Obama Health-Care Ruled Unconstitutional

From Bloomberg News, "Obama Health-Care Reform Act Ruled Unconstitutionalby Florida U.S. Judge" by By Andrew M. Harris:

President Barack Obama’s health care law, assailed as an abuse of federal power in a 26-state lawsuit, was ruled unconstitutional by a U.S. judge who said Congress overstepped its authority to regulate commerce.

U.S. District Judge Roger Vinson in Pensacola, Florida, declared the law unconstitutional today in a 78-page opinion.

Read Judge Vinson's complete decision, via The Wall Street Journal, here.

Given Many Choices, Consumers Will Pay More For High Quality And Less For Low Quality

From Columbia Business School Ideas at Work "The Discriminating Consumer: Product Proliferation and Willingness to Pay for Quality" by Sheena Iyengar, Marco Bertini, and Luc Wathieu:

In a series of experiments, the researchers showed that consumers do become more sensitive to quality when facing a dense field of choices — one in which there are a large number of products within a given range of qualities. Shoppers presented with 21 types of chocolate were prepared to pay 33 percent less for a low quality chocolate and 40 percent more for a high quality chocolate relative to those presented with only five different types. The results of further experiments where consumers chose from an assortment of wines or astronomical binoculars revealed that manipulating the perceived density of a choice set could similarly affect shoppers’ sensitivity to quality. The researchers also analyzed sales data from hundreds of lots sold through an auction house over a two-year period, finding that the same phenomenon holds true in the field.

In all cases, consumers were consistently willing to pay more for higher quality products and less for lower quality products. And, when given fewer choices, consumers were far less willing to pay for quality and gravitated toward lower quality, less costly items. They also reported weighting quality as more important when facing larger choice sets.

Read the complete Ideas at Work article here.

A PDF of the researchers' paper is available here.

A Forgotten Freight Transport Method Rediscovered, Aerial Ropeways

From "Aerial ropeways: automatic cargo transport for a bargain" in Low-tech Magazine:

These days, we use them [aerial ropeways] almost exclusively to transport skiers and snowboarders up snow slopes, but before the 1940s, aerial ropeways were a common means of cargo transport, not only in mountainous regions but also on flat terrain, with large-scale systems already built during the Middle Ages.***

***The advantages of aerial cargo ropeways are so numerous that it is no surprise that they are - slowly - being rediscovered. Worries about global warming, peak oil and environmental degradation have made the technology even more appealling. This does not only concern energy use: contrary to a road or a railroad track, a cargo ropeway can be built straight through nature without harming animal and plant life (or, potentially, straight through a city without harming human life). Traffic congestion also plays into the hands of cableways, because the service is entirely free from interference with surface traffic.

Video: Real Mark Zuckerberg On SNL Or Was That Adam Samberg Or Jesse Eisenberg

Interestingly, Mark Zuckerberg has more stage presence and charisma than the actors. While I would be at a loss for words if I met a famous actor, Jesse Eisenberg is at at a loss for words when meeting Mark Zuckerberg for the first time.

At least $50 billion (the valuation of Facebook) can get you on SNL for a few minutes.

To really understand Zuckerberg's power in today's business world, you need to know that IBM and Microsoft fear Google's competitive threat and Google fears Facebook's competitive threat. With a well played hand, Facebook can become the dominate software computer company. Zuckerberg knows how to play bridge. The next two or three years will be very interesting to watch as the four companies compete with each other. IBM's and Google's market capitalizations are just shy of $200 billion and Microsoft's market capitalization is just shy of $240 billion. Facebook is David against the Goliaths.

Video of SNL opening with Mark Zuckerberg meeting Jesse Eisenberg.

Higher Bank Capital Amounts Comment

A comment I posted on The Wall Street Journal article, "Number of the Week: Banks Should Hold More Capital" by Mark Whitehouse:

There is no contradiction. Modigliani and Miller wrote about an ideal situation with no bankruptcy (insolvency) and no taxes. It is a solid foundation to build upon and incorporate real world dynamics.

M-M did not incorporate into their research government backed deposit insurance and too big too fail government intervention. Government intervention through deposit insurance and too big to fail undoes much of Modigliani and Millers arguments. Their main arguments rely on market pricing and risk adjusted pricing of equity and debt. Government intervention, in any sector or industry including banking, interferes with risk adjusted pricing of equity and debt.

Fifty years ago, researchers realized that the addition of tax deductibility of interest expense would push firms to increase their debt levels. Similarly, the increasing risk of bankruptcy with increasing debt levels would push firms away from more debt financing. Whether the two forces offset each other or one dominates if at all is an open research question and much has been written on the topic.

Even at 52 percent capital, banks will go insolvent because banks face not only a valuation insolvency risk, debt value greater than asset value, they face liquidity and cash flow insolvency risk.

A bank with 52 percent capital can face a 'run on the bank' and if its loans and investments are illiquid, cannot be sold quickly in the market and converted into cash at face (par) value prices, it will not have adequate funds to pay withdrawals. If too many depositors withdraw their funds, the bank will face a run, and the government will step in to help with needed funds, or operate the bank, or force a takeover or close the bank and pay depositors from the insurance fund.

Banks face several different forms of insolvency risks and high capital amounts do not solve all the potential solvency problems banks face.

Regulators like capital because it is computable and measurable by a formula, easy to observe and fill in on a form, can be set at a precise level and avoids the appearance that the government acted arbitrarily against a particular bank. High capital amounts are not the end to future bank problems, and a low amount of capital amount is not the cause of bank problems.

Advance 4th Quarter GDP Number, 3,2 Percent, Subject To Big Later Revisions

The US Department of Commerce Bureau of Economic Analysis released the advance GDP number for the fourth quarter 2010. Real GDP increased by 3.2 percent, annualized from the third quarter of 2010.

The advance number is an early estimate of final GDP annualized percent change from the previous quarter and it is often later substantially revised. Check out the recent huge differences between the advance GDP annualized 4th quarter percent change numbers and the final revised GDP annualized 4th quarter percent change numbers in the following table:

Quarter							Advance							Final							Change
2007q4							0.6							2.9							2.3
2008q4							-3.8							-6.8							-3.0
2009q4							5.7							5.0							-0.7
2010q4							3.2							?							?

As you can see from the above table, final 4th quarter 2010 GDP annualized percent change from the 3rd quarter can be significantly different than the initial estimated advance number of 3.2 percent.

I chuckle when I see all the news articles and blogs comparing the latest advance GDP number with previous final GDP numbers. It is an apples and oranges comparison. Advance numbers should be compared against advance numbers and final numbers should be compared against final numbers.

Gladys Horton of the Marvellettes Died: Lead Singer On "Please Mr. Postman"

Gladys Horton of the Marvellettes died Wednesday. She was the lead singer and co-founder of the group. In 1961, "Please Mr Postman" was the first Motown song to reach the number one position on the pop charts.

The New York Times obituary is available here.

Cleveland Fed Predicts 1 Percent Yearly GDP Growth And 1.5 Percent Chance Of Recession

From "Yield Curve and Predicted GDP Growth: January 2011" Federal Reserve Bank of Cleveland:

Projecting forward using past values of the spread and GDP growth suggests that real GDP will grow at about a 1.0 percent rate over the next year, the same projection as in November and December.

Using the yield curve to predict whether or not the economy will be in recession in the future, we estimate that the expected chance of the economy being in a recession next January at 1.2 percent, a slight drop from December’s 1.5 percent and November’s 2.3 percent.

Read the complete Cleveland Fed article and prediction here.

Financial Crisis Inquiry Final Report Available

The Financial Crisis Inquiry Commission released its Final Report on the Causes of the Financial Crisis.

The 660 plus page report with dissenting commissioners' views is available free;
from the Commission here;
from GPO here;
and from my upload on Scribd here.

My personal biases are towards the scientific method, i.e. reproducibility. Since whatever causes presented in the report as an explanation for the financial crisis are not testable, I do not put much faith in the explanations in the report. Our state of financial, banking and economic knowledge has not changed since before the crisis. We did not understand the warning signs of a impending financial crisis before and we do not understand them any better now after the crisis.

The report is more a finger pointing, conventional wisdom, political document about the crisis than scientific inquiry into causes. The conclusions are based on observations without a reliable theory to explain any of the conclusions or causalities. The report fills a human and political need to find causes and blame even when the state of our knowledge does not lend itself to the task.

These types of inquiries remind me of the old beliefs that life could spontaneously occur in meats because maggots would suddenly appear on meat as it was left out in the open. It was later discovered that flies laid their eggs on the meat and the new born flies became larvae, maggots, before they matured into flies. When meat was placed in jars, covered with cloth, etc., no maggots appeared.

The report mentions many banking, financial, and regulatory things that existed before the crisis. Prior existence does not mean it caused the crisis, even if the logical connection exists in the minds of the report commission.

The report is more about closure than it is about finding causes. Unfortunately, it will be used as the basis to propose ineffective new regulations and laws.

CBO's 2011 - 2021 US Budget Deficit Projections

From the CBO summary, "The Budget and Economic Outlook: Fiscal Years 2011 to 2021":

sharply lower revenues and elevated spending deriving from the financial turmoil and severe drop in economic activity—combined with the costs of various policies implemented in response to those conditions and an imbalance between revenues and spending that predated the recession—have caused budget deficits to surge in the past two years. The deficits of $1.4 trillion in 2009 and $1.3 trillion in 2010 are, when measured as a share of gross domestic product (GDP), the largest since 1945—representing 10.0 percent and 8.9 percent of the nation’s output, respectively.

For 2011, the Congressional Budget Office (CBO) projects that if current laws remain unchanged, the federal budget will show a deficit of close to $1.5 trillion, or 9.8 percent of GDP. The deficits in CBO’s baseline projections drop markedly over the next few years as a share of output and average 3.1 percent of GDP from 2014 to 2021. Those projections, however, are based on the assumption that tax and spending policies unfold as specified in current law. Consequently, they understate the budget deficits that would occur if many policies currently in place were continued, rather than allowed to expire as scheduled under current law.

Read the complete CBO summary here.

Read the complete 172 page CBO report here.

Negative Equity Homeowners Are More Likely To Move Than Positive Equity Homeowners

From a recent research paper, "Negative Equity Does Not Reduce Homeowners' Mobility" by Sam Schulhofer-Wohl, Federal Reserve Bank of Minneapolis, Research Department, Working Paper 682, December 2010:

negative-equity homeowners are more rather than less likely to move.***homeowners with negative equity are at least as mobile as those with positive equity, holding other characteristics constant. Homeowners with extremely negative equity are especially mobile.

The paper's complete abstract:

Some commentators have argued that the housing crisis may harm labor markets because homeowners who owe more than their homes are worth are less likely to move to places that have productive job opportunities. I show that, in the available data, negative equity does not make homeowners less mobile. In fact, homeowners who have negative equity are slightly more likely to move than homeowners who have positive equity. Ferreira, Gyourko, and Tracy's (2010) contrasting result that negative equity reduces mobility arises because they systematically drop some negative-equity homeowners' moves from the data.

Read the full research paper here.

Uniform Fiduciary Standard For Retail Investment Advisers And Broker-Dealers Is Unworkable

From the SEC "Study on Investment Advisers and Broker-Dealer" as required by Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act:

The Staff [of the U.S. Securities and Exchange Commission] therefore recommends establishing a uniform fiduciary standard for investment advisers and broker-dealers when providing investment advice about securities to retail customers that is consistent with the standard that currently applies to investment advisers. The recommendations also include suggestions for considering harmonization of the broker-dealer and investment adviser regulatory regimes, with a view toward enhancing their effectiveness in the retail marketplace.

The full staff report is available here.

Fiduciary Standards Are A Pandora's Box Of Legal Problems For Retail Stock Brokers

Investment advisers perform a different function than retail stock brokers.

Investment advisers have specific investment objectives, an investment style, that they use to identify the way they invest or that their clients asked them to follow. For example, an investment adviser may be told by his client, or may identify his investment style in his promotional literature, as one that maximizes dividends and income while preserving capital. Another may identify himself, or be asked by a client, as seeking to maximize capital appreciation; an aggressive investor in small drug and biotech companies with the greatest potential for developing a blockbuster drug; for finding companies with extraordinary gains in profitability over the previous year, or for investing and trading in foreign currencies.

Fiduciary duty compliance for an investment adviser requires fair dealings without conflicts, with transparency and adherence to investment objectives.

Investment advisers and their clients have a mutual, agreed to understanding of investment goals and objectives for the money under advisement. Even if investment policy is never discussed, there is tacit acceptance of the policy by the customer just by going to an adviser who holds himself out to be a particular type of investor manager or adviser.

A retail stock broker, who does not currently by law, regulation or industry practice, have a fiduciary duty to a customer, is a salesperson. Salespeople in all other walks of life generally do not have fiduciary relationships with buyers. Does you supermarket have an obligation to tell you that their store brand is made by the same company you are buying and costs a few cents less? or that you should buy a few more cans of soup this week because prices are going up tomorrow?

Brokers can only sell to a retail customer investments, stocks, bonds, mutual funds, etc., that are on the brokerage firm's approved list. Is a retail broker with a fiduciary obligation required to tell you that the fees or transactions costs for the same investment are lower at another firm?

Are retail brokers with a fiduciary obligation obligated to tell a customer for a mutual fund that mutual fund managers cannot consistently beat an index fund? or that their firm's stock analyst cannot pick winning stocks any better than a someone who randomly picks a stock?

Will brokers be forbidden from selling commodities such as gold and silver to clients because they have a zero correlation with a market investment portfolio and therefore will not over time increase the value of the portfolio?

The functional difference between an investment adviser and a retail broker makes the application of a fiduciary standard impossible to implement effectively.

Imposition of a common fiduciary standard on advisers and brokers will lead to an enormous increase in lawsuits and arbitration claims against retail stock brokers and their firms. It will force the SEC to enact a very limited definition of fiduciary and that will create unmet retail broker client expectations, untold customer confusion and resentment by retail customers.

Let the lawsuits begin.

Overwhelming Lack Of Trust For US Government's Ability To Create Jobs

From "60% Trust Business Leaders More Than Government To Create Jobs" in January 26, 2011 Rasmussen Reports:

60% of Adults think decisions made by U.S. business leaders to help their own businesses grow will do more to help create jobs in America than decisions made by government officials. Just 24% say decisions made by government officials to help the economy grow will do more.

Read the complete report here.

Child's Self Control Is Second Only To IQ In Predicting Adult Success And Health

From "Stage set early for success, or failure: Good self-management by age 3 predicts adult health and wealth" by Bruce Bower in ScienceNews:

Intelligence, as measured by IQ tests, has long held sway as the prime mental influence on health and achievement. But self-control’s close link to adult health and accomplishment remained after researchers accounted for children’s IQ scores and family income. “Self-control and intelligence are both valuable for life success, but after years of effort, IQ has proven difficult to change through interventions,” [Duke University psychologist Terrie] Moffitt says.

Read the complete ScienceNews article here.

Does The Fed Have The Right Information? Reprinted

The following post is a reprint of my January 4, 2008, post on another, short-lived blog of mine. I am reprinting the post because 3 years later there is still a need for solutions to our economic problems of slow GDP growth and high unemployment and there is still an ongoing debate as to what are the best monetary and fiscal action policies to follow:

January 4, 2008

Does the Fed have the right information?

Does the Federal Reserve have the best information to control inflation and maintain employment growth? Has the Fed been too passive in accepting the current supply of economic data?

The Fed, like the rest of us, relies on published economic data, surveys, and anecdotal evidence to assess the state of the economy, and most of that data reflects past or concurrent economic indicators of the health of the economy. The Fed does not have magical powers or a crystal ball to tell it what will happen next. The Fed does not have a secret recipe that makes it a better predictor of the future of the US economy than ordinary investors. But, the Fed does attempt to maintain a sustainable level of economic growth that will cause neither inflation nor excessive unemployment based on all available information.

In fact, the Fed and many economists look at bond yields, including the slope of the yield curve, and stock market prices to assess future GDP because these prices contain investor expectation data about future interest rates, inflation, and economic growth.

But is the Fed too passive in monitoring the current supply of information. Why doesn't the Fed in conjunction with the Treasury create a government issued financial instrument that would reveal more about the future of the US economy than is currently available?

For example, Treasury could issue a GDP linked bond whose semiannual coupon payment would be a fixed percentage of the most recent nominal GDP number at the time of coupon payment. This would force investors, in pricing the bond, to incorporate explicit expectations about future GDP. The price of the bond would reflect the present value of all future GDP growth over the period until maturity. And because the bond would be discounted (present valued) based on nominal interest rates, the current price would be a measure of total real (inflation adjusted) GDP over the life of the bond.

GDP linked treasury bonds, through analysis of embedded forward rates, would allow the Fed to see in what future time periods over the future life of the bonds that the market was predicting a slow down in economic growth. It would also allow the Fed to see if its policies were merely time shifting future economic growth into other periods without actually creating any overall growth in the economy.

Over time, the premium on the rates paid on these bonds over plain treasury bonds would allow for an analysis of the inherent risk of the US economy. And whether this risk changes over time.

Changes in the price and future embedded rates of GDP linked bonds would allow for an analysis of the effect of legislative and other governmental policies on US future economic growth. If the government introduces or discusses policies and there is an immediate decrease in the price of the bonds then clearly the policies are not good for maximizing future economic growth; although, they may have other benefits.

Having a GDP linked treasury bond would allow the US to maximize future economic growth. The bonds would also allow information about future economic activity to be discerned and assigned to a specific future time period. GDP linked bonds would allow the populace to see if our politicians are doing positive things for the future health of the US economy after their terms in office end before we actually are in those time periods.

The Fed does have very good mathematical economic models to project future economic growth. However, like all models, they work only as long as the relationship among the variables remains static or predictable. So for example, one of the Fed's models mistakenly predicted that we should have been in a recession for the last several years because it used historical relationships about the relative investment in fixed capital versus intellectual property and missed the increase investment in intellectual assets. When correcting the model for the actual relationship between intellectual and fixed property investments over the last several years, the model accurately predicted the actual historical economic growth, but failed on a prospective basis because of the change in the relationship of the variables.

The Fed should take a more active role in deciding what information it can obtain from the investment markets, design instruments accordingly, and work with Treasury in issuing and creating liquid markets for these information designed securities.

Deficit Effect Of Ignoring Elimination Of The Employer Tax Deduction In Health Reform

The comment I posted on "What is Health Care Reform?" by Donald Marron that I discussed in my previous post:

I think to complete your [Donald Marron] argument about having a connection to health care to distinguish health care net revenues from the legislative reform net revenues, there needs to be a measurement of legislative opportunity costs, especially if one wants to motivate Congress to act or at least consider the economic effects of legislation on the deficit.

The most important reform for health care, as you rightly mention, is to eliminate the employer tax deduction. The deduction is a 'connected item to health reform' (and we will leave this concept undefined and sort of, I know it when I see it). Allowing the deduction to continue is a lost opportunity to reform health care and a lost opportunity to raise tax revenues $200 billion per year ($ 2 trillion over 10 year budget window). It depends on whether or not you view the marginal costs to include the opportunity costs of not eliminating the deduction.

If the deduction effect were included in the CBO cost analysis, and I believe it should have been, the deficit effect of the passed health reform legislation would start at the point of a deficit of $200 billion per year. Added to the $200 billion would be the additional deficit costs of the items in the legislation less any connected revenue producers, such as the Cadillac tax.

A CBO analysis that included the $200 billion per year foregone revenue would show a truer cost picture of ignoring the elimination of the employer tax deduction in the passed health reform legislation.

Distinguishing 'Health Care Reform' From 'Health Care Reform Legislation'

Read Donald Marron's thoughtful post, "What is Health Care Reform?"

Health care reform increases the federal deficit over the next ten years. The health care reform legislation, however, reduces the deficit.

Read Marron's complete post here.

US Union Membership Continues To Decline

From Statement by Secretary of Labor Hilda L. Solis on Bureau of Labor Statistics report on union members in 2010:

Today, the Bureau of Labor Statistics announced that, in 2010, the unionization rate of employed wage and salary workers was 11.9 percent, down from 12.3 percent in 2009. Among private sector employees, the rate dropped to 6.9 percent from 7.2 percent in 2009.

McKinsey's Assessment Of Obesity's Real Cost

From "The real cost of obesity" in the McKinsey Quarterly Chart Focus Newsletter January 2011:

Click chart to enlarge.
Read the McKinsey & Co article here.

US CEO Pay Is Not Excessive After Adjusting For Riskier Incentive Equities And Options In Pay

From the abstract to "Are U.S. CEOs Paid More Than U.K. CEOs? Inferences from Risk-adjusted Pay" by Martin J. Conyon, John E. Core and Wayne R. Guay:

We compute and compare risk-adjusted CEO pay in the United States and United Kingdom, where the risk adjustment is based on estimated risk premiums stemming from the equity incentives borne by CEOs. Controlling for firm and industry characteristics, we find that U.S. CEOs have higher pay, but also bear much higher stock and option incentives than U.K. CEOs. Using reasonable estimates of risk premiums, we find that risk-adjusted U.S. CEO pay does not appear to be large compared to that of U.K. CEOs. We also examine differences in pay and equity incentives between a sample of non-U.K. European CEOs and a matched sample of U.S. CEOs, and find that risk-adjusting pay may explain about half of the apparent higher pay for U.S. CEOs.

Read the complete paper here.

As The US Moves To A Centralized English Health Care System, England Moves To An Old-Fashioned Decentralized US Health Care System

From The New York Times article "Cameron Proposes Vast Changes to Health Service" by Sarah Lyall:

Prime Minister David Cameron on Wednesday proposed a radical reorganization of England’s health care system, introducing legislation that would hand responsibility for most of the country’s health budget to its 42,000 general practitioners and, his political opponents say, open the door to private competition that could threaten the foundations of socialized care.

The complete New York Times article is available here.

My Comment To Wall St Journal About SEC And Goldman Facebook Offering Disclosures

A comment I posted on The Wall Street Journal to an opinion piece, "What Really Merits Disclosure? Goldman clients are the ones who should be ticked off" by Holman W. Jenkins, Jr:

The SEC thinks the only way a stock can go down is due to fraud or misreporting of financial data. The SEC measures it success by the number of legal actions it takes against companies or investment firms and it is not measured by key positive indicators important to the US economy, such as the number of IPOs, the amount of company market debt financings, the liquidity of the market, the costs of transactions, etc. Imagine running a manufacturing firm and giving bonuses for poor quality instead of good quality goods. The SEC is rewarded for market and investment failures with more staff and more money. Instead, it should be rewarded for more of the positive things markets do, such as IPOs, etc.

If it viewed the markets positively instead of negatively and was measured by indicators of success in the market instead of the few failures, the SEC would have worked with Goldman to find a way to make the Facebook domestic private offering happen. Instead, the SEC comes in looking for ways to find a guilty party before the deal ever takes place. The SEC should be penalized for preventing sophisticated US investors from participating in a domestic stock offering.

There was occasional fraud and misreporting in the stock market before the SEC was established 75 years ago and there is no indication that there is any less fraud and misreporting since the SEC began.

The SEC only real goal always seems to be to complain that it needs more staff and more funding to do its work.

If I remember correctly, there are more financial experts and economists at the Department of Agriculture than there are at the SEC. The SEC is overstaffed with inexperienced young lawyers and government bureaucrats who know little, if any, about finance, investing, starting a company or taking a business or investment risk. The SEC should be abolished and replaced. A new agency that is more pro-business, pro-markets, pro-investment measured by positive economic, and market attributes should replace the SEC.

Need To Stop Kidding Ourselves That A Poor Education Outcome In The US Is A Money Problem

A comment I post on Capital Gains and Games blog, "The Problems of Local Governments -- In One Not So Easy Lesson" by Andrew Samwick:

"So calls for students to go to schools in their own neighborhoods really do put kids from minority, low-income households into schools with less opportunity."

My impression is that the issue is not so clear-cut. When you compare schools that have a mix of low income kids and high income kids with schools that are predominately high income, the predominately high income schools look better than the mix income schools on school wide statistics; higher average reading and math scores, higher percentage graduation rates, higher enrollment in colleges and higher enrollment in elite four year colleges. When the high-income group in the mix income school is compared by itself with the kids in the high-income schools, the results are equal.

Higher household income students do well independently of the school they attend. That is not to say they received identical educations. Certainly, schools in richer areas have more resources, smaller class size, more advance courses, etc., but reading and math scores and college enrollment are more predictable from parent's income and parent's education levels than they are from the amount of money spent per student in a school district, class size, age of the buildings, number of advanced classes, etc.

Schools in lower income areas often have minority kids but there are poor areas, such as Appalachia, and other parts of the US, where the kids are poor and not minorities. In low income areas, the structural aspect of schools, the buildings, the labs, the fields, etc, are in much poorer condition than in richer areas, but it is not clear any of that affects graduation rates or reading and math scores.

Years ago, it was noticed that despite extreme poverty in Appalachia, there were kids that went on to college. It was found that the most significant determinate was household expectation. Parents' expectations that their kids would graduate from high school and go to college were the important factors that determine which kids went on to college.

High-income parents expect their kids to go to good colleges. Kids accepted to charter schools or special magnet schools are expected by their parents to take advantage of that extra benefit and graduate and go to college.

A large percentage of Asian kids (and Asians are a minority in the US) go to college because their parents expect it.

Are there any studies that control for parents' expectations that show that a better school improves outcomes, controlling for the fact that any lower income parents who move or get their children into better schools are parents with higher educational expectations for their children? Parents who kids are rejected from enrollment into some 'special' better school (charter, magnet, etc.) due to some lottery or other mechanism will lower their expectations because their kids will continue to go to an 'inferior' school with worse education outcomes.

One of the big educational mistakes of the last few decades is the switch to the school centric, as opposed to the household centric, model for improvement of educational outcomes. The school centric model showed us that no matter how much money you throw at it, no matter what variables within the school you improve, such as teacher qualifications, class size, technology, etc., student education outcomes do not change. The average US reading and math scores on standardized tests has not improved in 40 years, despite more money, better teachers and smaller class size.

The extra money, in excess of inflation and student population growth, spent on education over the last few decades has not provided a positive return on the investment. We need to stop kidding ourselves that a poor education outcome in the US is a money problem.

See my earlier related blog post, "We Do Not Know How to Improve Student Education Levels And High School Graduation Rates."

Excellent Legal Risk Analysis Of Goldman Sachs' Decision To Cancel Facebook 's Domestic Share Offering

The New York Times Dealbook has an excellent discussion of Goldman Sachs' legal risks in the Facebook private equity offering, "Why Did Goldman Blink?" by Steven M. Davidoff:

Goldman Sachs’s decision to offer shares of Facebook only to offshore investors is simple risk management. The risk here can be attributable to the scrutiny that this transaction, and Goldman Sachs generally, are now under.

Read the complete New York Times article here.

States And Municipalities Should Not Honor Unaffordable Labor Contracts That Force Essential Services Cuts During Fiscal Crises

Why do States and municipalities put their constituents and residents at a lower priority and value than union labor agreements, when there are valid legal arguments for not complying with the onerous and expensive portions of labor agreements in these hard financial times?

Cutting Essential Services

As one example of many, a recent article in The Wall Street Journal Opinion, "Detroit and Decay: The city may abandon half its schools to pay union benefits" discusses the dire fiscal situation in Detroit's school system. Detroit has closed 59 schools in the last two years, will close 70 more schools of the remaining 142, faces high school class sizes of 62 kids and is seeking to save an additional $12 million dollars by abandoning the closed schools. Yet, under its teacher contract, Detroit has to pay a bonus of $11 million, above salaries, to schoolteachers for class sizes above 35 pupils.

Does anyone doubt that there are better uses in the Detroit school system for $11 million than to pay bonuses to teachers for handling larger class sizes? Some possibilities are hire aides or more teachers to assist in or reduce the number of the larger classes, or provide other essential educational services to students, such as tutoring, remedial classes, etc.

While this Wall Street Journal article focused on Detroit, many other states and municipalities are facing difficult economic times and they are cutting basic services to their residents during this recession. Yet, expensive and unaffordable labor contracts for unionized government workers are honored without question.

Legal Arguments

In the current and recent economic environments, States and their municipalities have several possible valid legal arguments for not complying with all the terms of negotiated labor contracts. These exculpatory factors are: Force majeure, sovereignty, general welfare of its citizenry, and maybe a business judgment rule.

When these labor contracts were negotiated and entered into neither the states nor economic forecasters expected a fiscal crisis and recession as severe as the one we entered. No one, including economic forecasters, foresaw the unprecedented decline in home prices of 20 to 50 percent, and more in some areas. No one foresaw the near collapse of the US industrial and financial sectors. No one foresaw the doubling of US unemployment and the resulting severe drop in state and local government revenues from the decline in sales, income and real estate taxes, fees and other government revenue sources.

As Maryland and Oregon learned with their millionaire taxes, and as New York learned with its cigarette tax, increasing the tax rate will not increase tax revenues anywhere near what was expected. Governments are limited in bad economic times from finding ways to increase revenues.

Force Majeure

All contracts have an implied escape clause called "force majeure." Force majeure excuses a party to a contract from complying with the contract if an unforeseen event that is not in the party's control stops the party from meeting its obligations under the contract. States and their municipalities did not cause the recession or the severe drop in state and local government revenues. Due to the severity of the recession, state and their local governments are forced to choose between providing essential services for the general welfare of their citizenry or to honor union contracts that will force cuts in basic and essential services that may cause irreparable harm, such as drastic cuts in k-12 education, significant reductions in the number of police, fire and other essential services personnel, essential repairs to basic infrastructure.

Are there any appeal level judges who would force states and local governments to comply with bonuses, salary raises, etc. in labor contracts negotiated before the recession that would force governments to sharply cut back on essential services? Is there any government union that would call for a strike in these hard times and face the public and politicians' wrath because some extra benefit beyond basic salary was not given?

All that the states and local governments need to do is to say they cannot comply with those parts of the agreements due to unforeseen circumstances, force majeure. There are many examples in the US where attempts to raise additional revenues from more taxes has failed. When there are hard economic times, states are forced to make cuts.

Sovereignty and General Welfare

In our federalist system of government, both states and the federal government are sovereigns. Sovereignty in the US in not only an offshoot of the king's sovereignty, but also includes an English concept parliamentary sovereignty, which grants equal sovereignty to our legislature and our courts. Otherwise known as our checks and balances form of government.

Sovereignty not only limits the power that one branch of government has over another; it also limits the power of the current sovereign over a later sovereign. For example, a legislature cannot pass a law that cannot be modified, amended or repealed by a subsequent legislature. A later President can undo the executive orders of a previous President, etc.

For this and other reasons, States and local governments pass one-year budgets instead of multi-year budgets. As a sovereign, can the state and local governments of an earlier year bind the actions of a later sovereign and prevent the later government from protecting the general welfare of its citizens. When courts have considered this point, they have separated the government actions into sovereign and proprietary. Proprietary is more about the business side of government of doing what the private sector does, such as in Westchester, NY where the county government owns and operates an amusement park, Rye Playland. Government as sovereign taxes and provides for the general welfare of its citizens, such as police and fire protection. Government it its proprietary capacity acts without all its sovereign rights.

If state and local governments acting in the best interest of the general welfare of their citizens, ignore the clauses in the labor contracts for bonuses, salary increases and benefits and divert the funds to sovereign activities during financial crises, and say they are not bound by prior agreements from previous governments, will any appeals level court stand in their way and say they are wrong? Do not sovereigns have the power to provide foremost for their citizens' general welfare during a time of fiscal crisis and use whatever funds they have available?

Despite cries of unfairness by the labor unions, remember in the above situation, the labor unions could have requested and negotiated in their contract for untouchable escrowed funding for future increases, bonuses and benefits. The unions did not because they did not want the total costs of the contract extras presented to the public at the time of negotiations. Creditors to local governments, bondholders, usually mandate that part of the principal be put into escrow each year for the final bond principal payment at the end of the bond term. Unions do not make equivalent requests for future contract payments.

Business Judgment Rule

The last and weakest argument is that of business judgment. When corporate boards of directors make business decisions, they are afforded protection from legal liability and second-guessing by courts or shareholders under the legal doctrine called the business judgment rule. If states and local governments are found to be acting in a proprietary manner during a fiscal and economic crisis as opposed to a sovereign manner, in ignoring parts of union contracts and using the funds for the general welfare of their citizens, should not the courts allow the governments the benefit of the doubt as to the local governments business, proprietary decisions, as to their citizens' general welfare and allow the states and local governments to ignore the union labor contract provision without incurring liability?

Complicit with the Unions

It seems that during the current, severe and unprecedented in recent times, economic and fiscal hardships, the states and local governments have been too complicit with the unions and their government worker labor contracts. The states and local governments have not been aggressive enough in seeking means to legally avoid the economically harsh terms of their existing labor contracts. The municipalities have been too quick to penalize their citizenry by cutting back on essential services instead of seeking ways to reduce current labor contract expenses.

Economists Cannot Predict The Yearly Variability Of The US Economy

Chart is from James Montier of GMO, a global investment management firm, via Henry Blodget:

From James Montier of GMO, an investment management firm, via Henry Blodget

As the above chart shows, the ups and downs of the US economy are much more pronounced than the yearly economists' forecasts. In fact the economists' yearly forecasts are almost a constant and show little change from year to year.

Menu Nutritional Labeling Had No Effect On Franchise Fast Food Sales.

From "Mandatory menu labeling didn’t change behavior at 1 fast food chain" on ScienceBlog:

in the 13 months after the [menu nutritional labeling] legislation went into effect, food-purchasing behavior at the Taco Time locations in King County [WA] was identical to that in Taco Time locations where menu boards remained unchanged.

The total number of sales and average calories per transaction were unaffected by the menu labeling.

Read the complete article here.

The nice thing about the mentioned study is that it compared restaurants in the same franchise with and without nutritional labeling over the same time period. This eliminated any food purchasing effects due to change in sales or food buying patterns at the whole franchise.

Hybrid Cars Are Uneconomical Under Electric Pricing Policies To Reduce Greenhouse Gases

From "Electricity pricing policies may make or break plug-in hybrid buys" on ScienceBlog:

California policies aimed at reducing electricity use and curbing greenhouse gas emissions have the unintended consequence of making new plug-in hybrid vehicles uneconomical, according to a Purdue University economist.***In tiered systems, consumers pay a higher rate for electricity they use beyond a certain amount. California has three rate tiers. It also has a time-of-use system, which reduces the rate during periods of low demand. In addition, Californians pay some of the highest electricity rates – an average of 14.42 cents per kilowatt hour, which is about 35 percent higher than the national average.

“The objective of a tiered pricing system is to discourage consumption. It’s meant to get you to think about turning off your lights and conserving electricity. In California, the unintended consequence is that plug-in hybrid cars won’t be economical under this system,” said Tyner, whose findings were published in the early online version of the journal Energy Policy. “Almost everyone in California reaches the third pricing tier each month. If they add a plug-in hybrid, they are charged the highest rate.”

Read the complete article here.

See my previous related post "Proxy Problem Of Carbon Based Pricing And Global Warming."

Municipalities Facing A Credit And Refinancing Crunch

From The Wall Street Journal article "New Hit to Strapped States: Borrowing Costs Up as Bond Flops; Refinancing Crunch Nears" by Michael Corkery And Ianthe Jeanne Dugan:

With the market for municipal bonds tumbling, cities, hospitals, schools and other public borrowers are scrambling to refinance tens of billions of dollars of debt this year, another sign that the once-safe market is under duress.

The muni bond market was hit with the latest wave of bad news Thursday, prompting a selloff that sent the market to its lowest level since the financial crisis.

Read the complete article here.

State Spending Growth Exceeded Inflation And Population Growth

From City Journal, "State Budget Bunk: A taxonomy of fiscal gimmicks, evasions, and ploys" by Steven Malanga, a chart of excess state spending over inflation and population growth:

Read the complete City Journal article here.

Air Quality Was Improving Before Clean Air Act: Significant Reductions In Sulfur Dioxide Occurred Before Clean Air Act

From "Flashback: Air Quality Trends Before 1970" by Steven F. Hayward on environmentaltrends, via Internet Archive Wayback Machine:

Most reports on air quality trends typically begin with 1970, with the passage of the first Clean Air Act and the beginning of systematic monitoring of emissions and ambient levels of air pollution. Data from early monitors and evidence from air quality models, however, show that many forms of air pollution started to decline—in some cases rapidly—before the Clean Air Act of 1970.

For sulfur dioxide, data from 21 urban monitors show that the average ambient level fell approximately 40 percent between 1962 and 1964, as shown in Figure 1. This set the stage for progress after the Clean Air Act; the national average dropped 66 percent since then. Local data for New York City show that ambient sulfur dioxide fell by almost 50 percent between 1964 and 1970....




Ambient SO2 Level, Mean Annual Average, 1962-1997

Ambient SO2 Concentrations in New York City, 1963-1972

As it is often the case, legislation just puts into law a natural, already recurring response to a problem. Legislators then can take the praise and glory for what would have happened without their involvement and legislation. In most cases, the law passage increases costs, creates unnecessary criminality and creates rigidity where flexibility is often needed.

Legislators and enforcement agencies will be able to cite statistics showing an improvement post passage of the law. However, a trend line starting from before the law's existence will almost always show that the law did not make any improvement over the pre-existing trend.

Related articles

• How much has the clean air act helped the environment? (greenanswers.com)
• The Wall Street Journal Editorial Board Does Not Like Clean Air (switchboard.nrdc.org)

Households Paid Down Debt Instead Of Adding To Savings Accounts During Recent Recession

During the recent recession and financial crisis, households paid down debt instead of putting the extra cash into savings and retirement accounts.

From Federal Reserve Bank of New York Staff Reports, January 2011, "Household Debt and Saving during the 2007 Recession" by Rajashri Chakrabarti, Donghoon Lee, Wilbert van der Klaauw and Basit Zafar:

increase in saving―at least in 2009―did not materialize through an increase in contributions to retirement and savings accounts. If anything, such contributions actually declined on average during that year. Instead, the higher saving rate appears to reflect a considerable decline in household debt, as households paid down mortgage debt in particular. At the end of 2009, individuals expected to continue increasing their saving and paying down of debt, which is consistent with what we have observed so far in 2010. [Empahasis added]

Read the full research paper here.

Related articles

• Household Debt: $11.6 Trillion And Falling (npr.org)
• A Terrible Way To Fix The Economy: Households Deleveraging Through Defaulting on Debt. (rortybomb.wordpress.com)
• U.S. households reduce debt 10th straight quarter (marketwatch.com)

Microscopic Bacteria In The Gulf Digested Much Of The Oil Spill Hydrocarbons

From "After the Great Spill: How the Gulf Cleaned Itself" by Bryan Walsh in TIME:

the Gulf proved to be much more resilient to the oil spill than scientists might have expected. The vast majority of the oil and other hydrocarbons seem to be gone, less than six months after the crude stopped flowing. And the biggest heroes of the cleanup turned out not to be the thousands of workers who scoured oil from the beaches or the shrimp-boat captains who turned their vessels into oil skimmers. It's actually microscopic bacteria in the Gulf, which digested much of the hydrocarbons while they were still deep under the surface.

Read the complete TIME article here.

Tariffs, Lower Foreign Wages And Corporate Taxes

The following is a comment I posted on Carpe Diem blog, "Top Ten Reasons Trade is Good for America" by Mark Perry:

I think that many people who are for trade protectionism and opposed to outsourcing assume that tariffs are necessary to equalize the wage differences between lower wage foreign countries and the higher wage US to protect industries.

A worker's wage, including benefits, is usually a small part of the cost of manufactured goods. For example, for a US manufactured automobile, labor costs are about 10 percent of the selling price, and labor cost in the 10-20 percent range is a typical amount for most goods.

The other costs are materials, energy, capital, corporate taxes and foreign currency conversion rates.

Lower wages in foreign countries exporting to the US are not the primary reason for the substantially lower prices of imported goods into the US.

US corporate taxes and unfavorable US dollar foreign currency conversions are the two major causes of the comparative disadvantage of US manufacturers versus foreign manufacturers exporting to the US.

If lower foreign wages were the primary cause of US outsourcing and foreign made imports into the US, US manufacturers could increase their capital investments, increase their production efficiency and lower the percentage of labor per unit of goods until the US price differences between imported and domestic manufactured goods were negligible.

If people for protectionism understood that wage differences are not the cause of increased imports or the cause of the decline in certain industries, they would be much less in favor of tariffs. Tariffs just allow the protected industries to avoid lowering prices through competition and efficiency/productivity gains to the harm of US consumers. Sure, there are times when domestic manufacturers cite high wages as the cause of their decline, but productivity gains through increase capital investment can offset high wages. The unwillingness to make further capital investment in an industry causes it to decline. The unwillingness to continue to invest in an industry comes from expected low future profits and the availability of other, newer opportunities with much higher expected returns and profits on the investment.

Since sustainable foreign currency conversion rates are not easy to modify, the best way to protect and increase US manufacturing companies would be to lower the US corporate tax rate. It would do much more good for US manufacturers and US consumers than trade tariffs.

CBO's Legislative Cost Scoring Process Is Antiquated, Confusing And Misleading

CBO's process is antiquated, confusing and does not provide useful information to balance the budget. Imagine a household that only has a $1000 available, goes to a casino, and loses all the money playing the slot machines. The family then comes home to an empty pantry/refrigerator/freezer, goes to the grocery store, and uses its credit card to buy food. Under CBO analysis, food buying increases the household's deficit, but not the gambling. Any sensible person knows the problem was the gambling and not the food purchases.

CBO deficit scoring of new legislation including the new healthcare law is very similar. Laws, like the new Patient Protection and Affordable Care Act, aka Obamacare, are substantial increases in the government's spending, about a trillion dollars of new costs.

CBO offsets the legislation's increased cost with revenues generated from a payroll tax, general tax increases, government medical program cost savings, such as in Medicare, penalties on employers for not providing healthcare or providing the wrong kind of healthcare, penalties on individuals for not obtaining healthcare, etc.

Congress can pass all of the revenue and cost reducing items in the new health law and others by themselves, without the trillion dollar cost-increasing provisions of the new healthcare law.

Imagine that Congress authorized and spends $X billion dollars to build an automobile bridge across the Grand Canyon. Imagine that to pay for it, Congress puts a nation national sales tax on pencils and CBO projects that the expected pencil tax revenues will equal the expected bridge building costs. Instead of being CBO deficit neutral, as CBO would state, the US really wasted an opportunity to use the new pencil tax revenue to reduce the deficit and the bridge is deficit increasing. Just like the gambling and not the food increased the family's debt in the previous example.

There are many ways for Congress to generate revenue and reduce costs. New government entitlement programs and program mandates are not required. CBO's scoring process forces Congress to link new programs with unrelated cost savings and revenue increases. CBO's scoring process allows Congress to waste deficit reduction on increased spending on new programs.

If Congress had just passed the revenue and cost reduction portions of the new healthcare law, instead of passing revenue neutral or slightly deficit reducing legislation, CBO would have probably projected about a trillion dollars in deficit reduction over the next ten years.

In effect, the passage of the new healthcare law that costs the government close to a trillion dollars is a lost opportunity to use the entire amount of those available cost reduction and revenue increases towards reducing the deficit.

CBO's cost scoring analysis misleads Congress, the media and the public because it unnecessarily links revenue production sources with costs increases. The process hides the true cost and negative budgetary impact of new government programs.

I also posted the above as a comment to The Wall Street Journal opinion piece, "The CBO's Fuzzy ObamaCare Math: Of course raising taxes and slashing Medicare will make the deficit look smaller" by Betsy McCaughey.

Why CBO Projects A Substantially Higher Cost For Healthcare Repeal Than Original Deficit Reductions

Donald Marron posted on his blog an explanation as to why repeal of healthcare cost $230 billion when CBO's original projections said the law reduced the deficit by $143 billion.

Donald Marron, a former CBO acting director and a former member of the President's Council of Economic Advisers, knows more than most people and most bloggers about the inner workings of CBO cost projections.

He wrote in his blog post, "Why Does It Cost $230 Billion to Repeal Health Reform?":

The main reason is that the 10-year budget window moved. The health debate started in 2009, so CBO used a 10-year window that ran from 2010 to 2019. It’s now 2011, so the repeal law will be judged against a 10-year window that runs from 2012 to 2021.***Bottom line: CBO estimated that the original legislation would reduce deficits by $143 billion over 2010-2019. CBO now estimates that repeal would increase deficits by $145 billion over the same period; the slight difference reflects the education provisions in the original legislation, the 2010 and 2011 costs that can’t be avoided, and the December 2010 changes to the law. The jump from $145 billion to $230 billion then reflects the addition of two years to the budget window.

Read Don Marron's complete blog post here.

Repeal Of The New Heathcare Law Will Not Increase The Deficit, Just As Its Passage Did Not Reduce The Deficit, Despite CBO's Opinion To The Contrary

Despite CBO's projections to the contrary, repeal of Obamacare will not increase the deficit, just as the original enactment of the new healthcare legislation did not reduce the deficit.

CBO projected expected revenues and costs of the new healthcare legislation under the assumption of a static economy, and it will use the same methodology to project the revenues and expenses of a repeal of Obamacare.

CBO does not model tax revenues. It uses the projections of the Joint Committee on Taxation (JCT). JCT uses a static model of the economy when modeling the effects of tax rates on tax revenue. JCT assumes individuals and corporations minimize taxes and modify behavior, but tax law changes do not change the projected growth rates of the US economy.

From page 19 of "Inside the JCT Revenue Estimating Process" JCT states:

"Macroeconomic" Revenue Estimates

• standard JCT estimate incorporates behavioral responses in projecting tax revenues, but assumes that these tax and behavioral changes do not in turn ‘move the needle' of the entire US economy
• This is termed the "Fixed GNP Constraint"
• Generally assumes that total labor supply and investment are fixed
• For example, we assume that a surtax on labor income will not cause taxpayers to retire early, or simply to work less hard

Unrealistically, CBO, in relying on JCT tax revenue estimates, uses estimates that the new taxes and new mandated employer costs in the new healthcare law do not change GDP growth, consumption, workforce participation rates, tax revenue estimates, or capital investment amounts. All of which will probably be lower under the new healthcare law due to increased taxes, penalties, and increased employer costs of employees.

When macro-economic economists model tax or price changes, they use more realistic models like dynamic stochastic general equilibrium (DSGE) models and not static models. DSGE models attempt to accurately reflect behavioral changes caused by tax, cost and price changes. DSGE models of the new healthcare reform law would show that the new law slows economic growth, slows employment growth, and that tax revenue will be lower than expected.

In other words, a more accurate macro-economic model of the US economy would show that repeal of the new healthcare law would increase GDP growth, increase capital investment, increase workforce participation, increase consumption and increase tax revenues. Repeal would not increase the deficit and may actually reduce the deficit more than the new healthcare law due to stronger economic growth after repeal.

See my two earlier posts about the shortcomings of CBO deficit estimates when there are tax changes:

"ObamaCare Highlights Weaknesses Of CBO Cost Estimating Process"

"A Bias Towards Tax Increases In NY Times, CBO, JTC Budget Calculators"

Microbes Ate All The BP Spill Released Methane

From The Wall Street Journal article, "Microbes Devoured Methane From BP Spill, Study Says" by Robert Lee Hotz:

Bacteria made quick work of the tons of methane that billowed into the Gulf of Mexico along with oil from the Deepwater Horizon blowout, clearing the natural gas from the waterway within months of its release, researchers reported Friday.

Read the complete article here.

Watch the video that accompanied the article below:

Hiring A Competitor's Employee Instead Of An Unemployed Worker

My comment to "Unemployment: Why Don't Employers Fish More?" by Arnold Kling on the Econlog blog:

3. Hiring workers is an expensive capital investment. It takes a long time for a worker to learn enough about the organization to be able to contribute in a positive way.

If 3 above is correct, then it is to a firm's advantage to fill an opening with an employee from a competitor. Both firms will then have the cost of hiring, instead of just the firm with the original vacancy. The first firm then also faces the capital investment decision of investing now, hiring now, or waiting to invest, hiring later in the business cycle. It should not be too difficult to see situations where a firm wants to increase the hiring costs for a competitor as it itself hires, but also wants to wait to do so to maximize the value of its investment in a new employee. If it hires out of the pool now, the firm loses that future opportunity to increase a competitor's cost.

Clean Energy Production Is Not Clean

From "Rare Earths Leave Toxic Trail to Toyota, Vestas" by Stuart Biggs on Bloomberg:

Rare earth metals are key to global efforts to switch to cleaner energy -- from batteries in hybrid cars to magnets in wind turbines. Mining and processing the metals causes environmental damage that China, the biggest producer, is no longer willing to bear.

Read the complete Bloomberg article here.

Is A Bacterial Infection The Leading Cause Of Death In The US?

From "Bacteria eyed for possible role in atherosclerosis" on ScienceBlog:

Dr. Emil Kozarov and a team of researchers at the Columbia University College of Dental Medicine have identified specific bacteria that may have a key role in vascular pathogenesis, specifically atherosclerosis, or what is commonly referred to as “hardening of the arteries” — the number one cause of death in the United States.***The data suggest that a chronic infection may underlie the process of atherosclerosis, an infection that can be initiated by the systemic dissemination of bacteria though different “gates” in the vascular wall — as in the case of a septic patient, through intestinal infection. The data support Dr. Kozarov’s previous studies, where his team identified periodontal bacteria in carotid artery, thus pointing to tissue-destructing periodontal infections as one possible gate to the circulation.

Neither Obamacare Nor Its Repeal Fixes The Healthcare Pricing System: The Only Long Term Solution To Healthcare Costs And Medicare Is To Repair And Restore The Pricing Mechanism At The User Level

About 20 months ago, in a post on this blog, "Health Care Is A Pricing Mechanism Problem Not An Insurance Problem," I wrote that the breakdown of the pricing mechanism in healthcare, and not health insurance, is the source of the problem of the high cost of US medical services. The fix of the pricing system requires users, the consumers, to have to budget part of their own income for medical costs.

Next week, the US House Republicans will vote on and likely pass a bill to repeal Obama's landmark healthcare legislation, The Patient Protection and Affordable Care Act, colloquially and disparagingly known as Obamacare. It is extremely unlikely the US Senate will undo the new healthcare law and even if by some odd fluke, the Senate passes a repeal, President Obama will certainly veto the bill.

Unfortunately, neither the new healthcare law, nor a repeal of that law, fixes the consumer pricing mechanism for healthcare services. One strong step towards fixing medical services' pricing in the US would be complete repeal of the employer tax deduction for medical insurance as an employee benefit.

As I wrote in my earlier post:

Most users only have to consider their want of healthcare and do not have to budget and allocate their resources to get it. Without consumers allocating their income for healthcare, the economy's pricing mechanism for allocating investment resources is broken and dysfunctional. It is over allocating investment and resources to the medical industry that otherwise would go to other industries with a better return. Consumers are also using more medical services than they would with a functioning price mechanism.

Any government program must be funded, but to most people their actual expected cost of medical services is higher than they want to or can afford to pay. If people were willing to pay for medical services out of pocket, they would only need insurance for catastrophic illnesses with extraordinarily high expenses.

Most government solutions attempt in part to keep the cost borne by the average user low by subsidizing and shifting some of the unpaid cost to a few others who pay more through higher taxes. This resolution does nothing to restore the pricing mechanism, and usage and cost will continue to grow. When costs are shifted and not borne by the end-user, the government is forced to delay, ration, deny and otherwise restrict services to contain growth in costs and use. The experience of most countries with a government health care system is rationing, delays and denials of services.

The true long-term solution to our healthcare problems is to repair and restore the pricing mechanism for consumer use of health services.

Read the complete earlier post here.

Why We Have Too Few Women At The Top: Video: Sheryl Sandberg, COO Facebook

Sheryl Sandberg: Why we have too few women leaders | Video on TED.com:

Ms. Sandberg is the business brains of Facebook. Her excellent presentation is well worth the fifteen minutes it takes to watch it.

Dodd-Frank Is Raising Credit Costs For Low Income Consumers

From The Wall Street Journal article, "Dodd-Frank and the Return of the Loan Shark: In the name of consumer protection, Congress has pushed more Americans outside the traditional banking system" by Todd Zywicki:

The least surprising event of 2010 was that, in the wake of new federal limits on how credit-card issuers can price risk and adjust interest rates, more Americans had to go to payday lenders, pawn shops and local loan sharks in order to get credit.***Proponents of the 2009 Credit CARD (Card Accountability Responsibility and Disclosure) Act argued that it would protect Americans from exploitative credit-card companies by limiting penalty fees and interest-rate adjustments. For many Americans, though, the law meant higher interest rates, an increase in other fees, and reduced credit limits.

The impact was even worse for lower-income Americans, who have lost access to credit cards and were dumped in the laps of payday lenders that charge interest rates 10 times higher than credit-card companies.

Read the complete Wall St. Journal article here.

Insider Trading And Free Speech

My comment to a very good post about insider trading on Truth on the Market blog, "Some Myths About Insider Trading" by Henry G. Manne, Dean Emeritus of the George Mason University School of Law and Distinguished Visiting Professor at the Ave Maria School of Law:

There is also a free speech issue.

Price is a fundamental statement of economic information in a capitalistic society. Any government restrictions on incorporating available, accurate information in prices are an abridgment of speech. There is also an element of fraud (although technically, I would guess governments do not commit fraud). Any buyer or seller of the stock or asset, after material information is available to insiders, is trading without that information and at prices that do not incorporate that information. If not for the government insider trading restrictions on that material information, the information, and the pricing reflecting trades with that information, would be available to non-inside buyers and sellers. Later release of that information does not help buyers and sellers who trade between the time the information becomes known to insiders and the later time that it is released. A buyer or a seller is involuntarily aggrieved by the unavailability of the insider information to determine their price of a trade and accept the trading price as is. With the earlier release of the information, directly or through trades based on that information, parties voluntarily make trades with the information, accept the price as is and are not aggrieved.

It would seem to me that SEC and other legal restrictions on trading on inside information are prior abridgments of speech. It is then a question of whether there is sufficient governmental interest to allow a prior restraint of information by prohibiting insider trades and whether that interest overrides the rights of buyers or sellers to trade on complete available information during the period prior to release and after the information is known by insiders.

World Carbon Emissions Are Possibly At or Near Peak Levels And Will Start Declining Soon

From "A Road Less Traveled: Passenger travel in the industrialized world has been stagnant for nearly a decade, researchers say" by Melinda Burns:

“A major factor behind increasing energy use and carbon dioxide emissions since the 1970s has ceased its rise, at least for the time being,” Schipper said. “If it is a truly permanent change, then future projections of carbon dioxide emissions and fuel demand should be scaled back.”

The peak travel study runs counter to government models predicting steady growth in travel demand well beyond 2030. Schipper and Millard-Ball say that their own findings are “suggestive rather than conclusive.” They speculate that highway gridlock, parking problems, high prices at the gas pump and an aging population that doesn’t commute may be contributing to peak travel. People already spend an average 1.1 hours per day traveling from one place to another, and driving speeds can’t get much faster.

The above article is based on the research paper, "Are We Reaching Peak Travel? Trends in Passenger Transport in Eight Industrialized Countries" by Adam Millard-Balla, Lee Schipper.

Below is the abstract of that paper:

Abstract
Projections of energy use and greenhouse gas emissions for industrialized countries typically show continued growth in vehicle ownership, vehicle use and overall travel demand. This growth represents a continuation of trends from the 1970s through the early 2000s. This paper presents a descriptive analysis of cross-national passenger transport trends in eight industrialized countries, providing evidence to suggest that these trends may have halted. Through decomposing passenger transport energy use into activity, modal structure and modal energy intensity, we show that increases in total activity (passenger travel) have been the driving force behind increased energy use, offset somewhat by declining energy intensity. We show that total activity growth has halted relative to GDP in recent years in the eight countries examined. If these trends continue, it is possible that an accelerated decline in the energy intensity of car travel; stagnation in total travel per capita; some shifts back to rail and bus modes; and at least somewhat less carbon per unit of energy could leave the absolute levels of emissions in 2020 or 2030 lower than today. [Emphasis added].

The reduction in future carbon emissions is projected and expected to occur without further legislation or additional government programs of carbon emission limits, a carbon tax or a carbon cap and trade system.

Happy New Year! Welcome 2011