Monday, November 19, 2012

MEDICARE

There are currently about 48 million people enrolled in the government-run comprehensive Medicare program covering people 65 years and older, at a projected annual 2012 cost of $585 billion, equivalent to $12,200 per person enrolled.

Overall annual health care expenditures in the United States are approximately $2.7 trillion, or $8,600 per capita.  It would be only logical to accept that health care costs per individual for the elderly would be more expensive than for the population at large, but the statistics hide some startling facts compiled by the Health Care Financing Administration (HCFA).

40 percent of Medicare dollars cover care for people in their last month of life, at an annual cost of $234 billion.  If we add people in the last two months of life we are looking at a cost in excess of $300 billion.

Furthermore, 10 percent of Medicare beneficiaries account for 70 percent of program spending, which is equivalent to $85,300 per beneficiary.

Thus, the cost of covering the remaining 90 percent of beneficiaries is actually a surprisingly low $4,100 per person given the age group in question, less than half the per capita cost for the population at large.

From this we may allow ourselves to draw some conclusions:

(1) In terms of the famously expensive United States health care system, government-run Medicare turns out to be not only comparatively cost efficient.  It is also a program universally loved by the country's elderly, yours truly being among them.

(2) It makes no sense whatsoever to try saving program costs by increasing the age of eligibility, because it is not generally at this lower end that the larger expenditures occur.  In addition, it would throw people in the 65 - 70 age bracket onto the mercy and good graces of the private for-profit health insurance industry.  And you can imagine the premium cost at that age.  That is, if you were lucky enough to be accepted.

(3) The problem lies squarely in the end-of-life-care decisions a society makes, and this is not unique to the United States.  The medical community of my native Norway is debating whether, and how, to place monetary restraints on end-of-life care, an issue which the country's politicians are not eager to embrace.  We need only recall Sarah Palin's "Death Panels".

We talk of the health care industry's mission to save lives as if life was eternal, while all one can hope for is to prolong a life.  In the overwhelming number of cases this is a sacred mission, but not indiscriminately and under any circumstance.

Placing value on human life is humanly impossible, so in the end common sense and humility must prevail.

When my time comes I wish to go gracefully, at the least possible expense to my family and the community at large.

Monday, October 8, 2012

U.S. JOB MARKET PROSPECTS

I have been hearing Mr. Mitt Romney, nominee of the Republican party to the U.S. presidential elections in November, refer to the "fact" that a 3 percentage point drop in the unemployment rate, from current 8 percent to 5 percent, would create nine million new jobs.  Whether this is a fib or lack of knowledge of basic labor market statistics, such statements are equally disturbing when coming from someone who's aim it is to lead the world's foremost economy.

The population of the United States is at the moment of writing around 312 million, and Mr. Romney's statement would be approximately correct if unemployment statistics were based on this total.  However they are not, as that figure includes some 75 million persons under the age of 18 and around 41 million who are 65 years or older.

The unemployment rate is defined as the percentage of the labor force out of work at any one time.

The United States labor force currently numbers a bit above 153 million, which in turn represents 78 percent of the population's 18-to-64 age group segment.

So, if Mr. Romney's - so far unknown - economic policies were to bring the unemployment rate down to the 5 percent level, we are not talking about 9 million jobs,  but rather about half that figure.  Not an unsubstantial difference.

Mr. Romney is also pledging to create 12 million new jobs during the first four years of his presidency, were he to be elected.  This is another statement that takes some credulity.

U.S. labor statistics indicate the total number of unemployed in 2011 to be about 13.7 million.  A 5 percent unemployment rate is generally equated with full employment, and historically the rate seldom dips under this threshold. The math to refute Mr. Romney's 12 million new jobs claim is therefore not overly complex.  He is again overstating the situation by a factor of two.

In this context it is also important to note that, during the remaining part of the decade, the 18-to-64 age segment - the main source of new labor - will only grow by less than a compounded 0.3% per year, primarily due to retirement of the baby-boom generation born during the years immediately following WWII.

On the opposite side of the political spectrum the incumbent presidential candidate, Mr. Obama, pleads with the electorate for the opportunity of another four years term to finish what he has begun, while admitting that there is still much to be done with respect to the level of employment.

When it comes to the jobs market, current trends actually do not bode badly for an Obama second term.

The dramatic increase in unemployment witnessed in the United States during the period 2008-10 was primarily rooted in the collapsing housing market, subsequently cascading over into plummeting state and local government employment levels forced on by shrinking tax revenues.

The housing market crash was a combined consequence of over-building and a simultaneous price bubble, aided and abetted by irresponsible and outright fraudulent financial market lending practices, leaving behind a household rate of debt never before experienced in the United States.

The long term rule of thumb for annual U.S. housing starts has been about 4.5 new units per 1,000 inhabitants.  During the period between 2000 and 2006 this ratio climbed steadily to a peak of about 6.0, creating a situation of substantial over-supply.  Subsequently, between 2006 and 2009 housing starts fell off a cliff, bottoming out at 1.2 units per 1,000 inhabitants.

When one realizes that housing starts - including attendant household goods industries - in normal times represent roughly 3 percent of U.S. Gross National Product, it is not hard to imagine what sort of impact sharp fluctuations in this market segment do to levels of national employment, in either direction.

The good news is that the 2000-06 housing over-supply has by now been corrected by the 2006-09 implosion of activity. The housing market is coming back to life, although still hampered by so-called "under water" mortgages, where the value of loans exceed the market value of the property.

With the supply over-hang out of the way, now would be a good time for the government to double down on unraveling the financial impediments still blocking the way to full recovery.

Further good news is that the U.S. auto sales, falling to 10 million units in 2009, is currently at some 15 million units and on its way back to the annual average16 million units prevailing in the early 2000s.  This is further strengthened by a revitalized U.S. auto industry and a small but steady trickle of returning manufacturing jobs from overseas.

Darkness is greatest during the hours before dawn, and the United States deserves to be lead back into the sunlight by a leader who gets the facts straight.




Saturday, September 8, 2012

GLOBALIZATION AND FREE TRADE

In 1776 Adam Smith wrote in his "Wealth of Nations"

If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage

The underlining is mine.

Trade is by definition the exchange of different commodities of equal value, and this is what Adam Smith refers to in his defense of free trade vs mercantilism.  Adam Smith was a moral philosopher - the term economist was yet to be coined - and from a moral-philosophical point of view his thesis makes good sense.  In practice, however, it has invariably been mercantilism which has propelled nations to prosperity and created those advantages which Adam Smith assumes to be phenomena of moral logic.

Adam Smith, and later David Ricardo, lived and wrote in agrarian times and were mainly concerned with the British Corn Laws which imposed prohibitive import duties on cheap foreign grains, a policy greatly favored by England's land owning classes who also happened to control Parliament.  This kept food prices high and landowners comfortably rich, but in time it would come to affect required living wage levels in the factories of the nascent industrial revolution.

The rapidly growing class of industrial capitalists wished labor costs to be as low as possible, so as to develop export markets for their products.  When these newly rich industrialists and tradesmen finally gained the political upper hand, the Corn Laws were abolished in favor of a new form of mercantilism, this time bent on protecting industrial export markets through monopoly corporations which became the backbone of the now defunct British Empire.

Industrialization has always been the driving force behind national economic development and wealth creation, and in every important instance it has been the consequence of mercantilism, the economic doctrine which states that government control of trade is of paramount importance to the prosperity of a nation, in particular by demanding a positive balance of trade.  Thus, modern economic globalization began with England's industrial revolution.

In no small degree, British mercantilism lead to the American Revolution and the creation of a new nation which promptly adopted similar policies, in reverse.  High tariffs on imported goods were the main source of U.S. Federal revenue from 1790 to 1914, often exceeding 90% of total revenues collected.  Behind these tariff walls and aided by abundant cheap immigrant labor and bountiful natural resources, thus arose the world's mightiest economy.  The United States ran consistent surpluses in foreign trade through the 1970s and was an ardent free-trade advocate.  The country has since become a substantial net importer and a less enthusiastic economic globalizer.

Nascent Germany under Otto von Bismarck was an early adherent to the American form of mercantilism and has basically stayed on track to this day, favoring policies of substantial foreign trade surpluses to the detriment of its partners in the European Community, from which Germany now demands commensurate punishment for not being able to pay their bills.  Japan chose a similar course and was not so long ago considered an invincible economic force.

Brazil started to stir in the 1950s, adding a new twist to barriers against imports, namely national content laws with the purpose of provoking inwards transfer of foreign capital and industrial know-how.  China did the same a generation later, adding numerous other non-tariff barriers as well as foreign exchange rate manipulation to their bag of mercantilistic tricks.

Unfortunately, global free trade is an illusion except in the minds of moral philosophers.  In the real world it is most ardently bandied about by trade surplus nations - the mercantilists - that have everything to gain from free and unfettered access to everybody else's markets.

That is not to say that trade is not advantageous - of course it is - so long as it is clearly for the reciprocal enrichment of the trading parties involved.  This is patently what Adam Smith alludes to in the passage quoted above.

But a system of world trade based on a number of nations running consistently large trade surpluses - the hallmark of mercantilism - must necessarily lead to a number of nations running up equally large and negative balances of trade, financed by the creation of excess, and ultimately irredeemable, credit.

Exactly where we find ourselves today.


Saturday, June 30, 2012

ARE THE UNITED STATES LIVING OFF CHINESE MONEY?

Not infrequently we see and hear statements from allegedly authoritative sources that the United States is deeply in debt to China and is living from day to day thanks to borrowings from that country.

Here are the facts as they currently stand.

As of May 2012, U.S. government debt held by the public stood at $11.0 trillion, while intra-governmental debt amounted to $4.76 trillion to give a combined outstanding public debt of $15.76 trillion.  (One could ask whether monies that the government owes to itself is debt in the true meaning of the word).

As of February 2012, $5.1 trillion of the debt held by the public was owned by foreign investors, the largest of which were China and Japan with just over $1.0 trillion each.  Other substantial foreign investors, although on a smaller scale, are Brazil, Switzerland, United Kingdom and Singapore.

So, China is only the source of approximately 10% of U.S. public debt, and there has not been any significant change in the size this debt for some time.

Not so dramatic and humiliating as some will have us believe.

TRUTH IN ADVERTISING

Advertising laws are aimed at protecting consumers by requiring advertisers to be truthful about their products and to be able to substantiate their claims.  All businesses must comply with advertising and marketing laws, and failure to do so could result in costly lawsuits and civil penalties.

The Federal Trade Commission (FTC) is the main federal agency that enforces advertising laws and regulations.  Under the Federal Trade Commission Act advertising must be truthful and non-deceptive, advertisers must have evidence to back up their claims, and advertisements cannot be unfair.

Hundreds of millions of dollars are being expended on political advertising which not infrequently is patently untruthful, deceptive and unfair.  Should not political advertising adhere to the same standards as the ones set for corporate America?

One could so wish, but purchase of political advertising is not held to such commercial standards, because their statements are considered "political speech" which falls under the protection of the First Amendment. The noble idea underpinning this different approach to advertising standards is the belief that voters have a right to uncensored opinion on which to base their political decisions.

A logical extension of this is that one also believes voters at the receiving end of the opinion are universally capable of separating the wheat from the chaff.  I will let you be the judge of that.

Furthermore, "opinion" (from Latin opinionem - what one thinks) is defined in the dictionary as "the expression of a belief that is held with confidence but not substantiated by positive knowledge or proof", or otherwise, "a personal belief or judgement that is not founded on proof or certainty".

In other words, one has the right to broadcast one's  opinion, but no obligation to be truthful or factual.

Caveat emptor - or, "Let the voter beware!"

Sunday, June 10, 2012

CHINA

"Of all external changes, demographics - defined as changes in population, its size, age structure, composition, employment, educational status and income - are the clearest.  They are unambiguous.  They have the most predictable consequences."

So said the late business thinker and writer Peter Drucker.  And when we take a closer look at China's demographic trends, things do not look all that bright.

As is familiar to us all, China has in modern times experienced a remarkable economic transformation, particularly during the period since 1995 when year-on-year compound growth, measured in nominal PPP (Purchasing Power Parity) dollars, has exceeded 11%, a feat unrivaled by any other nation over such an extended period of time.  How was this possible?

By mobilizing a vast, under-employed and cheap labor force into becoming the workshop to the world's rich economies, and in the process attracting huge amounts of inward capital and technology investments from rich-world corporations.  This economic expansion has been financed through an exceptionally high domestic savings rate, as a well as through positive foreign current account balances cumulatively exceeding 5.0 trillion dollars in the period since 1995.

How likely is it that this state of affairs will continue?  Time for a look at China's demographics.

In PPP terms China is already the world's second largest national economy and is slated to overtake number one, the United States, some time during the current decade.  But GDP per capita tells an entirely different story.  Here we find China in 120th place, with its nearest neighbors on the world rankings being Cook Islands, Jamaica, Monserrat and the Maldives above, and just below we find Equador, Belize, Bosnia and Palau.

 In other words, China is a large - but poor - country and is quite likely to remain that way.  Here is why.

Thanks not the least to its "one child" policy, China has long suffered from an exceptionally low birth rate, and the trend points toward further deterioration.  As a consequence of the same policy there is also a marked unbalance between the number of adult men and women.  Some 40 million Chinese will never find a mate.

The country's total population is in the process of peaking, but more disturbing pictures emerge when we look at age group distribution trends.The productive 15-64 years age group has already peaked at 73.6% of total population and will have fallen to 64.5% by 2030 and to 56.6% by 2050.  During this same time span the over-65 age group will have grown from a current 8,9% to respectively 22.2% and 33.2%.  In other words, China will have grown old before it has had time to become rich.

The already diminishing 15-64 age group will have serious economic consequences, because China's labor force participation within this group is already an extraordinarily high 83%.  In comparison we find Germany with 81%, Brazil with 77% and the United States with 73%.

The China-as-world-workshop policy, the linchpin of economic globalization, has been a main cause of the serious imbalances we are now experiencing both in world labor markets as well as world financial markets.  These imbalances are currently mainly manifesting themselves in rich world countries, but they will impact China soon enough.

It has long been pointed out that China needs to change tack and steer its economic development towards local consumption rather than savings, investment and export of manufactured goods.  The problem is that this is much easier said than done.

A fairly standard national GNP structure is somewhere around 80% consumption and 20% gross investment.  In 2011 China we find 46% consumption and 54% investment.  On the supply side of the equation, we find 47% of value creation coming from the manufacturing sector.  In terms of the national economy, this represents a huge over-capacity which can never be absorbed locally.

An economic restructuring of this magnitude could only lead to massive unemployment and serious social disturbances, to which history has taught us that the Chinese society is prone.  Another risk factor in this direction is the country's rapidly growing income inequality as measured by the Gini index.  Over a period of just two recent years China's position on this index has deteriorated by 16 percentage points.

And there is a diminishing probability that China's excess industrial capacity will continue to be absorbed by the rich-world economies, in the short term because they will not have the money, and in the longer term because the world  manufacturing labor market will have to be brought back into balance to avoid unacceptably high rich-world unemployment rates.  We already see signs of this happening in the United States, as steeply rising labor rates and general logistics costs are beginning to erode China's low cost advantage in some industrial sectors.

While total population is peaking, the rate of urbanization will continue unabated.  By 2030 China's urban population will have increased by some 50% to nearly one billion people.  Imagine the infrastructure investment requirements this will lead to.  Where will the money come from, as exports and inward investments dry up?  And does China have land and water resources to adequately feed such a large urban population without massive imports of food and energy?

Finally, in China there is hardly any health care and social security net to deal with more than 300 million old people by 2030.  Where will the money for that come from?

There seems to be current consensus that China will continue to grow at a blistering pace, no longer at 11% per year but maybe at 7%.  I would not bet on it.

Thursday, May 3, 2012

TRICKLE-DOWN ECONOMICS

The best definition of Trickle-Down Economics I can think of is the metaphor about the richest 1% up in the tree eating cherries while popping the pits down on the 99% percent down below.

Economic activity is not driven by supply but by demand.  Demand will generate supply, while it should be fairly obvious to anyone that supply without purchasing power generates only bankrupt companies unable to sell what is on offer.  And to generate demand it is the 99% that need to be employed at decent wages.  The 1% may have tons of money, but as consumers and generators of demand and economic activity they are not worth beans.

In case you are unaware of this, out of every 100 dollars of U.S. Gross Domestic Product, 75 dollars are generated by household consumption, 15 dollars from consumption by government (federal, state and local), with only 15 dollars being channeled towards gross private and public investment.  You will have noticed that this adds up to 105 rather than 100 dollars.  That is because we consume 5% more than we produce by importing from other countries more than we sell to them.

The above should make it pretty obvious where the attention has to be: ON THE PURCHASING POWER OF THE CONSUMER, NOT ON THE INVESTOR .

Henry Ford understood the relationship between demand and ability to purchase when he invented assembly line mass production of automobiles in the early 1920s.  He doubled wages to 5 dollars per day so that his workers could afford to buy all those cars he was now able  to turn out.  The lesson has obviously long been lost.

Some politicians and pundits talk and think as if we were in an ordinary garden-variety short term cyclical recession, and that all we need is some fiscal discipline and lower taxes on wealthy one-percenters and corporations for them to regain confidence enough to start creating jobs with their idle cash.  Those politicians and pundits are barking up the wrong tree.

From the time globalization got under way in a big way in the early 1980s, median U.S. household income measured in constant 2010 dollars has increase by 0.2% per year.  In other words, not grown at all.  Between 1999 and 2010 household income actually fell by 12% in real terms.  But with credit being abundantly available consumption continued unabated, coming to a screeching halt only after household debt had doubled to an unsustainable 200% of median income and home equity collateral  had disappeared.

Why has household income stagnated and declined, instead of accompanying the annual 2.3% real growth in gross national product during the period?  After all, that was the way it used to be.  It is because globalization in short order doubled the world labor force, and that over-supply of labor drove down wages everywhere.  This has caused a massive transfer of wealth from the consuming 85% of the economy to the investing (and gambling) 15%.

And where did all that abundant credit come from?  Thanks to globalization (and increasing oil prices) the value of world trade grew faster than the world economy.  While you'd think world trade by definition should be a zero sum game (world exports equaling world imports), unfortunately this does not quite hold true.  Most of the main export-driven economies and oil producers have no ready use for all the money they are raking in and consequently run huge current account surpluses.

These surpluses in turn have left the world financial system awash in funds for which the bankers desperately needed to find profitable outlets.  Too much cash chasing too few quality investment opportunities drives bankers to increasing financial ingenuity, skullduggery and risk-taking.  The first installment of that saga blew up in the face of western taxpayers in 2008, and worse is yet to come from a probable implosion of the Euro monetary union.

Let us have no illusions.  We have been digging ourselves a hole for some 25 years, and it is not going to be easy nor painless to dig out again.  We have accumulated the mother of all world debt overhangs which have to be pared back to sustainable levels.  Since one person's or nation's debt is another's asset, much of those assets are in fact smoke and mirrors.

And then there is the unbalanced pattern of trade created by the globalization of world labor and the hunt for the lowest common denominator, which is fundamentally how we got ourselves into this mess.  Until we find ways to gainfully employ the 99% at home where consumption takes place, the hole we have dug will just continue to deepen.



Thursday, April 19, 2012

ANDERS BEHRING BREIVIK

As I am sure you already know, Anders Behring Breivik is the miserable lunatic who in my country of birth on June 22, 2011 detonated a car bomb at the government office quarters in central Oslo with the loss of 8 lives, and from where he proceeded by car and ferry to the traditional annual Labor Party youth summer camp at the Utøya island, mercilessly stalking and shooting to death 69 unarmed youth while fronting as a police officer there to protect them.

His stated motive?  Hatred of government institutions for not doing anything to protect pristine Nordic ethnicity from the evils of encroachment by Muslims and immigrants.  If it sounds like Hitler to you, you are on the right track.

Let us draw a parallel with Timothy McVeigh and his Oklahoma City car bomb which he detonated on April 19, 1995 killing 168 and injuring close to 700 people.  McVeigh also hated his federal government and what he viewed as its liberal policies, confessed his crime and expressed no remorse.  He was executed by lethal injection on June 11, 2001.

After lengthy jockeying back and forth among psychiatric commissions and other "experts" in the vagaries of the human mind, it was finally settled that Anders Behring Breivik is not mentally impaired to stand trial.  It will however be up to the court to finally decide whether he shall be incarcerated as a criminal or parked in an asylum for the insane.  It's going to be a tough call.

The trial began on April 15 and is scheduled to last for 10 weeks.  A frenzied debate preceded the trial about whether the press should have free access to the proceedings.  It was ruled that the press should indeed be there and the usual circus has ensued, giving Breivik wide latitude to publicly air his sick social theories, insult the judges, claiming to be victim rather than offender and declaring that his only remorse is not having had the opportunity to kill even more people.  In return the mass murderer is not handcuffed, is received in court with cordial handshakes and is generally being treated respectfully as any lawful citizen.  I am not certain whether he also is being treated to coffee with cream and sugar, but I would not be surprised.

Norway formally abolished the death penalty in 1979, the last execution having taken place in 1948.  There is no provision for life imprisonment in Norway.  The maximum sentence is 21 years, although there seems to be some leeway to extend this to 30 years in cases of Breivik's magnitude.  Maximum security prisons in Norway are country clubs compared to U.S. standards -bright cells with large unbarred windows, modernistic IKEA furniture, flat screen TV and private bath.

Here is my dilemma.  Have my fellow Norwegians gone totally bananas with their liberal ideas about polite decency under any and all circumstances?  My gut feeling is that Anders Behring Breivik should be burnt at the stake, but my brain intercedes insidiously with the following:

Are those very same Norwegians on to something that is actually pretty clever?  If we can agree on the concept of justice as a tool of prevention rather than a means of social revenge, what is then more likely to turn world opinion off on Anders Behring Breivik and his ilk - and we know they are out there and only too ready to perpetrate great harm.  Letting Breivik expose himself in all his lunacy for the whole world to see while being treated as a gentleman, or keeping it all under close wraps and let imagination fester?  Breivik has already complained bitterly that the prosecution is trying to make him look ridiculous.

You be the judge.