragraphs of his speech carefully).

The banking regulators - in this case, the Office of the Comptroller of the Currency - are clearly unable to keep up with this form of “financial innovation” (which is really just clever ways to misreport risk).

Did JPMorgan Chase’s top management do this intentionally Did they mislead investors, particularly in the fateful conference call on April 13, 2012 This is a fascinating question on which the courts will no doubt rule. (You should also review this report by Josh Rosner of Graham Fisher, with the link kindly provided by Better Markets.)

Jamie Dimon will survive because JPMorgan Chase remains profitable. But it is profitable precisely because it receives implicit subsidies from being too big to fail. JPMorgan Chase disputes the precise scale of these subsidies - as Idiscussed here last week. Let’s just call them humongous.

This is not about individuals, this is about policy. And Richard Fisher has exactly the right approach:

At the Dallas Fed, we believe that whatever the precise subsidy number is, it exists, it is significant, and it allows the biggest banking organizations, along with their many nonbank subsidiaries (investment firms, securities lenders, finance companies), to grow larger and riskier.

This is patently unfair. It makes for an uneven playing field, tilted to the advantage of Wall Street against Main Street, placing the financial system and the economy in constant jeopardy.

It also undermines citizens’ faith in the rule of law and representative democracy.

Mr. Fisher’s speech is entitled “Ending ‘Too Big To Fail,’” the same title as a recent speech by Jerome Powell, a governor of the Fed board (which I wrote about here recently).

The difference between Mr. Fisher’s approach and what Mr. Powell proposes is significant, particularly regarding the timing for needed action.

Mr. Fisher wants to make the largest banks smaller - and particularly force investors to confront the reality that they will face losses when high-risk investment banking arms fail. In Mr. Fisher’s words:

The downsized, formerly too-big-to-fail banks would then be just like the other 99.8 percent, failing with finality when necessary - closed on Friday and reopened on Monday under new ownership and management in the customary process administered by the F.D.I.C.

Mr. Powell, by contrast, is not willing to take any additional actions at this time. As far as we can see, the Fed’s chairman, Ben Bernanke, is on the same side as Mr. Powell in this argument. But the Bernanke-Powell team is losing ground almost every day, at least on the merits of the argument. On Wednesday, Mr. Bernanke seemed to move a little closer to Mr. Fisher’s position but did not go as far as he should.

As Jesse Eisinger sums up the JPMorgan Chase mess with its multibillion-dollar trading loss last year, “Regulators remain their duped and docile selves.” The view that “smart regulation” can rein in excessive risk-taking is completely implausible.

Cyprus now demonstrates that the case for limiting the size of individual banks relative to the size of the economy is beyond debate. The awful financial debacle in that country, including the fumbled bailout unfolding this week, is a further reminder of the dangerous ledge on which we live.

If you let a few banks become very large relative to the economy, then their missteps can cause enormous damage - and big costs that will fall on someone. The losses incurred by Cypriot banks - around 6 billion euros (almost $8 billion) - are roughly on the same scale as the losses suffered by JPMorgan Chase as a result of its failed “London Whale” trades.

As the Nobel laureate Christopher Pissarides points out, nothing about this situation is fair or good for economic prosperity. A few Cypriot banks bet big on Greek bonds, very big, and their losses are about one-third of Cypriot G.D.P. Why would anyone want bank executives and traders to be in a position to do this much damage to a country

The question is only what the size cap should be - surely in the United States we should seek to be below the risk levels that built up in Cyprus (or Iceland or Switzerland or Britain). In fact, why should any single financial institution be big enough to damage the United States with its miscalculations or misrepresentations Yet the existence of too-big-to-fail subsidies means that a financial company like JPMorgan Chase has motive and opportunity to become even larger.

The British have figured out that finance needs to become safer; the authorities there are pushing for higher capital levels (above what seems likely to happen in the United States). And Martin Wolf, an influential senior columnist at The Financial Times, has a ringing endorsement of Anat Admati and Martin Hellwig’s new book, “The Bankers’ New Clothes,” on what is wrong with banking. Expect more British thinking to follow in this direction.

Why, in the United States, are we standing by

As with so much in our economy today, much depends on the Federal Reserve. The Fed could do a great deal by itself to make the largest banks smaller and safer; the F.D.I.C. is ready to move in this direction.

The Fed likes to look to Congress for action. But Congress will not act unless so advised by the Fed.

It’s time for Mr. Bernanke and Mr. Powell to listen more carefully to Mr. Fisher - as they watch the awful events in Cyprus.