Gary Becker is optimistic on future world food prices. His argument is a classic one in economics and it provides good guidance how we should think about similar questions.

Recent decline of US dollar reflects investors’ expectation that it may take long time for the Fed to raise interest rate, probably slower than ECB, certainly slower than commodities exporting countries.

Interest rate differential is the most important factor in predicting currency movement.

The first graph below shows you the 4-week average of jobless claims —we are clearly out of recession. Yet we are nowhere near the normal. The unemployment rate will certainly pass 10%, and it will take a while for the rate to peak.

(click to enlarge; graph courtesy of calculatedrisk)

The second graph shows you that it usually takes the Fed more than a year after the peak of unemployment rate to raise interest rate, which means the Fed won’t raise interest rate until 2011, at least. It looks like investor’s concerns are well justified.

(click to enlarge; graph courtesy of calculatedrisk)

But we know Bernanke is no Greenspan. Giving the huge liquidity the Fed has put into the system, the Fed may need to raise interest rate much quicker and more aggressively than what is suggested by recent history.

I am still not sure how the Fed can get the timing right. There is a huge risk down the road that the Fed raises interest rate too soon so killing the nascent recovery; however, if the Fed raises rate too slow and by too little, it may cause sharp jump of inflation (expectations).

This morning, I was so happy to hear Oliver Williamson won this year's Nobel prize in economics, together with Elinor Ostrom. I have been wanting and actively betting him to win over the last five years, at least.  Now he finally got it.  But I was a little surprised that Armen Alchian and Oliver Hart were not included, giving their equal contribution to the Firm Theory.  Maybe they will be recognized later.

Marty outlines his plan for health care reform. He proposes to scrap the subsidy on employment-based insurance, and he also proposes an innovative government health credit card to deal with sudden hit of a large medical bill. His first part of plan rivals Friedman’s school voucher plan.

The American health-care system suffers from three serious problems: Health-care costs are rising much faster than our incomes. More than 15 percent of the population has neither private nor public insurance. And the high cost of health care can lead to personal bankruptcy, even for families that do have health insurance.

These faults persist despite annual federal government spending of more than $700 billion for Medicare and Medicaid as well as a federal tax subsidy of more than $220 billion for the purchase of employer-provided private health insurance.

There’s got to be a better way. And it should not involve the higher government spending and increased regulation that characterize the proposals being discussed in Congress.

A good health insurance system should 1) guarantee that everyone can obtain appropriate care even when the price of that care is very high and 2) prevent the financial hardship or personal bankruptcy that can now result from large medical bills.

Private health insurance today fails to achieve these goals. It is also the primary cause of the rapid rise of health-care costs. Because employer payments for health insurance are tax-deductible for employers but not taxed to the employee, current tax rules encourage most employees to want their compensation to include the very comprehensive “first dollar” insurance that pushes up health-care spending.

A good system should not try to pay all health-care bills. That would lead to excessive demand, wasteful use of expensive technology and, inevitably, rationing in which health-care decisions are taken away from patients and their physicians. Countries that provide health care to all are forced to deny some treatments and diagnostic tests that most Americans have come to expect.

Here’s a better alternative. Let’s scrap the $220 billion annual health insurance tax subsidy, which is often used to buy the wrong kind of insurance, and use those budget dollars to provide insurance that protects American families from health costs that exceed 15 percent of their income.

Specifically, the government would give each individual or family a voucher that would permit taxpayers to buy a policy from a private insurer that would pay all allowable health costs in excess of 15 percent of the family’s income. A typical American family with income of $50,000 would be eligible for a voucher worth about $3,500, the actuarial cost of a policy that would pay all of that family’s health bills in excess of $7,500 a year.

The family could give this $3,500 voucher to any insurance company or health maintenance organization, including the provider of the individual’s current employer-based insurance plan. Some families would choose the simple option of paying out of pocket for the care up to that 15 percent threshold. Others would want to reduce the maximum potential out-of-pocket cost to less than 15 percent of income and would pay a premium to the insurance company to expand their coverage. Some families might want to use the voucher to pay for membership in a health maintenance organization. Each option would provide a discipline on demand that would help to limit the rise in health-care costs.

My calculations, based on the government’s Medical Expenditure Panel Survey, indicate that the budget cost of providing these insurance vouchers could be more than fully financed by ending the exclusion of employer health insurance payments from income and payroll taxes. The net budget savings could be used to subsidize critical types of preventive care. And unlike the proposals before Congress, this approach could leave Medicare and Medicaid as they are today.

Lower-income families would receive the most valuable vouchers because a higher fraction of their health spending would be above 15 percent of their income. The substitution of the voucher for employer-paid insurance would be reflected in higher wages for all.

Two related problems remain. First, how would families find the cash to pay for large medical and hospital bills that fall under the 15 percent limit? While it would be reasonable for a family that earns $50,000 a year to save to be prepared to pay a health bill of, say, $5,000, what if a family without savings is suddenly hit with such a large hospital bill? Second, how would doctors and hospitals be confident that patients with the new high deductibles will pay their bills?

The simplest solution would be for the government to issue a health-care credit card to every family along with the insurance voucher. The credit card would allow the family to charge any medical expenses below the deductible limit, or 15 percent of adjusted gross income. (With its information on card holders, the government is in a good position to be repaid or garnish wages if necessary.) No one would be required to use such a credit card. Individuals could pay cash at the time of care, could use a personal credit card or could arrange credit directly from the provider. But the government-issued credit card would be a back-up to reassure patients and providers that they would always be able to pay.

The combination of the 15 percent of income cap on out-of-pocket health spending and the credit card would solve the three basic problems of America’s health-care system. Today’s 45 million uninsured would all have coverage. The risk of bankruptcy triggered by large medical bills would be eliminated. And the structure of insurance would no longer be the source of rising health-care costs. All of this would happen without involving the government in the delivery or rationing of health care. It would not increase the national debt or require a rise in tax rates. Now isn’t that a better way?

Martin Feldstein, a professor of economics at Harvard University and president emeritus of the nonprofit National Bureau of Economic Research, was chairman of the Council of Economic Advisers from 1982 to 1984.

Unless the Fed raises interest rate quicker and faster than European Central Bank, the US dollar will probably continue to decline.

Another shoe to drop?

What We’ve Learned: Ugly Truths About Housing

By Edward L. Glaeser

With the anniversary of the failure of Lehman Brothers approaching, we asked each of our Daily Economists to explain what we’ve learned from the financial crisis. Here Edward L. Glaeser, an economics professor at Harvard, responds.

One year ago, Lehman Brothers fell and our financial markets teetered at the brink of a precipice. This event looms large in global finance, but it appears less momentous from the perspective of the housing markets.

Housing prices peaked not 12 but 40 months ago in May 2006. After experiencing a staggering 96 nominal percent price increase during the six years before then (72 percent in real dollars), prices started a slow decline. By September 2008, prices had already dropped 22 percent from the peak. Of course, they fell another 12 percent in the six months after Lehman collapsed.

What have we learned from the great housing bubble and crash of the aughts? Most obviously, we have learned that housing prices can be extraordinary volatile. This was less obvious from previous housing cycles.

During the last housing cycle, from 1987 to 1993, the Case-Shiller 10-city index increased by 31 percent between January 1987 (when Case-Shiller data starts) and the peak in March 1990. During the 38-month period before the more recent peak, the 10-city index increased by 55 percent.

But during the recent period, five metropolitan areas (out of 20) experienced price growth above 75 percent; no city experienced such a massive boom during the earlier cycle.

After the earlier peak, the market fell for 42 months before bottoming, with the 10-city decline at about 8 percent in nominal terms, which was closer to 20 percent in real terms. While there are no guarantees against further declines, national housing prices seemed to stop falling in May 2009, exactly three years after the more recent peak. In the current decline, housing prices dropped by 33 percent in nominal terms, or perhaps 38 percent in real terms. A 24 percentage point larger nominal rise in the recent boom was associated with a 25 percentage point greater nominal fall.

So let no one ever again say foolish things like housing prices never fall.

In the current drop, eight of the 20 Case-Shiller areas had housing price drops of 40 percent of more. People who bought with a standard mortgage in the years close to the boom have lost all of the equity in their houses. Buyers and bankers should never again think that an area’s recent price increases are the sign of a strong market where prices have nowhere to go but up. In the long run, price increases are followed by price drops, and special caution, by regulators as well, needs to be taken in booming markets.

In places like Las Vegas and Phoenix, there are no fundamental constraints on building new homes — like a shortage of land or onerous restrictions on construction — and prices in unconstrained areas must eventually find their way back to the construction costs. I once thought that this obvious lack of limits on building meant that such open areas would sit bubbles out, as Dalllas sat out the recent boom and bust, but I was wrong. The logic of supply and demand can be ignored for longer than I thought, but it ultimately reasserts itself.

The second lesson of the housing debacle is that there is extraordinary pain in both housing price busts and booms.

When housing prices soared, ordinary Americans found it increasingly hard to afford a house. I would certainly cheer if Detroit produced a wonder car for $10,000 that could get 50 miles to the gallon and go from 0 to 60 in five seconds. I would also cheer if the housing industry could produce a beautiful and energy efficient 3,000-square-foot home for $100,000. The same logic pushed me to boo when housing became outrageously expensive. During the boom, I hoped that housing prices would stop rising and even decline.

Yet I didn’t understand the terrible impact that declining housing prices would have on our financial sector. While rising housing prices weren’t particularly good for America, declining housing prices were particularly bad for the country. The lesson seems to be that large swings in housing prices, in either direction, can be extremely painful.

The third lesson is that American housing policy has been monumentally foolish.

We have used public resources to encourage ordinary Americans to bet all they could on highly risky housing markets. Fannie Mae and Freddie Mac, the home mortgage interest deduction, even the willingness to bail out financial firms that had lost too much on mortgages, can all be seen as policies that encourage ordinary people to risk it all on real estate.

I had once thought that these policies were misguided, but not terrible. We now know that encouraging buyers and lenders to bet on housing can impose vast costs on the country.

Luckily, no one will ever again think that Fannie and Freddie are independent entities that impose no costs on American taxpayers. I am also tremendously gratified that the government did not engage in a quixotic attempt to buoy the housing market artificially by subsidizing even more leveraged home purchases.

Yet I think that we have not yet fully faced the fact that our tax code encourages people to finance their homes with as much debt as possible, and that our financial regulations abet irresponsible lending.

Now that we have backed away from the abyss, we can consider making much-needed reforms, like reducing the upper cap on the home mortgage interest deduction, that could depress housing prices in the short run, but make future housing bubbles and crashes less likely.