Thursday, March 31, 2011

Tony Judt on the Origins of Our Economic Theories

A little over a year ago, not too long before he passed away, Tony Judt contributed an article to The New Yorker titled What is Living and What is Dead in Social Democracy. This article is crammed with interesting insights into the critical issues that the Western nations are going to have to face. There will be more about this in the future. Here we will only take note of Judt’s thoughts on what drove the theories of our economic icons.

“....we live in the long shadow of a debate with which most people are altogether unfamiliar. If we ask who exercised the greatest influence over contemporary Anglophone economic thought, five foreign-born thinkers spring to mind: Ludwig von Mises, Friedrich Hayek, Joseph Schumpeter, Karl Popper, and Peter Drucker. The first two were the outstanding “grandfathers” of the Chicago School of free-market macroeconomics. Schumpeter is best known for his enthusiastic description of the “creative, destructive” powers of capitalism, Popper for his defense of the “open society” and his theory of totalitarianism. As for Drucker, his writings on management exercised enormous influence over the theory and practice of business in the prosperous decades of the postwar boom.”

“Three of these men were born in Vienna, a fourth (von Mises) in Austrian Lemberg (now Lvov), the fifth (Schumpeter) in Moravia, a few dozen miles north of the imperial capital. All were profoundly shaken by the interwar catastrophe that struck their native Austria. Following the cataclysm of World War I and a brief socialist municipal experiment in Vienna, the country fell to a reactionary coup in 1934 and then, four years later, to the Nazi invasion and occupation.”

“All were forced into exile by these events and all—Hayek in particular—were to cast their writings and teachings in the shadow of the central question of their lifetime: Why had liberal society collapsed and given way—at least in the Austrian case—to fascism? Their answer: the unsuccessful attempts of the (Marxist) left to introduce into post-1918 Austria state-directed planning, municipally owned services, and collectivized economic activity had not only proven delusionary, but had led directly to a counterreaction.”

“The European tragedy had thus been brought about by the failure of the left: first to achieve its objectives and then to defend itself and its liberal heritage. Each, albeit in contrasting keys, drew the same conclusion: the best way to defend liberalism, the best defense of an open society and its attendant freedoms, was to keep government far away from economic life. If the state was held at a safe distance, if politicians—however well-intentioned—were barred from planning, manipulating, or directing the affairs of their fellow citizens, then extremists of right and left alike would be kept at bay.”
The other icon was John Maynard Keynes. He had a different historical perspective and came to a different conclusion.
“The same challenge—how to understand what had happened between the wars and prevent its recurrence—was confronted by John Maynard Keynes. The great English economist, born in 1883 (the same year as Schumpeter), grew up in a stable, confident, prosperous, and powerful Britain. And then, from his privileged perch at the Treasury and as a participant in the Versailles peace negotiations, he watched his world collapse, taking with it all the reassuring certainties of his culture and class. Keynes, too, would ask himself the question that Hayek and his Austrian colleagues had posed. But he offered a very different answer.”

“Yes, Keynes acknowledged, the disintegration of late Victorian Europe was the defining experience of his lifetime. Indeed, the essence of his contributions to economic theory was his insistence upon uncertainty: in contrast to the confident nostrums of classical and neoclassical economics, Keynes would insist upon the essential unpredictability of human affairs. If there was a lesson to be drawn from depression, fascism, and war, it was this: uncertainty—elevated to the level of insecurity and collective fear—was the corrosive force that had threatened and might again threaten the liberal world.”

“Thus Keynes sought an increased role for the social security state, including but not confined to countercyclical economic intervention. Hayek proposed the opposite.”
Judt tells us that we need to understand the origins of these economic outlooks because the contention between the two camps continues today.
“....we are today living out the dim echo—like light from a fading star—of a debate conducted seventy years ago by men born for the most part in the late nineteenth century. To be sure, the economic terms in which we are encouraged to think are not conventionally associated with these far-off political disagreements. And yet without an understanding of the latter, it is as though we speak a language we do not fully comprehend.”
Beginning of personal venting....

People occasionally place the words economics and science in the same sentence, and occasionally one word is even used as a modifier of the other, but here we have a very learned and wise man suggesting that the views of these lofty economists were determined by the neighborhood in which they grew up. If things had turned out differently, Hayek’s economic theories might have tended towards socialism.

Economics is not a science. Economists are observers. They can collect data and make assumptions which will allow them to draw conclusions, but one should not deceive oneself into thinking that these conclusions aren’t biased by personal opinions. Economists have become almost as predictable as Supreme Court Justices. They cling to their theories with the same tenacity as we exhibit in clinging to our political parties. They use their irrational brains to try and understand the individual and collective actions of many millions of irrational brains.

....end of venting.

Tuesday, March 29, 2011

Tax Dodging Corporations Are Now Demanding a Tax Holiday

Did you ever hear of a “Double Irish?” If that conjures up an image of a frothy beverage and congenial but boisterous companions, you are about to be disappointed. The Double Irish is the name those in the know give to a tax dodge that allows U.S. corporations to transfer many billions of dollars overseas where the IRS cannot touch it. Businessweek describes how this works using Forest Laboratories, a pharmaceutical company as the example.

“With a swipe of his debit card in a Phoenix pharmacy, Tyler Hurst bought a $99 bottle of Lexapro and kicked off a 9,400-mile odyssey of international corporate tax avoidance. Each stop along the way—an industrial park in Dublin, a skyscraper in Amsterdam, a palm-shaded law office in Bermuda—helps the medicine's maker, Forest Laboratories, cut its income tax bill. Although all of Forest's Lexapro sales are in the U.S., the company moves profits generated by the world's third-best-selling antidepressant from subsidiary to subsidiary overseas, exploiting tax advantages in multiple countries. The technique, known as transfer pricing, reduced Forest's net U.S. tax bill by more than a third in 2009, according to the company's annual report.”
Forest sets up an office in Bermuda and licenses it to produce and sell Lexapro. There is no corporate tax in Bermuda. Another subsidiary is set up in Ireland to actually manufacture the drug, under license of the Bermuda office. The Irish company sells the drug to Forest in the U.S. at some unknown, but probably large price. At this point the profits could be taxed at Ireland’s low rate rather than at the U.S’s higher rate. This is the “first Irish.” Since the Irish company is licensed by the Bermuda company, an arbitrarily large fraction of the funds could be transferred to Bermuda to avoid even the low Irish corporate tax. However, Ireland imposes a separate tax on funds transferred out of the country unless they are transferred to another E.U. country. That is where Amsterdam and the “second Irish” comes in. Another subsidiary is established in Amsterdam whose function is to accept the funds from Ireland and forward them to Bermuda. This is also referred to as the “Dutch Sandwich.”

This is all perfectly legal if performed in good faith. The IRS is aware of this process and has made it a rule that if Forest wants to license production of a drug to an overseas subsidiary, it must treat that subsidiary as if it were a third party. In that case, manufacturing is cheap and Forest would demand a high fee for the manufacturing rights. Most of the profits would go to Forest in the U.S.  Forest can ignore this requirement and provide the license to its Bermuda outfit at very little cost. Forest in the U.S. ends up paying a high price for the Irish pills, selling them domestically at a small markup, and funnels nearly all the profit overseas with a net tax rate close to zero.

Businessweek investigated and was unable to find any evidence of actual Forest employees in either Amsterdam or Bermuda. The address of the Bermuda subsidiary is a lawyer’s office.
“Thousands of other companies, from Oracle to Eli Lilly to Pfizer, also legally avoid some income taxes by using transfer pricing, typically converting sales in one country to paper profits in another, often a place where they have few employees or actual sales. GlaxoSmithKline, the U.K.'s largest drugmaker, settled a transfer-pricing case with the U.S. in 2006 for $3.4 billion. Since December, the IRS and the Justice Dept. have lost two such cases against Silicon Valley companies: a $24.3 million dispute with chipmaker Xilinx and a $545 million battle with software maker Symantec.”
Another Businessweek article lets us know that these corporate “patriots” wish to do the country a favor by bringing home some of these profits—estimated at around $1 trillion—provided they are allowed to do it without paying any significant tax. What they are asking for is a tax holiday on these repatriated profits.
“All they want in return is a temporary tax break that wouldn't cost the U.S. Treasury anything, since it's money that would otherwise be kept abroad and not taxed at all. The tax break would actually raise billions of dollars from applying the reduced tax rate to the money that's been repatriated. “

“What's not to like? John T. Chambers, Cisco's chief executive officer, told securities analysts in February that ‘you're now seeing political leaders at all levels understand"’ the case for a tax holiday on repatriated foreign profits. ‘I think this one has well over a 60 percent probability of being resolved in a positive way,’ he said. Although a lobbying campaign is just getting under way, Representative Brian P. Bilbray (R-Calif.) has already introduced a bill that would let companies bring home money tax-free if they used it for research and development or facilities expansion.”
This gambit succeeded in 2005 and repatriation was encouraged with a generous tax reduction.
“The temporary holiday....allowed companies to repatriate profits attributed to their foreign operations at a 5.25 percent tax rate instead of the usual 35 percent. (Companies get a credit for foreign tax already paid.) According to the IRS, $362 billion came back to the U.S., of which $312 billion was eligible for the reduced tax rate. The amount repatriated was 45 percent of the total held abroad at the end of 2004.”

“In the long run, though, the holiday was rife with unintended consequences. Research by Northwestern's Brennan indicates companies rationally concluded that if they were granted one special one-time tax break, they might very well be granted another. That gave them the incentive to attribute even more of their profits to foreign operations, like a shopper waiting for an end-of-season sale. By the end of 2006 the total ‘permanently’ reinvested abroad had exceeded the 2004 peak. It has continued to grow since.”
And what of the supposed benefits of bringing that money home at that low tax rate? What was the benefit to the economy?
“The 2005 repatriation ‘did not increase domestic investment, employment, or R&D,’ but did boost share buybacks, concludes a forthcoming Journal of Finance article by Illinois' Dharmapala, C. Fritz Foley at Harvard Business School, and Kristin J. Forbes at the MIT Sloan School of Management.”
The fear is that the same thing will happen again. Most companies are already hoarding a large amount of assets.
“Some economists say a holiday today might be even less effective because cash isn't a constraint in 2011—it's bountiful, thanks to the Federal Reserve's loose-money policy. U.S. nonfinancial corporations have $1.9 trillion in liquid assets, the Fed says. No more than half of that—probably significantly less—is offshore. (An unknown portion of the $1 trillion-plus in foreign-held profits isn't cash. It's tied up in foreign factories, offices, and the like and can't easily be repatriated.)”
The position of the Administration and the Fed seems to be that there will be no tax break without it being coupled to tax reform. With this much money involved the lobbyists will have a lot of weight to throw around. Hopefully Congress will hold its ground until the problem is finally fixed.

It seems fair to tax domestic profits by U.S. law, and tax non-domestic profits by the rules of the country in question, but it is ridiculous to allow corporations to extract funds from our economy, transfer them overseas and define them to be international profits. Apparently a company can defraud the government of billions of tax dollars and receive a slap on the wrist. How big does a financial crime have to be before it becomes a felony? Putting a few CEOs in jail could be a very effective deterrent.

Monday, March 28, 2011

Healthcare Costs, Accountable Care Organizations, and Kaiser Permanente

Much discussed within the healthcare industry, but little mentioned in the popular media, are Accountable Care Organizations (ACO). In its simplest form an ACO is a group of providers who band together with the goal of providing better healthcare results at lower costs. The Patient Protection and Affordable Care Act (ACA), encourages the formation of these entities by offering financial incentives to those that can demonstrate cost savings and improved care to Medicare patients. A good general reference can be found here.

“An accountable care organization (ACO) is a type of payment and delivery reform model that starts to tie provider reimbursements to quality metrics and reductions in the total cost of care for an assigned population of patients. A group of coordinated health care providers form an ACO, which then provides care to a group of patients. The ACO may use a range of different payment models (capitation, fee-for-service with asymmetric or symmetric shared savings, etc). The ACO is accountable to the patients and the third-party payer for the quality, appropriateness, and efficiency of the health care provided. According to the Centers for Medicare and Medicaid Services (CMS), an ACO is ‘an organization of health care providers that agrees to be accountable for the quality, cost, and overall care of Medicare beneficiaries who are enrolled in the traditional fee-for-service program who are assigned to it.’ While the ACO model is designed to be flexible, Dr. Mark McClellan, Dr. Elliott Fisher and others defined three core principles for all ACOs: 1) Provider-led organizations with a strong base of primary care that are collectively accountable for quality and total per capita costs across the full continuum of care for a population of patients; 2) Payments linked to quality improvements that also reduce overall costs; and, 3) Reliable and progressively more sophisticated performance measurement, to support improvement and provide confidence that savings are achieved through improvements in care.”
That all sounds good. Service providers will at least be pushed to economies of scale, and they will have to justify their treatments as being “best practice.” The Centers for Medicare and Medicaid Services will insist that an ACO be large enough to cover at least 5,000 patients and commit to at least three years of operation. The industry seems to be taking this new model seriously. Several ACOs are already in operation and others are in the planning stage.

However, one gets the feeling that they will be nibbling at the edges. We already have examples of how best to organize and incentivize healthcare in this country. There are already several outfits who have adopted this model successfully. The largest and most familiar is Kaiser Permanente (KP). We had occasion to talk about Kaiser when The Economist wrote an article about how U.K. healthcare experts were so impressed with some of Kaiser’s accomplishments.

One can think of Kaiser as an example of an ACO taken to its logical conclusion. KP is referred to as an integrated service provider. This means it provides the hospitals, doctors, clinics, and laboratories as a part of a single package. A clinic is basically a hospital without an emergency room or overnight care. When you make an appointment to see a doctor you have the labs, radiology, pharmacy, and access to a large suite of out-patient procedures all under one roof—one stop shopping.

KP’s organization provides enormous advantages of scale. They have a large enough patient population to be able to perform their own research on treatment outcomes. With multiple facilities within convenient driving distance, they do not have to duplicate expensive, but not fully utilized devices at all facilities. Nor do they have to provide a full range of specialists at each facility. They can scale their facilities to the actual needs of their population. I have at least six facilities within an hour drive.

KP also tends to have long-term patients. With less churning of subscribers than most insurers, it has the financial motivation to provide wellness assistance and encourage healthy lifestyles.

KP also provides the best cost incentive model around. As an insurer it has a fixed income and what is not spent is profit. But it is also the provider, so it can eliminate the evils of the fee for service model that is so dominant in this country. All the doctors are on salary. That means they are ranked according to patient satisfaction rather than how many patients they can squeeze into an hour. Since all of the work is in-house, there is little marginal cost whether a bed is filled on a given night, or if a procedure is deemed necessary or not. You encounter doctors who work eight hours a day and have lives. They can be medical care providers and not financial entrepreneurs.

With KP’s computerized system you can make appointments with your doctor on-line. If you leave the doctor’s office and think of several things you wished you had asked, you go home and send him, or her, an email with carefully thought out questions. Usually you will have a reply the same day. If you have blood work done in the morning, by evening you will be getting emails saying the results are available on-line. All your results are stored on line so you can view the information yourself.

To bring focus on the potential for cost savings consider this chart.

The U.S. spends about twice as much of its GDP on healthcare as the U.K. and produces worse healthcare outcomes. I discovered this report that was published in the British Medical Journal in 2002: Getting more for Their Dollar: A comparison of the NHS with California’s Kaiser Permanente. The NHS is the U.K.’s National Health Service. The report concludes:
“The per capita costs of the two systems, adjusted for differences in benefits, special activities, population characteristics, and the cost environment, were similar to within 10%.....Kaiser achieved better performance at roughly the same cost as the NHS because of integration throughout the system, efficient management of hospital use, the benefits of competition, and greater investment in information technology.”
So—Kaiser provides healthcare that is at least as good as that of the British, and at the same cost as the British. That would imply that Kaiser provides better than average healthcare at better than average cost in this country—perhaps much better than average. Why experiment with less ambitious models when we have had a demonstrably better approach available for decades? Because medical providers are desperately trying to hang on to their fat incomes. Until we eliminate the excessive incomes and profits from the system we will continue to do a tap dance around the real problem.

Sunday, March 27, 2011

Childhood Trauma and Health As an adult

Paul Tough has produced a fascinating article in The New Yorker titled The Poverty Clinic. The title arises from Tough’s decision to center his story on the work of Nadine Burke who runs a clinic in an impoverished area of San Francisco. Burke is introduced as a physician who had been following traditional treatment methods for the types of illnesses encountered in the population she serves. Feeling dissatisfied with the results, she became interested in subjects like stress physiology and neuroendocrinology. Her eureka moment came when she was introduced to a study performed by Kaiser Permanente in the '90’s.

The Kaiser study was called the Adverse Child Experience study, commonly referred to as the ACE study. This effort was conducted by Vincent J. Felitti in collaboration with Robert F. Anda of the Centers for Disease Control in Atlanta. Kaiser patients in the San Diego area were provided a questionnaire that asked them to report on ten categories of “adverse childhood experiences.” Note that this involved a sample more representative of the population as a whole than that of an impoverished community. The categories included:
“....parental divorce, physical abuse, emotional neglect, and sexual abuse, as well as growing up with family members who suffered from mental illness, alcoholism, or drug problems.”
The researchers gave each participant an ACE score, with one point for each category reported. The first surprise concerned the prevalence of adverse experiences.
“Two-thirds of the patients had experienced at least one category; one in six had an ACE score of 4 or higher.”
The startling news came from comparing scores with health records.
“The correlations between adverse childhood experiences and negative adult outcomes were so powerful that they ‘stunned us,’ Anda wrote later....the higher the ACE score, the worse the outcome, on almost every measure, from addictive behavior to chronic disease. Compared to those who had no history of ACEs, those with ACE scores of 4 or higher were twice as likely to smoke, seven times as likely to be alcoholics, and six times as likely to have had sex before the age of fifteen. They were twice as likely to have been diagnosed with cancer, twice as likely to have heart disease, and four times as likely to suffer from emphysema or chronic bronchitis. Adults with an ACE score of 4 or higher were twelve times as likely to have attempted suicide than those with an ACE score of 0. And men with an ACE score of 6 or higher were forty-six times as likely to have injected drugs than men who had no history of ACEs.”
Some of these correlations involved bad behavior which could be expected to lead to poor health outcomes. Nevertheless, the researchers found that even when these bad behaviors were factored out, deterioration in health was still observed.
“The researchers looked at patients with ACE scores of 7 or higher who didn’t smoke, didn’t drink to excess, and weren’t overweight, and found that their risk of ischemic heart disease (the most common cause of death in the United States) was three hundred and sixty percent higher than it was for patients with a score of 0. Somehow the traumatic experiences of their childhoods were having a deleterious effect on their later health, through a pathway that had nothing to do with bad behavior.”

The initial response of the medical community was tepid. One could criticize the study because it depended on the recollections of the patients, and also because there was no credible explanation of the results that could be put forward. As Tough points out, research is beginning to catch up with the ACE study.

A group in New Zealand has been able to reproduce the ACE results with a group of subjects that have been under observation since the early ‘70s. That answers the first objection. Tough quotes other research activities that provide a physiological basis for the results.
“....other researchers....have made advances in explaining how early trauma creates lasting changes in the brain and the body. The key pathway is the intricately connected system that our brain deploys in reaction to stressful events. This system activates defenses on many fronts at once, some of which we recognize as we experience them: it produces emotions like fear and anxiety, as well as physical reactions, including increased blood pressure and heart rate, clammy skin, and a dry mouth. Other bodily reactions to stress are less evident: hormones are secreted, neurotransmitters are activated, and inflammatory proteins surge through the bloodstream.”

“As a response to short-term threats, the system is beneficial, even essential. But researcher like Bruce McEwen....and Frances Champagne....have shown that repeated, full-scale activation of this stress system, especially in early childhood, can lead to deep physical changes. Michael Meany....and his colleagues have found that early adversity actually alters the chemistry of DNA in the brain, through a process called methylation. Traumatic experiences can cause tiny chemical markers called methyl groups to affix themselves to genes that govern the production of stress-hormone receptors in the brain. This process disables these genes, preventing the brain from properly regulating its response to stress.”

“When it comes to adult health, the most important element of the stress response is the immune system, which, during moments of acute anxiety, releases a variety of various proteins and other chemical signals into the bloodstream. In the short term, this process promotes resistance to infection, and prepares the body to repair tissues that might be damaged. After the short-term threat disappears, this inflammation subsides, unless the system gets overloaded, in which case these chemicals can build up, with toxic effects on the heart and other organs. The [New Zealand] researchers found that adults in their thirties who had been mistreated as children were nearly twice as likely to have elevated levels of an inflammatory adults who had not been mistreated.”
This protein is a known marker for cardiovascular disease.

What this means to a physician like Burke is that
“In many cases, what looks like a social situation is actually a neurochemical situation.”
Neurochemical defects can, in principle, be treated by other chemicals. If the results of these studies are to be believed, there is a current and present need for research in this area. Burke, in surveying her own patients discovered that
“....just three percent of her patients with an ACE score of 0 display learning or behavioral problems. Among patients with an ACE score of 4 or higher, the figure is fifty-one percent.”
Tough compares these findings to those obtained in the ‘60s that showed that childhood disadvantage led to diminished educational outcomes. He suggests that society needs to think of parallel initiatives to programs like Head Start that focus on protecting children from both the mental and physical consequences of childhood trauma.

We tend to think to think of children as tough little units that nature has made resilient enough to survive almost anything life can throw at them. Perhaps survival is more complicated than we thought. And perhaps those parents who we deemed over protective of their children weren’t so far off base after all.

The more one learns about the functioning of the human body, the more important chemistry becomes. One begins to wonder if there is anything that cannot be explained in terms of a chemical state. That sounds like an interesting topic for another day.

Saturday, March 26, 2011

Europe's Ambitious Climate Policy

It is nice to see that someone is taking climate change seriously, and is actually intending to do something about it. The European Commission released its plan for where it wants to be between now and 2050. The plan is surprisingly magnanimous in its allocation of responsibility. The Economist provides some details.

“Believing that global greenhouse-gas emissions must fall by half to limit climate change, and that rich countries should cut the most, Europe has set a goal of reducing emissions by 80-95% by 2050. The road map is its first stab at sharing out the cuts.”
This chart indicates the scale of the plan.

This would be no small undertaking, requiring a significant investment over a long period.
“The plan requires a lot of investment in power generation and smarter grids, best done in the context of—at long last—a reformed and competitive energy market. The commission says the investment required to decarbonise power would average about €30 billion ($42 billion) a year over 40 years. This is one of the cheaper parts of the plan; the total cost is about €270 billion a year, with €80 billion going on buildings and appliances and €150 billion on transport. But the commission’s modelling also points to savings on fuel costs, which are low for nuclear and zero for most renewables, of between €175 billion and €320 billion. Other benefits include more energy security and cleaner air.”
Interestingly, some countries want to accelerate the plan even though meeting its short-term targets is not a certainty.

“Some governments, including France’s and Britain’s, are so convinced of the benefits of green investment that they think the commission’s near-term goal of a 20% emission reduction by 2020 is too low. They want it raised to 30%. Others argue strenuously for the limit to be kept as it is, as do some industry lobbies. The road map says that an optimal path would require a larger cut by 2020—but that, as luck would have it, the optimal reduction, set at 25%, is what will be realised by existing plans for more renewable energy and improved energy efficiency if they work out.”

“One problem with this is that the efficiency goal of a 20% improvement by 2020 seems high. The commission says the EU is on course to do only half as well. In an energy-efficiency plan released with its road map, the commission talks of making the goals binding in 2013.”
To balance natural carbon emissions, power generation will have to go to essentially zero emission. About half of today’s power comes from fossil fuels. It is not practical to eliminate that dependence entirely. Consequently, the plan depends on carbon sequestration to meet its goals.
“The biggest technical caveat is that most studies include a lot of fossil-fuel plants in which carbon dioxide is whisked out of chimneys and tucked underground without troubling the atmosphere, and this capture and storage technology has yet to be proved on the scale needed.”
A good summary of sequestration technologies can be found here. The inevitability of continued worldwide coal burning for power generation is discussed here. Given that this is such a crucial element in the quest for carbon emissions reduction, one would think there would be more urgency in the quest to demonstrate sequestration technology. While there are significant efforts underway, one might expect that something on the scale of the Manhattan Project would be more appropriate.

Props to the EU for at least realizing what needs to be done. Let’s wish them well.

Thursday, March 24, 2011

Is the Internet Changing the Way Our Minds Work?

Is the Internet Changing the Way Our Minds Work? The trivial answer to this question is yes—everything we do or sense results in a modification to our brains. A more useful response might be that there is no evolutionary basis for reading; reading is an acquired skill that is learned from scratch as part of a person’s growth process. The internet is a new source that will be accommodated just as previous “new” sources were. Again, the answer is yes—but so what? There are those who wish to claim that the type of interaction with words and images provided by the internet is altering, negatively, our ability to concentrate and to engage in complex thought processes. This is a serious allegation and it deserves consideration.

Adam Gopnik addresses this issue in an article in The New Yorker: The Information: How the Internet Gets Inside Us. There is also a good article addressing the same topic in the London Review of Books by Jim Holt: Smarter, Happier, More Productive. Gopnik takes the broader approach, but both authors cover much of the same material, although from different perspectives.

Gopnik defines the issue as being less about content of information and more about the means. It is not so much a question of what, but rather of how much and of how quickly.
“The scale of the transformation is such that an ever-expanding literature has emerged to censure or celebrate it. A series of books explaining why books no longer matter is a paradox that Chesterton would have found implausible, yet there they are, and they come in the typical flavors: the eulogistic, the alarmed, the sober, and the gleeful.”

“All....kinds appear among the new books about the Internet: call them the Never-Betters, the Better-Nevers, and the Ever-Wasers. The Never-Betters believe that we’re on the brink of a new utopia, where information will be free and democratic, news will be made from the bottom up, love will reign, and cookies will bake themselves. The Better-Nevers think that we would have been better off if the whole thing had never happened, that the world that is coming to an end is superior to the one that is taking its place, and that, at a minimum, books and magazines create private space for minds in ways that twenty-second bursts of information don’t. The Ever-Wasers insist that at any moment in modernity something like this is going on, and that a new way of organizing data and connecting users is always thrilling to some and chilling to others—that something like this is going on is exactly what makes it a modern moment.”
Gopnik recounts and discusses some of the outpourings in his three categories. The Never-betters tend to be over the top, certainly premature, and not very compelling. The Better-Nevers require a detailed response, but we will leave that to the Holt article. Gopnik is at his best in addressing the attitudes of the Ever-Wasers.

Gopnik points out that if this is an information revolution, it isn’t the first or necessarily the most threatening. How about printing materials for the masses?
“Everyone complained about what the new information technologies were doing to our minds. Everyone said that the flood of books produced a restless, fractured attention. Everyone complained that pamphlets and poems were breaking kids’ ability to concentrate, that big good handmade books were ignored, swept aside by printed works that, as Erasmus said, “are foolish, ignorant, malignant, libelous, mad.” The reader consulting a card catalogue in a library was living a revolution as momentous, and as disorienting, as our own. The book index was the search engine of its era, and needed to be explained at length to puzzled researchers—as, for that matter.... did the idea of ‘looking things up.’ That uniquely evil and necessary thing the comprehensive review of many different books on a related subject, with the necessary oversimplification of their ideas that it demanded, was already around in 1500, and already being accused of missing all the points. In the period when many of the big, classic books that we no longer have time to read were being written, the general complaint was that there wasn’t enough time to read big, classic books.”
And then there was television.
“Yet everything that is said about the Internet’s destruction of ‘interiority’ was said for decades about television, and just as loudly. Jerry Mander’s ‘Four Arguments for the Elimination of Television,’ in the nineteen-seventies, turned on television’s addictive nature and its destruction of viewers’ inner lives; a little later, George Trow proposed that television produced the absence of context, the disintegration of the frame—the very things, in short, that the Internet is doing now.

“Now television is the harmless little fireplace over in the corner, where the family gathers to watch “Entourage.” TV isn’t just docile; it’s positively benevolent. This makes you think that what made television so evil back when it was evil was not its essence but its omnipresence. Once it is not everything, it can be merely something.”
Gopnik has apparently missed what is perhaps the first, and the boldest, complaint about new sources of information. Holt comes to the rescue
“Books also serve as external memory-storage devices; that is why Socrates, in the Phaedrus, warned that the innovation of writing would lead to the atrophy of human memory.”
Gopnik also provides interesting insight into how the availability of the internet has affected our communication opportunities, rather than our brain function.
“What we live in is not the age of the extended mind but the age of the inverted self. The things that have usually lived in the darker recesses or mad corners of our mind—sexual obsessions and conspiracy theories, paranoid fixations and fetishes—are now out there: you click once and you can read about the Kennedy autopsy or the Nazi salute or hog-tied Swedish flight attendants. But things that were once external and subject to the social rules of caution and embarrassment—above all, our interactions with other people—are now easily internalized, made to feel like mere workings of the id left on its own. (I’ve felt this myself, writing anonymously on hockey forums: it is easy to say vile things about Gary Bettman, the commissioner of the N.H.L., with a feeling of glee rather than with a sober sense that what you’re saying should be tempered by a little truth and reflection.) Thus the limitless malice of Internet commenting: it’s not newly unleashed anger but what we all think in the first order, and have always in the past socially restrained if only thanks to the look on the listener’s face—the monstrous music that runs through our minds is now played out loud.”
Some people even create blogs where they flaunt their opinions on any topic they choose, knowing full well that without the internet, they would have no one around interested in listening.
“Everything once inside is outside, a click away; much that used to be outside is inside, experienced in solitude. And so the peacefulness, the serenity that we feel away from the Internet, and which all the Better-Nevers rightly testify to, has less to do with being no longer harried by others than with being less oppressed by the force of your own inner life. Shut off your computer, and your self stops raging quite as much or quite as loud.”
One of the better known of the Better-Never class is The Shallows: How the Internet is Changing the Way We Think, Read and Remember by Nicholas Carr. Holt’s article is a review of this book.
“’The medium does matter,’ Carr has written. ‘As a technology, a book focuses our attention, isolates us from the myriad distractions that fill our everyday lives. A networked computer does precisely the opposite. It is designed to scatter our attention. . . . Knowing that the depth of our thought is tied directly to the intensity of our attentiveness, it’s hard not to conclude that as we adapt to the intellectual environment of the Net our thinking becomes shallower’.”

“’Ever-faster chips. Ever quicker modems. DVDs and DVD burners. Gigabyte-sized hard drives. Yahoo and Amazon and eBay. MP3s. Streaming video. Broadband. Napster and Google. BlackBerrys and iPods. Wi-Fi networks. YouTube and Wikipedia. Blogging and microblogging. Smartphones, thumb drives, netbooks. Who could resist? Certainly not I.’”
At the heart of Carr’s argument is the assumption that his experience is shared by a significant number of us.
“It wasn’t until 2007, Carr says, that he had the epiphany that led to this book: ‘The very way my brain worked seemed to be changing’.”
Carr’s specific claims are
The bad habits we develop on the internet become ingrained in our neuronal structure.

We are delivered information faster than it can be processed into long term memory, leading to a deficit in learning.

The interactivity provided by the internet is addictive and bad habits drive out good habits.
Holt finds very little evidence to support Carr’s contentions, and finds Carr’s own confirming sources to be equivocal at best. His refutations are eloquent and perhaps more gentle than warranted.

The subject of “neuroplasticity” earns this response.
"Many in the neuroscience community scoff at such claims. The brain is not ‘a blob of clay pounded into shape by experience’, Steven Pinker has insisted. Its wiring may change a bit when we learn a new fact or skill, but its basic cognitive architecture remains the same. And where is the evidence that using the internet can ‘massively remodel’ the brain?"
As for the issue of long term memory detention:
“Even if computers can improve our fluid intelligence, perhaps they are inimical to crystallised intelligence – that is, to the acquisition of knowledge. This seems to be Carr’s fall-back position. ‘The net is making us smarter,’ he writes, ‘only if we define intelligence by the net’s own standards. If we take a broader and more traditional view of intelligence – if we think about the depth of our thought rather than just its speed – we have to come to a different and considerably darker conclusion.’ Why is the ‘buzzing’ brain of the computer user inferior to the ‘calm mind’ of the book reader? Because, Carr submits, a buzzing brain is an overloaded one. Our ability to acquire knowledge depends on information getting from our ‘working memory’ – the mind’s temporary scratch pad – into our long-term memory. The working memory contains what we are conscious of at a given moment; it is estimated that it can hold only as many as four items of information at a time, which quickly vanish if they are not refreshed. The working memory is thus the bottleneck in the learning process – or, to use Carr’s image, the ‘thimble’ by which we must fill up the ‘bathtub’ of our long-term memory. A book provides a ‘steady drip’ of information which, through sustained concentration, we can transfer by means of this thimble with little spillage. But on the web, Carr writes, ‘we face many information faucets, all going full blast. Our little thimble overflows as we rush from one faucet to the next,’ and what we end up with is ‘a jumble of drops from different faucets, not a continuous, coherent stream from one source’.”

“This is a seductive model, but the empirical support for Carr’s conclusion is both slim and equivocal. To begin with, there is evidence that web surfing can increase the capacity of working memory. And.... No study has shown that internet use degrades the ability to learn from a book, though that doesn’t stop people feeling that this is so....”
And, as for the addictive nature of the internet:
"Perhaps what he needs are better strategies of self-control. Has he considered disconnecting his modem and Fedexing it to himself overnight, as some digital addicts say they have done? After all, as Steven Pinker noted a few months ago in the New York Times, ‘distraction is not a new phenomenon.’ Pinker scorns the notion that digital technologies pose a hazard to our intelligence or wellbeing. Aren’t the sciences doing well in the digital age, he asks? Aren’t philosophy, history and cultural criticism flourishing too? There is a reason the new media have caught on, Pinker observes: ‘Knowledge is increasing exponentially; human brainpower and waking hours are not.’ Without the internet, how can we possibly keep up with humanity’s ballooning intellectual output?”
One comes away with the image of Carr as a rather silly person lacking in willpower, whose “addiction” has led him to engage in some shallow thinking. After all, if his thesis is to be believed, one must conclude that he has become an unreliable witness.

Tuesday, March 22, 2011

Politics and the Price of Oil

Governments have been replaced in Tunisia and Egypt. Rulers in Bahrain, Yemen and Libya are struggling to hang on. Of these countries, only Libya is a significant source of oil, producing a mere two percent of the world’s consumption. Why have these events then had such a large effect on the market price of petroleum? Two recent articles shed some light on the highly disproportionate price increases that have ensued. Edward L. Morse has provided Oil and Unrest in Foreign Affairs. The Economist has chipped in with The Price of Fear. The titles of these articles provide a clue to the ultimate conclusion: it is not what has already happened so much as what could still happen.

Morse provides historical background to put today’s events in perspective.
“Between 1981 and 1985, the price of oil fell from $35 a barrel to $10, and then stabilized at around $20 a barrel for much of the 1990s (although it did plunge once again in 1998 to $10). Over the same period, the populations of OPEC countries started to mushroom, as both life expectancy and fertility rates rose. With oil revenues falling and populations growing, per capita income began to decline. Yet governments did little to diversify their economies; in fact, oil-producing states did not begin to invest in diversification and increase spending on social welfare until the spectacular rise in oil prices. (Other oil producers, Libya among them, did not even try.)”

“This neglect contributed to the many factors underlying the current wave of civil unrest, especially to the region's stagnant incomes and unemployment rates. Now, with the contagion spreading to the oil-congested area of the Arabian Peninsula and Persian Gulf, the likelihood of an oil apocalypse is no longer implausible: in such a scenario, domestic upheaval would bring civil strife and violence, which in turn would lead to a reduction or cessation of oil production. A true apocalyptic scenario would see these events take place in major producers such as Saudi Arabia.”
The real price driver is the perception of Saudi Arabia’s ability to increase production to compensate for losses elsewhere. The Economist contributes this:
“The spread of unrest to Bahrain, Oman and the Gulf has created a whole new dimension of anxiety. North Africa produces 5% of the world’s oil, but the Middle East produces 30%. Moreover, Bahrain’s problems are on Saudi Arabia’s doorstep. These bear on the situation in the eastern Saudi provinces, from which a huge quantity of oil is pumped into global markets.”

“Saudi Arabia is therefore the traders’ chief worry. But it is also, in oil terms, the world’s chief hope. It is the only producer with significant spare capacity that could quickly be released if the oil price rose too high. Although OPEC, in which Saudi Arabia is the biggest force, exists to keep oil prices buoyant, it does not want to see them reach a point where the world economy is damaged and demand for oil falls. When prices spiked in 2008, the Saudis said they had capacity to spare. Terrified oil markets doubted its existence, and prices rose anyway, to reach $145.”
The Economist also provides this chart which illustrates how spare petroleum production capacity has changed over time.

Note that with Libya unavailable and the potential for Algeria to become unavailable, the spare capacity is back to the levels in 2008 when prices jumped to over $140—assuming you believe Saudi Arabia’s claims.
“OPEC’s spare capacity now is put at anything between 6m b/d (by OPEC) and 4m-5m b/d (by industry analysts); Saudi Arabia’s share of that excess is perhaps 3m-3.5m b/d.”
Although Libya appears to be a small producer, a decrease in its output can have a disproportionate effect.
“When oil markets tighten, another set of problems emerges. Saudi oil is generally more dense and sulphurous than the Libyan crude it will replace. Europe’s creaky old refineries will not be able to process the heavier Saudi crude, and fuel regulations there are less tolerant of sulphur content than elsewhere in the world. So the Gulf oil will have to be shipped to Asia’s newer refineries, which are designed to deal with a wide variety of grades of oil. West African oil, a close substitute for Libya’s output which usually goes to Asia, will be sent to Europe instead.”

“If the supply situation worsens, opportunities for this type of substitution will be fewer, creating supply bottlenecks, shortages of petrol and spikes within price spikes for different crudes and products, even when spare capacity remains.”
Higher oil prices mean lower economic growth. Before the financial collapse, the $140 per barrel cost was probably driving us into a recession anyways.

While many of us do not like the governments in power in North Africa and the Middle East, it may be time to say “enough is enough.” If Saudi Arabia and its ability to pump oil were to appear the least bit threatened, the results could be catastrophic for the world economy.

Let us conclude with Morse’s outlook for the future.
“The many domestic factors that have led to the recent turmoil across the region are not going to disappear in 2011. Virtually no oil-producing country in the region has been able to diversify its economy away from oil. Almost all are seeing domestic oil consumption rising rapidly as governments subsidize gasoline, diesel, and power in an attempt to deliver material well-being to their citizens. Cheap energy is critical to the legitimacy of these regimes, making price spikes politically difficult. So far, only Iran has been able to raise domestic gasoline prices -- and that is only because of its lack of refining capacity and the squeeze of the U.S.-led embargo on gasoline deliveries to the country. Oil consumption within the Gulf countries rose from 4.8 million barrels a day in 2000 to 7.8 million in 2010, eroding exports and raising the minimum price of oil needed for oil-producing states to break even on their extraction and production costs. As a result, those states dependent on oil from the region are facing troubling prospects: a near-term loss of supply due to the current disruption and a longer-term loss of supply due to growth in domestic consumption.”

Monday, March 21, 2011

What Physicians Can Look Forward To: Change

Laura P. Jacobs provides a clear and perhaps eye-opening account of what the future holds in store for physicians in a HealthLeadersMedia article titled 10 Healthcare Reform Market Changes Affecting Physicians. While Republicans talk of repealing the Patient Protection and Affordable Care Act (ACA), those in the healthcare business are taking it quite seriously. They see big changes on the horizon, and are beginning to embrace the directives for change. For the individual physician it will no longer be practical to exist as an independent business working within the traditional fee-for-service model.

Jacobs leads with this sobering comment.
“Physicians in private practice have been faced with a series of challenges and opportunities in recent years, and some assume that ‘this too shall pass.’ The risk, though, of ignoring market trends is to face the downside of evolution – extinction.”
Her first warning is to not expect increases in income because Medicare reimbursements rates are becoming a relative standard and they are not going to increase much in the near future. The only way to beat this trend is to change the business model under which one operates.

Much discussed within the healthcare industry, but little mentioned in the popular media are Accountable Care Organizations (ACO). In its simplest form it is a group of providers who band together with the goal of providing better healthcare results at lower costs. Taken to its logical conclusion, an ACO is Kaiser-Permanente. ACO formation is encouraged within the ACA for participation in Medicare, where the incentive is that if savings are accrued relative to the fee-for-service experience, the savings can be shared with the ACO. To be considered an ACO one must have at least 5000 Medicare patients under coverage. The system is being forced to economies of scale, and each provider is placed in a cost sharing system where the incentives to over treat for greater income are inhibited.

If the ACO model works for Medicare it will work for all patients. The healthcare industry has bought into this as the future. There will be many trials and errors before the best manifestation of the ACO concept is determined, but it is expected to be a viable model for controlling costs and improving healthcare.

What does this mean for the individual physician?
“ With the passage of the American Recovery and Reinvestment Act of 2009 (“ARRA”), physicians have the opportunity to earn incentives up to $44,000 from Medicare for implementation of electronic medical records (“EMR”) that meet ‘meaningful use’ criteria. But after 2015, penalties are imposed if practices fail to meet these criteria. Additionally, the need to be clinically integrated with other physicians and hospitals is growing due to various new payment methodologies, not to mention patient expectations. Within the next few years, it will not be a ‘benefit’ to have an EMR AND connectivity with other providers, it will be a requirement to stay in the game.”
Physicians’ healthcare success will be open for public scrutiny.
“The Physician Quality Reporting Initiative (“PQRI”) program was expanded in ACA, so that there are increasing incentives to participate through 2014, then the penalties for non-participation begin (sense a theme here?). Results will be posted publicly on the to-be developed “Physician Compare” website sponsored by CMS. This is in addition to the data gathered by payers and other private rating websites such as HealthGrades. Whether or not the measures are “right,” they will be published and available to consumers. The forward-thinking physician organizations are collecting and sharing this information among physicians now to provide timely feedback and improve organization-wide performance and outcomes.”
The methods of doing business will change.
“Providing the estimated 32 million or more currently uninsured individuals with access to health insurance will likely create or exacerbate access issues for medical care.... Only through redesigning care delivery models, implementing electronic visits (e-visits) and other electronic tools such as telemedicine, effectively utilizing a broad array of healthcare practitioners and support staff, and empowering patients to play an active role in their health will an access ‘meltdown’ be avoided. Even today, patients are increasingly expecting ready access (defined by the patient) to their healthcare providers through e-mail, portals, and, when necessary, the face-to–face visit at home. Physicians who cling to the traditional office visit as the only venue for care will risk declining patient preference and limited – hence declining – patient revenue.”
The role of the physician within the medical community will also have to change. Economics demands it, and it appears the younger physicians also demand it.
“ In addition, the generational shift in expectations among young physicians – for employment models that provide greater security, balanced work life, and part-time options that many small private practices cannot offer – creates a dynamic in many markets where the big groups (or hospital-owned) get bigger, and the small practices disappear as physicians retire. All this requires physicians to evaluate how their group or practice is structured for recruitment of a clinical workforce to facilitate growth and/or succession planning to meet community need. This may require looking to advanced practice nurses or physician assistants as well as a re-evaluation of compensation plans, benefits, and even medical group structure.”
“The times they are a-changin’.” And it’s about time.

Sunday, March 20, 2011

Inherited Traditions that Cause Asians and Westerners to Think Differently

In his book, The Geography of Thought: How Asians and Westerners Think Differently...and Why, Richard E. Nisbett discusses the research by psychologists that indicates cognitive differences between those brought up in the “Western” tradition and those with an Oriental background. He associates these differences with societal habits acquired over the past few thousand years.

“The philosophies and achievements of the Greeks and Chinese of 2,500 years ago were remarkably different, as were the social structures and conceptions of themselves. And, as I hope to show....the intellectual aspects of each society make sense in light of their social characteristics”
To be more specific, the research results apply to:
“....Westerners (primarily Europeans, Americans, and citizens of the British Commonwealth) and East Asians (principally the people of China, Korea, and Japan) have maintained very different systems of thought for thousands of years.”
Nisbett provides the reader with a few brief passages which serve as summaries of his conclusions. He proposes the Greek character as the prototype for modern Western thought.
“The Greeks, more than any other ancient peoples, and in fact more than most people on the planet today, had a remarkable sense of personal agency—the sense that they were in charge of their own lives and free to act as they chose....A strong sense of individual identity accompanied the Greek sense of personal agency....The Greek sense of agency fueled a tradition of debate.”
The Oriental mindset is ascribed to the society that developed in ancient China.
“The Chinese counterpart to Greek agency was harmony. Every Chinese was first and foremost a member of a collective, or rather of several collectives—the clan, the village, and especially the family. The individual was not, as for the Greeks, an encapsulated unit who maintained a unique identity across social settings....The Chinese were concerned less with issues of control of others or the environment than with self-control, so as to minimize friction with others in the family and village...On the contrary, there would have been a sense of collective agency.”
Nisbett devotes the main part of the book to investigations of how these two different cultures manifested themselves in cognitive investigations of peoples from the two ends of the earth. That would be a topic for another day. My interest here is to consider his claim that the Western mindset is a direct descendent of that of the ancient Greeks. I will argue that what he is really observing is a mindset inherited from Protestant Christianity.

The author details the results of numerous studies that elucidate disparate responses from the two cultures. Most are followed by a statement similar to this one.
“About 75 percent of Americans chose the first definition, more than 50 percent of the Canadians, Australians, British, Dutch and Swedes chose that definition, and about a third of Japanese and Singaporese chose it. Germans, French and Italians as a group were intermediate between the Asians and the people of British and northern European culture.”
There was no uniformity of response within the “Western” community. It would seem that he is really drawing conclusions from studies of the English speaking countries.

Nesbitt describes the “Greek” tradition as one emphasizing the individual and individual initiative. Consider the results of the Hofstede study measuring the individualistic traits of given countries. This work resulted in the tabulation of a Country Individualism Index. Consider the values obtained for relevant countries. The top six scoring countries are:
U.S.A.           91
Australia         90
Great Britain   89
Canada          80
Netherlands    80
New Zealand  79
The countries with romance languages are:
Italy                76
France            71
Spain              51
Portugal          27
The Asian countries include:
Japan              46
Hong Kong     25
Singapore        20
Taiwan            17
Note that Greece itself comes in at a value of 35, which is more consistent with an Asian country than a European.

The Romans were the inheritors of Greek civilization and the propagators of culture throughout most of Europe for many centuries. But Nesbitt suggests that it is the regions that had no direct contact with Greece and the least contact with Rome that are somehow the inheritors of the Greek tradition.

Nesbitt provides us with a hint when he comments on the results of one of the studies he discussed.
“We generally find that it is the white Protestants among the American participants in our studies who show the most “Western” patterns of behavior and that Catholics and minority group members, including African Americans and Hispanics, are shifted somewhat toward Eastern patterns.”
The top countries on the individualism index list are either British derived, or the Netherlands. All of these countries were heavily influenced by Protestant Christianity, with Calvinism being one of the prime contributors.

I sympathize with the author. What he has written makes a very good story. It is rather unsettling to have to contemplate the fact that John Calvin may have had more of an influence on Western thought than Plato or Aristotle. In fact it is a damned scary thought. I will not bring it up again. I promise!

Saturday, March 19, 2011

Regional Economic Disparities and Rural Outsourcing

One has to take advantage of good news wherever one finds it. The Economist ran a short article pointing out that even within a given country large variations in wealth can exist. Using OECD data for Europe, and state-by-state data available for the U.S., they produced the following chart.

It is reasonably safe to associate GDP per person with wealth. It seems that the English speaking countries are particularly adept at generating economies capable of ignoring large chunks of the citizenry. The British are the clear champions with the U.S. not far behind.

This chart indicates that in the spirit of friendly competition the U.S. is determined to catch up.

So where might be the “good news” hinted at above? It turns out that the U.S. has regions within its borders that are poor enough to compete with second and third world countries for some of the low-skilled jobs that are normally shipped overseas.

Businessweek ran an article a few months ago highlighting an outfit called Cayuse Technologies which is owned by the Confederated Tribes of the Umatilla Indian Reservation in northeast Oregon. They reported that Cayuse
“....saw $7.7 million in sales last year, seven times what they had been in 2007, its first full year of operation. With revenues from corporate clients such as Accenture expected to exceed $11 million next year, Cayuse aims to hire an additional 75 workers, says Marc Benoist, the company's general manager. "We still have capacity here at our facility, so we have plenty of room for growth," he says.”

“Cayuse is one of a handful of fast-growing information technology companies in remote areas of the U.S. that are positioning themselves as alternatives to offshore outsourcing. On an hourly basis, these "rural outsourcers" cost anywhere from 10 percent to 150 percent more to use than rivals overseas. After factoring in additional costs such as oversight and quality control of the offshore work, however, rates are comparable, says Mary Lacity, a professor at the University of Missouri in St. Louis who studies outsourcing. And the rates of the rural outsourcers are better than their domestic counterparts in big cities because the towns and small cities where they operate have lower living costs. ‘Their value proposition is,”'We cost less than the East and West Coast, and we're easier to deal with than India,”’ says Lacity.”

“There are about 20 such companies now, up from two 12 years ago, estimate industry executives. ‘A lot of it is being driven by dissatisfaction with India and challenges with visas,’ says John Beesley, director of business development at 100-employee CrossUSA. Other companies, including Saturn Systems, Rural Sourcing, and Onshore Technology Services, are reporting double- and triple-digit revenue growth in the past few years. Last year, IT research firm Gartner said in a report that while the companies make up a sliver of the market, they are an "attractive alter native" to offshore outsourcers because of language and other cultural benefits. It's also easier for them to comply with U.S. data privacy regulations, the report said.”
The total outsourcing activity is huge compared to these efforts. One might think that this is an opportunity to be encouraged and nurtured, but business analysts are pessimistic about the growth potential for these domestic companies. Given the lack of jobs and the long-term unemployment, and the historical tenacity of poverty in many regions the reason why is a bit surprising.
“The challenge is training enough workers, says Shane Mayes, founder of 70-employee consulting firm Onshore Technology Services, which estimates it will have $10 million in revenues this year. ‘We take underemployed and dislocated workers who've lost manufacturing jobs and put them through a bootcamp-style training program,’ he says. "We make software developers out of them." With clients paying from the low $20s to $50 an hour, he says the firm has doubled its growth in recent years. Mayes has centers in Lebanon, Macon, and Joplin, Mo., and plans to hire 70 more employees in 2011.”

“Critics contend rural outsourcing will remain a niche because it won't be able to scale to a significant size for lack of workers. In a Strategic Outsourcing journal article, Lacity points out that more than 61 million people—a quarter of the U.S. population—is rural. Randy Willis, an Accenture senior executive who conceived of and hatched Cayuse Technologies, agrees the biggest challenge is creating and maintaining a large enough skilled workforce. ‘To meet the cost structure, you pretty much have to build the skills from scratch,’ he says. ‘The good news is we can supplement with lower-skilled work while we're growing the deeper skills’."
This appears to be a perfect example of a situation in which focused job training could make a big difference.

Is anyone paying attention out there?

Thursday, March 17, 2011

Will Germany's Economy Be Limited by Its "Immigration Dilemma?"

In terms of economics, Germany would appear to be one of most healthy countries in the world. It has strong growth, it did not suffer too much from the financial meltdown, and it has an enviable balance of payments. Could there be dark clouds on the horizon? Recently The Economist took a fresh look at the state of the German economy and declared it generally healthy, although with a few caveats. Tamar Jacoby provided some dark cloud focus with an article in Foreign Affairs: Germany’s Immigration Dilemma.

Starting with the brighter side, the argument is made that to truly understand the strength of the German economy one must look at its performance over a long period, such as a decade, and one must also look at growth numbers moderated by population because Germany has a declining population.

Looked at in terms of GDP growth per person, Germany is one of the leaders of the developed world. It has relatively low unemployment and moderate national and personal debt. It is also one of the strongest countries in the world in terms of exports.

These numbers put Germany in the same class as China when it comes to trade imbalances. The Economist provides insight into the importance of this positive current account balance. It is viewed as something that could a long-term problem for the country.
“.... another standout number—the country’s huge current-account surplus, which stood at 5% of GDP in 2010 and is seen by Germans as further proof of the country’s economic prowess. Germany is the only G7 economy whose share of world exports has not fallen since 2000, despite Chinese competition. An increase in net exports has accounted for no less than two-thirds of Germany’s total GDP growth over the past decade, far more than any other big economy. Net exports accounted for half of Japan’s GDP growth and only about one-tenth of China’s.”

“This is not a sustainable engine of growth. To contribute to GDP as it has in the past, Germany’s trade surplus would have to keep rising every year. That would leave Germany increasingly vulnerable to recessions elsewhere, as well as to the risk of a protectionist backlash. It is also improbable. Germany’s trade surplus has swollen only partly at the expense of other rich countries: two-fifths of the increase over the past decade was with emerging economies. Indeed, its surplus with America has shrunk as a share of America’s GDP over the past decade. But Germany does run a large surplus with the rest of the EU, where demand will be much weaker over the coming years.”

“Germany’s external surplus reflects chronically weak domestic demand as much as external strength. Consumer spending has grown by an annual average of only 0.3% over the past decade, depressed by prolonged wage restraint and high household saving. An ageing country such as Germany should save more than it invests (ie, run a current-account surplus) to build up a nest-egg of foreign assets that will pay for future pensions as the labour force shrinks. But Germany’s external surplus is too big. Much of it has also been poorly invested, in everything from American subprime bonds to Greek government bonds.”
So—we observe little income growth, a declining and aging population that saves too much, and weak internal demand—Germany is beginning to resemble Japan in some ways. Nevertheless, the article finishes on a positive note.
“The good news is that most of Germany’s growth last year did come from domestic demand, not exports. Business investment took the lead, but in the fourth quarter real consumer spending was almost 2% higher than a year ago. The lowest unemployment rate for almost 20 years is likely to push up wages this year and to encourage households to spend more of their income. A recovery which is “Made in Germany” would enable the country to keep up the pace.”
Jacoby focuses on Germany’s declining population and its need to attract immigrants in order to keep the economy growing. This issue is usually cast in terms of low-skilled workers, but the “dilemma” he refers to is Germany’s inability to attract the highly-skilled workers it needs.
“The Süssmuth commission made the recruitment of a highly skilled work force the centerpiece of its proposal to overhaul the immigration system. Already in 2001, in Germany and around the world, advances in communications and transportation were eroding the walls that once defined national labor markets, and governments were starting to grasp that they were in a race for workplace talent. Just as in the nineteenth century, when powerful states fought one another for territory and natural resources, now they were competing for brain power: the scientists, engineers, entrepreneurs, and high-end business managers who fuel the dynamism of the international economy.”

“The global race for skilled workers raged through the economic boom years of the past decade. As many saw it, Australia and Canada had the most appealing and effective immigration policies: both rely on point systems to draw international talent, selecting for immigrants with language skills and higher-than-average educational levels. Other countries soon made their own efforts to attract the highly qualified. Between 1998 and 2000, the United States more than doubled its quota for skilled workers admitted on temporary H-1B visas. In 2001, Germany made an exception to its 1973 ban on labor immigration, introducing a much-heralded Green Card to attract information technology (IT) professionals. France, Ireland, the Netherlands, and the United Kingdom soon developed similar initiatives. And in 2007, the European Union announced its ambitious supranational version of outreach to global talent: the Blue Card, designed to lure workers by, among other things, making it easier for them to move from job to job on the continent. (EU member states must incorporate Blue Card requirements in domestic legislation by June 2011.)”

“But Germany's effort to attract the best and brightest has not worked out as planned. In some cases, policymakers got cold feet; in others, initiatives failed to produce the expected results. The Green Card attracted far fewer IT specialists than anticipated -- less than 16,000 over three years. A push to create a German point system was derailed in 2004. The landmark immigration law that went into effect in 2005 created several new employment-based visas for highly qualified scientists, engineers, health professionals, university teachers, and managers (amendments passed in the years since have made entry easier for international students and investors). But the response has been underwhelming. Only a few hundred immigrants take up Germany's offer of permanent residence each year: in 2009, just 169 did. Another few thousand knowledge workers enter annually on temporary visas. University students find Germany more attractive: 60,000 are now arriving each year. But at the end of their studies, only some 6,000 of them choose to stay. And indeed, for several years now, more people have left Germany than have entered the country with an eye toward settling there.”
Is there something about Germany that discourages people from coming and staying? Only 169 of these skilled immigrants decided on permanent residence in 2009?

Jacoby says there are a number of factors that concern potential immigrants to Germany. The foremost is probably German history. The legacy from the Nazis and World War Two is probably of declining importance, but the more recent history is not very comforting either. Germany welcomed a large number of what they referred to as “guest workers” in the 60s and 70s. Given that descriptor, they probably assumed they were temporary visitors who would eventually return home. Most ended up staying and Germany still needs them. Many are Arab or Turkish in background and, not surprisingly, they have not integrated well into German society.

A recent book by a prominent and respected author crystallized the dissatisfaction with the state of affairs and created an environment where some sort of governmental response is required.
“Months after its publication last August, Thilo Sarrazin's book, Deutschland schafft sich ab (Germany does away with itself), is still a runaway bestseller in his native country. The book makes an apocalyptic argument -- that immigrants are destroying Germany. In Sarrazin's view, most of the country's large Arab and Turkish populations are not just unwilling but also unable to integrate, and the nation must take urgent steps, starting with a radical overhaul of its welfare system, to avoid a hastening demise.”

“According to one survey carried out two months after the publication of the book, 36 percent of the public felt that Germany was being "overrun by foreigners"; 58 percent thought the nation's four million Muslims should have their religious practices "significantly curbed." And the roiling national debate is opening old wounds. Even many highly successful immigrants with deep roots in Germany say that they feel they will never be fully accepted. As one rising young Berlin academic born in Turkey told me, ‘I'm a German citizen. I have a German child. I'm devoting my career to educating the young people who will run the country in the next generation. But I'm still seen as a foreigner’."
There are more structural issues about German society that are of concern to the educated who might have the choice of staying. Although it is successful at attracting foreign students, few chose to remain after graduation.
“Foreign university graduates thinking about staying in Germany worry about the entrenched seniority systems that often make it hard to rise in German companies. Others are concerned that they will not be able to penetrate German social and professional networks, or that speaking anything short of perfect German will stymie their careers. Still others worry about the myriad regulatory obstacles to starting their own businesses.”
Germany would seem to have many things to offer: a strong economy, good wages, its businesses are heavily involved in the high tech arenas, it has a solid educational system, and its universities are free. Jacoby argues that the country must come to terms with this problem because it has already become an economic handicap—one that will only get worse.
“According to one recent survey, by the Association of German Chambers of Industry and Commerce, 70 percent of German companies are having trouble finding master artisans, technicians, and other skilled laborers. The Association of German Engineers reports that there are 36,000 unfilled engineering positions across the country, and an association of IT companies estimates that there are 43,000 openings in the information field. The labor problem is particularly acute among the smaller, often rural manufacturing companies known as the Mittelstand, which sustain Germany's exporting prowess and provide 70 percent of its private-sector jobs. According to an estimate by the German Institute for Economic Research, the skilled-worker shortage is costing the country 15 billion euros ($20 billion) a year. If the problem is left unattended, these numbers are only going to get worse: the German fertility rate has fallen to a startling 1.38 children per woman, and the existing work force is aging rapidly -- by 2020, the carmaker Daimler expects that more than half its workers will be over 50 years old.”
Every country has an interesting story to tell. Germany is no exception.

Tuesday, March 15, 2011

Manufacturing in the U.S.A.

Before the Great Recession one had the impression that the U.S. was inexorably in retreat from the manufacturing arena. Now people are applauding the fact that manufacturing seems to be leading the economy out of the doldrums. Both statements would seem to be exaggerations. The manufacturing story is more complex than either of these generalizations.

The U.S. manufacturing capability was never in the process of going away. It has continued to grow. What has gone away are manufacturing jobs. An AP article provides this graphic.

An article in The Economist provides a closer and more current view.

An SFGate article provides a concise summary of the situation in this country.
“Several trends have emerged over the decades:

“America makes things that other countries can't. Today, "’Made in USA’ is more likely to be stamped on heavy equipment or the circuits that go inside other products than the TVs, toys, clothes and other items found on store shelves.”

“U.S. companies have shifted toward high-end manufacturing as the production of low-value goods moves overseas. This has resulted in lower prices for shoppers and higher profits for companies.”

“When demand slumps, all types of manufacturing jobs are lost. Some higher-end jobs - but not all - return with good times. Workers who make goods more cheaply produced overseas suffer.”
In spite of the media hype, the U.S. still outproduces China by 40 percent. U.S. factories produced $1.7T in goods in 2009. While China focuses on production for export, the U.S. is still its own best customer.
“Thirty years ago, U.S. producers made 80 percent of what the country consumed, according to the Manufacturers Alliance/MAPI, an industry trade group. Now it's around 65 percent.”

“American factories still provide much of the processed food that Americans buy, everything from frozen fish sticks to cans of beer. And U.S. companies make a considerable share of the personal hygiene products like soap and shampoo, cleaning supplies, and prescription drugs that are sold in pharmacies. But many other consumer goods now come from overseas.”
The Great Recession has generated some changes in markets that are likely to be long term. According to The Economist:
“Beyond this cyclical bounce-back, though, a structural shift may also be under way. Makers of floorings, furniture and glass, all of which go into houses, were especially hard hit and have yet to start hiring again. But those that make things for businesses or customers overseas—computers, machinery, electronic equipment, heavy-duty trucks—are thriving. Cisco Systems and Intel Corporation notched up record sales last year. Caterpillar and John Deere, which makes diggers, bulldozers and farm equipment, saw sales leap.”
And developing countries are to be cheered not feared.
“In its Economic Report of the President last month, Barack Obama’s Council of Economic Advisers calculated that each additional percentage point of another country’s growth boosts its imports from America by three percentage points. It thus expects emerging economies, including Mexico, to account for 71% of America’s export growth from 2009 to 2014—especially in farm products, aircraft, integrated circuits and oil- and gas-field machinery.”
There are a number of factors that seem to be converging and providing hope that manufacturing in the U.S. can expand sufficiently to provide a significant number of long-term jobs.

As businesses become more efficient, time scales become shorter and product builds become more focused. Shorter build cycles, more specialty items, and rapid design changes all favor domestic production. If the price of oil remains at an elevated level, that will also shift the profitability calculus in the favor of domestic production. There is a second phase to globalization. The overseas companies that gutted some of our industries with their imported goods are now beginning to realize the advantages of building the product in the product’s market. For example, many lost automotive jobs are gradually returning, albeit in another form, via factories being built in the U.S. by our competitors.

So stay tuned! There are many pages yet to be turned in this tale.

Monday, March 14, 2011

The Cost of Hospital Inefficiency

Hospitals are facilities dominated by fixed costs. A given hospital has to be able to cover whatever costs are residual from obtaining the land, building the structure, and filling it with the required equipment. There is not much elasticity in those costs. The facility has to be staffed with doctors, nurses, technicians, and various workers. The hospital does have some leeway in staffing levels in the sense that it can, to a certain degree, adjust personnel numbers to be consistent with current business level. However, if you build a 100 bed hospital, you better have access to enough people to care for the case where all 100 beds are occupied.

So if you spend a night in the hospital, blow your nose while in your room, and discover you have been billed $25 for tissue, that should not surprise you. Hospital costs have very little to do with services rendered. Yearly costs must be covered whether there are patients or not. Since patients are the major source of revenue, they must be charged whatever it costs to meet the expenses of the facility.

One would think that given this kind of economic situation, hospitals would be very careful about being efficient and matching their facility to the demand level so they could run at high occupancy and optimize their cash flow. Perversely, healthcare economics is almost always counterintuitive. Or, in other words, things are almost always worse than one could conceive them to be.

Eugene Litvac and Maureen Bisognano have provided an article in the journal Health Affairs with the title: “More Patients, Less Payment: Increasing Hospital Efficiency in the Aftermath of Health Reform.” Their concern is that the influx of new patients expected when 30-40 million more people acquire healthcare coverage will induce an attempt to expand hospital facilities. They argue that that will not be necessary and that simple efficiency measures can easily accommodate this new level of service. They provide this chart to support their conclusion.

Many countries provide excellent healthcare with hospital occupancy rates approaching 90 percent. This is the basis for the authors’ argument.
“Why is hospital bed occupancy just 65 percent and not 100 percent? Why are hospitals frequently overcrowded if occupancy rates are so low? The source of this counterintuitive effect is the presence of periodic swings—artificial peaks and valleys—in hospital bed occupancy, caused by peaks and valleys in elective or scheduled admissions.”
They quote the result of a study of admissions.
“The study’s main finding was that the presumably controllable flow of patients scheduled to come in for elective procedures was in fact more variable from day to day and week to week than the unpredictable flow of patients being admitted as a result of emergencies.”
And what is the result of these artificial peaks and valleys?
“As bed occupancy approaches 100 percent and backups occur in hospital emergency departments, for example, ambulances may be diverted to other hospitals. Stress on hospital personnel may increase, resulting in more medical errors. In contrast, in the case of care valleys, where there are relatively few patients to be treated or housed, hospital resources are in effect wasted. The hospital plant is operating, and the hospital may be fully staffed, but these resources are not generating any revenue or providing any value for the nonexistent patients.”
At this point it is easy to conclude that hospital administrators are not among the best and the brightest, but there may be something else at work here.
“This type of bunching, or inefficient patient flow, stems from the fact that hospitals have traditionally evolved around individual medical or surgical specialties as well as the preferences of particular doctors. For example, a given hospital may derive much of its revenue from cardiothoracic surgery and therefore may be deferential to its cardiac surgeons, who may wish to perform surgery only on certain days of the week. On these peak surgical days, then, when large numbers of elective surgical patients compete for beds with emergency patients, unnecessary overcrowding may be the result.”
The authors’ brilliant suggestion is that hospitals should avoid concentrating elective surgeries on specific days and instead spread the load out. They quote the results from one hospital that discovered that by scheduling more intelligently they were able to raise their average occupancy to 90 percent and still maintain efficiency.

That conclusion is encouraging, but let’s consider the implications. The National Center for Health Statistics tells us that 31 percent of all health expenditures involve hospital care. At $2.5T per year that is $775B. If we have hospitals with an occupancy rate of 65 percent when 90 percent is an attainable goal, then we have about 25 percent more hospital beds—or hospitals if you wish—than we need. We, as patients, are being overcharged to support that excess capacity, and, since half of all costs are picked up by the government, those excess charges are contributing to state and federal deficits.

One interpretation of the hospital scheduling craziness is that the hospitals are not merely stupid, but they realize they have more capacity than the market needs and this makes them beholden to doctors who can steer business in their direction. Unfortunately, profit motives being what they are, this has motivated some to create business that can be directed to the hospitals. And a few hospitals have been known to encourage this practice.

If 40 million newly insured people enter the health system over the next few years, that will only be a 15 percent increase. As the authors point out, the hospital system can handle that increase. That is the good news. The bad news is that we will still have an overcapacity and hospitals will continue to charge us for it.
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