Wednesday, May 25, 2011

The Fastest Growing Job Category: Unpaid Interning

Intern Nation: How to Earn Nothing and Learn Little in the Brave New EconomyWhen it comes to employment, it’s a buyer’s market. If there was ever any doubt it is laid to rest in an article by Andrew Ross in the London Review of Books. He discusses a book by Ross Perlin.

Intern Nation: How to Earn Nothing and Learn Little in the Brave New Economy by Ross Perlin
Verso, 258 pp, £14.99, May 2011, ISBN 978 1 84467 686 6

Ross titled his article A Capitalist’s Dream. And what is a capitalist’s dream?—getting someone to do your work for free. He provides a number of examples from show business and the internet where people have learned how to make money from the unpaid efforts of participants. The main topic however is the growing practice of requiring inexperienced or modestly experienced people to take a temporary position as an unpaid intern as a means of gaining access to a given career path.

“The most widespread trend in the world of working for nothing, however, is the explosion of white-collar and no-collar interning. Not only is interning the fastest-growing job category, it is also fashionable, with Kanye West signed on at the Gap and Lady Gaga in line to be taught about millinery by Philip Treacy. In Intern Nation, Ross Perlin, a survivor of serial internships on three continents, describes the lengths to which graduates must go to secure an unpaid intern position (often the first of many) that might help them build a CV or get a foot in the door.”

Incredibly, there is even a market where one can bid on unpaid internships.

“An auction market has even sprung up to sell these positions to the highest bidder. A Versace internship fetched $5000 at auction, temporary blogging rights at the Huffington Post went for $13,000, and someone paid $42,500 for a one-week stint at Vogue.....At one Californian outfit, Dream Careers, 2000 internships all over the world are sold annually. You can buy an eight-week summer position for $8000 (a placement in London will set you back $9500).”

One might think that these positions are like a true apprenticeship such as exists in the crafts, but one would be disappointed.

“The educational value of these gigs, whether organised by an operation like Dream Careers or a university careers centre, is notoriously slight. The work is usually menial; it’s rare for interns to receive any structured training. The biggest beneficiary is, of course, the employer. On Perlin’s estimate, corporate America enjoys a $2 billion annual subsidy from unpaid internships. He also confirms that a large number of full-time jobs have been converted into internships, while formerly paid internships have morphed into unpaid ones. An estimated 37 per cent of internships in this country [England] are now unpaid or below the minimum wage; the figure is 50 per cent in the US.”

The growing requirement that a person pass through one of these internships is inherently discriminatory.

“Internships have always been upper-class rites of passage. But this economic burden is now obligatory for almost any family intent on launching their child into white-collar employment. For those whose families can’t support them, the only way to avoid adding to their debts is to take on a paying job too. One survey cited by Perlin suggests that three-quarters of interning students in the US have other jobs, while some are collecting food stamps and relying on Medicaid. A consequence of all this is that occupations that don’t provide a steady income are almost exclusively reserved for those from monied backgrounds.”

There are also questions about the legality of the practice.

“While many positions at non-profit organisations can be regarded as ‘volunteer’ labour, internships from which an employer derives an ‘immediate advantage’ are subject to government regulation. Greenhouse described cases of interns suing corporations for backpay, which sent America’s human resources departments scrambling for legal cover. The Department of Labor has done precious little to clarify the legal status of internships, and Perlin does a good job of explaining why everyone involved has a vested interest in maintaining the conspiracy of silence. Interns won’t lodge complaints for fear of spoiling their career prospects. College administrators save money when students who intern for course credits don’t need to be taught. As for employers, the prospect of talented young people willing to pay to work for nothing is a capitalist’s dream.”

Perlin provides some suggestions for both employers and job seekers.

“....employers should abide by an Intern Bill of Rights (included as an appendix) or adopt codes of conduct....and interns should not only refuse work not linked to training: they should also organise, as US medical residents did (their union is affiliated with the Service Employees International Union).”

Ross sees Perlin’s book as providing excellent coverage of an issue of growing importance. Society has learned how to protect waged workers from predatory tactics, but salaried positions have few such protections.

“Today, there is reasonably broad agreement on what constitutes fair labour in the waged workplace, or there are limits at least to the range of disagreement. People understand, more or less, what a sweatshop is, and also recognise that its conditions are unfair. By contrast, we have very few yardsticks for judging fairness in the salaried or freelance sectors of the new, deregulated jobs economy, where any attempt to equate work with pay seems to be increasingly irrelevant.”

Tuesday, May 24, 2011

The Neurons That Shaped Civilization: V.S. Ramachandran

The Tell-Tale Brain: A Neuroscientist's Quest for What Makes Us HumanV.S. Ramachadran provides a fascinating discussion of mirror neurons in his book The Tell-Tale Brain. The chapter which introduces them is titled: “The Neurons that Shaped Civilization.”

Ramachandran begins by trying to provide an answer to a few interesting questions. Data indicates that the human brain reached its current size about 300,000 years ago, but the emergence of the capabilities and attributes that we associate with humanity—tool making, art, and perhaps language— only began to emerge about 75,000 years ago. He asks why did it take so long, and once these capabilities began to appear, how did they develop so quickly?

One must bear in mind that genetic modification by natural selection is a very inefficient process. Pre-man had evolved by this process for millions of years. What explains a massive change in capability taking place over thousands of years? Ramachandran suggests that what happened is that the brain at some point achieved a critical level of capability to program itself. Once you are able to learn and transmit skills culturally rather than genetically, there is no physical limit on growth of capability. He assigns mirror neurons a central role in this process.

Mirror neurons were discovered fairly recently, in the 1990s, during studies of monkeys. It was observed that certain neural networks were activated when a monkey performed a given task, such as reaching for an object. That was not remarkable, but what the excited the researchers was the discovery that these same neural networks fired when the monkey observed another monkey performing the same task. The author claims he nearly jumped out of his chair when he first heard these observations being reported.

Many ramifications flow from these networks that came to be referred to as mirror neurons. The most significant is that it appears that the brain has developed an efficient mechanism for mimicking the actions of another. In fact, it appears that this tendency to mimic is so strong that a brain function has to exist to suppress it when necessary. The most straightforward benefit of this capability is that one can learn and imprint skills by observing others. This, when combined with a language capability, provides cultural inheritance that can be passed on to, and be amplified by, a succeeding generation.

Ramachandran states that these mirror neurons actually have a higher order function than just mimicry. In observing the actions of another we are actually running a simulation of what the other person might be intending to do. The brain sorts through the various options and delivers to our consciousness what it considers the most likely outcome. This process is continually reviewed and updated as more data comes in. If you add to the process the ability to ascertain emotional content in the facial expression and body language of another via the same learning process, then you have the makings of a modern social human.

The author surmises that these mirror neurons also played a role in the development of language. The ability to make specific sounds for specific reasons is common to many animals and probably developed genetically in man as well. This capability for mimicry would certainly have been useful in developing more complex means of communicating that involved sign language or manipulation of the tongue and lips to perform more complex and varied sounds.

Humans and monkeys both have mirror neurons. Why are our capabilities so much greater? The author touches on this by pointing out that humans have combined their mirror neurons with more complex functional capabilities in our brains. There are limits to what a monkey can learn by observation.

The author also points out that the extremely long learning period that human children experience is necessary to adequately program the brain to function as it needs to function. In fact, as the modern world gets more complex, human intellectual adolescence is getting stretched to later years. Some parents are beginning to suspect it might never end. Watching an infant slowly acquire capabilities is a wondrous experience, but probably few parents think of their child as a computer being programmed.

Ramachandran has subtitled his book “A Neuroscientist’s Quest for what Makes Us Human.” A more appropriate title might have been “A Neuroscientist’s Quest to Explain Everything.” There are few things the author does not address. Fortunately he is quite consistent in telling the reader when he is speculating and when he is talking solid science. It makes a great read.

Sunday, May 22, 2011

World War I: The Guns of August by Barbara W. Tuchman

The Guns of August
To End All Wars: A Story of Loyalty and Rebellion, 1914-1918
The post describing Hitchen’s review of Hochschild’s book To End All Wars: A Story of Loyalty and Rebellion, 1914-1918, reminds one that history has a fascinating tale to tell. It resurrected memories of excellent books on the subject of war in general and World War I in particular.

Barbara W. Tuchman’s The Guns of August was perhaps the only history book I have encountered that was so exciting that I literally could not put it down. She summarizes the lead up to hostilities and the first month of the war concluding with the battle of the Marne, or what the French appropriately referred to as the “Miracle of the Marne.” I read it over forty years ago, but still recall the way she conveyed the “fog of war,” the generals—vain, timid, incompetent, foolhardy, patriotic—all trying to figure out what was actually happening. The climax comes when the German assault into France comes within 30 miles of Paris and the French have no means to stop them. The German general decides the most important military target is the destruction of what he believes is a retreating French army. He swerves away from Paris in pursuit and in so doing exposes his flank and allows Paris a few extra days to reform the French forces with fresh troops and supplies before attacking. Tuchman’s images of Parisian taxis and their drivers being used to funnel troops to the front, just a few miles away, are memorable.

She finishes with this passage:

“The Battle of the Marne was one of the decisive battles of the world not because it determined that Germany would ultimately lose or the Allies ultimately win the war but that it determined that the war would go on. There was no looking back, Joffre told the soldiers on the eve. Afterward there was no turning back. The nations were caught in a trap, a trap made during the first thirty days out of battles that failed to be decisive, a trap from which there was, and has been, no exit.”

Tuchman’s book received the Pulitzer Prize in 1963, at the height of the Cold War. She was making a similar point to the one Hitchens made: if the war had ended within the few weeks everyone anticipated, a peace would have been drawn up, some land and money probably exchanged, and life would have resumed. The stalemate and the years of mutual slaughter were so traumatic for all involved that a simple end would never be possible. The ultimate victors would demand compensation for their suffering, while the losers would resent the humiliation of being the vanquished and plot revenge. World War I created the conditions for World War II, which created the Cold War. Today, Tuchman would point out, as did Hitchens, that we are still suffering the fallout from the demise of the Ottoman Empire during this period.

The story of the first thirty days of the war make a great tale with brave soldiers being pushed to their limits by exhaustion and fear, but continuing to fight, driven by their love of country. The remainder of the war provides few such moments. The generals, trained to fight the last war, were given the weapons of the next war. They were very efficient at killing the enemy if the enemy was dumb enough to show itself. The strategy devolved to incredibly intense artillery barrages in hopes of killing or driving insane as many as possible, followed by a charge against fortifications over an open field. The slaughter that ensued was incomprehensible. Generals assumed that their tactics would ensure that the enemy would suffer greater casualties than their own troops. It was almost as if the more troops they lost, the greater the victory.

Tuchman provides a footnote to her story that puts these enormous casualties in perspective.

“In the chapel of St. Cyr (before it was destroyed during World War II) the memorial tablet to the dead of the Great War bore only a single entry for ‘the Class of 1914.’ The mortality rate is further illustrated by the experience of Andre Varagnac....who came of military age in 1914 but was not mobilized in August owing to illness, and found himself, out of the twenty-seven boys in his lycĂ©e class, the only one alive by Christmas.”

France suffered military casualties (killed and wounded) equal to 14.3% of the population. If one assumes that these were all military-aged males, this could mean that a generation of young men suffered casualties at a rate five or six times higher. These are astonishing numbers. It is no wonder that the war could not end well.

During World War II the US military suffered 417,000 deaths, about 0.32% of its population. The equivalent numbers for France in World War I are 1,397,000, about 4.3% of the population. In spite of the US fighting in multiple theaters, the loss of life was relatively small compared to the earlier war. The nature of war fighting had evolved and caused nations to use their soldiers more wisely. Unfortunately, that did not mean a lessening in ferocity because civilians had become military targets also. This yielded death rates for entire populations that were incredible—but that is a story for another day.

Saturday, May 21, 2011

World War One as Prelude: Christopher Hitchens

To End All Wars: A Story of Loyalty and Rebellion, 1914-1918Christopher Hitchens provides us with a lively and insightful book review titled The Pacifists and the Trenches. The subject is the book To End All Wars: A Story of Loyalty and Rebellion, 1914-1918 by Adam Hochschild.

Hitchens is effusive in his praise for the author who he describes as a historian “from below.” By this he means that Hochschild focuses on the people who had to suffer the consequences of the war rather than the rulers and statesmen responsible for starting it.

“No single narrative can do justice to an inferno whose victims still remain uncounted. Hochschild tries to encompass the global scope of the disaster, and to keep us updated with accounts of what was occurring at a given time in Russia and the United States, but his main setting is England and his chief concern the Western Front. In this hecatomb along the minor rivers of Flanders and Picardy, the British people lost the cream of their working class and the flower of their aristocracy.”

It was a time when vast social changes were called for across Europe, but the people who could have pushed for this change were consumed by the conflict. Some tried in vain to stop the inexorable move towards war.

“....the war represented the human sacrifice of those miners, railwaymen and engineers whose skills should have been used instead to depose the aristocracy and build a new society. For them, it was a matter of common cause among British, German and Russian workers, and for this principle they risked harsh imprisonment, punitive conscription and even death.”

“However, once the howitzers had started their bellowing, proletarian internationalism had a marked tendency to evaporate. Only Lenin and a handful of other irreducible revolutionaries bided their time, waiting for the war to devour those monarchs who had been foolish enough to start it.”

The mass slaughter that occurred may no longer be familiar to younger generations whose focus has moved on, but this butchery was only a hint of what was to come.

“What this meant in cold terms was the destruction of whole regiments, often comprising (as in the cases of Newfoundland and Ulster) entire communities back home who had volunteered as a body and stayed together in arms. They vanished, in clouds of poison gas, hails of steel splinters and great lakes of sucking mud. Or lay in lines, reminding all observers of mown-down corn, along the barbed wire and machine-gun emplacements against which they had been thrown. Like me, Hochschild has visited the mass graves and their markers, which still lie along the fields of northern France and Belgium, and been overwhelmed by what Wilfred Owen starkly and simply called ‘the pity of War’.”

For those interested in the period and its history, Hitchens provides Hochschild’s book with an enthusiastic recommendation.

“This is a book to make one feel deeply and painfully, and also to think hard.”

What I found particularly striking was Hitchen’s observations on Woodrow Wilson and the US role in the war. He suggests it was the American intervention that foreclosed any hope for a conclusion that could lead to stabilization rather than inevitable further conflict.

“We read these stirring yet wrenching accounts, of soldiers setting off to battle accompanied by cheers, and shudder because we know what they do not. We know what is coming, in other words. And coming not only to them. What is really coming, stepping jackbooted over the poisoned ruins of civilized Europe, is the pornographic figure of the Nazi. Again, Hochschild is an acute register. He has read the relevant passages of “Mein Kampf,” in which a gassed and wounded Austrian corporal began to incubate the idea of a ghastly revenge. He notes the increasing anti-Semitism of decaying wartime imperial Germany, with its vile rumors of Jewish cowardice and machination. And he approaches a truly arresting realization: Nazism can perhaps be avoided, but only on condition that German militarism is not too heavily defeated on the battlefield.”

“This highly unsettling reflection is important above all for American readers. If General Pershing’s fresh and plucky troops had not reached the scene in the closing stages of the bloodbath, universal exhaustion would almost certainly have compelled an earlier armistice, on less savage terms. Without President Wilson’s intervention, the incensed and traumatized French would never have been able to impose terms of humiliation on Germany; the very terms that Hitler was to reverse, by such relentless means, a matter of two decades later. In this light, the great American socialist Eugene V. Debs, who publicly opposed the war and was kept in prison by a vindictive Wilson until long after its ending, looks like a prescient hero. Indeed, so do many of the antiwar militants to whose often-buried record Hochschild has done honor.”

As always, Hitchens provides us with something interesting and provocative.

It is good to see that Hitchens is still at it. Hopefully we will have many more years of him to contend with and to enjoy.

Thursday, May 19, 2011

Will the South Korean Trade Agreement Be Better Than NAFTA?

The Economic Policy Institute has published a paper authored by Robert E. Scott titled Heading South: U.S.-Mexico trade and job displacement after NAFTA. This publication provides a detailed look at the expectations for NAFTA and the results that ensued.

It would appear that neither country benefited from this agreement according to this analysis. The US had a small trade surplus of $1.6 billion with Mexico in 1993 the year before the agreement took effect. That surplus immediately became a deficit that in 2010 reached $97.2 billion. Scott claims that this deficit represents 682,900 displaced US jobs. Much of Scott’s article involves detailing these lost jobs, by industry, by state, even by congressional district.

Here the focus will be on the nature of NAFTA and where it went wrong, and in the evaluation of what the trade agreement with South Korea (KORUS FTA) might hold in store. Scott introduces this issue right at the beginning of his article.

“Growing trade deficits almost always result in growing trade-related job displacement. Like NAFTA, the KORUS FTA will likely result in growing trade deficits and hence U.S. job displacement, not economy-wide job growth.”

The original logic behind NAFTA was to lower tariff barriers for entry of US goods to Mexico. Since barriers in the US for goods from Mexico were already lower, one might assume that the US would come out ahead in this situation. So what happened?

Scott points out that both US and international firms immediately recognized the opportunity to profit from low-cost entry into the US via Mexico by moving their factories to Mexico. There they would have the advantage of both low tariffs and low wages. One’s first reaction to this might be: “How could they be so stupid that they didn’t anticipate that?”

Scott points out some aspects of the NAFTA treaty that are not often discussed but turned out to be very important.

“In addition to shifting trade balances, NAFTA altered the landscape for Mexican and Canadian workers. For example, prior to the implementation of NAFTA, Mexico had relatively high tariffs on industrial goods and agricultural commodities. It also maintained a “developmental state” which supported domestic development through an extensive set of regulatory policies that included local content regulations, requirements that foreign firms employ local managers, and other restrictions on the operations of multinational companies. Mexico also had a wide social safety net that included a public health insurance system and a system of rural property rights that supported subsistence farming and prevented agribusinesses from converting small plots to ‘industrial farms’.”

“NAFTA did much more than eliminate tariffs between both countries: It required Mexico (and Canada) to dismantle key components of their developmental states and also exerted great pressure on Mexico to pare back or privatize large parts of its safety net, as well as the national banking system. NAFTA included rules on trade in goods, technical barriers to trade, government procurement, investment, services, intellectual property rights, and administrative provisions, which included a “dispute settlement” process in the chapter on “Investment” (NAFTA Secretariat 2011, Chapter 11) that, for the first time, allowed corporations to sue governments for “takings” or the loss of potential profits as a result of new government regulations.”

In other words, conservative economic doctrine was being imposed on all three countries. And who benefited?

“From the standpoint of the business community, NAFTA’s most important achievement was that it made Mexico a much safer and more attractive location to invest and outsource U.S. manufacturing production. NAFTA’s investment provisions created new and improved safeguards for foreign investors, including new dispute settlement tribunals providing a mechanism for settling disputes with foreign governments outside of the Mexican legal system. By eliminating Mexico’s developmental state and use of local content rules, and other demands and conditions on foreign investors, the trade agreement greatly reduced the cost of doing business in Mexico, and increased the security of those investments.”

Those of you who are interested in conspiracy theories will certainly find something to ponder here. One could argue that those who constructed and voted for this trade agreement were either stupid, or in league with big business to make a few people richer and many, many people poorer.

NAFTA is history and we should learn from history. Scott implies that the lesson to be learned is that we should never accept an agreement that increases our balance of trade deficit because that will cost the US jobs. He then goes further to imply that KORUS FTA will have a similar effect. But is that correct?

Scott recognizes that Mexico and South Korea are two very different situations. He argues that our trade imbalance with South Korea comes mostly from the electronics and auto industries, and that the terms of the agreement are likely to be more advantageous for the Koreans. That is probably correct. The electronics industry is not likely to be affected since we gave up competition long ago. Interestingly, the head of the UAW voiced support for the agreement. By making it more profitable to manufacture autos in the US, it may be that the UAW thinks the agreement might generate more assembly jobs—people the UAW still hopes to represent some day.

If one examines the PR that comes out of the White House, the auto industry seems to be almost an afterthought. While there are some advantages gained by the US auto industry in gaining access to South Korea, the focus seems to be elsewhere.

“Under the agreement, U.S. exports of aerospace, automotive, consumer goods, electrical/electronic goods, metals, scientific equipment, and shipping and transportation equipment will gain duty-free access to the Korean market. Beyond tariffs, the agreement establishes strong new rules on how Korea will develop regulations applied to U.S. exports, and contains state-of-the-art protections on intellectual property rights (IPRs). Strong protection for intellectual property is critically important for U.S. industry’s knowledge-based manufactured goods.”

“Korea has agreed to match the high level of openness provided by the United States in a host of services sectors, ranging from energy and environmental services to financial services and distribution. The agreement’s provisions on cross-border services, telecommunications, and electronic commerce offer particular advantages to the information and communications technology service sector – an area where the United States excels – benefitting small- and medium-sized American enterprises without the resources to establish an office in every market they serve. The agreement also discourages Korea from setting technology standards or other requirements in a way that would give domestic producers an advantage over American service suppliers.”

“The United States is already Korea’s top supplier of agriculture products, including of a broad variety of farm products such as almonds, fresh cherries, hides and skins and corn. The U.S.-Korea trade agreement creates new opportunities for U.S. farmers, ranchers and food processors seeking to export to Korea’s 49 million consumers, giving American agricultural producers more market access in two ways – by getting rid of tariffs charged when U.S. exports come into Korea, and by laying out a framework to tackle other barriers to U.S. exports –even those that might arise in the future.”

“The financial services chapter in the U.S.-Korea agreement provides significantly improved market access into Korea for American financial services firms – supplementing and modifying the agreement’s rules on investment and services to allow American companies to provide financial services in the Korean market.”

“The U.S.-Korea agreement expands U.S. firms’ access to the $100 billion Korean government procurement market, creating new opportunities for exporters, and ensuring that U.S. firms will get to bid on contracts on a level playing field with Korean firms. At the same time, the agreement’s government procurement rules ensure that certain American business sectors – such as small businesses or textile companies bidding on Department of Defense procurement – do not face foreign competition for key government contracts here at home.”

While we have given up some things, it may be that we will actually come out ahead. This appears to be a great improvement over NAFTA. I will hope for the best and cast my virtual vote in favor of the agreement.

Wednesday, May 18, 2011

Medicare: Putting “Going Broke” in Context

Money-Driven Medicine: The Real Reason Health Care Costs So Much
Maggie Maher provides a blog called Health Beat where she posts interesting information related to the world of healthcare. It is a great source of information. For those interested in the subject of healthcare costs, I also recommend her book: Money-Driven Medicine.

She provides us with some insight into Medicare and the report just issued by the Trustees of the system. This report was widely publicized with headlines proclaiming that Medicare will “go broke” in 2024. Maher provides some interesting details from that report and some advice on how to interpret it.

“What the report actually says is that in 2024, money flowing into the Medicare Hospital Insurance (HI) Trust will “be sufficient to pay [just] 90 percent of the trust fund’s costs.” In other words the money flowing into the Medicare fund that covers hospital stays will be 10 percent less than money flowing out.”

“Looking ahead another sixty years, the Trustees project that the Trust fund’s ability to pay all of its bills with revenues dedicated to HI is projected “to decline slowly to 75 percent in 2045, and then to rise slowly, reaching 88 percent in 2085.” In other words, in 2085 Medicare still will be able to cover 88 percent of hospital costs--which means that, in theory, the other 12 percent would come out of general revenues. But that is not likely to happen.”

If you had discovered that you were borrowing more against your credit cards than you could afford to pay off each month, would you announce to your associates that you had “gone broke?” Not likely. You would either try to increase your income (difficult) or lower your expenses (easier). That is the situation Medicare faces.

We have written many times about the opportunities to cut waste and fraud from healthcare costs. The recently passed Patient Protection and Affordable Care Act (ACA) attempts to address many of these issues.

“....the Affordable Care Act (ACA) already has helped keep the Trust Fund in the black. Before Congress passed the ACA, Medicare’s trustees had predicted that the Health Insurance Fund would begin running out of money in 2016 — just five years from now. After President Obama signed the legislation in March of 2010, the Trustees announced that thanks to cost savings and new money raised by the Affordable Care Act, the HI fund wouldn’t begin to run short until 2029.”

“Today Medicare's Trustees reported that a ‘slower than assumed economic recovery’ has taken a toll on revenues, and they moved the turning point up to 2024. This still means that reform legislation has given the Fund an extra eight years.”

“Today the Trustees affirmed that ‘projected Medicare costs over 75 years are about 25 percent lower because of provisions in the Patient Protection and Affordable Care Act.’”

These estimates are based on quantifiable changes that have been made. The problem with cost projections is that there are so many opportunities that cannot be quantified as of yet.

“Just how much will the Affordable Care Act save? Last year, the trustees noted that the ACA ‘contains roughly 165 provisions affecting the Medicare program by reducing costs, increasing revenues, improving certain benefits, combating fraud and abuse, and initiating a major program of research and development for alternative provider payment mechanisms, health care delivery systems, and other changes intended to improve the quality of health care and/or reduce its costs to Medicare.’”

It will take a while to see how all of these approaches pan out—and we have the time. Note that giving Medicare the right to negotiate costs with drug companies is not even included in that list. Meanwhile, there will be other opportunities to save healthcare costs not directly associated with Medicare.

Medicare is not in as bad a shape as some would like you to believe. What is in bad shape is our ability to create intelligence-driven legislation in our House and Senate. If drastic changes are to be made, that is where we should start.

Tuesday, May 17, 2011

Drug Companies: Accountability at Last?

It seems the US government is finally beginning to take significant action against drug companies that break the rules when marketing and distributing their products. In so doing they have irritated The Economist magazine and moved it to issue a caustic critique.

Let us first put matters in context. Drug companies have a unique role in society. Their products have the potential to do both tremendous good and tremendous harm. All drugs generate side effects and some individuals will suffer from having taken them. Who gets to decide when the benefits outweigh the harm? Society has decided it is more appropriate to have the government make that decision rather than the profit-driven company. When a drug company purposely ignores government regulations in order to sell more of their product they are acting as responsibly as a drunk driver. The difference is that when a drunk driver breaks the rules and kills somebody he/she could end up in jail. When a drug company breaks the rules and kills somebody they only have to give up a portion of their profit—assuming they get caught.

The Economist seems to view any attempt to hold management responsible for the actions of the company as a form of persecution. Their article tells the tale of Forest Laboratories and its CEO Howard Solomon.

Forest got caught breaking the rules and was fined.

“LAST year Howard Solomon, chief executive of Forest Laboratories, declared the end of an ordeal. After a long battle, the drug company agreed to settle charges of illegal marketing and distribution.”

In an encouraging move, the government decided to take additional action.

“But last month Forest got a surprise: a notice from America’s health department saying that it planned to bar Mr Solomon from doing business with federal health programmes such as Medicare. Unless he resigns, Forest would be barred too. As The Economist went to press Mr Solomon was planning a vigorous defence. Forest is burning with outrage. Other executives are shuddering.”

The article tries to claim that businesses are too complicated to allow guilt to be assessed to individuals. It subtitles the article: “The government seeks to sack an innocent boss.” They provide no evidence or argument why he should be assumed innocent other than that he is “only” the boss.

“For years government officials have struggled with a question: if a company does something wrong, who should be held accountable? This concern has become more urgent since the financial crisis, since so many financial firms did so much wrong in such complicated ways. But the question is particularly thorny for drug companies, which are often big, decentralised and vulnerable to lawsuits. Companies are used to being penalised—in 2009 the Justice Department wrung $3.7 billion in settlements from Eli Lilly and Pfizer for marketing drugs in improper ways. But the government is increasingly trying to punish individuals for the actions of their firms. It is a worrying shift.”

Rather than hiding behind the specious argument of complexity, it would seem that the guilt of the CEO should be obvious. A company is about to launch a new product in which they may have invested billions of dollars. Is it too complicated to have a few of their many lawyers review the marketing plan to see that it is consistent with regulations? Is it too complicated for a CEO to demand that all new products face a review of the intended procedures before they are released? That would cost almost nothing and take little time. Consider how much time, money, and effort go into planning the marketing campaign. When drug companies admit to $3.7 billion in guilt, their CEOs are either incompetent or guilty. My guess is that few would win an incompetence defense in front of a jury.

There is precedent for finding executives guilty.

“In 2007 prosecutors won guilty pleas from three serving and former executives of Purdue Pharma, a drug firm, over the misbranding of OxyContin, a painkiller. The men pleaded guilty to misdemeanour charges, though they said they were unaware of the misconduct that occurred on their watch.”

And the government is continuing to look for ways to respond in an effective manner.

“The Office of Inspector General (OIG) has long barred people convicted of certain offences from doing business with Medicare and Medicaid, along with doctors and nurses who lose their licences. But in October the OIG announced that it would increasingly bar executives in charge of firms that have been convicted of wrongdoing....”

The article tacitly admits that corporate misconduct takes place, yet it chooses to leave us with this curious warning.

“Mr Solomon’s punishment is intended to deter corporate misconduct. It may simply deter clever people from becoming drug executives.”

Perhaps putting some of these “clever” executives in the slammer for a few years would make room for honest and competent people to run these companies.

Monday, May 16, 2011

Europe and “Hard Keynesianism”

The financial troubles of Greece, Ireland, and now Portugal have been well publicized. Besides providing funds to bail these countries out over the short term, other members of the EU have imposed severe cuts in government spending. The philosophy was to placate debt holders and instill confidence that these governments were on a sound fiscal path. The debt holders were not convinced. They were smart enough to know that government austerity in a time of recession is never a good idea. They also seem to fear for the sustainability of the governments themselves under the political pressure the austerity has generated. The result has been low economic growth, increasing unemployment and increasing costs for new debt.

Henry Farrell and John Quiggen have written an article for Foreign Affairs titled How to Save the Euro—and the EU. They have included the subtitle: Reading Keynes in Brussels. These authors argue that the EU, driven by Germany and, to a lesser extent, France, is imposing an economic regime on itself that can only lead to disaster.

“But as many economists have pointed out, these measures are hindering growth without satisfying bondholders that their money is safe; bondholders worry that these measures are not politically sustainable. In fact, they are likely to undermine Europe's political union.”

“Nevertheless, Germany has been pressing European countries to institutionalize more stringent cuts in spending. In February, it, along with France, proposed that members of the eurozone introduce "debt brakes," inflexible limits on deficit spending. Germany had already incorporated such a cap into its own constitution, one that severely restricts any government deficit spending, including the kind that might benefit the country's long-term growth. In early March, the other 16 eurozone states agreed to introduce such debt brakes or some equivalent into their domestic laws and to make them as durable and binding as possible, for example, by incorporating them into their national constitutions.”

The authors believe these “debt brakes” are so stringent that the various countries will be unable to spend sufficiently in a downturn to counter its effects. The result will be what Greece faces. The only way to control debt with declining growth is by cutting back on wages and services. In other words, the governments are asking their voters to suffer the consequences. The authors point out that, historically, that has never provided a path towards political stability.

Instead, they claim that the proper path is not to eschew Keynesian economics but to embrace it in its true form—“hard Keynesianism.”

“Contrary to the beliefs of nearly all anti-Keynesians -- and, regrettably, some Keynesians, too -- Keynesianism demands more, not less, fiscal rectitude in normal times than does the orthodox theory of balanced budgets that underpins the EU. John Maynard Keynes argued that surpluses should be accumulated during good years so that they could be spent to stimulate demand during bad ones. This lesson was well understood during the golden age of Keynesian social democracy, after World War II, when, aided by moderate inflation, the governments of the countries in the Organization for Economic Cooperation and Development greatly reduced their ratios of public debt to GDP.”

While it is a good idea to discourage deficit spending, it is foolish to eliminate it as a part of fiscal policy when there is a compelling need to supplement demand. The authors contend that nations are weak willed and will squander riches and run small deficits even in the best of times. The appropriate legislation should focus on deriving enforceable rules that would require nations to save resources in the good times to pay down debt or to use to stimulate the economy when necessary. This would not be a simple or easily attained goal.

“Resorting to hard Keynesianism to deal with the euro crisis would require making far-reaching changes to the rules and practices of the EU's economic and monetary union. It would mean both toughening the requirements of the Stability and Growth Pact, which governs the euro, and strengthening the enforcement of these rules. As they stand, the Stability and Growth Pact's bylaws require the eurozone states to maintain budget deficits under three percent of GDP and debt-to-GDP ratios under 60 percent. The system does not provide enough flexibility during downturns: even German politicians ignored these requirements a few years ago, when Germany was suffering from a recession -- much as they prefer not to remember this today.”

“To be more effective, the system needs to be stricter. The Stability and Growth Pact should be strengthened so that it requires countries to put aside surpluses during auspicious years. Since governments are persistently tempted to squander surpluses, a new supervisory institution should be introduced at the EU level. It should be granted access to detailed budget-planning and other economic information from the eurozone states and should be empowered to sanction misbehaving states.”

This issue appears to be one component of a perfect economic storm that must push the EU to greater integration if it is to continue to function.

The authors finish their argument with this warning.

“By concentrating on its economic problems but ignoring their political consequences, the EU is setting itself up for failure. The case for austerity does not make sense. And if the EU fails to deal with the political fallout of its own institutional weaknesses, it is going to collapse. No political body can force voters to repeatedly shoulder the costs of adjustment on their own and expect to remain legitimate....Hard Keynesianism offers a means to combine fiscal discipline with flexibility in order to cushion the political costs of adjustment in times of economic stress. EU leaders must institute it in a hurry.”
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