Saturday, April 30, 2011

Biggest Recessionary Decline In States And Counties With Greatest Past Increases In Household Leverage

From "Household Leverage and the Recession" by Thomas Philippon, Stern School of Business, New York University and Virgiliu Midrigan, Department of Economics, New York University:
A salient feature of the recent U.S. recession is that output and employment have declined more in regions (states, counties) where household leverage had increased more during the credit boom. This pattern is difficult to explain with standard models of financing frictions. We propose a theory that can account for these cross-sectional facts. We study a cash-in-advance economy in which home equity borrowing, alongside public money, is used to conduct transactions. A decline in home equity borrowing tightens the cash-in-advance constraint, thus triggering a recession. We show that the evidence on house prices, leverage and employment across US regions identifies the key parameters of the model
.

Friday, April 29, 2011

Globally, Manufacturing's Share Of GDP Declining

From " 'Decline of Manufacturing' is Global Phenomenon: And Yet the World Is Much Better Off Because of It" by Mark Perry on his Carpe Diem blog:

The chart above shows manufacturing output as a share of GDP, for both the world and the U.S., using United Nations data for GDP and its components at current prices in U.S. dollars from 1970 to 2009.
The complete post is available here.

Videos Of Kate Middleton's Wedding Dress And The Royal Couple's Vows

The Royal wedding dress worn by Kate Middleton:




The Royal couple's wedding vows:

Possibility Of An Unfriendly Takeover Tender Offer For NYSE By Nasdaq-ICE

From Bloomberg, "Nasdaq, ICE Are Said to Consider Tender Offer for NYSE" by Nina Mehta:
Nasdaq OMX Group Inc. (NDAQ) and IntercontinentalExchange Inc. (ICE) may take their unsolicited takeover offer for NYSE Euronext directly to shareholders, bypassing board members who twice rejected their bid, according to a person familiar with the matter.
An appealing tender offer price may move enough NYSE shares into arbitrageurs' hands to give Nasdaq a realistic chance to acquire NYSE.

Wednesday, April 27, 2011

China's Energy Use And Carbon Emissions To Level Off By 2035

From "A surprise: China’s energy consumption will stabilize" on ScienceBlog, April 27, 2011:
Yet according to this new forecast, the steeply rising curve of energy demand in China will begin to moderate between 2030 and 2035 and flatten thereafter. There will come a time — within the next two decades — when the number of people in China acquiring cars, larger homes, and other accouterments of industrialized societies will peak. It’s a phenomenon known as saturation. “Once nearly every household owns a refrigerator, a washing machine, air conditioners and other appliances, and once housing area per capita has stabilized, per household electricity growth will slow,” [Mark] Levine [co-author of the report, "China’s Energy and Carbon Emissions Outlook to 2050"] explains.

Similarly, China will reach saturation in road and rail construction before the 2030-2035 time frame, resulting in very large decreases in iron and steel demand. Additionally, other energy-intensive industries will see demand for their products flatten
.Read the full article here.

The full 63-page PDF report is available here.

Trump's Intrade Republican Nomination and Presidential Election Securities Unimpressed By Obama's Birth Certificate Release

Donald Trump's Intrade security prices for him to get the Republican presidential nomination and win the presidential election unfazed by Obama's release of his birth certificate.

Trump currently has the best Republican chance to beat Obama in the next presidential election. Trump has a 67 percent chance conditional probability of beating Obama in the next election. However, he also has a very low chance, 8.8 percent, of getting the Republican nomination,

Intrade's presidential election winner security prices are conditional on first winning the nomination. So its price is the odds of getting the nomination times the true odds of winning the presidency equals the Intrade security presidential winner price. For Trump the numbers are 8.8 percent x true odds of winning equals 5.9 percent. Trumps current odds, 11:10 AM EST, April 27, 2011, of winning are 5.9/8.8 or 67 percent.

See my blog post of April 20, 2011, "Need To Consider Conditional Probabilities Of Intrade Prices To Find Winning Odds Of Republican Presidential Candidates."

FDIC Claims It Could Have Saved Lehman At Low Cost: Corollary Is Fed Broke Market Trust And Created Financial Crisis

From The American, published by American Enterprise Institute, "The Fed vs. the FDIC on Lehman’s Failure" by Peter J. Wallison commenting on the FDIC's article on how it could have saved Lehman:
the FDIC’s contention that Lehman’s creditors would have lost only three cents on the dollar again calls into question the U.S. government’s decision to let Lehman fail. Clearly, after Bear Stearns’s rescue, the financial markets were assuming that the United States would rescue all larger firms. This was confirmed by Anton Valukas’s report as an examiner for the U.S. bankruptcy court. Most market participants, he reported, including Lehman, could not imagine why the Fed would rescue Bear Stearns and not Lehman. When Lehman was allowed to fail, market participants realized that they did not know who would survive and who would not. A massive panic ensued as financial institutions hoarded cash.
Peter J. Wallison was a member of the Financial Crisis Inquiry Commission.

Tuesday, April 26, 2011

Cato Video On "False Promise Of Green Energy"

An hour and a half video of a Cato conference on the "False Promise of Green Energy" held April 21, 2011. Downloadable podcast and Quicktime video available here.

Monday, April 25, 2011

To The Poor, Avoiding Idleness And Boredom Can Be More Important Than Food And Shelter

From "Banerjee and Duflo: Remembering to respect the preferences of the poor" by J P London on The Economist Free Exchange Blog:
The life of the rural poor is extremely boring, with repetitive back-breaking tasks interrupted by periods of enforced idleness; it is far removed from Marie-Antoinettish idylls of Arcadia. As the authors [Abhijit Banerjee and Esther Duflo] remark, villages do not have movie theatres, concert halls, places to sit and watch interesting strangers go by and frequently not even a lot of work. This may sound rather demeaning to the poor, like Marx’s comment about “the idiocy of rural life”.

But it is important to understand because, as the authors remark, “things that make life less boring are a priority for the poor”. They tell the story of meeting a Moroccan farmer, Oucha Mbarbk. They ask him what would he do if he had a bit more money. Buy some more food, came the reply. What would he do if he had even more money? Buy better, tastier food. “We were starting to feel very bad for him and his family when we noticed a television, a parabolic antenna and a DVD player.” Why had he bought all this if he didn’t have enough money for food? “He laughed and said ‘Oh, but television is more important than food.’”

Nutritionists and aid donors often forget this. To them, it is hard to imagine anything being more important than food.
Read the entire article here.

A Hypothetical Doubling Of Everyone's Individual Income Tax Still Leaves A Substantial US Budget Deficit

Lost in the discussion about raising the US individual income tax rates on high income earners is that if the US raised EVERYONE'S individual income taxes by 100 percent, doubled everybody's individual income taxes, there would still be a substantial yearly US budget deficit.

In fiscal year 2010, the actual US revenues were $2,163 billion of which $899 billion was from individual income taxes. In FY2010, the US outlays were $3,456 billion for a deficit of $1,294 billion. (Data from CBO: AN ANALYSIS OF THE PRESIDENT'S BUDGETARY PROPOSALS FOR FISCAL YEAR 2012).

If the US had doubled everybody's individual income taxes and raised an additional $899 billion, the US would have still had a budget deficit of $395 billion ($1294 - 899).

For the first 6 months of fiscal year 2011 (October 2010 through March 2011), US revenues were $1,019 billion of which $394 was from individual incomes taxes. Outlays were $1,674 billion and the six month deficit was $830 billion. (Data from CBO: MONTHLY BUDGET REVIEW APRIL 2011).

Again, a doubling of individual income taxes would raise another $394 billion and still leave a six month US budget deficit of $436 billion ($830 - 394).

In FY2010, the US needed an additional 144 percent of the individual income taxes it raised to eliminate the budget deficit. For the first 6 months of FY2011, the US needs to raise an additional 210 percent of individual income taxes to eliminate the budget deficit.

The top 1 percent pay about 40 percent of US income taxes and the top 10 percent pay about 70 percent of US income taxes. If the US raised the individual income tax revenues from the top 10 percent by 50 percent, it would raise an additional 35 percent in individual income tax revenues and still would have been short 110 percent of individual income tax tax revenues in FY2010 and 175 percent of individual income tax tax revenues for the first 6 months of FY2011.

Sunday, April 24, 2011

Intrade 2012 Higgs Boson Security Increases Again

The Intrade Security price for finding a Higgs Boson particle before December 31, 2012, increased on Sunday, April 24, 2011, by 25 percent from 20 to 25.

This security has gone from 13 to 25, a 92 percent increase, in a few days.

Saturday, April 23, 2011

Inflation Adjusted Median Home Prices Below 1979 Levels

From "That Home You Bought In 1979 Has Lost 8.5% Of Its Inflation-Adjusted Value" by Gus Lubin:
Home values have already collapsed to 2003 levels.
But an even more grim picture comes when you adjust for inflation. That home you bought in 1979 has lost 8.5% of its inflation-adjusted value.

From Chart Of The Day:

Fed Caught Between Stopping Inflation And Allowing US Default

From "Central Bank Independence and Sovereign Default" by Narayana Kocherlakota, President, Federal Reserve Bank of Minneapolis at Wharton Conference, Philadelphia, Pennsylvania, April 1, 2011:
Let me wrap up. I’ve argued that even if the fiscal authority borrows exclusively in its country’s own currency, the central bank can have a large amount of control over the price level. But the central bank can only achieve that control if it is willing to commit to letting the fiscal authority default. Such a commitment may expose the country to risks of short-term and medium-term output losses. How this trade-off should best be resolved awaits future research. But I suspect that it may be optimal for central banks to guarantee fiscal authority debts in some situations. If so, we again have to think of price level determination as something that is done jointly by the fiscal authority and the central bank — just as Sargent and Wallace taught us 30 years ago.
Read the speech here.

Intrade's Higgs Boson 2011 Security Jumps 67 Percent On Data Leak Of Possible Find

The Intrade Security price for finding a Higgs Boson particle before December 31, 2011, increased on Saturday, April 23, 2011, at 4:23 PM EDT, NY, almost 67 percent from 12 to 20.

See articles about data leak here and here.

Legal Discussion Of Local And State Government Rights to Modify Pensions

An excerpt from "Public pension benefits & the law: Two pension experts offer insights into legal aspects of pension benefit protections for local and state government workers" by Ronald A. Wirtz - Editor, fedgazette, January 2011:
Sponsor distress can absolutely play a role in the legal ability of states to reduce pension benefits. No matter what a state’s law is regarding public pension benefits, states always retain something called the “police power,” which allows states to take action necessary to preserve public safety, order and welfare.

In states that protect public pensions as contracts, the police power will allow changes provided that the changes are reasonable and necessary to serve an important public purpose. This is actually a very difficult legal standard to satisfy. Take, for example, a state that is in severe fiscal distress and desires to reduce future benefits to alleviate a budget deficit. Helping to solve the state’s fiscal crisis would likely be considered an “important public purpose.” But the United States Supreme Court has stated that for a change to be considered necessary, the state must establish, first, that no less drastic modification could have been implemented to accomplish the state’s goal and, second, that the state could not have achieved its public policy goal without the modification.

It’s unclear under existing rulings when a state’s fiscal crisis would be considered severe enough to warrant the modification of the state’s contracts and, even then, under what circumstances the court will consider benefit reductions to be necessary to achieve fiscal relief. We do not yet know to what extent a state would first have to cut spending and raise tax rates before it would be allowed to reduce contractually protected pension benefits.
Read the entire discussion here.

Census Statistical Change, Not Recession Or Negative Equity, Made Americans Look Less Mobile

From The Minneapolis Federal Reserve Bank, "A sharp drop in interstate migration? Not really" by Greg Kaplan and Sam Schulhofer-Wohl, April 2011:
Many policymakers have expressed concern that unemployment remains high, in part, because the once highly mobile American worker has suddenly become unable or unwilling to move across the country for a job. This paper shows that this concern is unnecessary:
***
In 2006, the [Census] bureau changed the way it calculates.... This change in methods—not any actual change in migration patterns—turns out to be responsible for much of the recent decline in reported migration rates. The change explains 90 percent of the reported decrease in interstate migration between 2005 and 2006, and 42 percent of the decrease between 2000 (the recent high-water mark) and 2010.
Read the entire article here.

Friday, April 22, 2011

Intrade's Higgs Boson Security Jumps 50 Percent

The Intrade Security price for finding a Higgs Boson particle before December 31, 2012, increased on Friday, April 22, 2011, more than 50 percent from 13 to 20.

Capitalism Makes The Poor Richer

From The Wall Street Journal, "The New Face of 'Poverty': How economic freedom spreads the wealth around" by James Taranto:
Among "the persons whom the Census Bureau identifies as 'poor,' " 38% were homeowners. Among "poor" households, 62% owned a car, 14% two or more cars, nearly half had air-conditioning, and 31% had microwave ovens. "Nationwide, some 22,000 'poor' households have heated swimming pools or Jacuzzis.

One thing only rich people had back in 1990, though, was portable telephones. That's changed, hasn't it? If you're reading this column, you very likely have a cellular phone. You may even be reading this column on your cellular phone."
***
Between the olden days of 1990 and today, we've heard endless complaints, including in the Times, about rising "income inequality." In a strange twist, we've even ended up with a president who has said he would like to "spread the wealth around" by heavily taxing the "rich" and increasing handouts to the "poor." The story of the cellphone shows how a free economy spreads wealth. In actual material terms, the "poor" get richer as the rich also get richer.
All without subsidies or czars for air conditioning, microwaves, swimming pools or cellphones. Capitalism is amazing! It is a process of a constant competitive battle to lower prices to reach more users. In doing so, people are better off.

Negative Income Tax Is Lower Cost Way To Provide Government Benefits

My comment to Arnold Kling's post on Econlog, "Where is My Free Lunch?" about cost cutting and government programs:
Cutting costs is a good idea if one remembers that all government services and programs have intended economic and social benefits and that there is usually a more direct and lower cost way to achieve the same end goal.

Milton Friedman set out one way. He was in favor of a negative income tax that would give the "needy" money to spend. It is a low cost way to distribute funds to those who cannot afford food, healthcare, shelter, daycare, or who are unemployed, disabled, retired, etc.

The cost of using a negative income tax versus a government benefit program should be the basis and gold standard for determining the cost effectiveness of a specific program.

Since the IRS is already collecting taxes, the incremental cost to the government to administer a negative income tax is very low.

A negative income tax could replace many social and subsidy government programs at a lower cost with more funds reaching the intended beneficiaries.

Even if some of the beneficiaries spend wastefully, the final costs to the government would most likely be less than the cost to run the government benefits programs.

The government has too many programs with too many employees and bureaucracy spending too many dollars that do not achieve their intended social goals. A negative income tax is a more efficient, lower cost way to for the government to take care of those in need.
Also see my earler post, "Time To Consider A Negative Income Tax To Balance The Budget" on this blog.

Small Percentage Of Medicare Beneficiaries Account For Most Of Its Costs: Maybe Medicare Needs To Be Split Into Two

The 2010 Medicare Trustees report says that Medicare spent $502 billion in total benefits for 46.3 million beneficiaries, which averages out to $10,842 per beneficiary. The average cost number can be refined further into low, medium and high cost populations.

A recent blog post by Keith Hennessey about Medicare stated:
  • 70/10 rule: 10% of the seniors account for 70% of the costs. The healthiest 50% of seniors account for only 4% of the costs.
Using Hennessey's cost breakdown and assuming I understand his and the Trustees numbers, I came up with the following breakdown of average Medicare costs by three population segments; low, medium and high average Medicare costs groups.

There are:
  1. The 10 percent, 4.63 million, that receive 70 percent of Medicare benefits, $351.4 billion.

  2. The 50 percent, 23.15 million, that receive 4 percent of Medicare benefits, $20.08 billion.

  3. The 40 percent, 18.52 million, that receive the remaining 26 percent of Medicare benefits, $130.52 billion.
The $502 billion in benefits for the 46.3 million enrollees breaks out as follows:
  1. The 10 percent group receive an average Medicare benefit of $75,896.

  2. The 50 percent group receive an average Medicare benefit of $867.

  3. The residual 40 percent group receive an average Medicare benefit of $7,048.
The high 10 percent group costs Medicare $351 billion out of $502 billion. Also, notice that the average cost for the 40 and 50 percent groups separately is below the overall average and combined is $3614, a third of the entire Medicare cost average per beneficiary.

While I do not have numbers in front of me, I would not be surprised if that within the high cost 10 percent group, a small portion, maybe the top quarter or top ten percent of this high cost group accounted for most of this group's spending.

When data exhibits the characteristic of a small percentage of the population causing most of the effect, the data usually follows power law rules, aka Pareto distribution and aka Zipf's law. Power distributions tend to have scalability, like fractals, and exhibit similar characteristics at different granulation levels. For example, the 10 percent-70 percent rule likely not only applies to the whole population but also to the high cost 10 percent itself. The top 1-2 percent likely receive 70 percent of the total benefit that the top 10 percent receives.

In other words, the top 1 or 2 percent of Medicare beneficiaries likely account for half its costs (70 percent of 70 percent) and the other 98 - 99 percent of the members for the remaining half of the total cost.

A small percentage of Medicare recipients, probably less than 1 or 2 million, account for a disproportionate and substantial share of Medicare costs.

Too bad Medicare does not release information about why so few beneficiaries cost the program so much money. The biggest bang for the cost saving buck would be to try to find medical delivery systems and medical processes to reduce the cost of this high benefits group. Too much effort in the new health care legislation and in the President's rhetoric has been to treat the medical cost problem as a universal health care delivery problem. In reality, the very high cost of a few appear to be breaking the budget of the entire program.

With more information, Medicare could probably be split into two programs. A low cost program that the US and seniors can afford, that is likely amenable to vouchers and privatization, and a high cost program for a small percentage of the population that needs a major effort to control its costs.

The US has done similar things before for catastrophic insurance, terrorism insurance, flood insurance, etc.

Thursday, April 21, 2011

NYSE Board Rejects New Nasdaq-ICE Takeover Bid

From Bloomberg, "NYSE Board Rejects Nasdaq-ICE Bid With Breakup Fee, Financing" by Whitney Kisling and Nandini Sukumar:
NYSE Euronext directors again rebuffed an $11.3 billion takeover offer from Nasdaq OMX Group Inc. (NDAQ) and IntercontinentalExchange Inc. (ICE), saying a proposed breakup fee to allay antitrust concerns doesn’t change their commitment to merging with Deutsche Boerse AG. (DB1).
Read the complete Bloomberg article here.

Wednesday, April 20, 2011

Need To Consider Conditional Probabilities Of Intrade Prices To Find Winning Odds Of Republican Presidential Candidates: Romney Has Better Chance Than Appears

Intrade has a security trading for individual presidential winners. Right now, as of 6:45 PM EDT, April 20, 2011, it shows a last trade price of 59 for Obama and 12.2 for Romney, currently the highest priced Republican.

The odds of winning the presidency are obviously of course conditional on receiving the nomination to run for the office and the odds of winning the nomination must be included in computing the odds of winning the presidential election.

Without considering conditional probabilities, the odds appear to be 5 to 1 for Obama to beat Romney in the 2012 election for the US presidency.

Since the Republicans have not as yet chosen their candidate for the presidential election, have no clear candidate as yet, and there are many potential candidates, the odds of any one candidate getting the Republican nod are not very high at this time. Obama, unlike the Republican field of hopefuls, has a 91.9 (last trade Intrade price) percent chance of getting the Democratic nod to be the Democratic presidential candidate in the next election. Romney has a 24 (last trade Intrade) percent chance of getting the Republican presidential nomination.

Adjusting for the conditional probabilities of Obama and Romney getting their respective parties' nominations lowers the odds of Obama winning the next presidential race. Obama's odds of winning are recomputed to 64.2 and Romney's to 50.8. Obama's odd of winning a second term as president are 1.26 to 1, or about 5 to 4, he will win over Romney.

The presidential race between Romney and Obama is much closer than the listed prices of the Intrade security for individual presidential winners would suggest: 5 to 1 becomes 5 to 4.

While Trump's presidential bid is very speculative at this point, it appears that his recomputed odds based on the low conditional probability of getting the Republican nomination give him a good chance at this point in time of beating Obama. His recomputed odds are about 3 to 2 that he could beat Obama if he got the nomination. Of course if he became a serious presidential candidate, the public's perception of him might change, which would change his odds of winning.

Methodology: Recomputed odds are last Intrade price of individual winning the presidential election divided by last Intrade price of being their party's presidential nominee. For example for Obama: 59/91.9 = 64.2 percent.

Copy Of Court Decision Dismissing Madoff Victims' Gross Negligence Suit Against SEC

Judge Laura Taylor Swain, United States District Court, Southern District of New York, dismissed a lawsuit brought by two of Madoff's victims, Phyllis Molchatsky and Steven Schneider, against the SEC for gross negligence in the Commission's oversight, investigation and examination of Madoff and his firm.

A copy of the court's dismissal decision is available on Justia here.

Tuesday, April 19, 2011

High-Deductible Health Plans Pose No Special Risks To Low Income Enrollees

From "High-deductible health plans pose no special risks to the medically vulnerable, study finds" on ScienceBlog:
People who are medically vulnerable — those with low incomes or chronic health problems — who enroll in high-deductible health plans are at no more risk for cutting back on needed health care than other people who enroll in the plans, according to a new RAND Corporation study.

The findings, from the largest national study to examine the affects of high-deductible health plans, contradicts some of the earlier small studies that found medically vulnerable individuals cut back more than other people enrolled in the health plans.

The project examined the first-year experiences of more than 360,000 families nationwide....

Obama And Biden's 2010 Tax Returns --April 2011

President Obama's 2010 federal tax return is available here.

Vice President Biden's federal tax return is available here.

Previous year's (2009 filed 2010) Obama and Biden tax returns are available here.

Monday, April 18, 2011

How The FDIC Would Have Handled Lehman Brothers Failure Under Dodd-Frank

From the pre-published FDIC paper, "The Orderly Liquidation of Lehman Brothers Holdings Inc. under the Dodd-Frank Act" in the forthcoming FDIC Quarterly, 2011, Volume 5, No. 2:
The bankruptcy filing of Lehman Brothers Holdings Inc. (Lehman or LBHI) on September 15, 2008, was one of the signal events of the financial crisis. The disorderly and costly nature of the LBHI bankruptcy—the largest, and still ongoing, financial bankruptcy in U.S. history—contributed to the massive financial disruption of late 2008. This paper examines how the government could have structured a resolution of Lehman under the orderly liquidation authority of Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and how the outcome could have differed from the outcome under bankruptcy.
Read the entire article here.

Sunday, April 17, 2011

Doctor Supply Responds To Prices Paid

From The Boston Globe, "More doctors gravitate toward boutique practice: Fed up with long hours and limits on fees, they aim to offer a more personal approach — at a price" by Liz Kowalczyk:
But even a tiny number of doctors leaving traditional offices for boutique practices — out of thousands of primary care physicians — is enough to make some health care industry leaders nervous. They worry that more doctors will follow as insurers and government payers cut fees and hem in providers with regulations. And when even one doctor makes the switch, there are substantial side effects, leaving hundreds of patients to scramble for a new physician.

Concierge doctors care for a small number of patients who agree to pay an annual fee on top of insurance — $1,500 to $1,800 in MDVIP’s case — in return for fast, unlimited access to the physician and to extra services like a comprehensive wellness plan. Patients also enjoy more leisurely appointments than the 15-minute visits that are now standard for most primary care doctors.[Emphasis added]
Read the entire article here.

Fannie Mae Understated Risky Subprime Mortgages In 10-K

From Bloomberg Opinion, "Roots of Crisis Buried Deep After Inquiry" by Peter J. Wallison:
the [Financial Crisis Inquiry] commission, headed by Phil Angelides, a former Democratic candidate for governor of California, and Bill Thomas, a former Republican congressman from that state, never investigated what information about Fannie and Freddie’s loans was available at the time, or why investors and regulators continued to believe that mortgage-backed securities were safe.
***
For many years, Fannie Mae defined subprime mortgages as loans that it bought from subprime lenders, not by credit score. This had the effect of making its investment holdings seem less risky. In its 2007 10-K annual report, for example, the company estimated its subprime exposure at about 0.3 percent of its single-family mortgages. Tables deeper inside the report showed loans with FICO credit scores of less than 660 were 18 percent of the company’s single-family holdings.

The significance of this for the financial crisis is that Fannie and Freddie’s reports might have lulled analysts and risk managers into believing that if the housing bubble collapsed, the damage would be limited because the number of risky loans was small.

We now know the damage was severe. Had those 12 million Fannie Mae and Freddie Mac loans been prime instead of subprime, delinquencies and defaults probably would have been around 2 percent, not almost nine times higher.
Read the complete opinion piece here.

Peter J. Wallison was a member of the Financial Crisis Inquiry Commission.

Saturday, April 16, 2011

"The US Medicare Financial Problem" Reprint Of My May 17, 2009 Blog Post

To resolve the long-term US deficit problem, Congress must tackle Medicare funding. According to the 2010 Medicare Trustee Report, the recently passed new health care law, the Patient Protection and Affordable Care Act, did not resolve the long-term Medicare funding problem. See my recent post, "Time To Burst The Longterm Medicare Affordable Funding Myth."

Below is the full reprint of my still relevant 2-year old blog post, "The US Medicare Financial Problem" from May 17, 2009:
The US Medicare Financial Problem

Population Effects

According to US Census Bureau data and projections, the fundamental problem of Medicare is that the over 65 year old population and the over 85 year old population will increase in both absolute numbers and as a percentage of the US. The US will have a doubling of Medicare enrollees by 2030. The high cost users, those over 85 years old, will quadruple by 2050.

The over 65 group will be twice as large. It will grow from 35 million, 12 percent of the US in 2000, to 71.5 million, and 20 percent of the total US population in 2030.

The US Census Bureau projects that the population age 85 and over will grow from 5.3 million in 2006 to nearly 21 million by 2050. Some believe that the 85 and over number will be higher due to longevity improvements. From 2030 onward, the proportion age 65 and over will be relatively stable, at around 20 percent.

Medicare Costs

More users equal more cost. More high cost users, those over 85 years old, means even more costs. A higher percentage of seniors in the US mean less tax revenue to pay for Medicare costs.

Even if medical costs per person do not grow, the total cost for Medicare will grow due to the doubling of the over 65 age group and the quadrupling of the over 85 age group.

The Medicare Trustee report states that Medicare costs for the over 65-age group is about $11,000 per person. Subtracting Medicare enrollees and Medicare expenditures from total US numbers shows that non-Medicare enrollees', (the under 65-age group less the few other Medicare categories), medical costs average about $8200 per person.

However, the 35 percent difference is due to more than the higher costs per person of a user of medical services. Medicare has a higher utilization of its services than the non-Medicare population. There are fewer non-users and low volume users to subsidize the typical medical service user in Medicare than in the non-Medicare population.

Add medical cost inflationary increases at a rate above the average US inflation rate and the US government faces a difficult problem. The US government cannot afford to continue Medicare as it is currently financed and structured. The senior citizen lobby and voting bloc, whose base is growing as a percent of the US population, makes changes to Medicare structure and costs politically difficult.

Way to a Solution

Politically, universal healthcare dilutes the senior voting bloc and gives the government an opportunity to modify Medicare under another rubric, but successful solutions to control costs that do not limit or ration medical services are not obvious. Additionally, the President and Congress also do not trust the capitalistic, market pricing based system to cost effectively meet the needs of the medical consumer.

When delivery solutions of a business service problem are unknown, the best route for success is the competitive market. Profit-motivated, competitive, market based pricing with costs borne by the end user drives all producers and deliverers to become as efficient as possible. This is what capitalism is all about and how the US standard of living has grown substantially since its founding to become the highest in the world.

Without a well-functioning pricing mechanism, investments in medical services are misallocated and users do not limit their use by need or seek lower cost effective alternatives.

Even the poor and uninsured will have their needs met in a market base system. The delivery system and provider cost per patient will change. There maybe fewer doctors and hospital in an area and longer wait times to increase their volume and profit per doctor and hospital. There will probably be more use of nurse practitioners and other low cost providers, but the medical providers will meet all the demand. Even surgeries will change to become more efficient and less costly. For example, right now surgical procedures have the highest profit margin in the medical profession due to high reimbursement rates. Under a market pricing system, this profit margin will narrow and procedures will become efficient. There will be many other changes that the government cannot even envision, but cheaper delivery systems and other cost-cutting changes are the strength and power of capitalism and market based pricing.

The government should focus on the best way to transition to a market based system for medical services. The government should also remove all the laws and regulations that drove medicine away from a competitive, market based system, such as the employer medical benefit tax deduction and many other misdirected government policies.

See my previous post, "Health Care Is A Pricing Mechanism Problem Not An Insurance Problem"

The Budgetary Deficit Political Challenge End Game Is More Tax Revenues And Not Higher Tax Rates On The Rich

From The Washington Times Opinion "Obama’s spray-on hair of fiscal policy" by Milton R Wolf:
Politicians have built entire careers on blurring the line between tax rates and tax revenues. The tax rate is, of course, the percentage at which, say, an income is taxed, while the tax revenue is the total amount of money the government collects. Just as lower prices in a discount store can paradoxically generate higher total profits for a retailer, lower tax rates often generate higher tax revenues. The converse is equally true, with higher prices and higher tax rates yielding lesser benefits.

Throughout time, class-warfare politicians have learned this critical distinction between tax rates and tax revenues the hard way.
***
It has become increasingly obvious that to balance America’s national budget, we must cut spending and optimize tax revenues. The challenge is to find the tax rate that will best yield the necessary revenue.
***
This economic reality spares no political party. When Democratic President Kennedy and Republican Presidents Reagan and George W. Bush reduced income tax rates, total tax revenues coming into the Treasury increased because, as JFK explained, “a rising tide lifts all boats.” When Democratic Presidents Carter and Clinton and Republican President George H.W. Bush raised income tax rates, total tax revenues fell. The same holds true for other types of taxes. Reagan’s capital-gains tax increase reduced revenues, while tax-rate reductions instated by Mr. Carter, Mr. Clinton and George W. Bush yielded increased revenues.
Read the entire Opinion piece here.

Thursday, April 14, 2011

Time To Burst The Longterm Medicare Affordable Funding Myth: The Medicare Problem Is Not About Insurance Or Voucher Funding; Its About Delivery Costs

Over the next 35 years, the number of people on Medicare will double, while the workforce that pays the Medicare payroll tax will increase only by 28 percent. Most of Medicare funding, Part A Hospital Insurance, and Parts B and D, Supplemental Medicare Insurance, comes from the Medicare payroll tax, and general revenues. The latter are primarily federal income taxes and fees. There is a slight current revenue to expense shortfall, which is filled by interest on and spending of accumulated Medicare assets.

For sake of simplicity, let us assume the Medicare payroll tax and general revenues are sufficient to fully fund current Medicare. In other words there is a one to one ratio of revenues and taxes to medical costs. Let us also initially assume for simplicity that going forward per person general revenues and the payroll tax revenues increase at the rate of inflation. If per person medical costs just increase at the rate of inflation, then after 35 years, there will be twice as many Medicare enrollees with a total Medicare expense twice the current amount, in inflation adjusted current dollars. Unfortunately, the workforce supporting Medicare will increase by only 28 percent and the payroll tax and general tax revenues will likely increase by that amount also. The revenue to expense ratio will move from the current 1 to 1 in our example to 1.28 to 2, or from 100 percent to 64 percent.

If the medical establishment and consumer demand remain as they are, then it is likely that medical costs will continue to experience cost increases substantially above the rate of inflation. If medical costs increase by 2 percent a year above the average inflation rate for the next 35 years, costs will double in inflation adjusted dollars. The ratio of expected revenue to cost will jump from 1.28 to 2, to 1.28 to 4, or from 64 percent to 32 percent. Variations of the trend would continue beyond the next 35 years based on continuing medical cost increases and demographic shifts.

Medicare as it currently is cannot continue if it is to be funded by payroll taxes and general revenues. The cost structure of medicine and changing demographics make Medicare's continued funding unlikely, as recognized by the Medicare Trustees, from page 49 of the "2010 ANNUAL REPORT OF THE BOARDS OF TRUSTEES OF THE FEDERAL HOSPITAL INSURANCE AND FEDERAL SUPPLEMENTARY MEDICAL INSURANCE TRUST FUNDS":
the total number of Medicare beneficiaries approximately doubled over the last 35 years and is expected to double again over approximately the next 35 years. During this same historical period, the number of covered workers also increased rapidly (by about 55 percent), but is projected to increase much more slowly (about 28 percent) over the next 35 years. This relative demographic shift and its implications for Medicare costs, relative to workers’ earnings or to the GDP, are fairly well known.
Any funding solution will have to reduce medical costs to seniors and other Medicare enrollees by amounts in the range of 70 percent or more. Seventy percent is a drastic amount of money to cut and the current medical system cannot continue to supply all the medical services it does to Medicare beneficiaries at 30 percent of the cost. No one expects either vouchers, price controls or reduced Medicare medical reimbursements to be able achieve a 70 percent cost reduction.

The recently passed new health care law, the Patient Protection and Affordable Care Act, is a pipe dream, unworkable solution that will not solve the Medicare funding problem. As the Medicare actuaries stated in the 2010 Medicare Trustee report, from The Statement of Actuarial Opinion, pages 281-282, of the "2010 ANNUAL REPORT OF THE BOARDS OF TRUSTEES OF THE FEDERAL HOSPITAL INSURANCE AND FEDERAL SUPPLEMENTARY MEDICAL INSURANCE TRUST FUNDS":
Further, while the Patient Protection and Affordable Care Act, as amended, makes important changes to the Medicare program and substantially improves its financial outlook, there is a strong likelihood that certain of these changes will not be viable in the long range. Specifically, the annual price updates for most categories of non-physician health services will be adjusted downward each year by the growth in economy-wide productivity. The best available evidence indicates that most health care providers cannot improve their productivity to this degree—or even approach such a level—as a result of the labor-intensive nature of these services.

Without major changes in health care delivery systems, the prices paid by Medicare for health services are very likely to fall increasingly short of the costs of providing these services. By the end of the long-range projection period, Medicare prices for hospital, skilled nursing facility, home health, hospice, ambulatory surgical center, diagnostic laboratory, and many other services would be less than half of their level under the prior law. Medicare prices would be considerably below the current relative level of Medicaid prices, which have already led to access problems for Medicaid enrollees, and far below the levels paid by private health insurance. Well before that point, Congress would have to intervene to prevent the withdrawal of providers from the Medicare market and the severe problems with beneficiary access to care that would result. Overriding the productivity adjustments, as Congress has done repeatedly in the case of physician payment rates, would lead to far higher costs for Medicare in the long range than those projected under current law.

For these reasons, the financial projections shown in this report for Medicare do not represent a reasonable expectation for actual program operations in either the short range (as a result of the unsustainable reductions in physician payment rates) or the long range (because of the strong likelihood that the statutory reductions in price updates for most categories of Medicare provider services will not be viable). I encourage readers to review the “illustrative alternative” projections that are based on more sustainable assumptions for physician and other Medicare price updates. These projections are available at http://www.cms.gov/ActuarialStudies/Downloads/2010TRAlternativeScenario.pdf. [Emphasis added].
The Patient Protection and Affordable Care Act does not even solve the problem of insuring the medically uninsured yet alone solve the funding/cost problem, according to CBO.

From page 1, of the Statement of Douglas W. Elmendorf, CBO Director, "CBO’s Analysis of the Major Health Care Legislation Enacted in March 2010" before the Subcommittee on Health Committee on Energy and Commerce, U.S. House of Representatives, March 30, 2011:
About 23 million nonelderly residents will remain uninsured: About one-third of that group will be unauthorized immigrants, who are not eligible to participate in Medicaid or the insurance exchanges; another quarter will be eligible for Medicaid but are not expected to enroll; and the remaining fraction will include individuals who are ineligible for subsidies, are exempt from the individual mandate, choose not to comply with the mandate, or have some combination of those characteristics. [Emphasis added].
Medicare as we idealize it cannot continue. Nor can the American medical system as we have experienced it. The present medical industry structure cannot survive. Government cannot afford to pay for medical services for large segments of the US population and private individuals and employers can no longer continue to afford historical medical services over the next few decades.

Medicine needs to go through a complete restructuring to lower it labor, capital and delivery system costs.

Government needs to remove many barriers that it has created so as to allow competitive and economic forces to lower consumer prices for medical services and to allow the marketplace to match supply with demand at economic prices.

State and federal governments need to remove licensing restrictions on out of state doctors and to relax the restrictions so as to allow non-US trained doctors to practice medicine in the US. Also ways have to be found to relatively quickly substantially increase the training and number of doctors in the US. Medical schools have not kept up with the demand and have acted like cartels limiting the supply of new doctors.

There is also a need to create and allow whole classes of medical providers below the doctor level with much less training. Something like an Associate Doctor degree, sort of akin to paralegal. Much of medicine is mundane and routine and can easily be systematized and provided by someone with much less training than a medical doctor. Restrictions on pharmacists need to be relaxed. The FDA needs to be mandated and restructured to lower the costs to pharmaceutical companies for drug approvals.

There is also a need to change the entire government approach to hospitals, their licensing and funding. US hospitals are much too expensive for the services and medical benefits they provide.

While some may think more government involvement in medicine is needed to lower costs and increase the supply of medical providers, more government involvement will only introduce more rigidities and more price controls, which will impede the substantial progress that is needed to improve medical delivery and lower costs. Government needs to remove the regulatory and legal barriers, restrictions and imposed costs that have stopped medicine from adopting low cost solutions to meet increasing consumer demand.

At the same time, the purse string and economic costs for consumer medical spending must be in the consumer hands so that the consumer can evaluate the cost versus benefit of the medical service, budget their desire for the service against its cost to them and make medical providers competitive.

Much too much legislative focus has been on the insurance cost part of medicine. Much more focus and legislation is needed on the actual medical industry to enable it and to motivate it to lower costs. Insurance costs are more a reflection of the underlying industry that is insured than they are of the insurance industry. Unfortunately, the prime energy and focus of the Patient Protection and Affordable Care Act was directed at the wrong problem. An economic solution to medical services is still needed.

Wednesday, April 13, 2011

Raising Top Tax Rates Negatively Impacts Fastest Growing Businesses

From The Tax Foundation Tax Policy Blog, "Reaction to Obama Speech -- Raising Top Tax Rates Will Hurt Private Businesses" by Scott A. Hodge:
The frequently cited statistic that raising the top tax rates would "only" impact 2 or 3 percent of tax returns is misleading. Those 2 or 3 percent represent the most profitable and growing "flow-through" businesses that are key to economic recovery.

More than 74 percent of tax filers in the highest tax bracket report business income, compared to 20 percent of those at the lowest bracket. More than 40 percent of private business income is earned by taxpayers paying the top marginal rate.

Of the roughly $864 billion in taxable business income reported on individual tax returns in 2008, nearly 68 percent was claimed on by taxpayers earning over $200,000 and 35 percent was claimed by those earning over $1 million.
Read the complete blog post here.

Comparing Ryan's Path To Prosperity To Bowles Simpson Fiscal Commission

A side by side comparison of the Bowles Simpson Fiscal Commission report and Paul Ryan's Path to Prosperity report is available here, on Scribd here and embedded below.

Fiscal Commission and the Path to Prosperity

(HT: Greg Mankiw)

Increasing Miles Per Gallon Will Decrease Automobile Safety

From The Wall Street Journal article, "SUVs: Safer, Heavier, But What About the Gas?" by Joseph B White:
The Obama administration has promised to roll out by Sept. 1 a proposal to boost the average fuel economy of vehicles sold in the U.S. from 35 miles per gallon—the target for 2016—to as much as 62 mpg by 2025....

At the same time, federal officials are struggling to figure out how this can be accomplished without reversing the sharp reductions in highway fatalities achieved during the past decade.

Making a heavy vehicle lighter will improve efficiency—but it can make a vehicle less protective of its occupants unless other vehicles slim down in proportion. Even if all new vehicles are made lighter, but share the road with older, heavier vehicles, the people in newer vehicles could suffer, safety researchers say.
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"To reduce enough to have an effect on mileage, you'll have an effect on safety," says Gloria Bergquist of the Alliance of Automobile Manufacturers, the industry's Washington trade group.

Coal Power Plants Release More Thorium And Uranium Radioactivity Than Nuclear Power Plants

From The Wall Street Journal Opinion "Coal Is More Dangerous Than Nuclear: But don't tell that to Greens getting elected to office on post-Fukushima fear-mongering" by Holman W Jenkins, Jr:
Thousands more die in coal mining accidents each year (especially in China) than have been killed in all nuclear-related accidents since the beginning of time. What's more, coal plants spew toxins like mercury and other metals—along with more radioactive thorium and uranium than a nuclear plant—which are no less amenable to linear, no-threshold thinking. In 2004, the EPA estimated that a new emissions standard then being promoted would, by itself, save 17,000 lives a year.
Read the entire opinion piece here.

Tuesday, April 12, 2011

Final Fiscal Year 2011 Budget Continuing Resolution Summary By House Appropriations Committee

Link to the House Appropriations Committee Summary of the Final Fiscal Year 2011 Continuing Resolution is available here, on scribd here and embedded below.

The text of the Continuing Resolution is available here.

A Republican prepared list of highlighted program cut dollars is available here.

House Appropriations Committee Budget Summary Final FY2011 CR

Monday, April 11, 2011

Women Now Earn More Than Men

From the Wall Street Journal article, "There Is No Male-Female Wage Gap: A study of single, childless urban workers between the ages of 22 and 30 found that women earned 8% more than men." by Carrie Lukas:
In a 2010 study of single, childless urban workers between the ages of 22 and 30, the research firm Reach Advisors found that women earned an average of 8% more than their male counterparts. Given that women are outpacing men in educational attainment, and that our economy is increasingly geared toward knowledge-based jobs, it makes sense that women's earnings are going up compared to men's.
Read the whole article here.

Obama Economy Is Managed Decline Rather Than Dynamic Growth

From the National Affairs article, "The Auto Bailout and the Rule of Law" by Todd Zywicki:
Every piece of the "success story" of the auto bailout would thus seem to be in error. The bailout was not absolutely necessary and was pursued by means of dubious legality; the bankruptcies were highly irregular and inefficient; and the companies that have emerged from bankruptcy are far from lean and fit. They are certainly in no position to repay taxpayers for the generous loans they were given.
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As a matter of policy, the Bush interventions early in the process were more ad hoc affairs, motivated largely by panic in the midst of the economic crisis.
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The Obama administration's role in this story, however, is far more troubling. One cannot explain away Obama's overreach as a panicked response to an emergency; rather, his actions toward GM and Chrysler were part of a considered, coherent approach to the relationship between government and private industry. And this approach — defined by broad government power unchecked by legal constraints and possessing sweeping authority to pick winners and losers — has guided the administration's policies well beyond the auto bailout.
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The auto bailouts exemplify this new reality. Sold as a means of revitalizing the economy, they are in fact a means of transforming the relationship between the state and the market in a way that empowers large players at the cost of economic growth. The overall effect of such state capitalism is a kind of controlled stasis, in which the preservation of old jobs takes priority over the creation of new ones. Managed decline, rather than dynamic growth, is the defining feature of the Obama economy.[emphasis added].
Read the complete article here.

Sunday, April 10, 2011

NYSE Rejects NASDAQ Takeover Bid

From NYSE Euronext April 10, 2011, Press Release:
NYSE Euronext (NYSE: NYX) announced today that its Board of Directors, consistent with its fiduciary duties and advised by its independent financial and legal advisors, has unanimously reaffirmed the previously announced combination agreement with Deutsche Boerse AG (XETRA:DB1) and rejected the unsolicited and highly conditional proposal by NASDAQ OMX Group, Inc. (Nasdaq: NDAQ) and IntercontinentalExchange, Inc. (NYSE: ICE) to break up NYSE Euronext.
Read the full press release here.

Saturday, April 9, 2011

NYC MTA Versus Entrepreneurial Artists: How Government Doesn't Welfare Maximize

One of the MetroCards painted by Victoria McKenzie.


Original NYC MTA MetroCard

Which of the above cards would you rather have in your purse or wallet to use to pay NYC bus and subway fares?

The top picture is an artist painting by Victoria McKenzie on a usable MetroCard. The lower is the original MetroCard.

From The Wall Street Journal article, "MTA Says Artist on Wrong Track" by Shelly Banjo and Andrew Grossman:
The cash-strapped Metropolitan Transportation Authority is taking a swipe at an East Village artist for selling painted MetroCards, claiming the artist infringed on the authority's trademarked brand and logo.

But what the MTA deems copyright infringement is seen as works of art by self-described MetroCartists fighting for the right to use the cards as canvas.
Walk into any Starbucks and there is a choice of 10 to 15 different pictures and designs on pre-paid cards. Starbucks understands it is maximizing its profit by increasing customer welfare by allowing customers to choose a card with a design of their liking.

Nothing to date has stopped the MTA from issuing designer MetroCards or from selling them at a premium, which Starbucks does not.

Government functions are never about maximizing either profits or revenues and government certainly is not concerned about increasing consumer or taxpayer welfare.

Artists are not painting and selling Starbucks pre-paid cards. They are painting MetroCards because there is an unmet consumer market.

If the transportation system in NYC were private, competitive and relatively unregulated, instead of government owned and run, the private owners would strive daily to increase their revenue and profits along with consumer satisfaction and welfare. There likely would have been long ago a choice of many different types of designs and pictures for MetroCards.

Consumer welfare increasing is not part of the daily operation of government thinking or function, but it is part of the regular thinking in a competitive privately owned business environment.

Thursday, April 7, 2011

Video Excerpts Of Gov. Christie's April 7 Speech On Education Reform At Brookings And Full Audio Podcast

On April 7, 2011, at a Brookings Institution event on education reform, New Jersey Gov. Chris Christie (R-NJ) spoke of the need to reform the US education system so that teachers are held accountable for student progress. Below are three very short video excerpts of Gov. Christie's speech. Below the videos, there is a link to the full audio podcast of the Brookings event.







Full one hour and twenty minute audio podcast of Brookings event is available here.

Also, a weblink to the videos and the audio podcast on the Brookings Institution website is available here.

The Participants at the event were:

Welcome
William J. Antholis
Managing Director, The Brookings Institution

Introduction
James D. Robinson III
General Partner and Co-Founder, RRE Ventures

Keynote
The Hon. Chris Christie
Governor, New Jersey

Discussion
Moderator: Grover J. "Russ" Whitehurst
Senior Fellow, Governance Studies

Wednesday, April 6, 2011

Most Employee Layoffs Are Permanent And Not Temporary; Slowing An Employment Rebound

From "Temporary Layoffs during the Great Recession" by Erica L. Groshen, Federal Reserve Bank of New York:
despite the depth of the Great Recession, U.S. employers did not use temporary layoffs much to cut costs. Just as they did during the previous two recessions, when firms laid workers off, they usually severed ties completely. This prevalence of permanent layoffs during the recession could slow the employment rebound over the coming months. It also raises questions about why the behavior of employers during recessions has changed.


Tuesday, April 5, 2011

CBO Long-Term Analysis Of Ryan's Budget Proposal

CBO's long-term analysis of Chairman Ryan's FY2012 budget proposal is available here and embedded below. Chairman Ryan's FY2012 budget proposal "The Path To Prosperity" is available here.

CBO Long-Term Analysis Of Ryan's Budget Proposal

Ryan "Path To Prosperity" FY2012 Budget Document

Full text of Chairman Paul Ryan's House Budget Committee "The Path To Prosperity" FY2012 budget document is available here and embedded below.

The committee's 2 page summary of the document is available here.

A weblink to the House Budget Committee is here.

CBO's long-term analysis of Ryan's proposal is available here.

Path To Prosperity FY2012

Monday, April 4, 2011

Job Rebound Misses Long-term Unemployed

From Bloomberg, "U.S. Job Rebound Misses Those Looking Longest" by David Wilson:
While the jobless rate dropped for the fourth consecutive month in March, the number of people going more than six months without work rose to 6.12 million.
***
since December, when the rate started shrinking. Their number [more than 6 months unemployed] fell by 206,000 as people out of work for shorter periods tumbled by 1.36 million.

Friday, April 1, 2011

Nasdaq OMX And ICE Made $11.3 Billion Unsolicited Bid For NYSE Euronext

From Bloomberg, "Nasdaq, ICE Top Deutsche Boerse With $11.3 Billion NYSE Bid" by Whitney Kisling, Inyoung Hwang and Nikolaj Gammeltoft:
Nasdaq OMX and ICE made an unsolicited bid of about $11.3 billion for NYSE Euronext (NYX) today, trying to snatch the owner of the New York Stock Exchange away from Frankfurt-based Deutsche Boerse. Nasdaq OMX and ICE offered $42.50 in cash and stock for each NYSE Euronext share, according to a statement released today. The shares closed at $35.17 yesterday. Deutsche Boerse’s February all-stock agreement to purchase NYSE Euronext values the company at about $35.04 a share.

As part of the deal, ICE would purchase NYSE Euronext’s Liffe futures markets, while Nasdaq OMX would keep its U.S. options markets. The Deutsche Boerse deal, valued at $9.53 billion when announced in February, creates the world’s largest exchange operator with venues in the U.S. and Europe.