Monday, February 28, 2011

Putting Healthcare Costs in Perspective

The burden that our bloated and inefficient healthcare system puts on us has been a frequent topic here. Jamelle Bouie on The American Prospect found yet another way to point out how much it is hurting us. Medicaid is a program of last resort for the poor and the elderly. It is a shared program between the states and the federal government, with the states picking up about 43% of the cost on average. Medicaid costs have increased and tax revenue has decreased in the past few years putting a tremendous strain on state budgets. Bouie provides us with this chart to indicate how much of each state’s budget has to be directed towards Medicaid.

He points out that that the initial stimulus plan would have better served the states and the population by having the federal government pick up the entire cost of Medicaid for the duration of the fiscal crisis. The states are running low on funds and Medicaid is too big a target to ignore. The states are considering cutting people from the Medicaid rolls as a means of saving money.

Bouie’s note is a reminder that fixing the healthcare situation is the most important economic and social issue on our agenda. To put this issue more clearly in context, consider the amount of money that is being spent on healthcare in the U.S. This data is from the Centers for Medicare and Medicaid Services.

It is estimated that roughly 50% of all healthcare expenses are covered by government sources. This means excessive healthcare costs translate into excessive burdens on the taxpayer. This chart indicates how big a fraction of federal expenditures will have to be devoted to keeping this system afloat.

Just so your concern can be properly seasoned with a little outrage, here is a chart which shows how much of the GDP is spent on healthcare in other countries.

We spend about half again as much of our national commerce on healthcare as France and endure much worse healthcare outcomes. One way to look at this data is to conclude that at least a third of the $2.7 trillion we are projected to spend on healthcare in 2011 will be wasted money. There are a lot of things that could be accomplished with $900 billion.

Sunday, February 27, 2011

Nurses Are Needed. Where Will They Come From?

We have encountered a number of discussions of changes needed to provide better and less expensive healthcare. Inevitably the role of nurses comes up. There are compelling arguments for giving nurses more input and more responsibility in all aspects of healthcare.

The Institute of Medicine (IOM) recently released a study titled: The Future of Nursing: Leading Change, Advancing Health. The report summary included this statement.
“With more than 3 million members, the nursing profession is the largest segment of the nation’s health care workforce. Working on the front lines of patient care, nurses can play a vital role in helping realize the objectives set forth in the 2010 Affordable Care Act, legislation that represents the broadest health care overhaul since the 1965 creation of the Medicare and Medicaid programs. A number of barriers prevent nurses from being able to respond effectively to rapidly changing health care settings and an evolving health care system. These barriers need to be overcome to ensure that nurses are well- positioned to lead change and advance health.”
The report indicated the following as its four key messages.
“Nurses should practice to the full extent of their education and training.”

“Nurses should achieve higher levels of education and training through an improved education system that promotes seamless academic progression.”

“Nurses should be full partners, with physicians and other health care professionals, in redesigning health care in the United States.”

“Effective workforce planning and policy making require better data collection and information infrastructure.”
Better health outcomes can be produced by moving away from a doctor-dominated office-visit mode where patients are left to their own devices between 5 minute visits with a physician, to one in which patients are actually monitored to ensure that they are following the recommended treatments and lifestyle changes. This type of approach has been proven to provide better results at lower costs. It involves incorporating larger numbers healthcare workers who do not command the revenue demanded by doctors. Nurses will play a dominant role. This is the type of approach that is talked about in the context of the Accountable Care Organizations the recent healthcare law has encouraged.

These topics were discussed in the previous posts: Doctors Versus Nurses: Let’s Root for the Nurses, and Medical “Hot Spots” and the Future of Healthcare.

Having arrived at a significant level of enthusiasm for these anticipated changes in the way healthcare is delivered, it was disconcerting, to say the least, to discover that we may not have the capability to produce nurses in the number required. A note found on Health leaders Media announced:
“Enrollment in entry level baccalaureate nursing programs increased 3.5% in 2009, but nearly 40,000 qualified applicants were turned away, according to preliminary data released today by the American Association of Colleges of Nursing AACN).”
The best source of information on nursing as a career can be found at the Bureau of Labor Statistics (BLS). There are about 3.1 million registered nurses in the nation, of which 2.6 million are currently employed as nurses. BLS projected the need for the number of employed nurses to increase from 2.6 million to 3.2 million in the ten years between 2008 and 2018. That means that about 60,000 new nurses have to be added each year just to account for job growth. Also consider that there will be attrition. If one assumes a uniform age distribution and a 40 year career for nurses, the average yearly attrition rate will be about 65,000 per year. The combined effect is a need to produce, on the average, 125,000 nurses per year—and this is in the 2008 concept of healthcare.

How many nurses are we producing each year? That is a number that is difficult to find. Most nurses are produced in the college and university systems, either with a four year BSN degree or a roughly three year ADN certificate provided mostly by community colleges. Both graduates are required to take the same test to be certified as a registered nurse (RN). The best numbers I have been able to find indicate about 22,000 graduates are coming out of the BSN path and an estimate of about 30,000 from the ADN path—about 52,000 total. There is a quote on the AACN website recognizing a need to increase this.
“....officials state that to meet the projected growth in demand for RN services, the U.S. must graduate approximately 90 percent more nurses from US nursing programs.”
This would indicate a need for about 100,000 graduates per year, and this would be consistent with my rough estimate. According to AACN:
“U.S. nursing schools turned away....qualified 2009 due to insufficient number of faculty, clinical sites, classroom space, clinical preceptors, and budget constraints.”
Those all sound like things that could be solved by a long-term increase in funding.

The point is clear: we need to produce twice as many nurses as we are now. We have the needed additional candidates and we are throwing them away. Who knows how many applicants would apply if it was known that slots were available. And luring them away from other countries where they are also needed is not an acceptable solution.

One hears many people worrying about how we are going to find enough doctors to treat the millions of people who will soon have healthcare coverage. I don’t recall any national outcry about a shortage of nurses. I am not worried about doctors. They are as much a part of the problem as they are a part of the solution. It’s time to start worrying more about nurses and nursing schools.

Saturday, February 26, 2011

Income Inequality and Healthcare Costs

Two of the most talked about topics today are the cost of healthcare and growing income inequality. An article in the McKinsey Quarterly reminds us that the two issues are tightly coupled.

“The top-income category (earning on average $210,100 annually) has enjoyed rising incomes and growing employer-paid health care benefits, which have made their out-of-pocket spending on health care a relatively small and affordable portion of total spending. The higher-middle-income category (earning an average of $84,800 annually) and the lower-middle-income group (earning on average $41,500), have also seen increasing benefits and incomes—but at a much slower rate, making the uncovered portion of their health care costs ever-more expensive. In the bottom-income category (earning an average of $14,800 a year), incomes have been stagnant, and their employers are less likely to pay for their health insurance. This group is finding any health care difficult, if not impossible, to afford.”
Most families continue to receive whatever medical coverage they have through an employer. Higher income groups are likely to be provided plans with more generous coverage than low income groups, but the dollar equivalent of the benefit provided is smaller in spread than the income difference. It is not unreasonable to assume that overall healthcare costs for comparable families would be similar regardless of income. This means that healthcare costs for a low income family are a much greater share of resources. This imbalance is exacerbated by the fact that few low income families have any employer provided coverage.

For the highest income families, the cost of routine medical care is an inconvenience, for the lowest income families it is an existential threat. State and federal funds are often available to assist the poorest families. The lower middle class is often at most risk because they have the combination of poor coverage, low income, and ineligibility for government aide.

Our absurd healthcare system puts enormous financial burdens on lower income families, effectively decreasing their income even further. In most discussions of income inequality this type of income decrement is not considered. It should be.

Friday, February 25, 2011

Medicare Fraud and the Deficit

It seems that every few weeks there is an announcement of arrests in a Medicare fraud scheme. The amounts of money involved are staggering. There is more money being wasted in Medicare fraud than in Wall Street bonuses, just to put things in perspective. Recently I came across two stories that highlight just how endemic the problem has become.

There was a famous comparison between Medicare spending rates in McAllen Texas and other nearby cities which indicated McAllen seniors were costing much more than nearby counterparts. This was interpreted as McAllen having an inefficient or profit–hungry medical establishment. A subsequent study looked at medical spending patterns for non-seniors and discovered that this discrepancy disappeared when a private insurance company was monitoring the spending. It would appear that the cultural difference was not in healthcare but probably in criminal activity. As we shall see, Medicare fraud has been way to easy to carry off.

A second report is so bizarre as to leave few legal interpretations.
“In a curious case of Medicare billing, two California hospitals are reporting highly unusual rates of a Third World nutritional disorder.”

“The condition, called Kwashiorkor, is familiar to anyone who has seen photos of malnourished children living in impoverished regions of developing countries. Kwashiorkor is a Ghanaian word that means weaning sickness. Caused by insufficient protein in the diet, its chief physical manifestations are a distended belly, altered hair color and texture, and muscle wasting."

"Kwashiorkor is rare in developed countries, to say the least. Yet a California Watch article appearing in SFGate reports that "in 2009, Shasta Regional Medical Center in Redding reported that 16.1 percent of its Medicare patients 65 and older suffered from kwashiorkor, according to a California Watch analysis of state health data. That's about 70 times the state average of 0.23 percent."

“Is there an alarmingly high incidence of malnutrition among Medicare recipients in California health facilities operated by Prime Healthcare Services? Or is something else going on? Prime's director of reimbursement management told California Watch that, ‘Prime Healthcare hospitals cannot, have not, and will not engage in 'upcoding' or Medicare fraud’."
CBS provided an article based on a 60 Minutes investigation that illustrates how simple and how pervasive Medicare fraud is.
“According to the FBI, all you have to do to get into this business is rent a cheap storefront office, find or create a front man to get an occupational license, bribe a doctor or forge a prescription pad, and obtain the names and ID numbers of legitimate Medicare patients you can bill the phony charges to.”

“Once the crooked companies get hold of the patient lists, usually stolen from doctors' offices or hospitals, they begin running up all sorts of outlandish charges and submit them to Medicare for payment, knowing full well that the agency is required by law to pay the claims within 15 to 30 days, and that it has only enough auditors to check a tiny fraction of the charges to see if they are legitimate.”
A one or two person operation can run up millions of dollars in phony claims, close up shop in a few months, then set up a new crooked operation and repeat the process. Consider the amount of money that can be scammed from the government/tax payers when organized crime gets involved. The article suggests that Medicare fraud is now a bigger industry than the drug trade in South Florida. One of the criminals who was actually convicted, estimated that 95% of all medical supply companies in the region are likely to be illegally dipping into the Medicare till.

Medicare doled out about $430B last year while handling a billion transactions. There were three field investigators in South Florida to investigate thousands of suspicious operations.

Is help on the way? Apparently so.
“The Obama administration is providing Medicare with an additional $200 million to fight fraud as part of its stimulus package, and billions of dollars to computerize medical records and upgrade networks, which should help Medicare catch more phony charges.”
Is this new level of oversight paying off? Apparently so.

A Reuters article describing the arrest of 111 doctors, nurses and others in what was described as the largest Medicare fraud crackdown ever, also provides a quote from the Human Services Secretary.
“Sebelius said $4 billion was recovered last year, and the government's Medicare Fraud Strike Force was recently expanded to nine cities, with the addition of Dallas and Chicago.”

“A top FBI official, Shawn Henry, said 2,600 health care fraud cases were under investigation and that organized crime groups have been increasingly linked to the alleged schemes.”
Recovering $4B is a big deal. However, the CBS article describes this as a $60B crime. Inexplicably, it does not define that number as an integral over time or as a yearly take. Either way, there is clearly a lot of money being extracted from the healthcare system.

Consider these spending projections.

Something has to be done to control expenses in Medicare and Medicaid. However one interprets the CBS number, fraud is a large fraction of the $430B being spent by Medicare. It would appear that one of the least controversial approaches to cutting healthcare cost would require nothing more than good old-fashioned police work.

Thursday, February 24, 2011

Is al Qaeda Growing Weaker?....or Stronger?

Osama bin Laden has been in hiding since 2001. He is presumably physically isolated, but able to communicate. There have been no significant attacks on the West that can be directly attributed to bin Laden and the top al Qaeda leadership. One might feel safe in assuming that al Qaeda’s capability to cause harm has been diminished. Two recent articles look at the situation and draw different conclusions.

Thomas Rid has written an article for the winter, 2010 Wilson Quarterly: Cracks in the Jihad. Rid includes these statements that constitute a summation of what he believes is the state of al Qaeda today.
“....Al Qaeda is no longer a collective political actor. It is no longer an adversary that can articulate a will, capitulate, and be defeated. But the jihad’s new weakness is also its new strength: Because of its transformation, Islamist militancy is politically impaired yet fitter to survive its present crisis.”

“In the years since late 2001, when U.S. and coalition forces toppled the Taliban regime and all but destroyed Al Qaeda’s core organization in Afghanistan, the bin Laden brand has been bleeding popularity across the Muslim world. The global jihad, as a result, has been torn by mounting internal tensions.”

“Al Qaeda’s altered design has a number of immediate consequences. The global jihad is losing....a strong cause, and with it its political character. This change is making it increasingly difficult to distinguish jihad from organized crime on the one side and rudderless fanaticism on the other.”
From this one could conclude that bin Laden is personally less powerful, and that al Qaeda, as an organization, is less capable of causing significant terrorist operations. Rid points out that this is not necessarily a reason to rejoice because the dissemination of power and influence makes it all that much harder to counter these activities. The dissemination referred to is the formation of allied groups of Islamists in Yemen, Maghreb, and Iraq. Rid sees these groups as more interested in local issues, and ineffective and uninterested in bin Laden’s global ambitions.

Leah Farrall provided an article for the March/April 2011 edition of Foreign Affairs: How al Qaeda Works. Farrall provides these statements to summarize the state of affairs.
“Despite nearly a decade of war, al Qaeda is stronger today than when it carried out the 9/11 attacks. Before 2001, its history was checkered with mostly failed attempts to fulfill its most enduring goal: the unification of other militant Islamist groups under its strategic leadership. However, since fleeing Afghanistan to Pakistan's tribal areas in late 2001, al Qaeda has founded a regional branch in the Arabian Peninsula and acquired franchises in Iraq and the Maghreb. Today, it has more members, greater geographic reach, and a level of ideological sophistication and influence it lacked ten years ago.”

“Still, most accounts of the progress of the war against al Qaeda contend that the organization is on the decline, pointing to its degraded capacity to carry out terrorist operations and depleted senior leadership as evidence that the group is at its weakest since 9/11. But such accounts treat the central al Qaeda organization separately from its subsidiaries and overlook its success in expanding its power and influence through them. These groups should not be ignored.”

“Because al Qaeda will continue to encourage its branch and franchises to carry out attacks and will continue to use the reactions they provoke to pursue its goals, it is important that the strategic picture of al Qaeda accurately reflect the organization's broad operating dynamics instead of wishful thinking about the central organization's degraded capacity.”
Both Rid and Farrall would probably agree that there are more organized groups of terrorists who would consider themselves aligned with al Qaeda active now than there were before 2001. The big difference is in how these groups are viewed in terms of a threat. Both authors would also agree that these Islamists are mostly interested in their local initiatives. Rid indicates that bin Laden/al Qaeda has little influence, while Farrall believes that there is sufficient influence to coerce these groups to go international with their terrorism.

Rid has this to say:
“....coerced by adversaries and enabled by the Internet, the global jihadi movement has dismantled and disrupted its own ability to act as one coherent entity. No leader is in a position to articulate the movement’s will, let alone enforce it.”
Farrall counters with:
“So even as they pursued local agendas, the franchises were required to undertake some attacks against Western interests, and leaders of groups joining al Qaeda had to be willing to present a united front, stay on message, and be seen to fall under al Qaeda's authority -- all crucial for demonstrating the organization's power and attracting others to its cause.”

“AQI (al Qaeda in Iraq) has a closer relationship with al Qaeda than AQIM (al Qaeda in Maghreb). Still, AQIM has generally cooperated at least with requests to stay on message and present the image of a united and hierarchical organization. This emphasis on a unified appearance was clear when, in November 2010, AQIM's leader, Abu Musab Abdel Wadoud, announced that France would have to negotiate directly with bin Laden for the release of hostages held by AQIM. Although in recent times, the capacity of both franchises has been weakened by intensified counterterrorism efforts against them, neither has shown any signs of abandoning al Qaeda's global agenda in favor of purely local goals.”
So who is correct? Is the world less safe now than it was ten years ago?

I think Rid has presented the more compelling argument. Farrall’s contention that “al Qaeda is stronger today than when it carried out the 9/11 attacks,” is based on the claim that the organization is larger and more survivable now. But numbers of adherents and international extent do not necessarily translate into power. Rid is implying that al Qaeda and its satellites are incapable of organizing another event comparable to 9/11. The data seems to support Rid. While there are many horrific attacks taking place, they are almost exclusively local groups pursuing local agendas. The few attempts to go international seem half-hearted or amateurish in comparison to 9/11. If bin Laden cannot use these groups to organize activities that have international impact, then it is safe to say that he and al Qaeda are less powerful then they were ten years ago.

To close an unpleasant topic on a positive note, here are data quoted by Rid.
“The goal of leading Islamists has always been to turn their battle into ‘the Islamic Nation’s battle,’.... Far from reaching this goal, the jihad is veering the other way. Eight years after 9/11, support for Islamic extremism in the Muslim world is at its lowest point. Support for Al Qaeda has slipped most dramatically in Indonesia, Pakistan, and Jordan. In 2003, more than 50 percent of those surveyed in these countries agreed that bin Laden would “do the right thing regarding world affairs,” the Pew Global Attitudes Project found. By 2009 the overall level of support had dropped by half, to about 25 percent. In Pakistan, traditionally a stronghold of extremism, only nine percent of Muslims have a favorable view of Al Qaeda, down from 25 percent in 2008.”

Wednesday, February 23, 2011

Japan and the Effects of Deflation

Over the past year or so there have been numerous warnings about the dangers of deflation, usually coupled with the comment: “We don’t want to end up like Japan.” These concerns have diminished considerably given the uptick in economic activity, but the phenomenon of deflation turns out to be interesting in itself. At first thought, the notion of falling prices doesn’t seem like necessarily a bad thing, but a little further consideration brings focus to the problem. Falling prices, eventually, will be followed by falling wages. Once the notion that your salary is going to decline sets in, you will tend to be hesitant in making unnecessary purchases. Once the belief that prices will continue to drop becomes ingrained, there is little urgency in shopping for big-ticket items. Just exactly how bizarre this situation becomes can be illustrated by the decision to buy a home. The purchaser must go into the deal knowing that the value of the home will decrease, and the ability to make the mortgage payment will decline. So why do it? Taking out any kind of loan seems foolish in this situation. If so, how do you buy a car; how do you go to school; how do you start a family? Now consider what this does to the psyche when it continues for ten or twenty years. That has been the situation in Japan.

Data on the price history can be found at the Trading Economics site.

“Core consumer prices in Japan declined 0.4 percent on year in December, the Ministry of Internal Affairs and Communications said on January 28, falling for the 22nd consecutive month.”

“Overall consumer prices were flat on year following the 0.1 percent rise in November. On Month, CPI was unchanged at -0.3 percent.”

“Among the individual components, prices for education declined 13.0 percent on year, followed by furniture at -3.5 percent and recreation and clothing both down 0.8 percent.”
A number of articles have appeared recently that address the economic and social situation in Japan following many years of deflation. A recent New York Times article describes the mood in a Japan experiencing twenty years of deflation and diminished expectations as “resigned.” It is hard to see resignation as an indicator of a bright future.
“Just as inflation scarred a generation of Americans, deflation has left a deep imprint on the Japanese, breeding generational tensions and a culture of pessimism, fatalism and reduced expectations. While Japan remains in many ways a prosperous society, it faces an increasingly grim situation, particularly outside the relative economic vibrancy of Tokyo....”

“But perhaps the most noticeable impact here has been Japan’s crisis of confidence. Just two decades ago, this was a vibrant nation filled with energy and ambition, proud to the point of arrogance and eager to create a new economic order in Asia based on the yen. Today, those high-flying ambitions have been shelved, replaced by weariness and fear of the future, and an almost stifling air of resignation. Japan seems to have pulled into a shell, content to accept its slow fade from the global stage.”

“As living standards in this still wealthy nation slowly erode, a new frugality is apparent among a generation of young Japanese, who have known nothing but economic stagnation and deflation. They refuse to buy big-ticket items like cars or televisions, and fewer choose to study abroad in America.”

“Japan’s loss of gumption is most visible among its young men, who are widely derided as ‘herbivores’ for lacking their elders’ willingness to toil for endless hours at the office, or even to succeed in romance, which many here blame, only half jokingly, for their country’s shrinking birthrate. ‘The Japanese used to be called economic animals,’ said Mitsuo Ohashi, former chief executive officer of the chemicals giant Showa Denko. ‘But somewhere along the way, Japan lost its animal spirits’.”
As for what deflation does to the real estate market:
“The downsizing of Japan’s ambitions can be seen on the streets of Tokyo, where concrete ‘microhouses’ have become popular among younger Japanese who cannot afford even the famously cramped housing of their parents, or lack the job security to take out a traditional multidecade loan.”

“These matchbox-size homes stand on plots of land barely large enough to park a sport utility vehicle, yet have three stories of closet-size bedrooms, suitcase-size closets and a tiny kitchen that properly belongs on a submarine.”

“’This is how to own a house even when you are uneasy about the future, said Kimiyo Kondo, general manager at Zaus, a Tokyo-based company that builds microhouses.”
Businessweek included an article that provided the depressing assertion that the Japanese were becoming accustomed to deflation and were beginning to feel comfortable with it.
“There's something curious about the way the deflation syndrome has played out in Japan, though. The Japanese don't feel that threatened anymore. ‘Everyone knew deflation was bad for jobs and bad for the economy, but gradually households and companies just got used to it,’ says Martin Schulz, a senior economist at Tokyo's Fujitsu Research Institute.”

“Yet the Japanese have discovered the benefits of deflation as well. Monthly pay dropped to an average 315,294 yen ($3,800) in 2009, the lowest level since the government began tracking wage data in 1990. "It's not like I'm promised any pay raises," says Momoko Noguchi. The 24-year-old Tokyo resident gets by on two part-time jobs by shopping for everything from nail polish to dinner plates at her local 100-yen outlet (the Japanese equivalent of an American dollar store), and she pays 400 yen or less for lunch. ‘I hope prices keep falling.’ Four out of five Japanese say higher costs would be ‘unfavorable,’ according to a central bank survey.”
An article in The Economist provides some insight into why Japan seems unable to break out of this cycle. The first thought has to do with business decisions.
“JAPAN, one of the great exporting nations, usually runs a trade deficit with, of all places, Switzerland. Why? Ask Rolex. Japan also buys more from France and Italy than it sells there. Why? Bordeaux, Brie, mascarpone and Armani, to name a few expensive vices. In Japan such delicacies are mostly immune to deflation, while prices of everyday goods like cars, electronic goods and clothes tumble. Why then do Japanese firms continue to churn out the latter, even though margins are low? And could this help explain Japan’s persistent deflation problem?”

“These questions preoccupy Kosuke Motani, author of “The Real Face of Deflation”. In this book’s first seven months in print, 500,000 copies have been sold, including one to Naoto Kan, the prime minister. Mr Motani argues that deflation in Japan is not so much a monetary problem as a structural one linked to bad business decisions and demography.”

“If Japanese firms produced new types of luxury goods, he believes, they could unleash pent-up demand among Japan’s growing, and wealthy, ranks of old people and pay higher wages to Japan’s shrinking, and relatively poor, youth.”
Japan’s elderly also get blamed for the economic malaise. They control the majority of the country’s huge stash of savings ($18T). Much of these savings are needed to fund the borrowing the government must do in order to stimulate the economy to compensate for the fact the elderly are not spending: an interesting economic death spiral.
“Mr fed up with the elderly hoarding their money. He says they do this because of a “King Lear” complex: they feel they will be deserted if they give too much away. And he favours tax reform to encourage them to bequeath their money to their grandchildren, rather than their children. One of the flipsides of longevity, he points out, is that the average age of those who inherit is a grand old 67.”
So the elderly are afraid to let loose of their savings and they live long enough that the inheritance eventually goes to children who are already elderly and similarly insecure.

Every country has a story to tell. Japan produces one of the most unusual.

Sunday, February 20, 2011

The Financial Sector and Its Contribution to Society

Two recent articles address the question of Wall Street’s utility to society. John Cassidy leads with an article in The New Yorker: What Good is Wall Street. His subtitle, “Much of what investment bankers do is socially worthless,” conveys a hint of his conclusion. He reminds us that after the Great Depression new regulations for the financial sector created a stable economy.

“During this period, major financial crises were conspicuously absent, while capital investment, productivity, and wages grew at rates that lifted tens of millions of working Americans into the middle class.”
Cassidy then concludes by asking this question:
“Since the early nineteen-eighties, by contrast, financial blowups have proliferated and living standards have stagnated. Is this coincidence?”
Tyler Cowen picks up the topic of income inequality in an article in the American Interest: The Inequality That Matters. Cowen begins with a broad discussion of the subject and concludes that the fact that we have people that are superrich is not necessarily a sign that the lower 95 percentile are suffering from inequality. He concluded that things are not as bad for most of us as they might appear. That is a topic to be argued another day. Cowen then goes on to describe a class of excessively-rich people whose wealth is a danger to society: those making a killing in finance. Cowen answers Cassidy’s question not only with a “No,” but with a “Hell no!”

His view of the financial community leads him to finish with this intriguing statement:
“Is the overall picture a shame? Yes. Is it distorting resource distribution and productivity in the meantime? Yes. Will it again bring our economy to its knees? Probably. Maybe that’s simply the price of modern society. Income inequality will likely continue to rise and we will search in vain for the appropriate political remedies for our underlying problems.”
Let us see how these authors arrived at their conclusions. We will begin with Cassidy.

The financial sector plays a positive role when it acts as a source of funds for entities in need of funding, whether they are individuals looking for a loan, startup companies looking for financing, or established corporations wishing to raise money by selling bonds or shares. The financial sector should also assume the important responsibility of making sure money is used wisely. An unwise loan should be seen as risk of financial loss by the bank making the loan.

What are financial institutions really doing?
“Yet Wall Street’s role in financing new businesses is a small portion of what it does. The market for initial public offerings (I.P.O.s) of stock by U.S. companies never fully recovered from the tech bust. During the third quarter of 2010, just thirty-three U.S. companies went public, and they raised a paltry five billion dollars. Most people on Wall Street aren’t finding the next Apple or promoting a green rival to Exxon. They are buying and selling securities that are tied to existing firms and capital projects, or to something less concrete, such as the price of a stock or the level of an exchange rate. During the past two decades, trading volumes have risen exponentially across many markets: stocks, bonds, currencies, commodities, and all manner of derivative securities. In the first nine months of this year, sales and trading accounted for thirty-six per cent of Morgan Stanley’s revenues and a much higher proportion of profits. Traditional investment banking—the business of raising money for companies and advising them on deals—contributed less than fifteen per cent of the firm’s revenue. Goldman Sachs is even more reliant on trading. Between July and September of this year, trading accounted for sixty-three per cent of its revenue, and corporate finance just thirteen per cent.”

“In effect, many of the big banks have turned themselves from businesses whose profits rose and fell with the capital-raising needs of their clients into immense trading houses whose fortunes depend on their ability to exploit day-to-day movements in the markets. Because trading has become so central to their business, the big banks are forever trying to invent new financial products that they can sell but that their competitors, at least for the moment, cannot.”
The trading activities that have the major business component consists of buying and selling traditional investment vehicles, and creating, buying and selling nontraditional financial instruments such as collateralized debt obligations (CDO) and credit default swaps (CDS).

It is hard to see what social or economic value these institutions bring to the traditional markets by throwing their financial weight around. Markets are most stable when investors are in them for long-term gains. It is not clear that long term gains are part of their agenda. Investors hope for a steady but gradual increase in value. Speculators are after the higher returns on investment that are usually associated with greater risk and volatility. These outfits would seem to be playing the role of speculators, and there is at least circumstantial evidence that volatility has increased as they have become more active in the markets.

CDOs are probably best described as a good idea gone wrong. As a vehicle for distributing risk they provide some economic value, but the same vehicle can be used to hide risk and pass it on to someone else, a big factor in the recent financial collapse. A CDS is nothing but a bet.
“When an investor or financial institution buys this kind of swap, it doesn’t purchase a bond itself; it just places a bet on whether the bond will default. At the height of the boom, for every dollar banks issued in bonds, they might issue twenty dollars in swaps. “If they did a hundred-million-dollar bond issue, two billion dollars of swaps would be created and traded,” Schlosstein said. “That’s insane.” From the banks’ perspective, creating this huge market in side bets was very profitable insanity. By late 2007, the notional value of outstanding credit-default swaps was about sixty trillion dollars—more than four times the size of the U.S. gross domestic product. Each time a financial institution issued a swap, it charged the customer a commission. But wagers on credit-default swaps are zero-sum games. For every winner, there is a loser. In the aggregate, little or no economic value is created.”
Some of the more inventive financial instruments have other goals that do not contribute much to the economy.
“Banks often design complicated trading strategies that help a customer, such as a pension fund or a wealthy individual, circumvent regulatory requirements or reduce tax liabilities. From the client’s viewpoint, these types of financial products can create value, but from society’s perspective they merely shift money around. ‘The usual economists’ argument for financial innovation is that it adds to the size of the pie,’ Gerald Epstein, an economist at the University of Massachusetts, said. ‘But these types of things don’t add to the pie. They redistribute it—often from taxpayers to banks and other financial institutions’.”
Cassidy has illuminated some of the basic dynamic that is at work in big financial institutions. The picture that emerged was of an industry focused on generating profits from transactions that contributed little to the economic health of the nation. He also touched on an aspect of the risk involved in these activities, but it is Cowen who emphasized risk and its danger and associated it directly with the growth in income inequality.

To understand how risk feeds into income inequality, it is more helpful to think of these financial institutions as a collection of individual traders rather than a monolith. An individual can take someone else’s funds and create an investment situation that makes a lot of money. It can take months or years to figure out that this was ultimately a bad investment. Meanwhile the trader has acquired a lot of income. When the investment goes sour he does not have to give the money back. At worst, he is temporarily out of a job. The losses are passed on to the company as a whole, and ultimately to the stock holders. Do the shareholders care? Probably not, according to Cowen.
“Moreover, smart shareholders will acquiesce to or even encourage these gambles. They gain on the upside, while the downside, past the point of bankruptcy, is borne by the firm’s creditors.”
But do the firm’s creditors have any worries?
“Perhaps more important, government bailouts minimize the damage to creditors on the downside. Neither the Treasury nor the Fed allowed creditors to take any losses from the collapse of the major banks during the financial crisis. The U.S. government guaranteed these loans, either explicitly or implicitly.”
And now we see the crux of the problem.
“In short, there is an unholy dynamic of short-term trading and investing, backed up by bailouts and risk reduction from the government and the Federal Reserve. This is not good…. it means that banks take far too many risks and go way out on a limb, often in correlated fashion. When their bets turn sour, as they did in 2007–09, everyone else pays the price.”
They earn their profits in the good times, but they accrue no real penalty in the bad times. But even in the good times they are siphoning huge amounts of potential capital out of the economy and putting it to less useful purposes. If their bad behavior causes economic tumult and drives people out of work, the penalty is borne by others.
“It’s as if the major banks have tapped a hole in the social till and they are drinking from it with a straw. In any given year, this practice may seem tolerable—didn’t the bank earn the money fair and square by a series of fairly normal looking trades? Yet over time this situation will corrode productivity, because what the banks do bears almost no resemblance to a process of getting capital into the hands of those who can make most efficient use of it. And it leads to periodic financial explosions. That, in short, is the real problem of income inequality we face today. It’s what causes the inequality at the very top of the earning pyramid that has dangerous implications for the economy as a whole.”
Cowen is not optimistic about the ability of regulators to control the behavior of the large financial institutions. In part because regulators are always fighting the last war, and in part because the issues and organizations are so complicated.
“For the time being, we need to accept the possibility that the financial sector has learned how to game the American (and UK-based) system of state capitalism. It’s no longer obvious that the system is stable at a macro level, and extreme income inequality at the top has been one result of that imbalance. Income inequality is a symptom, however, rather than a cause of the real problem. The root cause of income inequality, viewed in the most general terms, is extreme human ingenuity, albeit of a perverse kind. That is why it is so hard to control.”
Lest we forget Cowen’s gloomy conclusion, it will be repeated here.
“Is the overall picture a shame? Yes. Is it distorting resource distribution and productivity in the meantime? Yes. Will it again bring our economy to its knees? Probably. Maybe that’s simply the price of modern society. Income inequality will likely continue to rise and we will search in vain for the appropriate political remedies for our underlying problems.”

Wednesday, February 16, 2011

The Arms Cascade and the Guns of Marja

C. J. Chivers uses the experience of soldiers in their assault on Marja, Afghanistan in 2010 as the basis for an examination of the worldwide arms market. His article, Small Arms, Big Problems: The Fallout of the Global Gun Trade, appeared in the January/February 2011 edition of Foreign Affairs.

“As the marines fought through ambushes and searched Afghan homes, they began to capture -- rifle by rifle and cartridge by cartridge -- some of the weapons used by their adversaries. These arms caches told something essential to understanding how many modern wars are fought and how relatively low-tech, low-budget irregular forces remain viable and effective. The rifles and machine guns seized by U.S. forces fit into two main categories: older bolt-action infantry arms (dominated by the Lee-Enfield line, of British provenance, and, to a lesser extent, Soviet Mosin-Nagants, manufactured before the Cold War) and newer, but still dated, automatic rifles. The automatics were the Kalashnikov assault rifle and its cousin, the Kalashnikov medium machine gun, or PKM.”
What was unique about these weapons caches were the age and durability of the weapons, and the variety of sources from which they could have been obtained.
“An infantry rifle can survive many decades in the field. They can survive so long, in fact, that no one knows how long they take to die, if only because many of the original items are still being used by guerillas. And they show no sign of breaking down. One of the Lee-Enfields captured by the marines in Marja bore a date stamp from 1915. This was a rifle that was manufactured as Kitchener's Army was massing for service on the western front, using ammunition made for service against the Third Reich, and now firing on U.S. troops in Afghanistan.”

“Lee-Enfields became widely available to guerrillas after World War I, when militaries contracted from their wartime size, and then again midway through the Cold War, as Western militaries began using assault rifles instead of bolt-action rifles. Kalashnikovs are a more recent example of the cascade, although they have now been around long enough that rifles from more than one generation of production are found side by side on the battlefield. Some of the date stamps on the assault rifles recovered from the Taliban have shown them to have been made in the 1950s and early 1960s -- a generation of the Kalashnikov line that the Soviet army replaced in the mid-1970s with a new variant that fired a smaller, faster round. The early models continued to be manufactured for stockpile and sale throughout the Cold War years, and these weapons -- many of which were effectively surplus from the moment of their birth -- had also found their way to the Taliban (some of the Taliban's weapons in Marja bore date stamps from the 1970s).”
Weapons become available for sale and distribution through a process that the author describes as the “arms cascade.” Nations that maintain an army are required to provide enough arms and ammunition to allow that army to fight a protracted war. That is the purpose of armies. This requires the stockpiling of enormous quantities of munitions. If the size or ambitions of the country and its army are scaled back, or if a new generation of weapons is to replace the old, suddenly there is a large excess of weapons that no longer have a use. This massive rearming takes place from time to time. The best example is the dismemberment of the Soviet Union and the incorporation of a number of states into NATO.
“The world's conventional militaries have upgraded their small arms several times in the past century. If there is any lesson about these cycles of replacement, it is this: as one class of weapon unseats another, displacing it from government arsenals, or as excess guns are deemed unnecessary for national security, the supposedly retired weapons often do not retire at all. They are recycled -- sold off or given to new owners -- and find new uses outside of state hands.”
Sometimes the weapons are distributed by well-intentioned governments to allies, but the net effect is to lose control over them. Often the profit motive is too great and arms dealers purchase them for resale. Chivers describes the vz.58 assault rifle which was made only in one factory in what was then Czechoslovakia. After the cold war the country was split in two and military needs were greatly reduced.
“The vz. 58s that filled armories quickly became surplus. A cascade began. How many rifles ultimately made their way out of state hands is not known. But this much is clear: they moved quickly. As a relatively unknown rifle with little reputation as a combat weapon, the vz. 58 entered the market at remarkably low prices. Some arms dealers say these rifles have been sold in bulk from Prague for less than $25 each; there are credible indications that when these guns are purchased in very large quantities -- 10,000 or more at a time -- they are sold for less than $15 apiece. Before long, the vz. 58 was turning up in African conflicts -- it was a staple of fighting in the Democratic Republic of the Congo (then Zaire) in the 1990s and is sometimes seen being carried by child soldiers there and elsewhere throughout Africa.”
The net effect of having large number of inexpensive weapons available is that one can support an insurgency or a rebel force with weaponry comparable to that of the most modern states with very little money.
“The image of a child soldier with a vz. 58 is especially evocative of the comprehensive effects of military small arms on conflict zones. This is because it is not what these weapons do to the militaries of powerful governments that causes the greatest and longest-lasting harm but rather their impact on the vulnerable and their role in making it possible for militias, militant groups, and criminal gangs to field well-equipped combatants. When readily available to irregular forces, surplus military small arms can make unstable regions more volatile and less economically sound, increase the expenses and dangers of military campaigns or aid and relief missions, enable crime and human rights abuses, dissuade governments from providing services, and increase human suffering. This is true whether the armed bands are in the Democratic Republic of the Congo, in and near the Horn of Africa, in southern Iraq, or along the Afghan-Pakistani border. Entire regions of the world, flooded with the excess stocks of government arsenals, have become simmering conflict zones and areas out of any government's control. These are places where even the world's best military forces operate with difficulty and local populations suffer from the presence of armed and lawless groups.”
The most disturbing notion to be derived from this article is that weapons never die. They just get passed on to people with less noble intentions. Many of the weapons being used against troops in Afghanistan were originally provided by the United States, either in the Afghan fight against the Russian invaders, or distributed to friendly Afghan forces after the invasion in 2001.

There appears to be a law of unintended consequences associated with guns.

A similar cascade effect seems to occur in our own towns and cities. Guns purchased for the best of intentions by individuals don’t seem to ever disappear. By sale or by theft they seem to move down the social ladder to those whose intentions are not always honorable.

Tuesday, February 15, 2011

Making Retirement More "Progressive"

In an earlier post, Unemployment, Social Security and Retirement Age: James K. Galbraith, we described Galbraith’s notion that early retirement could be used to address persistent unemployment. In a companion piece in The American Prospect Eugene Steuerle presents a different view of retirement policy. While aimed at the Social Security System, Steuerle’s comments would be relevant to any country with an age-based retirement plan.

Steuerle emphasizes the view that our social security system has evolved from an old-aged system to a middle-aged retirement plan.

“A single person retiring at the earliest retirement age (65) in 1940 was likely to receive close to 14 years of benefits. By 1975, this person could retire at 62 and would likely receive benefits for 19 years, and today that number has risen to almost 22 years. When it comes to couples retiring at the earliest retirement age, by 2030, at least one partner is expected to receive benefits for nearly 30 years.”
“Americans on average retired at age 68 in both 1940 and 1950. If they were to retire for the same number of years on average today as they did in 1940, they would be retiring at age 75. In 2070, they'd quit working at about age 80. Instead, they retire on average at about age 64.”

“Put another way, if you define old age by, say, the last 15, 18, or even 20 years of life, then Social Security has become, almost by definition, a middle-age retirement system."

He argues that there are a number of reasons why the retirement age should be raised for healthy individuals. Older workers are viewed as an asset that continues to be of value to the economy.

“It is a question about how we decide to live our lives and best use our nation's pool of human capital in the 21st century. In the next few decades, older workers will be seen as women were in the last half of the 20th century: the largest pool of underutilized talent in the economy. If we modernize the signals and symbols around the idea of when old age begins -- not just in Social Security but in the private sector as well -- labor demand is likely to shift toward this pool of talent.”
Steuerle’s contention is that encouraging these people to retire early consumes resources that could be better spent on those more in need: the poor and the disabled. The “progressive” aspect arises because requiring the able bodied to work longer effectively raises more tax revenue from them, and one can also choose to limit the amount ultimately paid out to those with higher incomes by the retirement system. This increase in resources can be used to fund a larger benefit for the lower income workers and the disabled.
“If we really wanted to help disadvantaged minorities and other workers with lower lifetime earnings, we could use the money more progressively by targeting benefits directly to them, through devices like minimum benefits and removal of the discrimination against parents -- minority women particularly -- who were not married and therefore get nothing out of the current spousal and survivor benefits, although they pay for them.”
The author realizes that there is an assumption buried in this concept that needs scrutiny.
“To the extent we can improve employment rates, we can also increase national income and personal income and in turn, raise income-tax revenues and therefore the level of benefits that government can provide to the truly needy.”
Steuerly raises the issue of unemployment in this indirect manner, but he never actually deals with it, nor does he address Galbraith’s concept. The notion of making social security benefits more progressive is a good one, but it could have been argued just on the basis of redistributing benefits from high income retirees to low income retirees. The retirement age is really a separate issue which must be defended on its own merit, both for individuals, and for the economy as a whole.

Steuerly makes the rather wild assumption that since life expectancy has increased ten years, then everyone should have ten more productive years at their disposal. Older workers are generally valued because they are a residue of experience, which often translates into wisdom. If one is looking for someone to work long hours and develop new concepts or new business models, you give the old guy a golden handshake and hire yourself a hungry young person—these days a young woman if you are smart. You can always buy the old guy’s experience by the hour, and as needed.

Consider universities where professors love to hang on forever and die at their desks. The schools are desperate to move most of them out. They need productive people who publish and attract grants, and attract students to work on the grants. Many of the older professors are no longer able, or willing, to produce at that level.

I like Steuerly’s suggestion that we can make the retirement system more progressive. I think the prospects for long term unemployment are such that it is silly to consider raising the retirement age. It occurs to me that we should perhaps better spend our time looking for ways to open up more positions for our youth. How about a lowering the retirement age for those willing to spend a compensatory amount of time performing public service as a retiree? Sixty-plus year olds can be of great value to society. I would not expect many to be out generating economic revolutions, but those who can, will continue to do so. But for most, there will come a time when enough is enough. Let them be. Let me be.

Monday, February 14, 2011

Food Allergies and the Risks Inherent in Medical Science

A perfect example of Medical Science and the Vanishing Truth has been provided by Jerome Groopman in a New Yorker article: The Peanut Puzzle. The phenomena of “vanishing truth” in medical science was described by Jonah Lehrer as a positive scientific finding with a veracity that seems to decay over time. Lehrer ascribes this decay to three factors: publication bias in favor of positive results, selective reporting in which researchers enhance, inadvertently or not, positive results over negative results, and to the hazards of deriving conclusions based on statistically small samples which may have uncontrolled variables. Lehrer focuses on the efficacy of certain drugs that were initially deemed to have significant effectiveness, but with subsequent studies, were found to be much less useful.

In the arena of food allergies there was an alarming trend identified. The incidence was rising dramatically in the western countries, but remained rare in Asia and Africa. The medical researchers looked for an explanation. They wanted to find some positive act that could explain and counter this trend. One study indicated that the incidence of food allergies could be reduced by eliminating cow’s milk, eggs and peanuts from the mother’s diet during the last trimester and while breastfeeding, and eliminating all foods that might cause an allergic response from the child’s diet for up to two years. The conclusion reached was:
“Reduced exposure of infants to allergenic foods appeared to reduce food sensitization and allergy primarily during the first year of life.”
These results seemed reasonable. The logic was that the human immunity system matures in a child similar to other body functions. By allowing the immune system to mature before introduction of a potentially allergenic product, it would be better able to deal with it. The medical community was satisfied with this conclusion: it suited them intellectually, and it allowed them to make a positive recommendation to their patients. In 1998 the UK formally adopted the study results as a set of guidelines for doctors and patients. In 2000 the American academy of Pediatrics did the same.

The conclusions may have been intellectually satisfying, but that did not make them correct. Less-well-funded thinking might have led them to ask “how is this predisposition to food allergies consistent with evolution?” Nuts had to be a major component of the diet of hunter gatherers, which is what mankind was for essentially all of its existence. How could such a deadly susceptibility be propagated genetically? And what was it about the manmade environment that was causing the increase in incidence of allergies?

In undeveloped countries it is still common for mothers to introduce solid food to their infants by first chewing the food and expelling the mushy product, saliva and all, into the baby’s mouth. This is presumably how infants were fed for thousands of generations. This introduced infants to a variety of food products, but in a controlled environment. Perhaps the mother’s saliva was beneficial in damping any sensitivity to the foods, allowing the infant to gradually develop a tolerance.

Further studies gradually began to undermine the formal recommendations. The evidence that suggested that the mother’s diet could be important in triggering an allergic response in her infant “vanished.” Medical researchers began to test the theory that introducing controlled mounts of a sensitive substance could allow a child to gradually develop a tolerance. This is exactly the opposite approach to that which produced the official guidelines.

In 2008
“....the American Academy of Pediatrics released a report by Mount Sinai’s Dr. Sicherer and other researchers that overturned the expert advice of the past decade: ‘Current evidence does not support a major role for maternal dietary restrictions during pregnancy or lactation....There is also little evidence that delaying the timing of the introduction of complementary foods beyond four to six months of age prevent the occurrence of [allergies].”
The author builds his narrative around the story of a mother who, under her physician’s guidance, followed the earlier recommendations to the letter. At nine months her daughter had a severe reaction to dairy products. She was also allergic to eggs, peanuts, tree nuts and sesame seeds. Her physician began trying to introduce to the child (at age seven) small doses of these allergenic foods in controlled environments in hopes of allowing her body to develop a tolerance. This approach seems to be having some success. Perhaps one day the child will be able to lead a normal life with close to a normal diet. It is possible that the medical advice the mother was given worsened the child’s experience rather than improving it. There is no way to be sure.

To say that the medical community has corrected an error and is now on the right path would be to make the same mistake that was made originally. There is probably much left to learn. Performing medical studies is extremely difficult. There are those who believe that many are so deficient as to be worthless. But that will not prevent them from being displayed prominently on the front page of your newspaper. It may take decades for the falsity or inappropriateness of a study to be recognized.

Is there a lesson to be learned here? Perhaps there are several.
Don’t assume what you read in the newspaper is true.

Don’t assume what a doctor tells you is necessarily true.

Don’t assume your doctor knows more about a topic than you could learn in a few hours of searching the web.

Get multiple opinions, and make sure you have an informed opinion of your own.

Doing nothing should always be considered as one of the possible options.

Sunday, February 13, 2011

Bangladesh, India, and Their Shared Future

Bangladesh would appear to be the poster child for an advertisement of coming climate change. Its existence is tenuous in the best of times.

“A warm and humid monsoon season lasts from June to October and supplies most of the country's rainfall. Natural calamities, such as floods, tropical cyclones, tornadoes, and tidal bores occur almost every year, combined with the effects of deforestation, soil degradation and erosion. The cyclones of 1970 and 1991 were particularly devastating. A cyclone that struck Bangladesh in 1991 killed some 140,000 people.”

“In September 1998, Bangladesh saw the most severe flooding in modern world history. As the Brahmaputra, the Ganges and Meghna spilt over and swallowed 300,000 houses, 9,700 kilometres (6,027 mi) of road and 2,700 kilometres (1,678 mi) of embankment 1,000 people were killed and 30 million more were made homeless with 135,000 cattle killed, 50 square kilometres (19.3 sq mi) of land destroyed and 11,000 kilometres (6,835 mi) of roads damaged or destroyed. Two-thirds of the country was underwater. There were several reasons for the severity of the flooding. Firstly, there were unusually high monsoon rains. Secondly, the Himalayas shed off an equally unusually high amount of melt water that year. Thirdly, trees that usually would have intercept rain water had been cut down for firewood or to make space for animals.”
In her recent book, The Weather of the Future: Heat waves, Extreme Storms, and Other Scenes From a Climate-Changed Planet, Heidi Cullen highlights Bangladesh as one of the spots on earth to be most affected by the changing climate.

It is not hard to understand why Bangladesh would be sensitive to climate change.
“....two-thirds of Bangladesh is less than 17 feet above sea level; only in the extreme northwest will you find an elevation of more than 100 feet. And in this small, densely packed, low-lying country there are 230 rivers. Three of them—the Ganges, the Brahmaputra, and the Meghna rivers—come together to form a large floodplain. Eighty percent of Bangladesh sits within that floodplain, and everyone who lives there knows that in any given year, roughly one-quarter of the country will be flooded. And everyone knows that every few years Bangladesh will experience a severe flood that inundates more than 70 percent of the country.”
Cullen assumes that green house gases will continue to grow, although reduced rates of growth are possible. She is not concerned much with the politics of carbon emission, nor does she jump to an apocalyptic scenario (although the dust jacket seems to show Manhattan under water), her intention is to alert us to changes that most of us are likely to see in our lifetimes (projections are out to 40 years). The book is actually rather positive in the sense that mankind seems to survive as long as it is willing to invest in responses to the changing climate. Bangladesh may be the one exception to that statement.

What the future holds in store is more variable and more extreme weather, rising sea levels (and in some cases lowering land levels), and more severe storms. Bangladesh is extremely susceptible to all of the above.

Much of this region of Asia is dependent on monsoon rains which generally come between May and October.
“During these months, the total rainfall varies from 4 feet in the northwest of Bangladesh to 11 feet in the coastal areas, and to more than 16 feet in the northeast.”
These are rather extreme “average” conditions. One can see that increased variability can cause excessive flooding. The issue is complicated by the number and size of the rivers flowing through the country. These flows are also subject to climate change as well as human-initiated interventions. The major rivers are fed my ice melt from the glaciers in the Himalaya’s.
“The current trends of glacial melt suggest that the Ganges and Brahmaputra, which crisscross the northern Indian plain, could run dry during the summer months in the near future as a consequence of climate change. And the IPCC report indicates that India will reach a condition of water stress before 2025.”
Floods, droughts, and cyclones will continue to worsen, but the most serious issue is the rise in sea level. This rise is a worldwide phenomenon, but in Bangladesh it is complicated by the overuse of ground water leading to land subsidence.
“....the rate of rise in sea level during the last twenty-two years is many times higher than the mean rate of global rise over a hundred years; this suggests that regional subsidence could be making the situation worse.”

“A 3.3 foot rise in sea level would inundate about 20 percent of Bangladesh’s total land, directly threatening 11 percent of the population with inundation....the backwater and increased river flow from sea level rise could affect 60 percent of the population.”
Over the coming decades many millions of people will be forced to migrate due to these changes. A glance back at the country map indicates that if you wish to leave Bangladesh, your options are limited. India is the only place to go.
“It’s also estimated that more than 10 million Bangladeshis have already made the move to India during the past twenty years. This issue is a constant source of tension between the two nations, and climate change isn’t helping....India is in the process of building a fence to keep them out....The fence runs along India’s porous 2,500 mile border with Bangladesh. It is high, and it is made of heavily reinforced barbed wire.”
India would claim that the fence is necessary to control illegal immigrants who could include smugglers and Islamic extremists. While India certainly has a right to build this fence, its behavior at this border does not bode well for a future in which mass migrations could become necessary. One report indicates that Indian border guards have been given a license to kill.
“Over the past 10 years Indian security forces have killed almost 1,000 people, mostly Bangladeshis, turning the border area into a south Asian killing fields. No one has been prosecuted for any of these killings, in spite of evidence in many cases that makes it clear the killings were in cold blood against unarmed and defenceless local residents.”

“Shockingly, some Indian officials endorse shooting people who attempt to cross the border illegally, even if they are unarmed. Almost as shocking is the lack of interest in these killings by foreign governments who claim to be concerned with human rights. A single killing by US law enforcement along the Mexican border makes headlines. The killing of large numbers of villagers by Indian forces has been almost entirely ignored.”
India will suffer severely from climate change as well. It will face the choice of sharing the grief with its neighbors, or it can decide to sit behind its fence and decide that every country must fend for itself.

Thursday, February 10, 2011

The Overselling of College Education

The American Prospect carries an article by Lawrence Mishel: The Overselling of Education. A discussion of education strategy is particularly timely. It is becoming clear, worldwide, that colleges are generating more graduates than their economies can accommodate. From China to Tunisia, to Egypt, to the European Union, and to the United States, there is evidence that college graduates are frustrated by either the inability to find a job at all, or by the need to accept one that is not commensurate with the expectations of one with a college degree. The uprising in Tunisia began with the self-immolation of a frustrated college graduate.

Mishel begins by detailing the conventional wisdom with regard to education and unemployment.
“A better-educated workforce is widely touted as the panacea for every economic problem. Education is said to be the cure both for unemployment and income inequality. To hear leaders of the financial sector talk, the underlying problem with the economy has not been a runaway financial sector but an unqualified workforce. In a recent Reuters special report on the U.S. economy, Diane Swonk, an oft-quoted financial-sector economist, said, ‘The recession merely revealed a reality that has been with us for a long time. We faced a growing gap in education and skills that we tried to fill with debt and credit, which gave us the illusion of growth’."

“This is very comfortable reasoning for the very comfortable class. It identifies ‘failing’ schools and dumb workers for the economic calamity actually caused by a deregulated financial sector following a massive redistribution of income and wealth.”
He then argues that the data does not support the notion that we are in the midst of a skills shortage.
“It is remarkable that anyone can claim that today's high unemployment is primarily due to a mismatch between the skills of the unemployed and the available jobs. After all, most of those who are unemployed today were productively employed just a year or two ago“

“The shortfall in job openings relative to the last recovery is apparent in nearly every industry, indicating that the problem is across the economy rather than rooted in particular sectors. Nor do the unemployed appear "unqualified." Unemployment over the recession has doubled for every educational grouping, including college graduates whose unemployment is far higher than anytime since 1979 (the earliest year for monthly unemployment data).”

“Moreover, the percentage of unemployed who have been out of work for at least six months is the same across all education groups. In other words, unemployed college graduates bear the same risk of long-term unemployment as those with high school degrees. In sum, we do not have unemployment because of weak skills or poor schools: Rather, we have a serious shortfall in demand due to a loss of housing and stock wealth and recession-caused income losses compounded by the de-leveraging of our household and business sectors.”
Mishel next takes up a crucial question: “Is there a looming shortage of college graduates?” No one would argue with the notion that we need the strongest possible K-12 education, and that it must be made available to all children. However, a policy that encourages as many as possible to randomly attend four year institutions and obtain degrees, demands some discussion. It is not necessary to spend four years and tens of thousands of dollars in order to get a job waiting on tables. Producing educated people does not create jobs. Society and the government need to stop and consider carefully where the country and the economy are headed—and perhaps even do some planning.
“Despite frequent claims, it is simply untrue that we have seen a three-decades-long radical increase in employers' demand for four-year college graduates. The widespread (even before the recession) utilization of college students and graduates working as unpaid (many unlawfully so) "interns" is evidence enough--if employers desperately needed these workers, they would pay them.”

“In fact, the trends of the last 10 years contradict this story. The wages and benefits received by young college graduates fell over the 2000-2007 business cycle and in this recession. Moreover, the wages of all college graduates have been flat over the last 10 years, with those for men having markedly declined. This should not be surprising as the relative demand for college graduates, according to Harvard's Claudia Goldin and Larry Katz, grew more slowly in the 2000s than in any postwar decade, following relatively slow growth in the 1990s. A major increase in the supply of college graduates would further erode the wages and benefits new college graduates obtain and drive down the wages of all college graduates, especially among men.”
Mishel blames the weakness in demand for workers on the gross inequality in income that has developed over recent decades.
“....the challenge we face with persistent unemployment exceeding 9 percent is not better education and training for those currently unemployed. Rather, we need more jobs.”

“The huge increase in wage and income inequality over the last 30 years was not caused by a skills deficit. Rather, workers face a "wage deficit." The key challenge is to provide good jobs and re-establish the basis for wages and compensation to grow in tandem with productivity, as they did before 1979.”
The association of low employment with income inequality is arguable. What is not arguable is the concept of what Mishel refers to as an “active labor-market policy.”
“We also need what Europeans call an active labor-market policy, so that the money we invest in training is directly connected to re-employment at good wages, rather than operating in a vacuum.”
If one wishes to include a college education as “training,” then developing some mechanism for insuring that an appropriate number of students get funneled into curricula that will provide them with a career seems like a goal worth striving for.

Wednesday, February 9, 2011

Unemployment, Social Security and Retirement Age: James K. Galbraith

Several weeks ago I wrote an article titled Dealing with Social Security, Deficits, and an Aging Population. In it, I bemoaned the fact that there did not appear to be any innovative thinking regarding the indicated problems. That has changed, with a few interesting ideas now appearing in print. Here we will discuss a proposal from James K. Galbraith from an article in The American Prospect: Early Retirement as a Fix for Unemployment. In my previous post I questioned the wisdom of enforcing a greater retirement age at a time when there would always be high residual unemployment. Galbraith cemented his reputation as a prescient and innovative thinker by agreeing with me—sort of.

Some authors have taken to referring to the recent recession as the Great Recession in order to remind us how close we came to the Great Depression. Being an independent thinker, Galbraith uses the term “Great Crisis.” This term conveys the notion that the effect on society transcends that of a mere recession, and that a different level of response is required.
“Debate over the future of Social Security and Medicare usually takes place in a timeless cocoon, insulated from other programs and economic forces, an economic neverland in which the Great Crisis either did not happen or has safely passed without lasting effect. This is explicit in the forecasts of the Congressional Budget Office, which habitually foresee full employment returning within five years, whatever the starting point. The CBO approach is like that of a doctor with only one patient: On observing that the patient has always recovered in the past, the doctor infers that the patient must, therefore, be immortal.”

“In the real world, we have suffered an economic calamity, and whether we recover from it fully or at all depends on the steps we take -- or fail to take -- right now. Social Security and Medicare can be part of that solution -- but not by cutting them to reduce the deficit. Rather, we should expand their eligibility to help those who suffered most from the calamity -- while also improving opportunities for other people looking for jobs.”
I had suggested infrastructure work driven by the need to respond to climate change would be a big driver towards greater employment in the future. That would be coupled with a remake of our healthcare system along the lines suggested by Atul Gawande’s writings (Medical “Hot Spots” and the Future of Healthcare). This envisages less money flowing to doctors, hospitals, and drug companies, and more being used to create numerous positions as nurses, home health advisors.... Galbraith is thinking along the same lines.
“We face the challenges of energy security and climate change. Some of the work required involves scientific, engineering, design, and planning talent. Much does not. Large parts of the conservation and mitigation task are matters of weatherizing buildings, tuning engines, reforesting land, constructing seawalls and levees, and similar semiskilled (though often technically demanding) tasks. Much will be in construction and reconstruction of infrastructure, engineered for energy saving and reducing greenhouse-gas emissions. All of this could provide jobs if the right institutions for planning, funding, and execution can be built.”

“Another area of clear need relates to our aging population. As people get older, they need care, and the proportion of the working population employed in providing it must rise. Further, training is necessary, and standards must be imposed, maintained, and enforced. This is the opportunity to create a large, labor-intensive, mainly not-for-profit sector, that would employ workers with relatively nontechnical backgrounds and help the elderly live in independence and comfort for as long as possible. Again, realizing this goal will require new institutions or stronger versions of institutions that already exist.”
While Galbraith does not indicate that long term elevated unemployment is going to be the norm, he justifies an extreme measure by stating that the job loss over the last ten years was so severe that standard approaches will not be adequate to address it. He is particularly worried about the prospects of older workers who have lost their jobs.
“Subjecting these older workers to the requirement that they search for jobs that don't exist in order to qualify for unemployment insurance is a debilitating waste of their time and effort.”

“Further, many older people are still working, despite the fact that their work is physically uncomfortable or even painful. They work because they need the income. They work because they want to hold out to get their full Social Security benefit, which may be their only source of retirement income, and because they need health insurance before they reach the Medicare eligibility age. Meanwhile, younger workers, with fresh skills and ambitions, wait for positions to open. And they wait. It's a bad bargain for both groups.”

“What the country needs is a massive shift in the labor market, to better match the workforce that we actually have to the diminished pool of jobs.”
His solution is a temporary lowering of the Social Security retirement age and the age for Medicare eligibility.
“Let Congress enact a three-year window during which full (or nearly full) Social Security benefits could be obtained by anyone retiring at the age of 62. Let Medicare be fully available to those who take this option. The ages, dates, and precise structure of the incentive can be tinkered with as conditions and response rates dictate; for now, it's the principle that matters.”

“The principle is: Those for whom earlier retirement is attractive, but not quite financially viable, should get a strong incentive to take it now. The decision to do so would be voluntary; no one who wanted to work would be forced out. Employers could, of course, offer counterincentives to workers they'd like to keep on. The policy would invite departures from the labor force. Those who wanted out could get out. It would thus open positions for those workers -- mostly younger -- who have the greatest need for jobs and who have suffered the gravest harm, early in their work lives, from being unable to find steady work. The unemployment rate would fall.”
The big issue with this sort of proposal is the cost issue. While the early retirement generates a cost, the emptying of the unemployment rolls represents a savings—several savings, in fact.
“Would this proposal cost money? There would be some offsets, from higher payroll taxes on higher wages, from reduced unemployment-insurance payments, and from reduced (private sector) medical bills. In general, though, of course it would cost money. (The exact amount would depend on how many took up the offer -- something we can't easily predict.) There is no cost-free solution to our jobs crisis. It would also make us a happier people, which is something worth spending money on. Indeed, I can think of no other proposal that might so effectively deal with our present miseries as quickly and fully as this one.”
It is a shame that he did not make a quantitative attempt at the cost issue. Without that effort it is hard to generate credibility. The man is a professor at a major university. He must be surrounded by unemployable graduate students looking for work. This type of study would have produced an excellent academic paper, received a NYTimes write-up, and perhaps even made mention on prestigious blogs. Hopefully, someone is back on campus working on it.

Tuesday, February 8, 2011

Deficit Reduction: Defense Spending Cuts

It is becoming clear that deficit reduction is necessary and urgent. One can argue about whether it should begin this year or next, but that does not really change the nature of the long term challenges that we face. It is also becoming recognized that the deficit is not just an economic problem, it is also a national security issue. That being the case, it is worthwhile to evaluate changes in our defense posture that can alleviate the economic issues while maintaining the needed military capability.

A number of such studies are beginning to appear. The Center for American Progress provides a study that suggests cuts in the Defense budget of 16% ($109B) by 2015 would sustain our military capability and contribute to deficit reduction.

We will focus on a report in “Foreign Affairs:” A Leaner and Meaner Defense by
GORDON ADAMS is a Professor in the U.S. Foreign Policy Program at the School of International Service at American University and a Distinguished Fellow at the Stimson Center. MATTHEW LEATHERMAN is a Research Associate for the Stimson Center's Budgeting for Foreign Affairs and Defense Program and a regular contributor to its blog, The Will and the Wallet.
The authors make the reasonable claim that the military cannot budget efficiently if it does not have a clear understanding of what its mission is going to be. Traditional Pentagon planning required resources to fight two conventional wars in two locations concurrently. That would obviously provide a rationalization for maintaining an enormous force. It is now hard to think of even one country we might go to war with, let alone two. Those who wish to propagate this mindset continue to point to the Chinese as a looming threat, but by treating China as a potential enemy, we only insure that China will have to build up a capability to match our perceived threat to them. The authors advise caution in treating China, and suggest we can hedge our military investment considerably without risk.

Their thesis is that the “war on terror” mentality and the Iraq and Afghanistan adventures have caused the military to lose focus on what their long-term mission really is. While Secretary Gates talks of eliminating programs and improving efficiency
“....Gates also argued last August that "the task before us is not to reduce the department's topline budget; rather, it is significantly to reduce its excess overhead costs and apply the savings to force structure and modernization." In other words, instead of contributing to a disciplined and well-planned reduction of the United States' debt, Gates wants to keep existing funds in the Pentagon and maintain both the military's current size and most of the Pentagon's planned investment programs. The FY 2011 budget, which is still pending before Congress, proposes to increase the defense budget, despite its already historic level, and Gates has widely advertised that he hopes to achieve one percent real growth in the defense budget in the years after FY 2011.”
This misguided quest for continued high levels of funds arises from a misconception.
“The most vexing missions are those at the heart of the Quadrennial Defense Review: counterinsurgency, nation building, and the building of other countries' security sectors, among others. And these, alongside competition with China, are motivating Gates and other planners at the Pentagon, despite Gates' acknowledgment in this magazine last spring that "the United States is unlikely to repeat a mission on the scale of those in Afghanistan or Iraq anytime soon -- that is, forced regime change followed by nation building under fire." Such planned missions are based on a misguided premise: that the U.S. campaigns in Afghanistan and Iraq foreshadow the need for a large U.S. military force to increasingly intervene in failing states teeming with insurgents and terrorists. But Gates' effort to nonetheless tailor U.S. military capabilities to such tasks suggests that there is still significant support for them in the Pentagon. According to General George Casey, the army chief of staff, for example, the United States is in an "era of persistent conflict." Yet the United States is very unlikely to embark on another regime-change and nation-building mission in the next decade -- nor should it. Indeed, in the wake of its operations in Afghanistan and Iraq, the demand for the United States to act as global policeman will decline.”
The authors suggest that the focus should be on dismantling al Qaeda, military cybersecurity, and maintaining forces necessary to wage a conventional war and to sustain a nuclear capability. The first two of these tasks do not require large numbers of additional personnel or massive new investments. The last mission is becoming ever more unlikely and the forces required should gradually be scaled down to represent that low probability.

Given this vantage point, the authors provide this overall assessment of the opportunities for reducing expenditures.
“The national defense budget accounts for 56 percent of all U.S. federal discretionary spending. Defense is now one of the country's "Big Four" accounts, consuming roughly the same share of federal spending as do each of Social Security, income-based entitlements (such as welfare), and the total nondefense discretionary budget. And the United States is expected to spend over $700 billion on national defense in 2011 -- twice as much as it spent in 2001, more in real dollars than for any year since the end of World War II, and as much as is spent by the rest of the world's militaries combined.”

“The Congressional Budget Office currently projects that between fiscal years (FY) 2012 and 2018, the U.S. government will spend over $5.54 trillion on defense. In addition to any reductions stemming from the United States' withdrawal from Afghanistan and Iraq, gradual cuts could lower the defense budget over those seven years by more than $788 billion, to about $4.75 trillion -- a reduction of more than 14 percent. This would involve reducing the active-duty force by 275,000 troops, to 1.21 million (yielding $166 billion in savings); cutting programs that are redundant, underperforming, or linked to low-priority missions ($354 billion in savings); restraining military compensation, health-care, and retirement costs ($148 billion in savings); and reforming the intelligence community ($120 billion in savings).”
The authors’ contentions regarding the manpower and acquisition cuts are not very controversial. However, the suggested savings from “reforming” the intelligence community is so large as to strain credulity. If they are correct, we have been wasting enormous amounts of money for years.
“According to James Clapper, the director of national intelligence, the intelligence budget for FY 2010 exceeded $80 billion. Size may now be the intelligence community's most significant problem.”

“Duplication in information technology, security procedures, human resource systems, and purchasing could be eliminated and overall management simplified. More savings still could be found by decreasing spending on government satellite imagery, which duplicates commercially available imagery, and by no longer vacuuming up more intelligence signals than are needed or can be processed. Helping the policymakers across the government who consume intelligence better communicate their needs to intelligence providers would also eliminate a sizable amount of unused analysis and the costs of generating it. Analysts with considerable internal management experience in the intelligence community think it reasonable to assume that such initiatives could save U.S. taxpayers $120 billion between FY 2012 and FY 2018.”
The surprising and, perhaps, controversial proposal involves military compensation. There are three issues at play here: pay level, health coverage, and retirement policy. Let’s start with military pay.
“The U.S. military's pay system has become increasingly disconnected from its primary purpose: developing a compensation system that produces the mix of personnel that can get the work done most effectively. By this standard, the key indicator of the adequacy of military pay is whether recruitment and retention targets are being met, particularly for tasks requiring critical skills. The Congressional Budget Office has determined that overall military pay, including cash and in-kind compensation, presently exceeds compensation for comparable work by civilians by at least 11 percent. This is the result of the Pentagon's long-standing tradition of maintaining morale by paying members of equal rank and grade roughly the same, irrespective of the demand for particular skills, as well as of Congress' routine practice of authorizing pay increases above those requested by the Pentagon.”

“A much more refined pay model is needed, one that replaces across-the-board pay raises with a more tailored approach that would allow supply and demand to generate the right combination of needed specialties and skills. This would involve much greater use of targeted bonuses and special pay for key required specializations or jobs, such as assignments to hazardous stations and language or technological skills. Importantly, current pay increases based on promotions or longevity would not be affected, nor would the special compensation given to combat troops for hazardous duties. Across-the-board pay increases should be suspended as military forces are reduced and reorganized according to the cuts suggested here. This adjustment could take two years or more, at which point the general pay increase question could be revisited. This could save roughly $40 billion between FY 2012 and FY 2018.”
The statement about the level on military pay is based on this CBO report, and this chart.

The level of military compensation for enlisted men was surprising. Apparently they are being paid above market level. It will be interesting to see if the most conservative of the legislators who would like to see a cut in wages for government workers would apply the same logic to the military. The notion of adjusting pay by value, rather than by strict classification, seems like a reasonable decision.

There appears to be a collective guilt over the way our stupid decisions have caused the abuse of our soldiers. The result is an attempt to expand benefits beyond what is fiscally sound or necessary in the opinion of the authors.
“Likewise, the Department of Defense's health-care system, TRICARE, badly needs discipline. Defense health-system costs have grown from $19 billion in FY 2001 to over $50 billion in FY 2010. The pool of eligible personnel has expanded since Congress created TRICARE in 1995: TRICARE Reserve Select was introduced for reservists and their dependents, and TRICARE for Life was added for Medicare-eligible retirees and their dependents.”

“There are two types of retirees in the TRICARE system: those who are eligible for Medicare and those who are not, typically because they remain in the work force and have not reached the age of eligibility for Medicare. TRICARE was founded with the expectation that beneficiaries who have not yet reached the age of eligibility for Medicare would pay approximately 27 percent of the overall cost of the program through enrollment fees and copays. But the premiums and the cost-sharing system have not changed since then. This has attracted a large number of military retirees still in the work force to TRICARE and away from alternative, civilian health-care plans. Now, only 11 percent of the program's costs are covered by beneficiaries not yet eligible for Medicare.”

“This must be corrected. Retirees who are eligible for Medicare and their dependents should share in the costs of TRICARE. For other retired beneficiaries, the enrollment fees and copays should be increased to 27 percent of costs, as was intended when the program was created. According to figures from the Congressional Budget Office, such changes could save $48 billion between FY 2012 and FY 2018.”
The proposed changes to the retirement system seem beneficial. It will be fairer for those who do not make the twenty-year mark, but those that do may be unhappy.
“Finally, the military's retirement program should be revised. It is an unfair system for those employees who leave the service before 20 years, the term after which they become eligible for the program. And it frustrates Pentagon managers, who could more easily encourage departures to match the military's personnel needs if a retirement option before 20 years of service were available. The system should be revised wholesale, using the civilian Federal Employees Retirement System as a model. FERS benefits become vested after five years, the program includes Social Security and a defined benefit plan, and employee contributions are matched by the employer. Eligibility for a full pension should be delayed until the retirement age set by Social Security, but a one-time lump-sum payment to ease the transition to civilian life should be provided to service members whenever they leave the service. Personnel who already have over 15 years of service at the time of the transition to the new system should be exempt from it. An analysis of similar proposals developed by the Department of Defense suggests that $60 billion could be saved between FY 2012 and FY 2018 from such a reform. Foregoing across-the-board military pay increases for two years, modernizing the TRICARE cost-sharing system for working military retirees, and reforming the military retirement savings plan could generate $148 billion in savings between FY 2012 and FY 2018.’
The authors’ schemes for cutting expenditures are probably conservative in the sense that there will still remain a military that is outsized and over-equipped for its mission. Politically, they are not conservative. Trying to push changes of this magnitude through the Houses of Congress will make for some interesting times for all.

The net result is that cuts of $100-150B per year from the Defense budget should be possible.
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